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[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]
[Proposed Rules]
[Pages 15460-15527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5950]

[[Page 15459]]

Vol. 77

Thursday,

No. 51

March 15, 2012

Part II

Commodity Futures Trading Commission

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17 CFR Part 43

 Procedures To Establish Appropriate Minimum Block Sizes for Large 
Notional Off-Facility Swaps and Block Trades; Proposed Rule

Federal Register / Vol. 77 , No. 51 / Thursday, March 15, 2012 / 
Proposed Rules

[[Page 15460]]

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 COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 43

RIN 3038-AD08

Procedures To Establish Appropriate Minimum Block Sizes for Large 
Notional Off-Facility Swaps and Block Trades

AGENCY: Commodity Futures Trading Commission.

ACTION: Further notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission is proposing 
regulations to implement certain statutory provisions enacted by Title 
VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 
Specifically, in accordance with section 727 of the Dodd-Frank Act, the 
Commission is proposing regulations that would define the criteria for 
grouping swaps into separate swap categories and would establish 
methodologies for setting appropriate minimum block sizes for each swap 
category. In addition, the Commission is proposing further measures 
under the Commission's regulations to prevent the public disclosure of 
the identities, business transactions and market positions of swap 
market participants.

DATES: Comments must be received on or before May 14, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD08, 
by any of the following methods:
     The agency's Web site, at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that you believe is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
Sec.  145.9 of the Commission's regulations.\1\
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    \1\ See 17 CFR 145.9.
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    Commenters to this further notice of proposed rulemaking are 
requested to refrain from providing comments with respect to the 
provisions in part 43 of the Commission's regulations that are beyond 
the scope of this proposed rulemaking. The Commission only plans to 
address those comments that are responsive to the policies, merits and 
substance of the proposed provisions set forth in this further notice 
of proposed rulemaking.
    Throughout this further notice of proposed rulemaking, the 
Commission requests comment in response to several specific questions. 
For convenience, the Commission has numbered each of these requests for 
comment. The Commission asks that, in submitting comments, commenters 
kindly identify the specific number of each request to which their 
comments are responsive.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.

FOR FURTHER INFORMATION CONTACT: Carl E. Kennedy, Counsel, Office of 
the General Counsel, 202-418-6625, c_kennedy@cftc.gov; or George 
Pullen, Economist, Division of Market Oversight, 202-418-6709, 
gpullen@cftc.gov; Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. The Dodd-Frank Act
    B. The Initial Proposal
    C. Public Comments in Response to the Initial Proposal
    1. Public Comments Regarding the Proposed Determination of 
Appropriate Minimum Block Sizes
    2. Public Comments Regarding the Proposed Anonymity Protections
    3. Public Comments Regarding Implementation
    D. Analysis of Swap Market Data; Issuance of the Adopting 
Release
II. Further Proposal--Block Trades
    A. Policy Goals
    B. Summary of the Proposed Approach
    C. Proposing Criteria for Distinguishing Among Swap Categories 
in Each Asset Class
    1. Interest Rate and Credit Asset Classes
    a. Background
    b. Interest Rate Swap Categories
    i. Interest Rate Swap Data Summary
    ii. Interest Rate Swap Data Analysis
    c. Credit Swap Categories
    i. Credit Swap Data Summary
    ii. Credit Swap Data Analysis
    2. Swap Category in the Equity Asset Class
    3. Swap Categories in the FX Asset Class
    4. Swap Categories in the Other Commodity Asset Class
    D. Proposed Appropriate Minimum Block Size Methodologies for the 
Initial and Post-Initial Periods
    1. Methodology for Determining the Appropriate Minimum Block 
Sizes in the Interest Rate and Credit Asset Classes
    2. Treatment of Swaps Within the Equity Asset Class
    3. Methodologies for Determining the Appropriate Minimum Block 
Sizes in the FX Asset Class
    a. Initial Period Methodology for Determining Appropriate 
Minimum Block Sizes in the FX Asset Class
    b. Post-Initial Period Methodology for Determining Appropriate 
Minimum Block Sizes in the FX Asset Class
    4. Methodologies for Determining Appropriate Minimum Block Sizes 
in the Other Commodity Asset Class
    a. Initial Period Methodology for Determining Appropriate 
Minimum Block Sizes in the Other Commodity Asset Class (Other Than 
Natural Gas and Electricity Swaps Proposed To Be Listed in Appendix 
B to Part 43)
    b. Initial Period Methodology for Natural Gas and Electricity 
Swaps in the Other Commodity Asset Class Proposed To Be Listed in 
Appendix B to Part 43
    c. Post-Initial Period Methodology for Determining Appropriate 
Minimum Block Sizes in the Other Commodity Asset Class
    5. Special Provisions for the Determination of Appropriate 
Minimum Block Sizes for Certain Types of Swaps
    a. Swaps With Optionality
    b. Swaps With Composite Reference Prices
    c. Physical Commodity Swaps
    d. Currency Conversion
    e. Successor Currencies
    E. Procedural Provisions
    1. Proposed Sec.  43.6(a) Commission Determination
    2. Proposed Sec.  43.6(f)(3) and(4) Publication and Effective 
Date of Post-Initial Appropriate Minimum Block Sizes
    3. Proposed Sec.  43.6(g) Notification of Election
    4. Proposed Sec.  43.7 Delegation of Authority
III. Further Proposal--Anonymity Protections for the Public 
Dissemination of Swap Transaction and Pricing Data
    A. Policy Goals
    B. Establishing Notional Cap Sizes for Swap Transaction and 
Pricing Data To Be Publicly Disseminated in Real-Time
    1. Policy Goals for Establishing Notional Cap Sizes

[[Page 15461]]

    2. Proposed Amendments Related to Cap Sizes--Sec.  43.2 
Definitions and Sec.  43.4 Swap Transaction and Pricing Data To Be 
Publicly Disseminated in Real-Time
    a. Initial Cap Sizes
    b. Post-Initial Cap Sizes and the 75-Percent Notional Amount 
Calculation
    c. Alternative Cap Size Calculations
    C. Masking the Geographic Detail of Swaps in the Other Commodity 
Asset Class
    1. Policy Goals for Masking the Geographic Detail for Swaps in 
the Other Commodity Asset Class
    2. Proposed Amendments to Sec.  43.4
    3. Application of Proposed Sec.  43.4(d)(4)(iii) and Proposed 
Appendix E to Part 43--Geographic Detail for Delivery or Pricing 
Points
    a. U.S. Delivery of Pricing Points
    i. Natural Gas and Related Products
    ii. Petroleum and Products
    iii. Electricity and Sources
    iv. All Remaining Other Commodities
    b. Non-U.S. Delivery or Pricing Points
    c. Basis Swaps
    4. Further Revisions to Part 43
    a. Additional Contracts Added to Appendix B to Part 43
    b. Technical Revisions to Part 43
IV. Regulatory Flexibility Act
    A. Potential Economic Impact--Proposed Sec.  43.6(g)--
Notification of Election
    B. Identification of Duplicative, Overlapping or Conflicting 
Federal Rules
    C. Alternatives to Proposed Rules That Will Have an Impact
    D. Certification
V. Paperwork Reduction Act
    A. Background
    B. Description of the Collection
    1. Proposed Sec.  43.6(g)--Notification of Election
    2. Proposed Amendments to Sec. Sec.  43.4(d)(4) and 43.4(h)
    C. Request for Comments on Collection
VI. Cost-Benefit Considerations
    A. Introduction
    B. The Requirements of Section 15(a)
    C. Structure of the Commission's Analysis; Cost Estimation 
Methodology
    D. Background; Objectives of This Further Proposal
    E. Costs and Benefits Relevant to the Block Trade Rules Section 
of the Further Proposal (Sec. Sec.  43.6(a)-(f) and (h))
    1. Costs and Benefits Relevant to the Proposed Criteria and 
Methodology
    a. Proposed Sec.  43.6(a) Commission Determination
    b. Proposed Sec.  43.6(b) Swap Category
    c. Proposed Sec. Sec.  43.6(c)-(f) and (h) Methods for 
Determining Appropriate Minimum Block Sizes
    d. Proposed Sec. Sec.  43.6(a)-(f) and (h) Costs Relevant to the 
Proposed Criteria and Methodology
    e. Benefits Relevant to Proposed Sec. Sec.  43.6(a)-(f) and (h)
    f. Application of the Section 15(a) Factors to Proposed 
Sec. Sec.  43.6(a)-(f) and (h)
    i. Protection of Market Participants and the Public
    ii. Efficiency, Competitiveness and Financial Integrity of 
Markets
    iii. Price Discovery
    iv. Sound Risk Management Practices
    v. Other Public Interest Considerations
    g. Specific Questions Regarding the Proposed Criteria and 
Methodology
    2. Cost-Benefit Considerations Relevant to the Proposed Block 
Trade/Large Notional Off-Facility Swap Election Process (Proposed 
Sec.  43.6(g))
    a. Costs Relevant to the Proposed Election Process (Proposed 
Sec.  43.6(g))
    i. Incremental, Non-Recurring Expenditure to a Non-Financial 
End-user, SEF or DCM To Update Existing Technology
    ii. Incremental, Non-Recurring Expenditure to a Non-Financial 
End-User, SEF or DCM To Provide Training to Existing personnel and 
Update Written Policies and Procedures
    iii. Incremental, Recurring Expenses to a Non-Financial End-
User, DCM or SEF Associated With Incremental Compliance, Maintenance 
and Operational Support in Connection With the Proposed Election 
Process
    iv. Incremental, Non-Recurring Expenditure to an SDR To Update 
Existing Technology To Capture and Publicly Disseminate Swap Data 
for Block Trades and Large Notional Off-Facility Swaps
    b. Benefits Relevant to the Proposed Election Process (Proposed 
Sec.  43.6(g))
    c. Application of the Section 15(a) Factors to Proposed Sec.  
43.6(g)
    i. Protection of Market Participants and the Public
    ii. Efficiency, Competitiveness and Financial Integrity
    iii. Price Discovery
    iv. Sound Risk Management Practices
    v. Other Public Interest Considerations
    d. Specific Questions Regarding the Proposed Election Process
    F. Costs and Benefits Relevant to Proposed Anonymity Protections 
(Amendments to Sec. Sec.  43.4(d)(4) and (h))
    1. Proposed Amendments to Sec.  43.4(d)(4)
    2. Proposed Amendments to Sec.  43.4(h)
    3. Costs Relevant to the Proposed Amendments to Sec. Sec.  
43.4(d)(4) and (h)
    4. Benefits Relevant to the Proposed Amendments to Sec.  43.4
    5. Application of the Section 15(a) Factors to the Proposed 
Amendments to Sec.  43.4
    a. Protection of Market Participants and the Public
    b. Efficiency, Competitiveness and Financial Integrity
    c. Price Discovery
    d. Sound Risk Management Practices
    e. Other Public Interest Considerations
    6. Specific Questions Regarding the Proposed Amendments to Sec.  
43.4
VII. Example of a Post-Initial Appropriate Minimum Block Size 
Determination Using the 50-Percent Notional Amount Calculation
VIII. List of Commenters Who Responded to the Initial Proposal

I. Background

A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII 
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'') 
\4\ to establish a comprehensive, new regulatory framework for swaps 
and security-based swaps. This legislation was enacted to reduce risk, 
increase transparency and promote market integrity within the financial 
system by, inter alia: (1) Providing for the registration and 
comprehensive regulation of swap dealers (``SDs'') and major swap 
participants (``MSPs''); (2) imposing mandatory clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust 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.
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    \2\ See Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ The short title of Title VII of the Dodd-Frank Act is the 
``Wall Street Transparency and Accountability Act of 2010.''
    \4\ See 7 U.S.C. 1 et seq.
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    Section 727 of the Dodd-Frank Act created section 2(a)(13) of the 
CEA, which authorizes and requires the Commission to promulgate 
regulations for the real-time public reporting of swap transaction and 
pricing data.\5\ Section 2(a)(13)(A) provides that the definition of 
``real-time public reporting'' means reporting ``data relating to a 
swap transaction, including price and volume, as soon as 
technologically practicable after the time at which the swap 
transaction has been executed.'' \6\ Section 2(a)(13)(B) states that 
the purpose of section 2(a)(13) is ``to authorize the Commission to 
make swap transaction and pricing data available to the public in such 
form and at such times as the Commission determines appropriate to 
enhance price discovery.''
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    \5\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).
    \6\ CEA section 2(a)(13)(A).
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    In general, section 2(a)(13) of the CEA directs the Commission to 
prescribe regulations ``providing for the public availability of 
transaction and pricing data'' for certain swaps. Section 2(a)(13) also 
places two other statutory requirements on the Commission that are 
relevant to this further notice of proposed rulemaking (``Further 
Proposal''). First, sections 2(a)(13)(E)(ii) and (iii) of the CEA 
respectively require the Commission to prescribe regulations specifying 
``the criteria for determining what constitutes a large notional swap 
transaction (block trade) for particular markets and contracts'' and 
``the appropriate time delay for reporting

[[Page 15462]]

large notional swap transactions (block trades) to the public.'' \7\ In 
promulgating regulations under section 2(a)(13), section 
2(a)(13)(E)(iv) directs the Commission to take into account whether 
public disclosure of swap transaction and pricing data will 
``materially reduce market liquidity.'' \8\
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    \7\ See CEA sections 2(a)(13)(E)(ii) and (iii). Section 
2(a)(13)(E) explicitly refers to the swaps described only in 
sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA (i.e., 
clearable swaps, including swaps that are exempt from clearing). As 
noted in the Commission's Initial Proposal (as defined below) and 
its Adopting Release (as defined below), the Commission interprets 
the provisions in section 2(a)(13)(E) to apply to all categories of 
swaps described in section 2(a)(13)(C) of the CEA.
    \8\ CEA section 2(a)(13)(E)(iv). Similarly, section 5h(f)(2)(C) 
of the CEA directs a registered swap execution facility (``SEF'') to 
set forth rules for block trades for swap execution purposes.
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    The second statutory requirement relevant to this Further Proposal 
is found in sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA. 
Section 2(a)(13)(E)(i) requires the Commission to protect the 
identities of counterparties to mandatorily-cleared swaps, swaps 
excepted from the mandatory clearing requirement and voluntarily-
cleared swaps. Section 2(a)(13)(C)(iii) of the CEA requires the 
Commission to prescribe rules that maintain the anonymity of business 
transactions and market positions of the counterparties to an uncleared 
swap.\9\ Indeed, Congress sought to ``ensure that the public reporting 
of swap transaction and pricing data [would] not disclose the names or 
identities of the parties to [swap] transactions.'' \10\
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    \9\ This provision does not cover swaps that are ``determined to 
be required to be cleared but are not cleared.'' See CEA section 
2(a)(13)(C)(iv).
    \10\ 156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement 
of Sen. Blanche Lincoln).
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    In carrying out these two statutory requirements under section 
2(a)(13), the Commission issued a notice of proposed rulemaking. A 
discussion of that notice is described immediately below.

B. The Initial Proposal

    On December 7, 2010, the Commission published in the Federal 
Register a notice of proposed rulemaking to implement section 2(a)(13) 
of the CEA (the ``Initial Proposal''), which included, among others, 
specific provisions pursuant to sections 2(a)(13)(E)(i)-(iv) and 
2(a)(13)(C)(iii).\11\ In the Initial Proposal, the Commission set out 
proposed provisions to satisfy the statutory requirements discussed 
above. With respect to the first statutory requirement, the Commission 
proposed: (1) Definitions for the terms ``large notional off-facility 
swap'' and ``block trade'' \12\; (2) a method for determining the 
appropriate minimum block sizes for large notional off-facility swaps 
and block trades; \13\ and (3) a framework for timely reporting of such 
transactions and trades.\14\ Proposed Sec.  43.5(g) provided that 
registered swap data repositories (``SDRs'') shall be responsible for 
calculating the appropriate minimum block size for each ``swap 
instrument'' using the greater result of the distribution test \15\ and 
the multiple test.\16\ Proposed Sec.  43.2(y) broadly defined ``swap 
instrument'' as ``a grouping of swaps in the same asset class with the 
same or similar characteristics.'' \17\ Proposed Sec.  43.5(h) provided 
that for any swap listed on a SEF or DCM, the SEF or DCM must set the 
appropriate minimum block trade size.\18\
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    \11\ See Real-Time Public Reporting of Swap Transaction Data, 75 
FR 76,139, Dec. 7, 2010, as corrected in Real-Time Public Reporting 
of Swap Transaction Data Correction, 75 FR 76,930, Dec. 10, 2010. 
Interested persons are directed to the Initial Proposal for a full 
discussion of each of the proposed part 43 rules.
    \12\ The Initial Proposal defined the term ``large notional 
swap.'' See proposed Sec.  43.2(l), 75 FR 76,171. The Adopting 
Release finalized the term as ``large notional off-facility swap,'' 
to denote, in relevant part, that the swap is not executed pursuant 
to a SEF or designated contract market's (``DCM'') rules and 
procedures. See Sec.  43.2, 77 FR 1,182, 1,244, Jan. 9, 2012 
(``Adopting Release''). Specifically, the Adopting Release defined 
the term as an ``off-facility swap that has a notional or principal 
amount at or above the appropriate minimum block size applicable to 
such publicly reportable swap transaction and is not a block trade 
as defined in Sec.  43.2 of the Commission's regulations.'' Id. 
Throughout this Further Proposal, the Commission uses the term 
``large notional off-facility swap'' as adopted in the Adopting 
Release.
    The Initial Proposal's definition of ``block trade'' was similar 
to the final definition in the Adopting Release. See proposed Sec.  
43.2(f), 75 FR 76,171. The Adopting Release defines the term ``block 
trade'' as a publicly reportable swap transaction that: ``(1) 
[i]nvolves a swap that is listed on a SEF or DCM; (2) [o]ccurs away 
from the [SEF's or DCM's] trading system or platform and is executed 
pursuant to the [SEF's or DCM's] rules and procedures; (3) has a 
notional or principal amount at or above the appropriate minimum 
block applicable to such swap; and (4) [i]s reported subject to the 
rules and procedures of the [SEF or DCM] and the rules described in 
[part 43], including the appropriate time delay requirements set 
forth in Sec.  43.5.'' See Sec.  43.2, 77 FR 1,243.
    \13\ See proposed Sec.  43.5, 75 FR 76,174-76.
    \14\ Proposed Sec.  43.5(k)(1) in the Initial Proposal provided 
that the time delay for the public dissemination of data for a block 
trade or large notional off-facility swap shall commence at the time 
of execution of such trade or swap. See 75 FR 76,176. Proposed Sec.  
43.5(k)(2) provided that the time delay for standardized block 
trades and large notional off-facility swaps (i.e., swaps that fall 
under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from 
the time of execution. Id. The Initial Proposal did not provide 
specific time delays for large notional off-facility swaps (i.e., 
swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead, 
proposed Sec.  43.5(k)(3) provided that the time delay for such 
swaps shall be reported subject to a time delay that may be 
prescribed by the Commission. Id.
    The Adopting Release established time delays for the public 
dissemination of block trades and large notional off-facility swaps 
in Sec.  43.5. See 77 FR 1,247-49.
    \15\ The distribution test, described in proposed Sec.  
43.5(g)(1)(i) of the Initial Proposal, required that an SDR take the 
rounded transaction sizes of all trades executed over a period of 
time for a particular swap instrument and create a distribution of 
those trades. An SDR would then determine the minimum threshold 
amount as an amount that is greater than 95 percent of the notional 
or principal transaction sizes for the swap instrument for an 
applicable period of time. See 75 FR 76,175.
    \16\ The multiple test, described in proposed Sec.  
43.5(g)(1)(ii) in the Initial Proposal, required that an SDR 
multiply the block trade multiple by the ``social size'' of a 
particular swap instrument. Proposed Sec.  43.2(x) defined ``social 
size'' as the greatest of the mean, median or mode for a particular 
swap instrument. The Commission proposed a block trade multiple of 
five. Id.
    \17\ See proposed Sec.  43.2(y), 75 FR 76,172. For the reasons 
described in section II.B. infra, the Commission is proposing to use 
the term ``swap category'' instead of ``swap instrument.'' The 
Commission is of the view that the term swap category is a more 
descriptive term to convey the concept of a grouping of swap 
contracts that would be subject to the same appropriate minimum 
block size.
    \18\ See 75 FR 76,176.
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    With respect to the second statutory requirement relevant to this 
Further Proposal, the Initial Proposal set forth several provisions to 
address issues pertinent to protecting the identities of parties to a 
swap. Essentially, these proposed provisions sought to protect the 
identities of parties to a swap through the limited disclosure of 
information and data relevant to the swap. In particular, proposed 
Sec.  43.4(e)(1) in the Initial Proposal provided that an SDR could not 
publicly report swap transaction and pricing data in a manner that 
discloses or otherwise facilitates the identification of a party to a 
swap. Proposed Sec.  43.4(e)(2) would have placed a requirement on 
SEFs, DCMs and reporting parties to provide an SDR with a specific 
description of the underlying asset and tenor of a swap. This proposed 
section also included a qualification with respect to the reporting of 
the specific description. In particular, this section provided that 
``[the] description must be general enough to provide anonymity but 
specific enough to provide for a meaningful understanding of the 
economic characteristics of the swap.'' \19\ This qualification would 
have applied to all swaps.
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    \19\ See 75 FR 76,174.
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    In the Initial Proposal, the Commission acknowledged that swaps 
that are executed on or pursuant to the rules of a SEF or DCM do not 
raise the same level of concerns in protecting the identities, business 
transactions or market positions of swap counterparties since these 
swaps generally lack

[[Page 15463]]

customization.\20\ As a result, the Commission provided that SEFs and 
DCMs should tailor the description required by proposed section 43.2(e) 
depending on the asset class and place of execution of each swap.
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    \20\ See 75 FR 76,151 (``In contrast, for those swaps that are 
executed on a swap market, the Commission believes that since such 
contracts will be listed on a particular trading platform or 
facility, it will be unlikely that a party to a swap could be 
inferred based on the reporting of the underlying asset and 
therefore parties to swaps executed on swap markets must report the 
specific underlying assets and tenor of the swap.'').
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    In contrast, the Commission acknowledged that the public 
dissemination of a description of the specific underlying asset and 
tenor of swaps that are not executed on or pursuant to the rules of a 
SEF or DCM (i.e., swaps that are executed bilaterally) may result in 
the unintended disclosure of the identities, business transactions or 
market positions of swap counterparties, particularly for swaps in the 
other commodity asset class.\21\ To address this issue, the Commission 
proposed in Sec.  43.4(e)(2) that an SDR publicly disseminate a more 
general description of the specific underlying asset and tenor.\22\ In 
the Initial Proposal, the Commission provided a hypothetical example of 
how an SDR could mask or otherwise protect the underlying asset from 
public disclosure in a manner too specific so as to divulge the 
identity of a swap counterparty. The Commission, however, did not set 
forth a specific manner in which SDRs should carry out this 
requirement.\23\
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    \21\ See 75 FR 76,150-51.
    \22\ See 75 FR 76,174.
    \23\ See 75 FR 76,150. The Initial Proposal further provided 
that the requirement in proposed Sec.  43.4(e)(2) was separate from 
the requirement that a reporting party report swap data to an SDR 
pursuant to section 2(a)(13)(G) of the CEA. See 75 FR 76,174.
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    To further protect the identities, business transactions or market 
positions of swap counterparties, proposed Sec.  43.4(i) of the Initial 
Proposal included a rounding convention for all swaps, which included a 
``notional cap'' provision. The proposed notional cap provision 
provided, for example, that if the notional size of a swap is greater 
than $250 million, then an SDR only would publicly disseminate a 
notation of ``$250+'' to reflect the notional size of the swap.\24\
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    \24\ See 75 FR 76,152.
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    The Commission issued the Initial Proposal for public comment for a 
period of 60 days, but later reopened the comment period for an 
additional 45 days.\25\ The comments that were submitted in response to 
the Initial Proposal are discussed in the section that follows.
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    \25\ The initial comment period for the Initial Proposal closed 
on February 7, 2011. The comment periods for most proposed 
rulemakings implementing the Dodd-Frank Act--including the proposed 
part 43 rules--subsequently were reopened for the period of April 27 
through June 2, 2011.
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C. Public Comments in Response to the Initial Proposal

    After issuing the Initial Proposal, the Commission received 105 
comment letters and held 40 meetings with interested parties regarding 
the proposed provisions.\26\ The commenters provided general and 
specific comments relating to the proposed provisions regarding the 
determination of appropriate minimum block sizes and anonymity 
protections for the identities, business transactions and market 
positions of swap counterparties.\27\ Subsection 1 below sets out a 
discussion of the comments submitted in response to the Initial 
Proposal regarding the provisions that pertain to the determination of 
appropriate minimum block sizes. Subsection 2 below sets out a 
discussion of the comments submitted in response to the Initial 
Proposal regarding the proposed provisions that provide anonymity 
protections for the identities, business transactions or market 
positions of swap counterparties. Subsection 3 below sets out a 
discussion of the comments submitted in response to the Initial 
Proposal regarding the implementation of proposed part 43.
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    \26\ The interested parties who either submitted comment letters 
or met with Commission staff included end-users, potential swap 
dealers, asset managers, industry groups/associations, potential 
SDRs, a potential SEF, multiple law firms on behalf of their clients 
and a DCM. Of the 105 comment letters submitted in response to the 
Initial Proposal, 42 letters focused on various issues relating to 
block trades and large notional off-facility swaps. Of the 40 
meetings, five meetings focused on various issues relating to block 
trades and large notional off-facility swaps. All comment letters 
received in response to the Initial Proposal may be found on the 
Commission's Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.
    \27\ A list of the full names and abbreviations of commenters 
who responded to the Initial Proposal and who the Commission refers 
to in this Further Proposal is included in section VI below. As 
noted above, letters from these commenters and others submitted in 
response to the Initial Proposal are available through the 
Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.
---------------------------------------------------------------------------

1. Public Comments Regarding the Proposed Determination of Appropriate 
Minimum Block Sizes
    In terms of general comments, many commenters argued that the 
potential effects of the large notional off-facility swap and block 
trade provisions (including the provisions regarding the appropriate 
time delay) would adversely affect market liquidity.\28\ Several 
commenters generally argued that the Commission's proposed methodology 
was not supported by actual swap market data.\29\ In support of these 
comments, a few commenters also argued that the Commission should 
examine swap markets over a sufficient period of time to obtain a 
comprehensive view of market liquidity.\30\ Other commenters also 
contended that the proposed methodology to determine appropriate 
minimum block sizes would increase transaction costs if the appropriate 
minimum block sizes are set too large or if time delays are not long 
enough.\31\
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    \28\ See, e.g., Freddie Mac CL at 2; ICI CL at 2; ABC/CIEBA CL 
at 1-2; ISDA/SIFMA CL at 2-4; Cleary Gottlieb CL at 6; JP Morgan CL 
at 2; WMBAA CL at 3.
    \29\ See, e.g., Cleary Gottlieb CL at 4-5; SIFMA/AFME/ASIFMA CL 
at 12; AII CL at 3-5. In their joint comment letter, for example, 
ISDA and SIFMA urged the Commission to conduct an empirical study on 
the impact of post-trade transparency on the over-the-counter 
(``OTC'') markets prior to finalizing the rulemaking. See ISDA/SIFMA 
CL at 4-5. In addition, ISDA and SIFMA argued that the Commission 
should conduct a three-month study, during which time the Commission 
should prescribe interim block trade rules. Id.
    \30\ Commenters did not agree on what constitutes a sufficient 
period of time to obtain a comprehensive view of liquidity. See, 
e.g., ISDA/SIFMA CL at 4 (three months); but see AII CL at 4 (one 
year); ABC/CIEBA CL at 5-6 (at least one year); UBS (six month 
consultation period).
    \31\ See, e.g., UBS CL at 1; AII CL at 4; SIFMA/AFME/ASIFMA CL 
at 11-13; BlackRock CL at 3-4; Hunton & Williams CL at 20; Cleary 
Gottlieb CL at 4-6; CCMR CL at 4; Coalition of Derivatives End-Users 
CL at 4-7; MFA CL at 3-4; MetLife CL at 2-3.
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    Some commenters made specific recommendations regarding the 
Commission's proposed method for determining appropriate minimum block 
sizes for large notional off-facility swaps and block trades.\32\ For 
example, four commenters proffered alternative methods in which to 
group or categorize swaps for the purposes of the appropriate minimum 
block size determination.\33\ Ten commenters recommended ways to modify 
the multiple test.\34\ Specifically, four commenters suggested that the 
Commission remove the mean from the calculation of social size.\35\ 
Several of

[[Page 15464]]

these commenters also suggested that the Commission use a multiple of 
less than five, with a multiple of two as the most often suggested 
alternative.\36\
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    \32\ See, e.g., BlackRock CL at attachment 3; Coalition of 
Derivatives End-Users CL at 2-4.
    \33\ See, e.g., UBS CL at 1; Coalition of Derivatives End-Users 
CL at 2-4; Cleary Gottlieb CL at 5-6; SIFMA AMG CL at 5; Goldman CL 
at 3-4; ICI CL at 3.
    \34\ See e.g., JP Morgan CL at 9; BlackRock CL at 4; Goldman CL 
at 5.
    \35\ See, e.g., Goldman CL at 5 (``[W]e encourage the 
[Commission] to modify the multiple test by eliminating the mean 
prong. Defining the social size of a swap category with reference to 
the mean of transaction sizes would make the calculation susceptible 
to skewing * * *.''). See also JPM CL at 8, UBS CL at 2, Federal 
National Mortgage Association CL at 2.
    \36\ See, e.g., UBS CL at 2 (multiple of 2); JP Morgan CL at 9 
(multiple of 2). But see MetLife CL at 5 (multiple of 1.5).
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    Ten commenters also recommended that the Commission alter the 
distribution test in a way that they would support it as a test, which 
should be used individually or used in combination with the multiple 
test.\37\ The majority of these commenters suggested that the 
Commission use a lower percentage than the proposed 95th 
percentile.\38\ Specifically, these commenters suggested a percentile 
between the 50th and 80th percentile.\39\
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    \37\ See e.g., PIMCO CL at 4; SIFMA AMG CL at 4; UBS CL at 2.
    \38\ See, e.g., BlackRock CL at 4; SIFMA AMG CL at 5; Vanguard 
CL at 5 . See also UBS CL at 2.
    \39\ See, e.g., BlackRock CL at 4 (use 75th percentile); SIFMA 
AMG CL at 5 (recommending ``somewhere in the range of the 66th to 
80th percentiles''); Vanguard CL at 5 (80th percentile); JP Morgan 
CL at 9 (50th percentile). See also UBS CL at 2.
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    A few commenters focused their recommendations on the methodologies 
that an SDR would use to calculate the appropriate minimum block sizes 
for specific asset classes. For example, three commenters made specific 
recommendations regarding the calculation and criteria of large 
notional off-facility swaps and block trades in the interest rate swap 
market.\40\ A third commenter made specific recommendations regarding 
the calculation and criteria of large notional off-facility swaps and 
block trades in the credit default swap market.\41\
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    \40\ See PIMCO CL at 3 (for interest rate swaps, ``$250 million 
for swaps of 0-2 years, $200 million for swaps of 2-5 years, $100 
million for swaps of 6-10 years, $75 million for swaps of 11-20 
years, and $50 million for swaps over 20 years.''); AII CL at 5 
(``For interest rate swaps 0-5 year interest rate swaps, it may be 
appropriate to set the limit at approximately $100 million. For 5-10 
year interest rate swaps, the threshold might be approximately $50 
million and for 10-30 year interest rate swaps, the appropriate 
threshold could be approximately $25 million.''); BlackRock CL at 
attachment 3 (for interest rate swaps, ``$300K DV01 (approximately 
$350 million 10 year equivalent)'').
    \41\ See BlackRock CL at attachment 3. See also SIFMA/AFME/
ASIFMA CL at 12 (recommending criteria for swaps and other 
instruments in the FX asset class).
---------------------------------------------------------------------------

    One commenter shared its view regarding whether the block trade 
rules that are applied in the futures markets are an appropriate 
analogy for determining appropriate minimum block sizes in related 
swaps markets. In its comment letter to the Initial Proposal, this 
commenter argued that the appropriate minimum block sizes in place for 
the futures market should be used as a comparison for determining 
appropriate minimum block sizes in the swaps market.\42\ The commenter 
stated that where an economically-equivalent futures contract is listed 
on a DCM, then the rules establishing appropriate minimum block sizes 
for a swap should be comparable to such futures contracts.\43\ The 
commenter also suggested that the Commission use comparable futures 
contracts in determining, inter alia, appropriate minimum block sizes 
and reporting and recordkeeping requirements.\44\ The commenter warned 
otherwise that, if the Commission was to adopt a different approach, 
then such action would unintentionally ``[tilt] the playing field in 
favor of one class of instruments.'' \45\ The commenter further argued 
that this consequence would not be consistent with Congress's intent 
when it enacted the Dodd-Frank Act.
---------------------------------------------------------------------------

    \42\ See CME CL at 12.
    \43\ See id.
    \44\ See id.
    \45\ Id. at 13.
---------------------------------------------------------------------------

    In contrast, other commenters suggested that the appropriate 
minimum block sizes in place for futures contracts would be an 
inappropriate comparative measure for the swaps market.\46\ Some of 
these commenters, for example, argued that the futures market is not an 
appropriate basis for setting appropriate minimum block sizes for block 
trades and large notional off-facility swaps because the swap market is 
significantly different than the futures market.\47\
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    \46\ See, e.g., Freddie Mac CL at 2; Barclays CL at 2; ICI CL at 
2-3; ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at 5; CCMR 
CL at 3.
    \47\ See ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at 
5; Freddie Mac CL at 2; Barclays CL at 2; ICI CL at 2-3; CCMR CL at 
3.
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    Many commenters to the Initial Proposal contended that the 
Commission should determine appropriate minimum block sizes based on 
the liquidity of a ``swap instrument.'' \48\ Two commenters suggested 
that markets with differing levels of liquidity should be subject to 
different block size methodologies.\49\ Another commenter suggested 
that a volume of less than five transactions per day be used to 
classify certain swap categories as illiquid and therefore subject to 
lower relative block size thresholds.\50\ Yet another commenter 
suggested utilizing a benchmark volume level to classify swaps within 
an asset class for the purpose of determining appropriate block 
sizes.\51\ One commenter suggested considering the turnover in a market 
to determine appropriate block sizes and time delays.\52\ Finally, 
another commenter recommended that the Commission review historical 
swap transaction data and consult with market participants in 
determining a liquidity spectrum for each swap category, with liquidity 
determined based on the average number of transactions per day (based 
on true risk transfer) over the preceding six months and the number of 
market makers regularly trading the instrument.\53\
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    \48\ See note 17 supra for the Commission's proposal to use the 
term ``swap category'' instead of ``swap instrument.''
    \49\ See ISDA/SIFMA CL at 4; Coalition of Derivatives End-Users 
CL at 4.
    \50\ See Morgan Stanley CL at 11.
    \51\ See Vanguard CL at 5.
    \52\ See TriOptima CL at 5.
    \53\ See UBS CL at 2.
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2. Public Comments Regarding the Proposed Anonymity Protections
    Several commenters expressed concerns that the Initial Proposal did 
not address possible disclosure of the identities, business 
transactions and market positions of swap counterparties.\54\ Many 
commenters stated that the failure to adequately protect the identities 
and business transactions of the counterparties in connection with 
transacting block trades or large notional off-facility swaps would 
result in harm to the market.\55\ These commenters argued that the 
proposal would increase the risk that sophisticated market participants 
or some counterparties would be able to detect either the asset being 
offset or the identity of the end-user doing the offsetting, 
notwithstanding the anonymity protections proposed in the Initial 
Proposal.\56\ According to these commenters, this issue is of 
particular concern when a swap market participant enters into multiple 
swap transactions to place a large offsetting position and some or all 
of those transactions involve thinly-traded products or illiquid 
markets.\57\ Under

[[Page 15465]]

those circumstances, the commenters asserted that the parties to a swap 
would face an increased risk that their identities or transactions 
would be revealed to the public in violation of sections 2(a)(13)(E)(i) 
and 2(a)(13)(C)(iv) of the CEA.\58\ The commenters concluded that, as a 
result, swap counterparties could experience difficulty in offsetting 
their positions at a competitive price.\59\
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    \54\ See e.g., Sutherland CL at 4-5; PIMCO CL at 3; Cleary 
Gottlieb CL at 5; Bracewell & Giuliani CL at 2-7; DTCC CL at 12; 
FINRA CL at 5; Dominion CL at 6-9; Commission staff meeting with 
Argus Media, Inc. on Feb. 3, 2011. See also ISDA and SIFMA, Block 
trade reporting over-the-counter derivatives markets, 6 (Jan. 2011), 
available at http://www.isda.org/speeches/pdf/Block-Trade-Reporting.pdf.
    \55\ See, e.g., Dominion CL at 5-6; PIMCO CL at 3; ABC/CEIBA CL 
at 16; WMBAA CL at 10; MFA CL at 2-3; Coalition for Derivatives End-
Users CL at 10; Sutherland CL at 5; Argus CL at 3-4; ATA CL at 5; 
Sadis Goldberg CL at 2-4.
    \56\ See, e.g., Sutherland CL at 5; Coalition for Derivatives 
End-Users CL at 10; ATA CL at 5.
    \57\ See, e.g., Argus CL at 3-4 (``In situations where only a 
few entities trade a certain type of underlying asset, real-time 
reporting may inadvertently reveal the identity of the swap 
participants, particularly where the underlying asset is a 
commodity.''); see also Dominion CL at 5-6; Sutherland CL at 5; 
Coalition for Derivatives End-Users CL at 10.
    \58\ See, e.g., Argus CL at 3-4; ATA CL at 5; Dominion CL at 5-
6; Sadis Goldberg CL at 2-4.
    \59\ Id. See note 58 supra.
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    To address concerns regarding limited disclosure, several 
commenters recommended that the Commission establish a ``masking 
rule.'' \60\ For example, one commenter suggested that the Commission 
set masking thresholds at or near the level that represents the 
dividing line between retail and institutional trades.\61\ Another 
commenter suggested that the Commission develop a masking rule for the 
swaps market that is similar to the one established by the Financial 
Industry Regulatory Authority (``FINRA'') for the bond market.\62\ 
These commenters suggested, however, that the Commission establish 
alternative methodologies to ensure limited public disclosure of swap 
transaction and pricing data.\63\
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    \60\ JP Morgan CL at 12-14 (``The masking rule is similar in 
concept to the so-called `5+ rule' in TRACE. Under TRACE, 
transactions involving bonds in excess of $5 [m]illion are reported 
as `5+' * * *.''); see also WMBAA CL at 10; ABC/CIEBA CL at 8-9.
    \61\ See JP Morgan CL at 12-13.
    \62\ See WMBAA CL at 10.
    \63\ See, e.g., ABC/CIEBA CL at 9 (``We ask the Commission adopt 
a rule * * * which will require that the volume of those swaps which 
are not block trades be disseminated in the form of ranges.'').
---------------------------------------------------------------------------

    Some commenters expressed general concerns regarding anonymity as 
well as specific concerns with respect to swaps in the other commodity 
asset class. One commenter provided specific examples of how the 
identities of the counterparties could be revealed by publicly 
disseminating information relating to energy products.\64\ Another 
commenter suggested the use of broad geographic regions when publicly 
disseminating data for commodity swaps with very specific underlying 
assets or delivery points (e.g., natural gas) in order to protect the 
anonymity of the parties to these swaps.\65\ In commenting on the 
hypothetical example provided in the Initial Proposal,\66\ the 
commenter suggested that instead of reporting Lake Charles, Louisiana 
as the delivery point, an SDR could publicly disseminate ``Louisiana'' 
or ``Gulf Coast.'' \67\
---------------------------------------------------------------------------

    \64\ See MS CL at 3.
    \65\ See Argus CL at 1-3.
    \66\ See 75 FR 76,150-76,151.
    \67\ See Argus CL at 1-3.
---------------------------------------------------------------------------

    Six commenters argued that the proposed anonymity provisions are 
not sufficient for certain swaps or certain markets (e.g., large, 
bespoke trades offsetting energy assets; illiquid contracts entered 
into by non-financial end-users; etc.). These commenters further argued 
that the public dissemination requirement in the Initial Proposal may 
result in undue harm to the swap market by increasing the risk of 
public disclosure of the identities, business transactions and market 
positions of swap counterparties.\68\
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    \68\ See Argus CL at 1-3; Coalition for Derivatives End-Users CL 
at 8-9; Dominion CL at 6-9; Cleary Gottlieb CL at 5; MS CL at 3; 
Bracewell & Giuliani CL at 2-7. See also Commission staff meeting 
with NFPEEU, June 11, 2011.
---------------------------------------------------------------------------

3. Public Comments Regarding Implementation
    In the Initial Proposal, the Commission solicited comments in 
response to specific questions regarding the implementation of real-
time public reporting, including, inter alia, the timetable in which 
the Commission would require the public dissemination of swap 
transaction and pricing data for block trades and large notional off-
facility swaps. In response to the Initial Proposal, several commenters 
suggested that the Commission phase-in the block trade thresholds and 
time delays, starting with lower thresholds and longer time delays.\69\ 
These commenters further suggested that the Commission phase-in 
stricter methodologies and time delays over time.\70\ For example, one 
commenter stated in its comment letter that the Commission should 
specify appropriate minimum block sizes in advance and readjust those 
sizes over time in order to provide certainty to the market.\71\ In 
contrast, another commenter argued that the Commission should use data 
that is currently available to set appropriate minimum block sizes 
without any delay.\72\
---------------------------------------------------------------------------

    \69\ See, e.g., Barclays Capital CL at 5; World Federation of 
Exchanges CL at 2; ISDA/SIFMA CL at 11-12; and Cleary Gottlieb CL at 
18-19.
    \70\ See, e.g., Freddie Mac CL at 2-3; Barclays Capital CL at 5.
    \71\ See CCMR CL at 2-4. Accord Freddie Mac CL at 2-3 (``As the 
Commission collects data about the liquidity of the swaps market and 
the effects of the Commission's reporting rules, it may be 
appropriate to revisit the initial parameters for block trade 
reporting in order to further increase transparency.'').
    \72\ See SDMA CL at 3.
---------------------------------------------------------------------------

    Following the close of the comment period, the Commission took 
several actions in consideration of the comments received regarding the 
proposed methodology to determine appropriate minimum block sizes, the 
proposed anonymity protections and the proposed implementation 
approach.\73\ A discussion of the Commission's actions and their impact 
on this Further Proposal is set out immediately below.
---------------------------------------------------------------------------

    \73\ Commission staff also consulted with the staffs of several 
other federal financial regulators in connection with the issuance 
of this Further Proposal.
---------------------------------------------------------------------------

D. Analysis of Swap Market Data; Issuance of the Adopting Release

    In consideration of the public comments submitted in response to 
the Initial Proposal, the Commission obtained and analyzed swap data in 
order to better understand the trading activity of swaps in certain 
asset classes.\74\ The Commission also reviewed additional information, 
including a recent study pertaining to the mandatory execution 
requirements and post-trade transparency concerns that arose out of two 
of the Commission's proposed rulemakings,\75\ as well as a report 
issued by two industry trade associations on block trade reporting in 
the swaps market.\76\ In addition, the Commission and the Securities 
and Exchange Commission, held a two-day public roundtable on Dodd-Frank 
Act implementation on May 2 and 3, 2011 (``Public Roundtable'').\77\ 
During the Public Roundtable and in comment letters submitted in 
support thereof, interested parties recommended that the Commission 
adopt a phased-in approach with respect to the establishment of block 
trade rules.
---------------------------------------------------------------------------

    \74\ A detailed discussion of the Commission staff's review and 
analysis process is set out below in section II.B.1.a. of this 
Further Proposal.
    \75\ See ISDA, Costs and Benefits of Mandatory Electronic 
Execution Requirements for Interest Rate Products, 24 (ISDA 
Discussion Paper No. 2, Nov. 2011), available at http://www2.isda.org/attachment/Mzc0NA==/ISDA%20Mandatory%20Electronic%20Execution%20Discussion%20Paper.pdf. 
This paper cited the Commission's notice of proposed rulemaking with 
respect to SEFs (Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR 1,214, 1,220, Jan. 7, 2011) and the 
Initial Proposal.
    \76\ See Block trade reporting for over-the-counter derivatives 
markets, note 54 supra.
    \77\ See Joint Public Roundtable on Issues Related to the 
Schedule for Implementing Final Rules for Swaps and Security-Based 
Swaps Under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR 23,211, Apr. 26, 2011. A copy of the 
transcript is accessible at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf.
---------------------------------------------------------------------------

    Recently, the Commission issued the Adopting Release that finalized 
several provisions that were proposed in the Initial Proposal.\78\ 
Those provisions,

[[Page 15466]]

once effective, will implement, among other things: (1) Several 
definitions proposed in the Initial Proposal relevant to this Further 
Proposal \79\; (2) the scope of part 43; (3) the reporting 
responsibilities of the parties to each swap; (4) the requirement that 
SDRs publicly disseminate swap transaction and pricing data; (5) the 
data fields that SDRs will publicly disseminate; (6) the time-stamping 
and recordkeeping requirements of SDRs, SEFs, DCMs and the ``reporting 
party'' to each swap \80\; (7) the interim time delays for public 
dissemination and the time delays for public dissemination of large 
notional off-facility swaps and block trades; and (8) interim notional 
cap sizes for all swaps that are publicly disseminated.\81\
---------------------------------------------------------------------------

    \78\ See 77 FR 1,182.
    \79\ The Adopting Release includes final definitions for the 
following terms: (1) Block trade; (2) large notional off-facility 
swap; (3) appropriate minimum block size; and (4) asset class. As 
noted above, the Adopting Release did not define the term swap 
instrument. This Further Proposal puts forth a new term swap 
category, which groups swaps for the purpose of determining whether 
a swap transaction qualifies as a large notional off-facility swap 
or block trade. See note 17 supra.
    \80\ See Sec.  43.2 of the Commission's regulations. 77 FR 
1,244. The Adopting Release finalized the definition of ``reporting 
party'' as a ``party to a swap with the duty to report a publicly 
reportable swap transaction in accordance with this part [43] and 
section 2(a)(13)(F) of the [CEA].'' 77 FR 1,244.
    \81\ See 77 FR 1,244.
---------------------------------------------------------------------------

    Based on the public comments received in response to the Initial 
Proposal, and in order to successfully implement the real-time public 
reporting regulatory framework established in the Adopting Release, the 
Commission has decided to further propose provisions that: (1) Specify 
the criteria for determining swap categories and methodologies for 
determining the appropriate minimum block sizes for large notional off-
facility swaps and block trades; and (2) provide increased protections 
to the identities of swap counterparties to large swap transactions and 
certain other commodity swaps, which were not fully addressed in the 
Adopting Release.\82\
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    \82\ In several places in the Adopting Release, the Commission 
stated that it plans to address these requirements in a separate, 
forthcoming release. See, e.g., 77 FR 1,185, 1,191, 1,193 and 1,217. 
This Further Proposal is that release.
    Commenters to this Further Proposal are requested to refrain 
from providing comments with respect to the provisions adopted in 
the Adopting Release. Those provisions are not the subject of this 
Further Proposal. The Commission will not address the policy merits 
or substance of those provisions in its final rulemaking to this 
Further Proposal.
---------------------------------------------------------------------------

    In section II of this Further Proposal, the Commission sets out its 
proposal with respect to the criteria for determining swap categories 
and the methodologies for determining appropriate minimum block sizes 
for block trades and large notional off-facility swaps. In section III 
of this Further Proposal, the Commission sets out its proposal with 
respect to methodologies that provide anonymity to the swap 
counterparties to large swap transactions and certain other commodity 
swaps.

