[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Rules and Regulations]
[Pages 21278-21310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7477]



[[Page 21277]]

Vol. 77

Monday,

No. 68

April 9, 2012

Part III





Commodity Futures Trading Commission





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





17 CFR Parts 1, 23, 37, et al.





 Customer Clearing Documentation, Timing of Acceptance for Clearing, 
and Clearing Member Risk Management; Final Rule

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

[[Page 21278]]


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

COMMODITY FUTURES TRADING COMMISSION

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

RIN 3038-0092, -0094


Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting rules to implement new statutory provisions 
enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. These rules address: The documentation between a 
customer and a futures commission merchant that clears on behalf of the 
customer; the timing of acceptance or rejection of trades for clearing 
by derivatives clearing organizations and clearing members; and the 
risk management procedures of futures commission merchants, swap 
dealers, and major swap participants that are clearing members. The 
rules are designed to increase customer access to clearing, to 
facilitate the timely processing of trades, and to strengthen risk 
management at the clearing member level.

DATES: This rule will become effective October 1, 2012.

FOR FURTHER INFORMATION CONTACT: John C. Lawton, Deputy Director, 202-
418-5480, <a href="/cdn-cgi/l/email-protection#e58f898492918a8ba586839186cb828a93"><span class="__cf_email__" data-cfemail="016b6d6076756e6f41626775622f666e77">[email protected]</span></a>, and Christopher A. Hower, Attorney-Advisor, 
202-418-6703, <a href="/cdn-cgi/l/email-protection#72111a1d05170032111406115c151d04"><span class="__cf_email__" data-cfemail="91f2f9fee6f4e3d1f2f7e5f2bff6fee7">[email protected]</span></a>, Division of Clearing and Risk, and 
Camden Nunery, Economist, 202-418-5723, Office of the Chief Economist, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581; and Hugh J. Rooney, Assistant 
Director, 312-596-0574, <a href="/cdn-cgi/l/email-protection#355d475a5a5b504c75565341561b525a43"><span class="__cf_email__" data-cfemail="bdd5cfd2d2d3d8c4fddedbc9de93dad2cb">[email protected]</span></a>, Division of Clearing and 
Risk, Commodity Futures Trading Commission, 525 West Monroe Street, 
Chicago, Illinois 60661.

SUPPLEMENTARY INFORMATION:

Table of Contents

yI. Background
II. Customer Clearing Documentation
    A. Introduction
    B. Summary of Comments
    C. Discussion
III. Time Frames for Acceptance Into Clearing
    A. Swap Dealer and Major Swap Participant Submission of Trades
    B. Swap Execution Facility and Designated Contract Market 
Processing of Trades
    C. Clearing Member and Clearing Organization Acceptance for 
Clearing
    D. Post-Trade Allocation of Bunched Orders
IV. Clearing Member Risk Management
    A. Introduction
    B. Components of the Rule
V. Effective Dates
    A. Summary of Comments
    B. Discussion
VI. Consideration of Costs and Benefits
VII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act

I. Background

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

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

    A fundamental premise of the Dodd-Frank Act is that the use of 
properly regulated central clearing can reduce systemic risk. Another 
tenet of the Dodd-Frank Act is that open access to clearing by market 
participants will increase market transparency and promote market 
efficiency by enabling market participants to reduce counterparty risk 
and by facilitating the offset of open positions. The Commission has 
adopted extensive regulations addressing open access and risk 
management at the derivatives clearing organization (``DCO'') level.\3\
---------------------------------------------------------------------------

    \3\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69334 (Nov. 8, 2011).
---------------------------------------------------------------------------

    Clearing members provide the portals through which market 
participants gain access to DCOs. Clearing members also provide the 
first line of risk management. Accordingly, in three related 
rulemakings, the Commission proposed regulations to increase customer 
access to clearing,\4\ to facilitate the timely processing of 
trades,\5\ and to strengthen risk management at the clearing member 
level.\6\ In addition, in a fourth rulemaking, the Commission proposed 
regulations relating to the allocation of bunched orders.\7\ The 
Commission is issuing final rules in each of these areas.
---------------------------------------------------------------------------

    \4\ Customer Clearing Documentation and Timing of Acceptance for 
Clearing, 76 FR 45730 (Aug. 1, 2011).
    \5\ Requirements for Processing, Clearing, and Transfer of 
Customer Positions, 76 FR 13101 (Mar. 10, 2011).
    \6\ Clearing Member Risk Management, 76 FR 45724 (Aug. 1, 2011).
    \7\ Adaption of Regulations to Incorporate Swaps, 76 FR 33066 
(Jun. 7, 2011).
---------------------------------------------------------------------------

    More specifically, the regulations contained in this Adopting 
Release were proposed in four separate notices of proposed rulemaking 
(``NPRMs''). Sections 1.72, 1.74, 23.608, 23.610, 39.12(a)(1)(iv), and 
39.12(b)(7) were proposed in Customer Clearing Documentation and Timing 
of Acceptance for Clearing,\8\ sections 23.506, 37.702(b), and 
38.601(b) were proposed in Requirements for Processing, Clearing, and 
Transfer of Customer Positions,\9\ sections 1.73 and 23.609 were 
proposed in Clearing Futures Commission Merchant Risk Management,\10\ 
and 1.35(a-1)(5)(iv) was proposed in Adaptation of Regulations to 
Incorporate Swaps.\11\ The Commission is finalizing the rules contained 
in this Adopting Release together because they address three 
overarching, closely-connected aims: (1) Non-discriminatory access to 
counterparties and clearing; (2) straight-through processing; and (3) 
effective risk management among clearing members. Each of these 
provides substantial benefits for the markets and market participants.
---------------------------------------------------------------------------

    \8\ See 76 FR 45730 (Aug. 1, 2011).
    \9\ See 76 FR 13101 (Mar. 10, 2011).
    \10\ See 76 FR 45724 (Aug. 1, 2011).
    \11\ See 76 FR 33066 (Jun. 6, 2011).
---------------------------------------------------------------------------

II. Customer Clearing Documentation

A. Introduction

    As discussed in the notice of proposed rulemaking,\12\ industry 
groups have developed a template for use by swap market participants in 
negotiating execution-related agreements with counterparties to swaps 
that are intended to be cleared.\13\ The template

[[Page 21279]]

includes optional annexes that make the clearing member to one or both 
of the executing parties a party to the agreement (the trilateral 
agreements). The trilateral agreements contain provisions that would 
permit a customer's futures commission merchant (``FCM''), in 
consultation with the swap dealer (``SD'') that is the customer's 
counterparty, to establish specific credit limits for the customer's 
swap transactions with the SD. The provisions further provide that the 
FCM will only accept for clearing those transactions that fall within 
these specific limits. The limits set for trades with the SD or MSP 
might be less than the overall limits set for the customer for all 
trades cleared through the FCM. The result would be to create a 
``sublimit'' for the customer when trading with that SD or MSP.
---------------------------------------------------------------------------

    \12\ See 76 FR 45730 at 45731, Aug. 1, 2011.
    \13\ See http://www.futuresindustry.org/downloads/ClearedDerivativesExecutionAgreement_June142001.pdf.
---------------------------------------------------------------------------

    When a trade is rejected for clearing, the parties to that trade 
may incur significant costs. As the clearing of swaps increases 
pursuant to the Dodd-Frank Act, the likelihood and size of such 
potential costs could also increase, according to the proponents of the 
trilateral agreements. The trilateral agreements were intended to limit 
these potential costs.
    The Commission expressed concern in the notice of proposed 
rulemaking that such arrangements potentially conflict with the 
concepts of open access to clearing and competitive execution of 
transactions.\14\ To address these concerns and to provide further 
clarity in this area, the Commission proposed Sec.  1.72 relating to 
FCMs, Sec.  23.608 relating to SDs and MSPs, and Sec.  39.12(a)(1)(vi) 
relating to DCOs. These regulations would prohibit arrangements 
involving FCMs, SDs, MSPs, or DCOs that would (a) disclose to an FCM, 
SD, or MSP the identity of a customer's original executing 
counterparty; (b) limit the number of counterparties with whom a 
customer may enter into a trade; (c) restrict the size of the position 
a customer may take with any individual counterparty, apart from an 
overall credit limit for all positions held by the customer at the FCM; 
(d) impair a customer's access to execution of a trade on terms that 
have a reasonable relationship to the best terms available; or (e) 
prevent compliance with specified time frames for acceptance of trades 
into clearing.
---------------------------------------------------------------------------

    \14\ Id. at 45732.
---------------------------------------------------------------------------

B. Summary of Comments

    The Commission received a total of 38 comment letters directed 
specifically at the proposed documentation rules.\15\ Of the 38 
commenters, 30 supported the proposed rules.\16\ They included asset 
managers, market makers, trading platforms, clearing organizations, 
bank/dealers, a non-profit organization, and a private citizen. Within 
this group, some commenters addressed only certain aspects of the rules 
and were silent on other sections and some requested clarification of 
certain provisions.
---------------------------------------------------------------------------

    \15\ Comment files for each proposed rulemaking can be found on 
the Commission Web site, www.cftc.gov. Commenters include: Chris 
Barnard (``Barnard''); MarkitSERV (``Markit''); Swaps & Derivatives 
Market Association (``SDMA''); Better Markets; 
IntercontinentalExchange, Inc. (``ICE''); ISDA FIA (``ISDA''); The 
Alternative Investment Management Association Ltd. (``AIMA''); CME 
Group Inc. (``CME''); Morgan Stanley; Edison Electric Institute 
(``EEI''); State Street Corporation (``State Street''); New York 
Portfolio Clearing (``NYPC''); Asset Management Group of the 
Securities Industry and Financial Markets Association (``SIFMA''); 
Vanguard; AllianceBernstein L.P. (``Alliance Bernstein''); 
Minneapolis Grain Exchange, Inc. (``MGEX''); Atlantic Trading USA 
LLC; Belvedere Trading; Bluefin Trading, LLC; Chopper Trading LLC; 
CTC Trading Group, LLC; DRW Holdings, LLC; Eagle Seven, LLC; 
Endeavor Trading, LLC; Flow Traders US LLC; Geneva Trading USA, LLC; 
GETCO; Hard Eight Futures; HTG Capital Partners; IMC Financial 
Markets; Infinium Capital Management LLC; Kottke Associates, LLC; 
Marquette Partners, LP; Nico Holdings LLC; Optiver US LLC; RGM 
Advisors, LLC; Templar Securities, LLC; Tower Research Capital LLC; 
TradeForecaster Global Markets LLC; Traditum Group, LLC; WH Trading 
LLC; XR Trading LLC (``Trading Firms''); Managed Funds Association 
(``MFA''); Arbor Research & Trading Inc. (``Arbor''); Eris Exchange 
(``Eris''); ICI; DRW Trading Group (``DRW''); Spring Trading, Inc. 
(``Spring Trading''); Javelin Capital Markets, LLC (``Javelin''); 
The Committee on Investment of Employee Benefit Assets (``CIEBA''); 
Citadel LLC (``Citadel''); Vizier Ltd. (``Vizier''); Federal Home 
Loan Banks (``FHLB''); Jefferies & Company, Inc. (``Jeffries''); UBS 
Securities LLC (``UBS''); Wells Fargo Securities (``WF''); 
LCH.Clearnet Group Limited (``LCH''); D. E. Shaw group (``D. E. 
Shaw''); Bank of America, Merrill Lynch, BNP Paribas, Citi, Credit 
Suisse Securities (USA) LLC, Deutsche Bank AG, Goldman Sachs, HSBC, 
J.P. Morgan, Morgan Stanley (``Banks''); Deutsche Bank (``DB''); 
Societe Generale (``SG''); The Association of Institutional 
Investors (``AII''); and The Committee on Capital Markets Regulation 
(``Committee'').
    \16\ AII, AIMA, AllianceBernstein, Arbor, Better Markets, 
Barnard, CIEBA, Citadel, CME, D. E. Shaw, DRW, Eris, FHLB, ICE, ICI, 
Javelin, Jeffries, LCH, Markit, MFA, MGEX, NYPC, SDMA, SIFMA, Spring 
Trading, State Street, Trading Firms, Vanguard, Vizier, and WF.
---------------------------------------------------------------------------

    Eight commenters expressed opposition.\17\ They include bank/
dealers, an association of electric utilities, and an asset manager. 
Within this group as well, some commenters addressed only certain 
aspects of the rules and were silent on other sections and some 
requested clarification of certain provisions.
---------------------------------------------------------------------------

    \17\ DB, ISDA, SG, UBS, Morgan Stanley, the Banks, EEI, and the 
Committee.
---------------------------------------------------------------------------

    Three commenters in support--Arbor, Citadel, and Eris--urged the 
Commission to make these rules a top priority in the final rulemaking 
process. Numerous commenters stated that the proposed rules would 
increase open access to clearing and execution, reduce risk, foster 
competition, lower costs, and increase transparency. FHLB expressed the 
view that the proposed rules will facilitate the transition to central 
clearing. Barnard and Vanguard asserted that the proposed rules will 
prevent conflicts of interest, and achieve clear walls between clearing 
and trading activities involving FCMs and affiliates. Six commenters 
went into detail why the trilateral agreements are bad for the markets, 
noting that such agreements discourage competition and efficient 
pricing, compromise anonymity, reduce liquidity, increase the time 
between execution and clearing, introduce conflicts of interest, and 
prevent the success of swap execution facilities (``SEFs'').\18\ SDMA 
commented that while ``the SDMA is philosophically loathe to encourage 
possible government [interference] with private contracts between two 
parties,'' the proposed rules are necessary in their entirety in this 
instance, and that the proposed rules are not overly prescriptive. 
Vanguard, estimated that if it was required to enter into trilateral 
agreements, it would have to negotiate approximately 4,800 new 
trilateral agreements per year.\19\
---------------------------------------------------------------------------

    \18\ AIMA, Javelin, SG, SIFMA, Spring Trading, and Vanguard.
    \19\ Vanguard.
---------------------------------------------------------------------------

    Seven commenters in opposition contended that without the 
trilateral agreements, some market participants may have reduced access 
to markets.\20\ (ISDA and the Committee did not address this issue.) 
They asserted that the trilateral agreements facilitate risk management 
and certainty of execution. DB believes that the trilateral agreements 
provide a means of ensuring compliance with mandatory clearing. DB also 
commented that if an SD does not know whether a swap will be cleared 
prior to execution, it will not know whether it should apply risk 
filters that take account of the swap as a cleared transaction or a 
bilateral one. SG commented that the rules will decrease liquidity and 
limit market participation, and that without the certainty of 
trilateral agreements, the rules may foster competing and inconsistent 
technology.
---------------------------------------------------------------------------

    \20\ Banks, DB, EEI, ISDA, Morgan Stanley, SG, and UBS.
---------------------------------------------------------------------------

    UBS believes that potential abuse of credit arrangements could be 
more narrowly tailored than the proposed rule. The Banks asserted that 
the credit filter infrastructure necessary to

[[Page 21280]]

maximize execution choice for customers while ensuring prudent risk 
management is not currently available. The Banks suggested that instead 
of prohibiting the trilateral agreements, the Commission could require 
that the allocation of credit limits across executing counterparties be 
specified by the customer, rather than the FCM, who would confirm the 
customer's allocation to the identified executing counterparties.
    Morgan Stanley requested clarification that the proposed rules only 
apply to arrangements between clearing firms and executing swap dealers 
and customers with respect to swaps, not futures. Morgan Stanley also 
commented that the Commission should alter the language in proposed 
Sec.  1.72 and Sec.  23.608 from ``relationship to the best terms 
available'' to ``execution with an executing swap dealer of the 
customer's choice.''
    Spring Trading requested clarification that ``on terms that have a 
reasonable relationship to the best terms available'' refers to the 
best terms available on any market regulated by the Commission, which 
would prohibit an FCM from establishing special hurdles for its 
clearing customers in order to trade on a particular SEF.

C. Discussion

    The Commission found persuasive the comments stating that the 
proposed rules would increase open access to clearing and execution, 
reduce risk, foster competition, lower costs, and increase 
transparency. The Commmission notes that cleared futures markets have 
operated for decades without any need for the types of provisions 
prohibited by the rules. Similarly, trades executed over-the-counter 
(``OTC'') have been successfully cleared by CME and ICE on behalf of 
customers for approximately ten years without such provisions.
    Specifically, the Commission believes that, as discussed by 
numerous commenters, (1) disclosure of a customer's original executing 
counterparty could have potentially anticompetitive effects, (2) 
limiting the number of counterparties would hurt the customer's access 
to the best price as well as general market liquidity, (3) restricting 
the size of trades with particular counterparties also would hurt the 
customer's access to the best price as well as general market 
liquidity, and (4) restrictions on the number of counterparties and on 
the size of trades with them would slow down acceptance for clearing 
thereby causing the very problem the restrictions were purportedly 
designed to address.
    The Commission believes that the risks the trilateral agreements 
were designed to address can be mitigated by other means without 
incurring the negative consequences described above. Specifically, the 
processing rules described in section III. below and the risk 
management rules described in section IV. below would significantly 
diminish the exposure of dealers, their counterparties, and their 
respective FCMs to risk.
    Moreover, the Commission notes that there are several sections of 
the CEA and Commission regulations that support the premise underlying 
these final rules. Section 4d(c) of the CEA, as amended by the Dodd-
Frank Act, directs the Commission to require FCMs to implement conflict 
of interest procedures that address such issues the Commission 
determines to be appropriate. Similarly, section 4s(j)(5), as added by 
the Dodd-Frank Act, requires SDs and MSPs to implement conflict of 
interest procedures that address such issues the Commission determines 
to be appropriate. Section 4s(j)(5) also requires SDs and MSPs to 
ensure that any persons providing clearing activities or making 
determinations as to accepting clearing customers are separated by 
appropriate informational partitions from persons whose involvement in 
pricing, trading, or clearing activities might bias their judgment or 
contravene the core principle of open access.
    Pursuant to these provisions, the Commission promulgated Sec.  
1.71(d) relating to FCMs and Sec.  23.605(d) relating to SDs and 
MSPs.\21\ These regulations prohibit SDs and MSPs from interfering or 
attempting to influence the decisions of affiliated FCMs with regard to 
the provision of clearing services and activities, and prohibit FCMs 
from permitting them to do so.
---------------------------------------------------------------------------

    \21\ ``Swap Dealer and Major Swap Participant Recordkeeping and 
Reporting, Duties, and Conflicts of Interest Policies and 
Procedures; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Policies and Procedures; Swap Dealer, Major 
Swap Participant, and Futures Commission Merchant Chief Compliance 
Officer,'' available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/ssLINK/federalregister022312b.
---------------------------------------------------------------------------

    Section 4s(j)(6) of the CEA prohibits an SD or MSP from adopting 
any process or taking any action that results in any unreasonable 
restraint on trade or imposes any material anticompetitive burden on 
trading or clearing, unless necessary or appropriate to achieve the 
purposes of the Act. To implement Section 4s(j)(6) of the CEA, the 
Commission has promulgated Sec.  23.607 in a separate rulemaking.\22\
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

    Section 2(h)(1)(B)(ii) of the CEA requires that DCO rules provide 
for the non-discriminatory clearing of swaps executed bilaterally or 
through an unaffiliated designated contract market (``DCM'') or SEF. 
The Commission has adopted Sec.  39.12(b)(3) to implement this 
provision.\23\
---------------------------------------------------------------------------

    \23\ 76 FR 69334, Nov. 8, 2011.
---------------------------------------------------------------------------

    The trilateral agreements potentially conflict with the recently-
adopted Sec. Sec.  1.71(d), 23.605(d), 23.607, and 39.12. As certain 
commenters have stated, the provisions of the trilateral agreements 
described above could lead to undue influence by FCMs on a customer's 
choice of counterparties or undue influence by SDs on a customer's 
choice of clearing member. They could constrain a customer's 
opportunity to obtain competitive execution of the trade by limiting 
the number of potential counterparties.
    The documentation rules covered by this rulemaking are consistent 
with, and complementary to, the recently adopted rules. The rules in 
this Federal Register release address specific circumstances that have 
been identified to the Commission by market participants, while the 
previously adopted rules set forth more general principles. The 
Commission believes that, in this case, market participants and the 
general public would be best served by providing both the clarity of a 
bright-line test for certain identifiable situations and the guidance 
of more broadly-articulated principles.
    Contrary to the assertion of some commenters, the rules do not 
prohibit trilateral agreements; they prohibit certain provisions 
whether contained in a trilateral or a bilateral agreement. The rules 
have been tailored to address specific issues identified by market 
participants.
    The Commission emphasizes that nothing in these rules would 
restrain an SD or MSP from establishing bilateral limits with each of 
its counterparties. Further, nothing in these rules would impair an 
SD's or MSP's ability to conduct due diligence with regard to each of 
its counterparties, including evaluation of balance sheet, credit 
ratings, overall market exposure, or similar factors.
    The Commission is revising the language in Sec. Sec.  23.608 and 
23.608(c) to clarify that, for swaps that will be submitted for 
clearing, an SD or MSP may continue to manage its risk by limiting its 
exposure to the counterparty with whom it is trading. This

[[Page 21281]]

clarification is intended to emphasize that SDs and MSPs may continue 
to conduct appropriate risk management exercises. Moreover, the 
Commission believes that this modification is responsive to the concern 
raised by some commenters that until straight through processing is 
achieved, SDs and MSPs will still need to manage risk to a counterparty 
before a trade is accepted or rejected for clearing.\24\ Furthermore, 
the Commission also believes that Sec.  23.608 does not preclude an SD 
or MSP from requiring that a counterparty confirm that the counterparty 
has an account with an FCM through which the counterparty will clear.
---------------------------------------------------------------------------

    \24\ ISDA.
---------------------------------------------------------------------------

    In response to the Morgan Stanley request for clarification, the 
Commission confirms that the rules, as drafted, only apply to swaps. As 
noted, similar provisions have never been needed and, therefore, were 
not proposed for futures.
    The Commission has determined not to modify the language in 
Sec. Sec.  1.72 and 23.608 as suggested by Morgan Stanley from 
``relationship to the best terms available'' to ``execution with an 
executing swap dealer of the customer's choice.'' The rule should not 
imply that customers may only trade with swap dealers. Moreover, some 
swap markets operate anonymous central limit order books. In these 
instances, the counterparty is immaterial; trading decisions are based 
on solely the terms of the trade.
    The Commission also has determined not to adopt the clarification 
suggested by Spring Trading. Requiring execution on the best terms 
available on any market regulated by the Commission could impose 
burdensome search costs.\25\ Moreover, there could be operational costs 
in establishing connectivity to every market. It is not clear how many 
markets there will be or how compatible their systems will be with one 
another or with the systems of all FCMs and SDs. Upon review of the 
comments, the Commission is adopting Sec. Sec.  1.72, and 
39.12(a)(1)(vi) as proposed, and Sec.  23.608 with the modification 
described above.
---------------------------------------------------------------------------

    \25\ The Commission notes that this rule does not impose a best 
execution requirement. This rule merely prohibits a contractual 
provision that would impair a customer's access to execution of a 
trade on terms that have a reasonable relationship to the best terms 
available.
---------------------------------------------------------------------------

III. Time Frames for Acceptance Into Clearing

A. Swap Dealer and Major Swap Participant Submission of Trades

1. Introduction
    Section 731 of the Dodd-Frank Act amended the CEA by adding a new 
section 4s, which sets forth a number of requirements for SDs and MSPs. 
Specifically, section 4s(i) of the CEA establishes swap documentation 
standards for those registrants. Section 4s(i) requires SDs and MSPs to 
``conform with such standards as may be prescribed by the Commission by 
rule or regulation that relate to timely and accurate confirmation, 
processing, netting, documentation, and valuation of all swaps.'' 
Section 8a(5) of the CEA authorizes the Commission to promulgate such 
regulations as, in the judgment of the Commission, are reasonably 
necessary to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.\26\ Pursuant to these provisions, and in order 
to ensure compliance with any mandatory clearing requirement issued 
pursuant to section 2(h)(1) of the CEA and to promote the mitigation of 
counterparty credit risk through the use of central clearing, the 
Commission proposed Sec.  23.506.
---------------------------------------------------------------------------

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

    As proposed, Sec.  23.506(a)(1) would require that SDs and MSPs 
have the ability to route swaps that are not executed on a SEF or DCM 
to a DCO in a manner that is acceptable to the DCO for the purposes of 
risk management. Under Sec.  23.506(a)(2), as proposed, SDs and MSPs 
would also be required to coordinate with DCOs to facilitate prompt and 
efficient processing in accordance with proposed regulations related to 
the timing of clearing by DCOs.
    As proposed, Sec.  23.506(b) would set forth timing requirements 
for submitting swaps to DCOs in those instances where the swap is 
subject to a clearing mandate and in those instances when a swap is not 
subject to a mandate. Under Sec.  23.506(b)(1), as proposed, an SD or 
MSP would be required to submit a swap that is not executed on a SEF or 
DCM, but is subject to a clearing mandate under section 2(h)(1) of the 
CEA (and has not been electively excepted from mandatory clearing by an 
end user under section 2(h)(7) of the CEA) as soon as technologically 
practicable following execution of the swap, but no later than the 
close of business on the day of execution.\27\
---------------------------------------------------------------------------

    \27\ The Commission notes that it is not expressing an opinion 
at this time as to whether a mandatory clearing determination must 
be made in conjunction with a mandatory trading determination.
---------------------------------------------------------------------------

    For those swaps that are not subject to a clearing mandate, but for 
which both counterparties to the swap have elected to clear the swap, 
under Sec.  23.506(b)(2), as proposed, the SD or MSP would be required 
to submit the swap for clearing not later than the next business day 
after execution of the swap, or the agreement to clear, if later than 
execution. This time frame reflects the possibility that in the case of 
a bilateral swap, the parties may need time to agree to terms that 
would conform with a DCO's requirements for swaps it will accept for 
clearing. As noted previously, any delay between execution and novation 
to a clearinghouse potentially presents credit risk to the swap 
counterparties and the DCO because the value of the position may change 
significantly between the time of execution and the time of novation, 
thereby allowing financial exposure to accumulate in the absence of 
daily mark-to-market. The proposed regulation was designed to limit 
this delay as much as reasonably possible.
2. Summary of Comments
    MFA generally supported proposed Sec. Sec.  23.506(a) and 
23.506(b).
    CME commented that the regulations should not require any 
particular system or methodology that SDs or MSPs must use for 
submitting swaps to DCOs. Instead, the regulations should give each DCO 
the flexibility to work with SDs and MSPs to implement various systems 
and methodologies for swap submission, which may be subject to change 
over time as cleared swap markets continue to develop and grow.
    ISDA also indicated that the rule should permit SDs and MSPs, 
coordinating with their DCOs, to be free to select the manner by which 
they route their swaps to DCOs. ISDA, however, commented that it is not 
apparent what proposed Sec.  23.506(a) adds to the Sec.  39.12(a)(3) 
requirement that clearing members have adequate operational capacity to 
meet obligations arising from their participation in DCOs. ISDA also 
noted that market participants have for some time been developing 
industry standards for the prompt and efficient processing of cleared 
swap transactions, and it suggested that the Commission study these 
standards and defer to them wherever possible.
    MarkitSERV commented that the requirement to submit swaps ``as soon 
as technologically practicable following

[[Page 21282]]

execution'' may be inappropriate in light of the Commission's proposed 
rule regarding confirmation requirements, which requires that swap 
transactions be confirmed within a certain time period after execution. 
MarkitSERV suggested that the regulation reference the time of 
confirmation as opposed to the time of execution. MarkitSERV also noted 
that requiring SDs and MSPs to submit swaps for clearing ``no later 
than the close of business on the day of execution'' fails to 
accommodate transactions that occur late in the day and suggested a 24 
hour time period.
    MarkitSERV also commented that there are numerous benefits to using 
third party middleware providers for routing and processing services, 
and it suggested that the Commission permit swap counterparties to 
control how they process transactions. According to MarkitSERV, 
counterparties should be permitted to use independent third party 
providers for confirming, routing, and satisfying the portfolio 
reconciliation requirements proposed by the Commission. MarkitSERV also 
suggested that the Commission clarify how proposed Sec.  23.506 would 
interact with proposed Sec.  23.501, which requires confirmation of all 
swaps, and with the then-proposed rules requiring reporting of swap 
transactions to an SDR.\28\
---------------------------------------------------------------------------

    \28\ Swap Data Repositories: Registration Standards, Duties and 
Core Principles, 76 FR 54538 (Oct. 31, 2011).
---------------------------------------------------------------------------

    FIA commented that SDs and MSPs are unlikely to submit a swap 
directly to a DCO for clearing. Instead, they will first affirm the 
swap by, for example, submitting the relevant details to an affirmation 
platform and then submit the swap to their respective clearing members 
for submission to a DCO.
    FIA suggested that the Commission should require SDs and MSPs to 
have a clearing arrangement in place with clearing members that, in 
turn, have the capacity to route orders to a DCO in a manner acceptable 
to it.
    FIA also believes that the ``no later than close of business'' 
could not be satisfied by swaps that are entered into later in the day 
and suggests the proposed rule be revised to provide the parties 
greater flexibility to submit a swap for clearing within a reasonable 
time as prescribed by the applicable DCO. Finally, to encourage the 
voluntary use of clearing where such swaps are not required to be 
cleared, FIA suggests that the proposed Sec.  23.506(b)(2) be revised 
to permit the parties to submit such trades for clearing on any date to 
which the parties and their respective clearing firms agree.
    The Options Clearing Corporation (``OCC'') commented that the 
phrase ``for purpose of risk management'' in proposed Sec. Sec.  
23.506(a)(1) and 37.702(b)(1) creates ambiguity because a DCO may have 
established routing requirements for reasons unrelated to risk 
management such as increased efficiency or decreased administrative 
costs. OCC believes that a party that submits transactions to a DCO for 
clearing should be required to ensure that it has the ability to route 
the transactions to the DCO in a manner that meets all of the DCO's 
legitimate requirements, and not only those that are related to risk 
management. OCC suggests that the Commission delete the phrase ``for 
purpose of risk management'' and substitute the phrase ``for 
clearing.''
    SDMA supported the amendments to proposed Sec.  23.506, and 
suggested that the Commission promulgate rules that ensure post-trade 
and pre-trade integrity. According to SDMA, the buyer and seller must 
know immediately whether their trade has been accepted for clearing. 
Trade uncertainty, SDMA continued, caused by the time delay between the 
time of trade execution and the time of trade acceptance into clearing, 
undermines market integrity in the post-trade work process. SDMA also 
stated that trade uncertainty also directly impedes liquidity, 
efficiency, and market stability.
    CME commented that the technology for SDs and MSPs to route swaps 
to a DCO may be as simple as entering the necessary data in a web page. 
It suggested that a more apt standard may be ``as soon as operationally 
feasible.'' CME also believes that the proposed time frames for 
submission of swaps are appropriate and operationally feasible, and it 
is not aware of systemic obstacles to the coordination between DCOs, 
MSPs, and SDs required under the proposed regulation.
    FHLBanks commented that the time frames are appropriate provided 
that the Commission establishes a cut-off time for determining the day 
on which a swap is executed because it may not be ``technologically 
practicable'' for a swap that is executed towards the end of a day to 
be submitted for clearing that day. FHLBanks suggests the rule specify 
that swaps executed after 4 p.m. New York time shall be deemed to be 
executed on the following business day.
    ISDA commented that submission by the close of business may not be 
technologically practicable. In addition, ISDA suggested that trades 
will need to go through an affirmation platform and clearing members 
will need to screen trades for compliance with their own standards and 
with DCO standards, and this may not occur before the end of the 
business day. ISDA also expressed concern that mandatory, same day 
submission may invite error because clearing members may focus on speed 
over accuracy. ISDA suggested that the Commission impose an ``as soon 
as reasonably and technologically practicable'' standard.
    ISDA also commented that Sec.  23.506(b)(2) should not set forth a 
time period for clearing. According to ISDA, limiting the flexibility 
of parties voluntarily seeking to clear will only create disincentives 
to such voluntarism, including confusion and potential legal 
uncertainty. Thus, ISDA suggested that where parties voluntarily elect 
to submit a swap for clearing, all aspects of that election should be 
left to the parties to determine contractually.
    Freddie Mac commented that swap dealers periodically enter 
mismatched data and send swap confirmations that incorrectly reflect 
the principal terms of transactions. As a result, Freddie Mac believes 
that a standard for submitting clearing submissions that starts the 
clock at execution would be confusing and impractical and it could be 
detrimental to counterparties who are subject to undue pressure to 
quickly assent to terms dictated by a market professional. Freddie Mac 
also commented that establishing a close of business deadline for 
submission of swaps for clearing would impair late day trading and 
potentially reduce market integrity. Freddie Mac suggested that the 
Commission modify proposed Sec.  23.506(b)(1) to provide that SDs and 
MSPs are required to submit swaps that are not executed on a SEF or DCM 
but that are subject to a clearing mandate as soon as commercially and 
operationally practical for both parties but no later than 24 hours 
after execution.
    LCH commented that swaps not subject to mandatory clearing 
obligations should not be subject to any timeline. LCH believes that a 
DCO should be able to accept such trades whenever they are submitted, 
provided that it has sufficient margin from both sides.
3. Discussion
    Proposed Sec.  23.506(a) does not prescribe the manner by which SDs 
or MSPs route their swaps to DCOs and provide for prompt and efficient 
processing. It is possible that DCOs will enable SDs and MSPs to submit 
their swaps to clearing via third-party platforms and other service 
providers. DCOs will certainly specify the role of their clearing 
members in the process.

[[Page 21283]]

    The flexibility of the rule makes it consistent with the comments 
of MFA, CME, ISDA, MarkitSERV, and FIA. The Commission concurs with 
OCC's comment that a DCO may have requirements beyond risk management. 
The issue raised by SDMA is addressed in the customer documentation 
provisions.
    As discussed above, any delay between the time of execution and the 
time of clearing creates financial risk for the parties to the trade 
and for their clearing FCMs. For trades that are not subject to a 
clearing mandate, the parties are not bound by any submission deadlines 
unless and until they voluntarily agree to have the trade cleared. Once 
they make that decision, however, it will reduce risk for both the 
parties, as well as their respective clearing members, to get the trade 
submitted for clearing as soon as practicable. Therefore, in most cases 
it seems likely that the parties will comply with the timing set forth 
within the rule because it is in their own best interests to do so. 
But, to leave ``all aspects'' to the parties, as ISDA suggested, 
creates the possibility that one party could expose itself, its 
counterparty, and its clearing member to unnecessary risk by delaying 
submission.\29\ In light of all the comments, the Commission believes 
that the timeframes for submission set forth in the proposed rules are 
reasonable.
---------------------------------------------------------------------------

    \29\ See ISDA.
---------------------------------------------------------------------------

    The Commission is not defining ``business day'' in this rule, in 
order to allow the entity accepting the trade for clearing, the DCO, to 
establish its own definition. The Commission understands that a DCO may 
choose to expand its business hours in order to offer a competitive 
advantage, and that this rule should not prescribe when swaps may be 
accepted for clearing. The Commission further believes that if a trade 
is submitted for clearing near the end of a business day for a 
particular DCO, but is ultimately not accepted or rejected before that 
deadline, the DCO will determine whether the trade will be accepted or 
rejected for clearing for the following day in accordance with Sec.  
39.12.
    The Commission is adopting Sec.  23.506(a)(1) with the amendment 
suggested by OCC, changing ``for purposes of risk management'' to ``for 
purposes of clearing.''
    The Commission is adopting Sec. Sec.  23.506(a)(2) and 23.506(b) as 
proposed.

B. Swap Execution Facility and Designated Contract Market Processing of 
Trades

1. Introduction
    For prompt and efficient clearing to occur, the rules, procedures, 
and operational systems of the trading platform and the clearinghouse 
must align. Vertically integrated trading and clearing systems 
currently process high volumes of transactions quickly and efficiently. 
The Commission believes that trading platforms and DCOs under separate 
control should be able to coordinate with one another to achieve 
similar results.
    The Commission proposed Sec. Sec.  37.700 through 37.703 to 
implement SEF Core Principle 7 (Financial Integrity of Transactions), 
pursuant to its rulemaking authority under sections 5h(h) and 8a(5) of 
the CEA.\30\ Core Principle 7 requires a SEF to ``establish and enforce 
rules and procedures for ensuring the financial integrity of swaps 
entered on or through the facilities of the swap execution facility, 
including the clearing and settlement of the swaps pursuant to section 
2(h)(1) [of the CEA].'' \31\ As originally proposed, Sec.  37.702(b) 
would require a SEF to provide for the financial integrity of its 
transactions cleared by a DCO by ensuring that the SEF has the capacity 
to route transactions to the DCO in a manner acceptable to the DCO for 
purposes of risk management.\32\ As part of the processing rulemaking, 
the Commission proposed to renumber previous Sec.  37.702(b) as 
paragraph (b)(1) and add a new paragraph (b)(2) to require the SEF to 
additionally provide for the financial integrity of cleared 
transactions by coordinating with each DCO to which it submits 
transactions for clearing, in the development of rules and procedures 
to facilitate prompt and efficient transaction processing in accordance 
with the requirements of Sec.  39.12(b)(7) of the Commission's 
regulations.\33\
---------------------------------------------------------------------------

    \30\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR 1214 (Jan. 7, 2011); 7 U.S.C. 7b-3(h); 
and 7 U.S.C. 12a(5).
    \31\ See section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
    \32\ See 76 FR at 1248. Section 37.702(b), as originally 
proposed, referred to ``ongoing'' risk management. In renumbering 
and finalizing this provision herein, the Commission is deleting the 
term ``ongoing'' because it is superfluous and could create 
confusion when read in conjunction with other Commission regulations 
that refer to ``risk management.'' See, e.g., proposed Sec.  39.13 
relating to risk management for DCOs, 76 FR at 3720.
    \33\ See 76 FR 13101 (Mar. 10, 2011) (setting forth time frames 
for accepting or rejecting swaps for clearing).
---------------------------------------------------------------------------

    Similarly, the Commission previously proposed Sec. Sec.  38.600 
through 38.607 to implement DCM Core Principle 11 (Financial Integrity 
of Transactions) pursuant to its rulemaking authority under sections 
5(d)(1) and 8a(5) of the CEA.\34\ Core Principle 11 requires a DCM to 
``establish and enforce-(A) rules and procedures for ensuring the 
financial integrity of transactions entered into on or through the 
facilities of the contract market (including the clearance and 
settlement of the transactions with a derivatives clearing 
organization); and (B) rules to ensure--(i) the financial integrity of 
any--(I) futures commission merchant; and (II) introducing broker; and 
(ii) the protection of customer funds.'' \35\
---------------------------------------------------------------------------

    \34\ See Core Principles and Other Requirements for Designated 
Contract Markets, 75 FR 80572 (Dec. 22, 2010); 7 U.S.C. 7(d)(1); and 
7 U.S.C. 12a(5).
    \35\ See Section 5(d)(11) of the CEA, 7 U.S.C. 7(d)(11).
---------------------------------------------------------------------------

    As originally proposed, Sec.  38.601 would require that 
transactions executed on or through a DCM, other than transactions in 
security futures products, must be cleared through a registered DCO in 
accordance with the provisions of part 39 of the Commission's 
regulations.\36\ The Commission later proposed to renumber this 
provision as paragraph (a) of proposed Sec.  38.601 and add a new 
paragraph (b) to specifically require the DCM to coordinate with each 
DCO to which it submits transactions for clearing, in the development 
of DCO rules and procedures to facilitate prompt and efficient 
transaction processing in accordance with the requirements of Sec.  
39.12(b)(7) of the Commission's regulations.\37\
---------------------------------------------------------------------------

    \36\ See 75 FR at 80618.
    \37\ See 76 FR 13101.
---------------------------------------------------------------------------

2. Summary of Comments
    FIA supported the rules and recommended that each SEF and DCM be 
required to assure equal access to all DCOs that wish to clear trades 
executed through the facilities of the SEF or DCM. According to FIA, 
failure to grant such access would be inconsistent with section 2(h) of 
the CEA as amended by the Dodd-Frank Act, which (1) provides for the 
non-discriminatory clearing of swaps executed bilaterally or on an 
unaffiliated SEF or DCM, and (2) provides that, with respect to a swap 
that is entered into by a SD or MSP, the counterparty shall have the 
sole right to select the DCO through which the swap is cleared.
    LCH also concurred with both rules. It commented that it is of 
paramount importance that: (1) A SEF or DCM seeking access to a DCO 
must first be required to meet all regulatory requirements; (2) each 
SEF and DCM

[[Page 21284]]

must code to each DCO's application programming interfaces; and (3) 
each SEF and DCM must treat DCOs on a nondiscriminatory basis.
    ISDA commented that coordination among the parties subject to the 
Commission's new swap jurisdiction is critical to ensuring that the 
rulemaking process is effective without disrupting the swap markets and 
applauds this proposal. ISDA suggested that an existing standard 
managed by ISDA and used between participating companies be adopted.
    As noted above, OCC commented that the phrase ``for purpose of risk 
management'' in proposed Sec. Sec.  23.506(a)(1) and 37.702(b)(1) 
creates ambiguity because a DCO may have established routing 
requirements for reasons unrelated to risk management such as increased 
efficiency or decreased administrative costs. OCC believes that a party 
that submits transactions to a DCO for clearing should be required to 
ensure that it has the ability to route the transactions to the DCO in 
a manner that meets all of the DCO's legitimate requirements, and not 
only those that are related to risk management. OCC suggests that the 
Commission delete the phrase ``for purpose of risk management'' and 
substitute the phrase ``for clearing.''
3. Discussion
    Rules, procedures, and operational systems, along the lines set 
forth in the rules, currently work well for many exchange-traded 
futures. Similar requirements could be applied across multiple 
exchanges and clearinghouses for swaps. The parties would need to have 
clearing arrangements in place with clearing members in advance of 
execution. In cases where more than one DCO offered clearing services, 
the parties also would need to specify in advance where the trade 
should be sent for clearing.
    The Commission concurs with OCC's comment that a DCO may have 
requirements beyond risk management. To the extent that FIA, LCH, and 
ISDA recommended that the Commission adopt additional requirements 
beyond those set forth in the rule as proposed, the Commission believes 
it is premature to adopt the additional requirements at the present 
time. However, the Commission will monitor the implementation of this 
rule and may propose amendments in the future.
    The Commission is adopting Sec.  38.601 as proposed. The Commission 
is adopting Sec.  37.702 with the amendment suggested by OCC changing 
``for purposes of risk management'' to ``for purposes of clearing.''

C. Clearing Member and Clearing Organization Acceptance for Clearing

1. Introduction
    As noted above, a goal of the Dodd-Frank Act is to reduce risk by 
increasing the use of central clearing. Minimizing the time between 
trade execution and acceptance into clearing is an important risk 
mitigant.
    This time lag potentially presents credit risk to the swap 
counterparties, clearing members, and the DCO because the value of a 
position may change significantly between the time of execution and the 
time of novation, thereby allowing financial exposure to accumulate in 
the absence of daily mark-to-market. Among the purposes of clearing are 
the reduction of risk and the enhancement of financial certainty, and 
this time lag diminishes the benefits of clearing swaps that Congress 
sought to promote in the Dodd-Frank Act. A delay in clearing is also 
inconsistent with other proposed regulations concerning product 
eligibility and financial integrity of transactions insofar as the 
delay reduces liquidity and increases risk.\38\
---------------------------------------------------------------------------

    \38\ See 76 FR 1214, Jan. 7, 2011.
---------------------------------------------------------------------------

    In this rulemaking, the Commission is seeking to expand access to, 
and strengthen the financial integrity of, the swap markets subject to 
Commission oversight by providing for prompt processing, submission, 
and acceptance of swaps eligible for clearing by DCOs. This requires 
setting an appropriate time frame for the processing and submission of 
swaps for clearing, as well as a time frame for the clearing of swaps 
by the DCO.
    As originally proposed, Sec.  39.12(b)(7)(i) required DCOs to 
coordinate with DCMs and SEFs to facilitate prompt and efficient 
processing of trades. In response to a comment, the Commission later 
proposed to require ``prompt, efficient, and accurate processing of 
trades.'' \39\
---------------------------------------------------------------------------

    \39\ See letter from Robert Pickel, Executive Vice Chairman, 
International Swaps and Derivatives Association, dated April 8, 
2011.
---------------------------------------------------------------------------

    Recognizing the key role clearing members play in trade processing 
and submission of trades to central clearing, the Commission also 
proposed parallel provisions for coordination among DCOs and clearing 
members. Proposed Sec.  39.12(b)(7)(i)(B) would require DCOs to 
coordinate with clearing members to establish systems for prompt 
processing of trades. Proposed Sec. Sec.  1.74(a) and 23.610(a) would 
require reciprocal coordination with DCOs by FCMs, SDs, and MSPs that 
are clearing members.
    As originally proposed, Sec.  39.12(b)(7)(ii) required DCOs to 
accept immediately upon execution all transactions executed on a DCM or 
SEF.\40\ A number of DCOs and other commenters expressed concern that 
this requirement could expose DCOs to unwarranted risk because DCOs 
need to be able to screen trades for compliance with applicable 
clearinghouse rules related to product and credit filters.\41\ The 
Commission recognized that while immediate acceptance for clearing upon 
execution currently occurs in some futures markets, it might not be 
feasible for all cleared markets at this time. For example, where the 
same cleared product is traded on multiple execution venues, a DCO 
needs to be able to aggregate the risk of trades coming in to ensure 
that a clearing member or customer has not exceeded its credit limits. 
Accordingly, the Commission modified proposed Sec.  39.12(b)(7)(ii) to 
permit DCOs to screen trades against applicable product and credit 
criteria before accepting or rejecting them.\42\ Consistent with 
principles of open access, the proposal would require that such 
criteria be non-discriminatory with respect to trading venues and 
clearing participants.
---------------------------------------------------------------------------

    \40\ See Requirements for Processing, Clearing, and Transfer of 
Customer Positions, 76 FR 13101 (March 10, 2011).
    \41\ See letter from Craig S. Donohue, Chief Executive Officer, 
CME Group, dated April 11, 2011; letter from R. Trabue Bland, Vice 
President and Assistant General Counsel, ICE, dated April, 11, 2011; 
letter from Iona J. Levine, Group General Counsel and Managing 
Director, LCH.Clearnet, dated April, 11, 2011; letter from William 
H. Navin, Executive Vice President and General Counsel, Options 
Clearing Corporation, dated April, 11, 2011; letter from John M. 
Damgard, President, Futures Industry Association, dated April 14, 
2011.
    \42\ See 76 FR 45730, Aug. 1, 2011.
---------------------------------------------------------------------------

    Proposed Sec.  1.74(b) would set up a parallel requirement for 
clearing FCMs; proposed Sec.  23.610(b) would set up a parallel 
requirement for SDs and MSPs that are clearing members. These rules, 
again, would apply a performance standard, not a prescribed method for 
achieving it.
    As originally proposed, Sec. Sec.  39.12(b)(7)(iii) and 
39.12(b)(7)(iv) distinguished between swaps subject to mandatory 
clearing and swaps not subject to mandatory clearing.\43\ Upon review 
of the comments, the Commission concluded that this distinction was 
unnecessary with regard to processing time frames. If a DCO lists a 
product for clearing, it should be able to process it regardless of 
whether clearing is mandatory or voluntary. Accordingly, the Commission 
modified proposed Sec.  39.12(b)(7)(iii) to cover all trades not 
executed on a DCM or SEF. It would require acceptance or rejection

[[Page 21285]]

by the DCO as quickly after submission as would be technologically 
practicable if fully automated systems were used.
---------------------------------------------------------------------------

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

    Proposed Sec.  1.74(b) would set up a parallel requirement for 
clearing FCMs; proposed Sec.  23.610(b) would set up a parallel 
requirement for SDs and MSPs that are clearing members. These rules, 
again, would apply a performance standard, not a prescribed method for 
achieving it.
    The Commission also recognized that some trades on a DCM or SEF may 
be executed non-competitively. Examples include block trades and 
exchanges of futures for physicals (``EFPs''). A DCO may not be 
notified immediately upon execution of these trades. Accordingly, the 
proposal treated these trades in the same manner as trades that are not 
executed on a DCM or SEF.
2. Summary of Comments
    Eighteen \44\ commenters expressed support for the timing standard 
as proposed by the Commission.
---------------------------------------------------------------------------

    \44\ AIMA, AllianceBernstein, Arbor, Barnard, CIEBA, Citadel, 
DRW, Eris, FHLB, ICI, Javelin, Jeffries, MFA, SDMA, State Street, 
Spring Trading, Trading Firms, and Vizier.
---------------------------------------------------------------------------