II. Further Proposal--Block Trades

A. Policy Goals

    In section 2(a)(13) of the CEA, Congress intended that the 
Commission consider both the benefits of enhanced market transparency 
and the effects such transparency would have on market liquidity.\83\ 
The Commission anticipates that the public dissemination of swap 
transaction and pricing data will generally reduce costs associated 
with price discovery and prevent information asymmetries between market 
makers and end users.\84\ The Commission is of the view that the 
benefits of enhanced market transparency are not boundless, 
particularly in swap markets with limited liquidity. As noted above, 
section 2(a)(13)(E)(iv) of the CEA places constraints on the 
requirements for the real-time public reporting of swap transaction and 
pricing data. Specifically, this section provides that the Commission 
shall ``take into account whether the public disclosure [of swap 
transaction and pricing data] will materially reduce market 
liquidity.'' \85\
---------------------------------------------------------------------------

    \83\ In considering the benefits and effects of enhanced market 
transparency, the Commission notes that the ``guiding principle in 
setting appropriate block trade levels [is that] the vast majority 
of swap transactions should be exposed to the public market through 
exchange trading.'' Congressional Record--Senate, S5902, S5922 (July 
15, 2010).
    \84\ See e.g., CEA section 2(a)(13)(B) (``The purpose of this 
section is to authorize the Commission to make swap transaction and 
pricing data available to the public in such form and at such times 
as the Commission determines appropriate to enhance price 
discovery.'').
    \85\ CEA section 2(a)(13)(E)(iv). See also CEA section 
5h(f)(2)(C) (concerning the treatment of block trades for execution 
purposes).
---------------------------------------------------------------------------

    The Commission believes that the publication of detailed 
information regarding ``outsize swap transactions'' \86\ could expose 
swap counterparties to higher trading costs.\87\ In this regard, the 
publication of detailed information about an outsize swap transaction 
may alert the market to the possibility that the original liquidity 
provider to the outsize swap transaction will be re-entering the market 
to offset that transaction.\88\ Other market participants might be 
alerted to the liquidity provider's need to offset risk and therefore 
would have a strong incentive to exact a premium from the liquidity 
provider. As a result, liquidity providers possibly could be deterred 
from becoming counterparties to outsize swap transactions if swap 
transaction and pricing data is publicly disseminated before liquidity 
providers can offset their positions. The Commission anticipates that, 
in turn, this result could negatively affect market liquidity in the 
swaps market. In consideration of these potential outcomes, this 
Further Proposal seeks to provide maximum transparency while taking 
into account reductions in market liquidity through more detailed 
criteria to establish: (1) Swap categories (relative to the definition 
of swap instrument in the Initial Proposal); and (2) a phased-in 
approach to determining appropriate minimum block sizes for block 
trades and large notional off-facility swaps. A summary of the 
Commission's proposed approach is described below.
---------------------------------------------------------------------------

    \86\ As used in this Further Proposal, an ``outsize swap 
transaction'' is a transaction that, as a function of its size and 
the depth of the liquidity of the relevant market (and equivalent 
markets), leaves one or both parties to such transaction unlikely to 
transact at a competitive price.
    \87\ The Commission's proposed SEF rulemaking, would require 
pre-trade transparency for swap transactions that: (1) Are subject 
to the mandatory clearing requirement; (2) involves a swap that a 
SEF makes available to trade; and (3) are not block trades. See 
proposed Sec.  37.9(a)(2)(v), 76 FR 1,220. This Further Proposal 
also would require SEFs to utilize the Commission's rules for block 
trades (i.e., the subject matter of this Further Proposal) in 
determining the trading procedures that apply to swap transactions. 
Therefore, swap transactions exceeding an appropriate minimum block 
size would therefore be exempt from the mandatory trading 
requirements.
    \88\ The price of such a transaction would reflect market 
conditions for the underlying commodity or reference index and the 
liquidity premium for executing the swap transaction. The time 
delays in part 43 of the Commission's regulations will protect end-
users and liquidity providers from the expected price impact of the 
disclosure of publicly reportable swap transactions. Trading that 
exploits the need of traders to reduce or offset their positions has 
been defined in financial economics literature as ``predatory 
trading.'' See e.g., Markus Brunnermeier and Lasse Heje Pedersen, 
Predatory Trading, Journal of Finance LX 4, Aug. 2005, available at 
http://pages.stern.nyu.edu/~lpederse/papers/predatory_trading.pdf.
---------------------------------------------------------------------------

B. Summary of the Proposed Approach

    The Commission is proposing a two-period, phased-in approach to 
implement of regulations for determining appropriate minimum block 
sizes.\89\ That is, the Commission is

[[Page 15467]]

proposing to phase-in its regulations during an initial period and 
thereafter on an ongoing basis (i.e., the post-initial period) so that 
market participants can better adjust their swap trading strategies to 
manage risk, secure new technologies and make necessary arrangements in 
order to comply with part 43. The Commission is proposing two 
provisions relating to the Commission's determination of appropriate 
minimum block sizes: (1) Initial appropriate minimum block sizes under 
proposed Sec.  43.6(e); and (2) post-initial appropriate minimum block 
sizes under proposed Sec.  43.6(f).
---------------------------------------------------------------------------

    \89\ The Commission is proposing the same phased-in approach for 
determining cap sizes. For a more detailed discussion of the 
Commission's proposed approach with respect to cap sizes, see 
section III of this Further Proposal infra.
    The two-period, phased-in approach would become effective after 
the implementation of the part 43 provisions in the Adopting 
Release. Until the date on which the proposed provisions in this 
Further Proposal become effective, all swaps would be subject to a 
time delay pursuant to the provisions in part 43.
---------------------------------------------------------------------------

    In proposed Sec.  43.6(e), the Commission is establishing initial 
appropriate minimum block sizes for each category of swaps within the 
interest rate, credit, foreign exchange (``FX'') and other commodity 
asset classes.\90\ The Commission has listed the prescribed initial 
appropriate minimum block sizes in proposed appendix F to part 43 based 
on these swap categories.\91\ For interest rate and credit swaps, the 
Commission reviewed actual market data and has prescribed initial 
appropriate minimum block sizes for swap categories in these asset 
classes based on that data. For the other asset classes, the Commission 
did not have access to relevant market data. As such, during the 
initial period, the Commission is proposing to use a methodology based 
on whether a swap or swap category is ``economically related'' to a 
futures contract.\92\ Swaps and swap categories that are not 
economically related to a futures contract would remain subject to a 
time delay (i.e., treated as block trades or large notional off-
facility swaps, as applicable, regardless of notional amount). All 
initial appropriate minimum block sizes in proposed appendix F to part 
43 would become effective 60 days following the publication in the 
Federal Register of a final rule adopting the provisions set forth in 
this Further Proposal.
---------------------------------------------------------------------------

    \90\ The Commission is proposing that swaps in the equity asset 
class do not qualify as block trades and large notional off-facility 
swaps. See proposed Sec.  43.6(d). Otherwise, the Commission is 
prescribing swap categories for each asset class as set forth in 
proposed Sec.  43.6(b). These swap categories would remain the same 
during the initial and post-initial periods.
    \91\ The Commission notes SEFs and DCMs would not be prohibited 
under this Further Proposal from setting block sizes for swaps at 
levels that are higher than the appropriate minimum block sizes as 
determined by the Commission.
    \92\ A discussion of the term ``economically related'' is set 
forth below in section II.C.4 of this Further Proposal.
---------------------------------------------------------------------------

    In proposed Sec.  43.6(f)(1), the Commission provides that the 
duration of this initial period would be no less than one year after an 
SDR has collected reliable data for a particular asset class as 
determined by the Commission. During the initial period, the Commission 
would review reliable data for each asset class. For the purposes of 
this proposed provision, reliable data would include all data collected 
by an SDR for each asset class in accordance with the compliance chart 
in the adopting release to part 45 of the Commission's regulations.\93\ 
The proposed initial period would expire following the publication of a 
Commission determination of post-initial appropriate minimum block 
sizes in accordance with the publication process set forth in proposed 
Sec. Sec.  43.6(f)(3) and (4). Thereafter, the Commission would set 
post-initial appropriate minimum block sizes for swap categories no 
less than once each calendar year using the calculation methodology set 
forth in proposed Sec.  43.6(c)(1).\94\
---------------------------------------------------------------------------

    \93\ See Swap Data Recordkeeping and Reporting Requirements, 77 
FR 2,136, 2,196, Jan. 13, 2012. The Commission is currently of the 
view, however, that data is per se reliable if it is collected by an 
SDR for an asset class after the respective compliance date for such 
asset class as set forth in part 45 of the Commission's regulations.
    \94\ In particular, the Commission is proposing a 67-percent 
notional amount calculation, which is discussed in more detail infra 
in section II.D.1 of this Further Proposal.
---------------------------------------------------------------------------

    The Commission is also proposing special rules for determining 
appropriate minimum block sizes in certain instances. In particular, in 
proposed Sec.  43.6(d), the Commission prescribes special rules for 
swaps in the equity asset class. In proposed Sec.  43.6(h), the 
Commission is establishing special rules for determining appropriate 
minimum block sizes in certain circumstances including, for example, 
rules for converting currencies and rules for determining whether a 
swap with optionality qualifies for block trade or large notional off-
facility swap treatment.
    Section C below describes the Commission's proposed approach to 
establish swap categories across the five asset classes. A discussion 
of the Commission's proposed methodologies to determine appropriate 
minimum block sizes follows in section D.

C. Proposing Criteria for Distinguishing Among Swap Categories in Each 
Asset Class

    The Commission is proposing to use the term ``swap category'' to 
convey the concept of a grouping of swap contracts that would be 
subject to a common appropriate minimum block size.\95\ Specifically, 
the Commission is proposing specific criteria for defining swap 
categories in each asset class. These proposed criteria are intended to 
address the following two policy objectives: (1) Categorizing together 
swaps with similar quantitative or qualitative characteristics that 
warrant being subject to the same appropriate minimum block size; and 
(2) minimizing the number of the swap categories within an asset class 
in order to avoid unnecessary complexity in the determination 
process.\96\ In the Commission's view, balancing these policy 
objectives and considering the characteristics of different types of 
swaps within an asset class are necessary in establishing appropriate 
criteria for determining swap categories within each asset class. The 
five asset classes established by the Commission in the Adopting 
Release are discussed briefly in the paragraph below, followed by a 
discussion of the proposed swap category criteria for each asset class.
---------------------------------------------------------------------------

    \95\ Proposed Sec.  43.6(b) does not set out a definition for 
the term ``swap category.'' Instead, proposed Sec.  43.6(b) sets out 
the provisions that group swaps within each asset class with common 
risk and liquidity profiles, as determined by the Commission.
    \96\ These objectives are specific to the determination of 
appropriate swap category criteria and are intended to promote the 
general policy goals described above in section II.A.of this Further 
Proposal.
---------------------------------------------------------------------------

    Section 43.2 of the Commission's regulations currently defines 
``asset class'' as ``a broad category of commodities, including without 
limitation, any `excluded commodity' as defined in section 1a(19) of 
the [CEA], with common characteristics underlying a swap.'' \97\ 
Section 43.2 also identifies the following five swap asset classes: 
interest rates; \98\ equity; credit; FX; \99\ and other 
commodities.\100\
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    \97\ See Sec.  43.2, 77 FR 1,243.
    \98\ In the Adopting Release, the Commission determined that 
cross-currency swaps are a part of the interest rate asset class. 
See 77 FR 1,193. The Commission noted that this determination is 
consistent with industry practice. See id.
---------------------------------------------------------------------------

    In this Further Proposal, the Commission is proposing to breakdown 
each asset class further into separate swap categories for the purpose 
of determining appropriate minimum block sizes for such categories. 
During the initial and post-initial periods, the Commission would group 
swaps in the five asset classes into the prescribed swap categories as 
set forth in proposed Sec.  43.6(b). In the subsections that follow, 
the Commission discusses in detail the proposed criteria for further 
delineating groups of swaps in the interest rate, credit, equity, FX, 
and other commodity

[[Page 15468]]

asset classes into separate swap categories.
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    \99\ To the extent that FX swaps or forwards, or both, are 
excluded from the definition of ``swap'' pursuant to a determination 
by United States Department of the Treasury (``Treasury''), the 
requirements of section 2(a)(13) of the CEA would not apply to those 
transactions, and such transactions would not be subject to part 43 
of the Commission's regulations. Treasury issued a proposed 
determination on April 29, 2011, in which it stated that FX swaps 
and forwards would be excluded from the definition of ``swap,'' and 
thereby exempt from certain requirements established in the Dodd-
Frank Act, including registration and clearing. See Determination of 
Foreign Exchange Swaps and Foreign Exchange Forwards Under the 
Commodity Exchange Act, 76 FR 25,774, May 5, 2011. Treasury's 
proposed determination may also be found at http://www.treasury.gov/initiatives/wsr/Documents/FX%20Swaps%20and%20Forwards%20NPD.pdf.
    The CEA provides, however, that, even if Treasury determines 
that FX swaps and forwards may be excluded from the definition of 
``swap'', these transactions still are not excluded from regulatory 
reporting requirements to an SDR. Nonetheless, as stated, such 
transactions would not be subject to part 43 of the Commission's 
regulations. See 77 FR 1,188. Treasury has proposed to act pursuant 
to the authority in section 721 of the Dodd-Frank Act that permits a 
determination that certain FX swaps and forwards should not be 
regulated as swaps and are not structured to evade the Dodd-Frank 
Act. The Commission has noted that, as proposed, Treasury's 
determination would exclude FX swaps and forwards, as defined in CEA 
section 1a, but would not apply to FX options or non-deliverable 
forwards. FX instruments that are not covered by Treasury's final 
determination would still be subject to part 43 of the Commission's 
regulations.
    \100\ The Adopting Release defines the term ``other commodity'' 
to mean any commodity that is not categorized in the other asset 
classes as may be determined by the Commission. See 77 FR 1,244. The 
definition of asset class in Sec.  43.2 also provides that the 
Commission may later determine that there are other asset classes 
not identified currently in that section. See 77 FR 1,243.
---------------------------------------------------------------------------

Request for Comment
    Q1. Should the Commission provide for special swap categories and 
appropriate minimum block size methodologies for bilateral versus 
cleared swap transactions? If so, why?
1. Interest Rate and Credit Asset Classes
a. Background
    The Commission was able to obtain and review non-public swap data 
to make inferences about patterns of trading activity, price impact and 
liquidity in the market for swaps in the interest rate and credit asset 
classes. Based on that review, the Commission is proposing criteria for 
determining swap categories in these two asset classes. Specifically, 
the Commission is proposing to define swap categories for: (1) Interest 
rate swaps based on unique combinations of tenor \101\ and currency; 
and (2) credit default swaps (``CDS'') based on unique combinations of 
tenor and conventional spreads.\102\
---------------------------------------------------------------------------

    \101\ As used in the Further Proposal, the tenor of a swap 
refers to the amount of time from the effective or start date of a 
swap to the end date of such swap. In circumstances where the 
effective or start date of the swap was different from the trade 
date of the swap, the Commission used the later occurring of the two 
dates to determine tenor.
    \102\ As generally used in the industry, the term ``conventional 
spread'' represents the equivalent of a swap dealer's quoted spread 
(i.e., an upfront fee based on a fixed coupon and using standard 
assumptions such as auctions and recovery rates. More information 
regarding the use of this term can be found at Markit, The CDS Big 
Bang: Understanding the Changes to the Global CDS Contract and North 
American Conventions, at http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf, (Mar. 2009), at 19.
---------------------------------------------------------------------------

    The Commission obtained transaction-level data for these asset 
classes from two third-party service providers with the assistance of 
the Over-the-Counter Derivatives Supervisors Group (``ODSG'').\103\ The 
ODSG was established in 2005 and is chaired by the Federal Reserve Bank 
of New York. The ODSG is comprised of domestic and international 
supervisors of representatives from major OTC derivatives market 
participants.\104\ In particular, the ODSG coordinated with the ``G-14 
banks'' in order to gain written permission to access the non-public 
swap data.\105\
---------------------------------------------------------------------------

    \103\ Section 8(a) of the CEA protects non-public, transaction-
level data from public disclosure. Section 8(a)(1) provides, in 
relevant part, that ``the Commission may not publish data and 
information that would separately disclose the business transactions 
or market positions of any person and trade secrets or names of 
customers * * *.'' To assist commenters, this Further Release 
includes various tables and summary statistics depicting the ODSG 
data in aggregate forms. In the discussion that follows, the 
Commission additionally has described the methodology it employed in 
reviewing, analyzing and drawing conclusions based on the ODSG data.
    \104\ See OTC Derivatives Supervisors Group--Federal Reserve 
Bank of New York, http://www.ny.frb.org/markets/otc_derivatives_supervisors_group.html (last visited Jan. 15, 2012). The ODSG was 
formed ``in order to address the emerging risks of inadequate 
infrastructure for the rapidly growing market in the credit 
derivatives * * *.'' The ODSG works directly with market 
participants to plan, monitor and coordinate industry progress 
toward collective commitments made by firms.
    \105\ The G-14 banks are: Bank of America-Merrill Lynch; 
Barclays Capital; BNP Paribas; Citigroup; Credit Suisse; Deutsche 
Bank AG; Goldman Sachs & Co.; HSBC Group; J.P. Morgan; Morgan 
Stanley; The Royal Bank of Scotland Group; Societe Generale; UBS AG; 
and Wells Fargo Bank, N.A.
---------------------------------------------------------------------------

    MarkitSERV, a post-trade processing company jointly owned by Markit 
and The Depository Trust & Clearing Corporation (``DTCC''), provided 
the interest rate swap data set. The interest rate swap data set 
covered transactions confirmed on the MarkitWire platform between June 
1, 2010 and August 31, 2010 where at least one party was a G-14 
Bank.\106\
---------------------------------------------------------------------------

    \106\ The interest rate swap data was limited to transactions 
and events submitted to the MarkitWire platform. MarkitWire is a 
trade confirmation service offered by MarkitSERV.
---------------------------------------------------------------------------

    The Warehouse Trust Company LLC (``The Warehouse Trust'') provided 
the CDS data set.\107\ The CDS data set covered CDS transactions for a 
three-month period beginning on May 1, 2010 and ending on July 31, 
2010.\108\
---------------------------------------------------------------------------

    \107\ The Warehouse Trust, a subsidiary of DTCC DerivSERV LLC, 
is regulated as a member of the U.S. Federal Reserve System and as a 
limited purpose trust company by the New York State Banking 
Department. The Warehouse Trust provides the market with a trade 
database and centralized electronic infrastructure for post-trade 
processing of OTC credit derivatives contracts over their entire 
lifecycle. See DTCC, The Warehouse Trust Company, About the 
Warehouse Trust Company, http://www.dtcc.com/about/subs/derivserv/warehousetrustco.php. (last visited Jan. 31, 2012).
    \108\ The Warehouse Trust data contained ``allocation-level 
data,'' which refers to refers to transactional data that does not 
distinguish between isolated transactions and transactions that, 
although documented separately, comprise part of a larger 
transaction.
    The Commission notes the work of other regulators in aggregating 
observations believed to be part of a single transaction. See 
Kathryn Chen, et al., Federal Reserve Bank of New York Staff Report, 
An Analysis of CDS Transactions: Implications for Public Reporting, 
(Sept. 2011), at 25, http://www.newyorkfed.org/research/staff_reports/sr517.html. The Commission notes that this allocation-level 
information could produce a downward bias in the notional amounts of 
the swap transactions in the data sets provided by the ODSG. In 
turn, this downward bias would produce smaller appropriate minimum 
block trade sizes relative to a data set that, if available with 
appropriate execution time stamps, would reflect the aggregate 
notional amount of swaps completed in a single transaction.
---------------------------------------------------------------------------

    b. The Commission filtered both data sets in order to analyze only 
transaction-level data corresponding to ``publicly reportable swap 
transactions,'' as defined in Sec.  43.2 of the Adopting Release.\109\ 
As such, the Commission excluded from its analysis duplicate and non-
price forming transactions.\110\ The

[[Page 15469]]

Commission also converted the notional amount of each swap transaction 
into a common currency denominator the U.S. dollar.\111\ Interest Rate 
Swap Categories.
---------------------------------------------------------------------------

    \109\ ``Publicly reportable swap transaction'' means, unless 
otherwise provided in this part: (1) Any executed swap that is an 
arm's-length transaction between two parties that results in a 
corresponding change in the market risk position between the two 
parties; or (2) any termination, assignment, novation, exchange, 
transfer, amendment, conveyance, or extinguishing of rights or 
obligations of a swap that changes the pricing of the swap. Examples 
of an executed swap that does not fall within the definition of 
publicly reportable swap transaction may include: (1) Certain 
internal swaps between 100-percent-owned subsidiaries of the same 
parent entity; and (2) portfolio compression exercises. These 
examples represent swaps that are not at arm's length, but that do 
result in a corresponding change in the market risk position between 
two parties. See 77 FR 1,244.
    \110\ The excluded records represented activities such as option 
exercises or assignments for physical, risk optimization or 
compression transactions, and amendments or cancellations that were 
assumed to be mis-confirmed. A transaction was assumed to be mis-
confirmed when it was canceled without a fee, which the Commission 
has inferred was the result of a confirmation correction. The 
Commission also excluded interest rate transactions that were 
indicated as assignments, terminations, and structurally excluded 
records since the Commission was unable to determine if these 
records were price-forming. The Commission also excluded CDS 
transactions that were notated as single name transactions. The data 
sets also included transaction records created for workflow purposes 
(and therefore redundant), duplicates and transaction records 
resulting from name changes or mergers.
    \111\ The Commission calculated the average daily exchange rates 
between relevant currencies and the U.S. dollar for the relevant 
three-month period covered by the data. This average daily exchange 
rate was then applied to the notional amounts for non-U.S. dollar 
denominated swap transactions.
---------------------------------------------------------------------------

i. Interest Rate Swap Data Summary
    The filtered transaction records in the interest rate swap data set 
contained 166,874 transactions with a combined notional value of 
approximately $45.4 trillion dollars.\112\ These transactions included 
trades with a wide range of notional amounts, 28 different currencies, 
eight product types, 57 different floating rate indexes and tenors 
ranging from under one week to 55 years. Summary statistics of the 
filtered interest rate swap data set are presented in Table 1.\113\
---------------------------------------------------------------------------

    \112\ The Commission only reviewed relevant transaction records 
in the interest rate swap data set. As noted above, the Commission 
excluded duplicate and non-price forming transactions from its 
review. See note 110 supra for a list of excluded transaction 
records.
    \113\ See the International Organization for Standardization 
(ISO) standard ISO 4217 for information on the currency codes used 
by the Commission. For information on floating rate indexes, see 
also ISDA, 2006 Definitions (2006), and supplements.
    \114\ In producing Table 1, the Commission counted tenors for 
swaps with an end date within four calendar days of a complete month 
relative to the swap's start date as ending on the nearest complete 
month.

  Table 1--Summary Statistics for the Interest Rate Swap Data Set by Product Type, Currency, Floating Index and
                                                   Tenor \114\
----------------------------------------------------------------------------------------------------------------
                                                                                     Notional
                                                     Number of     Percentage of      amount       Percentage of
                                                   transactions        total       (billions of   total notional
                                                                   transactions        USD)         amount (%)
----------------------------------------------------------------------------------------------------------------
Product Type:
    Single Currency Interest Rate Swap..........         128,658              77          16,276              36
    Over Night Index Swap (OIS).................          12,816               8          16,878              37
    Forward Rate Agreement (FRA)................           5,936               4           7,071              16
    Swaption....................................          11,042               7           2,256               5
    Other.......................................           8,395               5           2,909               6
Currency:
    European Union Euro Area euro (EUR).........          46,412              28          18,648              41
    United States dollar (USD)..................          50,917              31          11,377              25
    United Kingdom pound sterling (GBP).........          16,715              10           7,560              17
    Japan yen (JPY).............................          19,502              12           4,253               9
    Other.......................................          33,301              20           3,553               8
Floating Index:
    USD-LIBOR-BBA...............................          48,651              29           9,411              21
    EUR-EURIBOR-Reuters.........................          39,446              24           9,495              21
    EUR-EONIA-OIS-COMPOUND......................           6,517               4           9,122              20
    JPY-LIBOR-BBA...............................          19,194              12           4,010               9
    GBP-LIBOR-BBA...............................          12,835               8           2,419               5
    GBP-WMBA-SONIA-COMPOUND.....................           2,014               1           5,123              11
    Other.......................................          38,190              23           5,809              13
Tenor:
    1 Month.....................................           3,171               2          11,859              26
    3 Month.....................................          10,229               6          11,660              26
    6 Month.....................................           2,822               2           1,701               4
    1 Year......................................           9,522               6           3,484               8
    2 Year......................................          16,450              10           3,347               7
    3 Year......................................           9,628               6           1,488               3
    5 Year......................................          26,139              16           2,712               6
    7 Year......................................           6,599               4             661               1
    10 Year.....................................          34,000              20           2,746               6
    30 Year.....................................           9,616               6             448               1
    Other.......................................          38,671              23           5,284              12
                                                 ---------------------------------------------------------------
        Sample Totals...........................         166,847             100          45,390             100
----------------------------------------------------------------------------------------------------------------

    Table 2 below sets out the notional amounts of the interest rate 
swap data set organized by product type, currency, floating index and 
tenor. The table also includes the notional amounts in each percentile 
of a distribution of the data set.

[[Page 15470]]

Table 2--Notional Amounts of Interest Rate Swap Data Set Organized by Product Type, Currency, Floating Index and
                                                      Tenor
                                              [In millions of USD]
----------------------------------------------------------------------------------------------------------------
                                          Mean                              Percentiles
                                        notional ---------------------------------------------------------------
                                         amount     5th    10th    25th    50th    75th    90th        95th
----------------------------------------------------------------------------------------------------------------
Product Type:
    Single Currency Interest Rate            127       4       9      23      52     117     252             438
     Swap............................
    OIS..............................      1,293       6      13      63     341   1,261   3,784           5,282
    FRA..............................      1,168      90     133     266     631   1,039   2,000           3,018
    Swaption.........................        204       3      20      50     100     226     500             642
    Other............................        346       *       1      23      89     250     631           1,132
Currency:
    EUR..............................        400       6      15      38      91     249     631           1,617
    USD..............................        221       5      12      31      89     200     500           1,000
    GBP..............................        435       1       1      15      57     167     755           1,698
    JPY..............................        221      11      13      28      57     124     339             790
    Other............................        108       4       6      13      30      78     175             308
Floating Index:
    USD-LIBOR-BBA....................        192       5      12      30      76     180     500             803
    EUR-EURIBOR-Reuters..............        241       8      17      38      79     189     416             757
    EUR-EONIA-OIS-COMPOUND...........      1,385       4      10      61     315   1,261   3,784           6,306
    JPY-LIBOR-BBA....................        211      11      12      28      57     113     339             658
    GBP-LIBOR-BBA....................        181       1       4      23      54     151     377             755
    GBP-WMBA-SONIA-COMPOUND..........      2,450      75     113     283   1,509   3,018   6,037           9,055
    Other............................        152       2       4      12      31      88     264             500
Tenor:
    1 Month..........................      3,523      37     252   1,251   2,522   3,784   7,546          12,074
    3 Month..........................      1,081      11      38     208     604   1,250   2,000           3,018
    6 Month..........................        581      19      49     150     377     747   1,261           1,892
    1 Year...........................        348      20      31      70     151     341     755           1,261
    2 Year...........................        205      10      16      39     111     243     453             631
    3 Year...........................        154      10      16      44      95     169     315             500
    5 Year...........................        107       5       9      25      63     113     226             316
    7 Year...........................        105       7      13      29      57     113     221             315
    10 Year..........................         83       5      10      23      50      95     175             252
    30 Year..........................         47       4       7      18      26      50      95             132
    Other............................        249       2       4      15      50     126     340             883
----------------------------------------------------------------------------------------------------------------

    The Commission also analyzed the interest rate swap data set to 
classify the counterparties into broad groups.\115\ The Commission's 
analysis of the interest rate swap data set revealed that approximately 
50 percent of transactions were between buyers and sellers who were 
both identified as G-14 banks and that these transactions represented a 
combined notional amount of approximately $22.85 trillion or 50 percent 
of the relevant IRS data set's total combined notional amount.
---------------------------------------------------------------------------

    \115\ MarkitSERV anonymized the identities of the counterparties 
and indicated whether a G-14 bank was a party to the swap 
transaction. Summary statistics relating to these anonymous numbers 
included: (1) Total count of unique counterparties was equal to 
approximately 300; (2) the average notional size of transactions 
involving two G-14 banks was equal to approximately $280 million; 
(3) the average notional size of transactions involving both a G-14 
bank and a non G-14 bank (which traded at least 100 swap 
transactions) was equal to approximately $260 million.
---------------------------------------------------------------------------

ii. Interest Rate Swap Data Analysis
    As noted above, the Commission is proposing swap categories in the 
interest rate asset class based on tenor and underlying currency. The 
Commission is of the view that these criteria would meet the objectives 
of grouping swaps with economic similarity and reducing unnecessary 
complexity for market participants in determining whether their swaps 
are classified within a particular swap category. Tenors were 
associated with concentrations of liquidity at commonly recognized 
points along the yield curve. In general, the Commission observed that 
transactions in the data set (and related market liquidity) tended to 
cluster at certain tenors.\116\
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    \116\ The Commission alternatively considered using tenor solely 
to determine interest rate swap categories. While this alternative 
approach would result in fewer swap categories (and would be based 
on the strongest single variable indicator of notional size in 
statistical regressions performed by the Commission on the interest 
rate swap data set), it may result in overbroad swap categories 
treating, for example, interest rate swaps denominated in U.S. 
dollars the same as those denominated in Polish zlotys, despite 
relative liquidity differences. As a result, this alternative 
approach may result in the super-major currency-denominated interest 
rate swaps setting the block size for all other currencies because 
of the super-major currency's relatively higher trading frequency. 
See note 123 infra for the Commission's definition of ``super-
majority currency.''
---------------------------------------------------------------------------

    The Commission is proposing interest rate swap tenor groupings 
based on two observations regarding the data in the interest rate swap 
data set.\117\ First, the Commission observed that price-notation 
conventions and points of concentrated transaction activity correspond 
with specific tenors (e.g., three months, six months, one year, two 
years, etc.). Second, the Commission observed a similarity in the 
transaction amounts within a given tenor grouping (e.g., longer-dated 
tenors in the data set generally had lower average notional sizes). 
Based on these observations, table 3 below details the proposed tenor 
groups for the interest rate asset class.
---------------------------------------------------------------------------

    \117\ Through the performance of statistical regressions on the 
interest rate swap data set, the Commission found that tenor was the 
single strongest indicator of variations in notional amounts.
    \118\ The Commission chose to extend the tenor groups about one-
half month beyond the commonly observed tenors to group similar 
tenors together and capture variations in day counts. The Commission 
added an additional 15 days beyond a multiple of one year to the 
number of days in each group to avoid ending each group on specific 
years.

[[Page 15471]]

   Table 3--Proposed Tenor Groups for Interest Rates Asset Class \118\
------------------------------------------------------------------------
                                                     And tenor less than
         Tenor group           Tenor greater than        or equal to
------------------------------------------------------------------------
1...........................  ....................  Three months (107
                                                     days).
2...........................  Three months (107     Six months (198
                               days).                days).
3...........................  Six months (198       One year (381 days).
                               days).
4...........................  One year (381 days).  Two years (746
                                                     days).
5...........................  Two years (746 days)  Five years (1,842
                                                     days).
6...........................  Five years (1,842     Ten years (3,668
                               days).                days).
7...........................  Ten years (3,668      30 years (10,973
                               days).                days).
8...........................  30 years (10,973
                               days).
------------------------------------------------------------------------

    Similarly, through its analysis of the interest rate swap data set, 
the Commission found that the currency referenced in a swap explains a 
significant amount of variation in notional size and, hence, can be 
used to categorize interest rate swaps given this relationship.\119\ 
The Commission is proposing currency groupings after considering: (1) 
Price-notation conventions; (2) the relative development of currency 
groups in the interest rate and FX futures markets; (3) the relative 
swap transaction total notional amounts and transaction volumes of each 
currency group; and (4) the relative average transaction notional 
amounts and lack of evidence of large transacted notional amounts or 
substantial volume of each currency group.\120\ After considering these 
factors, the Commission is proposing three currency categories for the 
interest rate asset class: (1) Super-major currencies, which are 
currencies with large volume and total notional amounts; \121\ (2) 
major currencies, which generally exhibit moderate volume and total 
notional amounts; \122\ and (3) non-major currencies, which generally 
exhibit moderate to very low volume and notional amounts.
---------------------------------------------------------------------------

    \119\ The Commission considered alternative approaches of using 
the individual floating rate indexes or currencies to determine swap 
categories in the interest rate asset class. These alternative 
approaches would have the benefit of being more correlated to an 
underlying curve than the recommended currency and tenor groupings. 
The data contained 57 floating rate indexes and 28 currencies, which 
would result in 456 and 224 categories respectively, after sorting 
by the eight identified tenor groups. The Commission anticipates, 
however, that grouping swaps using individual rates or currencies 
would not substantially increase the explanation of variations in 
notional amounts, while it could result in cells with relatively few 
observations in some currency-tenor categories. Hence, the 
Commission does not believe there would be a significant benefit to 
offset the additional compliance burden that a more granular 
approach would impose on market participants.
    \120\ Non-major currencies represent less than two percent of 
the total notional and about 10 percent of the transactions. These 
currencies typically do not have corresponding futures markets.
    \121\ Super-major currencies represent over 92 percent of the 
total notional amounts and 80 percent of the total transactions in 
the data set. It is noteworthy that these currencies have well-
developed futures markets for general interest rates and exchange 
rates.
    \122\ Major currencies represent about six percent of the total 
notional amount and about 10 percent of the transactions. Some of 
these currencies host liquid futures markets for interest rates, and 
all exhibit liquid foreign exchange markets.
---------------------------------------------------------------------------

    Table 4 below summarizes the Commission's three proposed currency 
swap categories.
---------------------------------------------------------------------------

    \123\ The Commission selected these currencies for inclusion in 
the definition of major currencies based on the relative liquidity 
of these currencies in the interest rate and FX futures markets. The 
Commission is of the view that this list of currencies is 
consistent, in part, with the Commission's existing regulations in 
Sec.  15.03(a), which defines ``major foreign currency as ``the 
currency, and the cross-rates between the currencies, of Japan, the 
United Kingdom, Canada, Australia, Switzerland, Sweden and the 
European Monetary Union.'' 17 CFR 15.03(a).

  Table 4--Proposed Currency Categories for Interest Rates Asset Class
------------------------------------------------------------------------
      Currency category                   Component currencies
------------------------------------------------------------------------
Super-Major Currencies.......  United States dollar (USD), European
                                Union Euro Area euro (EUR), United
                                Kingdom pound sterling (GBP), and Japan
                                yen (JPY).
Major Currencies \123\.......  Australia dollar (AUD), Switzerland franc
                                (CHF), Canada dollar (CAD), Republic of
                                South Africa rand (ZAR), Republic of
                                Korea won (KRW), Kingdom of Sweden krona
                                (SEK), New Zealand dollar (NZD), Kingdom
                                of Norway krone (NOK) and Denmark krone
                                (DKK).
Non-Major Currencies.........  All other currencies.
------------------------------------------------------------------------

    Table 5 below presents details on the sample characteristics of the 
interest rate swap data set organized by currency and tenor swap 
categories.
---------------------------------------------------------------------------

    \124\ Table 5 does not include swap categories with less than 
200 transactions in order to preserve the anonymity of the parties 
to these transactions.