    CME recommended that the standard be revised to ``as quickly as 
would be technologically practicable if fully automated systems and 
filters were used or as quickly as possible if automated systems or 
filters are not used.''
    MGEX requested that the Commission codify the preamble text that 
the new timing standard would require action in a matter of 
``milliseconds or seconds or, at most, a few minutes, not hours or 
days.'' MGEX also commented that proposed Sec.  39.12(b)(7) should be a 
general acceptance and timing rule, not applicable for each specific 
contract listed to be cleared. MGEX argued that the rule only should 
apply to those swaps that a DCO has identified that it can and will 
clear, as opposed to variations of contracts listed for clearing or any 
contract not previously cleared by the DCO.
    Morgan Stanley believes that the timing standard should be intended 
to prohibit only those arrangements that prevent the use of automated 
systems that are available in the market to facilitate clearing.
    LCH suggested that the Commission modify proposed Sec. Sec.  
39.12(7)(ii) and (iii) by adding the language ``and for which 
sufficient margins have been received by the derivatives clearing 
organization'' prior to accepting and confirming a trade for clearing.
    NYPC requested clarification that in circumstances where a DCO 
automatically receives matched trade data from a DCM or SEF on a 
locked-in basis, no further systems development would be required in 
order to satisfy the above-referenced requirements of proposed 
regulations 1.74(a) and 39.12(b)(7)(i)(B).
    Better Markets stated that the timing standard must be: (1) 
Provided by the DCO or FCM; (2) capable of receiving and processing 
trade data from multiple sources in real time; (3) able to screen 
against standards such as price levels and block trade sizes as a 
threshold matter; (4) able to decrease or increase available credit 
real time; and (5) automatic push notification of acceptance or 
rejection by the DCO or FCM. Better Markets also commented that systems 
provided by a DCO or FCM must be open and require no special 
capabilities on the part of the trade execution venue, and that once 
data is input, the systems must function on a first-come-first-served 
basis using a reliable and common time stamping regime, regardless of 
affiliation or contractual relationship between the trading venue and 
DCO or FCM. Better Markets noted that confirmation of acceptance or 
rejection must not differ between trading venues based on affiliation 
or relationship.
    SG suggested that the Commission establish one or both of the 
following: (1) Credit limits of customers and FCMs are stored at the 
DCO and provided to SEFs in real time upon electronic demand; or (2) an 
industry-wide utility that stores customer and FCM limits and provides 
them to DCOs and SEFs in real time upon electronic demand.
3. Discussion
    The Commission continues to believe that acceptance or rejection 
for clearing in close to real time is crucial both for effective risk 
management and for the efficient operation of trading venues.\45\ 
Rather than prescribe a specific length of time, the Commission is 
implementing a standard that action be taken ``as quickly as would be 
technologically practicable if fully automated systems were used.'' 
This standard would require action in a matter of milliseconds or 
seconds or, at most, a few minutes, not hours or days. The Commission 
recognizes that processing times may vary by product or market.
---------------------------------------------------------------------------

    \45\ See letter from James Cawley, Swaps and Derivatives Market 
Association, dated April 19, 2011.
---------------------------------------------------------------------------

    This requirement is intended to be a performance standard, not the 
prescription of a particular method of trade processing. The Commission 
expects that fully automated systems will be in place at some DCOs, 
FCMs, SDs, and MSPs. Others might have systems with some manual steps. 
The use of manual steps would be permitted so long as the process could 
operate within the same time frame as the automated systems.
    As discussed by numerous commenters, the proposed standard 
approximates real-time acceptance while providing flexibility to 
accommodate different systems and procedures. Avoiding a large gap 
between trade execution and acceptance for clearing is crucial to risk 
management for DCOs, FCMs, and market participants.
    The Commission notes that the time frame for acceptance by clearing 
members and DCOs set forth in this section is stricter than the time 
frames for submission by SDs and MSPs set forth in Section III.A., 
above. Where execution is bilateral and clearing is voluntary, the 
delay between execution and submission to clearing is, of necessity, 
within the discretion of the parties to some degree. The Commission 
believes, however, that prudent risk management dictates that once a 
trade has been submitted to a clearing member or a DCO, the clearing 
member or DCO must accept or reject it as quickly as possible.
    Assuring prompt acceptance or rejection for clearing also 
undermines much of the stated rationale for the provisions in the 
trilateral agreements. In those unusual circumstances in which trades 
are rejected, the parties will know almost immediately and be able to 
take appropriate steps to mitigate risk.
    The Commission disagrees with CME's suggested standard of ``as 
quickly as possible.'' The Commission believes that this standard would 
introduce too much potential for delay. It could increase the very 
risks that this final rulemaking is designed to reduce or eliminate.
    In support of the final standard, the Commission notes that on 
December 13, 2011, $4.1 billion of trades were executed on a trading 
platform and cleared by a DCO within the time frame contemplated by the 
proposed rules. Specifically, 21 interest rate swaps were executed and 
cleared with an average time of 1.9 seconds and a quickest time of 1.3 
seconds.\46\
---------------------------------------------------------------------------

    \46\ Katy Burne, UPDATE: Javelin, CME Claim Record Time To Clear 
Rate Swaps, Dow Jones Newswires, Nasdaq (Dec. 14, 2011; accessed 
Jan. 3, 2012) http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201112141726dowjonesdjonline000739&title=updatejavelincme-claim-record-time-to-clear-rate-swaps.

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

[[Page 21286]]

    The Commission also disagrees with the MGEX suggestion that the 
timing standard should be codified as ``milliseconds, seconds, or 
minutes,'' because this would provide a window for trade acceptance 
that might be too wide as faster systems become available. The 
Commission believes that its proposed standard will allow for 
innovation to bring faster trade acceptance or rejection to the market 
most efficiently.
    The Commission also disagrees with LCH's proposed addition of the 
language ``and for which sufficient margins have been received by the 
derivatives clearing organization'' prior to accepting and confirming a 
trade for clearing. This standard may not be practicable for DCOs that 
are linked to high-volume automated trading systems. Currently, many 
DCOs in such circumstances calculate margin at the end of the day for 
collection the next day. Nothing in the final rules, however, precludes 
a DCO in its discretion from applying such a standard.
    The Commission confirms NYPC's belief that in circumstances where a 
DCO automatically receives matched trade data from a DCM or SEF on a 
locked-in basis, no further systems development would be required.
    The Commission believes that the comments of Better Markets and SG 
are consistent with the intent of the rules but provide a level of 
detail that the Commission believes is unnecessary at the present time, 
and in some respects goes beyond what the Commission proposed. For 
example, Better Markets recommended that DCOs and FCMs be able to 
increase available credit in real-time and to have automatic push 
notification of acceptance or rejection from clearing. The first could 
conflict with risk management procedures that some DCOs or FCMs might 
wish to use. The second is likely to be in place at many firms, but the 
Commission continues to believe that it is appropriate to have a rule 
that sets a performance standard rather than specifying a particular 
means of achieving it. Fully automated systems would of course comply 
with the performance standard. Accordingly, the Commission has decided 
not to change the rule in the manner suggested by Better Markets and 
SG. The Commission, however, will monitor the implementation of this 
rule and may propose amendments in the future.
    The Commission received numerous comments in the customer clearing 
documentation rulemaking emphasizing that it is imperative for 
effective risk management to have the shortest possible gap between 
execution and clearing. To permit additional time as suggested by some 
of the commenters on this rule would increase risk for DCOs, clearing 
members, and market participants.
    However, in light of commenters' concerns, the Commission is 
adopting Sec. Sec.  1.75 and 23.611, which delegate to the Director of 
the Division of Clearing and Risk the authority to establish an 
alternative compliance schedule for requirements of Sec. Sec.  1.74 and 
23.610 for swaps that are found to be technologically or economically 
impracticable for an FCM, SD, or MSP affected by Sec. Sec.  1.74 or 
23.610. The purpose of Sec. Sec.  1.75 and 23.611 is to facilitate the 
ability of the Commission to provide a technologically practicable 
compliance schedule for affected FCMs, SDs, or MSPs that seek to comply 
in good faith with the requirements of Sec. Sec.  1.74 or 23.610.
    In order to obtain an exception under Sec. Sec.  1.75 or 23.611, an 
affected FCM, SD, or MSP must submit a request to the Director of the 
Division of Clearing and Risk. FCMs, SDs, and MSPs submitting requests 
must specify the basis in fact supporting their claims that compliance 
with Sec. Sec.  1.74 or 23.610 would be technologically or economically 
impracticable. Such a request may include a recitation of the specific 
costs and technical obstacles particular to the entity seeking an 
exception and the efforts the entity intends to make in order to ensure 
compliance according to an alternative compliance schedule. An 
exception granted under Sec. Sec.  1.75 or 23.611 shall not cause a 
registrant to be out of compliance or deemed in violation of any 
registration requirements.
    Such requests for an alternative compliance schedule shall be acted 
upon by the Director of the Division of Clearing and Risk or designees 
thereto within 30 days from the time such a request is received. If not 
acted upon within the 30 day period, such request will be deemed 
approved.
    The Commission is adopting Sec. Sec.  1.74, 23.610, and 39.12(b)(7) 
as proposed.

D. Post-Trade Allocation of Bunched Orders

1. Introduction
    Bunched orders are orders entered by an account manager on behalf 
of multiple customers, which are executed as a block and later 
allocated among participating customer accounts for clearing. Believing 
that procedures used in the futures markets could be adapted for use in 
the swaps markets, the Commission proposed Sec.  1.35(a-1)(5)(iv).\47\ 
It provided that allocations must be made as soon as practicable after 
execution but in any event no later than the following times: (1) For 
cleared transactions, sufficiently before the end of the day to ensure 
that clearing records identify the customer accounts, and (2) for 
uncleared trades, no later than the end of the day the swap was 
executed.
---------------------------------------------------------------------------

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

2. Summary of Comments
    In comments filed in connection with proposed Sec. Sec.  1.74, 
23.610, and 39.12(b)(7), BlackRock and State Street stated that the 
Commission should clarify the rules to specifically allow for post-
trade allocation of block trades. BlackRock also commented that the 
final rule should provide that at the time of trade execution, 
confirmation of trade economics may be done at the block level, and a 
two-hour delay be allowed before the trade must be submitted to a DCO 
for clearing.
    In comments also filed in connection with proposed Sec. Sec.  1.74, 
23.610, and 39.12(b)(7), MFA and D. E. Shaw stated that it is not 
necessary to delay trades for post-execution allocation of trades to 
multiple funds. D. E. Shaw asserted that post-execution allocation is a 
``red herring'' and should not prevent the Commission from mandating 
real-time clearing in the proposal.
    In a comment filed in connection with the proposed amendment to 
Sec.  1.35, CME asserted that bunched orders in swaps should not be 
subject to the same type of regulatory regime as bunched orders in 
futures contracts because the ``futures model'' for treatment of 
bunched orders is not a suitable model for block trades of swaps. After 
a bunched trade in the futures market is accepted for clearing, an FCM 
generally holds the positions in a suspense account while awaiting 
allocation instructions from the asset manager. In contrast, the CME 
believes that an FCM holding bunched orders for swaps in a suspense 
account, while waiting for allocation instructions, may be exposed to 
substantially greater risk considering larger transaction sizes and the 
different risk profile of cleared swaps as compared to futures. CME 
stated that a time frame of two hours should allow sufficient time for 
asset managers to allocate block trades in swaps to their individual 
customers' accounts.
    In contrast, in comments also filed in connection with proposed 
Sec.  1.35, SDMA stated that there should be no delay for bunched 
orders that are allocated after execution. According to SDMA, the 
process for swaps trade allocation

[[Page 21287]]

should be similar to that of the futures markets.
    The Commission received no substantive comments regarding 
allocation of uncleared trades.
3. Discussion
    For many years in the futures markets, bunched orders have been 
executed as a block for immediate acceptance into clearing and 
allocated into individual accounts later in the day. Essentially, a 
``stand-by'' clearing member guarantees the trades until they can be 
allocated. Consequently, there is no need for a two-hour delay.
    The proposed amendments would apply the same process to swaps. By 
allowing post-trade allocation of bunched orders, the rule is 
responsive to all the comments. By not permitting a two-hour delay the 
rule is also responsive to the comments of State Street, MFA, D. E. 
Shaw, and SDMA, but is contrary to the comments of CME and BlackRock.
    The Commission does not find persuasive the arguments that cleared 
swaps should be subject to a standard that differs in this regard from 
the standard for cleared futures. The Commission believes that a two-
hour delay would create risk rather than mitigate it. First, the 
counterparty or counterparties to the trade would incur a delay in 
acceptance of their side into clearing because of the happenstance of 
being opposite a bunched order. This result is untenable in fast-moving 
markets. Second, the customers whose orders were being bunched would 
also suffer the same delay thereby incurring the same risks.
    The futures model has worked well for many years. In most 
instances, the orders are successfully allocated and the stand-by FCM 
ultimately is not required to clear any trades. In those cases where 
there is a misallocation, it is corrected the next day and the stand-by 
FCM is compensated by the account manager. All parties receive the 
benefits of immediate acceptance into clearing. CME and BlackRock have 
not demonstrated why these procedures would not work for swaps.
    The Commission believes that a similar analysis applies to 
uncleared swaps. Certainty of allocation by the end of the calendar day 
that a swap is executed will reduce risk for both counterparties. The 
Commission received no comments indicating otherwise.
    The Commission is adopting Sec.  1.35(a-1)(5)(iv) as proposed.

IV. Clearing Member Risk Management

A. Introduction

    CEA Section 3(b) provides that one of the purposes of the Act is to 
ensure the financial integrity of all transactions subject to the Act 
and to avoid systemic risk. CEA section 8a(5) authorizes the Commission 
to promulgate such regulations that it believes are reasonably 
necessary to effectuate any of the provisions or to accomplish any of 
the purposes of the Act. Risk management systems are critical to the 
avoidance of systemic risk, as evidenced by the statutory provisions 
cited below.
    CEA section 4s(j)(2) requires each SD and MSP to have risk 
management systems adequate for managing its business. CEA section 
4s(j)(4) requires each SD and MSP to have internal systems and 
procedures to perform any of the functions set forth in Section 4s.
    CEA section 4d requires FCMs to register with the Commission. It 
further requires FCMs to segregate customer funds. CEA section 4f 
requires FCMs to maintain certain levels of capital. CEA section 4g 
establishes reporting and recordkeeping requirements for FCMs.
    These provisions of law--and Commission regulations promulgated 
pursuant to these provisions--create a web of requirements designed to 
secure the financial integrity of the markets and the clearing system, 
to avoid systemic risk, and to protect customer funds. Effective risk 
management by SDs, MSPs, and FCMs is essential to achieving these 
goals. For example, a poorly managed position in the customer account 
may cause an FCM to become undersegregated. A poorly managed position 
in the proprietary account may cause an FCM to fall out of compliance 
with capital requirements.
    Even more significantly, a failure of risk management can cause an 
FCM to become insolvent and default to a DCO. This can disrupt the 
markets and the clearing system and harm customers. Such failures have 
been predominately attributable to failures in risk management.
    Proposed Sec.  1.73 set forth risk management requirements that 
would apply to clearing members that are FCMs; proposed Sec.  23.609 
would apply to clearing members that are SDs or MSPs. These provisions 
would require these clearing members to have procedures to limit the 
financial risks they incur as a result of clearing trades and liquid 
resources to meet the obligations that arise. The proposal required 
each clearing member to:
    (1) Establish credit and market risk-based limits based on position 
size, order size, margin requirements, or similar factors;
    (2) Use automated means to screen orders for compliance with the 
risk-based limits;
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests of all positions in the proprietary 
account and all positions in any customer account that could pose 
material risk to the futures commission merchant at least once per 
week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate the positions it clears in an 
orderly manner, and estimate the cost of the liquidation at least once 
per month; and
    (8) Test all lines of credit at least once per quarter.
    Each of these items has been observed by Commission staff as an 
element of an existing sound risk management program at a DCO or an 
FCM.

B. Components of the Rule

    The Commission received a total of 15 comment letters directed 
specifically at the proposed risk management rules.\48\ A discussion of 
the comments received in response to each component of the rule 
follows.
---------------------------------------------------------------------------

    \48\ Barnard; Futures Industry Association (``FIA''); SDMA; 
Better Markets; ICE; CME; Freddie Mac; ISDA; MGEX; MFA; Citadel; 
FHLB; Jeffries; Arbor; and Javelin.
---------------------------------------------------------------------------

1. Establish Credit and Market Limits and Automated Screening of Orders
a. Summary of Comments
    FIA stated that it does not believe that ``pre-execution'' 
screening of orders is feasible in all market situations. For instance, 
the FIA noted four situations wherein ``pre-execution screening'' is 
not possible given current technology. Specifically, FIA does not 
believe that ``pre-execution'' screening is possible in the case of 
floor execution, trading advisors using ``bunched'' orders, give-up 
agreements, and traders using multiple trading platforms.
    The CME also commented that automated screening is not feasible in 
a floor trading environment. The CME suggested that the Commission 
adopt the following language: ``automated or otherwise appropriate 
means to screen orders for compliance with risk-base-limits.''
    ISDA made comments consistent with CME and recommended a more 
flexible approach. ISDA noted that the

[[Page 21288]]

regulation may not take into account the manner in which swaps are 
executed.
b. Discussion
    As noted previously, the Dodd-Frank Act requires the increased use 
of central clearing. In particular, Section 2(h) establishes procedures 
for the mandatory clearing of certain swaps. Central clearing will 
provide more stability to the markets, and increase transparency for 
market participants.\49\ As stated in the Committee report of the 
Senate Committee on Banking, Housing, and Urban Affairs: ``Increasing 
the use of central clearinghouses * * * will provide safeguards for 
American taxpayers and the financial system as a whole.'' \50\
---------------------------------------------------------------------------

    \49\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act: Title VII, Derivatives, Mark Jickling & Kathleen Ann Ruane, 5 
(Aug. 30, 2010).
    \50\ S. Rep. No. 111-176, at 32 (2010) (report of the Senate 
Committee on Banking, Housing, and Urban Affairs).
---------------------------------------------------------------------------

    The Commission has finalized extensive risk management standards at 
the DCO level. Given the increased importance of clearing and the 
expected entrance of new products and new participants into the 
clearing system, the Commission believes that enhancing the safeguards 
at the clearing member level is necessary as well.
    Bringing swaps into clearing will increase the magnitude of the 
risks faced by clearing members. In many cases, it will change the 
nature of those risks as well. Many types of swaps have their own 
unique set of risk characteristics. The Commission believes that the 
increased concentration of risk in the clearing system combined with 
the changing configuration of the risk warrant additional vigilance not 
only by DCOs but by clearing members as well.
    FCMs generally have extensive experience managing the risk of 
futures. They generally have less experience managing the risks of 
swaps. The Commission believes that it is a reasonable precaution to 
require that certain safeguards be in place. It would ensure that FCMs, 
who clear on behalf of customers, are subject to standards at least as 
stringent as those applicable to SDs and MSPs, who clear only for 
themselves. Failure to require SDs, MSPs, and FCMs that are clearing 
members to maintain such safeguards would frustrate the regulatory 
regime established in the CEA, as amended by the Dodd-Frank Act. 
Accordingly, the Commission believes that applying the risk-management 
requirements in the proposed rules to SDs, MSPs, and FCMs that are 
clearing members are reasonably necessary to effectuate the provisions, 
and to accomplish the purposes, of the CEA.
    The Commission does not intend to prescribe the particular means of 
fulfilling these obligations. As is the case with DCOs, clearing 
members will have flexibility in developing procedures that meet their 
needs. For example, items (1) and (2) could be addressed through simple 
numerical limits on order or position size, or through more complex 
margin-based limits. Further examples could include price limits that 
would reject orders that are too far away from the market, or limits on 
the number of orders that could be placed in a short time.
    These proposals are consistent with international standards. In 
August 2010, the International Organization of Securities Commissions 
issued a report entitled ``Direct Electronic Access to Markets.'' \51\ 
The report set out a number of principles to guide markets, regulators, 
and intermediaries. Principle 6 states that:

    \51\ The report can be found at www.iosco.org.

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

    Principle 7 states that:

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

    Over the years, ``rogue'' traders have caused substantial financial 
damage to both small and large firms. The size or sophistication of the 
firm has not provided comprehensive protection. Traders have found ways 
to exploit gaps in internal controls. Automated screening procedures, 
such as Globex Credit Controls, are already in place in many markets 
and have proven to be effective tools for reducing risk. Therefore, the 
Commission believes that as proposed, the rule should require clearing 
members to use automated means for screening orders executed on 
automated trading systems.
    In response to the comments, the Commission has determined that, 
for non-automated markets such as open outcry exchanges or voice 
brokers, the rules would permit other forms of internal controls. For 
example, a clearing member cannot use an automated system to screen the 
orders of a floor trader. Proprietary or customer orders executed by 
open outcry or voice broker can be screened automatically if they are 
routed automatically. Many orders, however, continue to be placed by 
telephone. It is not practicable at this time to use automated means to 
screen such orders. A clearing member, however, can actively monitor a 
trader's activities and be in communication if the trader approaches a 
limit. To incorporate this approach, the Commission is revising 
Sec. Sec.  1.73(a)(2)(ii), 1.73(a)(2)(iii), and 23.609(a)(2)(ii) using 
language suggested by ISDA. Specifically, as amended, these rules 
provide that clearing members must ``establish and maintain systems of 
risk controls reasonably designed to ensure compliance.''
    The Commission believes that, as amended, the rules will be 
responsive to the comments of FIA, CME, and ISDA. They will continue to 
emphasize the key role that order screening can play in managing risk 
while making accommodation for certain circumstances where automated 
screening may not be possible or practicable at this time.
    In response to the comments, the Commission has also determined to 
make changes with regard to give-ups and bunched orders. Give-ups are 
trades where the execution function and the clearing function are 
performed by different firms. Revised paragraph (2)(iv) requires the 
clearing firm, which bears the financial risk of the trade, to set 
limits and communicate them to the executing firm, which would apply 
them. This arrangement is consistent with current practice. The uniform 
give-up contract contains a provision allowing a clearing firm to 
establish limits on the trades it will accept from the executing firm.
    To the extent the executing firm is an SD or MSP, and the clearing 
firm is an affiliated FCM, the firms will also have to comply with the 
conflict of interest rules for SD/MSPs and the conflict of interest 
rules for FCMs.\52\ Those rules address appropriate partitions between 
the trading units of an SD/MSP and the clearing units of an affiliated 
FCM. For example, recently-promulgated Sec.  23.605(d)(1)(iv) prohibits 
an SD/MSP

[[Page 21289]]

from interfering with the setting of risk tolerance levels by an 
affiliated FCM.
---------------------------------------------------------------------------

    \52\ See ``Swap Dealer and Major Swap Participant Recordkeeping 
and Reporting, Duties, and Conflicts of Interest Policies and 
Procedures; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Policies and Procedures; Swap Dealer, Major 
Swap Participant, and Futures Commission Merchant Chief Compliance 
Officer,'' available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/ssLINK/federalregister022312b.
---------------------------------------------------------------------------

    As noted above, for bunched orders, typically one firm acts as a 
``stand-by'' clearing firm for purposes of getting the trade executed, 
but before the end of the day, the block is broken up and assigned 
among multiple clearing members, each of whom is acting on behalf of a 
particular customer.
    Revised paragraph (2)(v)(A) requires the stand-by clearing firm to 
establish limits for the block account and screen the order. Revised 
paragraph (2)(v)(B) requires each ultimate clearing firm to establish 
limits for each of its customers and enter an agreement with the 
account manager under which the account manager would screen orders for 
compliance. Revised paragraph (2)(v)(C) requires each ultimate clearing 
firm to establish controls to enforce its limits. The revisions adjust 
the rule to take into account the more complex procedures entailed in 
processing bunched orders. They narrow the scope of the screening 
required by various clearing participants from what was originally 
proposed.
    To the extent the account manager or one of the customers is an SD/
MSP and one of the clearing firms is an affiliated FCM, the firms also 
will have to comply with the conflict of interest rules for SD/MSPs and 
the conflict of interest rules for FCMs. As noted above, those rules 
address appropriate partitions between the trading units of an SD/MSP 
and the clearing units of an affiliated FCM.
2. Stress Tests
a. Summary of Comments
    Chris Barnard and Better Markets both recommended that the 
Commission require specific stress tests. Barnard recommended that the 
Commission adopt a minimum standard and Better Markets recommended an 
``extreme but plausible'' standard for stress tests. In addition, 
Better Markets believes that stress test results should be reported to 
the Commission and the relevant DCO. FHLB recommended that stress test 
results be publicly disclosed. FHLB believes that public disclosure of 
stress test results would allow customers to mitigate risk.
b. Discussion
    Stress tests are an essential risk management tool. The purpose in 
conducting stress tests is to determine the potential for significant 
losses in the event of extreme market events and the ability of traders 
and clearing members to absorb the losses.
    The Commission intentionally refrained from setting specific stress 
tests levels or a minimum threshold. The Commission believes that 
clearing members are in the best position to design stress tests based 
on their knowledge of markets and the types of customers they carry. In 
addition, the Commission believes that specifying certain stress tests 
might stifle innovation or cause firms to use minimum levels to meet 
regulatory compliance rather than implementing a vigorous risk 
management program. This approach is consistent with the approach 
recently adopted by the Commission for DCO stress tests. The Commission 
intends to monitor the implementation of this rule to determine whether 
clearing members are routinely conducting stress tests reasonably 
designed for the types of risk the clearing members and their customers 
face.
    The Commission believes that the concept of ``extreme but 
plausible'' conditions is commonly used and was implicit in the 
proposal. The Commission is adding the phrase to the rule text for 
clarity.
    The Commission believes that public disclosure of stress test 
results could be a disincentive to aggressive stress testing. Moreover, 
disclosure of results could have the effect of improper disclosure of 
confidential position information.
    The Commission is adopting the provisions as proposed, with 
amendments to Sec. Sec.  1.73(a)(4) and 23.609(a)(4) to incorporate the 
phrase ``extreme but plausible market conditions.''
3. Margin Evaluation
a. Summary of Comments
    ISDA and FIA believe that the requirement to evaluate initial 
margin once per week is unclear. ISDA pointed out that a clearing 
member generally knows the amount of initial margin and collects it 
promptly.
    The Commission received no comments regarding Sec. Sec.  1.73(a)(6) 
and 23.609(a)(6) regarding variation margin.
b. Discussion
    The purpose of this provision is to require clearing firms to 
evaluate their ability to deal with certain contingencies on a routine 
basis. For example, a DCO might raise margin requirements, or option 
positions might be exercised, or a customer might default on a margin 
call. The clearing firm should make sure that it has resources 
available to meet its continuing obligations under such circumstances.
    The Commission is adopting Sec. Sec.  1.73(a)(5), 1.73(a)(6), 
23.609(a)(5), and 23.609(a)(6) as proposed.
4. Estimated Cost of Liquidation
a. Summary of Comments
    FIA commented that ``even in normal markets, estimating the costs 
of liquidating such positions in an orderly manner will be difficult at 
best. In times of market stress, such estimates will be impossible.''
b. Discussion
    The Commission recognizes that estimating the cost of liquidation 
is at times difficult. But the inevitable imprecision of any estimate 
does not justify abandoning efforts to quantify potential losses.
    The purpose of the calculation is to alert the clearing firm to 
potential risks that might otherwise go undetected. This exercise could 
lead a clearing firm to decide: (1) To arrange for additional financing 
to cover a potential loss; or (2) to reduce the positions prior to a 
period of market stress. Commission staff perform stress tests of FCM 
positions and have alerted FCMs about potential losses. Based on 
Commission staff's experience in this area, the Commission believes 
that this is a topic that has not been fully addressed by some clearing 
members in recent years.
    In response to commenters, the Commission has decided to modify 
Sec.  1.73(a)(7) to require estimation of liquidation costs once per 
quarter, rather than once per month.
    Additionally, the Commission is re-numbering Sec.  23.609(a)(7) to 
Sec.  23.609(a)(8), and renumbering Sec.  23.609(a)(8) to Sec.  
23.609(a)(7), in order to follow the parallel structure in Sec.  1.73.
    The Commission is adopting Sec. Sec.  1.73(a)(8) and 23.609(a)(7) 
with the modifications discussed above.
5. Testing Lines of Credit
a. Summary of Comments
    The CME commented that the requirement to test lines of credit 
should only be done on an annual basis rather than a quarterly basis. 
The CME believes that quarterly testing is not cost efficient. ISDA 
sought clarification on whether the test requires an actual drawing of 
funds or an assessment of conditions precedent to drawing.
b. Discussion
    The Commission accepts that quarterly testing might not be cost 
efficient under all circumstances. Nonetheless, the Commission 
encourages clearing members to test lines of credit more frequently 
based on

[[Page 21290]]

market and credit events. For instance, if a line of credit is in place 
with a bank that has recently suffered a credit rating downgrade, a 
test may be appropriate.
    The Commission believes that the actual drawing of funds is 
essential to testing a line of credit. Among other things, the test 
should ensure the ability of the bank or other institution to move the 
funds in a timely fashion and that the clearing member can assess its 
ability to approve the drawing and properly make accounting entries. 
This approach is consistent with the approach the Commission recently 
adopted for DCOs.
    The Commission is adopting Sec. Sec.  1.73(a)(8) and 23.609(a)(7) 
as proposed, but with an amendment to provide for annual--rather than 
quarterly--testing of lines of credit.
6. Vagueness, Conflict, and/or Overlap Among Regulations
a. Summary of Comments
    FIA expressed concern that paragraphs (a)(1) and (a)(4) through (6) 
of Sec.  1.73 are too vague. FIA also expressed concern that the limits 
required by Sec.  1.73 ``may conflict with the provisions of proposed 
Rule 1.72(c), which provides that an FCM may set only `an overall limit 
for all positions held by the customer' at the FCM. Further, such 
limits may indirectly `limit' the number of counterparties with whom a 
customer may enter into a trade, in apparent violation of proposed Rule 
1.72(b).'' Regulation 1.72 was proposed in the customer clearing 
documentation rules \53\ and is discussed in Part II, above.
---------------------------------------------------------------------------

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

    ISDA commented that the then-proposed Sec.  23.600 imposes a risk 
management program for SDs and MSPs that must include ``policies and 
procedures to monitor and manage, market, credit, liquidity, foreign 
currency, legal, operational, and settlement risk, as well as controls 
on business trading.'' ISDA believes that the broad requirements of 
Sec.  23.600 that pertain to liquidity and funding make proposed Sec.  
23.609(a)(5)-(8) redundant. The Commission recently promulgated Sec.  
23.600 as a final rule.\54\
---------------------------------------------------------------------------

    \54\ ``Swap Dealer and Major Swap Participant Recordkeeping and 
Reporting, Duties, and Conflicts of Interest Policies and 
Procedures; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Policies and Procedures; Swap Dealer, Major 
Swap Participant, and Futures Commission Merchant Chief Compliance 
Officer,'' available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/ssLINK/federalregister022312b.
---------------------------------------------------------------------------

b. Discussion
    The Commission does not believe that Sec.  1.73 is too vague. 
Paragraph (a)(1) addresses risk-based limits, paragraph (a)(4) 
addresses stress tests, and paragraphs (a)(5) and (6) address margin. 
While FIA asserts that these requirements are vague, it provides no 
additional detail on the issue.
    The regulation was intentionally drafted in a non-prescriptive 
manner. Risk management is a complex process that requires firms to 
make judgment calls on a daily basis. Moreover, each firm has a 
different customer base, different resources, and a different risk 
appetite. The Commission envisions that each clearing member will 
comply with Sec.  1.73 using procedures and technology appropriate to 
its business model and customer base. As drafted, these provisions 
allow flexibility and innovation in complying with the regulation.
    The Commission does not believe that Sec. Sec.  1.73 and 1.72 
conflict. As proposed, Sec.  1.72(b) would prohibit limits as to the 
number of counterparties, whereas Sec.  1.73 would require limits set 
according to criteria such as position size or margin amount. FIA 
asserts that the regulations could conflict because Sec.  1.73 may 
``indirectly'' limit the number of counterparties. A position limit, of 
course, can have the effect of limiting the number of counterparties in 
the sense that if a trader can only execute 100 lots, the trader cannot 
have more than 100 counterparties. But such an indirect result is 
distinguishable from the conduct prohibited by Sec.  1.72(b)--the 
deliberate setting of limits on the number of counterparties. The first 
is a legitimate risk management tool; the second is an unnecessary 
impediment to the free and open trading that would promote liquidity.
    Section 1.72(c) would prohibit only limits on the size of positions 
with specific counterparties. It does not prohibit limits tied to 
executing firms. Moreover, it specifically provides that overall 
position limits are permissible. Thus, there is no conflict between 
Sec.  1.72(c) and Sec.  1.73.
    The Commission also does not believe that the broad requirements of 
the recently-promulgated Sec.  23.600 make proposed Sec.  1.73 
redundant. Section 23.600 sets out broad principles applicable to all 
SDs and MSPs. As proposed, Sec.  23.609 would apply only to those SDs 
and MSPs that are clearing members of a DCO. The Commission believes 
that if an SD or MSP takes on the additional risks and responsibilities 
of clearing, it should undertake risk management procedures similar to 
those undertaken by clearing FCMs for their proprietary accounts. 
Clearing members pose risks to DCOs and users of DCOs that are not 
posed by SDs and MSPs that are not clearing members.

V. Effective Dates

A. Summary of Comments

    Arbor, Citadel, and Eris urged the Commission to prioritize the 
entire rule in the final rulemaking process.
    The Banks, DB, EEI, and ISDA commented that the Commission should 
not rush this proposal.
    Wells Fargo commented that the Commission should delay compliance 
until most industry systems meet the real-time acceptance standard. LCH 
requested that the Commission delay compliance for 9 months, if the 
rules are adopted as proposed. AllianceBernstein commented that the 
Commission's recently proposed phased implementation provides ample 
time for the market to make final preparations, and no ``interim'' 
execution documentation arrangements are necessary. Morgan Stanley 
stated that real-time clearing and risk limit compliance verification 
cannot be developed quickly enough to abandon trilateral agreements.

B. Discussion

    This rulemaking includes rules applicable to FCMs, SDs, MSPs, DCMs, 
SEFs, and DCOs. In addressing implementation, it is important to 
distinguish between FCMs, DCMs, and DCOs, on the one hand, and SDs, 
MSPs, and SEFs, on the other.
    FCMs, DCMs, and DCOs are currently involved in clearing swaps. 
Entity definitions are not necessary for them. Product definitions are 
not necessary for the implementation of the rules applicable to them. 
The products currently being cleared as swaps by DCOs are commonly 
characterized as such by market participants. To delay implementation 
of these rules pending implementation of the further product definition 
rules would be to deny market participants pricing, operational, and 
risk-management benefits unnecessarily.
    No firms are currently registered as SDs, MSPs, or SEFs. Therefore, 
the rules applicable to these entities will have no practical effect 
until other rulemakings are completed, such as the further entity 
definition rulemaking. Nevertheless, many entities currently expect to 
operate as SDs, MSPs, or SEFs, regardless of the precise contours of 
the entity definitions. It would be more efficient for such entities, 
particularly those that are currently active in the

[[Page 21291]]

markets, to develop their systems and procedures in anticipation of 
being subject to these rules as soon as they become applicable. Indeed, 
failing to take such measures would disadvantage those that did not 
prepare for the imminent regulatory framework. This approach would also 
avoid temporary gaps or discrepancies in the system of rules addressing 
client clearing documentation, trade processing, and clearing member 
risk management resulting from differing implementation schedules for 
various entities.
    As discussed above, the Commission believes that implementation of 
these rules is essential to effective clearing of swaps. The Commission 
has determined that for FCMs, DCMs, and DCOs, these rules shall become 
effective October 1, 2012. For SDs and MSPs, these rules shall become 
effective on the later of October 1, 2012, or the date that the 
registration rules become effective.\55\ For SEFs, these rules shall 
become effective on the later of October 1, 2012, or the date that the 
rules implementing the core principles for SEFs become effective.\56\ 
The Commission believes that this approach strikes an appropriate 
balance between those commenters who urged implementation as quickly as 
possible and those who urged delayed implementation.
---------------------------------------------------------------------------

    \55\ Registration of Swap Dealers and Major Swap Participants, 
77 FR 2613 (Jan. 19, 2012).
    \56\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214 (Jan. 7, 2011).
---------------------------------------------------------------------------

VI. Consideration of Costs and Benefits

Introduction

    CEA Section 15(a) requires the CFTC to consider the costs and 
benefits of its action before promulgating a regulation under the CEA, 
specifying that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations.\57\ To the extent that these final regulations repeat 
the statutory requirements of the Dodd-Frank Act, they will not create 
costs and benefits beyond those resulting from Congress's statutory 
mandates in the Dodd-Frank Act. However, to the extent that the 
regulations reflect the Commission's own determinations regarding 
implementation of the Dodd-Frank Act's provisions, such Commission 
determinations may result in other costs and benefits. It is these 
other costs and benefits resulting from the Commission's determinations 
pursuant to and in accordance with the Dodd-Frank Act that the 
Commission considers with respect to the Section 15(a) factors.
---------------------------------------------------------------------------

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

    The regulations contained in this Adopting Release were proposed in 
four separate notices of proposed rulemaking (``NPRMs''). Sections 
1.72, 1.74, 23.608, 23.610, 39.12(a)(1)(iv), and 39.12(b)(7) were 
proposed in Customer Clearing Documentation and Timing of Acceptance 
for Clearing,\58\ sections 23.506, 37.702(b), and 38.601(b) were 
proposed in Requirements for Processing, Clearing, and Transfer of 
Customer Positions,\59\ sections 1.73 and 23.609 were proposed in 
Clearing Futures Commission Merchant Risk Management,\60\ and 1.35(a-
1)(5)(iv) was proposed in Adaptation of Regulations to Incorporate 
Swaps.\61\ The Commission is finalizing the rules contained in this 
Adopting Release together because they address three overarching, 
closely-connected aims: (1) Non-discriminatory access to counterparties 
and clearing; (2) straight-through processing; and (3) effective risk 
management among clearing members. Each of these provides substantial 
benefits for the markets and market participants.
---------------------------------------------------------------------------

    \58\ See 76 FR 45730 (Aug. 1, 2011).
    \59\ See 76 FR 13101 (Mar. 10, 2011).
    \60\ See 76 FR 45724 (Aug. 1 2011).
    \61\ See 76 FR 33066 (Jun. 6, 2011).
---------------------------------------------------------------------------

    The regulations related to non-discriminatory access concern 
customer clearing documentation. Specifically, they prohibit FCMs, SDs, 
MSPs, and DCOs from entering into agreements, including those known in 
the industry as ``trilateral agreements,'' with terms restricting an 
FCM's customer's ability to access all willing counterparties in the 
market and obtain a swap on reasonably competitive terms.\62\ Open 
access, unrestrained by contractual terms of this type, is critical to 
the efficiency and financial integrity of the swap markets.
---------------------------------------------------------------------------

    \62\ See Sec. Sec.  1.72, 23.608, and 39.12(a).
---------------------------------------------------------------------------

    This first set of rules is designed to avoid the undesirable 
consequences likely to result from trilateral agreements, which include 
limits on the range of eligible counterparties with whom market 
participants can transact, reduced competition for customers' business, 
fragmentation of customers' trading limits at the FCM, and distorted 
price discovery.\63\ Reduced competition in this context may lead to 
wider spreads, higher transaction fees (i.e., increased costs for 
customers), and reduced market efficiency. Moreover, limiting a market 
participant's access to less than all willing counterparties, including 
those offering trades on terms approximating the best available in the 
market could undermine price discovery, and market efficiency. The 
first cluster of rules seeks to mitigate these problems through 
provisions fostering open access to all available counterparties and 
democratized access to clearing services. To that end, it prevents 
FCMs, SDs, MSPs, and DCOs from entering into any agreement that would: 
(a) Disclose the identity of a customer's original executing 
counterparty to the FCM, SD, or MSP; (b) limit the number of 
counterparties available to the customer; (c) set any limits on the 
size of position a customer may take (other than the general limit 
established by their FCM); (d) impede a customer's access to trades 
that approximate the best terms available; or (e) prevent compliance 
with timeframes for processing swaps that are required by other parts 
of these rules.
---------------------------------------------------------------------------

    \63\ Trilateral agreements were introduced in June 2011. On 
August 1, 2011 the Commission issued the NPRM of this rule 
prohibiting certain terms that are central to the trilateral 
agreements and as a consequence, adoption of the agreements thus far 
has been extremely limited.
---------------------------------------------------------------------------

    A second group of regulations mandates straight-through 
processing--rapid processing of swap transactions, including rapid 
submission to the DCO for acceptance or rejection from clearing--for 
swaps required to be cleared or that the counterparties elect to clear. 
In this regard, the regulations impose requirements on FCMs, SDs, MSPs, 
DCMs, SEFs, and DCOs that, taken together, are designed to ensure that 
counterparties know whether a swap will be accepted for clearing at, or 
soon after, the time of execution which is a critical condition for 
eliminating counterparty risk that undermines democratized access to 
the swap markets.\64\ When two parties enter into a bilateral swap 
transaction with the intention of clearing a swap, each party bears 
counterparty risk with respect to the other until the swap enters 
clearing. Once the swap enters clearing, the clearinghouse becomes the 
counterparty to each side of the trade, which minimizes and 
standardizes counterparty risk.To the extent that there is a period of 
time between execution and clearing, counterparty risk may develop as 
post-execution market movements impact the swap's value and each party 
could face significant costs if the swap is

[[Page 21292]]

eventually rejected from clearing and subsequently broken. Both 
counterparties run the risk that they may have to replace the swap 
under different, less desirable terms if the market has moved against 
them during the intervening time. In addition, SDs, whether providing 
liquidity to a non-SD or SD counterparty, may have to unwind or offset 
any positions they have taken on to hedge the original swap; this can 
also be costly, again, particularly if the market has moved against 
them since the execution of the original swap. Bilateral agreements 
typically address such ``breakage'' costs, but the effectiveness of 
those provisions could be compromised if either counterparty is 
unwilling or unable to make the other whole for losses. Such costs are 
potentially significant, particularly when the markets are volatile and 
the latency period is long, giving SDs an incentive to discriminate 
among counterparties on the basis of their credit quality. To mitigate 
those costs and promote more democratized access to the markets, it is 
critical that executed swap transactions be accepted or rejected from 
clearing quickly.
---------------------------------------------------------------------------

    \64\ See Sec. Sec.  1.35, 1.74, 23.506, 23.610, 37.702, 38.601, 
and 39.12(b) of the Commission's regulations.
---------------------------------------------------------------------------

    These rules contain several requirements that are designed to 
ensure that swaps are processed and accepted or rejected promptly from 
clearing, including requirements that FCMs, SDs, MSPs, SEFs, DCMs, and 
DCOs coordinate with one another to ensure they have the capacity to 
accept or reject trades ``as quickly as technologically practicable if 
fully automated systems were used.'' For trades executed on a DCM or 
SEF, the Commission anticipates that processing and submitting a trade 
for clearing would be near real-time, thus substantially eliminating 
the potential for significant counterparty risk accumulation during the 
latency period. For trades that are not executed on an exchange, but 
are required to be cleared, the rules require submission for clearing 
``as soon as is technologically practicable after execution'' but no 
later than by the close of business on the day of execution. Similarly, 
swaps not executed on an exchange and for which clearing is elected by 
the counterparties (but not required by law) must also be submitted for 
clearing as soon as technologically practicable, but not later than the 
day following the latter of execution or the decision to clear.
    The Commission expects that these rules requiring coordination to 
ensure rapid processing and acceptance or rejection of swaps for 
clearing will be beneficial in several respects. First, they will 
promote rapid adoption in the market of currently existing technologies 
that will make possible near real-time processing of exchange traded 
swaps. For trades that are pre-screened, or executed on an exchange, 
this will virtually eliminate counterparty credit risks associated with 
clearing rejection. The rules will also significantly reduce the amount 
of time needed to process swaps that are not traded on an exchange; 
although costs associated with latency-period counterparty credit risk 
cannot be completely eliminated in this context, the rules will 
substantially reduce the need to discriminate among potential 
counterparties in off-exchange trades, as well as the potential costs 
associated with rejected trades. By reducing or eliminating the 
counterparty risk that could otherwise develop during the latency 
period, these rules promote a market in which all eligible market 
participants have access to counterparties willing to trade on terms 
that approximate the best available terms in the market. This rule may 
improve price discovery and promote market integrity.
    The third set of rules in this Adopting Release requires that FCMs, 
SDs, and MSPs who are clearing members of a DCO implement sound risk 
management practices that help ensure their financial strength. A DCO's 
financial strength depends on the continued financial strength of its 
clearing members. The Commission believes that requiring clearing 
members to engage in certain risk management procedures will provide 
additional assurance of their ability to meet their financial 
obligations to their respective DCOs, particularly in times of market 
stress.
    The third group of rules in this Adopting Release therefore 
requires clearing members to establish overall risk-based position 
limits for their proprietary trading accounts and each of their 
customer accounts, and to screen trades for compliance with those 
limits. The rules also require clearing members to monitor for 
adherence to such risk-based position limits, both intra-day and 
overnight; to conduct rigorous stress tests on significant accounts at 
least once per week; to evaluate their ability to meet initial and 
variation margin requirements at least once per week; to evaluate the 
probable cost of liquidating various accounts at least once per month; 
to test all lines of credit at least once per year; and to establish 
procedures and records that ensure and verify their compliance with 
these requirements. Many of these requirements reflect common practices 
for clearing members. These rules promote consistent use of risk 
management best practices among clearing members, while also allowing 
flexibility to encourage innovation and adaptation to the specific 
operating requirements of diverse clearing members. The Commission 
anticipates that the requirements themselves will help to ensure that 
clearing members and their respective DCOs remain financially sound 
during periods of market stress. Moreover, the Commission believes that 
the flexibility these requirements allow will minimize attendant costs 
and enable members to adapt their risk management practices to new 
market demands and develop more effective strategies for monitoring and 
managing risk.
    In the sections that follow, the Commission evaluates the costs and 
benefits relevant to each of the three groups of rules pursuant to 
Section 15(a) of the CEA. Each section specifically addresses the 
individual Section 15(a) factors with respect to the rule group and 
responds to comments pertaining to that group. In its analysis, the 
Commission has endeavored, where possible, to quantify costs and 
benefits. However, the costs and benefits are either indirect, highly 
variable, or both and therefore are not subject to reliable 
quantification at this time. Nevertheless, the Commission has 
considered all the comments received, a broad range of costs and 
benefits pertaining to democratized swap market access, improvements 
and challenges in risk management, development and implementation of 
necessary technology, market liquidity, and several others as detailed 
below.

Cost Benefit Consideration by Rule Group

1. Customer Clearing Documentation
    Sections 1.72, 23.608, and 39.12(a)(1)(vi) restrict FCMs, SDs and 
MSPs, and DCOs, respectively, from entering into any arrangements that 
would (a) disclose the identity of a customer's original executing 
counterparty to any FCM, SD, or MSP; (b) limit the number of 
counterparties with whom a customer may trade; (c) restrict the size of 
a position that the customer may take with any individual counterparty 
apart from the overall limit for all positions held by the customer at 
the FCM; (d) limit a customer's access to trades on terms that have a 
reasonable relationship to the best terms available; or (e) prevents 
compliance with other regulations requiring rapid processing and 
acceptance or rejection from clearing.
    The Commission believes that these rules proscribe certain terms in 
trilateral agreements that were proposed by some

[[Page 21293]]

SDs and FCMs. However, the Commission notes that trilateral agreements 
were not used in swap markets prior to June 2011. SDs historically have 
provided liquidity and managed risk without the use of trilateral 
agreements, and the Commission understands that such agreements have 
not yet been widely adopted. Therefore, it is unlikely that these 
rules, by preventing certain terms in trilateral agreements, will cause 
widespread changes in current market practices for managing 
counterparty risk or for negotiating bilateral agreements.\65\ 
Moreover, the rules adopted in this Adopting Release will enhance risk 
management in other ways, obviating any perceived need for terms in 
trilateral agreements that can harm market competitiveness, efficiency, 
and price discovery. In that context, the Commission concludes that 
these changes are justified.
---------------------------------------------------------------------------

    \65\ To the extent that changes will occur, the costs attendant 
to them are indirect and cannot be estimated without data that is 
not available at this time.
---------------------------------------------------------------------------

a. Protection of Market Participants \66\ and the Public
---------------------------------------------------------------------------

    \66\ The term ``market participants'' as it is used throughout 
the cost benefit considerations section includes SDs, MSPs, FCMs, 
and the customers of FCMs (i.e., SD, MSP, and non-SD/MSP swap 
counterparties).
---------------------------------------------------------------------------

    The Commission is concerned that by giving FCMs the ability to 
establish and communicate sub-limits on the positions a specific SD may 
clear with a specific customer, the trilateral agreements may allow 
FCMs to influence the amount of business that a customer conducts with 
specific counterparties, or to constrain the number or choice of 
counterparties with whom a customer is able to trade. This concern is 
amplified because a number of FCMs have affiliated SDs who (along with 
other SDs with whom the FCM-affiliated SD competes for swap transaction 
business) are potential counterparties to the FCM's customers. To the 
extent that FCMs could use terms in trilateral agreements to influence 
a customer's choice from among potential SD counterparties, the 
agreements could provide a means for FCMs to direct business toward an 
associated SD (or to raise the cost of doing business with an 
unassociated SD) to the diminution of competition to provide swap 
liquidity generally; in this way, the agreement may work to the 
disadvantage of those market participants that might benefit from 
better competition. Moreover, by limiting a customer's range of 
potential counterparties and the size of positions that may be entered 
with specific counterparties, the FCM establishes a condition that in 
some circumstances could preclude matching of the customer's order with 
the counterparty that is willing to provide the best available terms in 
the market at that time. This sub-optimal outcome increases costs for 
the customer, and any systematic increases in costs to the customer 
will indirectly impact prices that the public ultimately pays for 
related goods and services.
    In addition, such limitations also impose costs on potential 
counterparties who are prevented from trading with customers by 
restrictions in the trilateral agreements. If those counterparties are 
dealers, they lose the opportunity to win that customer's business. If 
those counterparties are non-dealers, they lose the liquidity that 
would have otherwise been available to them as a consequence of the 
customer's need to execute a swap. Last, an FCM could, intentionally or 
unintentionally, signal to the market information about the customer 
through designation notices. For example, clearing members may be more 
likely to reduce a customer's limits during a time of market stress. 
Communicating reductions on various sub-limits to potential SD 
counterparties may signal (perhaps wrongly) that the credit quality of 
the customer is deteriorating. This signal could make it more difficult 
for the customer to transact at a time when their ability to transact 
is particularly critical.
    These potential costs to customers and the public will be 
forestalled or altogether eliminated by these rules. These benefits, 
however, are unquantifiable for several reasons. First, many of the 
potential costs and benefits associated with trilateral agreements are 
indirect and dispersed to a degree that they would be difficult to 
estimate even if there were ample data available. Second, ample data is 
not available. The Commission does not have any data that characterizes 
pricing, liquidity, or other important variables in the presence and 
absence of trilateral agreements. Last, trilateral agreements were 
introduced in mid-June 2011, and the Commission believes that adoption 
of trilateral agreements thus far has been extremely limited. Further, 
the Commission believes that the NPRM of this rule, which was released 
a few weeks after trilateral agreements were introduced, may be a 
primary factor deterring rapid adoption of these agreements.\67\ To the 
extent that this is correct, the current rate of adoption and impact on 
the market is unlikely to be a reflection of what the impact of 
trilateral agreements would be in the absence of this rule. In other 
words, even if the Commission had the data necessary to estimate the 
current impact of trilateral agreements (which it does not), those 
estimates would not accurately reflect the potential impact of these 
agreements. However, by prohibiting contractual terms that would limit 
the number of potential counterparties, set sub-limits on a customer's 
positions, or restrict a customer's access to terms reasonably related 
to the best terms available in the market, these rules provide 
significant protection to market participants.
---------------------------------------------------------------------------