                 Table 5--Sample Characteristics of Proposed Interest Rate Swap Categories \124\
----------------------------------------------------------------------------------------------------------------
                                                                    Percent of       Notional       Percent of
        Currency category           Tenor group      Number of     transactions    (billions of   total notional
                                                   transactions         (%)            USD)             (%)
----------------------------------------------------------------------------------------------------------------
Super-major.....................               1          11,394               7          22,347              50
Super-major.....................               2           2,563               2           1,813               4
Super-major.....................               3           6,277               4           3,302               7
Super-major.....................               4          12,395               7           3,420               8
Super-major.....................               5          32,148              19           4,818              11
Super-major.....................               6          42,675              26           4,220               9
Super-major.....................               7          24,237              15           1,433               3
Super-major.....................               8           1,857               1              56               0

[[Page 15472]]

 
Major...........................               1           2,305               1           1,818               4
Major...........................               2             445               0             124               0
Major...........................               3           2,113               1             302               1
Major...........................               4           2,639               2             226               1
Major...........................               5           5,380               3             293               1
Major...........................               6           3,707               2             129               0
Major...........................               7             704               0              19               0
Major...........................               8            SERV platform. See also Markit Credit Indices, A Primer, Nov. 
2008, 30, available at https://www.markit.com/news/Credit%20Indices%20Primer.pdf.
    \132\ Two times the ``social size'' see note 16 supra, for the 
relevant CDS data set was $93 million, covered 87 percent of the 
number of transactions, and 49 percent of the cumulative notional 
amount. Five times the social size, or $230 million, covered 97 
percent of transactions and 75 percent of the cumulative notional 
amount.
    \133\ The Commission used the rounding convention set forth in 
Sec.  43.4(g) of the Commission's regulations.
    \134\ In descending order and in millions of dollars, the ten 
most frequently traded rounded notional amounts included: 32 (the 
mode); 10; 25; 13; 50; 63; 5; 100; 6; and 20.
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    The Commission also analyzed the CDS data set to classify the 
counterparties into broad groups.\135\ The Commission's analysis of the 
CDS data set revealed that approximately 55 percent of transactions 
were between buyers and sellers who were both identified as G-14 banks 
and that these transactions represented a combined notional amount of 
approximately $3.1 trillion, or 66 percent of the relevant CDS data 
set's total combined notional amount.\136\
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    \135\ The Commission notes that the CDS data set was anonymized 
by The Warehouse Trust, but counterparties were identified by a 
number value and an account number in one of the following eleven 
groups: Asset managers, bank, custodian, dealer, financial services, 
G14 dealer, hedge fund, insurance, non-financial, other, and pension 
plan. Summary statistics relating to these identifiers included: (1) 
Total count of buyer account identifiers equal to approximately 
1,900; (2) total count of seller account identifiers equal to 
approximately 1,700; (3) total count of unique buyer and seller 
account identifiers equal to approximately 2,600; (4) total count of 
buyers equal to approximately 600; (5) total count of sellers equal 
to approximately 500; and (6) total count of unique buyers and 
sellers equal to approximately 700. The CDS data set identified 
counterparties as belonging to one of the eleven groups, and the 
average notional size of transactions in the eight tenor groups 
which contained more than 100 transactions ranging from 
approximately $19 million to $92 million.
    \136\ The Commission notes that the CDS data set only included 
transaction records where a G-14 bank was one of the counterparties, 
and did not include transaction records with two buy-side 
counterparties. A natural bias was present in the percentage of 
market share that G-14 banks have in the CDS market.
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ii. Credit Swap Data Analysis
    As noted above, the Commission is proposing to use tenor and 
conventional spread criteria to define swap categories for CDS indexes. 
The Commission anticipates that these proposed criteria would provide 
an appropriate way to group swaps with economic similarities and to 
reduce unnecessary complexity for market participants in determining 
whether their swaps are classified within a particular swap category. 
The Commission is proposing the following six broad tenor groups in the 
credit asset class: (1) Zero to two years (0-746 days); (2) over two to 
four years (747-1,476 days); (3) over four to six years (1,477-2,207 
days) (which include the five-year tenor); (4) over six to eight-and-a-
half years (2,208-3,120 days); (5) over eight-and-a-half to 12.5 years 
(3,121-4,581 days) and (6) greater than 12.5 years (4,581 days).\137\ 
The Commission added an additional 15 days to each tenor group beyond a 
multiple of one year in order to avoid ending each group on specific 
years.
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    \137\ The Commission assessed the possibility of applying the 
tenor categories proposed for swaps in the interest rate asset class 
to the distribution of notional sizes in the CDS indexes and 
anticipates the level of granularity proposed to categorize swaps in 
the interest rate asset class by tenor would be inappropriate for 
the CDS index market. The Commission anticipates that this level of 
granularity would be inappropriate because the vast majority of CDS 
index transactions in the data set were for five years (or 
approximately 1,825 days). Based on the concentration of CDS index 
transactions in five-year tenors, the Commission is proposing a six 
tenor bands for CDS indexes.
---------------------------------------------------------------------------

    The Commission is proposing these swap categories based on the way 
transactions in the CDS data set clustered towards the center of each 
tenor band. While the majority of transactions in the CDS data set 
consisted of corporate credit default index swaps with a five-year 
tenor, the Commission found that trading of corporate credit default 
index swaps also occurred in other tenor ranges.\138\ The Commission 
believes that its proposed approach is appropriate since CDS on indexes 
other than corporate indexes (e.g., asset backed indexes, municipal 
indexes, sovereign indexes) may also trade at tenors other than five 
years.\139\
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    \138\ For example, based on the observed CDS data set, off-the-
run swaps (i.e., previous five-year tenor swaps for corporate credit 
default index swaps) have less than five years to maturity and 
displayed different trading patterns than the five-year, on-the-run 
swaps.
    \139\ For example, based on the observed CDS data set, the 
majority of municipal credit default index swaps traded with tenors 
of around 10 years.
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    With respect to the conventional spread criterion, the Commission 
is proposing ranges of spread values based on the Commission's review 
of the distribution of spreads in the entire CDS data set.\140\ In 
particular, the Commission observed that the relevant CDS data set 
partitioned at the 175 basis points (``bps'') and 350 bps levels.\141\ 
The Commission found that significant differences existed in the CDS 
data set between CDS indexes with spread values under 175 bps and those 
in the other two swap categories. Table 8 shows the summary statistics 
of the proposed criteria to determine swap categories for swaps in the 
credit asset class.\142\
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    \140\ See note 102 supra for a definition of conventional 
spread.
    \141\ The Commission is proposing partition levels by a 
qualitative examination of multiple histogram distributions of the 
traded and fixed spreads from the CDS data set. This qualitative 
examination was confirmed through a partition test (using JMP 
software), including both before and after controlling for the 
effects of tenor on the distribution. The Commission observed that 
175 bps explained the greatest difference in means of the two data 
sets resulting from a single partition of the data. The Commission 
also observed that 350 bps was an appropriate partition for CDS 
index transactions with spreads over 175 bps.
    \142\ Table 8 uses tenor and spread criteria discussed above, in 
a standardized, least squared regression utilizing observed log 
notional amounts.

[[Page 15475]]

 Table 8--CDS Index Sample Statistics by Proposed Swap Category Criteria
------------------------------------------------------------------------
                                 Sum of notional
           Spread             amounts (in billions    Number of trades
                                     of USD)
------------------------------------------------------------------------
........................                   577                27,998
Tenor (in calendar days):
    0-746...................                   146                 1,421
    747-1,476...............                   569                 6,774
    1,477-2,207.............                 3,490                79,357
    2,208-3,120.............                   159                 2,724
    3,121-4,581.............                    18                   497
    4,582+..................                   190                 8,157
------------------------------------------------------------------------

Request for Comment
    Q9. The Commission seeks comment on all aspects of its proposed 
approach to define swap categories for the credit asset class for the 
purpose of setting appropriate minimum block sizes. More specifically, 
the Commission seeks comment as to whether the proposed grouping, 
alternatives or some other combination of alternatives offer the best 
means to identify swap categories.
    Q10. As an alternative to the proposed criteria, should the 
Commission use other criteria? \143\ The Commission considered the 
following alternative criteria: (1) The underlying reference CDS index 
or the more specific RED code (of which there were hundreds); \144\ (2) 
the tranche level; \145\ (3) on-the-run versus off-the-run version or 
series; \146\ and (4) the difference in the average notional amounts of 
transactions by groupings of counterparties.\147\
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    \143\ The Commission notes that the investment grade of an 
underlying asset is a material economic term of each CDS contract. 
When reviewing the CDS data set, the Commission considered using 
investment grade as an alternative criterion through which to group 
CDS into separate swap categories. The Commission, however, is of 
the view that using this alternative criterion would be 
inappropriate in light of the statutory prohibition against 
references to credit ratings in federal regulations. This 
prohibition is set forth in section 939 of the Dodd-Frank Act.
    Section 939A(a) of the Dodd-Frank Act provides, in relevant 
part, that ``each Federal agency shall, to the extent applicable, 
review--(1) any regulation issued by such agency that requires the 
use of an assessment of the creditworthiness of a security or money 
market instrument; and (2) any references to or requirement in such 
regulations regarding credit ratings.'' In addition, section 939A(b) 
further provides that ``[e]ach such agency shall modify any such 
regulations identified by the review * * * to remove any reference 
to or requirement of reliance on credit ratings and to substitute in 
such regulations such standard of credit-worthiness as each 
respective agency shall determine as appropriate for such 
regulations.'' 15 U.S.C. 78o-7 note.
    Pursuant to the directive set forth in section 939A of the Dodd-
Frank Act, the Commission has issued final rules removing all 
references to credit ratings in the Commission's regulations. See 76 
FR 78,776, Dec. 19, 2011; 76 FR 44,262, July 25, 2011.
    \144\ While the underlying indexes and the RED codes helped 
explain average notional size in the CDS data set, the Commission is 
of the view--based on the large number of currently offered indexes, 
the frequency with which new indexes may be created, and the large 
number of RED codes--that such an approach may not be practicable 
and may impose unnecessary complexity on market participants trying 
to determine what appropriate minimum block sizes apply to what 
transactions.
    \145\ In the CDS market, a ``tranche'' means a particular 
segment of the loss distribution of the underlying CDS index. For 
example, tranches may be specified by the loss distribution for 
equity, mezzanine (junior) debt, and senior debt on the referenced 
entities. The Commission found that the tranche-level data was even 
more granular than index-level data. Similarly, the Commission 
anticipates that grouping the relevant CDS data set in tranche 
criterion may not be practicable because it may produce too many 
swap categories and as a result would impose unnecessary complexity 
on market participants.
    \146\ An on-the-run CDS index represents the most recently 
issued version of an index. For example, every six months, Dow Jones 
selects 125 investment grade entities domiciled in North America to 
make up the Dow Jones North American investment grade index 
(``CDX.NA.IG''). Each new CDX.NA.IG index is given a new series 
number while market participants continue to trade the old or ``off-
the-run'' CDX.NA.IG series. The Commission observed that an on-the-
run index series was more actively traded than off-the-run index 
series. Each version or series of an index had a distinct group of 
tenors and, in most cases, the five year tenor was most active. The 
index provider determines the composition of each index though a 
defined list of reference entities. The index provider has 
discretion to change the composition of the list of reference 
entities for each new version or series of an index. In its analysis 
of the CDS data set, the Commission generally observed either no 
change or a small change (ranging from one percent to ten percent) 
of existing composition in the reference entities underlying a new 
version or series of an index. Because of these two dynamics (tenor 
and index composition), the CDS data set contained transactions 
within a given index with different versions and series that were in 
some instances identical and in others not identical across varying 
tenors. While the off-the-run transactions were generally larger on 
average than the on-the-run transactions, trading activity in the 
on-the-run indexes was more active than in the off-the-run indexes.
    The Commission decided not to use this level of detail for 
grouping CDS indexes into categories because: (i) The underlying 
components of swaps with differing versions or series based on the 
same named index are broadly similar, if not the same, indicative of 
economic substitutability across versions or series; (ii) 
differences in the average notional amount across differing versions 
or series were explained by differences in tenor; and (iii) and 
using versions or series as the criterion for defining CDS swap 
categories may result in an unnecessary level of complexity.
    \147\ Although the Commission was not able to examine non-
anonymized data, the Commission did observe differences of 
approximately 50 percent from the average notional amount for 
transactions involving different groups based on the counterparty 
identifiers provided by The Warehouse Trust. The Commission, 
however, believes that it would be neither practical nor equitable 
to base a swap category and related appropriate minimum block size 
based on the predominant business activity of a counterparty.
---------------------------------------------------------------------------

    Q11. As another alternative, the Commission seeks comment on the 
possibility of establishing two swap categories in the credit asset 
class based on ``activity groupings'' of notional amounts of 
transactions: A ``more active group''; and a ``less active group.'' The 
more active group would be calculated by ordering, from most to least, 
the sum of non-rounded notional amounts of all swaps reported to SDRs 
by a CDS index (e.g., CDX.NA.IG) and then selecting the CDS indexes 
represented in the first 50 percent of aggregate notional amount. If 
only one index accounted for the first 50 percent of aggregate notional 
amount, then the next largest index also would be included in the more 
active group. The less active group would be comprised of the remainder 
of all credit index transactions that are not within the more active 
group. Should the Commission use this activity grouping approach to 
categorize CDS indexes? If so, how should the Commission determine 
appropriate minimum block sizes and cap sizes?
    Q12. As a third alternative, the Commission seeks comment on the 
possibility of establishing swap categories in the credit asset class 
based on sector groupings of the underlying reference entities. Under 
this alternative approach, the Commission would group the CDS index 
market into the following four sectors: Corporate; sovereign; 
municipal; and mortgage-backed security. An index with a mix of sectors 
represented in the reference entities

[[Page 15476]]

would be categorized by the sector representing the majority of 
entities. The Commission is of the view that in addition to these four 
distinct sectors, a fifth catch-all group (other) would be necessary to 
categorize any new swap index that either does not fall into any of 
these four enumerated sectors or is in mixed sectors not predominated 
by a single sector.
    Q13. As a fourth alternative, should the Commission consider basing 
swap categories for the credit asset class on individual CDS indexes? 
For example, CDX.NA.IG would constitute its own swap category.
    Q14. Should the Commission combine aspects of the above 
alternatives? For example, should the Commission distinguish between 
on-the-run and off-the-run series under an index grouping approach? The 
Commission seeks comment on whether distinguishing between on-the-run 
and off-the-run series and tenor would be appropriate under this 
approach, given the underlying economic similarity of swaps utilizing 
the same underlying CDS index.
2. Swap Category in the Equity Asset Class
    The Commission is proposing a single swap category for swaps in the 
equity asset class. The Commission is proposing this approach based on: 
(1) The existence of a highly liquid underlying cash market; (2) the 
absence of time delays for reporting block trades in the underlying 
equity cash market; (3) the small relative size of the equity index 
swaps market relative to the futures, options, and cash equity index 
markets; and (4) the Commission's goal to protect the price discovery 
function of the underlying equity cash market and futures market by 
ensuring that the Commission does not create an incentive to engage in 
regulatory arbitrage among the cash, swaps, and futures markets.\148\
---------------------------------------------------------------------------

    \148\ As used in this Further Proposal, the term ``regulatory 
arbitrage'' means engaging in financial structuring or a series of 
transactions without economic substance in order to avoid unwelcome 
regulation or to exploit inconsistencies in regulations.
---------------------------------------------------------------------------

Request for Comment
    Q15. Please provide specific comments regarding the Commission's 
proposed approach with respect to having one swap category in the 
equity asset class.
    Q16. As an alternative to the proposed approach, should the 
Commission establish one or more swap categories for swaps in the 
equity asset class based on any of the following criteria or a 
combination of such criteria: (1) Tenor; (2) publicly-listed equity 
indexes and custom equity indexes; \149\ (3) market capitalization of 
the underlying index components; \150\ and/or (4) whether a swap is 
based on an ``open market'' versus a ``closed market''? \151\
---------------------------------------------------------------------------

    \149\ Under this alternative approach, ``publicly-listed'' 
equity indexes would be defined as equity swaps with reference 
prices economically related to equity indexes with publicly 
available index weightings. ``Custom equity index swaps,'' in 
contrast, would be defined as equity swaps that utilize reference 
prices that are not economically related to equity indexes with 
publicly known index weightings. This alternative approach would be 
based on the premise that a custom equity index swap would have a 
higher probability of being subject to liquidity risk.
    \150\ For example, if an equity index is composed of the 
weighted average of ten equity components, A Corp., B Corp., C 
Corp., D Corp., E Corp., F Corp., G Corp., H Corp., I Corp., and J 
Corp. corresponding to a market capitalization on the day prior to 
the related swap transaction of $100 million, $200 million, $300 
million, $400 million, $500 million, $200 million, $100 million, 
$200 million, $300 million, and $500 million, respectively, then it 
would result in an average market capitalization of $280 million. 
This alternative approach is premised on market capitalization 
serving as indicia of cash market liquidity for derivatives on the 
index.
    \151\ Under ISDA's Master Confirmation Templates, ``open 
market'' references ISDA annexes with underlying shares or indices 
in Australia, Hong Kong, New Zealand or Singapore. ``Closed market'' 
references ISDA annexes with underlying shares or indices in India, 
Indonesia, Korea, Malaysia, Taiwan and Thailand. For more 
information, see ISDA, ISDA Equity Derivatives, ISDA Master 
Confirmation Templates (by region), http://www.isda.org/c_and_a/equity_der.html#defs.
    Under this alternative, other countries outside of Asia could be 
added to the list in a similar fashion.
---------------------------------------------------------------------------

    Q16.a. If the Commission follows the alternative approach to use 
tenor as a criterion to distinguish between swap categories, how should 
the Commission address the practice of long-tenured swaps that are 
terminated prior to maturity?
3. Swap Categories in the FX Asset Class
    The Commission proposes to establish swap categories for the FX 
asset class based on unique currency combinations. The Commission bases 
this approach on the observation that FX swaps and instruments with 
identical currency combinations draw upon the same liquidity pools. The 
Commission proposes in Sec. Sec.  43.6(b)(4)(i) and (b)(4)(ii) to 
distinguish between FX swaps and instruments based on the existence of 
a related futures contract. Accordingly, the Commission would establish 
swap categories under proposed Sec.  43.6(b)(4)(i) based on the unique 
currency combinations of super-major currencies, major currencies and 
the currencies of Brazil, China, Czech Republic, Hungary, Israel, 
Mexico, New Zealand, Poland, Russia, and Turkey (e.g., euro (EUR) and 
Canadian dollar (CAD) combination would be a separate swap category; 
Swedish kronor (SEK) and U.S. dollar (USD) combination would be a 
separate swap category; etc.). These currency combinations currently 
have sufficient liquidity in the underlying futures market, which may 
suggest that there may be sufficient liquidity in the swaps market for 
these currency combinations. In proposed Sec.  43.6(b)(4)(ii), the 
Commission would establish swap categories based on unique currency 
combinations not included in proposed Sec.  43.6(b)(4)(i).
Request for Comment
    Q17. The Commission requests specific comments, data and analysis 
in respect of its proposed approach to determining swap categories for 
the FX asset class.
    Q18. As an alternative to the proposal, should the Commission 
establish swap categories based on currency class pairings? In other 
words, swap categories that correspond to: (i) Super-major-to-super-
major; (ii) super-major-to-major; (iii) super-major-to-non-major; (iv) 
major-to-major; (v) major-to-non-major; and (vi) non-major-to-non-major 
currency class pairings? \152\
---------------------------------------------------------------------------

    \152\ This approach would result in fewer swap categories, 
thereby easing administrative burdens related to determining the 
appropriate swap category corresponding to a swap. At the same time, 
however, this approach would require the use of a common denominator 
currency (e.g., the U.S. dollar) for determining the applicable 
notional amount. This would imply a currency conversion, thereby 
increasing administrative burdens associated with currency 
conversions.
---------------------------------------------------------------------------

    Q18.a. Should the Commission develop currency and tenor swap 
categories similar to what it is proposing for swaps in the interest 
rate asset class? The currency and tenor categories could be adjusted 
to reflect current trading activity in the FX swap and instrument 
markets.
    Q19. In the post-initial period, should the Commission include 
tenor as a criterion for distinguishing FX swap categories? For 
example, should the Commission separate FX swaps with short-dated 
tenors (e.g., less than one or three months) from those with long-dated 
tenors (e.g., greater than one or three months)? \153\
---------------------------------------------------------------------------

    \153\ This approach would be predicated on expected differing 
liquidity and notional size distributions between FX swaps with 
differing tenors.
---------------------------------------------------------------------------

    Q20. The Commission is considering as a variation of its proposed 
approach to characterize certain swap categories within the FX asset 
class as ``infrequently transacted.'' Infrequently-transacted swaps 
would exhibit all or some of the following features: (1) The 
constituent swap or swaps to which they are economically related are 
not

[[Page 15477]]

executed on, or pursuant to the rules of, a SEF or DCM; (2) few market 
participants have transacted in these swaps or in economically-related 
swaps; or (3) few swap transactions are executed during a historic 
period in these swaps or in economically-related swaps.\154\
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    \154\ The Commission considered applying a methodology resulting 
in less relative transparency to such infrequently transacted swap 
categories (e.g., a 50-percent notional amount calculation).
---------------------------------------------------------------------------

4. Swap Categories in the Other Commodity Asset Class
    The Commission proposes to determine swap categories in the other 
commodity asset class based on groupings of economically related swaps 
under proposed Sec. Sec.  43.6(b)(5)(i) and (ii) and based on groupings 
of swaps sharing a common product type under proposed Sec.  
43.6(b)(5)(iii). Swap contracts and futures contracts that are 
economically related to one another--as defined by the Commission in a 
proposed amendment to Sec.  43.2--are economic substitutes that should 
be subject to the same appropriate minimum block sizes or block trade 
rules for futures contracts, as applicable.\155\ Accordingly, the 
Commission is proposing to define ``economically related'' in Sec.  
43.2 as a direct or indirect reference to the same commodity at the 
same delivery location or locations,\156\ or with the same or 
substantially similar cash market price series.\157\ The Commission 
anticipates that this proposed definition would: (1) Ensure that swap 
contracts with shared reference price characteristics indicating 
economic substitutability (i.e., an ability to offset some or all of 
the risks across swaps in a specific category) are grouped together 
within a common swap category; and (2) provide further clarity as to 
which swaps are described in Sec.  43.4(d)(4)(ii)(B).\158\ This 
definition would apply to the use of the term ``economically related'' 
throughout all of part 43 of the Commission's regulations.
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    \155\ In the Adopting Release, the Commission explained: ``For 
the purposes of part 43, swaps are economically related, as 
described in Sec.  43.4(d)(4)(ii)(B), if such contract utilizes as 
its sole floating reference price the prices generated directly or 
indirectly from the price of a single contract described in appendix 
B to part 43.'' 77 FR 1,211. Further, the Commission explained that 
``an `indirect' price link to an Enumerated Physical Commodity 
Contract or an Other Contract described in appendix B to part 43 
includes situations where the swap reference price is linked to 
prices of a cash-settled contract described in appendix B to part 43 
that itself is cash-settled based on a physical-delivery settlement 
price to such contract.'' Id. at n.289.
    \156\ For example, a swap utilizing the Platts Gas Daily/Platts 
IFERC reference price is economically related to the Henry Hub 
Natural Gas (NYMEX) (futures) contract because it is based on the 
same commodity at the same delivery location as that underlying the 
Henry Hub Natural Gas (NYMEX) (futures) contract.
    \157\ For example, a swap utilizing the Standard and Poor's 
(``S&P'') 500 reference price is economically related to the S&P 500 
Stock Index futures contract because it is based on the same cash 
market price series.
    \158\ The Commission is proposing to amend Sec.  43.2 to define 
``reference price'' as a floating price series (including 
derivatives contract and cash market prices or price indices) used 
by the parties to a swap or swaption to determine payments made, 
exchanged or accrued under the terms of a swap contract. The 
Commission is proposing to use this term in connection with the 
establishment of a method through which parties to a swap 
transaction may elect to apply the lowest appropriate minimum block 
size applicable to one component swap category of such swap 
transaction.
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    Under proposed Sec.  43.6(b)(5)(i), the Commission would establish 
separate swap categories for swaps that are economically related to one 
of the contracts listed on appendix B to part 43. Appendix B to part 43 
currently lists 28 enumerated physical commodity contracts and other 
contracts (i.e., Brent Crude Oil (ICE)) for which an SDR must ensure 
the public dissemination of the actual underlying asset for the 
applicable publicly reported swap transactions under Sec.  
43.4(d)(4)(ii) of the Commission's regulations.\159\ The Commission 
previously has identified these other commodity contracts as: (1) 
Having high levels of open interest and significant cash flow; and (2) 
serving as a reference price for a significant number of cash market 
transactions. The Commission is proposing to establish an initial 
appropriate minimum block size for the swap categories corresponding to 
each of these contracts to the extent that a DCM has set a block trade 
size for such a contract.
---------------------------------------------------------------------------

    \159\ The Commission is proposing to add 13 contracts to 
appendix B to part 43, as described in detail in section III.C.4 
infra. Each of these additional swap contracts would be categorized 
in its own other commodity swap grouping.
---------------------------------------------------------------------------

    Under proposed Sec.  43.6(b)(5)(ii), the Commission would establish 
swap categories based on swaps in the other commodity asset class that 
are: (1) Not economically related to one of the futures or swap 
contracts listed in appendix B to part 43; (2) futures related; and (3) 
economically related to the relevant futures contract that is subject 
to the block trade rules of a DCM. Proposed Sec.  43.6(b)(5)(ii) lists 
the futures contracts to which these swap categories are economically 
related; \160\ these swap categories would include any swap that is 
economically related to such contracts. The swap categories established 
by proposed Sec.  43.6(b)(5)(i) (discussed in the paragraphs above) 
differ from the swap categories established by proposed Sec.  
43.6(b)(5)(ii) in that the former may be economically related to 
futures contracts that are not subject to the block trade rules of a 
DCM, whereas the latter are economically related to futures contracts 
that are subject to the block trade rules of a DCM.\161\
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    \160\ Specifically, these additional other commodity swap 
categories would be based on the following futures contracts: CME 
Cheese; CBOT Distillers' Dried Grain; CBOT Dow Jones-UBS Commodity 
Index Excess Return; CBOT Ethanol; CME Frost Index; CME Goldman 
Sachs Commodity Index (GSCI) (GSCI Excess Return Index); NYMEX Gulf 
Coast Gasoline; NYMEX Gulf Coast Sour Crude Oil; NYMEX Gulf Coast 
Ultra Low Sulfur Diesel; CME Hurricane Index; CME International 
Skimmed Milk Powder; NYMEX New York Harbor Ultra Low Sulfur Diesel; 
CBOT Nonfarm Payroll; CME Rainfall Index; CME Snowfall Index; CME 
Temperature Index; CME U.S. Dollar Cash Settled Crude Palm Oil; and 
CME Wood Pulp.
    \161\ This distinction is noteworthy because proposed Sec.  
43.6(e)(3) provides that ``[p]ublicly reportable swap transactions 
described in Sec.  43.6(b)(5)(i) that are economically related to a 
futures contract in appendix B to this part [43] shall not qualify 
to be treated as block trades or large notional off-facility swaps 
(as applicable) [during the initial period], if such futures 
contract is not subject to a designated contract market's block 
trading rules.'' See the discussion of this proposed provision in 
section II.D.4(a) infra.
---------------------------------------------------------------------------

    Under proposed Sec.  43.6(b)(5)(iii), the Commission would 
establish swap categories for all other commodity swaps that are not 
categorized under proposed Sec. Sec.  43.6(b)(5)(i) or (ii). These 
swaps are not economically related to one of the contracts listed in 
appendix B to part 43 or in proposed Sec.  43.6(b)(5)(ii). In 
particular, the Commission would determine the appropriate swap 
category based on the product types described in appendix D to part 43 
to which the underlying asset(s) of the swap would apply or otherwise 
relate. Proposed appendix D to part 43 establishes ``Other Commodity 
Groups'' and certain ``Individual Other Commodities'' within those 
groups. To the extent that there is an ``Individual Other Commodity'' 
listed, the Commission would deem the ``Individual Other Commodity'' as 
a separate swap category. For example, regardless of whether the 
underlying asset to an off-facility swap is ``Sugar No. 16'' or ``Sugar 
No. 5,'' the underlying asset would be grouped as ``Sugar.'' The 
Commission thereafter would set the appropriate minimum block size for 
each of the swap categories listed in appendix D to part 43.
    In circumstances where a swap does not apply or otherwise relate to 
a specific ``Individual Other Commodity'' listed under the ``Other 
Commodity Group'' in appendix D to part 43, the Commission would 
categorize such swap as falling under the respective

[[Page 15478]]

``Other'' swap categories. For example, an emissions swap would be 
categorized as ``Emissions,'' while a swap in which the underlying 
asset is aluminum would be categorized as ``Base Metals--Other.'' 
Additionally, in circumstances where the underlying asset of swap does 
not apply or otherwise relate to an ``Individual Other Commodity'' or 
an ``Other'' swap category, the Commission would categorize such swap 
as either ``Other Agricultural'' or ``Other Non-Agricultural.''
Request for Comment
    Q21. The Commission requests specific comments, data and analysis 
with respect to its proposed approach for determining swap categories 
for the other commodity asset class.
    Q22. Does the proposed definition of economically related 
appropriately capture swaps that are economic substitutes within a 
single swap category? Should the Commission define economically related 
to mean swaps that have historically correlated changes in daily prices 
within a swap category (e.g., a correlation coefficient of 0.95 or 
greater)? This alternative approach would be based on the notion that 
historical correlation is indicative of economic substitutability.
    Q23. In the post-initial period, should the Commission include 
tenor as a criterion for determining swap categories for the other 
commodity asset class? For example, should the Commission separate 
other commodity swaps with short-dated tenors (e.g., less than one or 
three months) from those with long-dated tenors (e.g., greater than one 
or three months)? \162\
---------------------------------------------------------------------------

    \162\ This approach would be predicated on expected differing 
liquidity and notional size distributions between other commodity 
swaps with differing tenors.
---------------------------------------------------------------------------

    Q24. As a variation of the proposal, should the Commission create 
additional product types in order to provide specific swap categories 
for commodities not specifically listed in proposed appendix D to part 
43? \163\
---------------------------------------------------------------------------

    \163\ These additional product types would allow the Commission 
to set an appropriate minimum block size for a swap category based 
on a distribution of transactions with more similar underlying 
physical commodity market characteristics. For example, swaps 
utilizing a reference price based on an aluminum or iron underlier 
would be included in the same ``other base metal'' swap category. 
Under this variation to the proposed approach, there could be 
additional specific product types corresponding to specific 
commodities not included in proposed appendix D to part 43 (e.g., 
aluminum or iron).
---------------------------------------------------------------------------

    Q25. As a variation of the proposal, should the Commission further 
refine the swap categories in Sec.  43.6(b)(5)(iii) (i.e., those based 
on product types listed in proposed appendix D to part 43) on the basis 
of geography? If so, on what basis and for which product types?
    Q26. As a variation on the proposed approach, should the Commission 
include inflation index futures contracts in proposed Sec.  
43.6(b)(5)(ii)?
    Q27. As an alternative approach, the Commission is considering 
characterizing certain swap categories within the other commodity asset 
class as ``infrequently transacted.'' This alternative approach is 
consistent with the approach discussed in Q20 above.
    Q27.a. Should this alternative approach apply to asset classes in 
addition to the FX and other commodity asset classes?
    Q28. As another alternative, should the Commission consider 
dividing the swaps in the other commodity asset class into swap 
categories based on relative market concentration? For example, a 
variation of the Herfindahl-Hirschman Index (``HHI'') based on the 
average daily or average month-end HHI score to determine swap 
categories for the other commodity asset class? \164\ Would a daily or 
month-end average long-short swap position HHI \165\ for a three-year 
rolling window (beginning with a minimum of one year and adding one 
year of data for each calculation until a total of three years of data 
is accumulated) of lower than 2,500, 2,000, or 1,500 be indicative of a 
market that is not concentrated? \166\
---------------------------------------------------------------------------

    \164\ An ``HHI score'' would be defined as the sum of the 
squared percentages, in whole numbers, of relative positions or 
transactions on the long or short side of a grouping of swap 
positions or transactions during a specified period. This 
alternative approach would be based on the distribution of 
percentages of positions or transactions held or executed by non-
affiliated market participants on the long and short side of a swap 
market. In addition, this alternative approach would be predicated 
on the notion that reduced market concentration is indicative of a 
degree market liquidity depth that warrants greater transparency 
because of reduced liquidity concerns, as well as reduced concerns 
with the anonymity of transactions in such swap categories.
    \165\ This figure would be the simple average of the HHI score 
on the short and long sides of a swap market based on the 
concentration of open interest on either side of such a market.
    \166\ The Commission may consider applying a methodology 
resulting in less relative transparency to concentrated swap 
categories (e.g., a 50-percent notional amount calculation).
---------------------------------------------------------------------------

    Q28.a. Should the Commission use this approach for other asset 
classes?

D. Proposed Appropriate Minimum Block Size Methodologies for the 
Initial and Post-Initial Periods

    The Commission is proposing a tailored approach for determining 
appropriate minimum block sizes during the initial and post-initial 
periods for each asset class. In the subsections below, the Commission 
sets out a more detailed discussion of the appropriate minimum block 
methodologies for swaps within: (1) The interest rate and credit asset 
classes; (2) the single swap category in the equity asset class; (3) 
swap categories in the FX asset class; and (4) swap categories in the 
other commodity asset class. Thereafter, the Commission discusses 
special rules for determining the appropriate minimum block sizes 
across asset classes. For convenience, the chart immediately below 
summarizes swap categories and calculation methodologies that the 
Commission is proposing for each asset class.

                                                Proposed Approach
----------------------------------------------------------------------------------------------------------------
                                                                                               Post-initial
             Asset class                Swap category criteria   Initial implementation   implementation  period
                                                                         period                   \167\
----------------------------------------------------------------------------------------------------------------
Interest Rates.......................  By unique currency and   67-percent notional      67-percent notional
                                        tenor grouping \168\.    amount calculation by    amount calculation by
                                                                 swap category \169\.     swap category.\170\
Credit...............................  By tenor and
                                        conventional spread
                                        grouping \171\.
FX...................................  By numerated FX          Based on DCM futures
                                        currency combinations    block size by swap
                                        (i.e., futures           category \173\.
                                        related) \172\.
                                       By non-enumerated FX     All trades may be
                                        currency combinations    treated as block
                                        (i.e., non-futures       trades \175\.
                                        related) \174\.

[[Page 15479]]

 
Other Commodity......................  By economically-related  Based on DCM futures
                                        Appendix B to part 43    block size by swap
                                        contract if the swap     category \177\.
                                        is (1) futures related
                                        and (2) the relevant
                                        futures contract is
                                        subject to DCM block
                                        trade rules \176\.
                                       By economically-related  No trades may be
                                        Appendix B to part 43    treated as blocks
                                        contract if the swap     \179\.
                                        is: (1) futures
                                        related and (2) the
                                        relevant futures
                                        contract is not
                                        subject to DCM block
                                        trade rules \178\.
                                       By economically-related  Appropriate minimum
                                        Appendix B to part 43    block size equal to
                                        contract if the swap     $25 million \181\.
                                        is (1) a listed
                                        natural gas or
                                        electricity swap
                                        contract and (2) the
                                        relevant Appendix B
                                        contract is not
                                        futures related \180\.
                                       By swaps that are        Based on DCM futures
                                        economically related     block size by swap
                                        to the list of 18        category \183\.
                                        contracts listed in
                                        Sec.   43.6(b)(5)(ii)
                                        \182\.
                                       By Appendix D to part    All trades may be
                                        43 commodity group,      treated as block
                                        for swaps not            trades \185\.
                                        economically related
                                        to a contract listed
                                        in Appendix B to part
                                        43 or to the list of
                                        18 contracts listed in
                                        Sec.   43.6(b)(5)(ii)
                                        \184\.
                                                               -------------------------------------------------
Equity...............................  All equity swaps \186\.  No trades may be treated as blocks.\187\
----------------------------------------------------------------------------------------------------------------

Request for Comment
---------------------------------------------------------------------------

    \167\ This post-initial implementation period would commence at 
a minimum of one year after the initial period. Thereafter, the 
Commission would determine appropriate minimum block sizes a minimum 
of once annually. See proposed Sec.  43.6(f)(1).
    \168\ See proposed Sec.  43.6(b)(1).
    \169\ See proposed Sec.  43.6(c)(1).
    \170\ See proposed Sec.  43.6(f)(2).
    \171\ See proposed Sec.  43.6(b)(2).
    \172\ See proposed Sec.  43.6(b)(4)(i).
    \173\ See proposed Sec.  43.6(e)(1).
    \174\ See proposed Sec.  43.6(b)(4)(ii).
    \175\ See proposed Sec.  43.6(e)(2).
    \176\ See proposed Sec.  43.6(b)(5)(i).
    \177\ See proposed Sec.  43.6(e)(1).
    \178\ See proposed Sec.  43.6(b)(5)(i).
    \179\ See proposed Sec.  43.6(e)(3).
    \180\ See proposed Sec.  43.6(b)(5)(i).
    \181\ See proposed Sec.  43.6(e)(3).
    \182\ See proposed Sec.  43.6(b)(5)(ii).
    \183\ See proposed Sec.  43.6(e)(1).
    \184\ See proposed Sec.  43.6(b)(5)(iii) and the product types 
groupings listed in proposed appendix D to part 43.
    \185\ See proposed Sec.  43.6(e)(2).
    \186\ See proposed Sec.  43.6(b)(3).
    \187\ See proposed Sec.  43.6(d).
---------------------------------------------------------------------------

    Q29. The Commission requests general comment regarding its proposed 
methodologies to determine appropriate minimum block sizes in both 
implementation periods.
    Q29.a. In the post-initial period, should the Commission consider 
using the previous period's appropriate minimum block size or one of 
the alternative calculation methodologies (as discussed in Q35 below) 
if the calculated appropriate minimum block size during the current 
period is extraordinarily high or low, or where the number of 
transactions in a swap category is small (e.g., less than 60 
transactions each six month period)?
    Q30. Should the updates of post-initial appropriate minimum block 
sizes and related calculations occur at regular periods of time? If so, 
is the proposed time frame for updating the appropriate minimum block 
sizes sufficient? \188\
---------------------------------------------------------------------------

    \188\ See proposed Sec.  43.6(f)(1).
---------------------------------------------------------------------------

    Q31. During the initial period, should the Commission update the 
appropriate minimum block sizes based on the methodologies or 
alternatives described in this proposed rulemaking?
1. Methodology for Determining the Appropriate Minimum Block Sizes in 
the Interest Rate and Credit Asset Classes
    The Commission is proposing to use a 67-percent notional amount 
calculation to determine initial and post-initial appropriate minimum 
block sizes for swaps in the interest rate and credit asset classes 
pursuant to proposed Sec. Sec.  43.6(c)(1) and 43.6(e)(1).\189\ The 67-
percent notional amount calculation is a methodology under which the 
Commission would: (step 1) Select all of the publicly reportable swap 
transactions within a specific swap category using a rolling three-year 
window of data beginning with a minimum of one year's worth of data and 
adding one year of data for each calculation until a total of three 
years of data is accumulated ;\190\ (step 2) convert to the same 
currency or units and use a ``trimmed data set;'' \191\ (step 3) 
determine the sum of the notional amounts of swaps in the trimmed data 
set; (step 4) multiply the sum of the notional amount by 67 percent; 
(step 5) rank order the observations by notional amount from least to 
greatest; (step 6) calculate the cumulative sum of the observations 
until the cumulative sum is equal to or greater than the 67-percent 
notional amount calculated in step 4; (step 7) select the notional 
amount

[[Page 15480]]

associated with that observation; (step 8) round the notional amount of 
that observation to two significant digits, or if the notional amount 
associated with that observation is already significant to two digits, 
increase that notional amount to the next highest rounding point of two 
significant digits \192\; and (step 9) set the appropriate minimum 
block size at the amount calculated in step 8. An example of how the 
Commission would apply this proposed methodology is set forth in 
section VII of this Further Proposal.
---------------------------------------------------------------------------

    \189\ Proposed Sec.  43.6(c)(1) describes the 67-percent 
notional amount calculation. Proposed Sec.  43.6(e)(1) provides the 
provisions relating to the methodology for determining appropriate 
minimum block sizes during the initial period for swaps in the 
interest rate and credit asset classes, inter alia.
    \190\ See note 109 supra for the definition of publicly 
reportable swap transaction. Since the Commission is proposing to 
determine all appropriate minimum block sizes based on reliable data 
for all publicly reportable swap transactions within a specific swap 
category, the Commission does not view the fact that more than one 
SDR may collect such data as raising any material concerns.
    \191\ See proposed amendment to Sec.  43.2 and the discussion 
infra in this section.
    \192\ For example, if the observed notional amount is 
$1,250,000, the amount should be increased to $1,300,000. This 
adjustment is made to assure that at least 67 percent of the total 
notional amount of transactions in a trimmed data set are publicly 
disseminated in real time.
---------------------------------------------------------------------------

    There were three swap categories in the interest rate and credit 
asset classes, which contained less than 30 transaction records that 
would meet the definition of publicly reportable swap transaction. For 
these swap categories, the Commission is proposing to use the lowest 
appropriate minimum block size for their respective asset classes based 
on the respective data set. The three swap categories are: (1) Interest 
rate swap category major currency/30 years +; (2) interest rate swap 
category non-major currency/30 years +; and (3) CDS index swap category 
350 bps/six-to-eight years and six months. If the Commission were to 
use the proposed 67-percent notional calculation method, then two of 
the three swap categories would have resulted in appropriate minimum 
block sizes higher than those proposed. The remaining swap category 
contained no data.
    The proposed 67-percent notional amount calculation is intended to 
ensure that within a swap category, approximately two-thirds of the sum 
total of all notional amounts are reported on a real-time basis. Thus, 
this approach would ensure that market participants have a timely view 
of a substantial portion of swap transaction and pricing data to assist 
them in determining, inter alia, the competitive price for swaps within 
a relevant swap category. The Commission anticipates that enhanced 
price transparency would encourage market participants to provide 
liquidity (e.g., through the posting of bids and offers), particularly 
when transaction prices moves away from the competitive price. The 
Commission also anticipates that enhanced price transparency thereby 
would improve market integrity and price discovery, while also reducing 
information asymmetries enjoyed by market makers in predominately 
opaque swap markets.\193\
---------------------------------------------------------------------------

    \193\ The proposed calculation stands in contrast to the 
proposed 95th percentile-based distribution test set out in the 
Initial Proposal. See the discussion supra in section I.B. of this 
Further Proposal.
---------------------------------------------------------------------------

    In the Commission's view, using the proposed 67-percent notional 
amount calculation also would minimize the potential impact of real-
time public reporting on liquidity risk. The Commission views this 
calculation methodology as an incremental approach to achieve real-time 
price transparency in swap markets. The Commission believes that its 
methodology represents a more tailored and incremental step (relative 
to the approach set out in the Initial Proposal) towards achieving the 
goal of ``a vast majority'' of swap transactions becoming subject to 
real-time public reporting.\194\
---------------------------------------------------------------------------

    \194\ See note 83 supra. This phased-in approach seeks to 
improve transparency while not having a negative impact on market 
liquidity.
---------------------------------------------------------------------------

    As noted above, CEA section 2(a)(13)(E)(iv) directs the Commission 
to take into account whether the public disclosure of swap transaction 
and pricing data ``will materially reduce market liquidity.'' \195\ If 
market participants reach the conclusion that the Commission has set 
appropriate minimum block sizes for a specific swap category in a way 
that will materially reduce market liquidity, then those participants 
are encouraged to submit data in support their conclusion. In response 
to such a submission, the Commission has the legal authority to take 
action by rule or order to mitigate the potential effects on market 
liquidity with respect to swaps in that swap category. In addition, if 
through its own surveillance of swaps market activity, the Commission 
becomes aware that an appropriate minimum block size would reduce 
market liquidity for a specific swap category, then under those 
circumstances the Commission may exercise its legal authority to take 
action by rule or order to mitigate the potential effects on marketing 
liquidity with respect to swaps in that swap category.
---------------------------------------------------------------------------

    \195\ 7 U.S.C. 2(a)(13)(E)(iv).
---------------------------------------------------------------------------

    As referenced above, the Commission is proposing to amend Sec.  
43.2 of the Commission's regulations to define the term ``trimmed data 
set'' as a data set that has had extraordinarily large notional 
transactions removed by transforming the data into a logarithm with a 
base of ten (Log10), computing the mean, and excluding 
transactions that are beyond four standard deviations above the mean. 
Proposed Sec.  43.6(c) uses this term in connection with the 
calculations that the Commission would undertake in determining 
appropriate minimum block sizes and cap sizes.
    The Commission is proposing to use a trimmed data set since it 
believes that removing the largest transactions, but not the smallest 
transactions, may provide a better data set for establishing the 
appropriate minimum block size, given that the smallest transactions 
may reflect liquidity available to offset large transactions. Moreover, 
in the context of setting a block trade level (or large notional off-
facility swap level), a method to determine relatively large swap 
transactions should be distinguished from a method to determine 
extraordinarily large transactions; the latter may skew measures of the 
central tendency of transaction size (i.e., transactions of usual size) 
away from a more representative value of the center.\196\ Therefore, 
trimming the data set increases the power of these statistical 
measures.
---------------------------------------------------------------------------

    \196\ A measure of central tendency, also known as a measure of 
location, in a distribution is a single value that represents the 
typical transaction size. Two such measures are the mean and the 
median. For a general discussion of statistical methods, see e.g., 
Wilcox, R. R., Fundamentals of Modern Statistical Methods (Springer 
2d ed. 2010), (2010).
---------------------------------------------------------------------------

Request for Comment
    Q32. Please provide specific comment regarding the Commission's 
proposed approach to determine appropriate minimum block sizes for 
swaps in the interest rates and credit asset classes.
    Q32.a. Is the Commission's proposed approach reasonable with 
respect to those swap categories for which there were less than 30 
transaction records? Is there another appropriate minimum block size 
(either higher or lower) that the Commission should use for these swap 
categories? If so, then why? Should the Commission continue to use this 
approach in the post-initial period by determining whether there are 
less than 30 transaction records within a six-month period?
    Q33. As a variation of the proposed approach, should the Commission 
use a 50-percent notional amount calculation methodology for 
determining the appropriate block sizes for these asset classes? If so, 
please explain why. If so, what affects would a 50-percent notional 
amount calculation have on the costs imposed on, and the benefits that 
would inure to, market participants and registered entities? \197\ Are 
there some

[[Page 15481]]

parts of the swaps market for which 50-percent notional amount 
calculation would be a more appropriate methodology (e.g., actively-
traded swap categories in the interest rates and credit asset classes)? 
The following two charts compare the proposed initial appropriate 
minimum block sizes (using the 67-percent notional amount calculation) 
for swaps in the interest rate and credit asset classes with 
appropriate minimum block sizes that would result if the Commission 
were to use the 50-percent notional amount calculation.\198\
---------------------------------------------------------------------------

    \197\ The Commission is actively considering the use of a 50-
percent notional amount calculation methodology in the initial and/
or post-initial periods. The rule text for the 50-percent notional 
amount calculation would be nearly identical to proposed Sec.  
43.6(c)(1) and (2), except for the insertion of ``50-percent'' where 
appropriate.
    \198\ Using the ODSG data for interest rate swaps, the 
Commission notes that the proposed 67-percent notional amount 
calculation would result in 94 percent of trades being reported in 
real-time, compared with 86 percent of trades that would be reported 
in real-time under the alternative 50-percent notional amount 
calculation.
    Using the ODSG data for CDS, the Commission notes that the 
proposed 67-percent notional amount calculation would result in 94 
percent of trades being reported in real-time, compared with 85 
percent of trades that would be reported in real-time under the 
alternative 50-percent notional amount calculation.