    \67\ See 76 FR 45730, Aug. 1, 2011.
---------------------------------------------------------------------------

    With respect to the customer-identity nondisclosure requirement, 
several commenters stated that protecting anonymity is critical as a 
condition for open, efficient, and competitive swap markets.\68\ 
Maintaining the anonymity of a customer's counterparty prevents the 
clearing member from sharing with any affiliated SDs competitively 
sensitive information about its customers' counterparties--who may be 
competitors and/or subsequent swap counterparties to the affiliated 
SD--that affiliated SDs can use for their own gain (and that of the SD/
FCM affiliate group). This rule, together with the rule that prevents 
FCMs from establishing sub-limits, prohibits arrangements that allow 
FCMs to share competitively sensitive information that could undermine 
competition to provide swap liquidity--including information that 
provides transparency into customer swap positions and exposures. In so 
doing, the rules better protect those swap counterparty market 
participants that benefit from greater competition (e.g., as may be 
reflected in improved bid/ask spreads) to provide the desired swaps. 
The value of such protection would vary depending on the specific type 
and timing of information that is communicated as well as the role and 
incentives of the entity receiving that information relative to the 
entity about which the information is disclosed. These factors are 
highly variable and impracticable to quantify, and, as a consequence, 
the Commission does not have adequate information to reasonably 
estimate the additional costs that might be caused by such disclosures, 
or the value of preventing such costs.
---------------------------------------------------------------------------

    \68\ See MFA, Arbor, SIFMA, D. E. Shaw, AIMA, and Vizer.
---------------------------------------------------------------------------

    In addition, SDs, FCMs, and FCM customers may soon expend resources 
negotiating trilateral agreements. By prohibiting certain provisions 
from inclusion in trilateral agreements, these rules reduce the 
likelihood that SDs, FCMs, and customers will enter into them. To the 
extent that this occurs,

[[Page 21294]]

SDs, FCMs, and customers will save the substantial costs that otherwise 
would be required to negotiate such agreements.\69\ Vanguard, for 
example, estimates that, if it was forced by SDs to implement 
trilateral agreements, it may have to negotiate and enter into 
approximately 4,800 new trilateral agreements per year.\70\ In 
addition, those agreements would create significant administrative and 
ongoing legal costs associated with review, periodic update, and, for 
customers, compliance to monitor their own activities. Some commenters 
suggested that the resources necessary to create and administer 
trilateral agreements would divert resources from implementing market 
infrastructure that is necessary to facilitate straight through 
processing.\71\
---------------------------------------------------------------------------

    \69\ See AllianceBernstein, Citadel, D. E. Shaw, MFA, SIFMA, and 
Vanguard.
    \70\ See Vanguard.
    \71\ See e.g., Citadel, Alliance Bernstein, and MFA.
---------------------------------------------------------------------------

    The Commission recognizes that prohibiting certain arrangements 
that are currently in trilateral agreements may increase counterparty 
risks (costs) that SDs face due to the possibility that swaps they 
enter could be rejected from clearing. Trilateral agreements are 
intended to increase the degree of the SD's certainty that trades with 
certain customers and within certain limits will be accepted for 
clearing. The prohibitions contained in the first group of rules are 
likely to prevent SDs from using trilateral agreements in this way, 
creating certain potential costs for the SDs who have established 
trilateral agreements with some of their customers and the customers' 
FCMs.\72\ However, as noted above, there are also significant costs 
associated with trilateral agreements. Moreover, in the Commission's 
judgment, provisions contained within the second cluster of rules 
(i.e., rules pertaining to straight-through processing) will mitigate 
the potential costs to SDs and other market participants substantially. 
More specifically, as discussed below, the second group of rules 
mitigates costs associated with pre-clearing-approval counterparty risk 
through straight-through-processing requirements; the Commission 
anticipates these rules will drive rapid implementation of existing 
market technology to substantially narrow the window of counterparty 
risk for SDs between execution and clearing acceptance/rejection.
---------------------------------------------------------------------------

    \72\ These costs, if compared against the baseline of current 
market practice, depend on the extent to which trilateral agreements 
containing terms proscribed in these rules are currently being used. 
Based on anecdotal feedback from market participants, the Commission 
believes that trilateral agreements have not yet been widely 
adopted. Moreover, as suggested above, the Commission believes that 
requiring more rapid swap processing and clearing determinations 
will offset these costs, diminishing them significantly over time. 
However, the Commission does not have sufficient data regarding the 
number of trilateral agreements currently in place, or the number 
and terms of swap transactions that they impact, to estimate these 
costs.
---------------------------------------------------------------------------

    Moreover, commenters have suggested that in certain circumstances, 
the sub-limits associated with trilateral agreements may actually 
exacerbate the counterparty risk problem by delaying processing and 
increasing the latency period during which counterparty exposure 
develops.\73\ If a customer enters a swap with an SD without a 
trilateral agreement in place, the FCM may need to check with and 
adjust the limits of various SDs who do have trilateral agreements set 
up with that customer before making a clearing determination. The 
administrative requirements of these steps could delay clearing. By 
prohibiting agreements that create such delays, the rules reduce the 
latency period for some transactions, which also reduces the amount of 
counterparty risk that can develop during that period.
---------------------------------------------------------------------------

    \73\ See e.g., AIMA, SIFMA, Vanguard, and MFA.
---------------------------------------------------------------------------

    Notwithstanding the inability to quantify in dollar terms the costs 
of this change in risk avoidance and mitigation practice, in the 
Commission's judgment the change is justified by the critical benefits 
that the rules provide regarding open access to, and democratization 
of, swap markets.
b. Efficiency, Competitiveness and Financial Integrity of Markets
    These rules specifically prohibit any agreement that would limit a 
customer's potential available counterparties. This prohibition 
encourages competition among SD counterparties for the customer's 
business, which is likely to reduce spreads and promote the customer's 
ability to obtain swap positions on terms approaching or equaling the 
best available terms in the market at that time. Accordingly, the 
Commission expects the spreads and terms under which customers are able 
to obtain swaps to improve when compared with a situation in which 
customers' range of potential counterparties is constrained by 
counterparty-specific sub-limits established by the FCM. It is possible 
that the effect of greater competition on spreads and terms may be 
mitigated by the impact of increased risk to the dealers, which is also 
likely to impact spreads and terms. However, the Commission believes 
that the latter effects will be minimized and diminish over time as the 
processing of trades becomes more rapid.
    As suggested above, counterparty-specific sub-limits increase 
expenses related to monitoring and administrative requirements, and 
commenters have stated that in some circumstances trilateral agreements 
may actually slow swap processing. The prohibitions contained in these 
rules will prevent such arrangements, thereby leading to greater swap 
processing speed in those circumstances.
c. Price Discovery
    If certain customers are prevented from accessing swaps on terms 
that approximate the best available terms in the market at that time, 
and then the terms of that trade are reported in real time, it risks 
sending misleading signals to the market about the price at which 
certain swaps are available. This result has the potential to undermine 
price discovery. The prohibitions in these rules will help ensure that 
customers in the market can access trades on approximately the best 
terms available in the market, both in general by prohibiting 
agreements that would prevent such an outcome, and more specifically by 
prohibiting any (1) agreements that would limit the number of 
counterparties with whom a customer may trade, and (2) counterparty-
specific sub-limits on the customer's positions.
d. Sound Risk Management Practices
    By ensuring that customers are able to trade with all willing 
counterparties in the market, the rules promote greater liquidity 
available to the customer and to potential counterparties, which makes 
it more likely they will be able to enter swaps and offset positions as 
needed. This result is important for maintaining effective offsetting 
positions as underlying positions change. Moreover, greater liquidity 
may push transaction costs downward, which enables market participants 
to execute their risk management strategies in a more cost-effective 
manner.
    To the extent that prohibiting certain terms typical of trilateral 
agreements will reduce an SD's certainty about whether the swap will be 
cleared, it may increase the SD's risk management costs. However, as 
noted above, trilateral agreements did not appear until June 2011, 
which suggests that SDs are capable of managing their risks effectively 
in the absence of certain terms contained in those agreements. For 
example, SDs conduct due diligence in order to evaluate their 
counterparty's credit-worthiness, and may choose to negotiate terms in 
the bilateral agreement that determine what

[[Page 21295]]

obligations each counterparty has in the event that a swap should be 
rejected from clearing. SDs may have to adjust their risk management 
strategies for the possibility that their counterparty may not be able 
to meet the terms of the bilateral agreement if the trade is rejected. 
If such bilateral agreements provide that the swap will be terminated 
when rejected from clearing, the dealer may have to unwind or offset 
certain aspects of positions that they have taken to offset the 
original position. The Commission anticipates that SDs will account for 
these potential additional costs in the terms and pricing of the swaps 
they offer. In most cases, however, the risk management strategies 
described above reflect current market practice. Therefore, much of the 
costs associated with those practices are not a function of these 
rules. Last, these potential costs will be mitigated by faster 
processing, and, in cases where prescreening or near real-time post-
execution screening are possible, eliminated.\74\
---------------------------------------------------------------------------

    \74\ Several commenters pointed out that in an environment where 
real-time clearing determinations are made, bilateral execution 
agreements are not necessary. As evidence, commenters pointed to 
Clearport, Globex, and WebICE. Each of these platforms facilitate 
real-time clearing determinations, and each does so without 
bilateral execution agreements. See e.g., SDMA and Javelin.
---------------------------------------------------------------------------

    Some SDs have posited that market liquidity for some customers may 
decrease because SDs will not provide swaps to counterparties whose 
credit quality is lower unless a trilateral agreement is executed. The 
Commission recognizes that any factor that undermines SDs' confidence 
that swaps will be cleared may cause them to avoid certain trades or to 
increase the price at which they are willing to offer swaps to certain 
counterparties. However, because SDs have been providing liquidity to 
market participants for years in the absence of trilateral agreements, 
and adoption of such agreements is not yet widespread, the Commission 
does not believe that preventing certain provisions of these agreements 
will significantly reduce liquidity in swap markets. Moreover, certain 
aspects of these rules, such as requirements for rapid swap processing 
and clearing determinations, are likely to promote additional liquidity 
by reducing the counterparty risk that could develop for SDs between 
the time of execution and clearing.\75\
---------------------------------------------------------------------------

    \75\ See section 2, Timing of Acceptance of Trades for Clearing, 
below.
---------------------------------------------------------------------------

e. Other Public Interest Considerations
    The Commission has not identified additional public interest 
considerations beyond those discussed above.
f. Response to Comments
    Several commenters noted that the benefits of the proposed rules 
include: reduced systemic risk; \76\ reduced barriers to entry and 
greater competition among liquidity providers, clearing members, and 
execution venues; \77\ enhanced market depth and liquidity; \78\ 
substantially reduced transaction costs; \79\ narrower bid-ask spreads; 
\80\ and increased access to best execution via the freedom to execute 
with any counterparty in the market.\81\ D. E. Shaw and MFA commented 
that the proposed rules would preserve anonymity among trading 
participants, and facilitate the development of electronic trading and 
central limit order books.
---------------------------------------------------------------------------

    \76\ See AllianceBernstein, Arbor, CBA, CIEBA, Citadel, D. E. 
Shaw, and MFA.
    \77\ See AllianceBernstein, Arbor, Citadel, D. E. Shaw, and MFA.
    \78\ Id.
    \79\ See AllianceBernstein, Arbor, and CIEBA.
    \80\ See AllianceBernstein, Citadel, D. E. Shaw, and MFA.
    \81\ See AllianceBernstein, Citadel, D. E. Shaw, and MFA.
---------------------------------------------------------------------------

    Additionally, several commenters remarked that without the final 
rules, the framework for trilateral agreements would substantially 
increase costs for market participants.\82\ AllianceBernstein suggested 
that without the proposed rules, resources would be diverted from 
forward-looking technological solutions for clearing certainty, and 
instead used to prop-up legacy systems for credit intermediation.\83\ 
Vanguard stated that the trilateral agreement will introduce 
significant costs and delays to the timeline for swaps clearing 
implementation because parties will be forced to execute a myriad of 
documents as a pre-condition to clearing and trading.
---------------------------------------------------------------------------

    \82\ See AllianceBernstein, Citadel, D. E. Shaw, MFA, SIFMA, and 
Vanguard.
    \83\ See also MFA, Citadel.
---------------------------------------------------------------------------

    Moreover, multiple commenters stated that while they are generally 
loathe to encourage regulations that interfere with private contracts 
between two parties, they believe that the undesirable consequences of 
trilateral agreements, such as limiting a customer's choice of 
counterparties and trading venues, impairing their access to the best 
terms available, the potential for anticompetitive effects, creating 
barriers to entry for new liquidity providers, delaying adoption of 
technology that will enable real time processing and clearing 
determinations, and precluding anonymity that is a necessary condition 
for trading on central limit order books, justify these rules.\84\ In 
this vein commenters maintained that the largest SDs have sufficient 
power deriving from their role as swap liquidity providers to coerce at 
least some market participants into signing ``optional'' trilateral 
agreements, and expressed concern that the agreement could rapidly 
become an industry standard despite the resistance of buy-side 
firms.\85\ The Commission agrees that it is necessary, in this case, to 
establish rules that prevent trilateral agreements from being used to 
limit open and competitive swap markets.
---------------------------------------------------------------------------

    \84\ See SDMA, AIMA, Trading Firms, MFA, Arbor, DRW, and 
Jeffries.
    \85\ See AIMA, Trading Firms, CIEBA, Citadel.
---------------------------------------------------------------------------

    In supporting the use of trilateral agreements some commenters have 
suggested that they are analogous to the FIA/FOA sponsored 
International Uniform Brokerage Execution Services (``Give-Up'') 
Agreement (``Futures Give-Up Agreement''), which is used in the futures 
markets. The Futures Give-Up Agreement is between an executing broker, 
clearing broker, and customer, and allows the clearing broker to 
``place limits or conditions on the positions it will accept for the 
give-up for customer's account.'' \86\ Commenters expressed the opinion 
that the risks faced by executing brokers and clearing firms in futures 
markets are substantially similar to the risks faced by SDs and 
clearing members in the swap markets, and therefore the use of 
trilateral agreements should be acceptable.\87\
---------------------------------------------------------------------------

    \86\ See Morgan Stanley, FIA/ISDA, Banks.
    \87\ See Morgan Stanley.
---------------------------------------------------------------------------

    However, the Commission is not persuaded that the points of 
similarity between Futures Give-Up Agreements and trilateral agreements 
provide sufficient evidence to demonstrate that the latter may be used 
in swap markets without adverse effects on market participants as 
discussed above. The two types of agreements are distinguishable in 
important respects. The parties to a Futures Give-Up Agreement include 
a customer and two brokers acting on behalf of the customer. The 
parties do not include the customer's trading counterparty in the 
relevant transaction. Moreover, Futures Give-Up Agreements do not: (a) 
Disclose the identity of a customer's original executing counterparty 
to any FCM, SD, or MSP; (b) limit the number of counterparties with 
whom a customer may trade; (c) restrict the size of a position that the 
customer may take with any individual counterparty apart

[[Page 21296]]

from the overall limit for all positions held by the customer at the 
FCM; (d) limit a customer's access to execution of trades on terms that 
have a reasonable relationship to the best terms available; or (e) 
prevent compliance with other regulations requiring rapid processing 
and acceptance or rejection from clearing.
    Some commenters suggested that by specifying the types, size, and 
volume of trades that they are willing to engage in with certain 
customers, trilateral agreements help increase the range of 
counterparties with whom SDs are willing to trade.\88\ There is not 
sufficient data available to the Commission to evaluate these 
assertions, and commenters did not provide any data to support them. 
The Commission acknowledges that factors reducing an SD's certainty 
about whether a swap will be cleared could prompt it to limit its 
business with certain counterparties or to change the terms under which 
it offers swaps to certain counterparties, but the trilateral 
agreements could also constrain either the range of counterparties with 
whom an SD is willing to trade, the size of positions it is willing to 
offer to certain counterparties, or both.\89\ In other words, while 
some commenters are concerned that prohibiting certain terms in 
trilateral agreements may constrain liquidity, the Commission 
recognizes that trilateral agreements also constrain liquidity. It is 
not knowable at this time which force is likely to have the greater 
constrictive effect on the liquidity that an SD is willing to provide 
to certain counterparties. Moreover, as stated above, some aspects of 
these rules, including the straight-through-processing and risk 
management provisions, are likely to substantially reduce, if not 
eliminate, SD latency exposure and encourage SDs to provide greater 
liquidity. Accordingly, in the Commission's judgment, proscribing 
certain terms of trilateral agreements (with their negative 
implications for competition, efficiency and price discovery) is the 
preferable approach from a systemic standpoint to promote liquidity.
---------------------------------------------------------------------------

    \88\ See Morgan Stanley, UBS, and EEI.
    \89\ The first page of the FIA-ISDA Cleared Derivatives 
Execution Agreement states that ``EXECUTION PARTIES MAY REQUEST THAT 
A FORM OF THIS AGREEMENT (OR THE ANNEXES HERETO) BE EXECUTED AS A 
CONDITION TO ENTERING INTO TRANSACTIONS INTENDED TO BE CLEARED.'' 
See http://www.futuresindustry.org/downloads/ClearedDerivativesExecutionAgreement_June142001.pdf.
---------------------------------------------------------------------------

    Commenters opposed to the rules stated that prohibiting trilateral 
agreements would require buy-side and sell-side firms to subject 
themselves to risks that they do not face today and would make it 
necessary for dealers to expend resources negotiating bilateral 
agreements with customers and evaluating the customer's credit prior to 
executing a transaction.\90\ However, this would only be true to the 
extent that trilateral agreements are (1) being used today to mitigate 
certain risks, and (2) make it unnecessary to negotiate bilateral 
agreements and evaluate a customer's counterparty risk. As stated 
above, the Commission believes that trilateral agreements are not 
widely used at this time and, thus, are providing dealers risk 
protection only to a limited extent. Moreover, it does not appear that 
trilateral agreements obviate the need to negotiate what might happen 
in the event of breakage; the Commission, therefore, does not believe 
that prohibiting certain provisions of trilateral agreements is likely 
to significantly impact the expenses associated with bilateral 
agreements.\91\
---------------------------------------------------------------------------

    \90\ See Banks, Morgan Stanley.
    \91\ See http://www.futuresindustry.org/downloads/ClearedDerivativesExecutionAgreement_June142001.pdf. The trilateral 
agreement template includes terms dictating what happens in the 
event that a swap is rejected from clearing. The CFTC believes, 
therefore, that these terms are likely negotiated and addressed even 
where trilateral agreements are used.
---------------------------------------------------------------------------

    Furthermore, commenters opposed to the rules stressed that the 
trilateral agreements are optional.\92\ They also noted that the 
trilateral agreements ``do not affirmatively limit'' a customer's 
ability to trade with willing counterparties or prohibit dealers and 
customers from entering positions greater than the sub-limit 
established by the FCM.\93\ However, even in the absence of 
``affirmative'' limitations, the agreement may have much the same 
effect. Some commenters stated that certain dealers have expressed 
unwillingness to continue providing swaps to certain customers if they 
did not sign a trilateral agreement; the agreement itself contemplates 
this possibility.\94\ The Commission's concern with conduct of this 
type is heightened by information suggesting that a relatively small 
number of dealers provide a significant amount of swap liquidity 
available.\95\ Under these circumstances, each dealer that refuses to 
offer swaps in the absence of a trilateral agreement may significantly 
reduce liquidity available to a customer. Absent sufficient competition 
to provide liquidity, dealers may be able to impose restrictive, 
undesirable trilateral agreement terms on customers.
---------------------------------------------------------------------------

    \92\ See FIA/ISDA.
    \93\ See Morgan Stanley. See also FIA/ISDA, Banks.
    \94\ See n.71, above.
    \95\ See the OCC's Quarterly Report on Bank Trading and 
Derivatives Activities Third Quarter 2011, available at http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq311.pdf, which states, ``Derivatives activity in the 
U.S. banking system continues to be dominated by a small group of 
large financial institutions. Five large commercial banks represent 
96% of the total banking industry notional amounts and 85% of 
industry net current credit exposure.'' While the report only 
includes data related to positions held by U.S. banks, and 
incorporates derivatives that are not swaps, anecdotal evidence also 
supports the likelihood that a relatively small dealer population 
accounts for significant portions of swap liquidity.
---------------------------------------------------------------------------

    Commenters in favor of trilateral agreements suggested that concern 
about anti-competitive behavior could be addressed by allowing the 
customer to determine how their overall limit at the clearinghouse is 
allocated across potential counterparties. The Commission agrees that 
such an approach would mitigate the concern that FCMs could use 
trilateral agreements to influence a customer's choice of 
counterparties in an anti-competitive manner. However, it would not 
allow customers to take positions in excess of previously established 
sub-limits with certain counterparties without walking through the 
process of reallocating sub-limits, a process that could be time 
consuming. This result risks delay of swap processing and clearing 
determinations, or inducement of market participants to select 
suboptimal offers that comply with pre-established limits to avoid the 
delay. Such a delay could be particularly problematic in volatile 
market situations, where the ability to enter into positions quickly 
may be necessary in order to manage risk effectively.
2. Timing of Acceptance of Trades for Clearing
    Taken as a whole, the regulations in this cluster require SEFs, 
DCMs, SDs, MSPs, and DCOs to coordinate in order to facilitate real-
time acceptance or rejection of trades for clearing, including through 
development of the technology necessary to do so. In the case of 
cleared trades, the swaps must be processed and submitted to the DCO as 
soon as technologically practicable using fully automated systems. In 
the case of non-cleared trades, the swaps will be processed and 
submitted to the DCO as soon as is technologically practicable, but 
allows for processing to take slightly longer. More specifically:
Regarding Clearing Members
    Sections 1.74 and 23.610 require that FCMs, and SDs and MSPs, 
respectively, coordinate with the DCO to accept or reject trades for 
clearing ``as quickly as

[[Page 21297]]

would be technologically practicable if fully automated systems were 
used'' and do so by one of the following methods: (1) Pre-screening 
orders; (2) enabling the DCO to screen orders using criteria 
established by the FCM, SD or MSP; or (3) setting up systems that 
enable the DCO to communicate with and receive a reply from the FCM, 
SD, or MSP as soon as would be practicable if fully automated systems 
were used.
    Section 23.506 requires SDs and MSPs to: (1) Have the capacity to 
submit swaps that are not executed on a DCM or SEF (``OTC swaps'') to 
the DCO for clearing in a way that is acceptable to the DCO; (2) work 
with the DCO to process swaps in a manner that is ``prompt and 
efficient'' and that complies with 39.12(b)(7); (3) submit bilateral 
swaps to the DCO as soon as is technologically practicable but no 
later, if it is a swap subject to mandatory clearing, than the close of 
business on the day of execution, or, if it is a swap not subject to 
mandatory clearing, no later than the end of the following business day 
from the later of execution or the date when the parties decide to 
clear.
    Section 1.35 requires that for bunched trades that are cleared, 
post-trade allocations must occur on the day of execution, so that 
clearing records properly reflect the ultimate customers. (Bunched 
trades that are cleared are not given a delay for post-trade allocation 
before being submitted for clearing.) For bunched trades that are not 
cleared, post-trade allocations must happen by the end of the day they 
are executed.
Regarding Execution Platforms
    Section 38.601 requires that transactions executed on or through a 
DCM, other than transactions in security futures products, must be 
cleared on a DCO, and the DCM must work with DCOs to ensure ``prompt 
and efficient'' transaction processing such that the DCO can comply 
with Sec.  39.12(b)(7). Section 37.702(b) requires that SEFs coordinate 
with DCOs in order to route transactions to the DCO in a manner 
acceptable to the DCO, and to develop rules and procedures that 
facilitate prompt transaction processing in accordance with Sec.  
39.12(b)(7).