                              Comparison of Initial Appropriate Minimum Block Sizes
                                              [Interest rate swaps]
----------------------------------------------------------------------------------------------------------------
                                                           Tenor less than or     50% Notional     67% Notional
          Currency group             Tenor greater than         equal to         (in millions)    (in millions)
----------------------------------------------------------------------------------------------------------------
Super-Major.......................  ....................  Three months (107               3,800            6,400
                                                           days).
Super-Major.......................  Three months (107     Six months (198                 1,200            1,900
                                     days).                days).
Super-Major.......................  Six months (198       One year (381 days).            1,100            1,600
                                     days).
Super-Major.......................  One year (381 days).  Two years (746 days)              460              750
Super-Major.......................  Two years (746 days)  Five years (1,842                 240              380
                                                           days).
Super-Major.......................  Five years (1,842     Ten years (3,668                  170              290
                                     days).                days).
Super-Major.......................  Ten years (3,668      30 years (10,973                  120              210
                                     days).                days).
Super-Major.......................  30 years (10,973      ....................               67              130
                                     days).
Major.............................  ....................  Three months (107                 700              970
                                                           days).
Major.............................  Three months (107     Six months (198                   440              470
                                     days).                days).
Major.............................  Six months (198       One year (381 days).              220              320
                                     days).
Major.............................  One year (381 days).  Two years (746 days)              130              190
Major.............................  Two years (746 days)  Five years (1,842                  88              110
                                                           days).
Major.............................  Five years (1,842     Ten years (3,668                   49               73
                                     days).                days).
Major.............................  Ten years (3,668      30 years (10,973                   37               50
                                     days).                days).
Major.............................  30 years (10,973      ....................               15               22
                                     days).
Non-Major.........................  ....................  Three months (107                 230              320
                                                           days).
Non-Major.........................  Three months (107     Six months (198                   150              240
                                     days).                days).
Non-Major.........................  Six months (198       One year (381 days).              110              160
                                     days).
Non-Major.........................  One year (381 days).  Two years (746 days)               54               79
Non-Major.........................  Two years (746 days)  Five years (1,842                  27               40
                                                           days).
Non-Major.........................  Five years (1,842     Ten years (3,668                   15               22
                                     days).                days).
Non-Major.........................  Ten years (3,668      30 years (10,973                   16               24
                                     days).                days).
Non-Major.........................  30 years (10,973      ....................               15               22
                                     days).
----------------------------------------------------------------------------------------------------------------

                              Comparison of Initial Appropriate Minimum Block Sizes
                                             [Credit default swaps]
----------------------------------------------------------------------------------------------------------------
                                    Traded tenor greater    Traded tenor less
   Spread group  (basis points)             than            than or equal to      50% Notional     67% Notional
----------------------------------------------------------------------------------------------------------------
Less than or equal to 175.........  ....................  Two years (746 days)              320              510
Less than or equal to 175.........  Two years (746 days)  Four years (1,477                 200              300
                                                           days).
Less than or equal to 175.........  Four years (1,477     Six years (2,207                  110              190
                                     days).                days).
Less than or equal to 175.........  Six years (2,207      Eight years and six               110              250
                                     days).                months (3,120 days).
Less than or equal to 175.........  Eight years and six   Twelve years and six              130              130
                                     months (3,120 days).  months (4,581 days).
Less than or equal to 175.........  Twelve years and six  ....................               46              110
                                     months (4,581 days).
Greater than 175 and less than or   ....................  Two years (746 days)              140              210
 equal to 350.
Greater than 175 and less than or   Two years (746 days)  Four years (1,477                  82              130
 equal to 350.                                             days).
Greater than 175 and less than or   Four years (1,477     Six years (2,207                   32               36
 equal to 350.                       days).                days).
Greater than 175 and less than or   Six years (2,207      Eight years and six                20               26
 equal to 350.                       days).                months (3,120 days).
Greater than 175 and less than or   Eight years and six   Twelve years and six               26               64
 equal to 350.                       months (3,120 days).  months (4,581 days).
Greater than 175 and less than or   Twelve years and six  ....................               63              120
 equal to 350.                       months (4,581 days).
Greater than 350..................  ....................  Two years (746 days)               66              110
Greater than 350..................  Two years (746 days)  Four years (1,477                  41               73
                                                           days).
Greater than 350..................  Four years (1,477     Six years (2,207                   26               51
                                     days).                days).
Greater than 350..................  Six years (2,207      Eight years and six                13               21
                                     days).                months (3,120 days).

[[Page 15482]]

 
Greater than 350..................  Eight years and six   Twelve years and six               13               21
                                     months (3,120 days).  months (4,581 days).
Greater than 350..................  Twelve years and six  ....................               41               51
                                     months (4,581 days).
----------------------------------------------------------------------------------------------------------------

    Q34. As another variation of the proposed methodology, should the 
Commission change specific aspects of its methodology?
    Q34.a. For example, should the Commission define the term ``trimmed 
data set'' to exclude greater or fewer extremely large transactions 
from the data set used to determine appropriate minimum block sizes? 
Or, should the term be defined to exclude transactions that are three 
or five standard deviations beyond the mean? If so, should this be done 
for all asset classes?
    Q34.b. Should the Commission use another method for excluding 
outliers?
    Q35. As an alternative to the proposed 67-percent notional amount 
calculation methodology, should the Commission use any of the following 
in the initial and/or post-initial periods:
    Q35.a. As an alternative approach, should the Commission determine 
appropriate minimum block sizes based on a measure of market depth and 
breadth? Market depth and breadth is one of several approaches in which 
the Commission could preserve market liquidity.\199\ Under this 
alternative, market depth and breadth would be determined using the 
following methodology: (step 1) Identify swap contracts with pre-trade 
price transparency within a swap category \200\; (step 2) calculate the 
total executed notional volumes for each swap contract in the set from 
step 1 and calculate the sum total for the swap category over the look 
back period; (step 3) collect a market depth snapshot \201\ of all of 
the bids and offers once each minute for the pre-trade price 
transparency set of contracts identified in step 1 \202\; (step 4) 
identify the four 30-minute periods that contain the highest amount of 
executed notional volume each day for each contract of the pre-trade 
price transparency set identified in step 1 and retain 120 observations 
related to each 30-minute period for each day of the look-back period 
\203\; (step 5) determine the average bid-ask spread over the look-back 
period of one year by averaging the spreads observed between the 
largest bid and executed offer for all the observations identified in 
step 3; (step 6) for each of the observations 120 observations 
determined in step 4, calculate the sum of the notional amount of all 
orders collected from step 3 that fall within a range,\204\ calculate 
the average of all of these observations for the look-back period and 
divide by two; (step 7) to determine the trimmed market depth, 
calculate the sum of the market depth determined in step 6 for all swap 
contracts within a swap category; (step 8) to determine the average 
trimmed market depth, use the executed notional volumes determined in 
step 2 and calculate a notional volume weighted average of the notional 
amounts determined in step 6; (step 9) using the calculations in steps 
7 and 8, calculate the market breadth based on the following formula--
market breadth = averaged trimmed market depth + (trimmed market depth-
average trimmed market depth) x .75; (step 10) set the appropriate 
minimum block size equal to the lesser of the values from steps 8 and 
9. Would the Commission have to establish special swap categories for 
this approach? Would the collection of snapshots from a central limit 
order book be too burdensome (i.e., costly and time consuming) for DCMs 
and SEFs? What are the costs and benefits of adopting this approach?
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    \199\ Although this alternative approach presents several 
limitations (e.g., the impact of collecting market depth data on a 
regular basis), the Commission considers this alternative to be a 
viable option to its proposed approach discussed above.
    \200\ Swap contracts would be determined to have pre-trade price 
transparency if they have electronically displayed and executable 
bids and offers along with displayed available volumes for 
execution.
    \201\ CEA sections 4g(b), 4g(d), 5(d)(1), 5(d)(10) and 5(d)(18) 
authorize the Commission to request this data from a DCM. CEA 
sections 5h(f)(5) and 5h(f)(10) authorize the Commission to request 
this data from a SEF. The Commission would request such data as part 
of a special call process.
    \202\ Note that this is a snapshot observation for a single 
moment in time. The Commission is not specifying which second within 
the minute would be analyzed when taking a snapshot of market depth.
    \203\ These periods may vary from day to day and from contract 
to contract and would be defined on the 48 30-minute periods set to 
the top and bottom of each hour of each day (e.g., 1-1:29 p.m. 1:30-
1:59 p.m., etc.). In instances when tie occurs in identifying the 
four 30-minute periods based on executed notional volumes, 
preference would first be given to the period with the largest total 
notional volume for the largest bid and offer. If a tie still 
results, then preference would be given to the period with the 
smallest difference in bids minus asks. Lastly, if a tie is still 
remains, then the period of time after and nearest to 12 p.m. New 
York time would be selected.
    \204\ The range would be determined by the average of the 
largest bid and offer for that observation plus or minus three time 
the average bid-ask spread (as determined in step 5) for all 120 
observations.
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    Q35.b. Should the Commission use a confidence interval test for 
calculating the appropriate minimum block sizes for these asset 
classes?
    The confidence interval test calculates the minimum notional value 
as the point where the publicly disseminated average notional size is 
within the 95-percent confidence interval using the following process: 
(step 1) Select the swap transaction data for a specific swap category; 
(step 2) convert to the same currency or units and determine the 
transaction distribution of notional amounts using the natural 
logarithm and trimmed data set for the swap category \205\; (step 3) 
calculate the average notional size and the 95-percent confidence 
interval around this average \206\; (step 4) drop the largest

[[Page 15483]]

remaining transaction from the distribution \207\; (step 5) conditional 
on the full-sample 95-percent confidence interval, calculate the sample 
average notional size using the data resulting from step 4; (step 6) if 
the sample average notional size is not outside of the 95-percent 
confidence interval, repeat steps 4 and 5 until it is just outside of 
the 95-percent confidence interval; (step 7) once the sample average 
notional size is outside the 95-percent confidence interval, set the 
minimum notional value equal to the notional value; (step 8) round the 
notional amount of that observation to two significant digits, or if 
the notional amount associated with that observation is already 
significant to two digits, increase that notional amount to the next 
highest rounding point of two significant digits; and (step 9) set the 
appropriate minimum block size equal to the largest transaction of the 
distribution for which the sample average notional size was still 
within the 95-percent confidence interval. What are the costs and 
benefits associated with using this alternative approach?
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    \205\ In practice, the natural logarithm of the notional value 
is preferred over the nominal value to reduce the effect of skewness 
on sample statistics. In addition to classical statistical methods, 
the calculation of the confidence interval may be improved by using 
``bootstrapping'' methods to estimate the distribution of the 
average notional trade size. See generally, Bradley Efron, Bootstrap 
Methods: Another Look at the Jackknife, Ann. Statist. Vol. 7, No. 1 
(1979), 1-26, http://projecteuclid.org/DPubS?service=UI&version=1.0&verb=Display&handle=euclid.aos/1176344552 (last visited Jan. 31, 2012).
    \206\ The confidence interval test assumes sufficient data is 
available in a swap category such that a normal distribution is a 
good approximation to compute an interval estimate. To the extent 
that the actual distribution diverges significantly from a normal 
distribution, the interval estimate may not reflect the probability 
at the desired (95 percent) confidence interval. In which case, 
other methods such as ``bootstrapping'' may be necessary to compute 
the confidence intervals around the full sample average notional 
size. The Commission notes the ODSG data sets were not normally 
distributed, but were nearly symmetric after trimming. Further, 
according to a TABB Group survey, many market participants expected 
the average notional transaction size to decline, which would have 
implied change in the distribution. See the presentation of Kevin 
McPartland, Principal, Tabb Group, CFTC Technology Advisory 
Committee Meeting, Dec. 13, 2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.
    \207\ The Commission is also considering dropping transactions 
in one-percent increments until the sample average moves outside the 
95-percent confidence interval. The Commission would then drop 
transactions within the last one-percent increment until the actual 
transaction is found that moves the sample mean outside of the 
confidence interval.
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    Q35.c. Should the Commission use a stability test that makes use of 
``CUSUM'' and/or ``CUSUM of Square'' methods? \208\ The Commission 
would define the stability test calculation as a process whereby the 
Commission would: (step 1) In the post-initial period, select swap 
transaction data for a specific swap category over a specified period 
(e.g., a rolling window of three years of such data at one year 
intervals) \209\; (step 2) trim the extraordinarily large notional 
transactions from the swap transaction data by converting the data 
series into natural logarithm value equivalents, determining the mean, 
and excluding transactions that are beyond four standard deviations 
above the mean; (step 3) reposition the largest transactions back into 
a time-ordered trade sequence based on the reporting delay using one-
percent sample increments of the largest transactions; (step 4) measure 
stability of this repositioning by calculating the fraction of 
observations violating the 95-percent confidence interval in the 
``CUSUM'' and ``CUSUM of Squares'' methods \210\; and (step 5) identify 
the increment that causes the least change in stability of the average 
notional trade size compared to a non-repositioned sequence. The 
notional size cutoff for this increment would become the appropriate 
minimum block size in that swap category. If the test above does not 
produce a disruption in the stability of the average notional trade 
size, then the Commission would use the 67-percent notional amount 
calculation methodology. What are the costs and benefits associated 
with using this alternative approach?
---------------------------------------------------------------------------

    \208\ Brown, R.L., J. Durbin, and J.M. Evans, ``Techniques for 
Testing the Constancy of Regression Relationships over Time,'' 
Journal of the Royal Statistical Society, B, 37, 149-163 (1975).
    \209\ If the Commission were applying this methodology to the 
initial period, then a rolling three-year window of data, beginning 
with a minimum of one year's worth of data, may not be available. In 
that case, the Commission would use the ODSG data where applicable.
    \210\ As with the confidence interval test, this test assumes a 
normal distribution, and as such, will follow similar procedures to 
those outlined in note 206 supra.
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    Q35.d. Should the Commission utilize a percentile-based methodology 
to determine appropriate minimum block sizes that would focus on the 
number of trades? \211\
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    \211\ For example, the Commission would order all publicly 
reportable swap transactions in a swap category by notional amount. 
After ordering these swap transactions, the Commission would set the 
appropriate minimum block size at the notional amount that 
corresponds to the 80th percentile. See note 15 supra for a 
discussion of the distribution test, which was proposed in the 
Initial Proposal.
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    Q35.e. Should the Commission use a measure of average volume in a 
given time period \212\ as a proxy for liquidity in order to calculate 
the appropriate minimum block size? The Commission is considering two 
alternatives for calculating appropriate minimum block size using this 
methodology: (1) Setting the initial appropriate minimum block size 
using daily volume when time-stamped transactions are not available; or 
(2) setting the post-initial block sizes once time-stamped transactions 
become available.\213\ The methodology for setting initial appropriate 
minimum block size in the swap categories in the interest rate and 
credit asset classes would use the ODSG data sets to calculate the 
minimum notional value for a block using the following procedure for a 
given swap category: (step 1) Sum the notional volume of all trades 
within the swap category for each day for the ODSG data set; (step 2) 
calculate an estimate of the average volume in a 15-minute time period 
for each day by dividing the sum from step 1 by 32 (there are 32, 15-
minute increments in an 8-hour time period, which is the presumed 
active trading period) \214\; (step 3) calculate the daily average for 
the ODSG data set by summing each day's estimated 15-minute average 
volume calculated in step 2 and dividing it by the total number of 
business days in the ODSG data set; and (step 4) multiply the daily 
average of the 15-minute average volume in time (``AVIT'') by a factor 
of two to determine the minimum block size.
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    \212\ The Commission is considering using a measure of the 
average volume in time (``AVIT'') to determine the minimum block 
size since liquidity may not be directly observable in the market 
and historical trading volume is one indicator of (or proxy for) 
liquidity. Incorporating a measure of liquidity into the calculation 
of block sizes is important given that section 2(a)(13)(E)(iv) of 
the CEA requires the Commission to take into account whether public 
disclosure will materially reduce market liquidity. Moreover, 
calculating the AVIT for a 15-minute time period may serve as a 
proxy for the expected volume that could normally be transacted in 
the time between a block trade being executed and being publicly 
reported. See 7 U.S.C. 2(a)(13)(E)(iv).
    \213\ The transactions in the data sets for the interest rate 
and credit asset classes which the Commission is using in the 
initial period are not time stamped. However, SDRs will receive 
time-stamped swap transactions under real time reporting rules, 
which will then be remitted to the Commission.
    \214\ In the post-initial period when time-stamped transaction 
data will be available, the Commission could use a calculation based 
on actual transaction times. For example, the average volume could 
be calculated for each clock hour (e.g., 8:00-:859 a.m.) in each 
business day by summing the notional sizes of all transactions for a 
12-month time period in each clock hour and dividing by the total 
number of business days. Thereafter, the Commission would calculate 
the 15-minute volume.
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    Q35.f. As a variation of the AVIT methodology, should the 
Commission instead examine the volume of a portion of trades? For 
example, should the Commission examine volumes during the most active 
periods of a day, month or quarter? Or should the Commission only 
examine volume associated with a net change in position by 
counterparties during the delay period or the end of the day?
    Q35.g. Should the Commission consider using a combination of the 
proposed and alternative tests as part of a composite test? \215\ A 
composite test

[[Page 15484]]

would combine a number of methods to determine potential block size and 
would include switching rules to select the appropriate block size from 
among the methods. An example of a simple switching rule is to select 
the largest result from among a number of alternative methods. For 
example, a general composite test to calculate the block size would 
consist of setting the appropriate minimum block size to the greater of 
the results using (a) 50-percent distribution test,\216\ (b) AVIT 
method and (c) social size. In this example, three methods are used and 
a simple switching rule would use the largest value resulting from the 
three methods. The example composite test ensures that a minimum block 
size would be equal to the larger of the three component tests, and 
thus ensures a minimal acceptable level of transparency.\217\ The 
Commission recognizes that alternative switching rules may be more 
appropriate, such as taking the lower of two or more individual tests 
or taking the average of two or more tests to produce the appropriate 
minimum block size, and seeks comments on the use of alternative 
switching methods. The Commission invites comments on the use of a 
composite test as an alternative to a single method and on whether a 
composite test should be used to determine the appropriate minimum 
block size. If so, which methods should be included and what switching 
rule(s) should be used? Why would such an alternative be appropriate?
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    \215\ The Commission believes a composite test may increase the 
flexibility (i.e., robustness) of setting minimum block sizes by 
using methods which are more appropriate in certain circumstances. 
For example, the Commission recognizes that certain methods may have 
limitations, including statistical breakdown points given certain 
distributions of transactions. Hence, it may be that no single test 
optimally sets block sizes under all distributions of transactions. 
A composite test may be more appropriate than any single test in 
setting block sizes across the wide variety of products that 
comprise the various swap categories and asset classes. In the event 
sample sizes are small, methods such as the social size, 50-percent 
distribution test, and AVIT may not produce results that adequately 
differentiate large swap transactions in need of block 
consideration. In addition, the 95% confidence interval test could 
be included in a composite test to ensure that the level of 
transparency provided by the real-time publicly reported tape is 
representative of the actual data.
    \216\ See note 15 supra.
    \217\ For example, shredding by market participants may cause a 
marked decrease in the average notional size of transactions as a 
participant executes numerous smaller transactions as opposed to a 
single large transaction. It is possible that even as total notional 
volume in a market increases, and by assumption liquidity increases, 
measures of average trade size fall, causing calculations based on 
the notional distribution of transactions to suggest lower block 
sizes. If shredding becomes standard practice in a market, then 
using only the social size or the 67-percent notional amount 
calculation method would result in low minimum block sizes which 
would not reflect the true size of a transaction and would not 
adequately determine what constitutes ``large notional swap 
transactions'' (i.e., block trades) in particular markets. Section 
2(a)(13)(E)(ii) of the CEA requires that the Commission ``specify 
the criteria for determining what constitutes a large notional swap 
transaction (block trade) for particular markets and contracts.'' 7 
U.S.C. 2(a)(13)(E)(ii).
---------------------------------------------------------------------------

    Q35.h. Should the Commission use a methodology that takes into 
consideration the impact of trade sizes on prices in the swap markets 
while determining post-interim minimum block sizes?
    Q35.i. Should the Commission use a variation of the multiple test, 
which was proposed in the Initial Proposal? \218\ For example, should 
the Commission remove one or more of the components of the test (i.e., 
should the Commission remove the mean, median or mode)? Should the 
components be weighted? Should the multiplier be increased or 
decreased?
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    \218\ See note 16 supra for a description of the multiple test.
---------------------------------------------------------------------------

2. Treatment of Swaps Within the Equity Asset Class
    The Commission is proposing under Sec.  43.6(d) that all swaps in 
the equity asset class would not qualify for treatment as a block trade 
or large notional off-facility swap (i.e., these swaps would not be 
subject to a time delay under part 43). As noted above, the Commission 
is proposing this approach based on: (1) The existence of a highly 
liquid underlying cash market; (2) the absence of time delays for 
reporting block trades in the underlying equity cash market; (3) the 
small relative size of the equity index swaps market relative to the 
futures, options and cash equity index markets; and (4) the 
Commission's goal to protect the price discovery function of the 
underlying equity cash market and futures market by ensuring that the 
Commission does not create an incentive to engage in regulatory 
arbitrage among the cash, swaps, and futures markets.
Request for Comment
    Q36. Please provide specific comments regarding the Commission's 
proposed approach to disallow swaps in the equity asset class from 
being eligible for treatment as a block trade or large notional off-
facility swap.
    Q37. In the alternative, should the Commission employ a phased-in 
approach with respect to swaps in the equity asset class, whereby 
during the initial period all swaps in this asset class would be 
eligible for treatment as block trades or large notional off-facility 
swaps?
    Q37.a. If so, then on what basis would the Commission follow this 
alternative approach?
    Q38. As a second alternative, should the Commission establish post-
initial appropriate minimum block sizes for swaps in the equity asset 
class using the 50-percent notional amount calculation?
    Q38.a. If not a 67-percent notional amount calculation, then what 
other calculation methodology could the Commission adopt? For example, 
the Commission could establish appropriate minimum block sizes for 
swaps in the equity asset class at 0.002 percent of average market 
capitalization for publicly-listed equity indexes, and at some lower 
threshold (e.g., 0.00175 percent) for custom equity indexes in 
recognition of possible marginal increased liquidity risk associated 
with these indexes.
    Q38.b. Should the Commission establish post-initial appropriate 
minimum block sizes for swaps in the equity asset class using one of 
the alternative methodologies discussed in Q35 above?
    Q39. As a third alternative, should the Commission adopt and then 
increase the 67-percent notional amount calculation over time? If so, 
why? For example, for each year after the implementation of post-
initial appropriate minimum block sizes, should the notional amount 
calculation threshold increase by five or ten percentage points until a 
maximum of 95-percent notional amount is reached? Is this alternative 
appropriate for swaps in other asset classes?
    Q40. As a fourth alternative, should the Commission apply an 
approach that uses a different calculation methodology based on the 
underlying liquidity in a swap category to determine the calculation 
methodology used to determine the appropriate minimum block size? If 
so, what measures of liquidity should the Commission use to determine 
appropriate categorization of swap categories into low, medium, or high 
liquidity swaps within the equity asset class? Is this alternative 
appropriate for swaps in other asset classes?
    Q40.a. Would a 33, 50 and 67-percent notional amount calculation be 
appropriate for low, medium, or high liquidity swap categories 
respectively?
3. Methodologies for Determining the Appropriate Minimum Block Sizes in 
the FX Asset Class
    The Commission is proposing to use different methodologies for the 
initial and post-initial periods to determine appropriate minimum block 
sizes for swaps categories in the FX asset class. The Commission's 
proposed approach is premised on the absence of actual market data on 
which to determine appropriate minimum block sizes in the initial 
period. Subsection a. below includes a discussion of the initial period 
methodology. Subsection b. below includes a discussion of the post-
initial period methodology.

[[Page 15485]]

a. Initial Period Methodology for Determining Appropriate Minimum Block 
Sizes in the FX Asset Class
    During the initial period, the Commission is proposing under Sec.  
43.6(e)(1) to set the appropriate minimum block sizes for swaps in the 
FX asset class based on whether such swap is economically related to a 
futures contract. For futures-related swaps in the FX asset class, 
proposed Sec.  43.6(e)(1) provides that the Commission would establish 
the appropriate minimum block sizes for futures-related swaps \219\ 
based on the block trade size thresholds set by DCMs for economically-
related futures contracts.\220\ The Commission has set forth the 
initial appropriate minimum block sizes in proposed appendix F to part 
43 of the Commission's regulations.\221\ The Commission anticipates 
that this approach would encompass the most liquid FX swaps and 
instruments, including most super-major currencies combinations, as 
well as most super-major and major currencies combinations. This 
approach also would further encompass many important super-major-and-
major combinations and super-major-and-non-major currency 
combinations.\222\ The Commission believes that this proposed approach 
is appropriate during the initial period in the absence of actual swap 
data for two reasons. First, the Commission aims to deter regulatory 
arbitrage opportunities with respect to swaps that are economically 
related to futures contracts. In the Commission's experience, futures 
and swap contracts that are economically related form one part of a 
larger derivatives market and, as such, should be subject to consistent 
block trade regulations (i.e., time delays, methodologies for 
calculating block trade sizes, etc.) in order to minimize the potential 
for regulatory arbitrage.
---------------------------------------------------------------------------

    \219\ The Commission is proposing to amend Sec.  43.2 to define 
``futures related swap'' to mean a swap (as defined in section 
1a(47) of the Act and as further defined by the Commission in 
implementing regulations) that is economically related to a futures 
contract.
    \220\ For example, if swap A is economically related to futures 
F, and futures F is subject to the block trade rules of a DCM that 
applies at a notional amount of $1 million, then swap A would 
qualify for treatment as a block trade or large notional off-
facility swap if the notional amount of swap A exceeds $1 million.
    \221\ In situations when two or more DCMs offer for trading 
futures contracts that are economically related, the Commission has 
selected the lowest applicable non-zero futures block size as the 
initial appropriate minimum block size. The Commission believes that 
this approach would reduce the chance that the appropriate minimum 
block size established by the Commission in the initial period would 
have an unintended adverse effect on market liquidity for the 
relevant swap category.
    \222\ See Q18 supra, which sets forth an alternative approach to 
proposed swap categories based on unique currency combinations.
---------------------------------------------------------------------------

    Second, this proposed approach during the initial period would draw 
upon the experience of DCMs in considering the potential impacts on 
liquidity risk that enhanced transparency may cause in connection with 
futures contract execution.\223\ The Commission understands that DCMs 
have set block sizes primarily in consideration of the objectives of 
enhancing pre-trade transparency and reducing liquidity risk.\224\ The 
Commission notes that DCMs are required to set block sizes for futures 
in compliance with relevant core principles (including Core Principle 
9) \225\ and part 40 of the Commission's regulations.\226\
---------------------------------------------------------------------------

    \223\ The Commission notes further that DCMs historically have 
had the appropriate incentive to balance these considerations 
because they benefit from liquidity generally (i.e., commissions 
from transaction volume in block and non-block trades provides DCMs 
with their primary source of revenue).
    \224\ The Commission is of the view that the pre-trade and post-
trade contexts are sufficiently similar in that policies directed at 
balancing transparency and liquidity concerns in a pre-trade context 
are relevant in considering what an appropriate balance is in the 
post-trade context. In the pre-trade context, block sizes are set 
near or at the point where a trader would be able to offset the risk 
of an equally large transaction without bearing liquidity risk.
    \225\ Core Principle 9 of section 5(d) of the CEA provides that 
a DCM ``shall provide a competitive, open, and efficient market and 
mechanism for executing transactions * * *.'' 7 U.S.C. 7(d)(9). 
Current appendix B to part 38 of the Commission's regulations 
provides that in order to maintain compliance with core principle 9, 
DCMs allowing block trading ``should ensure that the block trading 
does not operate in a manner that compromises the integrity of 
prices or price discovery on the relevant market.'' See 17 CFR 38 
app. B.
    \226\ Section 40.6 of the Commission's regulations include a 
process by which registered entities may certify rules or rule 
amendments that establish or change block trade sizes for futures 
contracts. See 17 CFR 40.6.
---------------------------------------------------------------------------

    Swap contracts and futures contracts that are economically 
related--as defined by the Commission in the proposed amendment to 
Sec.  43.2--are economic substitutes for the purpose of determining an 
appropriate minimum block size.\227\ Where swap positions are 
economically related to futures positions, parties would likely have an 
incentive to conduct regulatory arbitrage by trading swaps. This 
incentive is created because swap positions provide counterparties with 
the ability to keep the nature of their trade confidential. 
Accordingly, the Commission is proposing to adopt the same block sizes 
established by DCMs in futures markets for futures-related swaps in 
order to ensure consistent levels of market transparency across futures 
and swaps markets that are economically related.
---------------------------------------------------------------------------

    \227\ Correlations among all members of a group of economically 
related swaps or futures contracts may vary, for the purpose of 
determining appropriate minimum block sizes. As a general matter, 
however, such swaps correlate closely in price. See Sec.  36.3 of 
the Commissions regulations.
---------------------------------------------------------------------------

    For non-futures related swaps in the FX asset class in the initial 
period of implementation, the Commission is proposing under Sec.  
43.6(e)(2) that all non-futures-related swaps in the FX asset class 
would qualify to be treated as block trades or large notional off-
facility swaps (i.e., these swaps would be subject to a time delay 
under part 43 of the Commission's regulations). The Commission expects 
that this provision only would apply to the most illiquid swaps.
Request for Comment
    Q41. Please provide specific comments regarding the Commission's 
proposed approach to prescribe initial appropriate minimum block sizes 
for swaps in the FX asset class.
    Q41.a. As a variation of the proposed approach, should the 
Commission use a ``triangulated'' approach for setting specific 
appropriate minimum block sizes in the initial period for FX swaps and 
instruments involving pairings of currencies that are not included in a 
single FX futures contract but whose currency legs can be indirectly 
paired through a common FX futures contract pairing with a third 
currency? \228\ That is, the Commission would infer an appropriate 
minimum block size for pairings not subject to a common block size by 
comparing the DCM block sizes that apply to each pair with respect to 
the U.S. dollar and choosing the lower of the two block sizes.\229\ 
This approach would enable the Commission to prescribe an appropriate 
minimum block size for all pairings involving all combinations of 
super-major and major currencies (except those involving the Danish 
krone).
---------------------------------------------------------------------------

    \228\ For example, futures based on Canadian dollar (CAD) and 
Australian dollar (AUD) currency pairings are not offered on a DCM 
while Canadian dollar/U.S. dollar DCM futures contracts and 
Australian dollar/U.S. dollar futures contracts are offered on a 
DCM. Therefore, the Canadian dollar and Australian dollar can be 
indirectly paired through their common relationship with U.S. 
dollar-linked FX futures.
    \229\ For example, the Canadian dollar/U.S. dollar DCM futures 
contract is subject to a block size of 10,000,000 CAD and the 
Australian dollar/U.S. dollar is subject to a block size of 
10,000,000 AUD. The Commission would base the appropriate minimum 
block size for AUD/CAD swaps on the lower of 10,000,000 CAD and 
10,000,000 AUD.
---------------------------------------------------------------------------

    Q42. As an alternative to the proposed approach, should the 
Commission treat all FX swaps and instruments in the same manner as it 
is proposing to treat all equity swaps under Sec.  43.6(d) (i.e., all 
FX swaps and instruments would not be subject to a time delay and as a 
result

[[Page 15486]]

would have to be publicly disseminated as soon as technological 
practicable)? The Commission would premise this alternative on: (1) The 
existence of very liquid FX spot, futures and forwards markets; and (2) 
the absence of a centralized FX market structure.
    Q43. For longer-dated tenor transactions, should the Commission 
establish appropriate minimum block sizes at a fraction of the block 
trade sizes set by DCMs? This variation to the proposed approach would 
be based on the premise that longer-dated swaps may be less liquid.
    Q43.a. If so, then for which specific futures-related swap 
contracts? What is an appropriate fraction? For which tenors should the 
fraction apply (e.g., tenors beyond three months, one year, two years, 
etc.)?
b. Post-Initial Methodology for Determining Appropriate Minimum Block 
Sizes in the FX Asset Class
    In the post-initial period, the Commission is proposing under Sec.  
43.6(f)(2) to utilize the 67-percent notional amount calculation to 
determine appropriate minimum block sizes for swap categories in the FX 
asset class. That is, the Commission would group all publicly 
reportable swap transactions in the FX asset class into their 
respective swap categories and then apply the 67-percent notional 
amount calculation to determine the appropriate minimum block sizes.
Request for Comment
    Q44. Should the Commission continue to utilize the initial 
appropriate minimum block sizes for futures-related FX swaps as a 
minimum or floor appropriate minimum block size in the post-initial 
period? Should this floor level only apply to short-dated tenors? \230\
---------------------------------------------------------------------------

    \230\ For example, swaps with a tenor of less than one or three 
months.
---------------------------------------------------------------------------

    Q45. Should the Commission establish post-initial appropriate 
minimum block sizes for swaps in the FX asset class using one of the 
alternative methodologies discussed in Q35 above?
4. Methodologies for Determining Appropriate Minimum Block Sizes in the 
Other Commodity Asset Class
    The Commission is proposing to use different methodologies for the 
initial and post-initial periods to determine appropriate minimum block 
sizes for swaps categories in the other commodity asset class. The 
proposed methodology for determining the appropriate minimum block 
sizes in the initial period differs based on the three types of other 
commodity swap categories: (1) Those swaps based on contracts listed in 
appendix B to part 43 of the Commission's regulations \231\; (2) swaps 
that are economically related to certain futures contracts \232\; and 
(3) other swaps.\233\ The Commission has set initial appropriate 
minimum block sizes for publicly reportable swap transactions in which 
the underlying asset directly references or is economically related to 
the natural gas or electricity swap contracts proposed to be listed in 
appendix B to part 43 of the Commission's regulations.\234\ The 
proposed methodology for determining the appropriate minimum block 
sizes for other commodity swaps in the post-initial period follows the 
same methodology used for determining the post-initial appropriate 
minimum block sizes in the interest rate, credit and FX asset classes. 
A more detailed description of the methodologies during the initial and 
post-initial periods, as well as the rules for the special treatment of 
listed natural gas and electricity swaps are presented in the 
subsections below.
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    \231\ See proposed Sec.  43.6(b)(5)(i).
    \232\ These futures contracts are: CME Cheese; CBOT Distillers' 
Dried Grain; CBOT Dow Jones-UBS Commodity Index Excess Return; CBOT 
Ethanol; CME Frost Index; CME Goldman Sachs Commodity Index (GSCI) 
(GSCI Excess Return Index); NYMEX Gulf Coast Gasoline; Gulf Coast 
Sour Crude Oil; NYMEX Gulf Coast Ultra Low Sulfur Diesel; CME 
Hurricane Index; CME International Skimmed Milk Powder; NYMEX New 
York Harbor Ultra Low Sulfur Diesel; CBOT Nonfarm Payroll; CME 
Rainfall Index; CME Snowfall Index; CME Temperature Index; CME U.S. 
Dollar Cash Settled Crude Palm Oil; and CME Wood Pulp. See proposed 
Sec.  43.6(b)(5)(ii).
    \233\ See proposed Sec.  43.6(b)(5)(iii).
    \234\ The Commission notes that pursuant to proposed Sec.  
43.6(b)(5)(i), each of the listed natural gas and electricity swap 
contracts proposed to be listed in appendix B to part 43 would be 
considered its own swap category.
---------------------------------------------------------------------------

a. Initial Period Methodology for Determining Appropriate Minimum Block 
Sizes in the Other Commodity Asset Class (Other Than Natural Gas and 
Electricity Swaps Proposed To Be Listed in Appendix B to Part 43)
    With respect to swaps that reference or are economically related to 
one of the futures contracts listed in appendix B to part 43 \235\ or 
proposed Sec.  43.6(b)(5)(ii), the Commission would set the appropriate 
minimum block size based on the block sizes for related futures 
contracts set by DCMs.\236\ For swaps that reference or are 
economically related to a futures contract listed in appendix B to part 
43 that is not subject to a DCM block trade rule, the Commission 
proposes in Sec.  43.6(e)(3) to disallow treatment as a block trade or 
large notional off-facility swap. The Commission bases this approach on 
an inference that DCMs have not set block trade rules for certain 
futures contracts because of the degree of liquidity in those futures 
markets.
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    \235\ The futures contracts that are currently listed on 
appendix B to part 43 are the 28 Enumerated Reference Contracts plus 
Brent Crude Oil (ICE). The 13 swap contracts that the Commission is 
proposing to add to appendix B to part 43 of the Commission's 
regulations in this Further Proposal are not futures contracts.
    \236\ In situations when two or more DCMs offer for trading 
futures contracts that are economically related, the Commission has 
selected the lowest applicable non-zero futures block size among the 
DCMs as the initial appropriate minimum block size. The Commission 
believes that this approach would reduce the chance that the 
appropriate minimum block size established by the Commission in the 
initial period would have an unintended adverse effect on market 
liquidity for the relevant swap category.
---------------------------------------------------------------------------