Regarding DCOs

    Section 39.12(b)(7) requires DCOs: (1) To coordinate with SEFs and 
DCMs to develop rules and procedures that facilitate ``prompt, 
efficient, and accurate'' processing of transactions received by the 
DCO; (2) to coordinate with FCMs, SDs, and MSPs to set up systems that 
enable the clearing member or the DCO acting on its behalf to accept or 
reject trades for clearing as swiftly as if fully automated systems 
were used; (3) for trades executed on SEFs or DCMs, to establish rules 
to accept or reject trades for clearing as fast as if fully automated 
systems were used, and to accept all trades for which both executing 
parties have a clearing member, and that satisfy the criteria of the 
DCO; and (4) for trades that are not executed on SEFs or DCMs, but that 
are for contracts listed by the DCO, to satisfy requirements similar to 
those applicable to trades that are executed on SEFs or DCMs.
a. Protection of Market Participants and the Public
    The Commission anticipates that this group of rules will provide 
significant benefits to market participants. First, by requiring that 
SEFs, DCMs, SDs, and MSPs coordinate in ways that will lead to faster 
processing and acceptance or rejection of swaps for clearing, the rules 
reduce the latency period during which counterparty risk can accumulate 
for parties who have executed a swap that they intend to clear. If, 
following a long latency period, the swap is rejected from clearing and 
is cancelled as a consequence, the SD will be forced to recoup breakage 
costs from their counterparty to the extent that their bilateral 
agreement provides and their counterparty is able to meet the terms of 
that agreement; the SD also may need to unwind or offset any position 
it has established, potentially at a loss. SDs have pointed out that 
the size of many swap transactions, as well as the illiquidity and 
volatility of these markets, create the potential for these risks to be 
substantial,\96\ so by reducing the time between execution and 
clearing, these rules provide considerable benefits to SDs. Moreover, 
for swaps where real-time acceptance or rejection from clearing occurs, 
the latency period, and the potential for post-execution termination 
costs, is eliminated.
---------------------------------------------------------------------------

    \96\ SDs, however, did not provide estimates of or seek to 
quantify such risks.
---------------------------------------------------------------------------

    Likewise, non-SD market participants will be able to better judge 
their counterparty risk and hedging strategies. The possibility exists 
that a non-SD market participant could have to unwind or offset other 
positions at a loss if a swap position is cancelled unexpectedly, or 
need to create the same position but on less favorable terms if the 
market has moved against them. It is also possible that the non-SD 
market participant may not be able to negotiate terms with the SD that 
would allow it to recoup much or all of the costs associated with the 
cancelled swap. Reducing or eliminating the latency period through more 
rapid processing and acceptance or rejection of swaps from clearing 
will reduce those costs to the benefit of both SD and non-SD market 
participants. If there is less time between execution and clearing, 
there will be less time for counterparty exposure to develop, which 
mitigates the need for extensive due diligence or for elaborate 
procedures to address breakage costs.
    With respect to costs, some capital investment will be necessary to 
develop the processes and implement the technology necessary to meet 
the requirements specified in these rules. However, in the case of 
DCMs, SDs, MSPs, and DCOs, the Commission believes that many entities 
are already using procedures and technology that comply with the 
standards in some measure. The necessary investments, therefore, will 
be incremental and will depend significantly on the current processes 
and technology in place at each of these institutions. Moreover, many 
of these entities may have to modify or upgrade their systems in order 
to comply with other aspects of the Dodd-Frank Act. The costs necessary 
to adjust technology platforms to meet these other requirements are 
being considered in each of those rules, and so the costs attributable 
to these rules are only those that create improvements that would not 
otherwise be made pursuant to those other rules. The incremental costs 
attributable to these rules cannot be quantified, due to the 
flexibility the rules provide regulated entities to meet the applicable 
standards and to the differing technology already in use by those 
entities, but the Commission anticipates that the necessary capital 
expenditures by some entities may be significant. However, as discussed 
above, the benefits of such technology and procedures are substantial 
as well, and, based on comments, the Commission believes potentially of 
a magnitude to offset the costs of implementing such systems. Citadel 
believes the rules will save enough resources to benefit the economy as 
a whole, and SDMA estimates that the total benefits for corporate 
America will have a value of approximately $15 billion annually.\97\
---------------------------------------------------------------------------

    \97\ See Citadel and SDMA. Neither commenter provided 
calculations to substantiate their estimates, so the Commission is 
not able to verify their accuracy. However, as stated above, the 
Commission does believe that the benefits of such systems and 
procedures will be substantial.

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

[[Page 21298]]

b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The general requirement that processing and acceptance or rejection 
from clearing must occur ``as quickly as is technologically 
practicable'' or ``as quickly as is technologically practicable if 
fully automated systems are used'' creates an enforceable standard that 
provides SEFs, DCMs, SDs, MSPs, and DCOs the freedom to establish 
systems that meet their unique operational needs and that is, in their 
judgment, most cost effective. By accommodating innovation, and further 
system improvements, this approach will promote continued improvements 
in the reliability and efficiency of these systems that, indirectly, 
may benefit financial market efficiency generally.
    Rapid processing and acceptance or rejection from clearing will 
help to ensure that eligible counterparties are not exposed in 
transactions that are ultimately rejected from clearing and broken. 
With respect to dealers, this helps to ensure that they will be 
available to other eligible customers by reducing the amount of their 
balance sheet that is ``tied up'' supporting transactions that are 
eventually rejected from clearing and broken. By limiting the duration 
of transactional exposure, the rules' rapid processing requirements 
serve to help protect market liquidity that dealers in significant part 
provide.\98\
---------------------------------------------------------------------------

    \98\ See n. 77, above.
---------------------------------------------------------------------------

    Required coordination among SEFs, DCMs, SDs, MSPs, and DCOs, 
together with the requirements for rapid processing and acceptance or 
rejection from clearing, is likely to promote broad adoption of 
standardized technologies and processes. The rules, in this respect, 
will provide an incentive to further improvements in the speed of 
processing, and may reduce switching costs for customers by ensuring 
that their technology platforms are able to interface with a wide array 
of FCMs and counterparties without significant modifications. Lower 
switching costs, in turn, are conducive to greater competition among SD 
counterparties and lower bid-ask spreads may result.
    Limit order books \99\ cannot exist in an environment where there 
is uncertainty about clearing because each participant will want to 
identify its potential counterparty and evaluate its creditworthiness 
in order to manage risks that could develop if the trade is rejected 
from clearing. Enabling clearing members and exchanges to pre-screen 
orders in real time for compliance with clearing member limits for each 
customer facilitates the development of a central limit order book and 
the pure price competition it affords by ensuring that each trade 
executed on the exchange will proceed to clearing. This certainty, and 
the central limit order book that it makes possible, enables anonymous, 
exchange-based execution. This execution method is an effective 
mechanism for providing all-to-all market access, placing all eligible 
market participants on equal footing when bidding on or offering 
positions; the only distinguishing characteristic among them is the 
price they bid or offer. Participants do not need to know the identity 
of entities on the other side of the trade or to concern themselves 
with the creditworthiness of those entities because each participant 
knows they will be facing the clearinghouse as their counterparty.
---------------------------------------------------------------------------

    \99\ A Central Limit Order Book (CLOB) is a system used by many 
exchanges to consolidate and match orders. An open CLOB exposes 
available pricing and market depth for listed products. Market 
participants are allowed to see limit orders that have been placed 
but have not yet been executed or cancelled. Usually, exchanges use 
open CLOBs to match customer trade orders with a ``price time 
priority.''
---------------------------------------------------------------------------

    Efficiency, certainty of clearing, and liquidity in the U.S. based 
swap markets are attractive characteristics that may prompt additional 
customers and dealers to send business to U.S.-based exchanges. To the 
extent that this occurs, it will promote greater liquidity and 
competition.
c. Price Discovery
    Pre-trade price transparency is enhanced by central limit order 
books, where market participants can view the prices at which market 
participants are willing to ``buy'' or ``sell'' certain positions. Pre-
screening capabilities help to ensure that only bids and offers from 
parties whose transactions will be accepted for clearing are 
represented in the central limit order book. This promotes the 
integrity of the order book, and the informational value of the bids 
and offers contained within it, which promotes effective price 
discovery.
    To the extent that a swap moves from execution to acceptance or 
rejection from clearing and receives an answer in real time that speed 
eliminates the need for SDs to price idiosyncratic counterparty risk 
(i.e. risk that is different than that posed by the clearinghouse as a 
counterparty) into the swap. This result means that the price at which 
a swap is transacted more accurately reflects the price that other 
market participants would receive for the same product at that time. 
Therefore, the prices reported in real time have greater informational 
value for all market participants.
d. Sound Risk Management Practices
    If an SD is uncertain whether a trade will clear, it will not know 
whether it should account for idiosyncratic counterparty risk because 
it will not know whether the clearinghouse or their counterparty will 
face them for the life of the swap.\100\ Or, if the agreement between 
the SD and the customer counterparty calls for the trade to be 
cancelled in the event of clearing rejection, the SD's hedging 
strategies will be complicated by uncertainty until the clearing 
outcome is known. Faster processing and acceptance or rejection of 
trades from clearing facilitates sound risk management by eliminating 
these uncertainties, or at least by reducing the period of time during 
which they are relevant. This result makes it easier and potentially 
less costly for dealers to develop and execute sound risk management 
strategies.
---------------------------------------------------------------------------

    \100\ See DB.
---------------------------------------------------------------------------

    Similarly, faster processing and acceptance or rejection from 
clearing makes it easier and potentially less costly for other non-SD 
market participants to manage their risk effectively. The more 
certainty SDs have that a trade will clear, the less they need to 
charge for clearing-acceptance risk. This result makes it less 
expensive for non-SD market participants to acquire the positions they 
need to execute their risk management strategies. It also obviates the 
need that an SD would otherwise have to evaluate counterparty credit-
worthiness, which may decrease the amount of time required for a market 
participant to execute a needed trade. In volatile markets, this 
increased speed can be valuable, if not essential, when managing 
complex risks.
    On the other hand, some processes will still be manual even after 
these rules are adopted. This result may be true particularly for swap 
transactions that are executed bilaterally and then communicated to 
clearing members. Speed requirements may increase the possibility of 
errors in manual processes. The potential range of mistakes and range 
of costs associated with those mistakes is broad, and impossible to 
estimate. However, market participants have an incentive to avoid such 
mistakes, and the Commission anticipates that the requirements related 
to the timing of acceptance or rejection from clearing will encourage 
automated, straight-through processing, which over time is likely to 
reduce the number of manual processes and therefore the number of 
opportunities for errors.
    Also, while these rules require clearing members, SEFs, DCMs, and

[[Page 21299]]

DCOs to develop the ability to process swaps and make clearing 
determinations in a timeframe that is likely to be a matter of 
milliseconds, seconds, or at most, a few minutes, bilateral 
transactions will still take some amount of time to submit to the 
appropriate clearing member. The rules require SDs and MSPs to submit 
OTC swaps for clearing as soon as is technologically practicable and in 
no case later than the close of business on the date of execution for 
swaps that are required to be cleared, and in no case later than the 
end of the business day following execution or the decision to clear 
(whichever is later) for swaps that are not required to be cleared. 
Moreover, until the mandatory clearing regime becomes effective, all 
OTC swaps will be subject to the requirement that they be submitted for 
clearing as soon as is technologically practicable but in no case later 
than the day following execution or the decision to clear (whichever is 
later). Therefore, some time lapse between execution and clearing as 
well as some breakage risk will remain for OTC swaps and that risk may 
be greater prior to the mandatory clearing regime becoming effective.
    However, the Commission notes that these rules establish timelines 
for submission to clearing that are considerably shorter than what some 
market participants practice today. Moreover, the close of business on 
the date of execution and the end of the business day following 
execution or the decision to clear (whichever is later) are outer 
bounds on the timeline for submitting swaps to clearing. The rules 
still require these swaps to be submitted ``as soon as is 
technologically practicable,'' which in many cases will likely be 
sooner than these outer limits. Last, to the extent that market 
participants bear breakage cost risk, they have an incentive to submit 
OTC swaps for clearing promptly and to implement and promote 
technological improvements that will allow them to do so. Each of these 
considerations are likely to significantly reduce the amount of time 
between execution and submission for clearing for OTC swaps, and 
therefore, are likely to mitigate the breakage risks that 
counterparties face when engaging in OTC transactions.
e. Other Public Interest Considerations
    As described above, rapid and predictable clearing provides 
substantial benefits for both SDs and other market participants. As 
market entities come into compliance with these rules, the Commission 
anticipates that rapid processing and clearing determinations will make 
the U.S. markets more attractive to foreign entities, which could 
further increase liquidity and reduce spreads.
    Also, the Commission observes that much of the technology that will 
be necessary to meet these requirements has been implemented in certain 
venues with marked success.\101\ This circumstance, together with the 
fact that many market participants already may have systems capable of 
at least partial compliance, will serve to limit the overall outlay 
necessary to bring regulated entities into compliance.
---------------------------------------------------------------------------

    \101\ See e.g., Arbor, Eris, CME, SDMA, Vanguard, and Javelin.
---------------------------------------------------------------------------

f. Response to Comments
    Many commenters agreed that the technology for real time acceptance 
or rejection already exists in other cleared derivatives markets and is 
currently being rolled out for cleared OTC swaps.\102\ Commenters also 
noted that the benefits of the rules far exceed any incremental costs 
in upgrading infrastructure, and that any required infrastructure 
upgrades would be minimal due to existing industry capabilities.\103\ 
Furthermore, Citadel stated that any costs to upgrade existing 
infrastructure have already been factored into industry investment 
plans, because many SDs, FCMs, DCOs, and SEFs are already launching 
real-time acceptance.
---------------------------------------------------------------------------

    \102\ See AllianceBernstein, Arbor, Citadel, D.E. Shaw, Eris, 
Javelin, MFA, SDMA, and State Street.
    \103\ See AllianceBernstein, Arbor, D.E. Shaw, MFA, and SDMA.
---------------------------------------------------------------------------

    Eris noted that it is currently able to execute and clear interest 
rate swaps. Arbor stated that it supports both the Globex and Clearport 
solutions for swaps because they are proven, work well, and would be 
inexpensive alternatives for market participants to implement. Arbor 
continued to state that because such workflow and technology are 
currently used by clearinghouses and clearing members today, these 
technologies could be ported quickly into the cleared swaps context. 
Finally, Arbor remarked that by compelling market adoption of workflow 
and systems currently deployed in other cleared markets, implementation 
will be less costly and more rapid.
    Javelin calculated that Clearport's daily trade volume increased 
from 139,177 contracts in 2005 to over 450,000 contracts today. Javelin 
also noted that Clearport covers multiple asset classes including 
credit and interest rates, and is interfacing with over 16,000 
registered users, and Globex had average daily volume of 6,368,000 
contracts in interest rates during August 2011 and total exchange 
average daily volume of 14,420,000 contracts during the same period.
    Commenters opposed to the rules doubted that ``market-wide real-
time'' clearing and risk limit compliance verification can be developed 
quickly enough or provided with sufficient reliability to eliminate the 
``functional benefits'' of trilateral agreements.\104\ One commenter 
posited that to provide real-time clearing on a broad basis would 
require systems that have the capacity to share information, calculate 
risk metrics on a portfolio basis, adjust limits accordingly, and 
disseminate information in ways that are not currently possible and 
that are unlikely to be possible in the near future.\105\
---------------------------------------------------------------------------

    \104\ See Morgan Stanley, and Banks.
    \105\ See Morgan Stanley.
---------------------------------------------------------------------------

    However, the Commission is not persuaded by these opposing 
commenters' arguments, which pivot on an assumption that the 
Commission's determination to prohibit certain provisions commonly 
contained in trilateral agreements is premised on a faulty belief that 
the functional benefits of trilateral agreements will be entirely 
eliminated in the near term. Such a belief, however, is not the premise 
for the Commission's determination. Rather, after careful consideration 
of costs and benefits associated with trilateral agreements, the 
Commission believes that certain provisions common to these agreements 
generate unacceptable costs and, thus, should be prohibited. In 
reaching this determination, the Commission has not concluded, and need 
not conclude, that the trilateral agreements, judged in isolation, are 
devoid of value.
    Moreover, the Commission believes that significant improvements in 
straight through processing and in the speed of processing and clearing 
determinations can be achieved even when the ideal is not yet 
attainable. In that regard, the Commission notes that the system 
requirements delineated by commenters opposed to the rules describe 
``requirements'' that the Commission does not believe are necessary to 
straight through processing or real time clearing determinations.\106\ 
Several commenters noted that some technologies existing today provide 
near real-time clearing determinations with respect to certain 
swaps.\107\ Those

[[Page 21300]]

systems function effectively despite the fact that they do not achieve 
the ideal system requirements described by other commenters. The 
Commission, therefore, believes that while many of the ``requirements'' 
described by some commenters are desirable, they are not essential to 
swap processing and clearing determinations that comply with these 
rules. Furthermore, the Commission believes that improvements that 
significantly mitigate the risks associated with counterparty exposure 
that trilateral agreements seek to address are possible with existing 
technology.
---------------------------------------------------------------------------

    \106\ Id.
    \107\ See SDMA, Vanguard, State Street, Arbor, Eris, CME, and 
Javelin. Multiple commenters cited Clearport as an example of 
immediate post-trade (or ''low latency'') solution that is already 
providing clearing acceptance/rejection decisions within 
milliseconds of execution in some markets. Similarly, commenters 
cited Globex and WebICE as examples of platforms that provide pre-
trade screens against customer limits set by FCMs, which enables 
``perfect settlement'' (i.e. every trade that is executed is 
accepted immediately for clearing) for the markets in which they 
operate. Commenters generally cited these examples as evidence that 
the requisite technology for real time clearing determinations 
already exists, and could be applied more broadly in order to 
facilitate compliance with the rules adopted in this release.
---------------------------------------------------------------------------

    One commenter suggested that sub-limits with individual dealers 
need not delay clearing of swaps because the same technology that is 
used to satisfy the Commission's requirements for clearing in real time 
could be used to automate the sub-limits.\108\ However, commenters 
generally agreed that real-time clearing determinations would mitigate 
or eliminate any legitimate need for sub-limits or the agreements 
necessary to establish them, a perspective that the Commission finds 
persuasive.\109\ Once the technology necessary for straight through 
processing and real time clearing determinations is in place, the 
economic rationale that commenters have advanced in favor of sub-limits 
will no longer be relevant, and therefore the elements of trilateral 
agreements that are prohibited in the first part of these rules will 
not assist SDs with risk management.
---------------------------------------------------------------------------

    \108\ See Morgan Stanley.
    \109\ See e.g., SDMA, AIMA, Vanguard, AllianceBernstein, Trading 
Firms, and MFA. In addition, Morgan Stanley, ISDA/FIA, Banks, and 
EEI implicitly acknowledge that real-time clearing determinations 
mitigate the need for trilateral agreements by arguing that 
trilateral agreements are a useful risk management tool because 
real-time clearing determinations are not yet possible in all parts 
of the market.
---------------------------------------------------------------------------

3. Clearing Member Risk Management
    This cluster of rules establishes risk management requirements for 
FCMs, SDs, and MSPs who are clearing members. Section 1.73 of the 
Commission's regulations requires FCMs who are clearing members to: (1) 
Establish limits for proprietary accounts and customer accounts based 
on position size, order size, margin requirements, etc.; (2) ensure 
that trades received by the FCM for automated or non-automated 
execution, that are executed bilaterally then delivered to the FCM, or 
that are executed by a broker and then delivered to the FCM, are 
screened by either the FCM or the broker (whichever encounters the 
transaction first) for compliance with overall position limits at the 
FCM for each customer; (3) monitor for compliance with overall position 
limits at the FCM for each customer both intraday and overnight; (4) 
conduct stringent stress tests for all positions that could impact its 
financial strength at least once per week; (5) evaluate its ability to 
meet initial margin requirements at least once per week; (6) evaluate 
its ability to, and the cost of, liquidating positions in its 
proprietary and customer accounts at least once per month; (7) test all 
lines of credit at least once per year; and (8) establish procedures 
and maintain records to ensure and document compliance with these 
requirements.
    Section 23.609 requires SDs and MSPs who are clearing members to do 
all the same things to manage risk, with the exception that bilateral 
execution, ``give up'' agreements, and bunched orders are not addressed 
in this section, because SDs and MSPs may only clear customer trades if 
they are also registered as FCMs.
a. Protection of Market Participants
    Several reported incidents over the last 15 years involving so 
called ``rogue traders''\110\ highlight the protective import of these 
rules. The rules in the second group require FCMs to establish overall 
position limits for each of their customers and promote the 
establishment of systems capable of more effectively pre-screening 
orders for compliance with these overall position limits. Automated 
screening mechanisms that are external to those of an FCM's customer 
provide a second layer of defense against evasion by rogue traders 
within the customer's organization. The Commission believes that these 
measures will help protect against rogue trading, thereby protecting 
market participants, who past events have shown to be vulnerable to 
harm from such conduct.\111\
---------------------------------------------------------------------------

    \110\ See e.g., Report of the Board of Banking Supervision 
Inquiry Into the Circumstances of the Collapse of Barings, (Jul. 18, 
1995), available at: http://www.prmia.org/pdf/Case_Studies/Barings_Case_Study.pdf; Factbox: Rise and Fall of the SocGen Rogue 
Trader, Reuters (Jan. 27, 2008), available at http://www.reuters.com/article/2008/01/27/us-socgen-factbox-idUSL2733740320080127.
    \111\ A key purpose of risk management procedures is to minimize 
the chance of a firm incurring losses that exceed its risk appetite. 
For example, in 1999, a CFTC-regulated futures commission merchant 
filed bankruptcy after a trader exceeded his trading limits. This 
event highlights the potential damage that occurs from a poorly 
designed risk management program or from a lack internal controls.
---------------------------------------------------------------------------

    With respect to the risk management requirement that each clearing 
member establish overall position limits for each customer, the rules 
promote restrictions that help prevent individual customers from 
establishing positions sufficiently large to jeopardize the financial 
health of their clearing member if they were to default. This is a 
critical safeguard that, due to its importance and relative simplicity, 
the Commission anticipates many clearing members may already have in 
place. But, by implementing these rules, the Commission is ensuring 
that every clearing member uses such safeguards to help ensure that 
they, and the DCOs on which they clear trades, remain financially sound 
even during times of financial market turbulence.
    The risk management requirements do prescribe certain timelines for 
regular testing and evaluation; however, they do not dictate (1) 
specific levels for position limits set by clearing members, or (2) 
specific methodologies of testing with respect to the clearing member's 
ability to meet margin requirements, the cost of liquidating positions, 
or stress testing positions that could have a material impact on the 
entity's financial strength. This flexibility gives market participants 
the opportunity to implement the requirements in ways that are suited 
to their operational patterns and minimize costs associated with 
changes and upgrades to existing technology systems. Moreover, it 
allows market participants ample room to innovate and adapt the most 
effective procedures as the market continues to evolve. This 
flexibility for innovation and adaptation is critical to the long term 
success of risk management practices. Over time the markets will 
continue to evolve with changes in products, connections among 
institutions, regulatory requirements, and broader economic realities. 
Each of these dynamic realities has the potential to impact the 
effectiveness of specific risk management strategies, making it 
essential for firms to continue adapting their approaches. The rules 
benefit FCMs, their counterparties, and the public by giving FCMs the 
flexibility they need to continue developing effective risk management 
strategies that address current market realities.
    Clearing members that do not currently practice one or more of the 
requirements established by this cluster of rules will incur some 
incremental costs to comply with them. Some initial investment will be 
required to develop

[[Page 21301]]

and implement processes necessary for compliance, and ongoing costs 
will be incurred as such entities engage in repeated testing. The 
incremental cost for each entity will depend on the degree to which its 
current practices are or are not in compliance, as well as the 
procedures they select and implement in order to comply. The Commission 
does not have, and has not been provided by commenters with, the 
information required to estimate those costs either on a per-entity or 
aggregate basis. However, the Commission expects that while the costs 
may be material for a small number of entities, most clearing members 
are currently using risk management strategies that are largely 
compliant with these requirements and, therefore, the incremental cost 
for most entities and for the market as a whole is likely to be 
relatively low.
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    With clearing mandates in place, the financial integrity of swap 
markets will depend significantly on the financial strength of DCOs. 
Moreover, the financial health of a DCO is dependent upon the strength 
of its clearing members and those members' ability to meet any 
obligations pursuant to the terms of their agreement with the DCO. By 
requiring clearing members to implement sound risk management 
practices, the rules mitigate the risk that those members could 
experience financial strain that could undermine the financial strength 
of the DCO.
    In addition, by requiring that DCOs coordinate with clearing 
members and that clearing members coordinate with account managers who 
execute trades before submitting them to the clearing member, the rules 
promote market integrity by making it more difficult for market 
participants to circumvent the overall position limit established by 
their clearing member.
c. Price Discovery
    The Commission does not expect these rules to materially affect 
price discovery.
d. Sound Risk Management Practices
    As mentioned above, prescreening of trades for compliance with 
overall position limits set by the clearing member will help guard 
against the activities of rogue traders, particularly those that may be 
operating within one of the clearing members' customers. Intraday and 
overnight monitoring of compliance with overall position limits is an 
additional line of defense against the same risk, but also serves to 
help protect the clearing member against any such activities within its 
own ranks. In this way, the rules mandate processes that provide a 
deterrent against and a screen for rogue trading, and help to protect 
market participants from these relatively infrequent, but potentially 
catastrophic, risks.
    Moreover, in situations where automated screening may not be 
possible, such as with bunched trades and give-up trades, the rules 
still specify requirements that should effect pre-screening of trades 
against overall position limits with the clearing member. Non-automated 
systems may be slightly slower, but the manual screens still provide 
some measure of protection against the activities of rogue traders. 
Even in situations where non-automated screening occurs post-execution, 
as is the case with screens on floor traders, manual systems--if 
carefully and rigorously practiced--can provide effective protection 
against excessive exposure. In the case of floor traders, the clearing 
member may monitor the trader's positions throughout the day and 
intervene in person when the trader exceeds allowable limits, forcing 
him to close out positions immediately in order to come under such 
limits, even if he must close out those positions at a loss. Such 
monitoring reduces the opportunity that the trader has to exceed 
appropriate limits, and the amount of time that such excesses can last, 
thus limiting the associated potential risk for his firm and the 
clearing member.
    Also, as stated above, the flexibility that is implicit in these 
requirements is particularly critical as a precondition to innovation 
regarding testing methodologies. Clearing members might develop many 
different approaches to stress tests, one or more of which may be 
particularly well suited to a particular firm and set of market 
conditions, but which may not be well suited to other firms and market 
conditions. Flexibility is critical to enabling continued development 
and testing of new methodologies. It is likely to benefit the 
individual entities that engage in such innovation and testing, as well 
as a broader array of market participants introduced to developments at 
industry gatherings and through informal transfer of intellectual 
capital as personnel move between firms.
    The requirement for each clearing member to evaluate its ability to 
meet margin requirements at least once per week is a valuable tool to 
help clearing firms avoid liquidity crises, which could jeopardize the 
solvency of otherwise healthy clearing members. Margin calls can come 
as a result of significant movements in the price of the underlying 
commodity, or as a consequence of changes in price volatility. 
Counterparties may choose to exercise options at unanticipated times, 
which may have significant repercussions for a clearing member's margin 
requirements. Additionally, a clearing member's cash position may be 
negatively impacted if one of its customers becomes unable to meet 
margin calls on large positions. Clearing members must have sufficient 
liquidity to meet margin calls from the DCO, even at a time when the 
clearing member may have a depleted cash position due to the failure of 
its customers to meet margin requirements. Such stress tests may help 
to ensure that the clearing member has a clear sense for how much 
liquidity may be necessary in such circumstances, and may encourage 
them to preserve ample liquidity.
    Testing lines of credit also helps clearing members to ensure that 
(1) the credit provider is able to honor its commitment, and (2) the 
clearing member can access the line in a timely fashion. Liquidity 
crises seldom play out in slow motion, and time is likely to be of the 
essence when a clearing member needs to access its credit line. 
Therefore, it is important for the clearing member's staff to know how 
to access the line quickly and reliably when it is needed. By requiring 
annual testing, the rules guard against the danger that an episode of 
financial strain for the member could be exacerbated by an inability to 
access its credit line in a timely manner. Such preventable problems 
could be fatal for the firm in the midst of a liquidity crisis.
e. Other Public Interest Considerations
    The Commission understands that the past several years' events in 
the financial markets have tested and strained the public's confidence 
in financial institutions' management of risks. To the extent that 
these regulations promote broader implementation of sound risk-
management practices, they may serve to strengthen such public 
confidence in the integrity of the affected markets. Such public 
confidence, if justified by improved risk-management practices, is 
critical to the overall health and functioning of the swaps and 
commodity markets.
    To the extent that sound risk management practices are broadened, 
these regulations will help to promote such confidence, and as such 
will benefit the financial markets and the American public who 
ultimately

[[Page 21302]]

benefits from the health of these markets.
f. Response to comments
    Chris Barnard and Better Markets both recommend that the Commission 
require specific stress tests, and FHLB recommends that stress test 
results be publicly disclosed.\112\ FHLB believes that public 
disclosure of stress test results would allow customers to mitigate 
risk.
---------------------------------------------------------------------------

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

    The purpose of stress tests is for clearing members to monitor the 
potential losses they would face in the event of extreme market events 
as well as their ability to absorb such losses.
    The Commission has chosen not to set specific thresholds or 
specifying methodologies for stress tests for three reasons. First, 
appropriate thresholds and methodologies depend, at least in part, on 
the types of customers and positions that characterize each clearing 
member's business. The clearing member is best positioned to account 
for these factors when developing an appropriate test. Second, the 
Commission believes that specifying certain stress test thresholds 
could prompt firms to focus tests on those minimum levels in order to 
meet regulatory requirements rather than establishing thresholds that 
further achieve the goal of maintaining a vigorous risk management 
program. Third, the Commission believes that specifying particular 
methodologies for stress testing would stifle innovation, which would 
undermine the effectiveness of stress tests as the swap markets and 
their clearing members continue to evolve.\113\
---------------------------------------------------------------------------

    \113\ The Commission also notes that the approach taken in this 
rule is consistent with the approach recently adopted by the 
Commission for DCO stress tests. The Commission intends to monitor 
to determine whether the tests conducted by clearing members are 
reasonably designed for the types of risk the clearing members and 
their customers face.
---------------------------------------------------------------------------

    The Commission considered FHLB's recommendation but believes that 
public disclosure of stress test results could be a disincentive to 
aggressive stress testing, which would undermine the intent of this 
rule and the strength of the FCM's risk management program, and in so 
doing, increase risk to the DCO. Moreover, disclosure of results could 
have the effect of improper disclosure of confidential position 
information. Last, additional rules have been enacted limiting the 
range of assets in which FCMs can invest customer funds,\114\ and 
requiring careful segregation of customer funds,\115\ both of which are 
designed to protect customers in the event that an FCM should become 
insolvent. With these considerations in view, the Commission has chosen 
not to require FCMs to make the results of their stress tests public.
---------------------------------------------------------------------------

    \114\ See Investment of Customer Funds and Funds Held in an 
Account for Foreign Futures and Foreign Options Transactions, 76 FR 
78776 (Dec. 19, 2011).
    \115\ See Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy 
Provisions, 77 FR 6336 (Feb. 7, 2012).
---------------------------------------------------------------------------

    The CME commented that clearing members should only be required to 
test lines of credit on an annual basis rather than a quarterly basis 
because they believe that more frequent testing is not cost efficient. 
ISDA inquired as to whether an institution must actually draw funds in 
order to properly test a line of credit.
    The Commission agrees that quarterly testing might not be cost 
efficient in every situation, and therefore has established an annual 
testing requirement in the Adopting Release. However, the Commission 
encourages clearing members to test lines of credit more frequently 
based on any developments that might impact the ability of the lender 
to provide the line of credit, or the clearing member's ability to 
access it in a timely manner. Various market events, credit events, and 
operational changes could lead to a situation where testing lines of 
credit would be appropriate. For example, if, the clearing member 
changes personnel or reorganizes in a manner that changes the 
individuals who would be responsible for accessing the credit line, the 
Commission believes that it would be beneficial to test lines of 
credit.
    The Commission believes that the actual drawing of funds is 
essential to testing a line of credit. Among other things, the test 
should ensure the ability of the bank or other institution to move the 
funds in a timely fashion, which is likely to be particularly important 
at times when the firm most needs the additional liquidity provided by 
the line of credit.

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\116\ The 
final rules set forth in this release would affect FCMs, SDs, MSPs, 
DCOs, DCMs, and SEFs. The Commission has already established certain 
definitions of ``small entities'' to be used in evaluating the impact 
of its rules on such entities in accordance with the RFA.
---------------------------------------------------------------------------

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

    In the Commission's ``Policy Statement and Establishment of 
Definitions of `Small Entities' for Purposes of the Regulatory 
Flexibility Act,'' \117\ the Commission concluded that registered FCMs 
should not be considered to be small entities for purposes of the RFA. 
The Commission's determination in this regard was based, in part, upon 
the obligation of registered FCMs to meet the capital requirements 
established by the Commission. Likewise, the Commission determined 
``that, for the basic purpose of protection of the financial integrity 
of futures trading, Commission regulations can make no size distinction 
among registered FCMs.'' \118\ Thus, with respect to registered FCMs, 
the Commission believes that the final rules will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \117\ 47 FR 18618 (Apr. 30, 1982).
    \118\ Id. at 18619.
---------------------------------------------------------------------------

    Like FCMs, SDs will be subject to minimum capital and margin 
requirements, and are expected to comprise the largest global firms. 
Moreover, the Commission is required to exempt from designation as an 
SD any entity that engages in a de minimis level of swaps dealing in 
connection with transactions with or on behalf of customers. Based, in 
part, on that rationale, the Commission previously has determined that 
SDs should not be considered to be ``small entities'' for purposes of 
the RFA.\119\ Thus, with respect to SDs, the Commission believes that 
the final rules will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \119\ See ``Registration of Swap Dealers and Major Swap 
Participants,'' 77 FR 2613, 2620 (Jan. 19, 2012); ``Business Conduct 
Standards for Swap Dealers and Major Swap Participants with 
Counterparties,'' 77 FR 9734, 9803-04 (Feb. 17, 2012).
---------------------------------------------------------------------------

    Further, the Commission previously has determined that large 
traders are not ``small entities'' for RFA purposes, with the 
Commission considering the size of a trader's position to be the only 
appropriate test for the purpose of large trader reporting. The 
Commission similarly has noted that MSPs, by definition, will maintain 
substantial positions in swaps, creating substantial counterparty 
exposure that could have serious adverse effects on the financial 
stability of the United States banking system or financial markets. 
Based, in part, on those facts, the Commission previously has 
determined that MSPs should not be considered to be ``small entities'' 
for purposes of the RFA.\120\

[[Page 21303]]

Thus, with respect to MSPs, the Commission believes that the final 
rules will not have a significant economic impact on a substantial 
number of small entities.\121\
---------------------------------------------------------------------------

    \120\ Id.
    \121\ In a recent rulemaking, the Commission discussed the 
applicability of the RFA with respect to SDs and MSPs as follows: 
``The Commission is carrying out Congressional mandates by proposing 
these rules. The Commission is incorporating registration of SDs and 
MSPs into the existing registration structure applicable to other 
registrants. In so doing, the Commission has attempted to accomplish 
registration of SDs and MSPs in the manner that is least disruptive 
to ongoing business and most efficient and expeditious, consistent 
with the public interest, and accordingly believes that these 
registration rules will not present a significant economic burden on 
any entity subject thereto.'' ``Swap Dealer and Major Swap 
Participant Recordkeeping and Reporting, Duties, and Conflicts of 
Interest Policies and Procedures; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Policies and Procedures; 
Swap Dealer, Major Swap Participant, and Futures Commission Merchant 
Chief Compliance Officer,'' available at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_4_BusConductStandardsInternal/ssLINK/federalregister022312b.
---------------------------------------------------------------------------

    Certain of the final rules set forth in this release will affect 
DCMs, SEFs, and DCOs, some of which will be designated as systemically 
important DCOs. The Commission previously has determined that DCMs, 
SEFs, and DCOs are not ``small entities'' for purposes of the RFA.\122\ 
In determining that these registered entities are not ``small 
entities,'' the Commission reasoned that it designates a contract 
market, or registers a DCO or SEF, only if the entity meets a number of 
specific criteria, including the expenditure of sufficient resources to 
establish and maintain an adequate self-regulatory program.\123\ 
Because DCMs, SEFs, and DCOs are required to demonstrate compliance 
with Core Principles, including principles concerning the maintenance 
or expenditure of financial resources, the Commission determined that 
such registered entities are not ``small entities'' for the purposes of 
the RFA. Thus, with respect to DCMs, SEFs, and DCOs, the Commission 
believes that the final rules will not have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \122\ 76 FR 44776, 44789 (July 27, 2011) (``Provisions Common to 
Registered Entities''); see 66 FR 45604, 45609 (Aug. 29, 2001); 47 
FR 18618, 18619 (Apr. 30, 1982).
    \123\ See, e.g., Core Principle 2 applicable to SEFs under 
Section 733 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Accordingly, pursuant to Section 605(b) of the RFA, 5 U.S.C. 
605(b), the Chairman, on behalf of the Commission, certifies that these 
rules and rule amendments will not have a significant economic impact 
on a substantial number of small entities.

B. Paperwork Reduction Act

1. Customer Clearing Documentation
    Pursuant to the Paperwork Reduction Act (``PRA''),\124\ the 
Commission may not conduct or sponsor, and a registrant is not required 
to respond to, a collection of information unless it displays a 
currently valid Office of Management and Budget (``OMB'') control 
number. The final rules set forth in this Adopting Release relating to 
Customer Clearing Documentation will result in new collection of 
information requirements within the meaning of the PRA.
---------------------------------------------------------------------------

    \124\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Accordingly, the Commission requested control numbers for the 
required collection of information. The Commission has submitted this 
notice of final rulemaking along with supporting documentation for 
OMB's review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 
The title for this collection of information is ``Customer Clearing 
Documentation and Timing of Acceptance for Clearing.'' The OMB has 
assigned this collection control number 3038-0092.
    The collection of information under these regulations is necessary 
to implement certain provisions of the CEA, as amended by the Dodd-
Frank Act. Specifically, it is essential to reducing risk and fostering 
open access to clearing and execution of customer transactions on a DCM 
or SEF on terms that have a reasonable relationship to the best terms 
available by prohibiting restrictions in customer clearing 
documentation of SDs, MSPs, FCMs, or DCOs that could delay or block 
access to clearing, increase costs, and reduce market efficiency by 
limiting the number of counterparties available for trading. These 
regulations are also crucial both for effective risk management and for 
the efficient operation of trading venues among SDs, MSPs, FCMs, and 
DCOs.
    Many responses to this collection of information will be mandatory. 
The Commission protects proprietary information according to the 
Freedom of Information Act and 17 CFR part 145, ``Commission Records 
and Information.'' In addition, section 8(a)(1) of the CEA strictly 
prohibits the Commission, unless specifically authorized by the CEA, 
from making public ``data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' The Commission is also 
required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
a. Information Provided by Reporting Entities/Persons
    SDs, MSPs, FCMs, and DCOs will be required to develop and maintain 
written customer clearing documentation in compliance with Sec. Sec.  
1.72, 23.608, and 39.12. Section 39.12(b)(7)(i)(B) requires DCOs to 
coordinate with clearing members to establish systems for prompt 
processing of trades. Sections 1.74(a) and 23.610(a) require reciprocal 
coordination with DCOs by FCMs, SDs, and MSPs that are clearing 
members.
    The annual burden associated with these regulations is estimated to 
be 16 hours, at an annual cost of $1,600 for each FCM, SD, and MSP. 
Burden means the total time, effort, or financial resources expended by 
persons to generate, maintain, retain, disclose, or provide information 
to or for a federal agency. The Commission has characterized the annual 
costs as initial costs because the Commission anticipates that the cost 
burdens will be reduced dramatically over time as the documentation and 
procedures required by these regulations become increasingly 
standardized within the industry.
    Sections 1.72 and 23.608 require each FCM, SD, and MSP to ensure 
compliance with these regulations. Maintenance of contracts is prudent 
business practice and the Commission anticipates that SDs and MSPs 
already maintain some form of this documentation. Additionally, the 
Commission believes that much of the existing customer clearing 
documentation already complies with these rules, and therefore that 
compliance will require a minimal burden.
    In addition to the above, the Commission anticipates that FCMs, 
SDs, and MSPs will spend an average of another 16 hours per year 
drafting and, as needed, updating customer clearing documentation to 
ensure compliance required by Sec. Sec.  1.72 and 23.608.
    For each DCO, the annual burden associated with these regulations 
is estimated to be 40 hours, at an annual cost of $4,000. Burden means 
the total time, effort, or financial resources expended by persons to 
generate, maintain, retain, disclose, or provide information to or for 
a federal agency. The Commission has characterized the annual costs as 
initial costs because the Commission anticipates that the cost burdens 
will be reduced dramatically over time as the documentation and 
procedures required by the regulations

[[Page 21304]]

are implemented. Any additional expenditure related to Sec.  39.12 
likely would be limited to the time required to review--and, as needed, 
amend--existing documentation and procedures.
    Section 39.12(b)(7) requires each DCO to coordinate with clearing 
members to establish systems for prompt processing of trades. The 
Commission believes that this is currently a practice of DCOs. 
Accordingly, any additional expenditure related to Sec.  39.12(b)(7) 
likely would be limited to the time initially required to review--and, 
as needed, amend--existing trade processing procedures to ensure that 
they conform to all of the required elements and to coordinate with 
FCMs, SDs, and MSPs to establish reciprocal procedures.
    The Commission anticipates that DCOs will spend an average of 20 
hours per year drafting--and, as needed, updating--the written policies 
and procedures to ensure compliance required by Sec.  39.12, and 20 
hours per year coordinating with FCMs, SDs, and MSPs on reciprocal 
procedures.
    The hour burden calculations below are based upon a number of 
variables such as the number of FCMs, SDs, MSPs, and DCOs in the 
marketplace and the average hourly wage of the employees of these 
registrants that would be responsible for satisfying the obligations 
established by the proposed regulation.
    There are currently 134 FCMs and 14 DCOs based on industry data. 
SDs and MSPs are new categories of registrants. Accordingly, it is not 
currently known how many SDs and MSPs will become subject to these 
rules, and this will not be known to the Commission until the 
registration requirements for these entities become effective. The 
Commission believes there will be approximately 125 SDs and MSPs who 
will be required to comply with the recordkeeping requirements of the 
proposed rules. The Commission estimated the number of affected 
entities based on industry data.
    According to recent Bureau of Labor Statistics, the mean hourly 
wage of an employee under occupation code 11-3031, ``Financial 
Managers,'' (which includes operations managers) that is employed by 
the ``Securities and Commodity Contracts Intermediation and Brokerage'' 
industry is $74.41.\125\ Because SDs, MSPs, FCMs, and DCOs include 
large financial institutions whose operations management employees' 
salaries may exceed the mean wage, the Commission has estimated the 
cost burden of these proposed regulations based upon an average salary 
of $100 per hour.
---------------------------------------------------------------------------

    \125\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

    Accordingly, the estimated hour burden was calculated as follows:
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for SDs and MSPs. This hourly burden 
arises from the requirement that SDs and MSPs make and maintain records 
documenting compliance related to client clearing documentation.
    Number of registrants: 125.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 125.
    Estimated annual hour burden per registrant: 16 hours.
    Estimated aggregate annual hour burden: 2,000 burden hours [125 
registrants x 16 hours per registrant].
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for FCMs. This hourly burden arises from 
the requirement that FCMs make and maintain records documenting 
compliance related to client clearing documentation.
    Number of registrants: 134.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 134.
    Estimated annual hour burden per registrant: 16 hours.
    Estimated aggregate annual hour burden: 2,144 burden hours [134 
registrants x 16 hours per registrant].
    Drafting and Updating Trade Processing Procedures for DCOs. This 
hour burden arises from the time necessary to develop and periodically 
update the trade processing procedures required by the regulations.
    Number of registrants: 14.
    Frequency of collection: Initial drafting, updating as needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 14.
    Estimated annual hour burden per registrant: 40 hours.
    Estimated aggregate annual hour burden: 560 burden hours [14 
registrants x 40 hours per registrant].
    Based upon the above, the aggregate hour burden cost for all 
registrants is 4,704 burden hours and $470,400 [4,704 x $100 per hour].
2. Time Frames for Acceptance into Clearing
    The Commission believes that the final rules set forth in this 
Adopting Release relating to the Time Frames for Acceptance into 
Clearing will not impose any new information collection requirements 
that require approval of OMB under the PRA.
3. Clearing Member Risk Management
    The final rules contained in this Adopting Release relating to 
Clearing Member Risk Management will result in new collection of 
information requirements within the meaning of the PRA. Accordingly, 
the Commission requested control numbers for the required collection of 
information. The Commission has submitted this notice of final 
rulemaking along with supporting documentation for OMB's review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for this 
collection of information is ``Clearing Member Risk Management.'' An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. The OMB has assigned this collection control 
number 3038-0094.
    The collection of information under these regulations is necessary 
to implement certain provisions of the CEA, as amended by the Dodd-
Frank Act. Specifically, it is essential both for effective risk 
management and for the efficient operation of trading venues on which 
SDs, MSPs, and FCMs participate. The position risk management 
requirement established by the rules diminishes the chance for a 
default, thus ensuring the financial integrity of markets as well as 
customer protection.
    Responses to this collection of information will be mandatory. The 
Commission protects proprietary information according to the Freedom of 
Information Act and 17 CFR part 145, ``Commission Records and 
Information.'' In addition, section 8(a)(1) of the CEA strictly 
prohibits the Commission, unless specifically authorized by the CEA, 
from making public ``data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' The Commission is also 
required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
a. Information Provided by Reporting Entities/Persons
    SDs, MSPs, and FCMs will be required to develop and monitor 
procedures for position risk management in accordance with Sec. Sec.  
1.73 and 23.609.

[[Page 21305]]

    The annual burden associated with these regulations is estimated to 
be 524 hours, at an annual cost of $52,400 for each FCM, SD, and MSP. 
Burden means the total time, effort, or financial resources expended by 
persons to generate, maintain, retain, disclose, or provide information 
to or for a federal agency. The Commission has characterized the annual 
costs as initial costs because the Commission anticipates that the cost 
burdens will be reduced dramatically over time as the documentation and 
procedures required by the regulations become increasingly standardized 
within the industry.
    This hourly burden primarily results from the position risk 
management obligations that will be imposed by Sec. Sec.  1.73 and 
23.609. Sections 1.73 and 23.609 will require each FCM, SD, and MSP to 
establish and enforce procedures to establish risk-based limits, 
conduct stress testing, evaluate the ability to meet initial and 
variation margin, test lines of credit, and evaluate the ability to 
liquidate, in an orderly manner, the positions in the proprietary and 
customer accounts and estimate the cost of the liquidation. The 
Commission believes that each of these items is currently an element of 
existing risk management programs at a DCO or an FCM. Accordingly, any 
additional expenditure related to Sec. Sec.  1.73 and 23.609 likely 
will be limited to the time initially required to review and, as 
needed, amend, existing risk management procedures to ensure that they 
encompass all of the required elements and to develop a system for 
performing these functions as often as required.
    In addition, Sec. Sec.  1.73 and 23.609 will require each FCM, SD, 
and MSP to establish written procedures to comply, and maintain records 
documenting compliance. Maintenance of compliance procedures and 
records of compliance is prudent business practice and the Commission 
anticipates that FCMs, SDs, and MSPs already maintain some form of this 
documentation.
    With respect to the required position risk management, the 
Commission estimates that FCMs, SDs, and MSPs will spend an average of 
2 hours per trading day, or 504 hours per year, performing the required 
tests. The Commission notes that the specific information required for 
these tests is of the type that would be performed in a prudent market 
participant's ordinary course of business.
    In addition to the above, the Commission anticipates that FCMs, 
SDs, and MSPs will spend an average of 16 hours per year drafting and, 
as needed, updating the written policies and procedures to ensure 
compliance required by Sec. Sec.  1.73 and 23.609, and 4 hours per year 
maintaining records of the compliance.
    The hour burden calculations below are based upon a number of 
variables such as the number of FCMs, SDs, and MSPs in the marketplace 
and the average hourly wage of the employees of these registrants that 
will be responsible for satisfying the obligations established by the 
regulations.
    There are currently 134 FCMs based on industry data. SDs and MSPs 
are new categories of registrants. Accordingly, it is not currently 
known how many SDs and MSPs will become subject to these rules, and 
this will not be known to the Commission until the registration 
requirements for these entities become effective. The Commission 
believes there will be approximately 125 SDs and MSPs who will be 
required to comply with the recordkeeping requirements of the proposed 
rules. The Commission estimated the number of affected entities based 
on industry data.
    According to recent Bureau of Labor Statistics, the mean hourly 
wage of an employee under occupation code 11-3031, ``Financial 
Managers,'' (which includes operations managers) that is employed by 
the ``Securities and Commodity Contracts Intermediation and Brokerage'' 
industry is $74.41.\126\ Because SDs, MSPs, and FCMs include large 
financial institutions whose operations management employees' salaries 
may exceed the mean wage, the Commission has estimated the cost burden 
of these regulations based upon an average salary of $100 per hour.
---------------------------------------------------------------------------

    \126\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

    Accordingly, the estimated hour burden was calculated as follows:
    Developing and Conducting Position Risk Management Procedures for 
SDs and MSPs. This hourly burden arises from the requirement that SDs 
and MSPs establish and perform testing of clearing member risk 
management procedures.
    Number of registrants: 125.
    Frequency of collection: Daily.
    Estimated number of responses per registrant: 252 [252 trading 
days].
    Estimated aggregate number of responses: 31,500 [125 registrants x 
252 trading days].
    Estimated annual burden per registrant: 504 hours [252 trading days 
x 2 hours per record].
    Estimated aggregate annual hour burden: 63,000 hours [125 
registrants x 252 trading days x 2 hours per record].
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for SDs and MSPs. This hourly burden 
arises from the requirement that SDs and MSPs make and maintain records 
documenting compliance related to clearing member risk management.
    Number of registrants: 125.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 125.
    Estimated annual hour burden per registrant: 20 hours.
    Estimated aggregate annual hour burden: 2,500 burden hours [125 
registrants x 20 hours per registrant].
    Developing and Conducting Position Risk Management Procedures for 
FCMs. This hourly burden arises from the requirement that FCMs 
establish and perform testing of clearing member risk management 
procedures.
    Number of registrants: 134.
    Frequency of collection: Daily.
    Estimated number of responses per registrant: 252 [252 trading 
days].
    Estimated aggregate number of responses: 33,768 [134 registrants x 
252 trading days].
    Estimated annual burden per registrant: 504 hours [252 trading days 
x 2 hours per record].
    Estimated aggregate annual hour burden: 67,536 hours [134 
registrants x 252 trading days x 2 hours per record].
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for FCMs. This hourly burden arises from 
the requirement that FCMs make and maintain records documenting 
compliance related to clearing member risk management.
    Number of registrants: 134.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 134.
    Estimated annual hour burden per registrant: 20 hours.
    Estimated aggregate annual hour burden: 2,680 burden hours [134 
registrants x 20 hours per registrant].
    Based upon the above, the aggregate hour burden cost for all 
registrants is 135,716 burden hours and $13,571,600 [227,416 x $100 per 
hour].
    In addition to the per hour burden discussed above, the Commission 
anticipates that SDs, MSPs, and FCMs may incur certain start-up costs 
in connection with the recordkeeping obligations. Such costs may 
include the expenditures related to re-programming or updating existing 
recordkeeping technology and systems to enable the SD, MSP, or FCM to 
collect, capture,

[[Page 21306]]

process, maintain, and re-produce any newly required records. The 
Commission believes that SDs, MSPs, and FCMs generally could adapt 
their current infrastructure to accommodate the new or amended 
technology and thus no significant infrastructure expenditures would be 
needed. The Commission estimates the programming burden hours 
associated with technology improvements to be 60 hours.
    According to recent Bureau of Labor Statistics, the mean hourly 
wages of computer programmers under occupation code 15-1021 and 
computer software engineers under program codes 15-1031 and 1032 are 
between $34.10 and $44.94.\127\ Because SDs, MSPs, and FCMs generally 
will be large entities that may engage employees with wages above the 
mean, the Commission has conservatively chosen to use a mean hourly 
programming wage of $60 per hour. Accordingly, the start-up burden 
associated with the required technological improvements is $3,600 [$60 
x 60 hours] per affected registrant or $932,400 [$3,600 x 259 
registrants] in the aggregate.
---------------------------------------------------------------------------

    \127\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 1

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

17 CFR Part 23

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

17 CFR Part 37

    Swaps, Swap execution facilities.