    In the initial period, the Commission provides in proposed Sec.  
43.6(e)(2) to treat all non-futures-related swaps \237\ in the other 
commodity asset class as block trades or large notional off-facility 
swaps (i.e., these swaps would be subject to a time delay under part 
43, irrespective of notional amount). The Commission currently believes 
that non-futures-related swaps in the other commodity asset class 
generally have lower liquidity in contrast to the more liquid interest 
rate, credit and equity asset classes, as well as other commodity swaps 
that are economically related to liquid futures contracts (i.e., those 
futures contracts listed in proposed appendix B to part 43).
---------------------------------------------------------------------------

    \237\ These non-futures related swaps are not economically 
related to one of the futures contracts listed in proposed appendix 
B to part 43 or in proposed Sec.  43.6(b)(5)(ii). See proposed Sec.  
43.6(b)(5)(iii).
---------------------------------------------------------------------------

Request for Comment
    Q46. Should the Commission allow swaps that are economically 
related to futures contracts listed on appendix B to part 43 (but are 
not subject to a DCM's block trade rules) to qualify as block trades or 
large notional off-facility swaps--i.e., should the Commission not 
finalize Sec.  43.6(e)(3) as proposed? If so, how should the Commission 
determine the initial appropriate minimum block size for such 
contracts? \238\
---------------------------------------------------------------------------

    \238\ For example, the Commission could set an appropriate 
minimum block size at $25 million or treat all of these swaps as 
block trades or large notional off-facility swaps.
---------------------------------------------------------------------------

    Q47. Please provide comment regarding the Commission's current 
belief that non-futures-related swaps in the other commodity asset 
class generally have lower liquidity in contrast to the more liquid 
interest rate, credit and equity asset classes, as well

[[Page 15487]]

as in contrast to other commodity swaps that are economically related 
to liquid futures contracts.
b. Initial Period Methodology for Natural Gas and Electricity Swaps in 
the Other Commodity Asset Class Proposed To Be Listed in Appendix B to 
Part 43
    For swaps in which the underlying asset references or is 
economically related to one of the natural gas or electricity swaps 
listed in appendix B to part 43, the Commission is proposing to treat 
such natural gas and electricity swaps differently than other publicly 
reportable swap transactions in the other commodity asset class when 
setting the initial appropriate minimum block sizes. The Commission 
recognizes that traders typically offset their positions in the natural 
gas and electricity markets through trading OTC forward contracts, 
swaps, plain vanilla options, non-standard options and other customized 
arrangements since existing futures contracts listed on DCMs only cover 
a limited number of electricity delivery points.\239\ As discussed in 
section III.C.4 below, the Commission is proposing to amend appendix B 
to part 43 of the Commission's regulations to add 13 natural gas and 
electricity swap contracts, which the Commission previously has 
determined to be liquid contracts serving a price discovery function. 
Accordingly, the Commission is proposing that for all swaps that 
reference natural gas or electricity swap contracts proposed to be 
listed in appendix B to part 43 of the Commission's regulations, the 
Commission would set the initial appropriate minimum block size at $25 
million, which corresponds to the level of the interim and initial cap 
sizes.\240\ The $25 million initial appropriate minimum block size 
would be applied to natural gas and electricity swaps that reference or 
are economically related to the natural gas and electricity swap 
contracts proposed to be listed in appendix B to part 43 of the 
Commission's regulations.
---------------------------------------------------------------------------

    \239\ See, e.g., Statement of Richard McMahon, on Behalf of the 
Edison Electric Institute, the American Gas Association and the 
Electric Power Supply Association, before the Committee on 
Agriculture, U.S. House of Representatives, Mar. 31, 2011 
(``[Utilities and energy companies] need the ability to use OTC 
swaps because existing futures contracts cover limited natural gas 
and electricity delivery points. The derivatives market has proven 
to be an extremely effective tool in insulating [their] customers 
from this risk and price volatility. Utilities and energy companies 
use both exchange traded and cleared and OTC swaps for natural gas 
and electric power to hedge commercial risk. About one-half of our 
gas swaps and about one-third of our power swaps are traded on 
exchanges.'').
    \240\ For a discussion of interim and initial cap sizes, see 
section III.A supra of this Further Proposal.
---------------------------------------------------------------------------

Request for Comment
    Q48. Please provide specific comments regarding the Commission's 
proposed approach to determine the initial appropriate minimum block 
sizes for publicly reportable swap transactions that reference or are 
economically related to natural gas or electricity swap contracts 
proposed to be listed in appendix B to part 43 of the Commission's 
regulations.
    Q49. Should the initial appropriate minimum block size for the 
publicly reportable swap transactions that reference the natural gas or 
electricity swaps proposed to be listed be greater than or lower than 
$25 million? If so, then why?
    Q50. Should the appropriate minimum block sizes for the gas and 
electricity swap contracts proposed to be listed in appendix B to part 
43 of the Commission's regulations be different based on the referenced 
underlying assets? If so, how should the appropriate minimum block 
sizes be differentiated and at what levels should the appropriate 
minimum block sizes be set? Please provide data to support your 
comment.
    Q51. Are there other swaps within the other commodity asset class 
that should be treated in a manner similar to the manner being proposed 
for the publicly reportable swap transactions that reference or are 
economically related to the natural gas and electricity swap contracts 
proposed to be listed in appendix B to part 43 of the Commission's 
regulations? If so, which underlying assets should be treated the same 
and why?
c. Post-Initial Period Methodology for Determining Appropriate Minimum 
Block Sizes in the Other Commodity Asset Class
    In the post-initial period, the Commission provides in proposed 
Sec.  43.6(f)(3) to determine appropriate minimum block sizes for swaps 
in the other commodity asset class by using the 67-percent notional 
amount calculation set forth in proposed Sec.  43.6(c)(1). The 67-
percent notional amount calculation would be applied to publicly 
reportable swap transactions in each swap category observed during the 
appropriate time period.
Request for Comment
    Q52. The Commission requests specific comment regarding its 
proposed methodology to determine post-initial appropriate minimum 
block sizes for the swap categories in the other commodity asset class.
    Q53. As an alternative to the proposed methodology, should the 
Commission continue to utilize the initial appropriate minimum block 
sizes for futures-related swaps in the other commodity asset class as a 
minimum or floor in the post-initial period? If so, then should this 
floor only apply to short-dated tenors? \241\
---------------------------------------------------------------------------

    \241\ For example, swaps with a tenor of less than one or three 
months.
---------------------------------------------------------------------------

    Q54. As another alternative, for the swap categories in the other 
commodity class that fall under proposed Sec.  43.6(b)(5)(iii), should 
the Commission group these swaps under a single category and apply a 
single default appropriate minimum block size to all swaps in the 
category?
    Q54.a. If so, then should the Commission set the default 
appropriate minimum block size without regard to observed data or by 
some other mechanism?
    Q54.b. If the Commission sets the default appropriate minimum block 
size without regard to observed data, then at what levels should the 
Commission set appropriate minimum block sizes? For example, should the 
Commission set the appropriate minimum block size at $25 million?
5. Special Provisions for the Determination of Appropriate Minimum 
Block Sizes for Certain Types of Swaps
    The Commission recognizes the complexity of the swap market may 
make it difficult to determine appropriate minimum block sizes for 
particular types of swaps under the methodologies discussed above. For 
that reason, the Commission is proposing Sec.  43.6(h), which sets out 
a series of special rules that apply to the determination of the 
appropriate minimum block sizes for particular types of swaps. The 
Commission is proposing special rules in respect of: (a) Swaps with 
optionality; (b) swaps with composite reference prices \242\; (c) 
``physical commodity swaps'' \243\; (d) currency conversions; and (e) 
successor

[[Page 15488]]

currencies. Each of these special rules is discussed in the subsections 
below.
---------------------------------------------------------------------------

    \242\ The Commission is proposing to amend Sec.  43.2 to define 
``swaps with composite reference prices'' as swaps based on 
reference prices composed of more than one reference price that are 
in differing swap categories. The Commission is proposing to use 
this term in connection with the establishment of a method through 
which parties to a swap transaction can determine whether a 
component to their swap would qualify the entire swap as a block 
trade or large notional off-facility swap.
    \243\ The Commission is proposing to amend Sec.  43.2 of the 
Commission's regulations by defining the term ``physical commodity 
swap'' as a swap in the other commodity asset class that is based on 
a tangible commodity.
---------------------------------------------------------------------------

a. Swaps With Optionality
    A swap with optionality highlights special concerns in terms of 
determining whether the notional size of such swap would be treated as 
a block trade or large notional off-facility swap. Proposed Sec.  
43.6(h)(1) addresses these concerns and provides that the notional size 
of swaps with optionality shall equal the notional size of the swap 
component without the optional component. For example, a LIBOR 3-month 
call swaption with a calculated notional size of $9 billion for the 
swap component--regardless of option component, strike price, or the 
appropriate delta factor--would have a notional size of $9 billion for 
the purpose of determining whether the swap would qualify as a block 
trade or large notional off-facility swap.\244\
---------------------------------------------------------------------------

    \244\ In essence, this approach would assume a delta factor of 
one with respect to the underlying swap for swaptions.
---------------------------------------------------------------------------

    The Commission is proposing to take this approach with respect to 
swaps with optionality because, in the Commission's view, it provides 
an easily calculable method for market participants to ascertain 
whether their swaps with optionality features would qualify as a block 
trade or large notional off-facility swap. The Commission is aware that 
this approach does not take into account the risk profile of a swap 
with optionality compared to that of a ``plain-vanilla swap,'' but 
believes that this approach is reasonable to minimize complexity.
b. Swaps With Composite Reference Prices
    Swaps with two or more reference prices (i.e., composite reference 
prices) raise concerns as to which reference price market participants 
should use to determine whether such swap qualifies as a block trade or 
large notional off-facility swap.\245\ Proposed Sec.  43.6(h)(2) 
provides that the parties to a swap transaction with composite 
reference prices (i.e., two or more reference prices) may elect to 
apply the lowest appropriate minimum block size applicable to any 
component swap category. This provision also would apply to: (1) 
Locational or grade-basis swaps that reflect differences between two or 
more reference prices; and (2) swaps utilizing a reference price based 
on weighted averages of component reference prices.\246\ The Commission 
is proposing Sec.  43.6(h)(2) in order to provide market participants 
with a straightforward and uncomplicated way in which determine whether 
such swap would qualify as a block trade or large notional off-facility 
swap.
---------------------------------------------------------------------------

    \245\ Swaps with composite reference prices are composed of 
reference prices that relate to one another based on the difference 
between two or more underlying reference prices--for example, a 
locational basis swap (e.g., a natural gas Rockies Basis swap) that 
utilizes a reference price based on the difference between a price 
of a commodity at one location (e.g., a Henry Hub index price) and a 
price at another location (e.g., a Rock Mountains index price)).
    \246\ In other words, swaps with a composite reference price 
composed of reference prices that relate to one another based on an 
additive relationship. This term would include swaps that are priced 
based on a weighted index of reference prices.
---------------------------------------------------------------------------

    Under proposed Sec.  43.6(h)(2), market participants would need to 
decompose their composite reference price swap transaction in order to 
determine whether their swap would qualify as a block trade or large 
notional off-facility swap. For example, assume that the appropriate 
minimum block sizes for futures A-related swaps is $3 million, for 
futures B-related swaps is $800,000, for futures C-related swaps is 
$1.2 million and for futures D-related swaps is $1 million. If a swap 
is based on a composite reference price that itself is based on the 
weighted average of futures price A, futures price B, futures price C, 
and futures price D (25% equal weightings for each), and the notional 
size of the swap is $4 million (i.e., $1 million for each component 
swap category), then the swap would qualify as a block trade or large 
notional off-facility swap based on the futures B-related swap 
appropriate minimum block size.
c. Physical Commodity Swaps
    Block trade sizes for physical commodities are generally expressed 
in terms of notional quantities (e.g., barrels, bushels, gallons, 
metric tons, troy ounces, etc.). The Commission is proposing a similar 
convention for determining the appropriate minimum block sizes for 
block trades and large notional off-facility swaps. In particular, 
proposed Sec.  43.6(h)(3) provides that notional sizes for physical 
commodity swaps shall be expressed in terms of notional quantities 
using the notional unit measure utilized in the related futures 
contract market or the predominant notional unit measure used to 
determine notional quantities in the cash market for the relevant, 
underlying physical commodity. This approach ensures that appropriate 
minimum block size thresholds for physical commodities are not subject 
to volatility introduced by fluctuating prices. This approach also 
eliminates complications arising from converting a physical commodity 
transaction in one currency into another currency to determine 
qualification for treatment as a block trade or large notional off-
facility swap.
d. Currency Conversion
    Under proposed Sec.  43.6(h)(4), the Commission provides that when 
determining whether a swap transaction denominated in a currency other 
than U.S. dollars qualifies as a block trade or large notional off-
facility swap, swap counterparties and registered entities may use a 
currency exchange rate that is widely published within the preceding 
two business days from the date of execution of the swap transaction in 
order to determine such qualification. This proposed approach would 
enable market participants to use a currency exchange rate that they 
deem to be the most appropriate or easiest to obtain.
e. Successor Currencies
    As noted above, the Commission is proposing to use currency as a 
criterion to determine swap categories in the interest rate asset 
class.\247\ The Commission is also proposing to classify the euro (EUR) 
as a super-major currency, among other currencies.\248\ Proposed Sec.  
43.6(h)(5) provides that for currencies that succeed a super-major 
currency, the appropriate currency classification for such currency 
would be based on the corresponding nominal gross domestic product 
(``GDP'') classification (in U.S. dollars) as determined in the most 
recent World Bank World Development Indicator at the time of 
succession. This proposed provision is intended to address the possible 
removal of one or more of the 17 eurozone member states that use the 
euro.\249\
---------------------------------------------------------------------------

    \247\ See proposed Sec.  43.6(b)(1)(i) and the related 
discussion in section II.B.1. of this Further Proposal.
    \248\ See the proposed amendment to Sec.  43.2, defining 
``super-major currencies.''
    \249\ The 17 countries that use the euro are: Austria, Belgium, 
Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, 
Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and 
Spain.
---------------------------------------------------------------------------

    Proposed Sec.  43.6(h)(5)(i)-(iii) further specifies the manner in 
which the Commission would classify a successor currency for each 
nation that was once a part of the predecessor currency. Specifically, 
the Commission proposes to use GDP to determine how to classify a 
successor currency. For countries with a GDP greater than $2 trillion, 
the Commission would classify the successor currency to be a super-
major currency.\250\ For countries with a GDP

[[Page 15489]]

greater than $500 billion but less than $2 trillion, the Commission 
would classify the successor currency as a major currency.\251\ For 
nations with a GDP less than $500 billion, the Commission would 
classify the successor currency as a non-major currency.\252\
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    \250\ See proposed Sec.  43.6(h)(6)(i).
    \251\ See proposed Sec.  43.6(h)(6)(ii).
    \252\ See proposed Sec.  43.6(h)(6)(iii).
---------------------------------------------------------------------------

Request for Comment
    Q55. The Commission requests general comments on its proposed 
special rules in proposed Sec.  43.6(h).
    Q56. As an alternative to the proposed method for determining 
whether a swap with optionality would qualify as a block trade or large 
notional off-facility swap (i.e., proposed Sec.  43.6(h)(1), should the 
Commission use a delta-equivalent or gamma-equivalent approach to 
determine the notional size of swaps with optionality?
    Q56.a. What are the direct and indirect costs to market 
participants of determining delta or gamma equivalents?
    Q57. As an alternative to proposed Sec.  43.6(h)(3), should the 
Commission base notional sizes for physical commodities on the notional 
amount in the applicable currency?
    Q58. As an alternative to proposed Sec.  43.6(h)(4), should the 
Commission mandate that market participants use the most recent 
currency exchange rate set at some specified time and location (e.g., 4 
p.m. London time from the preceding business day)? This alternative 
approach could provide greater certainty as to the appropriate 
conversion rates at the cost of the providing market participants with 
greater flexibility.
    Q59. As another alternative to proposed Sec.  43.6(h)(4), should 
the Commission publish a currency exchange rate on the Commission's Web 
site in connection with its regular post-initial appropriate minimum 
block size determination? If so, then how should the Commission 
determine the currency exchange rate?
    Q60. As an alternative to proposed Sec.  43.6(h)(5), should the 
Commission classify all successor currencies as major currencies?
    Q60.a. Some critics have argued that too much emphasis is currently 
placed on the importance of GDP as a measure of progress. Should the 
Commission use a measure other than GDP (e.g., the Index of Sustainable 
Economic Welfare)?

E. Procedural Provisions

1. Proposed Sec.  43.6(a) Commission Determination
    The Commission is proposing that it determine the appropriate 
minimum block size for any swap listed on a SEF or DCM, and for large 
notional off-facility swaps. Proposed Sec.  43.6(a) specifically 
provides that the Commission would establish the appropriate minimum 
block sizes for publicly reportable swap transactions based on the swap 
categories set forth in proposed Sec.  43.6(b) in accordance with the 
provisions set forth in proposed Sec. Sec.  43.6(c), (d), (e), (f) and 
(h), as applicable. In the Commission's view, this proposed approach 
would be the least burdensome from a cost-benefit perspective because 
it significantly reduces the direct costs imposed on SDRs and other 
registered entities. As noted above, nothing in this Further Proposal 
would prohibit SEFs and DCMs from setting block sizes for swaps at 
levels that are higher than the appropriate minimum block sizes 
determined by the Commission.
Request for Comment
    Q61. The Commission requests specific comments on its proposal that 
the Commission determine appropriate minimum block sizes.
    Q62. In the alternative, should the Commission permit SEFs or DCMs 
to determine the appropriate minimum block size for swaps that the SEFs 
or DCMs list? Would this alternative lead to unnecessary market 
fragmentation?
    Q62.a. What would be the appropriate parameters or guidance that 
the Commission should give to SEFs or DCMs in setting appropriate 
minimum block sizes?
    Q62.b. What procedure could the Commission use to ensure that there 
are standard appropriate minimum block size determinations across all 
markets?
2. Proposed Sec.  43.6(f)(3) and(4) Publication and Effective Date of 
Post-Initial Appropriate Minimum Block Sizes
    Proposed Sec.  43.6(f)(3) provides that the Commission would 
publish the post-initial appropriate minimum block sizes on its Web 
site. Proposed Sec.  43.6(f)(4) provides that these sizes would become 
effective on the first day of the second month following the date of 
publication. Per proposed Sec.  43.6(f)(1), the Commission would 
publish updated post-initial appropriate minimum block sizes in the 
same manner no less than once each calendar year.
Request for Comment
    Q63. The Commission requests specific comment on proposed 
Sec. Sec.  43.6(f)(3) and (4).
    Q64. Instead of publishing initial appropriate minimum block sizes 
through proposed appendix F to part 43, should the Commission publish 
these initial appropriate minimum block sizes on the Commission's Web 
site at http://www.cftc.gov? This approach would ensure that in the 
post-initial period, no confusion arises in terms of the method for 
publication and the relevant appropriate minimum block sizes.
3. Proposed Sec.  43.6(g) Notification of Election
    Proposed Sec.  43.6(g) sets forth the election process through 
which a qualifying swap transaction would be treated as a block trade 
or large notional off-facility swap, as applicable. Proposed Sec.  
43.6(g)(1) establishes a two-step notification process relating to 
block trades. Proposed Sec.  43.6(g)(2) establishes the notification 
process relating to large notional off-facility swaps.
    Proposed Sec.  43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this 
section provides that the parties to a publicly reportable swap 
transaction that has a notional amount at or above the appropriate 
minimum block size are required to notify the SEF or DCM (pursuant to 
the rules of such SEF or DCM) of their election to have their 
qualifying publicly reportable swap transaction treated as a block 
trade. With respect to the second step, proposed Sec.  43.6(g)(1)(ii) 
provides that the SEF or DCM, as applicable, that receives an election 
notification is required to notify the relevant SDR of such block trade 
election when transmitting swap transaction and pricing data to the SDR 
for public dissemination.
    Proposed Sec.  43.6(g)(2) is very similar to the first step set 
forth in proposed Sec.  43.6(g)(1). That is, proposed Sec.  43.6(g)(2) 
provides, in part, that a reporting party who executes an off-facility 
swap with an notional amount at or above the applicable appropriate 
minimum block size is required to notify the relevant SDR of its 
election to treat such swap as a large notional off-facility swap. This 
section provides further that the reporting party is required to notify 
the relevant SDR in connection with the reporting party's transmission 
of swap transaction and pricing data to the SDR pursuant to Sec.  43.3 
of the Commission's regulations.

[[Page 15490]]

Request for Comment
    Q65. The Commission requests specific comments regarding proposed 
Sec.  43.6(g), the proposed notification process for the election to 
treat a qualifying swap transaction as a block trade or large notional 
off-facility swap.
    Q66. As a variation of the proposed approach, should the Commission 
also require SEFs, DCMs and reporting parties to indicate under which 
swap category they are claiming block trade or large notional off-
facility swap treatment in connection with the transmission of an 
election notification?
    Q67. Are there alternative methods through which a reporting party 
can elect to treat its qualifying swap transaction as a block trade or 
large notional off-facility?
    Q68. Should the Commission establish a special method of election 
for small end-users when those end users are the reporting party to a 
qualifying swap transaction?
4. Proposed Sec.  43.7 Delegation of Authority
    Under proposed Sec.  43.7(a), the Commission would delegate the 
authority to undertake certain Commission actions to the Director of 
the Division of Market Oversight (``Director'') and to other employees 
as designated by the Director from time to time. In particular, this 
proposed delegation would grant to the Director the authority to 
determine: (1) The new swap categories as described in proposed Sec.  
43.6(b); (2) the post-initial appropriate minimum block sizes as 
described in proposed Sec.  43.6(f); and (3) the post-initial cap sizes 
as described in the proposed amendments to Sec.  43.4(h) of the 
Commission's regulations.\253\ The purpose of this proposed delegation 
provision is to facilitate the Commission's ability to respond 
expeditiously to ever-changing swap market and technological 
conditions. The Commission is of the view that this delegation would 
help ensure timely and accurate real-time public reporting of swap 
transaction and pricing data and further ensure anonymity in connection 
with the public reporting of such data. Proposed Sec.  43.7(b) provides 
that the Director may submit to the Commission for its consideration 
any matter that has been delegated pursuant to this authority. Proposed 
Sec.  43.7(c) provides that the delegation to the Director does not 
prevent the Commission, at its election, from exercising the delegated 
authority.
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    \253\ See the discussion of post-initial cap sizes in section 
III.B. infra. As noted above, the Commission is proposing an 
amendment to Sec.  43.2 to define the term ``cap size'' as the 
maximum limit of the principal, notional amount of a swap that is 
publicly disseminated. This term applies to the cap sizes determined 
in accordance with the proposed amendments to Sec.  43.4(h) of the 
Commission's regulations.
---------------------------------------------------------------------------

Request for Comment
    Q69. The Commission requests specific comment on its proposed 
delegation of authority to the Director of certain Commission actions.
    Q70. Should the Director be given the authority to take other 
actions not identified in proposed Sec.  43.7 on behalf of the 
Commission in connection with the calculation of post-initial 
appropriate minimum block sizes and cap sizes? If so, then what other 
actions?

III. Further Proposal--Anonymity Protections for the Public 
Dissemination of Swap Transaction and Pricing Data

A. Policy Goals

    Section 2(a)(13)(E)(i) of the CEA directs the Commission to protect 
the identities of counterparties to swaps subject to the mandatory 
clearing requirement, swaps excepted from the mandatory clearing 
requirement and voluntarily cleared swaps. Similarly, section 
2(a)(13)(C)(iii) of the CEA requires that the Commission prescribe 
rules that maintain the anonymity of business transactions and market 
positions of the counterparties to an uncleared swap.\254\ In proposed 
amendments to Sec. Sec.  43.4(h) and 43.4(d)(4), the Commission is 
prescribing measures to protect the identities of counterparties and to 
maintain the anonymity of their business transactions and market 
positions in connection with the public dissemination of publicly 
reportable swap transactions. The Commission is proposing to follow the 
practices used by most federal agencies when releasing to the public 
company-specific information--by removing obvious identifiers, limiting 
geographic detail (e.g., disclosing the general, non-specific 
geographical information about the delivery and pricing points) and 
masking high-risk variables by truncating extreme values for certain 
variables (e.g., capping notional values).\255\ Further details about 
the proposals to determine cap sizes and applying them to various swap 
categories are described below in section III.B of this Further 
Proposal. Further details regarding the limitations placed on SDRs in 
connection with the public disclosure of geographic details for the 
other commodity asset class are provided below in section III.C of this 
Further Proposal.
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    \254\ This provision does not cover swaps that are ``determined 
to be required to be cleared but are not cleared.'' See 7 U.S.C. 
2(a)(13)(C)(iv).
    \255\ The Commission is following the necessary procedures for 
releasing microdata files as outlined by the Federal Committee on 
Statistical Methodology: (i) Removal of all direct personal and 
institutional identifiers, (ii) limiting geographic detail, and 
(iii) top-coding high-risk variables which are continuous. See 
Federal Committee on Statistical Methodology, Report on Statistical 
Disclosure Limitation Methodology 94 (Statistical Policy Working 
Paper 22, 2d ed. 2005), http://www.fcsm.gov/working-papers/totalreport.pdf. The report was originally prepared by the 
Subcommittee on Disclosure Limitation Methodology in 1994 and was 
revised by the Confidentiality and Data Access Committee in 2005.
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B. Establishing Notional Cap Sizes for Swap Transaction and Pricing 
Data To Be Publicly Disseminated in Real-Time

1. Policy Goals for Establishing Notional Cap Sizes
    In addition to establishing appropriate minimum block sizes, the 
Commission is also proposing to amend Sec.  43.4(h) to establish cap 
sizes for notional and principal amounts that would mask the total size 
of a swap transaction if it equals or exceeds the appropriate minimum 
block size for a given swap category. For example, if the block size 
for a category of interest rate swaps was $1 billion, the cap size was 
$1.5 billion, and the actual transaction had a notional value of $2 
billion, then this swap transaction would be publicly reported with a 
delay and with a notional value of $1.5+ billion.
    The proposed cap size provisions are consistent with the two 
relevant statutory requirements in section 2(a)(13) of the CEA. First, 
the cap size provisions would help to protect the anonymity of 
counterparties' market positions and business transactions as required 
in section 2(a)(13)(C)(iii) of the CEA.\256\ Second, the masking of 
extraordinarily large positions also takes into consideration the 
requirement under section 2(a)(13)(E)(iv), which provides that the 
Commission take into account the impact that real-time public reporting 
could have in reducing market liquidity.\257\
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    \256\ See 7 U.S.C. 2(a)(13)(C)(iii).
    \257\ See id. at 2(a)(13)(E)(iv).
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2. Proposed Amendments Related to Cap Sizes--Sec.  43.2 Definitions and 
Sec.  43.4 Swap Transaction and Pricing Data To Be Publicly 
Disseminated in Real-Time
    The Commission is proposing an amendment to Sec.  43.2 to define 
the term ``cap size'' as the maximum limit of the principal, notional 
amount of a swap that is publicly disseminated. This term applies to 
the cap sizes determined in accordance with the proposed

[[Page 15491]]

amendments to Sec.  43.4(h) of the Commission's regulations.
    Section 43.4(h) of the Commission's regulations currently 
establishes interim cap sizes for rounded notional or principal amounts 
for all publicly reportable swap transactions. In the Adopting Release, 
the Commission finalized Sec.  43.4(h) to provide that the notional or 
principal amounts shall be capped in a manner that adjusts in 
accordance with the appropriate minimum block size that corresponds to 
a publicly reportable swap transaction.\258\ Section 43.4(h) further 
provides that if no appropriate minimum block size exists, then the cap 
size on the notional or principal amount shall correspond to the 
interim cap sizes that the Commission has established for the five 
asset classes.\259\ In Sec.  43.4(h) and as described in the Adopting 
Release, the Commission notes that SDRs will apply interim cap sizes 
until such time as appropriate minimum block sizes are 
established.\260\ The Commission continues to believe that the interim 
cap sizes for each swap category should correspond with the applicable 
appropriate minimum block size, to the extent that an appropriate 
minimum block size exists.\261\
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    \258\ See 77 FR 1,247.
    \259\ Sections 43.4(h)(1)-(5) established the following interim 
cap sizes for the corresponding asset classes: (1) Interest rate 
swaps at $250 million for tenors greater than zero up to and 
including two years, $100 million for tenors greater than two years 
up to and including 10 years, and $75 million for tenors greater 
than 10 years; (2) credit swaps at $100 million; (3) equity swaps at 
$250 million; (4) foreign exchange swaps at $250 million; and (5) 
other commodity swaps at $25 million.
    \260\ See 77 FR 1,215.
    \261\ Leading industry trade associations agree that cap sizes 
are an appropriate mechanism to ensure that price discovery remains 
intact for block trades, while also protecting post-block trade risk 
management needs from being anticipated by other market 
participants. See ISDA and SIFMA, Block Trade Reporting for Over-
the-Counter Derivatives Market, Jan. 18, 2011.
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    The Commission is now proposing to amend Sec.  43.4(h) both to 
establish initial cap sizes for each swap category within the five 
asset classes and also to delineate a process for the post-initial 
period through which the Commission would establish post-initial cap 
sizes for each swap category.\262\ This Further Proposal would change 
the term ``interim'' as it is used in Sec.  43.4(h) to ``initial'' in 
order to correspond with the description of the initial period in 
proposed Sec.  43.6(e).
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    \262\ The Commission does not intend the provisions in this 
Further Proposal to prevent a SEF or DCM from sharing the exact 
notional amounts of a swaps transacted on or pursuant to the rules 
of its platform with market participants on such platform 
irrespective of the cap sizes set by the Commission. To share the 
exact notional amounts of swaps, the SEF or DCM must comply with 
Sec.  43.3(b)(3)(i) of the Commission's regulations. See 77 FR 
1,245.
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a. Initial Cap Sizes
    In the initial period,\263\ proposed Sec.  43.4(h)(1) sets the cap 
size for each swap category as the greater of the interim cap sizes set 
forth in the Adopting Release (existing Sec.  43.4(h)(1)-(5)) or the 
appropriate minimum block size for the respective swap category.\264\ 
If such appropriate minimum block size does not exist, then the cap 
sizes shall be set at the interim cap sizes set forth in the Adopting 
Release (existing Sec.  43.4(h)(1)-(5)).
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    \263\ The initial period is the period prior to the effective 
date of a Commission determination to establish an applicable post-
initial cap sizes. See proposed Sec.  43.4(h)(1).
    \264\ See 77 FR 1,249.
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b. Post-Initial Cap Sizes and the 75-Percent Notional Amount 
Calculation
    In proposed Sec.  43.6(c)(2), the Commission would use the 75-
percent notional amount calculation as a means to set post-initial cap 
sizes for the purpose of reporting block trades or large notional off-
facility swaps of significant size. This calculation methodology is 
different from the 67-percent notional amount calculation methodology 
that the Commission proposes in Sec.  43.6(c)(1) for determining 
appropriate minimum block sizes. The Commission is proposing to use the 
former methodology to set post-initial cap sizes because setting cap 
sizes above appropriate minimum block sizes would provide additional 
pricing information with respect to large swap transactions, which are 
large enough to be treated as block trades (or large notional off-
facility swaps), but small enough that they do not exceed the 
applicable post-initial cap size. This additional information may 
enhance price discovery by publicly disseminating more information 
relating to market depth and the notional sizes of publicly reportable 
swap transactions, while still protecting the anonymity of swap 
counterparties and their ability lay off risk when executing 
extraordinarily large swap transactions.
    The Commission notes that the appropriate minimum block sizes and 
the cap sizes seek to achieve the statutory goals set forth in CEA 
section 2(a)(13)(E)(iv) in different ways.\265\ Appropriate minimum 
block sizes achieve this statutory requirement by providing market 
participants transacting large notional swaps with a time delay in the 
public dissemination of swap transaction and pricing data relating to 
such swaps. As a result of these time delays, market participants are 
able to offset the risk associated with these swaps. Cap sizes achieve 
the statutory requirement of CEA section 2(a)(13)(E)(iv) by masking the 
notional size of large transactions permanently from public 
dissemination. As a result, market participants conducting 
extraordinarily large swap transactions would be able to offset risk 
since an SDR would not publicly disseminate the actual notional amount 
of such transactions.
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    \265\ Section 2(a)(13)(E)(iv) of the CEA requires that the 
Commission ensure that public reporting does not materially reduce 
market liquidity. See 7 U.S.C. 2(a)(13)(E)(iv).
---------------------------------------------------------------------------

    While appropriate minimum block sizes and cap sizes both seek to 
achieve the statutory mandate in CEA section 2(a)(13)(E)(iv), they also 
seek to address different statutory requirements. As noted above, CEA 
sections 2(a)(13)(E)(ii) and (iii) require that the Commission specify 
criteria for determining block trades and large notional off-facility 
swaps for the purpose of subjecting those trades and swaps to a time 
delay from public dissemination. In addition, CEA sections 
2(a)(13)(C)(iii) and 2(a)(13)(E)(i) require that the Commission 
promulgate regulations ensuring that public reporting does not disclose 
the identities, business transactions and market positions of any 
person. Cap sizes primarily address the statutory requirements in CEA 
sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i), while appropriate minimum 
block sizes primarily address the statutory requirements in 
2(a)(13)(E)(ii) and (iii).
    Pursuant to proposed Sec.  43.4(h)(2)(ii), the Commission would use 
a 75-percent notional amount calculation to determine the appropriate 
post-initial cap sizes for all swap categories.\266\ For the 75-percent 
notional amount calculation, the Commission would determine the 
appropriate cap size through the following process, pursuant to 
proposed Sec.  43.6(c)(2): (step 1) Select all of the publicly 
reportable swap transactions within a specific swap category using a 
rolling three-year window of data beginning with a minimum of one 
year's worth of data and adding one year of data for each calculation 
until a total of three years of data is accumulated; (step 2) convert 
to the same currency or units and use a trimmed data set; (step 3) 
determine the sum of the notional amounts of swaps in the trimmed data 
set; (step 4) multiply the sum of the notional amount by 75 percent; 
(step 5) rank order the observations by notional amount from least to 
greatest; (step 6) calculate the cumulative sum of the

[[Page 15492]]

observations until the cumulative sum is equal to or greater than the 
75-percent notional amount calculated in step 4; (step 7) select the 
notional amount associated with that observation; (step 8) round the 
notional amount of that observation to two significant digits, or if 
the notional amount associated with that observation is already 
significant to two digits, increase that notional amount to the next 
highest rounding point of two significant digits; and (step 9) set the 
appropriate minimum block size at the amount calculated in step 8.
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    \266\ See proposed Sec.  43.6(c)(2).
---------------------------------------------------------------------------

    Consistent with the Commission's proposed process to determine the 
appropriate post-initial minimum block sizes, proposed Sec.  43.4(h)(3) 
provides that the Commission would publish post-initial cap sizes on 
its Web site. Proposed Sec.  43.4(h)(4) provides that unless otherwise 
indicated on the Commission's Web site, the post-initial cap sizes 
would become effective on the first day of the second month following 
the date of publication.
c. Alternative Cap Size Calculations
    In addition to the 75-percent notional amount calculation, the 
Commission is considering alternative calculations that it would use to 
set post-initial cap sizes. These calculations are based on common 
statistical disclosure controls used by other agencies in making data 
publicly available.\267\
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    \267\ These are typical of statistical disclosure practices used 
by other Federal agencies as described in the Report on Statistical 
Disclosure Limitation Methodology, see note 255 supra.
---------------------------------------------------------------------------

    Specifically, the Commission is considering the following six 
alternative calculations to the 75-percent notional amount calculation 
of cap sizes during the post-initial period:
     67-percent Notional Amount Calculation with a Floor. As a 
variation of the 75-percent notional amount calculation the Commission 
is considering determining post-initial cap sizes as the greater of the 
result of the 75-percent notional amount calculation or the interim cap 
sizes described in the Adopting Release (existing Sec. Sec.  
43.4(h)(1)-(5)). The Commission recognizes that in certain markets 
``shredding'' may result in smaller transaction sizes,\268\ thereby 
impacting the resulting cap size as determined pursuant to the 75-
percent notional amount calculation. As a result, post-initial cap 
sizes could reach levels that are significantly lower than those 
adopted as interim cap sizes in Sec.  43.4(h). In order to ensure that 
the public and market participants are provided with meaningful data 
related to notional amounts and market depth, the Commission believes 
that requiring this variation may appropriately enhance price discovery 
consistent with the purpose of CEA section 2(a)(13)(B).
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    \268\ The term ``shredding'' refers to the practice of breaking 
up a large swap transaction into a number of smaller ones. The 
practice is often done to avoid causing a large impact on prices or 
to conceal the existence of a large trade originating from a single 
source. When traders attempt to execute a single large trade they 
may be required to pay a liquidity or risk premium to encourage 
traders on the other side of the market to take on the trade. 
Shredding by market participants may cause a marked decrease in the 
average notional size of transactions as a participant executes 
numerous smaller transactions as opposed to a single large 
transaction. For a further discussion of shredding, see note 217 
supra.
---------------------------------------------------------------------------

     Appropriate Minimum Block Size with a Floor. The 
Commission is considering whether to set the post-initial cap sizes 
equal to the greater of the post-initial appropriate minimum block size 
or the interim cap sizes described in the Adopting Release (existing 
Sec. Sec.  43.4(h)(1)-(5)). This alternative method for determining 
post-initial cap sizes would directly link the post-initial cap sizes 
to the post-initial appropriate minimum block sizes.
     Number of Non-affiliated Markets Participant Calculation. 
The Commission is also considering whether to set post-initial cap 
sizes using a calculation that determines the minimum notional value 
cap size based on the number of non-affiliated market participants who 
have transactions with notional values greater than the cap size. This 
process would determine the post-initial cap size through the following 
process: (1) Select the swap transaction data for a specific swap 
category; (2) convert to the same currency or units and use a trimmed 
data set; (3) determine the transaction distribution of notional 
amounts using the trimmed data set for the swap category; (4) find the 
minimum notional value where, for transactions with a notional value 
greater than that value, there are 10 non-affiliated market 
participants. The Commission anticipates that under this alternative 
approach, all market participants from the same legal entity would be 
considered as one non-affiliated market participant.
     Non-affiliated Market Participants and Minimum 
Concentration Calculation. The Commission is also considering whether 
to set post-initial cap sizes using a calculation that determines the 
minimum notional value cap size based on number of market participants 
and the market concentration of transactions with notional sizes above 
the cap size. This process would determine the post-initial cap size 
through the following process: (1) Select the swap transaction data for 
a specific swap category; (2) convert to the same currency or units and 
use a trimmed data set; (3) determine the transaction distribution of 
notional amounts using the trimmed data set for the category; (4) find 
the minimum notional size such that the number of unique participants 
in a swap category with transactions greater than that value exceeds 
10, the maximum share of any one participant in trades above the 
minimum notional value is less than 25 percent, or the maximum share of 
notional value by a participant for transactions greater than the 
minimum notional value is less than 25 percent.
     Confidence Interval Test. The Commission is also 
considering whether to set post-initial cap sizes using a confidence 
interval test, which determines the point at which masking one more 
transaction causes the average notional size--calculated from the data 
for all publicly reportable swap transactions--to be outside of the 
expected range of the true notional size. This alternative test takes 
into account the impact of information loss on the transparency for 
swap transaction and pricing data. The confidence interval test 
calculates the minimum notional value as the point where the publicly 
disseminated average notional size is within the 95-percent confidence 
interval using the following process: (step 1) Select the swap 
transaction data for a specific swap category; (step 2) convert to the 
same currency or units and determine the transaction distribution of 
notional amounts using the logged \269\ and trimmed data set for the 
swap category; (step 3) calculate the average notional size and the 95-
percent confidence interval around this average; \270\ (step 4) drop 
the largest

[[Page 15493]]

remaining transaction from the distribution \271\; (step 5) conditional 
on the full-sample 95-percent confidence interval, calculate the sample 
average notional size using the data resulting from step 4; (step 6) if 
the sample average notional size is not outside of the 95-percent 
confidence interval, repeat steps 4 and 5 until it is just outside of 
the 95-percent confidence interval; and (step 7) once the sample 
average notional size is outside the 95-percent confidence interval, 
set the minimum notional value equal to the notional value, rounded 
pursuant to Sec.  43.4(g), of the largest transaction of the 
distribution for which the sample average notional size was still 
within the 95-percent confidence interval.\272\
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    \269\ In practice, the natural logarithm of the notional value 
is preferred over the nominal value to reduce the effect of skewness 
on sample statistics. In addition to classical statistical methods, 
the calculation of the confidence interval may be improved by using 
``bootstrapping'' methods to estimate the distribution of the 
average notional trade size.
    \270\ The confidence interval test assumes sufficient data in a 
swap category such that a normal distribution is a good 
approximation to compute an interval estimate. To the extent the 
actual distribution diverges significantly from a normal 
distribution, the interval estimate may not reflect the probability 
at the desired (95 percent) confidence interval. In which case, 
other methods such as ``bootstrapping'' may be necessary to compute 
the confidence intervals around the full sample average notional 
size. The Commission notes the ODSG data sets were not normally 
distributed, but were nearly symmetric after transforming the 
notional size by the natural logarithm. Further, according to a TABB 
Group survey, many market participants expected the average notional 
transaction size to decline, which may imply a change in the 
distribution. See the presentation of Kevin McPartland, Principal, 
Tabb Group, CFTC Technology Advisory Committee Meeting, Dec. 13, 
2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.
    \271\ The Commission is also considering dropping transactions 
in one-percent increments until the sample average moves outside the 
95-percent confidence interval. The Commission would then drop 
transactions within the last one-percent increment until the actual 
transaction is found that moves the sample mean outside of the 
confidence interval.
    \272\ See Sec.  43.4(g), which provides that the notional or 
principal amount of a publicly reportable swap transaction, ``as 
described in appendix A to this part [43], shall be rounded and 
publicly disseminated by [an SDR]'' based on the range of notional 
or principal amounts.
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     Variation of the Confidence Interval Test. The Commission 
is also considering a slightly different methodology for the confidence 
interval test. This variation still would calculate the average of the 
entire distribution using all of the available data and the 95-percent 
confidence interval for that average. However, instead of completely 
dropping the largest remaining transactions (step 4, as referenced in 
the previous alternative) and then calculating the sample average 
notional size for the publicly disseminated information without any 
information from these ``dropped'' transactions (step 5), this 
alternative methodology would use the notional value of the largest 
transaction (that would otherwise have been dropped) as though it were 
the cap size and would calculate the average notional size of the 
publicly disseminated data by setting the notional values above that 
size equal to the cap. This approach would simulate the information 
known by the public if the notional value of that last transaction was 
the notional cap size. Since the Commission would calculate the average 
of publicly disseminated transactions with an approximation of the 
notional value of such transactions above the cap size, the cap size 
would be lower than the methodology where all information about the 
size of the transaction is dropped from the estimation.
Request for Comment
    Q71. Please provide specific comments regarding the Commission's 
proposed approach regarding cap sizes in the initial period.
    Q72. Please provide specific comments regarding the Commission's 
proposed approach to set cap sizes in the post-initial period.
    Q73. As an alternative to the proposed approach, should initial and 
post-initial cap sizes always be equal to the appropriate minimum block 
size for a particular swap category?
    Q74. Please provide comments regarding the above-described 
alternative methods for determining post-initial cap sizes.
    Q74.a. Specifically, would any of these alternatives lead to the 
unintended public disclosure of the identities, market positions and 
business transactions of swap counterparties?
    Q75. Should the Commission provide a fixed cap size for each asset 
class rather than varying the cap size by swap category?
    Q76. Should the Commission consider using linear sensitivity 
measures or other statistical disclosure controls outlined in the 
Report on Statistical Disclosure Limitation Methodology from the 
Federal Committee on Statistical Methodology to set post-initial cap 
sizes?
    Q77. Is the definition of a ``non-affiliated market participant's 
as described in the alternative methods for calculating the post-
initial cap sizes the correct definition for the purpose of calculating 
the minimum notional amounts that are publicly disseminated?
    Q78. Are there other alternative methods for determining the post-
initial notional cap sizes that the Commission should consider that are 
not described in this Further Proposal? If yes, please explain those 
methods, as well as any data, studies or additional information to 
support such method.

C. Masking the Geographic Detail of Swaps in the Other Commodity Asset 
Class

1. Policy Goals for Masking the Geographic Detail for Swaps in the 
Other Commodity Asset Class
    In the Adopting Release, the Commission sets forth general 
protections for the identities, market positions and business 
transactions of swap counterparties in Sec.  43.4(d). Section 43.4(d) 
generally prohibits an SDR from publicly disseminating swap transaction 
and pricing data in a manner that discloses or otherwise facilitates 
the identification of a swap counterparty.\273\ Notwithstanding that 
prohibition, Sec.  43.4(d)(3) provides that SDRs are required to 
publicly disseminate data that discloses the underlying asset(s) of 
publicly reportable swap transactions.
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    \273\ See Sec.  43.4(d)(1) of the Commission's regulations.
---------------------------------------------------------------------------

    Section 43.4(d)(4) contains special provisions for swaps in the 
other commodity asset class. These swaps raise special concerns because 
the public disclosure of the underlying asset(s) may in turn reveal the 
identities, market positions and business transactions of the swap 
counterparties. To address these concerns, Sec.  43.4(d)(4) limits the 
types of swaps in the other commodity asset class that are subject to 
public dissemination. Specifically, Sec.  43.4(d)(4)(ii) of the 
Commission's regulations provides that, for publicly reportable swap 
transactions in the other commodity asset class, SDRs must publicly 
disseminate the actual underlying assets only for: (1) Those swaps 
executed on or pursuant to the rules of a SEF or DCM; (2) those swaps 
referencing one of the contracts described in appendix B to part 43; 
and (3) those swaps that are economically related to one of the 
contracts described in appendix B to part 43.\274\ Essentially, the 
Commission has determined that these three categories of swap have 
sufficient liquidity such that the disclosure of the underlying asset 
would not reveal the identities, market positions and business 
transactions of the swap counterparties.
---------------------------------------------------------------------------

    \274\ Appendix B to part 43 provides a list of 28 ``Enumerated 
Physical Commodity Contracts'' as well as one contract under the 
``Other Contracts'' heading. See 77 FR 1,182 app. B.
---------------------------------------------------------------------------

    In its Adopting Release, the Commission included in appendix B to 
part 43 a list of contracts that, if referenced as an underlying asset, 
should be publicly disseminated in full without limiting the commodity 
or geographic detail of the asset. In this Further Proposal, the 
Commission is proposing to add 13 contracts to appendix B to part 43 
under the ``Other Contracts'' heading.\275\ The Commission believes 
that since it previously has determined that these 13 contracts have 
material liquidity and price references, among other things, the public 
dissemination of the full underlying asset for publicly reportable swap 
transactions that reference such contracts (and any underlying assets

[[Page 15494]]

that are economically related thereto) would not disclose the 
identities, market positions and business transactions of swap 
counterparties.
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    \275\ Appendix B to part 43 currently lists only Brent Crude Oil 
(ICE) under the ``Other Contracts'' heading.
---------------------------------------------------------------------------

    Pursuant to the Adopting Release, any publicly reportable swap 
transaction in the other commodity asset class that is excluded under 
Sec.  43.4(d)(4)(ii) would not be subject to the reporting and public 
dissemination requirements for part 43 upon the effective date of the 
Adopting Release. The Commission noted in the Adopting Release that it 
planned to address the group of other commodity swaps that were not 
subject to the rules of part 43 in a forthcoming release.\276\ 
Accordingly, the Commission is proposing rules in this Further Proposal 
to address the public dissemination of swap transaction and pricing 
data for the group of other commodity swaps that are not covered 
currently by Sec.  43.4(d)(4)(ii).
---------------------------------------------------------------------------

    \276\ See 77 FR 1,211.
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    The Commission is of the view that given the lack of data on the 
liquidity for certain swaps in the other commodity asset class, the 
lack of data on the number of market participants in these other 
commodity swaps markets, and the statutory requirement to protect the 
anonymity of market participants,\277\ the public dissemination of less 
specific information for swaps with specific geographic or pricing 
detail may be appropriate. The Commission anticipates that the public 
dissemination of the exact underlying assets for swaps in this group of 
the other commodity asset class may subject the identities, market 
positions and business transactions of market participants to 
unwarranted public disclosure if additional protections are not 
established with respect to the geographic detail of the underlying 
asset. For that reason, the Commission is proposing that SDRs mask or 
otherwise disguise the geographic details related to the underlying 
assets of a swap in connection with the public dissemination of such 
swap transaction and pricing data.\278\
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    \277\ See sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the 
CEA. 7 U.S.C. 2(a)(13)(C)(iii), (E)(i).
    \278\ Limiting the geographical detail is a typical statistical 
disclosure control used by other federal agencies as described in 
the Report on Statistical Disclosure Limitation Methodology, see 
note 255 supra.
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2. Proposed Amendments to Sec.  43.4
    In order to accommodate the policy goals described above, the 
Commission is proposing to add Sec.  43.4(d)(4)(iii) to part 43 to 
establish rules regarding the public dissemination of the remaining 
group of swaps in the other commodity asset class (i.e., those not 
described in Sec.  43.4(d)(4)(ii)). In the Commission's view, proposed 
Sec.  43.4(d)(4)(iii) would ensure that the public dissemination of 
swap transaction and pricing data would not unintentionally disclose 
the identities, market positions and business transactions of any swap 
counterparty to a publicly reportable swap transaction in the other 
commodity asset class. In particular, proposed Sec.  43.4(d)(4)(iii) 
provides that SDRs must publicly disseminate the details about the 
geographic location of the underlying assets of the other commodity 
swaps not described in Sec.  43.4(d)(4)(ii) (i.e., other commodity 
swaps that have a specific delivery or pricing point) pursuant to 
proposed appendix E to part 43. Proposed appendix E to part 43 is 
discussed in the next subsection to this Further Proposal.
    The Commission recognizes that requiring the public dissemination 
of less specific geographic detail for an other commodity swap may, to 
some extent, diminish the price discovery value of swap transaction and 
pricing data for such swap. The Commission anticipates, however, that 
the public dissemination of such data would continue to provide the 
market with useful information relating to market depth, trading 
activity and pricing information for similar types of swaps. Further, 
sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i) of the CEA expressly 
require that the Commission protect the identity, market positions and 
business transactions of swap counterparties.
    The Commission is also proposing to make conforming amendments to 
Sec.  43.4(d). Specifically, the Commission is proposing to amend the 
introductory language to Sec.  43.4(d)(4)(i) by deleting ``Sec.  
43.4(d)(4)(ii)'' and adding in its place ``Sec. Sec.  43.4(d)(4)(ii) 
and (iii)'' to make clear that SDRs have to publicly disseminate swaps 
data under Sec.  43.4(d)(4)(iii) in accordance with part 43.\279\
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    \279\ In addition to proposing limitations on the geographic 
detail for public dissemination of underlying assets for certain 
swaps in the other commodity asset class, the Commission is also 
proposing to amend Sec. Sec.  43.4(g) and (h) to make conforming 
changes.
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3. Application of Proposed Sec.  43.4(d)(4)(iii) and Proposed Appendix 
E to Part 43--Geographic Detail for Delivery or Pricing Points
    Proposed appendix E to part 43 includes the system that SDRs must 
use to mask the specific delivery or pricing points that are a part of 
an underlying asset in connection with the public dissemination of swap 
transaction and pricing data for certain swaps in the other commodity 
asset class. To the extent that the underlying asset of a publicly 
reportable swap transaction described in proposed Sec.  43.4(d)(4)(iii) 
does not have a specific delivery or pricing point, then the provisions 
of proposed Sec.  43.4(d)(4)(iii) and proposed appendix E to part 43 
would not be applicable. Specifically, proposed appendix E to part 43 
provides top-coding for various geographic regions, both in the United 
States and internationally.
    Subsection (a) below includes a description of the top-coding U.S. 
regions. Subsection (b) below includes a description of the top-coding 
non-U.S. regions. Finally, subsection (c) below proposes a system for 
SDRs to publicly disseminate ``basis swaps''.\280\
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    \280\ For the purposes of this Further Proposal, basis swaps are 
defined as swap transactions in which one leg of the swap references 
a contract described in appendix B to part 43 (or is economically 
related thereto) and the other leg of the swap does not.
---------------------------------------------------------------------------

a. U.S. Delivery or Pricing Points
    Table E1 in appendix E to part 43 lists the geographic regions that 
an SDR would publicly disseminate for an off-facility swap in the other 
commodity asset class that is described in proposed Sec.  
43.4(d)(4)(iii). The Commission is proposing that an SDR publicly 
disseminate swap transaction and pricing data for certain energy and 
power swaps in the other commodity asset class, as described in more 
detail below, in a different manner than the remaining other 
commodities. In order to mask the specific delivery or pricing detail 
of these energy and power swaps, the Commission is proposing to use 
established regions or markets that are associated with these 
underlying assets.
i. Natural Gas and Related Products
    In proposed Sec.  43.4(d)(4)(iii) and proposed appendix E to part 
43, the Commission is setting forth a method to describe the publicly 
reportable swap transactions that have natural gas or related products 
as an underlying asset and have a specific delivery or pricing point in 
the United States. In particular, this proposed section would require 
SDRs to publicly disseminate a description of the specific delivery or 
pricing point based on one of the five industry specific natural gas 
markets set forth by the Federal Energy Regulatory Commission 
(``FERC'').\281\ The FERC Natural Gas Markets reflect natural 
deviations found in the spot prices in different markets.\282\ The 
Commission

[[Page 15495]]

anticipates that a distinction for natural gas is necessary to enhance 
price discovery while protecting the identities of the parties, 
business transactions and market positions of market participants.
---------------------------------------------------------------------------

    \281\ See FERC, National Gas Markets--Overview, http://www.ferc.gov/market-oversight/mkt-gas/overview.asp (last viewed Jan. 
31, 2012).
    \282\ See FERC, Natural Gas Market Overview: Spot Gas Prices, 
http://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-avg-spt-ng-pr.pdf (updated Jan. 1, 2012). In addition, there is evidence 
that the spot prices in these markets and the corresponding futures 
prices are highly correlated. D. Murray, Z. Zhu, ``Asymmetric price 
responses, market integration and market power: A study of the U.S. 
natural gas market,'' Energy Economics, 30 (2008) 748-765.
---------------------------------------------------------------------------

    The proposed five markets for public dissemination of delivery or 
pricing points for natural gas swaps are as follows: (i) Midwest 
(including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan, 
Indiana, Illinois, Iowa, Nebraska, Kansas, Oklahoma, Missouri and 
Arkansas); (ii) Northeast (including Maine, New Hampshire, Vermont, 
Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania, 
Kentucky, Ohio, West Virginia, New Jersey, Delaware, Maryland and 
Virginia) \283\ (iii) Gulf (including Louisiana and Texas); (iv) 
Southeast (including Tennessee, North Carolina, South Carolina, 
Georgia, Florida, Alabama and Mississippi); and (v) Western (including 
Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington, 
Oregon, California, Nevada and Arizona). For any other pricing points 
in the United States, SDRs would publicly disseminate ``Other U.S.'' in 
place of the actual pricing or delivery point for such natural gas 
swaps.
---------------------------------------------------------------------------

    \283\ The District of Columbia would be included in this region, 
if any specific delivery or pricing points existed at the time of 
this Further Proposal.
---------------------------------------------------------------------------

    The Commission is considering alternatives for how to break down 
the regions or markets with respect to the public dissemination of 
specific delivery or pricing points for natural gas. The Commission is 
considering using FERC's Natural Gas Futures Trading Markets, which are 
different from the FERC Natural Gas Markets described above. The public 
dissemination regions for delivery or pricing points for such natural 
gas swaps for this alternative would be as follows: (i) Midwest 
(including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan, 
Indiana, Illinois, Iowa, Nebraska, Missouri, Ohio and Kentucky); (ii) 
Northeast (including Maine, New Hampshire, Vermont, Massachusetts, 
Rhode Island, Connecticut, Pennsylvania, West Virginia, New York, New 
Jersey, Delaware and Maryland); (iii) South Central (including Kansas, 
Oklahoma, Arkansas, Louisiana and Texas); (iv) Southeast (including 
Virginia, Tennessee, North Carolina, South Carolina, Georgia, Florida, 
Alabama and Mississippi); (v) Western (including Montana, Wyoming, 
Colorado, New Mexico, Idaho, Utah, Washington, Oregon, California, 
Nevada and Arizona).\284\ For any other pricing points in the United 
States, SDRs would publicly disseminate ``Other U.S.'' in place of the 
actual pricing or delivery point for such natural gas swaps.\285\
---------------------------------------------------------------------------

    \284\ See FERC, Gas Futures Trading, Natural Gas Futures Trading 
Markets, http://www.ferc.gov/market-oversight/mkt-gas/trading/2011/11-2011-gas-tr-fut-archive.pdf. (Nov. 2011).
    \285\ See section III.C.3.a.iv infra.
---------------------------------------------------------------------------

    Finally, the Commission is also considering whether one of the 
public dissemination methods described for the ``All Remaining Other 
Commodities'' would be appropriate with respect to the public 
dissemination for the specific delivery or pricing points related to 
natural gas swaps.
ii. Petroleum and Products
    In proposed Sec.  43.4(d)(4)(iii) and proposed appendix E to part 
43, the Commission is setting forth a method to describe the publicly 
reportable swap transactions that have petroleum products as an 
underlying asset and have a specific delivery or pricing point in the 
United States. In particular, this proposed section would require SDRs 
to publicly disseminate a description of the specific delivery or 
pricing point based on one of the seven Petroleum Administration for 
Defense Districts (``PADD'') regions.\286\ The PADD regions indicate 
economically and geographically distinct regions for the purposes of 
administering oil allocation. The Department of Energy's Energy 
Information Administration (``EIA'') collects and publishes oil supply 
and demand data with respect to the PADD regions.\287\ Accordingly, to 
provide consistency with EIA publications and information regarding 
regional patterns, the Commission is proposing that specific delivery 
or pricing points with respect to such petroleum product swaps are 
publicly disseminated based on PADD regions.
---------------------------------------------------------------------------

    \286\ See PADD Map, Appendix A, Petroleum Administration for 
Defense Districts, http://205.254.135.24/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/paddmap.htm. (last viewed 
Jan. 31, 2012).
    \287\ See U.S. Energy Information Administration (EIA)--
Petroleum & Other Liquids, http://www.eia.gov/petroleum/data.cfm 
(last viewed Jan. 31, 2012).
---------------------------------------------------------------------------

    The PADD regions for public dissemination of delivery or pricing 
points for such petroleum product swaps are as follows: (i) PADD 1A 
(New England); (ii) PADD 1B (Central Atlantic); (iii) PADD 1C (Lower 
Atlantic); (iv) PADD 2 (Midwest); (v) PADD 3 (Gulf Coast); (vi) PADD 4 
(Rocky Mountains); and (vii) PADD 5 (West Coast).\288\ For any other 
pricing points in the United States, SDRs would publicly disseminate 
the term ``Other U.S.'' in place of the actual pricing or delivery 
point for such petroleum product swaps.
---------------------------------------------------------------------------

    \288\ Alternatively, the Commission is considering combining the 
East Coast PADD into one category, such that any oil swap with a 
specific delivery or pricing point as PADD 1A (New England), PADD 1B 
(Central Atlantic), or PADD 1C (Lower Atlantic) would be publicly 
disseminated as PADD 1 (East Coast).
---------------------------------------------------------------------------

    The Commission is also considering whether one of the public 
dissemination methods described for the ``All Remaining Other 
Commodities'' would be appropriate with respect to the public 
dissemination for the specific delivery or pricing points related to 
petroleum product swaps.\289\
---------------------------------------------------------------------------

    \289\ See section III.C.3.a.iv infra.
---------------------------------------------------------------------------

iii. Electricity and Sources
    In proposed Sec.  43.4(d)(4)(iii), the Commission also is setting 
forth a method to describe publicly reportable swap transactions that 
have electricity and sources as an underlying asset and have a specific 
delivery or pricing point in the United States. In particular, this 
proposed section would require SDRs to publicly disseminate the 
specific delivery or pricing point based on a description of one of the 
FERC Electric Power Markets.\290\
---------------------------------------------------------------------------

    \290\ See FERC, Electric Power Markets--Overview, http://www.ferc.gov/market-oversight/mkt-electric/overview.asp (last viewed 
Jan. 31, 2012).
---------------------------------------------------------------------------

    The markets for public dissemination of delivery or pricing points 
for such electricity swaps are as follows: (i) California (CAISO); (ii) 
Midwest (MISO); (iii) New England (ISO-NE); (iv) New York (NYISO); (v) 
Northwest; (vi) PJM; (vii) Southeast; (viii) Southwest; (ix) Southwest 
Power Pool (SPP); and (x) Texas (ERCOT). For any other pricing points 
in the United States, SDRs would publicly disseminate the term ``Other 
U.S.'' in place of the actual pricing or delivery point for such 
electricity and sources swaps.
    Alternatively, the Commission is considering using the North 
American Electric Reliability Corporation (``NERC'') regions for 
publicly disseminating delivery or pricing points for electricity swaps 
described in proposed Sec.  43.4(d)(4)(iii). The NERC regions are 
broader than the FERC regions and include much of Canada. Specifically, 
the NERC regions are as follows: (i) Florida Reliability Coordinating 
Council (FRCC); (ii) Midwest Reliability Organization (MRO); (iii) 
Northeast Power Coordinating Council (NPCC); (iv)

[[Page 15496]]

ReliabilityFirst Corporation (RFC); (v) SERC Reliability Corporation 
(SERC); (vi) Southwest Power Pool, RE (SPP); (vii) Texas Regional 
Entity (TRE); (viii) Western Electricity Coordinating Council 
(WECC).\291\
---------------------------------------------------------------------------

    \291\ See NERC, Key Players: Regional Entities, http://www.nerc.com/page.php?cid=1%7C9%7C119 (last visited Jan. 31, 2012).
---------------------------------------------------------------------------

    Finally, the Commission is also considering whether one of the 
public dissemination methods described below for the ``All Remaining 
Other Commodities'' would be appropriate with respect to the public 
dissemination for the specific delivery or pricing points related to 
electricity and sources swaps.
iv. All Remaining Other Commodities
    In proposed Sec.  43.4(d)(4)(iii) and proposed appendix E to part 
43, the Commission is setting forth a method to describe any swaps in 
the other commodity asset class that do not have oil, natural gas or 
electricity as an underlying asset, but have specific delivery or 
pricing points in the United States. In particular, the Commission is 
proposing in this section that SDRs publicly disseminate information 
with respect to these swaps based on the 10 federal regions established 
by the U.S. Energy Information Administration (``EIA''). The Commission 
anticipates that the use of the 10 federal regions would provide 
consistency among different types of underlying assets in the other 
commodity asset class with respect to delivery and pricing point 
descriptions. The Commission anticipates, however, that for some 
underlying assets, the public dissemination of delivery or pricing 
points by region may still result in thinly-populated swap categories.
    The 10 federal regions that SDRs would use for public dissemination 
for all remaining other commodity swaps are as follows: (i) Region I 
(including Connecticut, Maine, Massachusetts, New Hampshire, Rhode 
Island and Vermont); (ii) Region II (including New Jersey and New 
York); (iii) Region III (including Delaware, District of Columbia, 
Maryland, Pennsylvania, Virginia and West Virginia); (iv) Region IV 
(including Alabama, Florida, Georgia, Kentucky, Mississippi, North 
Carolina, South Carolina and Tennessee); (v) Region V (including 
Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin); (vi) 
Region VI (including Arkansas, Louisiana, New Mexico, Oklahoma and 
Texas); (vii) Region VII (including Iowa, Kansas, Missouri and 
Nebraska); (viii) Region VIII (including Colorado, Montana, North 
Dakota, South Dakota, Utah and Wyoming); (ix) Region IX (including 
Arizona, California, Hawaii and Nevada); and (x) Region X (including 
Alaska, Idaho, Oregon and Washington).\292\ The Commission is also 
considering whether the use of these 10 federal regions is appropriate 
for the natural gas, oil and/or electricity swap markets as described 
above.
---------------------------------------------------------------------------

    \292\ See U.S. Energy Information Administration, U.S. Federal 
Region Map, http://www.eia.gov/cneaf/electricity/page/channel/fedregstates.html (last visited Jan. 31, 2012).
---------------------------------------------------------------------------

    Alternatively, the Commission is considering whether SDRs should 
publicly disseminate information with respect to these swaps based on 
one of the four U.S. Census regions.\293\ The Commission is also 
considering whether the use of the four U.S. Census regions is 
appropriate for the natural gas, oil and/or electricity swaps markets 
as described above. Using the U.S. Census regions, however, might 
provide fewer reporting categories and, as a result, market 
participants and the public may lose some price discovery as compared 
to a description system based on the 10 federal regions. The four U.S. 
Census regions are: (i) Midwest (including North Dakota, South Dakota, 
Minnesota, Wisconsin, Michigan, Indiana, Illinois, Iowa, Nebraska, 
Missouri, Ohio, Kentucky and Kansas); (ii) Northeast (including Maine, 
New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New 
York, Pennsylvania and New Jersey); (iii) South (including Oklahoma, 
Arkansas, Louisiana, Texas, West Virginia, Maryland, Delaware, District 
of Columbia, Virginia, Tennessee, North Carolina, South Carolina, 
Georgia, Florida, Alabama and Mississippi); and (iv) West (including 
Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington, 
Oregon, California, Nevada, Arizona, Alaska and Hawaii).\294\
---------------------------------------------------------------------------

    \293\ See U.S. Department of Commerce, Economics and Statistics 
Administration, Census Bureau, Census Regions and Divisions of the 
United States, http://www.census.gov/geo/www/us_regdiv.pdf (last 
viewed Jan. 31, 2012).
    \294\ See note 293 supra.
---------------------------------------------------------------------------

    Finally, the Commission is considering whether it is appropriate to 
publicly disseminate the specific delivery or pricing points in the 
United States for certain types of swaps in the other commodity asset 
class that are not described in proposed Sec.  43.4(d)(4)(ii). 
Specifically, the Commission is considering whether public disclosure 
of such information would disclose the identities, business 
transactions and market positions of any persons and whether price 
discovery would be enhanced by publicly disseminating more specific 
information.
b. Non-U.S. Delivery or Pricing Points
    Table E2 in proposed appendix E to part 43 provides the appropriate 
manner for SDRs to publicly disseminate non-U.S. delivery or pricing 
points for all publicly reportable swap transactions described in the 
proposed Sec.  43.4(d)(4)(iii). The Commission is of the view that SDRs 
should not publicly disseminate the actual location for these 
international delivery or pricing points since the public disclosure of 
such information may disclose the identities of parties, business 
transactions and market positions of market participants. In Table E2, 
the Commission is proposing the countries and regions that an SDR must 
publicly disseminate. In proposing the use of these geographic 
breakdowns for the public reporting of international delivery or 
pricing points, the Commission considered world regions that have 
significant energy consumption, whether ISDA-specific documentation 
exists for a particular country, and whether public disclosure would 
compromise the anonymity of the swap counterparties.
    The Commission is proposing the following international regions for 
publicly disseminating specific delivery or pricing points of publicly 
reportable swap transactions described in Sec.  43.4(d)(4)(iii): (i) 
North America (publicly disseminate ``Canada'' or ``Mexico''); (ii) 
Central America (publicly disseminate ``Central America''); (iii) South 
America (publicly disseminate ``Brazil'' or ``Other South America''); 
(iv) Europe (publicly disseminate ``Western Europe,'' ``Northern 
Europe,'' ``Southern Europe,'' or ``Eastern Europe''); (v) Russia 
(publicly disseminate ``Russia'') \295\; (vi) Africa (publicly 
disseminate ``Northern Africa,'' ``Western Africa,'' ``Eastern 
Africa,'' ``Central Africa,'' or ``Southern Africa''); (vii) Asia-
Pacific (publicly disseminate ``Northern Asia,'' ``Central Asia,'' 
``Eastern Asia,'' ``Western Asia,'' ``Southeast Asia'' or ``Australia/
New Zealand/Pacific Islands''). The Commission is considering whether a 
more granular approach is necessary for certain regions in order to 
enhance price discovery while still protecting anonymity. For example, 
Mexico, Canada and Russia may benefit from a more granular public 
dissemination of delivery or pricing points given the

[[Page 15497]]

amount of energy production in those regions.
---------------------------------------------------------------------------

    \295\ Note that Russia is not included in ``Eastern Europe'' or 
in ``Northern Asia'' and instead should be publicly disseminated as 
``Russia.''
---------------------------------------------------------------------------

    Alternatively, the Commission is considering a broader approach to 
the public dissemination of non-U.S. delivery or pricing points for 
swaps described in proposed Sec.  43.4(d)(4)(iii). Specifically, the 
Commission is considering public dissemination of only the top-level 
regions for certain regions (e.g., ``Africa'' instead of ``North 
Africa''). The Commission is considering this alternative approach in 
order to prevent the public disclosure of the identities, business 
transactions and market positions of swap counterparties.
    Finally, the Commission is considering whether it is appropriate to 
publicly disseminate the specific delivery or pricing points outside 
the United States for certain types of swaps in the other commodity 
asset class that are not described in Sec.  43.4(d)(4)(ii). 
Specifically, the Commission is considering whether public disclosure 
of such information would disclose the identities, business 
transactions and market positions of any persons and whether price 
discovery would be enhanced by publicly disseminating more specific 
information.
    To the extent that a publicly reportable swap transaction described 
in proposed Sec.  43.4(d)(4)(iii) references the United States as a 
whole and not a specific delivery or pricing point, proposed appendix E 
would require an SDR to publicly disseminate that reference. For 
example, an SDR would publicly disseminate a weather swap that 
references ``U.S. Heating Monthly'' as ``U.S. Heating Monthly.''
c. Basis Swaps
    The Commission is proposing to require SDRs to ensure that specific 
underlying assets are publicly disseminated for basis swaps that 
qualify as publicly reportable swap transactions. The Commission 
recognizes that basis swaps exist in which one leg of the swap 
references a contract described in appendix B to part 43 (or is 
economically related to one such contract) and the other leg of the 
swap references an asset or pricing point not listed in appendix B to 
part 43. With respect to the leg of a basis swap that does not 
reference a contract in appendix B to part 43, the Commission is 
proposing to require SDRs to publicly disseminate the underlying asset 
of the basis swap pursuant to proposed Sec.  43.4(d)(4)(iii) and 
proposed appendix E to part 43. That is, Sec.  43.4(d)(4) currently 
requires an SDR to publicly disseminate the underlying asset of the leg 
of the basis swap that references a contract listed in appendix B to 
part 43. To the extent that a basis swap is executed on or pursuant to 
the rules of a SEF or DCM, an SDR would publicly disseminate the 
specific underlying asset (i.e., the top-coding provisions of proposed 
Sec.  43.4(d)(4)(iii) would not apply since those basis swaps are 
executed on or pursuant to the rules of a SEF or DCM).
Request for Comment
    Q79. The Commission requests specific comment on all aspects of the 
proposed anonymity protections for the public dissemination of publicly 
reportable swap transactions in the other commodity asset class.
    Q80. As an alternative to the proposed approach, should the 
Commission narrow the limited transaction reporting detail provisions 
of proposed Sec.  43.4(d)(4)(iii) to exclude other commodity swaps 
involving many non-affiliated market participants during a sufficiently 
long observation period--for example, an observation period of at least 
one year? This alternative approach would be predicated on the notion 
that reduced market concentration is indicative of a market with very 
limited or non-existent anonymity concerns.
    Q80.a. Would this alternative approach enhance price discovery in 
other commodity swap markets by providing more granular data to the 
public? \296\
---------------------------------------------------------------------------

    \296\ See, e.g., IEA, IEF, OPEC, and IOSCO, Oil Price Reporting 
Agencies, http://www.g20.org/Documents2011/11/IOs%20Report%20on%20PRA%20Report.pdf. (Oct. 2011).
---------------------------------------------------------------------------

    Q80.b. Does this approach create a risk that SDRs would publicly 
disclose details regarding the identities of swap counterparties and 
their business transactions in these markets in light of the other 
anonymity protections (e.g., the rounded notional or principal amounts 
provisions of Sec. Sec.  43.4(g)-(h), the applicable cap size 
provisions, and any relevant reporting delay)?
    Q80.c. Should the Commission adopt a combination of the alternative 
approach and the proposed top-coding approach? If yes, then how should 
the Commission apply the combination of these two approaches?
    Q81. Would any of the alternatives in the discussion of proposed 
appendix E to part 43 above improve price discovery? Would any of these 
alternatives improve anonymity protections?
    Q82. From the standpoint of enhancing price discovery and 
protecting anonymity, would public dissemination of specific delivery 
or pricing points based on the FERC Natural Gas Futures Trading Markets 
be a better alternative than the regions established by the FERC 
Natural Gas Markets?
    Q83. Would the benefits of using the same categories or regions for 
all types of other commodities outweigh the potential loss of enhanced 
price discovery and/or the potential increased risk of disclosure?
    Q84. Would the proposal to use U.S. regions for natural gas 
products, petroleum and products, electricity and sources and other 
commodity groups enhance or limit price discovery? Would these regions 
or markets adequately protect the identities, business transactions and 
market positions of swap counterparties?
    Q85. Would the proposed international regions or markets adequately 
protect the identities, business transactions and market positions of 
swap counterparties? Is there sufficient volume to support these 
different international regions within the different types of other 
commodities?
    Q86. Should the international regions vary for each of the 
different types of commodities within the other commodities asset class 
(i.e., natural gas and related products, petroleum and products, 
electricity and sources, all remaining other commodities)? Are there 
specific regions which should be identified for each of these different 
types of other commodities?
    Q87. Should the Commission limit the proposed requirement for SDRs 
to anonymize delivery and pricing points for natural gas and related 
products to only natural gas?
    Q88. Should the Commission limit the proposed requirement for SDRs 
to anonymize specific delivery and pricing points for electricity and 
sources to only electricity?
    Q89. Should SDRs publicly disseminate the delivery or pricing point 
with respect to coal in the same manner as the ``All Remaining Other 
Commodities''?
    Q90. For thinly-traded products or illiquid markets, is a less 
specific delivery or pricing point necessary to protect anonymity? For 
example, should there only be a distinction between ``U.S.'' and 
``International?'' Would such a broad description limit price discovery 
to market participants and the public?
    Q91. As an alternative approach, please provide comments regarding 
the use of the other commodity groupings in proposed appendix D to part 
43 of the Commission regulations as a means to top-code the public 
dissemination of the underlying commodities for swaps in

[[Page 15498]]

the other commodity asset class that are not described in Sec.  
43.4(d)(4)(ii). That is, an SDR would publicly disseminate the 
individual other commodity swap grouping rather than the specific 
underlying assets.
    Q91.a. Should the Commission apply this additional masking to other 
commodity swaps that are not described in Sec.  43.4(d)(4)(ii)? If yes, 
please provide specific examples.
    Q91.b. Would the public dissemination of proposed ``Individual 
Other Commodity'' groups per proposed appendix D to part 43 of the 
Commission's regulations enhance price discovery?
    Q91.c. Do the swap categories in proposed appendix D to part 43 of 
the Commission's regulations adequately mask the actual underlying 
commodity in such a way that would protect the anonymity of the 
identities, market positions and business transactions of swap 
counterparties?
4. Further Revisions to Part 43
a. Additional Contracts Added to Appendix B to Part 43
    Appendix B to part 43 currently lists contracts that, if referenced 
as an underlying asset, would require SDRs to publicly disseminate the 
full geographic detail of the asset. In the Adopting Release, the 
Commission provided that SDRs were required to publicly disseminate any 
underlying asset of a publicly reportable swap transaction that 
references or is economically related to any contract or contracts 
listed in appendix B to part 43 in the same manner.
    As noted above, the Commission is proposing to add 13 contracts 
under the ``Other Commodity'' heading in appendix B to part 43. The 
addition of these 13 contracts effectively would require SDRs to 
publicly disseminate these contracts the same way as the other 
contracts that are currently listed in appendix B to part 43. That is, 
an SDR would publicly disseminate the actual underlying asset (and any 
underlying asset(s) that are economically related) without any 
limitation of the geographic detail.
    The Commission previously has determined that these 13 contracts 
are significant price discovery contracts (``SPDCs'') in connection 
with trading on exempt commercial markets (``ECMs'').\297\ Each of the 
13 contracts has undergone an analysis in which the Commission 
considered the following five criteria: (i) Price linkage (the extent 
to which the contract uses or otherwise relies on a daily or final 
settlement price of a contract listed for trade on or subject to the 
rules of a DCM); (ii) arbitrage (the extent to which the price of the 
contract is sufficiently related to the price of a contract listed on a 
DCM to permit market participants to effectively arbitrage between the 
two markets); (iii) material price reference (the extent to which, on a 
frequent and recurring basis, bids, offers or transactions in a 
commodity are directly based on, or are determined by referencing, the 
prices generated by contracts being traded or executed on the ECM); 
(iv) material liquidity (the extent to which volume of the contract is 
sufficient to have a material effect on other contracts listed for 
trading); and (v) other material factors.\298\
---------------------------------------------------------------------------

    \297\ The Commission is proposing to add the following SPDC 
designated contracts to appendix B to part 43. The Commission has 
previously issued orders finding that these contracts perform a 
significant price discovery function: AECO Financial Basis Contract 
traded on the IntercontinentalExchange, Inc. (``ICE'') (See 75 FR 
23,697); NWP Rockies Financial Basis Contract traded on ICE (See 75 
FR 23,704); PG&E Citygate Financial Basis Contract traded on ICE 
(See 75 FR 23,710); Waha Financial Basis Contract traded on ICE (See 
75 FR 24,655); Socal Border Financial Basis Contract traded on ICE 
(See 75 FR 24,648); HSC Financial Basis Contract traded on ICE (See 
75 FR 24,641); ICE Chicago Financial Basis Contract traded on ICE 
(See 75 FR 24,633); SP-15 Financial Day-Ahead LMP Peak Contract 
traded on ICE (See 75 FR 42,380); SP-15 Financial Day-Ahead LMP Off-
Peak Contract traded on ICE (See 75 FR 42,380); PJM WH Real Time 
Peak Contract traded on ICE (See 75 FR 42,390); PJM WH Real Time 
Off-Peak Contract traded on ICE (See 75 FR 42,390); Mid-C Financial 
Peak Contract traded on ICE (See 75 FR 38,469); Mid-C Financial Off-
Peak Contract traded on ICE (See 75 FR 38,469).
    \298\ The Dodd-Frank Act deleted and replaced CEA section 
2(h)(7), which contained the five criteria for determining a SPDC. 
The Dodd-Frank Act amended CEA section 4a(a) to include CEA section 
4a(a)(4), which contains a similar version of the five criteria for 
determining a SPDC in the context of excessive speculation.
---------------------------------------------------------------------------

    The Commission anticipates that since the Commission already has 
determined these 13 contracts to have material liquidity and material 
price reference, among other things, the public dissemination of the 
full underlying asset for publicly reportable swap transactions that 
reference such contracts (and any underlying assets that are 
economically related thereto) would not disclose the identities, market 
positions and business transactions of market participants and would 
enhance price discovery in the related markets.
    The Commission notes that the Commission already has determined one 
additional contract, ``Henry Financial LD1 Fixed Price Contract,'' is a 
SPDC.\299\ The Commission, however, is not proposing to add this 
contract under the heading ``Other Contracts'' in appendix B to part 
43. This contract is economically related to the ``New York Mercantile 
Exchange Henry Hub Natural Gas,'' which is listed under ``Enumerated 
Physical Commodity Contracts'' in appendix B to part 43. Therefore, 
listing this contract again would be redundant.
---------------------------------------------------------------------------

    \299\ See 74 FR 37,988.
---------------------------------------------------------------------------

b. Technical Revisions to Part 43
    In the Adopting Release, the Commission states that the 
transactions described Sec. Sec.  43.4(d)(4)(ii)(A)-(C) are meant to be 
exclusive of one another. Under these sections, an SDR is required to 
publicly disseminate the underlying asset(s) of a swap in the other 
commodity asset class that is executed on or pursuant to the rules of a 
SEF or DCM regardless of whether the underlying asset is listed on 
appendix B to part 43 or is economically related to such contracts. 
Accordingly, the Commission is proposing a technical clarification to 
Sec.  43.4(d)(4)(ii)(B) to clarify the intent that these elements are 
exclusive of one another, as articulated in the preamble to the 
Adopting Release.
Request for Comment
    Q92. How would reporting the 13 contracts that the Commission is 
proposing to list in appendix B to part 43 impact price discovery and 
anonymity of those contracts and other publicly reportable swap 
transactions in the other commodity asset class? For example, does the 
exact reporting of the PJM WH Real Time Peak Contract impact the 
remaining volume of publicly reportable swap transactions in the other 
commodity asset class that would be publicly disseminated with a PJM 
delivery or pricing point?

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') was adopted in 1980 to 
address concerns that government regulations may have a significant 
and/or disproportionate effect on small businesses. To mitigate this 
risk, the RFA requires federal agencies to issue an initial and final 
regulatory flexibility analysis for each rule of general applicability 
for which the agency issues a general notice of proposed 
rulemaking.\300\ These analyses must describe: (i) The economic impact 
of the proposed rule on small entities, including a statement of the 
objectives and the legal bases for the rulemaking; (ii) an estimate of 
the number of small entities to be affected; (iii) identification of 
federal rules that may duplicate, overlap or conflict with the proposed

[[Page 15499]]

rules; and (iv) a description of any significant alternatives to the 
proposed rule that would minimize any significant impacts on small 
businesses.\301\ The RFA focuses on direct impact to small businesses 
and not on indirect impacts on these businesses, which may be tenuous 
and difficult to discern.\302\
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    \300\ See 5 U.S.C. 601 et seq.
    \301\ See 5 U.S.C. 603, 604.
    \302\ See Whitman v. Am. Trucking Ass'ns, 531 U.S. 457 (2001); 
Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (DC Cir. 1985); Mid-
Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).
---------------------------------------------------------------------------

    As noted above, section 2(a)(13)(E)(ii) of the CEA directs the 
Commission to prescribe regulations specifying ``the criteria for 
determining what constitutes a large notional off-facility swap 
transaction (block trade) for particular markets and contracts.'' In 
general, proposed Sec.  43.6 sets out, inter alia, the criteria to 
determine swap categories and the methodologies that the Commission 
would employ in determining the appropriate minimum block sizes for 
those swap categories. In addition, the proposed amendments to Sec.  
43.4 set out a system to mask the notional amounts of swaps of relative 
large size, as well as a system to anonymize geographic and underlying 
asset detail for certain other commodity swaps. The Commission is of 
the view that these proposed provisions would impose only one direct 
requirement on businesses, including small businesses.\303\ Proposed 
43.6(a) would require reporting parties to notify an SDR of its 
election to treat a qualifying publicly reportable swap transaction as 
a large notional off-facility swap. The Commission anticipates that the 
direct impact of this requirement would not be significant for the 
purposes of the RFA.
---------------------------------------------------------------------------

    \303\ As discussed below, the Commission is of the view that 
registered entities such as SDs and MSPs are not small businesses.
---------------------------------------------------------------------------

    Indeed, proposed Sec.  43.6(g) would impose minimal notice 
requirements on market participants that are subject to part 43 of the 
Commission's regulations. A more fulsome analysis of the implications 
that proposed Sec.  43.6(g) may have on small businesses is described 
immediately below.