17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets, 
Transactions off the centralized market.

17 CFR Part 39

    Derivatives clearing organizations, Risk management, Swaps.

    For the reasons stated in the preamble, amend 17 CFR parts 1, 23, 
37, 38, and 39 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. Revise the authority citation for part 1 to read as follows:

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


0
2. Amend Sec.  1.35 by revising paragraph (a-1)(5)(iv) to read as 
follows:


Sec.  1.35  Records of commodity interest and cash commodity 
transactions.

* * * * *
    (a-1) * * *
    (5) * * *
    (iv) Allocation. Orders eligible for post-execution allocation must 
be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the 
entire transaction is executed, but in any event no later than the 
following times: For cleared trades, account managers must provide 
allocation information to futures commission merchants no later than a 
time sufficiently before the end of the day the order is executed to 
ensure that clearing records identify the ultimate customer for each 
trade. For uncleared trades, account managers must provide allocation 
information to the counterparty no later than the end of the calendar 
day that the swap was executed.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
* * * * *

0
3. Add Sec.  1.72 to read as follows:


Sec.  1.72  Restrictions on customer clearing arrangements.

    No futures commission merchant providing clearing services to 
customers shall enter into an arrangement that:
    (a) Discloses to the futures commission merchant or any swap dealer 
or major swap participant the identity of a customer's original 
executing counterparty;
    (b) Limits the number of counterparties with whom a customer may 
enter into a trade;
    (c) Restricts the size of the position a customer may take with any 
individual counterparty, apart from an overall limit for all positions 
held by the customer at the futures commission merchant;
    (d) Impairs a customer's access to execution of a trade on terms 
that have a reasonable relationship to the best terms available; or
    (e) Prevents compliance with the timeframes set forth in Sec.  
1.74(b), Sec.  23.610(b), or Sec.  39.12(b)(7) of this chapter.

0
4. Add Sec.  1.73 to read as follows:


Sec.  1.73  Clearing futures commission merchant risk management.

    (a) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish risk-based limits in the proprietary account and in 
each customer account based on position size, order size, margin 
requirements, or similar factors;
    (2) Screen orders for compliance with the risk-based limits in 
accordance with the following:
    (i) When a clearing futures commission merchant provides electronic 
market access or accepts orders for automated execution, it shall use 
automated means to screen orders for compliance with the limits;
    (ii) When a clearing futures commission merchant accepts orders for 
non-automated execution, it shall establish and maintain systems of 
risk controls reasonably designed to ensure compliance with the limits;
    (iii) When a clearing futures commission merchant accepts 
transactions that were executed bilaterally and then submitted for 
clearing, it shall establish and maintain systems of risk management 
controls reasonably designed to ensure compliance with the limits;
    (iv) When a firm executes an order on behalf of a customer but 
gives it up to another firm for clearing,
    (A) The clearing futures commission merchant shall establish risk-
based limits for the customer, and enter into an agreement in advance 
with the executing firm that requires the executing firm to screen 
orders for compliance with those limits in accordance with paragraph 
(a)(2)(i) or (ii) as applicable; and
    (B) The clearing futures commission merchant shall establish and 
maintain systems of risk management controls reasonably designed to 
ensure compliance with the limits.
    (v) When an account manager bunches orders on behalf of multiple 
customers for execution as a block and post-trade allocation to 
individual accounts for clearing:
    (A) The futures commission merchant that initially clears the block 
shall establish risk-based limits for the block account and screen the 
order in accordance with paragraph (a)(2)(i) or (ii) as applicable;
    (B) The futures commission merchants that clear the allocated 
trades

[[Page 21307]]

on behalf of customers shall establish risk-based limits for each 
customer and enter into an agreement in advance with the account 
manager that requires the account manager to screen orders for 
compliance with those limits; and
    (C) The futures commission merchants that clear the allocated 
trades on behalf of customers shall establish and maintain systems of 
risk management controls reasonably designed to ensure compliance with 
the limits.
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests under extreme but plausible conditions of 
all positions in the proprietary account and in each customer account 
that could pose material risk to the futures commission merchant at 
least once per week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate, in an orderly manner, the 
positions in the proprietary and customer accounts and estimate the 
cost of the liquidation at least once per quarter; and
    (8) Test all lines of credit at least once per year.
    (b) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish written procedures to comply with this regulation; 
and
    (2) Keep full, complete, and systematic records documenting its 
compliance with this regulation.
    (3) All records required to be maintained pursuant to these 
regulations shall be maintained in accordance with Commission 
Regulation 1.31 (17 CFR 1.31) and shall be made available promptly upon 
request to representatives of the Commission and to representatives of 
applicable prudential regulators.

0
5. Add Sec.  1.74 to read as follows:


Sec.  1.74  Futures commission merchant acceptance for clearing.

    (a) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall coordinate with each 
derivatives clearing organization on which it clears to establish 
systems that enable the futures commission merchant, or the derivatives 
clearing organization acting on its behalf, to accept or reject each 
trade submitted to the derivatives clearing organization for clearing 
by or for the futures commission merchant or a customer of the futures 
commission merchant as quickly as would be technologically practicable 
if fully automated systems were used; and
    (b) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall accept or reject each trade 
submitted by or for it or its customers as quickly as would be 
technologically practicable if fully automated systems were used; a 
clearing futures commission merchant may meet this requirement by:
    (1) Establishing systems to pre-screen orders for compliance with 
criteria specified by the clearing futures commission merchant;
    (2) Establishing systems that authorize a derivatives clearing 
organization to accept or reject on its behalf trades that meet, or 
fail to meet, criteria specified by the clearing futures commission 
merchant; or
    (3) Establishing systems that enable the clearing futures 
commission merchant to communicate to the derivatives clearing 
organization acceptance or rejection of each trade as quickly as would 
be technologically practicable if fully automated systems were used.

0
6. Add Sec.  1.75 to read as follows:


Sec.  1.75  Delegation of authority to the Director of the Division of 
Clearing and Risk to establish an alternative compliance schedule to 
comply with futures commission merchant acceptance for clearing.

    (a) The Commission hereby delegates to the Director of the Division 
of Clearing and Risk or such other employee or employees as the 
Director may designate from time to time, the authority to establish an 
alternative compliance schedule for requirements of Sec.  1.74 for 
swaps that are found to be technologically or economically 
impracticable for an affected futures commission merchant that seeks, 
in good faith, to comply with the requirements of Sec.  1.74 within a 
reasonable time period beyond the date on which compliance by such 
futures commission merchant is otherwise required.
    (b) A request for an alternative compliance schedule under this 
section shall be acted upon by the Director of the Division of Clearing 
and Risk within 30 days from the time such a request is received, or it 
shall be deemed approved.
    (c) An exception granted under this section shall not cause a 
registrant to be out of compliance or deemed in violation of any 
registration requirements.
    (d) Notwithstanding any other provision of this section, in any 
case in which a Commission employee delegated authority under this 
section believes it appropriate, he or she may submit to the Commission 
for its consideration the question of whether an alternative compliance 
schedule should be established. Nothing in this section shall be deemed 
to prohibit the Commission, at its election, from exercising the 
authority delegated in this section.

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
7. Revise the authority citation for part 23 to read as follows:

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


0
8. Add subpart I to read as follows:
Subpart I--Swap Documentation
Sec.
23.500-23.505 [Reserved]
23.506 Swap processing and clearing.

Subpart I--Swap Documentation


Sec. Sec.  23.500-23.505  [Reserved]


Sec.  23.506  Swap processing and clearing.

    (a) Swap processing. (1) Each swap dealer and major swap 
participant shall ensure that it has the capacity to route swap 
transactions not executed on a swap execution facility or designated 
contract market to a derivatives clearing organization in a manner 
acceptable to the derivatives clearing organization for the purposes of 
clearing; and
    (2) Each swap dealer and major swap participant shall coordinate 
with each derivatives clearing organization to which the swap dealer, 
major swap participant, or its clearing member submits transactions for 
clearing, to facilitate prompt and efficient swap transaction 
processing in accordance with the requirements of Sec.  39.12(b)(7) of 
this chapter.
    (b) Swap clearing. With respect to each swap that is not executed 
on a swap execution facility or a designated contract market, each swap 
dealer and major swap participant shall:
    (1) If such swap is subject to a mandatory clearing requirement 
pursuant to section 2(h)(1) of the Act and an exception pursuant to 
2(h)(7) is not applicable, submit such swap for clearing to a 
derivatives clearing organization as soon as technologically 
practicable after execution of the swap, but no later than the close of 
business on the day of execution; or
    (2) If such swap is not subject to a mandatory clearing requirement 
pursuant to section 2(h)(1) of the Act but is accepted for clearing by 
any derivatives clearing organization and

[[Page 21308]]

the swap dealer or major swap participant and its counterparty agree 
that such swap will be submitted for clearing, submit such swap for 
clearing not later than the next business day after execution of the 
swap, or the agreement to clear, if later than execution.

0
9. Add Sec.  23.608 to subpart J, as added at 77 FR 20128, April 3, 
2012, effective June 4, 2012, to read as follows:


Sec.  23.608  Restrictions on counterparty clearing relationships.

    No swap dealer or major swap participant entering into a swap to be 
submitted for clearing with a counterparty that is a customer of a 
futures commission merchant shall enter into an arrangement that:
    (a) Discloses to the futures commission merchant or any swap dealer 
or major swap participant the identity of a customer's original 
executing counterparty;
    (b) Limits the number of counterparties with whom a customer may 
enter into a trade;
    (c) Restricts the size of the position a customer may take with any 
individual counterparty, apart from an overall limit for all positions 
held by the customer with the swap dealer or major swap participant;
    (d) Impairs a customer's access to execution of a trade on terms 
that have a reasonable relationship to the best terms available; or
    (e) Prevents compliance with the timeframes set forth in Sec.  
1.74(b), Sec.  23.610(b), or Sec.  39.12(b)(7) of this chapter.

0
10. Add Sec.  23.609 to subpart J, as added at 77 FR 20128, April 3, 
2012, effective June 4, 2012, to read as follows:


Sec.  23.609  Clearing member risk management.

    (a) With respect to clearing activities in futures, security 
futures products, swaps, agreements, contracts, or transactions 
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act, 
commodity options authorized under section 4c of the Act, or leveraged 
transactions authorized under section 19 of the Act, each swap dealer 
or major swap participant that is a clearing member of a derivatives 
clearing organization shall:
    (1) Establish risk-based limits based on position size, order size, 
margin requirements, or similar factors;
    (2) Screen orders for compliance with the risk-based limits in 
accordance with the following:
    (i) For transactions subject to automated execution, the clearing 
member shall use automated means to screen orders for compliance with 
the risk-based limits; and
    (ii) For transactions subject to non-automated execution, the 
clearing member shall establish and maintain systems of risk controls 
reasonably designed to ensure compliance with the limits.
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests under extreme but plausible conditions of 
all positions at least once per week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate the positions it clears in an 
orderly manner, and estimate the cost of the liquidation; and
    (8) Test all lines of credit at least once per year.
    (b) Each swap dealer or major swap participant that is a clearing 
member of a derivatives clearing organization shall:
    (1) Establish written procedures to comply with this regulation; 
and
    (2) Keep full, complete, and systematic records documenting its 
compliance with this regulation.
    (3) All records required to be maintained pursuant to these 
regulations shall be maintained in accordance with Commission 
Regulation Sec.  1.31 and shall be made available promptly upon request 
to representatives of the Commission and to representatives of 
applicable prudential regulators.

0
11. Add Sec.  23.610 to subpart J, as added at 77 FR 20128, April 3, 
2012, effective June 4, 2012, to read as follows:


Sec.  23.610  Clearing member acceptance for clearing.

    (a) Each swap dealer or major swap participant that is a clearing 
member of a derivatives clearing organization shall coordinate with 
each derivatives clearing organization on which it clears to establish 
systems that enable the clearing member, or the derivatives clearing 
organization acting on its behalf, to accept or reject each trade 
submitted to the derivatives clearing organization for clearing by or 
for the clearing member as quickly as would be technologically 
practicable if fully automated systems were used; and
    (b) Each swap dealer or major swap participant that is a clearing 
member of a derivatives clearing organization shall accept or reject 
each trade submitted by or for it as quickly as would be 
technologically practicable if fully automated systems were used; a 
clearing member may meet this requirement by:
    (1) Establishing systems to pre-screen orders for compliance with 
criteria specified by the clearing member;
    (2) Establishing systems that authorize a derivatives clearing 
organization to accept or reject on its behalf trades that meet, or 
fail to meet, criteria specified by the clearing member; or
    (3) Establishing systems that enable the clearing member to 
communicate to the derivatives clearing organization acceptance or 
rejection of each trade as quickly as would be technologically 
practicable if fully automated systems were used.

0
12. Add Sec.  23.611 to subpart J, as added at 77 FR 20128, April 3, 
2012, effective June 4, 2012, to read as follows:


Sec.  23.611  Delegation of authority to the Director of the Division 
of Clearing and Risk to establish an alternative compliance schedule to 
comply with clearing member acceptance for clearing.

    (a) The Commission hereby delegates to the Director of the Division 
of Clearing and Risk or such other employee or employees as the 
Director may designate from time to time, the authority to establish an 
alternative compliance schedule for requirements of Sec.  23.610 for 
swaps that are found to be technologically or economically 
impracticable for an affected swap dealer or major swap participant 
that seeks, in good faith, to comply with the requirements of Sec.  
23.610 within a reasonable time period beyond the date on which 
compliance by such swap dealer or major swap participant is otherwise 
required.
    (b) A request for an alternative compliance schedule under this 
section shall be acted upon by the Director of the Division of Clearing 
and Risk within 30 days from the time such a request is received, or it 
shall be deemed approved.
    (c) An exception granted under this section shall not cause a 
registrant to be out of compliance or deemed in violation of any 
registration requirements.
    (d) Notwithstanding any other provision of this section, in any 
case in which a Commission employee delegated authority under this 
section believes it appropriate, he or she may submit to the Commission 
for its consideration the question of whether an alternative compliance 
schedule should be established. Nothing in this section shall be deemed 
to prohibit the Commission, at its election, from exercising the 
authority delegated in this section.

[[Page 21309]]


0
13-14. Revise part 37 to read as follows:

PART 37--SWAP EXECUTION FACILITIES

Sec.
Subparts A-G [Reserved]
Subpart H--Financial Integrity of Transactions
37.700 [Reserved]
37.701 [Reserved]
37.702 General financial integrity.
37.703 [Reserved]
Subparts I-K [Reserved]

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.

Subparts A-G [Reserved]

Subpart H--Financial Integrity of Transactions


Sec.  37.700  [Reserved]


Sec.  37.701  [Reserved]


Sec.  37.702  General financial integrity.

    (a) [Reserved]
    (b) For transactions cleared by a derivatives clearing 
organization:
    (1) By ensuring that the swap execution facility has the capacity 
to route transactions to the derivatives clearing organization in a 
manner acceptable to the derivatives clearing organization for purposes 
of clearing; and
    (2) By coordinating with each derivatives clearing organization to 
which it submits transactions for clearing, in the development of rules 
and procedures to facilitate prompt and efficient transaction 
processing in accordance with the requirements of Sec.  39.12(b)(7) of 
this chapter.


Sec.  37.703  [Reserved]

Subparts I-K [Reserved]

PART 38--DESIGNATED CONTRACT MARKETS

0
15. Revise the authority citation for part 38 to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.


0
16. Designate existing Sec. Sec.  38.1 through 38.6 as the contents of 
added subpart A under the following heading:

Subpart A--General Provisions

* * * * *

0
17. Add subpart L to read as follows:
Subpart L--Financial Integrity of Transactions
Sec.
38.600 [Reserved]
38.601 Mandatory clearing.
38.602-38.606 [Reserved]

Subpart L--Financial Integrity of Transactions


Sec.  38.601  [Reserved]


Sec.  38.601  Mandatory clearing.

    (a) Transactions executed on or through the designated contract 
market, other than transactions in security futures products, must be 
cleared through a registered derivatives clearing organization, in 
accordance with the provisions of part 39 of this chapter.
    (b) A designated contract market must coordinate with each 
derivatives clearing organization to which it submits transactions for 
clearing, in the development of rules and procedures to facilitate 
prompt and efficient transaction processing in accordance with the 
requirements of Sec.  39.12(b)(7) of this chapter.


Sec. Sec.  38.602-38.606  [Reserved]

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
18. Revise the authority citation for part 39 to read as follows:

    Authority:  7 U.S.C. 2, and 7a-1 as amended by the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 
Stat. 1376.

Subpart B--Compliance With Core Principles

0
19. In Sec.  39.12, add paragraphs (a)(1)(vi) and (b)(7) to read as 
follows:


Sec.  39.12  Participant and product eligibility.

    (a) * * *
    (1) * * *
    (vi) No derivatives clearing organization shall require as a 
condition of accepting a swap for clearing that a futures commission 
merchant enter into an arrangement with a customer that:
    (A) Discloses to the futures commission merchant or any swap dealer 
or major swap participant the identity of a customer's original 
executing counterparty;
    (B) Limits the number of counterparties with whom a customer may 
enter into trades;
    (C) Restricts the size of the position a customer may take with any 
individual counterparty, apart from an overall limit for all positions 
held by the customer at the futures commission merchant;
    (D) Impairs a customer's access to execution of a trade on terms 
that have a reasonable relationship to the best terms available; or
    (E) Prevents compliance with the time frames set forth in Sec.  
1.74(b), Sec.  23.610(b), or Sec.  39.12(b)(7) of this chapter.
* * * * *
    (b) * * *
    (7) Time frame for clearing. (i) Coordination with markets and 
clearing members.
    (A) Each derivatives clearing organization shall coordinate with 
each designated contract market and swap execution facility that lists 
for trading a product that is cleared by the derivatives clearing 
organization in developing rules and procedures to facilitate prompt, 
efficient, and accurate processing of all transactions submitted to the 
derivatives clearing organization for clearing.
    (B) Each derivatives clearing organization shall coordinate with 
each clearing member that is a futures commission merchant, swap 
dealer, or major swap participant to establish systems that enable the 
clearing member, or the derivatives clearing organization acting on its 
behalf, to accept or reject each trade submitted to the derivatives 
clearing organization for clearing by or for the clearing member or a 
customer of the clearing member as quickly as would be technologically 
practicable if fully automated systems were used.
    (ii) Transactions executed competitively on or subject to the rules 
of a designated contract market or swap execution facility. A 
derivatives clearing organization shall have rules that provide that 
the derivatives clearing organization will accept or reject for 
clearing as quickly after execution as would be technologically 
practicable if fully automated systems were used, all contracts that 
are listed for clearing by the derivatives clearing organization and 
are executed competitively on or subject to the rules of a designated 
contract market or a swap execution facility. The derivatives clearing 
organization shall accept all trades:
    (A) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization;
    (B) For which the executing parties identify the derivatives 
clearing organization as the intended clearinghouse; and
    (C) That satisfy the criteria of the derivatives clearing 
organization, including but not limited to applicable

[[Page 21310]]

risk filters; provided that such criteria are non-discriminatory across 
trading venues and are applied as quickly as would be technologically 
practicable if fully automated systems were used.
    (iii) Swaps not executed on or subject to the rules of a designated 
contract market or a swap execution facility or executed non-
competitively on or subject to the rules of a designated contract 
market or a swap execution facility. A derivatives clearing 
organization shall have rules that provide that the derivatives 
clearing organization will accept or reject for clearing as quickly 
after submission to the derivatives clearing organization as would be 
technologically practicable if fully automated systems were used, all 
swaps that are listed for clearing by the derivatives clearing 
organization and are not executed on or subject to the rules of a 
designated contract market or a swap execution facility or executed 
non-competitively on or subject to the rules of a designated contract 
market or a swap execution facility. The derivatives clearing 
organization shall accept all trades:
    (A) That are submitted by the parties to the derivatives clearing 
organization, in accordance with Sec.  23.506 of this chapter;
    (B) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization;
    (C) For which the executing parties identify the derivatives 
clearing organization as the intended clearinghouse; and
    (D) That satisfy the criteria of the derivatives clearing 
organization, including but not limited to applicable risk filters; 
provided that such criteria are non-discriminatory across trading 
venues and are applied as quickly as would be technologically 
practicable if fully automated systems were used.
* * * * *

    Issued in Washington, DC, on March 20, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management--Commission Voting 
Summary and Statements of Commissioners

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, and Wetjen voted in the affirmative; Commissioner O'Malia 
voted in the negative.

Appendix 2--Statement of Chairman Gensler

    I support today's final rulemaking on clearing which will 
promote market participants' access to central clearing, increase 
market transparency, foster competition, support market efficiency, 
and bolster risk management. These rules include provisions on 
client clearing documentation, so-called `straight-through' 
processing, bunched orders, and clearing member risk management.
    These final rules have all benefited from broad public comment.
    One of the primary goals of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act) is to lower risks to 
the public by increasing the use of central clearing and to promote 
the financial integrity of the markets and the clearing system. 
These rules are an important step in furtherance of these goals.
    First, the final rule does so by establishing requirements for 
the documentation between a Futures Commission Merchant (FCM) and 
its customers and between a Swap Dealer and its counterparties. This 
rule will foster bilateral clearing arrangements between customers 
and their FCM. The rule will promote competition in the provision of 
clearing services and swap liquidity to the broad public by limiting 
one FCM or Swap Dealer from restricting a customer or counterparty 
access to other market participants.
    Second, the final rule does so by setting standards for the 
timely processing of trades through so-called `straight-through' 
processing or sending transactions promptly to the clearinghouse 
upon execution. This lowers risk to the markets by minimizing the 
time between submission and acceptance or rejection of trades for 
clearing. These regulations would require and establish uniform 
standards for prompt processing, submission and acceptance for 
clearing of swaps eligible for clearing. Such uniform standards, 
similar to the practices in the futures markets, lower risk because 
they allow market participants to get the prompt benefit of clearing 
rather than having to first enter into a bilateral transaction that 
would subsequently be moved into a clearinghouse.
    Third, the final rule does so by allowing asset managers to 
allocate bunched orders for swaps consistent with long established 
rules for allocating bunched orders for futures. This will help 
promote access to clearing of swaps for pension funds, mutual funds 
and other clients of asset managers.
    Lastly, the final rule does so by strengthening the risk 
management procedures of clearing members. One of the primary goals 
of the Dodd-Frank Act was to reduce the risk that swaps pose to the 
economy. The final rule would require clearing members that are 
FCMs, Swap Dealers, and major swap participants to establish risk-
based limits on their customer and house accounts. The rule also 
would require clearing members to establish procedures to, amongst 
other provisions, evaluate their ability to meet margin 
requirements, as well as liquidate positions as needed. These risk 
filters and procedures would help secure the financial integrity of 
the markets and the clearing system.

[FR Doc. 2012-7477 Filed 4-6-12; 8:45 am]
BILLING CODE 6351-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>