A. Potential Economic Impact--Proposed Sec.  43.6(g)--Notification of 
Election

    Proposed Sec.  43.6(g) contains the provisions regarding the 
election to have a swap transaction treated as a block trade or large 
notional off-facility swap, as applicable. Proposed Sec.  43.6(g)(1) 
establishes a two-step notification process relating to block trades. 
Proposed Sec.  43.6(g)(2) establishes the notification process relating 
to large notional off-facility swaps.
    Proposed Sec.  43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this 
section provides that the reporting party to a swap that is executed at 
or above the appropriate minimum block size is required to notify the 
SEF or DCM (as applicable) of its election to have its qualifying swap 
transaction treated as a block trade. With respect to the second step, 
proposed Sec.  43.6(g)(1)(ii) provides that the SEF or DCM, as 
applicable, that receives an election notification is required to 
notify an SDR of a block trade election when transmitting swap 
transaction and pricing data to such SDR for public dissemination.
    Proposed Sec.  43.6(g)(2) is similar to the first step set forth in 
proposed Sec.  43.6(g)(1). That is, proposed Sec.  43.6(g)(2) provides, 
in part, that a reporting party who executes a bilateral swap 
transaction that is at or above the appropriate minimum block size is 
required to notify the SDR of its election to treat such swap as a 
large notional off-facility swap. This section provides further that 
the reporting party is required to notify the SDR in connection with 
the reporting party's transmission of swap transaction and pricing data 
to the SDR for public dissemination.
    The second step in the two-step process in proposed Sec.  
43.6(g)(1) imposes direct burdens on SEFs and DCMs. The Commission 
previously has determined that these entities are not small businesses 
for the purposes of the RFA.\304\
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    \304\ See 17 CFR part 40 Provisions Common to Registered 
Entities, 75 FR 67,282 (Nov. 2, 2010); see also 47 FR 18,618, 
18,619, Apr. 30, 1982 and 66 FR 45,604, 45,609, Aug. 29, 2001.
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    In contrast, the first step in the two-step process in proposed 
Sec.  43.6(g)(1) and the notification election in proposed Sec.  
43.6(g)(2) would impose direct burdens on parties to a swap, which the 
Commission has determined previously may include a percentage of small 
end users that are considered small businesses for the purposes of the 
RFA.\305\ Notwithstanding the imposition of this burden, however, the 
Commission anticipates that the notification requirements in proposed 
Sec. Sec.  43.6(g)(1)(i) and 43.6(g)(2) would not create significant 
economic burdens on small end users. The Commission anticipates that 
the notification requirements imposed in proposed Sec. Sec.  
43.6(g)(1)(i) and 43.6(g)(2) will likely be automated and electronic. 
Section 43.3 of the Commission's regulations already requires these 
entities to report their swap transaction and pricing data to an 
SDR.\306\ The Commission is of the view that requiring these entities 
to include an additional notification or field in conjunction with the 
reporting of such data would impose, at best, a marginal and 
incremental cost.
---------------------------------------------------------------------------

    \305\ See 77 FR 1,240 (``[T]he Commission recognized that the 
proposed rule could have an economic effect on certain single end 
users, in particular those end users that enter into swap 
transactions with another end-user. Unlike the other parties to 
which the proposed rulemaking would apply, these end users are not 
subject to designation or registration with or to comprehensive 
regulation by the Commission. The Commission recognized that some of 
these end users may be small entities.''). The term reporting party 
also includes swap dealers and major swap participants.
    The Commission previously has determined that these entities do 
fall within the definition of small business for the purpose of the 
RFA. See 75 FR at 76,170.
    \306\ See 77 FR 1,240.
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    Moreover, as stated in prior RFA determinations, the Commission 
anticipates the percentage of end users that would fall within the 
definition of reporting party \307\ would likely be minimal since, 
according to industry data, most end users transact swaps with a swap 
dealer.\308\ Thus, the percentage of small end users that would be 
required to notify SDRs directly of their election to treat a swap as a 
block trade or large notional off-facility swap would not likely be 
significant.
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    \307\ See 77 FR 1,244.
    \308\ See ISDA/SIFMA Jan. 18, 2011, Block trade reporting over-
the-counter derivatives markets, 13-14. See also Costs and Benefits 
of Mandatory Electronic Execution Requirements for Interest Rate 
Products, note 75 supra. (``In contrast with the current environment 
where swap dealers are principals on every trade * * *.'').
---------------------------------------------------------------------------

B. Identification of Duplicative, Overlapping or Conflicting Federal 
Rules

    The Commission has not identified any existing federal rules exist 
that are duplicative, overlapping or conflicting with the provisions in 
this Further Proposal, including the provisions in proposed Sec.  
43.6(g).

C. Alternatives to Proposed Rules That Will Have an Impact

    Under the RFA, the Commission is not required to identify 
alternatives as a result of its determination that the provisions in 
proposed Sec.  43.6(g) would not have a significant economic impact on 
a significant number of small businesses.

D. Certification

    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed rules will not 
have a

[[Page 15500]]

significant economic impact on a substantial number of small 
businesses. Nonetheless, the Commission specifically requests comment 
on the economic impact that this Further Proposal may have on small 
businesses.

V. Paperwork Reduction Act

A. Background

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 
et seq. (``PRA'') are, among other things, to minimize the paperwork 
burden to the private sector, ensure that any collection of information 
by a government agency is put to the greatest possible uses, and 
minimize duplicative information collections across the 
government.\309\ The PRA applies with extraordinary breadth to all 
information, ``regardless of form or format,'' whenever the government 
is ``obtaining, causing to be obtained [or] soliciting'' information, 
and includes requires ``disclosure to third parties or the public, of 
facts or opinions,'' when the information collection calls for 
``answers to identical questions posed to, or identical reporting or 
recordkeeping requirements imposed on ten or more persons.'' \310\ The 
PRA requirements have been determined to include not only mandatory but 
also voluntary information collections, and include both written and 
oral communications.\311\
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    \309\ See 44 U.S.C. 3501.
    \310\ See 44 U.S.C. 3502.
    \311\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    To effectuate the purposes of the PRA, Congress requires all 
agencies to quantify and justify the burden of any information 
collection it imposes.\312\ This requirement includes submitting each 
collection, whether or not it is contained in a rulemaking, to the 
Office of Management and Budget (``OMB'') for review. The OMB 
submission process includes completing a form 83-I and a supporting 
statement with the agency's burden estimate and justification for the 
collection. When an information collection is established within a 
rulemaking, the agency's burden estimate and justification should be 
provided in the proposed rulemaking, subjecting the proposed 
information collection to the rulemaking's public comment process.
---------------------------------------------------------------------------

    \312\ See 44 U.S.C. 3506.
---------------------------------------------------------------------------

    Proposed Sec.  43.6 and amendments to Sec.  43.4 would result in 
amendments to an existing collection of information within the meaning 
of the PRA in two respects. Accordingly, the Commission is submitting 
this Further Proposal to the OMB for review pursuant to 44 U.S.C. 
3507(d) and 5 CFR1320.11. OMB has assigned control number 3038-0070 to 
the existing collection of information, which is titled ``Part 43--
Real-Time Public Reporting.'' If adopted, then responses to this 
amended collection of information would be mandatory.

B. Description of the Collection

    Recently, the Commission issued the Adopting Release, which 
includes three collections of information requirements within the 
meaning of the PRA. The first collection of information requirement 
under Part 43 imposed a reporting requirement on a SEF or DCM when a 
swap is executed on a trading facility or on the parties to a swap 
transaction when the swap is executed bilaterally. The second 
collection of information requirement under Part 43 created a public 
dissemination requirement on SDRs. The third collection of information 
requirement created a recordkeeping requirement for SEFs, DCMs, SDRs 
and any reporting party (as such term is defined in part 43 of the 
Commission's regulations).
    Proposed amendments to Sec.  43.4 and proposed Sec.  43.6 would 
amend the first and second collections of information within the 
meaning of the PRA as described below. The analysis with respect to the 
amended collections as a result of proposed Sec.  43.6 is set out in 
section 1 below. The analysis with respect to the amended collections 
as a result of proposed amendments to Sec.  43.4 is set out in section 
2 below.
1. Proposed Sec.  43.6(g)--Notification of Election
    Proposed Sec.  43.6(g) would amend the first and second collections 
of information within the meaning of the PRA. In particular, proposed 
Sec.  43.6(g) contains the provisions regarding the election to have a 
swap transaction treated as a block trade or large notional off-
facility swap, as applicable. Proposed Sec.  43.6(g)(1) establishes a 
two-step notification process relating to block trades. Proposed Sec.  
43.6(g)(2) establishes the notification process relating to large 
notional off-facility swaps. Proposed Sec.  43.6(g) is an essential 
part of this rulemaking because it provides the mechanism through which 
market participants will be able to elect to treat their qualifying 
swap transaction as a block trade or large notional off-facility swap.
    Proposed Sec.  43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this 
section provides that the parties to a swap that are executed at or 
above the appropriate minimum block size for the applicable swap 
category are required to notify the SEF or DCM (as applicable) of their 
election to have their qualifying swap transaction treated as a block 
trade. The Commission understands that SEFs and DCMs use automated, 
electronic, and in some cases, voice processes to execute swap 
transactions; therefore, the transmission of the notification of a 
block trade election also would either be automated, electronic or 
communicated through voice.
    The Commission estimates that there are 125 SDs and MSPs, and 1,000 
other non-financial end-user parties.\313\ The Commission estimates 
that, on average, SD/MSP reporting parties would likely notify a SEF or 
DCM of a block trade election approximately 1,000 times per year while 
non-SD/MSP reporting parties likely would notify a SEF or DCM of a 
block trade election approximately five times per year.\314\ Thus, the 
Commission estimates that there would be 130,000 notifications of a 
block trade election by reporting parties under proposed Sec.  43.6(g) 
each year.\315\
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    \313\ The Commission has previously estimated that 125 SDs and 
MSPs will register with the Commission and 1,000 non-financial end-
users (i.e., non-SD/non-MSPs) will be required to report swap 
transactions annually. 77 FR 1,229-30.
    \314\ The Commission anticipates that these figures will change 
as a function of changes in the market structure and practices in 
the U.S. swaps markets.
    \315\ The Commission estimates the total number of notifications 
as follows: 125 SDs/MSPs x 1,000 notifications = 125,000 
notifications per year; 1,000 non-SDs/non-MSPs x 5 notifications = 
5,000 notifications per year; therefore, the total across all types 
of entities would be 130,000 notifications per year.
---------------------------------------------------------------------------

    The Commission estimates that the burden hours associated with the 
Sec.  43.6(g)(1)(i) would include: (i) 30 seconds on average for 
parties to a swap to determine whether a particular swap transaction 
qualifies as a block trade based on the appropriate minimum block size 
of the applicable swap category; and (ii) 30 seconds on average for the 
parties to electronically transmit or otherwise communicate their 
notice of election. SDs, MSPs and reporting parties would use existing 
traders (or other professionals earning similar salaries) to 
electronically transmit or otherwise communicate their notice of 
election. Based on the Securities Industry and Financial Market 
Association's 2010 Securities Industry Salary Survey, the Commission 
estimates that these block traders would earn approximately $140.93 per 
hour in total compensation.\316\ Accordingly, the

[[Page 15501]]

Commission estimates that the total annual burden hour costs associated 
with the first step in proposed Sec.  43.6(g)(1)(i) would be 2,167 
hours \317\ or $305,396 in total annual burden hours costs \318\ and 
$11.2 million in total start-up capital costs.\319\
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    \316\ The Commission previously has utilized wage rate estimates 
based on average salary and average prior year bonus information for 
the securities industry compiled by SIFMA. These wage estimates are 
derived from an industry-wide survey of participants and thus 
reflect an average across entities; the Commission notes that the 
actual costs for any individual company or sector may vary from the 
average.
    The Commission estimated the dollar costs of hourly burdens for 
different types of relevant professionals using the following 
calculations:
    (1) [(2009 salary + bonus) * (salary growth per professional 
type, 2009-2010)] = Estimated 2010 total annual compensation. The 
most recent data provided by the SIFMA report describe the 2009 
total compensation (salary + bonus) by professional type, the growth 
in base salary from 2009 to 2010 for each professional type, and the 
2010 base salary for each professional type; therefore, the 
Commission estimated the 2010 total compensation for each 
professional type, but, in the absence of similarly granular data on 
salary growth or compensation from 2010 to 2011 and beyond, did not 
estimate dollar costs beyond 2010.
    (2) [(Estimated 2010 total annual compensation)/(1,800 annual 
work hours)] = Hourly wage per professional type.]
    (3) [(Hourly wage) * (Adjustment factor for overhead and other 
benefits, which the Commission has estimated to be 1.3)] = Adjusted 
hourly wage per professional type.]
    (4) [(Adjusted hourly wage) * (Estimated hour burden for 
compliance)] = Dollar cost of compliance for each hour burden 
estimate per professional type.]
    The sum of each of these calculations for all professional types 
involved in compliance with a given element of this Further Proposal 
represents the total cost for each counterparty, reporting party, 
swap dealer, major swap participant, SEF, DCM, or SDR, as applicable 
to that element of the proposal.
    \317\ To comply with the election process in proposed Sec.  
43.6(g), a market participant likely would need to provide training 
to its existing personnel and update its written policies and 
procedures to account for this new process. The total annual burden 
hours equals the total hours for swap dealers and major swap 
participants plus the total hours for non-swap dealers and non-major 
swap participants.
    \318\ The underlying adjusted labor cost estimate of $140.93 per 
hour used in this estimate is calculated based on the adjusted wages 
of swap traders. See note 316 supra.
    \319\ The estimated costs are based on the Commission's estimate 
of the incremental, non-recurring expenditures to reporting 
entities, including non-SD/non-MSPs (i.e., non-financial end-users) 
to: (1) update existing technology, including updating its OMS 
system ($6,761.20); and (2) provide training to existing personnel 
and update written policies and procedures ($3,195.00). See section 
VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs 
would incur similar non-recurring start-up costs. The Commission has 
previously estimated that 125 SDs and MSPs will register with the 
Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs) 
will be required to report in a year. See 77 FR 1229-30.
---------------------------------------------------------------------------

    With respect to the second step, proposed Sec.  43.6(g)(1)(ii) 
provides that the SEF or DCM, as applicable, that receives an election 
notification is required to notify an SDR of a block trade election 
when transmitting swap transaction and pricing data to such SDR for 
public dissemination. As noted above, the Commission anticipates that 
SEFs and DCMs would use automated, electronic and, in some cases, voice 
processes to execute swap transactions. The Commission estimates that 
there will be approximately 58 SEFs and DCMs. Accordingly, the 
Commission estimates that the total annual burden associated with the 
second step in proposed Sec.  43.6(g)(1)(ii) would be approximately 
$577,460 in non-recurring annualized capital and start-up costs.\320\ 
The Adopting Release already has addressed the recurring annualized 
costs for the hour burden, as well as ongoing operational and 
maintenance costs.
---------------------------------------------------------------------------

    \320\ The Commission bases this estimate on 58 projected SEFs 
and DCMs, each of which will incur costs of investing in update 
technology, including updating its OMS system ($6,761.20); and 
training existing personnel and updating written policies and 
procedures ($3,195.00). See section VI(E)(2)(a)(i)-(ii) infra.
---------------------------------------------------------------------------

    Proposed Sec.  43.6(g)(2) is similar to the first step set forth in 
proposed Sec.  43.6(g)(1). That is, proposed Sec.  43.6(g)(2) provides, 
in part, that a reporting party who executes a bilateral swap 
transaction that is at or above the appropriate minimum block size is 
required to notify the SDR of its election to treat such swap as a 
large notional off-facility swap. This section provides further that 
the reporting party is required to notify the SDR in connection with 
the reporting party's transmission of swap transaction and pricing data 
to the SDR for public dissemination. The Commission anticipates that 
reporting parties may have various methods through which they will 
transmit information to SDRs, which would include a large notional off-
facility swap election. Most reporting parties would use automated and 
electronic methods to transmit this information; other reporting 
parties, because of the expense associated with building an electronic 
infrastructure, may contract with third parties (including their swap 
counterparty) to transmit the notification of a large notional off-
facility swap election.
    The Commission estimates that the incremental time and cost burden 
associated with the Sec.  43.6(g)(2) would include: (i) One minute for 
a reporting party to determine whether a particular swap transaction 
qualifies as a large notional off-facility swap based on the 
appropriate minimum block size of the applicable swap category; and 
(ii) one minute for the reporting party (or its designee) to 
electronically transmit or communicate through voice processes its 
notice of election. The Commission estimates that, of the approximately 
2,255 hours incurred by 125 SDs/MSPs and 1,000 non-SD/MSPs, all of 
those hours would be spent by traders and market analysts (or 
designee).\321\ SIFMA's report states that traders and market analysts 
make $140.93 per hour in total compensation.\322\
---------------------------------------------------------------------------

    \321\ The economic costs associated with entering into a third 
party service arrangement to transmit an electronic notice to an SDR 
are difficult to determine. There are too many variables that are 
involved in determining those costs. Notwithstanding this 
difficulty, the Commission foresees that, for many reporting parties 
that infrequently trade swaps, the annualized cost of entering into 
a third-party service arrangement of this type would likely be less 
than the total annual cost of building an electronic infrastructure 
to transmit electronic notices directly to an SDR.
    \322\ See note 316 supra.
---------------------------------------------------------------------------

    The Commission estimates that, on average, each of the estimated 
125 SD/MSP counterparties would likely notify an SDR of a large 
notional off-facility swap election approximately 500 times per year 
while each of the estimated 1,000 non-SD/MSP counterparties would 
notify an SDR approximately five times per year. Accordingly, the 
Commission estimates that there are, on average, approximately 67,500 
notifications large notional off-facility swaps under proposed Sec.  
43.6 each year. Accordingly, the Commission estimates that the total 
annual burden associated with proposed Sec.  43.6(g)(2) would be 
approximately 2,255 annual labor hours or $317,797 in annual labor 
costs.\323\
---------------------------------------------------------------------------

    \323\ The labor hour estimate is calculated as follows: (125 
SDs/MSPs x 500 notifications) + (1,000 non-SDs/non-MSPs x 5 
notifications) = 67,500 notifications x 2 minutes/notification = 
135,000 minutes/60 minutes/hour = 2,255 hours. The labor cost 
estimate is calculated as follows: 2,255 labor hours x $140.93 per 
hour total compensation = $317,797.
---------------------------------------------------------------------------

    In addition, the Commission estimates that proposed Sec.  
43.6(g)(2) would result in $11.2 million in non-recurring annualized 
capital and start-up costs.\324\ The Adopting Release addressed all 
ongoing operational and maintenance costs.\325\
---------------------------------------------------------------------------

    \324\ The estimated costs are based on the Commission's estimate 
of the incremental, non-recurring expenditures to reporting 
entities, including non-SD/non-MSPs (i.e., non-financial end-users) 
to (1) update existing technology, including updating its OMS system 
($6,761.20); and (2) provide training to existing personnel and 
update written policies and procedures ($3,195.00). See section 
VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs 
would incur similar non-recurring start-up costs. The Commission has 
previously estimated that 125 SDs and MSPs will register with the 
Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs) 
will be required to report in a year. 77 FR 1,229-30.
    \325\ See 77 FR at 1,232.
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2. Proposed Amendments to Sec. Sec.  43.4(d)(4) and 43.4(h)
    The Commission addresses the public dissemination of certain swaps 
in the other commodity asset class in Sec.  43.4(d)(4). Section 
43.4(d)(4)(ii)

[[Page 15502]]

provides that for publicly reportable swaps in the other commodity 
asset class, the actual underlying assets must be publicly disseminated 
for: (1) Those swaps executed on or pursuant to the rules of a SEF or 
DCM; (2) those swaps referencing one of the contracts described in 
appendix B to part 43; and (3) any publicly reportable swap transaction 
that is economically related to one of the contracts described in 
appendix B to part 43. Pursuant to the Adopting Release, any swap that 
is in the other commodity asset class that does not fall under Sec.  
43.4(d)(4)(ii) would not be subject to reporting and public 
dissemination requirements upon the effective date of the Adopting 
Release.
    In this Further Proposal, the Commission is proposing a new 
provision (proposed Sec.  43.4(d)(4)(iii)), which would develop a 
system for the public dissemination of exact underlying assets in the 
other commodity asset class with a ``mask'' based on geographic detail. 
The Commission is proposing a new appendix to part 43, which contains 
the geographical top-codes that SDRs would use in masking certain other 
commodity swaps in connection with such swaps public dissemination of 
swap transaction and pricing data under part 43. The Commission 
anticipates that there will be approximately 50,000 additional swaps 
reported to an SDR each year in the other commodity asset class, which 
the Commission estimates would be $117,395 in annualized hour burden 
costs.\326\
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    \326\ The Commission estimates that there will be 5 SDRs, which 
will collect swaps data in the other commodity asset class. Each SDR 
would collect swaps data on approximately 10,000 swap transactions 
in the other commodity asset class. The commission estimates that it 
will take each SDR on average approximately 1 minute to publicly 
disseminate swaps data related to these new swap transactions. The 
number of burden hours for these SDRs would be 833 hours. As 
referenced in note 318 supra, the total labor costs for a swap 
trader is $140.93. Thus, the total number of burden hour costs equal 
the total number of burden hours (833 burden hours) x $140.93.
---------------------------------------------------------------------------

    The Commission's regulations currently provide a system 
establishing cap sizes. Section 43.4(h) of the Commission's regulations 
provides that cap sizes for swaps in each asset class shall equal the 
appropriate minimum block size corresponding to such publicly 
reportable swap transaction. If no appropriate minimum block size 
exists, then Sec.  43.4(h) sets out specific interim cap sizes for each 
asset class.\327\
---------------------------------------------------------------------------

    \327\ The Adopting Release calculated and addressed the total 
ongoing burden hours and burden hour costs. See 77 FR 1,1232.
---------------------------------------------------------------------------

    This Further Proposal would amend Sec.  43.4(h) to establish new 
cap sizes in the post-initial period using a 75-percent notional amount 
calculation. Under this proposed amendment, the Commission would 
perform the calculation; however, SDRs would update their technology 
and other systems at a minimum of once per year to publicly disseminate 
swap transaction and pricing data with the cap sizes issued by the 
Commission.
    The Commission estimates that the incremental, start-up costs 
associated with proposed amendment to Sec. Sec.  43.4(d)(4) and 43.4(h) 
for an SDR would include: (1) Reprograming its technology 
infrastructure to accommodate the proposed masking system and proposed 
post-initial cap sizes methodology; (2) updating its written policies 
and procedures to ensure compliance with proposed Sec.  43.4(d)(4)(iii) 
and the proposed amendment to Sec.  43.4(h); and (3) training staff on 
the new policies and procedures.\328\ The Commission estimates that the 
total annual burden associated with proposed Sec.  43.4(d)(4)(iii) and 
the proposed amendments to 43.4(h) would be 1,000 labor hours and 
approximately $75,900.\329\
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    \328\ The economic costs associated with entering into a third 
party service arrangement to transmit an electronic notice to an SDR 
are difficult to determine because of too many variables involved in 
determining those costs. Notwithstanding this difficulty, the 
Commission believes that, for many reporting parties that 
infrequently trade swaps, the annualized cost of entering into a 
third-party service arrangement of this type would likely be less 
than the total annual cost of building an electronic infrastructure 
to transmit electronic notices directly to an SDR.
    \329\ This estimate is calculated as follows: Senior Programmer 
cost ($81.52 adjusted hourly wage x 250 hours) + Systems Analyst 
($54.89 adjusted hourly wage x 250 hours) + Compliance Manager 
($77.77 adjusted hourly wage x 250 hours) + Compliance Attorney 
(i.e., Assistant General Counsel) ($89.43 adjusted hourly wage x 250 
hours).
---------------------------------------------------------------------------

C. Request for Comments on Collection

    The Commission requests comments on the accuracy of these estimates 
provided in these proposed amendments to existing collections of 
information. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the burden of the 
proposed amendments to the collections of information that are 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed amendments to the collections of information; 
(iii) determine whether there are ways to enhance the quality, utility 
and clarity of the information to be collected; and (iv) minimize the 
burden of the proposed amendments to the collections of information on 
those who are to respond, including through the use of automated 
collection techniques or other forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs of OMB by fax at (202) 395-6566 or by email at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of the submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ``Addresses'' 
section of this Further Proposal for comment submission instructions to 
the Commission. A copy of the supporting statements for the collection 
of information discussed above may be obtained by visiting RegInfo.gov. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is most assured of being fully effective 
if received by OMB and the Commission within 30 days after publication 
of this Further Proposal. Nothing in this Further Proposal affects the 
deadline enumerated above for public comment to the Commission.

VI. Cost-Benefit Considerations

A. Introduction

    Title VII of the Dodd-Frank Act added section 2(a)(13) to the CEA 
to direct the Commission to promulgate rules requiring the real-time 
public reporting of swap transaction and pricing data, while protecting 
market liquidity for block trades and large notional off-facility 
swaps. Transaction reporting is a fundamental component of the Dodd-
Frank Act's general objectives to reduce risk, increase transparency 
and promote market integrity within the financial system and the swaps 
market in particular.
    Four provisions in section 2(a)(13) are relevant to this Further 
Proposal. Section 2(a)(13)(E)(ii) requires the Commission to establish 
criteria for determining what constitutes a large notional off-facility 
swap or block trade for particular markets and contracts. Section 
2(a)(13)(E)(iii) requires the Commission to specify the appropriate 
time delay for reporting large notional off-facility swaps and block 
trades. Finally, sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) 
collectively require the Commission to protect the identities of 
counterparties to swaps and to maintain the anonymity of business 
transactions

[[Page 15503]]

and market positions of those counterparties.
    The Commission has implemented three of the four provisions in 
section 2(a)(13). The Adopting Release issued on January 9, 2012 sets 
forth, inter alia: (i) Definitions for the terms ``large notional off-
facility swap'' and ``block trade''; (ii) the appropriate time delay 
for reporting these swaps and trades; and (iii) a system to protect the 
anonymity of parties to a swap, including the establishment of interim 
cap sizes and the creation of an exception from the real-time public 
reporting requirement for certain swaps in the other commodity asset 
class.
    While part 43 defines the terms large notional off-facility swap 
and block trade and sets forth time delays for reporting such swaps and 
trades, part 43 as adopted does not ``specify the criteria for 
determining what constitutes a large notional [off-facility] swap 
transaction [or block trade] for particular markets and contracts.'' 
\330\ Since the Commission has not yet specified criteria, by default, 
all publicly reportable swap transactions are now subject to a time 
delay. The provisions of this Further Proposal would, if adopted, 
become effective against this baseline--that is, at a point in time 
when all publicly reportable swap transactions are subject to a time 
delay and are not publicly reported in real-time (i.e., as soon as 
technologically practicable).
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    \330\ See CEA section 2(a)(13)(E)(ii). 7 U.S.C. 2(a)(13)(E)(ii).
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    This Further Proposal seeks to amend part 43 by establishing 
criteria to group swaps into categories and methodologies to determine 
appropriate minimum block sizes for each swap category. In addition, 
this Further Proposal seeks to establish additional measures to protect 
the identities of swap counterparties and their business transactions. 
This Further Proposal does not affect provisions relating to the 
appropriate time delay for block trades and large notional off-facility 
swaps. Similarly, this Further Proposal does not amend or further 
propose provisions that would require swap market participants to 
develop a completely new infrastructure or hire new personnel in order 
to comply with the existing provisions of part 43.\331\
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    \331\ For a discussion of the costs and benefits of the time 
delay and development of an infrastructure for block trades and 
large notional off-facility swaps, see the Adopting Release, 77 FR 
1,232.
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    In the sections that follow, the Commission identifies and 
considers certain costs and benefits associated with the Further 
Proposal to amend part 43 as required by section 15(a) of the CEA. The 
Commission requests comment on all aspects of its proposed 
consideration of costs and benefits, including identification and 
assessment of any costs and benefits not discussed in this analysis. In 
addition, the Commission requests that commenters provide data and any 
other information or statistics that the commenters relied on to reach 
any conclusions on the Commission's proposed consideration of costs and 
benefits.

B. The Requirements of Section 15(a)

    Section 15(a) of the CEA \332\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. To the extent that these new regulations reflect 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 new 
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 own 
determinations pursuant to and in accordance with the Dodd-Frank Act 
that the Commission considers with respect to the section 15(a) 
factors.
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    \332\ 7 U.S.C. 19(a).
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C. Structure of the Commission's Analysis; Cost Estimation Methodology

    Of the two parts to this Further Proposal, ``Part One'' establishes 
block trade rules, and ``Part Two'' addresses anonymity protections. 
Part One further proposes regulations specifying criteria for 
categorizing swaps and determining the appropriate minimum block size 
for each swap category. In particular, in Part One the Commission is 
proposing: (i) The criteria for determining swap categories and the 
methodologies that it would use to determine the initial and post-
initial appropriate minimum block sizes for large notional off-facility 
swaps and block trades; and (ii) a method by which parties to a swap, 
SEFs, and DCMs would elect to treat the parties' qualifying swap 
transactions as block trades or large notional off-facility swaps, as 
applicable. The Commission has considered the costs and benefits 
associated with Part One separately for each of the two above-specified 
groups of provisions since different parties would bear primary 
compliance obligations for each group. That is, the provisions 
establishing criteria for determining swap categories and appropriate 
minimum block size methodologies primarily impose obligations on the 
Commission, and the provisions establishing election methodology 
primarily impose obligations on parties to a swap and registered 
entities.
    Part Two provides: (i) A methodology for determining post-initial-
period cap sizes; and (ii) a system for the public dissemination of 
swap transaction and pricing data for certain other commodity swaps 
with specific underlying assets and geographic detail in a manner that 
does not disclose the business transactions and market positions of 
swap market participants. Since Part Two's provisions would impose the 
same or similar costs (e.g., technology re-programming costs) and 
confer the same or similar benefits on swap market participants (e.g., 
anonymity protections with respect to the identities of the parties to 
a swap and their market transactions), the Commission analyzed the 
costs and benefits of these provisions in one group section.
    Wherever reasonably feasible, the Commission has endeavored to 
quantify the costs and benefits of this Further Proposal. In a number 
of instances, however, the Commission lacks or is otherwise unaware of 
information needed as a basis for quantification. In these instances, 
the Commission has requested data from the public to aid the Commission 
in considering the quantitative effects of its rulemaking. Where it has 
not been feasible to quantify (e.g., because of the lack of accurate 
data), the Commission has considered the costs and benefits of this 
Further Proposal in qualitative terms.
    The conditions now existent under part 43--i.e., all publicly 
reportable swap transactions qualify for a time-delay--provide the 
baseline for the Commission's consideration of incremental costs and 
benefits that would arise from this Further Proposal.\333\ These 
baseline costs and benefits are discussed in the Adopting Release. As a 
reference point for estimating the incremental costs and benefits 
against this baseline, the Commission has used a non-financial

[[Page 15504]]

end-user that already has developed the technical capability and 
infrastructure necessary to comply with the requirements set forth in 
part 43.\334\ Relative to this reference point, however, the Commission 
anticipates that in many cases the actual costs to established market 
participants (including swap counterparties, SDRs and other registered 
entities) would be lower--perhaps significantly so, depending on the 
type, flexibility, and scalability of systems already in place. 
Moreover, the Commission anticipates that with respect to SDRs 
specifically, they may recover their incremental costs by passing them 
on as fees assessed on reporting parties--SEFs and DCMs--for use of the 
SDRs' public dissemination services.\335\ In addition, the Commission 
recognizes that its choice of an alternative method for determining 
appropriate minimum block sizes and cap sizes may alter the cost and 
benefit estimates described below.
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    \333\ See 77 FR 1,232.
    \334\ A non-financial end-user is a new market entrant with no 
prior swaps market participation or infrastructure. This reference 
point is different from the reference point(s) used in the PRA 
analysis in section V above for the following two reasons: (1) The 
burdens in the PRA are narrower than the costs discussed in this 
section (i.e., the PRA analysis solely discusses costs relating to 
collections of information, whereas this cost-benefit analysis 
considers all costs relating to the proposed rules); and (2) as 
discussed above, the cost-benefit analysis determines costs relative 
to one market participant that presumably would bear the highest 
burdens in implementing the proposed rules, whereas the PRA analysis 
seeks to estimate the costs of the proposed rules on all market 
participants.
    \335\ See Sec.  43.3(i) of the Commission's regulations, which 
authorizes an SDR to charge fees to persons reporting swap 
transaction and pricing data for real-time public dissemination, so 
long as such fees are equitable and non-discriminatory. The 
Commission currently does not have sufficient data on which to 
estimate the fees that an SDR would charge to person reporting swap 
transaction and pricing data. 77 FR 1,246.
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D. Background; Objectives of This Further Proposal

    In the Adopting Release, the Commission stated that it planned to 
``issue a separate notice of proposed rulemaking that would 
specifically address the appropriate criteria for determining 
appropriate minimum block trade sizes in light of the data and comments 
received.'' \336\ Accordingly, in this Further Proposal, the Commission 
is specifically proposing to: (1) Establish criteria by creating the 
concept of a ``swap category'' (i.e., groupings of swaps within the 
same asset class based on underlying characteristics) \337\; (2) 
prescribe initial appropriate minimum block sizes based on the 
Commission's review and analysis of swap market data across certain 
asset classes \338\; (3) establish a methodology for calculating post-
initial appropriate minimum block sizes \339\; (4) establish an 
obligation for the Commission to calculate appropriate minimum block 
sizes; (5) provide the method through which parties to a swap may elect 
block trade or large notional off-facility swap treatment for their 
swap transaction \340\; (6) establish a system to ensure the anonymity 
of certain swaps in the other commodity asset class \341\; and (7) 
establish a methodology for the calculation of post-interim or post-
initial cap sizes.\342\
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    \336\ See 77 FR 1,185.
    \337\ See proposed Sec.  43.6(b), which defines swap category by 
asset class.
    \338\ See proposed Sec.  43.6(e) and proposed appendix F to part 
43.
    \339\ See proposed Sec. Sec.  43.6(c) and (f).
    \340\ See proposed Sec.  43.6(g).
    \341\ See proposed amendments to Sec.  43.4(d)(4).
    \342\ See proposed Sec. Sec.  43.4(h) and 43.6(c).
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    Items (1) through (5) referenced above are addressed in Part One of 
this Further Proposal since they relate to the proposed criteria, 
methodology and election for block sizes and large notional off-
facility swaps. Items (6) and (7) are discussed in Part Two since they 
relate to protecting the identity of parties to a swap in accordance 
with sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.

E. Costs and Benefits Relevant to the Block Trade Rules Section of the 
Further Proposal (Sec. Sec.  43.6(a)-(f) and (h))

    The Commission has organized its cost-benefit discussion of the 
provisions within Part One of this Further Proposal as follows: (1) The 
proposed criteria for establishing swap categories and a proposed 
methodology for determining appropriate minimum block sizes; and (2) 
the proposed method through which the parties to a swap may elect to 
treat their qualifying swap transaction as a block trade or large 
notional off-facility swap, as applicable. The Commission has performed 
a separate section 15(a) analysis with respect to each group of 
provisions.
1. Costs and Benefits Relevant to the Proposed Criteria and Methodology
    In proposed Sec. Sec.  43.6(a)-(f) and (h), the Commission 
specifies criteria for establishing swap categories and a proposed 
methodology that the Commission would use in determining appropriate 
minimum block sizes. In the subsections that follow, the Commission 
sets forth brief summaries of the relevant proposed provisions, 
followed by a discussion of associated costs and benefits.
a. Proposed Sec.  43.6(a) Commission Determination
    Pursuant to proposed Sec.  43.6(a), the Commission would determine 
the appropriate minimum block size for any swap listed on a SEF or DCM, 
and for large notional off-facility swaps. Following an initial period 
(as described below), the Commission would calculate and publish all 
appropriate minimum block sizes across all asset classes no less than 
once each calendar year.
b. Proposed Sec.  43.6(b) Swap Category
    The Commission is proposing a tailored approach to group swaps 
within each asset class. Section 43.6(b) proposes unique swap 
categories based on the underlying asset class, relevant economic 
indicators and the Commission's analysis of relevant swap market data.
c. Proposed Sec. Sec.  43.6(c)-(f) and (h) Methods for Determining 
Appropriate Minimum Block Sizes
    The Commission is proposing in Sec. Sec.  43.6(c)-(f) and (h) a 
phased-in approach, with an initial period and a post-initial period, 
to determine appropriate minimum block sizes for each swap category. 
During the initial period, the Commission is proposing a schedule of 
initial appropriate minimum block sizes in appendix F to part 43. The 
Commission is proposing to determine the appropriate minimum block 
sizes for the interest rate and credit asset classes differently from 
the sizes for the equity, FX and other commodity asset classes. With 
respect to the interest rate and credit asset class, the Commission 
established the initial appropriate minimum block sizes based on data 
it had received from the Over-the-Counter Derivatives Supervisors 
Group.\343\ In calculating these sizes, the Commission has applied the 
67-percent notional amount calculation, which is set forth in proposed 
Sec.  43.6(c)(1).
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    \343\ A discussion of the ODSG is set forth in section II.C.1 of 
this Further Proposal.
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    In proposed Sec.  43.6(d), the Commission would disallow swaps in 
the equity asset class from being eligible for treatment as block 
trades or large notional off-facility swaps (i.e., equity swaps would 
not be subject to a time delay as provided in part 43). As noted above, 
the Commission is of the view that applying this treatment to the 
equity asset class is inappropriate given, inter alia, the depth of 
liquidity in the underlying equity cash market.
    With respect to the FX and other commodity asset classes, the 
appropriate minimum block sizes for

[[Page 15505]]

swaps during the initial period would be divided primarily between 
swaps that are futures-related swaps and those that are not futures 
related.\344\ Proposed appendix F to part 43 lists the proposed initial 
appropriate minimum block sizes for swap categories in the FX and other 
commodity asset classes. For those swaps in the FX and other commodity 
asset classes that are not listed in proposed appendix F to part 43, 
the Commission generally provides in proposed Sec.  43.6(e)(2) that 
these swaps would qualify as block trades or large notional off-
facility swaps.
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    \344\ As noted above, the Commission is of the view that the 
difference in methodology for determining initial appropriate 
minimum block sizes for swaps in the FX and other commodity asset 
classes is warranted because: (1) Swaps in these asset classes are 
closely linked to futures markets; (2) tying block sizes to their 
economically related futures contracts reduces opportunities for 
regulatory arbitrage; and (3) DCMs have experience in setting block 
sizes in such a way that maintains market liquidity.
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    After an SDR has collected reliable data for a particular asset 
class, proposed Sec.  43.6(f)(1) provides that the Commission shall 
determine post-initial appropriate minimum block sizes for all swaps in 
the interest rate, credit, FX and other commodity asset classes based 
on the 67-percent notional amount calculation. The Commission is also 
proposing special rules for the determination of appropriate minimum 
block sizes that would apply to all asset classes.
    In the following paragraphs, the Commission estimates the costs of 
the proposed criteria and methodology and discusses their benefits, 
before considering these costs and benefits in light of the five public 
interest areas of section 15(a) of the CEA.
d. Proposed Sec. Sec.  43.6(a)-(f) and (h) Costs Relevant to the 
Proposed Criteria and Methodology
    The Adopting Release identifies the baseline of direct, 
quantifiable costs to reporting parties, SDRs, SEFs and DCMs from 
current part 43.\345\ The Commission foresees that proposed Sec. Sec.  
43.6(a)-(f) and (h) would impose incremental direct costs on swap 
market participants and registered entities (i.e., SEFs, DCMs, or SDRs) 
through the need to reprogram and update their technology to 
accommodate the Commission's publication of post-initial appropriate 
minimum block sizes at least once each calendar year following the 
initial period. The Commission does not anticipate that proposed 
Sec. Sec.  43.6(a)-(f) and (h) would impose any direct costs on the 
general public. As noted above, proposed Sec.  43.6(a) provides that 
the Commission shall set appropriate minimum block sizes for block 
trades and large notional off-facility swaps following the procedures 
set forth in proposed Sec. Sec.  43.6(b)-(f) and (h). The Commission 
would determine these sizes both in the initial and post-initial 
periods. The Commission anticipates that the requirements proposed in 
Sec.  43.6(a) likely would mitigate new costs since the proposed 
approach seeks to build on the existing connectivity, infrastructure 
and arrangements that market participants and registered entities have 
established in complying with the requirements in part 43 of the 
Commission's regulations.\346\ The Commission anticipates that market 
participants and registered entities may have to reprogram or update 
their technology to accommodate the Commission's publication of post-
initial appropriate minimum block sizes at least once each calendar 
year following the initial period. The Commission anticipates that 
compliance would be slightly different for market participants and 
registered entities.
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    \345\ In the Adopting Release, the Commission noted that ``the 
direct, quantifiable costs imposed on reporting parties, SEFs and 
DCMs will take the forms of (i) non-recurring expenditures in 
technology and personnel; and (ii) recurring expenses associated 
with systems maintenance, support, and compliance.'' See 77 FR 
1,231.
    \346\ In its report, ISDA states that end-users ``will face 
significant technology and operational challenges as well as 
increased regulatory reporting requirements. Dealers will have to 
upgrade infrastructure to deal with automated trading and comply 
with increased regulatory reporting and recordkeeping.'' See Costs 
and Benefits of Mandatory Electronic Execution Requirements for 
Interest Rate Products note 75 supra, at 24.
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    Market participants, and specifically non-financial end users, 
likely would need to provide training to their existing personnel and 
update their written policies and procedures in order to comply with 
proposed Sec.  43.6(a)-(f) and (h). The Commission estimates that 
providing training to existing personnel and updating written policies 
and procedures would impose an initial non-recurring burden of 
approximately 15 personnel hours at an approximate cost of $1,431.26 
for each non-financial end-user.\347\ This cost estimate includes the 
number of potential burden hours required to produce and design 
training materials, conduct training with existing personnel, and 
revise and circulate written policies and procedures in compliance with 
the proposed requirements.
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    \347\ This estimate is calculated as follows: (Compliance 
Manager at 10 hours) + (Director of Compliance at 3 hours) + 
(Compliance Attorney at 2 hours) = 15 hours per non-financial end-
user who is a reporting party. A compliance manager's adjusted 
hourly wage is $77.77. A director of compliance's hourly wage is 
$158.21. A compliance attorney's hourly wage is $89.43. See note 316 
supra.
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    Registered entities would likely need to update their existing 
technology in order to comply with proposed Sec.  43.6(a)-(f) and (h). 
The Commission estimates that registered entities updating existing 
technology would impose an initial non-recurring burden of 
approximately 40 personnel hours at an approximate cost of $2,728 for 
each registered entity.\348\ This cost estimate includes the number of 
potential burden hours required to amend internal procedures, reprogram 
systems and implement processes to account for each swap category and 
to update appropriate minimum block sizes at least once each calendar 
year.
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    \348\ The estimate is calculated as follows: (Senior Programmer 
at 20 hours) + (Systems Analyst at 20 hours). A senior programmer's 
adjusted hourly wage is $81.52. A systems analyst's adjusted hourly 
wage is $54.89. See note 316 supra.
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    The Commission anticipates that the publication of swap transaction 
and pricing data may enhance market liquidity. The Commission also 
anticipates, however, that the immediate reporting of block trades and 
large notional off-facility swaps may have the potential to increase 
the costs associated with the trading of those swaps. If these costs 
increase, then market liquidity may decrease. In these circumstances, 
swap market participants may experience difficulty managing the risks 
attendant to their trading activity.
    The Commission anticipates that some market participants may face 
increased, indirect costs if block trades and large notional off-
facility swaps are reported without a time delay (i.e., as soon as 
technologically practicable). Some market makers could experience 
higher trading costs as a result of increased liquidity risks attendant 
to the need to offset large swap positions. Market makers ultimately 
would pass those costs onto their end-user clients. The Commission 
anticipates that the proposed criteria and methodology may mitigate the 
potential increase in costs by addressing both liquidity concerns and 
enhanced price discovery. The Commission also anticipates that its 
proposed approach of establishing specific criteria for grouping swaps 
into a finite set of defined swap categories might provide a clear 
organizational framework that avoids administrative burdens for market 
participants that otherwise could arise from more numerous and/or non-
uniform swap categories.
    The Commission anticipates that the potential costs of disruptions 
to market liquidity and trading activity are

[[Page 15506]]

minimized through the proposed regime. That is, the Commission 
anticipates that the phase-in approach should provide swap market 
participants with an adequate amount of time to incrementally adjust 
their trading practices, technology infrastructure and business 
arrangements to comply with the new block trade regime. This approach 
also may ensure efficient compliance with the proposal while minimizing 
the impact of implementation costs to swap market participants, 
registered entities and the general public.
    The Commission anticipates that market participants, registered 
entities and the general public may bear some indirect costs due to the 
increased degree of transparency that would result from the criteria 
and methodology in proposed Sec. Sec.  43.6(a)-(f) and (h). However, 
the Commission proposed that the appropriate minimum block trade sizes 
specified in this Further Proposal are sufficiently moderate to 
mitigate these indirect costs. The Commission also anticipates that the 
benefits of transparency would be significant relative to the costs 
occasioned by the tailored institution of appropriate minimum block 
size levels proposed in the initial period.
e. Benefits Relevant to Proposed Sec. Sec.  43.6(a)-(f) and (h)
    The Commission anticipates that proposed Sec. Sec.  43.6(a)-(f) and 
(h) would generate several overarching, although presently 
unquantifiable, benefits to swap market participants, registered 
entities and the general public. Most notably, the Commission expects 
that the proposed criteria and methodologies for setting appropriate 
minimum block sizes would provide greater price transparency for a 
substantial portion of swap transactions in a manner modulated to 
mitigate any negative impact to swaps market liquidity. More 
specifically, the proposed regulations would provide price transparency 
by lifting the current part 43 real-time reporting time delay \349\ for 
swap transactions with notional values under specified threshold 
levels. At the same time, the Commission's proposed criteria and 
methodology--including carefully crafted block trades and large-
notional off-facility swap categories--are designed to retain time-
delay status for those high-notional-value transactions exceeding 
thresholds intended to avoid a negative market liquidity impact. The 
phased-in implementation proposed by the Commission is intended to 
introduce greater transparency in an incremental, measured and flexible 
manner so that appropriate minimum block sizes are responsive to 
changing markets.\350\ The Commission also intends the proposed 
approach to enhance price transparency in a manner that respects market 
participants' and registered entities' efficiency needs. Under proposed 
Sec.  43.6(a), the Commission would be required to set all appropriate 
minimum block sizes. The Commission anticipates that its proposed 
approach would impose significantly fewer direct burdens on market 
participants and registered entities than an alternative that would 
require them to engage in a more quantitative analysis to ascertain 
appropriate minimum block sizes for themselves. Such an alternative 
approach could lead to market fragmentation, adversely affect market 
liquidity, or reduce price transparency.
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    \349\ See 77 FR 1,240.
    \350\ Proposed Sec.  43.6(f)(2) permits the Commission to set 
appropriate minimum block sizes no less than once annually during 
the post-initial period. If swap market conditions were to change 
significantly after the implementation of the provisions of this 
Further Proposal, the Commission could react to further improve 
price transparency or to mitigate adverse effects on market 
liquidity.
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f. Application of the Section 15(a) Factors to Proposed Sec. Sec.  
43.6(a)-(f) and (h)
    As noted above, section 15(a) directs the Commission to consider 
the following five areas in evaluating the costs and benefits of a 
particular Commission action.
i. Protection of Market Participants and the Public
    The Commission anticipates that the criteria and methodology in 
proposed Sec. Sec.  43.6(a)-(f) and (h) would protect swap market 
participants by extending the delay for reporting for publicly 
reportable swap transactions, as appropriate, while also accommodating 
the market participant and public interest with enhanced transparency. 
By setting appropriate minimum block sizes in a thoughtful and measured 
manner as contemplated in the Further Proposal, the Commission strives 
to attain at least a near-optimal balance between transparency and 
liquidity interests. As a result, swap market participants would retain 
a means to offset risk exposures related to their swap transactions 
(including outsize swap transactions) at competitive prices. While the 
Commission notes that all publicly reportable swap transactions would 
remain subject to a time delay, the Commission foresees a resulting 
swap-market transparency counterbalance that could benefit swap market 
participants by promoting greater competition for their businesses. 
Specifically, the Commission expects that the availability of real-time 
pricing information for carefully enumerated categories of swap 
transactions could draw increased swap market liquidity through the 
competitive appeal of improved pricing efficiency that greater 
transparency affords. More liquid, competitive swap markets, in turn, 
allow businesses to offset costs more efficiently than in completely 
opaque markets, thus serving well the interests of both market 
participants and the public who should benefit through lower costs of 
goods and services.\351\
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    \351\ There may be a de minimis cost in the form of increased 
offsetting costs, but the Commission foresees that its proposed 
criteria and methodology would likely mitigate that cost. A 
discussion of this de minimis cost is set forth above.
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ii. Efficiency, Competitiveness and Financial Integrity of Markets 
\352\
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    \352\ The Commission is presently unable to identify any 
potential impact to the financial integrity of futures markets from 
the proposed criteria and methodology in its consideration of 
section 15(a)(2)(B) of the CEA. Although by its terms, section 
15(a)(2)(B) applies to futures (not swaps), the Commission finds 
this factor useful in analyzing the costs and benefits of swaps 
regulation, as well.
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    The Commission anticipates that the proposed criteria and 
methodology would promote market efficiency, competitiveness and 
financial integrity of markets in a number of respects, including the 
following:
     They impose minimal administrative burdens on swap market 
participants as a result of Commission-specified swap categories and 
the Commission's responsibility to determine of appropriate minimum 
block sizes (as opposed to requiring registered entities to establish 
such categories and determine such sizes).
     With respect to futures-related swaps in the FX and other 
commodity asset classes, by synchronizing the appropriate minimum block 
sizes for swaps with DCM block trade sizes for futures during the 
initial period, they can be expected to reduce opportunities for 
regulatory arbitrage between the underlying cash or futures markets and 
the swap markets.
     They retain needed flexibility in light of the changes 
that the Commission anticipates will occur in swap markets following 
the implementation of part 43 and other implementing regulations. More 
specifically, the proposed methodology in Sec. Sec.  43.6(c)-(f) and 
(h) would recalibrate appropriate minimum block sizes regularly to 
ensure that those sizes remain appropriate for, and responsive to, 
these changing markets.

[[Page 15507]]

     As discussed above with respect to the protection of 
market participants and the public, they would introduce increased 
market transparency for swaps in a careful, measured manner that seeks 
to optimize the balance between liquidity and transparency 
concerns.\353\ The Commission anticipates that this enhanced 
transparency would be introduced in a manner capable of fostering 
greater competition among swap market participants drawn to the 
improved pricing efficiency that transparency fosters.
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    \353\ As noted above, under part 43 of the Commission's 
regulations (as now promulgated in the Adopting Release), all 
publicly reportable swap transactions are subject to a time delay 
pending further amending regulation to establish the criteria and 
methodology to distinguish block trades and large notional off-
facility swaps from those swaps that do not meet those definitions. 
See 77 FR 1,217. As a result, SDRs as of now are not required to 
publicly disseminate publicly reportable swap transactions as soon 
as technologically practicable.
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iii. Price Discovery
    The Commission anticipates that the proposed criteria and 
methodology will enhance swap market price discovery by eliminating, to 
the extent appropriate, the time delays for the real-time public 
reporting of those swaps as now provided in the Adopting Release. The 
proposed criteria and methodology of this Further Proposal would ensure 
that an SDR could be able to publicly disseminate data for certain 
swaps as soon as technologically practicable. As more trades are 
published in real-time, reported prices are likely to be better 
indicators of competitive pricing.
iv. Sound Risk Management Practices
    As discussed above, the Commission anticipates that the proposed 
criteria and methodology, if adopted, would likely result in enhanced 
price discovery since SDRs would be able to publicly disseminate some 
swaps as soon as technologically practicable. With better and more 
accurate data, valuation, and risk assessment information, swap market 
participants would likely be better able to measure risk. An ability to 
better manage risk at an entity level is likely to translate to 
improved market participant risk management generally. Improved risk 
measurement and management potential, in turn, may reduce the risk of 
another financial crisis since, presumably, it should better equip 
market participants to value their swap contracts and other assets 
during times of market instability. In addition, the proposed criteria 
and methodology may avoid higher costs that could cause some market 
participants to abandon swaps transactions in favor of more imperfect 
financial risk management tools.
    The Commission also anticipates that as the market price reflects 
more accurate economic information, volatility is likely to be reduced, 
therefore smoothing market risk for participants.
v. Other Public Interest Considerations
    The Commission does not anticipate that the proposed criteria and 
methodology discussed above would have a material effect on public 
interest considerations other than those identified above.
g. Specific Questions Regarding the Proposed Criteria and Methodology
    The Commission requests comments on its cost and benefit 
considerations with respect to the proposed criteria and methodology. 
While comments are welcome on all aspects of the proposal, the 
Commission notes the following specifically:
    Q93. Please provide comments regarding views on the accuracy and/or 
inaccuracy of: (1) The facts cited in support of the Commission's 
analysis of the identified considerations relating to the proposed 
criteria and methodology in proposed Sec. Sec.  43.6(a)-(f) and (h); 
and (2) the Commission's general analysis.
    Q93.a. Please provide estimates or data regarding the direct, 
quantifiable costs associated with the criteria and methodology in 
proposed Sec. Sec.  43.6(a)-(f) and (h).
    Q93.b. Please provide estimates or data regarding the indirect, 
quantifiable costs associated with the criteria and methodology in 
proposed Sec. Sec.  43.6(a)-(f) and (h).
    Q93.c. Please comment and provide data on whether the proposed 
criteria and methodology would decrease or increase liquidity in swaps 
markets.
    Q93.d. How can these costs be avoided by the use of alternative 
trading strategies (e.g., splitting larger trades into smaller trades)? 
What are the costs related to those alternative trading strategies?
    Q93.e. Please provide estimates of the fees that SDRs and other 
registered entities would charge reporting parties and other market 
participants in order to pass along the incremental costs associated 
with proposed Sec. Sec.  43.6(a)-(f) and (h).
    Q93.f. Would market participants abandon swap transactions in favor 
of more imperfect financial risk management tools?
    Q93.g. Does the 67-percent notional amount calculation meet the 
optimization goal of balancing liquidity and transparency concerns?
    Q94. Other than those public interest considerations identified 
herein, are there any other public interest considerations that the 
Commission should examine in finalizing proposed Sec. Sec.  43.6(a)-(f) 
and (h)?
    Q94.a. One of the Commission's rationales for its proposed criteria 
and methodology is the objective of deterring regulatory arbitrage as 
between swaps and futures markets. Should the Commission also be 
concerned regarding the costs and benefits related to regulatory 
arbitrage as between swaps and forwards markets?
    Q95. In a discussion paper titled ``Costs and Benefits of Mandatory 
Electronic Execution Requirements for Interest Rate Products,'' ISDA 
examined the likely costs and benefits of mandating the execution of 
interest rate swaps on DCMs and SEFs.\354\ ISDA's paper provided an 
analysis of, inter alia, liquidity and transaction costs in the 
interest futures and options markets, in addition to a review of 
liquidity and transaction costs in the OTC derivatives market. ISDA 
surveyed financial and non-financial end users to estimate the 
incremental costs resulting from the introduction of the electronic 
execution requirement in the Commission's proposal for SEFs.\355\ The 
paper identifies some potential costs that are relevant to this Further 
Proposal, such as technology costs and costs associated with 
development of algorithms for block trades. This paper also identifies 
potential costs that are either beyond the scope of this Further 
Proposal (e.g., costs necessary to establish a SEF) or are irrelevant 
to an analysis under section 15(a) of the CEA (e.g., costs to 
regulators). The Commission requests comments on the analysis and 
conclusions reached in ISDA's paper.
---------------------------------------------------------------------------

    \354\ See Costs and Benefits of Mandatory Electronic Execution 
Requirements for Interest Rate Products note 75316 supra.
    \355\ See Core Principles and Other Requirements for Swap 
Execution Facilities, 76 FR 1,214, Jan. 7, 2011.
---------------------------------------------------------------------------

    Q96. Will end users that desire to transact large trades under the 
appropriate minimum block size find it necessary to develop some form 
of algorithmic trading procedure? If so, what are the direct and 
indirect costs and benefits related to the development?
    Q97. The Commission seeks comment with respect to whether there is 
a feasible alternative approach to the one now contemplated in proposed 
Sec.  43.6(a) (i.e., the Commission would assume all responsibilities 
for determining and publishing appropriate minimum block sizes) that 
would impose less regulatory

[[Page 15508]]

burden on swap market participants and the general public.
    Q98. The Commission anticipates that increased bid/ask spreads 
could make it difficult for end users to obtain more competitive 
pricing for outsize swap transactions. Under this Further Proposal, 
would the price of executing outsize swap transactions be generally 
higher? Would bid/ask spreads widen in yield as a result of this 
Further Proposal?
    Q98.a. Whether, and to what extent, do market participants 
anticipate that their knowledge of bid/ask spreads or of liquidity in a 
swap market generally will improve as a result of this Further 
Proposal?
    Q98.b. Whether, and to what extent, do market participants 
anticipate that their knowledge of the competitive price for swaps will 
improve as a result of this Further Proposal?
    Q98.c. Would increased knowledge of the competitive price in a 
market encourage market participants that may not be current liquidity 
providers to provide liquidity to the market?
    Q99. On average, what are current transaction costs for standard 
size swaps in comparison to transaction costs in the futures markets? 
Would transaction costs for swap markets increase as a result of this 
Further Proposal? If so, by how much? Would the difference between 
swaps and futures transaction costs induce more market participants to 
trade futures instead of transacting swaps?
    Q100. What effects, if any, would this Further Proposal have on 
access to swaps markets? Would the Further Proposal positively or 
negatively impact access opportunities for small end users?
2. Cost-Benefit Considerations Relevant to the Proposed Block Trade/
Large Notional Off-Facility Swap Election Process (Proposed Sec.  
43.6(g))
    Proposed Sec.  43.6(g) contains the provisions regarding the 
election to have a swap transaction treated as a block trade or large 
notional off-facility swap, as applicable. Proposed Sec.  43.6(g)(1) 
establishes a two-step notification process relating to block trades. 
Proposed Sec.  43.6(g)(2) establishes the notification process relating 
to large notional off-facility swaps.
    Proposed Sec.  43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this 
section provides that the parties to a swap executed at or above the 
appropriate minimum block size for the applicable swap category are 
required to notify the SEF or DCM, as applicable, of their election to 
have their qualifying swap transaction treated as a block trade. The 
Commission anticipates that SEFs and DCMs will use automated, 
electronic--and in some cases voice--processes to execute swap 
transactions; and that the transmission of the notification of a block 
trade election also will be either automated, electronic or 
communicated through voice processes. A discussion of the costs and 
benefits relevant to proposed Sec.  43.6(g) is set forth in the 
subsections that follow.
a. Costs Relevant to the Proposed Election Process (Proposed Sec.  
43.6(g))
    Non-financial end-users who are reporting parties, as well as SEFs, 
DCMs, and SDRs would likely bear the costs of complying with the 
election process in proposed Sec.  43.6(g). The Commission anticipates, 
however, that these entities already will have made non-recurring 
expenditures in technology and personnel in connection with the 
requirements set forth in part 43. In addition, these entities already 
will be required to incur recurring expenses associated with systems 
maintenance, support and compliance as described in the cost-benefit 
discussion in the Adopting Release.\356\ As such, the Commission 
assumes that these non-financial end-users, SEFs, DCMs, and SDRs would 
likely be able to leverage their existing technology, systems and 
personnel in complying with the election process in proposed Sec.  
43.6(g). Based on this assumption, the Commission anticipates that non-
financial end-users, SEFs, DCMs and SDRs would likely have the 
following direct, quantifiable costs: (i) An incremental, non-recurring 
expenditure to update existing technology; (ii) an incremental non-
recurring expenditure for training existing personnel and updating 
written policies and procedures for compliance with amendments to part 
43; and (iii) incremental recurring expenses associated with 
compliance, maintenance and operational support in connection with the 
proposed election process. SDRs also would have incremental, non-
recurring expenditures to update existing technology.\357\ In the 
paragraphs that follow, the Commission discusses each of these costs.
---------------------------------------------------------------------------

    \356\ See 77 FR 1,237. As noted in the Adopting Release, non-
financial end-users (that do not contract with a third party) will 
have initial costs consisting of: (i) Developing an internal order 
management system capable of capturing all relevant data ($26,689 
per non-financial end-user) and a recurring annual burden of 
($27,943 per non-financial end-user); (ii) establishing connectivity 
with an SDR that accepts data ($12,824 per non-financial end-user); 
(iii) developing written policies and procedures to ensure 
compliance with part 43 ($14,793 per non-financial end-user); and 
(iv) compliance with error correction procedures ($2,063 per non-
financial end-user). See id. With respect to recurring costs, a non-
financial end-user will have: (i) Recurring costs for compliance, 
maintenance and operational support ($13,747 per non-financial end-
user); (ii) recurring costs to maintain connectivity to an SDR 
($100,000 per non-financial end-user); and (iii) recurring costs to 
maintain systems for purposes of reporting errors or omissions 
($1,366 per non-financial end user). See id.
    SDRs (that do not enter into contracts with a third party) would 
have incremental costs related to compliance with part 43 beyond 
those costs identified in the release adopting part 49 of the 
Commission's regulations. See Swap Data Repositories: Registration 
Standards, Duties and Core Principles, 76 FR 54,538 (Sept. 1, 2011). 
In the Adopting Release, the Commission stated that each SDR would 
have: (i) A recurring burden of approximately $856,666 and an annual 
burden of $666,666 for system maintenance per SDR; (ii) non-
recurring costs to publicly disseminate ($601,003 per SDR); and 
(iii) recurring costs to publicly disseminate ($360,602 per SDR). 
See id.
    In the Adopting Release, the Commission assumed that SEFs and 
DCMs will experience the same or lower costs as a non-financial end-
user. See id.
    \357\ SDRs that do not enter into contracts with a third party 
would have incremental costs related to compliance with part 43 of 
the Commission's regulations beyond those costs identified in the 
release adopting part 49 of the Commission's regulations. See Swap 
Data Repositories: Registration Standards, Duties and Core 
Principles, 76 FR 54,538, Sept. 1, 2011. In the Adopting Release, 
the Commission stated that each SDR would have: (1) A recurring 
burden of approximately $856,666 and an annual burden of $666,666 
for system maintenance per SDR; (2) non-recurring costs to publicly 
disseminate ($601,003 per SDR); and (3) recurring costs to publicly 
disseminate ($360,602 per SDR). See id.
---------------------------------------------------------------------------

i. Incremental, Non-Recurring Expenditure to a Non-Financial End-User, 
SEF or DCM to Update Existing Technology\358\
---------------------------------------------------------------------------

    \358\ For the same reasons stated in the Adopting Release, the 
Commission assumes that SEFs and DCMs would experience the same or 
less costs as a non-financial end-user. See 77 FR 1,236. Under 
proposed Sec.  43.6(g)(1), SEFs or DCMs would be required to 
transmit a block trade election to an SDR only when the SEF or DCM 
receives notice of a block trade election from a reporting party.
---------------------------------------------------------------------------

    To comply with the election process in proposed Sec.  43.6(g), a 
non-financial end-user, SEF, or DCM likely would need to: (1) Update 
its OMS system to capture the election to treat a qualifying publicly 
reportable swap transaction as a block trade or large notional off-
facility swap. The Commission estimates that updating an OMS system to 
permit notification to an SDR of a block trade or large notional off-
facility swap election would impose an initial non-recurring burden of 
approximately 80 personnel hours at an approximate cost of $6,761.20 
for each non-financial end-user, SEF or DCM.\359\ This cost

[[Page 15509]]

estimate includes an estimate of the number of potential burden hours 
required to amend internal procedures, reprogram systems and implement 
processes to permit a non-financial end-user to elect to treat their 
qualifying swap transaction as a block trade or large notional off-
facility swap in compliance with the requirements set forth in proposed 
Sec.  43.6(g).
---------------------------------------------------------------------------

    \359\ This estimate is calculated as follows: (Compliance 
Manager at 15 hours) + (Director of Compliance at 10 hours) + 
(Compliance Attorney at 5 hours) + (Senior Systems Analyst at 30) + 
(Senior Programmer at 20) = 80 hours per non-financial end-user who 
is a reporting party. See note 316 supra.
---------------------------------------------------------------------------

ii. Incremental, Non-Recurring Expenditure to a Non-Financial End-User, 
SEF or DCM To Provide Training to Existing Personnel and Update Written 
Policies and Procedures
    To comply with the election process in proposed Sec.  43.6(g), a 
non-financial end-user likely would need to provide training to its 
existing personnel and update its written policies and procedures to 
account for this new process. The Commission estimates that providing 
training to existing personnel and updating written policies and 
procedures would impose an initial non-recurring burden of 
approximately 39 personnel hours at an approximate cost of $3,195.00 
for each non-financial end-user.\360\ This cost estimate includes the 
number of potential burden hours required to produce design training 
materials, conduct training with existing personnel, and revise and 
circulate written policies and procedures in compliance with the 
requirements set forth in proposed Sec.  43.6(g).
---------------------------------------------------------------------------

    \360\ This estimate is calculated as follows: (Compliance 
Manager at 5 hours) + (Director of Compliance at 2 hours) + 
(Compliance Attorney at 2 hours) + (Senior Systems Analyst at 10) + 
(Senior Programmer at 20) = 39 hours per non-financial end-user who 
is a reporting party. A compliance manager has adjusted hourly wages 
of $77.77. See note 316 supra.
---------------------------------------------------------------------------

iii. Incremental, Recurring Expenses to a Non-Financial End-User, DCM 
or SEF Associated With Incremental Compliance, Maintenance and 
Operational Support in Connection With the Proposed Election Process
    A non-financial end-user, DCM or SEF likely would incur costs on an 
annual basis in order to comply with the election process in proposed 
Sec.  43.6(g). The Commission estimates that annual compliance, 
maintenance and operation support would impose an incremental, 
recurring burden of approximately five personnel hours at an 
approximate cost of $341.60 for each non-financial end-user, DCM or 
SEF.\361\ This cost estimate includes the number of potential burden 
hours required to design training materials, conduct training with 
existing personnel, and revise and circulate written policies and 
procedures in compliance with the requirements set forth in proposed 
Sec.  43.6(g).
---------------------------------------------------------------------------

    \361\ This estimate is calculated as follows: (Director of 
Compliance at 1 hour) + (Compliance Clerk at 3 hours) + (Compliance 
Attorney at 1 hour) = 5 hours per year per non-financial end-user 
who is a reporting party. A director of compliance has adjusted 
hourly wages of $158.21. A compliance clerk (junior compliance 
advisor) has adjusted hourly wages of $31.22. A compliance attorney 
has adjusted hourly wages of 89.43. See note 316 supra.
---------------------------------------------------------------------------

iv. Incremental, Non-Recurring Expenditure to an SDR To Update Existing 
Technology To Capture and Publicly Disseminate Swap Data for Block 
Trades and Large Notional Off-Facility Swaps
    To comply with the election process in proposed Sec.  43.6(g), an 
SDR likely would need to update its existing technology to capture 
elections and disseminate qualifying publicly reportable swap 
transactions as block trades or large notional off-facility swaps. The 
Commission estimates that updating existing technology to capture 
elections would impose an initial non-recurring burden of approximately 
15 personnel hours at an approximate cost of $1,317.58 for each 
SDR.\362\ This cost estimate includes the number of potential burden 
hours required to amend internal procedures, reprogram systems, and 
implement processes to capture and publicly disseminate swap 
transaction and pricing data for block trades and large notional off-
facility swaps in compliance with the requirements set forth in 
proposed Sec.  43.6(g).
---------------------------------------------------------------------------

    \362\ This estimate is calculated as follows: (Sr. Programmer at 
8 hours) + (Sr. Systems Analyst at 3 hours) + (Compliance Manager at 
2 hours) + (Director of Compliance at 2 hours) = 15 hours per SDR. A 
senior programmer has adjusted hourly wages of $81.52. A senior 
systems analyst has adjusted hourly wages of $64.50. A compliance 
manager has adjusted hourly wages of $77.77. A director of 
compliance has adjusted hourly wages of $158.21. See note 316 supra.
---------------------------------------------------------------------------

b. Benefits Relevant to the Proposed Election Process (Proposed Sec.  
43.6(g))
    The Commission has identified two overarching, although presently 
unquantifiable, benefits that the proposed election process in Sec.  
43.6(g) would confer on swap market participants, registered entities 
and the general public. First, although proposed Sec.  43.6(g) sets out 
a purely administrative process with which market participants and 
registered entities must comply, the Commission submits that this 
proposed process is an integral component of the block trade framework 
in this Further Proposal and in part 43. Consequently, this proposed 
election process would benefit market participants, registered entities 
and the general public by providing greater price transparency in swaps 
markets than currently exists under part 43.\363\
---------------------------------------------------------------------------

    \363\ See the discussion of benefits in section VI.E.1.e above 
with respect to proposed Sec. Sec.  43.6(a)-(f) and (h).
---------------------------------------------------------------------------

    Second, the Commission foresees that the election process would 
promote market efficiency by creating a standardized process in 
proposed Sec.  43.6(g) for market participants to delineate which 
publicly reportable swap transactions qualify for block trade or large 
notional off-facility swap treatment. In addition, this standardized 
process would further promote efficiency by allowing market 
participants and registered entities to leverage their existing 
technology infrastructure, connectivity, personnel and other resources 
required under parts 43 and 49 of the Commission's regulations. The 
Commission has endeavored to craft the Further Proposal in such a 
manner that its elements work together and avoid duplicative or 
conflicting obligations on market participants and registered entities.
c. Application of the Section 15(a) Factors to Proposed Sec.  43.6(g)
    As noted above, section 15(a) directs the Commission to consider 
five particular factors in evaluating the costs and benefits of a 
particular Commission action. These factors are considered below with 
respect to proposed Sec.  43.6(g).
i. Protection of Market Participants and the Public
    Although proposed Sec.  43.6(g) sets out a purely administrative 
process with which market participants and registered entities must 
comply, the Commission foresees this proposed process as integral to 
the effective functioning of the block trade framework in this Further 
Proposal and in part 43. Consequently, this proposed election process 
contributes to providing greater swap market transparency than what 
currently exists under part 43 of the Commission's regulations. Market 
participants, registered entities and the general public benefit from 
this enhanced swap market price transparency.
ii. Efficiency, Competitiveness and Financial Integrity \364\
---------------------------------------------------------------------------

    \364\ Although by its terms, section 15(a)(2)(B) of the CEA 
applies to futures and not swaps, the Commission finds this factor 
useful in analyzing the costs and benefits of regulating swaps, as 
well. See 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

    As noted above, the proposed election process would promote 
efficiency by providing market participants and

[[Page 15510]]

registered entities with a standardized process to delineate which 
publicly reportable swap transactions are block trades or large 
notional off-facility swaps. In addition, the proposed election process 
would promote efficiency by allowing non-financial end-users, SEFs, 
DCMs and SDRs to leverage their existing technology infrastructure, 
connectivity, personnel and other resources required under part 43 and 
part 49 of the Commission's regulations. The use of existing 
technologies, connectivity, personnel and other resources would create 
efficiencies for these entities and significantly minimize costs in 
connection with implementation of, and compliance with, proposed Sec.  
43.6(g).
    The Commission has identified no potential impact on 
competitiveness and financial integrity that would result from the 
implementation of the proposed election process.
iii. Price Discovery
    The Commission has identified no potential material impact to price 
discovery that would result from the implementation of the proposed 
election process.
iv. Sound Risk Management Practices
    The Commission has identified no potential impact on sound risk 
management practices that would result from the implementation of the 
proposed election process.
v. Other Public Interest Considerations
    The Commission has identified no potential impact on other public 
interest considerations (other than those identified above) that would 
result from the implementation of the proposed election process.
d. Specific Questions Regarding the Proposed Election Process
    The Commission requests comments on its cost and benefit 
consideration with respect to the proposed election process. While 
comments are welcome on all aspects of the proposal, the Commission is 
particularly interested in the following:
    Q101. Please provide comments regarding the Commission's estimates 
of direct and indirect costs to non-financial end-users and SDRs.
    Q102. Please provide comments regarding views on the accuracy and/
or inaccuracy of: (1) The facts cited in support of the Commission's 
analysis of the identified considerations relating to the proposed 
election process; and (2) the Commission's analysis.
    Q103. Are there any other public interest considerations that the 
Commission should examine in finalizing proposed Sec.  43.6(g)?
    Q104. Are there other alternative processes that would further 
reduce burdens on market participants and registered entities?

F. Costs and Benefits Relevant to Proposed Anonymity Protections 
(Amendments to Sec. Sec.  43.4(d)(4) and (h))

    The Commission has organized its cost-benefit discussion of the two 
proposed amendments to Sec.  43.4 of the Commission's regulations into 
one section. Section 43.4 as now promulgated prescribes the manner in 
which SDRs must publicly disseminate swap transaction and pricing data. 
One amendment proposes to add a system for masking the geographical 
data for certain other commodity swaps, which are not currently subject 
to public dissemination. The other amendment proposes to establish a 
methodology to establish cap sizes for large swap transactions that is 
different than the methodology for determining appropriate minimum 
block sizes. Both amendments seek to protect the anonymity of the 
parties to swaps while providing increased transparency in swaps 
markets.
    A discussion of each amendment is set out immediately below, 
followed by a discussion of the costs and benefits of the amendments, 
as well as an analysis of the costs and benefits in light of the five 
factors identified in section 15(a) of the CEA.
1. Proposed Amendments to Sec.  43.4(d)(4)
    The Commission addresses the public dissemination of certain swaps 
in the other commodity asset class in Sec.  43.4(d)(4). Section 
43.4(d)(4)(ii) provides that for publicly reportable swaps in the other 
commodity asset class, information identifying the actual underlying 
assets must be publicly disseminated for: (a) Those swaps executed on 
or pursuant to the rules of a SEF or DCM; (b) those swaps referencing 
one of the contracts described in appendix B to part 43; and (c) any 
publicly reportable swap transaction that is economically related to 
one of the contracts described in appendix B to part 43. Pursuant to 
the Adopting Release, any swap that is in the other commodity asset 
class that falls under Sec.  43.4(d)(4)(ii) would be subject to 
reporting and public dissemination requirements.
    In this Further Proposal, the Commission is proposing a new 
provision, Sec.  43.4(d)(4)(iii), which would establish develop a 
system for the public dissemination of exact underlying assets in the 
other commodity asset class with a ``mask'' that is based on commodity 
detail and geographic detail. The Commission also is proposing a new 
appendix to part 43, which contains the geographical details that SDRs 
would use in masking certain other commodity swaps in connection with 
public dissemination of swap transaction and pricing data.
2. Proposed Amendments to Sec.  43.4(h)
    Section 43.4(h) of the Commission's regulations establishes cap 
sizes for rounded notional or principal amounts that are publicly 
disseminated for publicly reportable swap transactions. The purpose of 
establishing cap sizes is to provide anonymity to large swap 
transactions that, if the notional or principal amounts were revealed, 
would likely identify the parties to the swap or their business 
transactions. The Commission notes that the objective of cap sizes 
differs from the primary objective underlying the establishment of 
appropriate minimum block sizes. With respect to the latter, the 
objective is tied to ensuring that a block trade or large notional off-
facility swap can be sufficiently offset during a relative short 
reporting delay.
    Section 43.4(h) currently requires SDRs to publicly disseminate the 
notional or principal amounts of a publicly reportable swap transaction 
represented by a cap size (i.e., $XX+) that adjusts in accordance with 
their respective appropriate minimum block size for the relevant swap 
category. Section 43.4(h) further provides that if no appropriate 
minimum block size exists with respect to a swap category, then the cap 
size on the notional or principal amount will correspond with interim 
cap sizes that the Commission has established for the five asset 
classes.\365\
---------------------------------------------------------------------------

    \365\ See note 259 supra, which lists the interim cap sizes set 
forth in Sec. Sec.  43.4(h)(1)-(5).
---------------------------------------------------------------------------

    The proposed amendment to Sec.  43.4(h) would continue to require 
SDRs to publicly disseminate cap sizes that correspond with their 
respective appropriate minimum block sizes during an initial period. 
However, upon publishing post-initial appropriate minimum block sizes 
in accordance with proposed Sec.  43.6(f), the Commission also would 
publish post-initial cap sizes for each swap category by applying the 
75-percent notional amount calculation on data collected by SDRs. The 
Commission would apply the 75-percent notional amount calculation on a 
three-year rolling window (i.e., beginning with a minimum of one year 
and adding one year of data for each calculation until a total of three 
years of

[[Page 15511]]

data is accumulated) of such data corresponding to each relevant swap 
category for each calendar year.
3. Costs Relevant to the Proposed Amendments to Sec. Sec.  43.4(d)(4) 
and (h)
    SDRs potentially would bear the costs of complying with the 
proposed amendments to Sec. Sec.  43.4(d)(4) and (h).\366\ The 
Commission anticipates that these entities already will have made non-
recurring expenditures in technology and personnel in connection with 
the requirements set forth in part 43 and part 49 (which contain rules 
regarding the registration and regulation of SDRs). As such, SDRs 
already will be required to pay recurring expenses associated with 
systems maintenance, support and compliance as described in the cost-
benefit discussion in the Adopting Release.\367\ Notwithstanding these 
recurring expenses, an SDR would have additional non-recurring 
expenditures associated with the amendments to Sec.  43.4. 
Specifically, the Commission estimates that updating existing 
technology to capture elections would impose an initial non-recurring 
burden of approximately 34 personnel hours at an approximate cost of 
$3,195.00 for each SDR.\368\ This cost estimate includes an estimate of 
the number of potential burden hours required to amend internal 
procedures, reprogram systems and implement processes to capture and 
publicly disseminate swap transaction and pricing data for block trades 
and large notional off-facility swaps in compliance with the 
requirements set forth in proposed Sec.  43.6(g).
---------------------------------------------------------------------------

    \366\ The Commission anticipates that reporting parties, SEFs 
and DCMs would not incur any new costs related to the proposed 
amendments to Sec.  43.4 because this section relates to the data 
that an SDR must publicly disseminate. Section 43.3 of the 
Commission's regulations sets out the requirements for reporting 
parties, SEFs and DCMs in terms of what is transmitted to an SDR.
    \367\ See 76 FR 54,572-75. As noted in SDR final rule, SDRs 
(that do not enter into contracts with a third party) would have 
incremental costs related to compliance with part 43 beyond those 
costs identified in the release adopting part 49 of the Commission's 
regulations. See 76 FR 54,573. In the Adopting Release, the 
Commission stated that each SDR would have: (i) A recurring burden 
of approximately $856,666 and an annual burden of $666,666 for 
system maintenance per SDR; (ii) non-recurring costs to publicly 
disseminate ($601,003 per SDR); and (iii) recurring costs to 
publicly disseminate ($360,602 per SDR). See 77 FR 1,238.
    \368\ This estimate is calculated as follows: (Sr. Programmer at 
20 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager 
at 2 hours) + (Director of Compliance at 2 hours) = 34 hours per 
SDR. A senior programmer has adjusted hourly wages of $81.52. A 
senior systems analyst has adjusted hourly wages of $64.50. A 
compliance manager has adjusted hourly wages of $77.77. A director 
of compliance has adjusted hourly wages of $158.21. See note 316 
supra.
---------------------------------------------------------------------------

    In the Commission's view, these additional non-recurring and 
recurring costs are not likely to be significant to an SDR given the 
likelihood that it will leverage its existing technology, systems and 
personnel in complying with the proposed amendments to Sec.  43.4.
    In addition, the Commission anticipates that proposed Sec.  
43.4(d)(4)(iii) may result in some incremental, recurring costs for 
SDRs because they will be required to publicly disseminate other 
commodity swaps data that were not previously within the scope of the 
public dissemination requirement in Sec.  43.4. At this time, however, 
the Commission does not have sufficient data to quantify these costs.
    The Commission also anticipates that proposed Sec.  43.4(d)(4)(iii) 
may result in some indirect costs to the market through reduced 
information bearing on the contours of total trading in the market. The 
Commission currently lacks data to quantify the costs associated with 
the reduction of information.
4. Benefits Relevant to the Proposed Amendments to Sec.  43.4
    The Commission anticipates that the proposed anonymity provisions 
of Sec.  43.4 would generate several overarching, although presently 
unquantifiable, benefits to swap market participants, registered 
entities and the general public. In the first instance, the Commission 
anticipates that the proposed cap size amendments to Sec.  43.4(h) 
would benefit market participants, registered entities and the general 
public by providing greater price transparency with respect to swaps 
with notional amounts that fall between the post-initial appropriate 
minimum block size and post-initial cap size for a particular swap 
category. During the post-initial period, the Commission would set 
appropriate minimum block sizes based on the 67-percent notional amount 
calculation \369\ and cap sizes based on the 75-percent notional amount 
calculation.\370\ Although swaps with notional amounts that fall 
between these two sizes would be subject to a time delay, the exact 
notional amounts of these swaps eventually would be publicly disclosed. 
The Commission is of the preliminary view that the delayed public 
disclosure of the notional amount of these swaps would provide market 
participants, registered entities and the general public with 
meaningful price transparency.
---------------------------------------------------------------------------

    \369\ See proposed Sec.  43.6(c)(1).
    \370\ See proposed Sec.  43.6(c)(2).
---------------------------------------------------------------------------

    The proposed masking provisions in the amendment to Sec.  
43.4(d)(4) and proposed appendix D to part 43 would further benefit 
market participants, registered entities and the general public by 
enhancing price discovery with respect to swaps that currently are not 
required to be publicly disclosed under part 43. Section 43.4(d)(4) 
currently requires SDRs to publicly disseminate swap transaction and 
pricing data for publicly reportable swap transactions that reference 
or are economically related to the 29 contracts identified in appendix 
B to part 43. The Commission is of the preliminary view that there are 
a significant number of swaps in the other commodity asset class that 
are not economically related to the 29 contracts identified in appendix 
to part 43. The proposed amendment creating new Sec.  43.4(d)(4)(iii) 
would require the public dissemination of data on these swaps. The 
Commission proposes that the real-time public reporting of these swaps 
would enhance price discovery in the other commodity asset class.
    Moreover, the Commission's proposed amendments to the anonymity 
provisions are intended to reduce impacts on market liquidity. As noted 
above, CEA section 2(a)(13) requires the Commission to prescribe rules 
for the real-time public reporting of all swap transactions in order to 
enhance price transparency, while taking into account the effects of 
such transparency on market liquidity. The Commission's proposed 
approach would introduce greater transparency in a flexible manner so 
that post-initial cap sizes are responsive to changing markets. 
Proposed Sec.  43.4(h) would permit the Commission to set cap sizes no 
less than once annually during the post-initial period. If swap market 
conditions change significantly after the implementation of the 
provisions of this Further Proposal, then the Commission could react in 
a timely manner to further improve price transparency or to mitigate 
adverse effects on market liquidity.\371\
---------------------------------------------------------------------------

    \371\ This benefit is consistent with one of the considerations 
for implementation identified by ISDA and SIFMA in their January 18, 
2011 report. See Block trade reporting for over-the-counter 
derivatives markets, note 54 supra.
---------------------------------------------------------------------------

    Finally, the proposed approach would promote market efficiency for 
market participants and registered entities. Under proposed Sec.  
43.4(h), Commission would be required to set all cap sizes. The 
Commission anticipates that its proposed approach would impose 
significantly fewer direct burdens on market participants and 
registered entities that they otherwise would have

[[Page 15512]]

in the alternative (e.g., requiring market participants and/or 
registered entities to set cap sizes for the entire swaps market). An 
alternative approach could lead to market fragmentation, adverse 
effects on market liquidity, or reduced price transparency.
5. Application of the Section 15(a) Factors to the Proposed Amendments 
to Sec.  43.4
    As noted above, section 15(a) directs the Commission to consider 
five particular areas in evaluating the costs and benefits of a 
particular Commission action. These five areas with respect to proposed 
amendments to Sec.  43.4 are considered below.
a. Protection of Market Participants and the Public
    The Commission anticipates that the proposed amendments to Sec.  
43.4 would ensure the protection of swap counterparty anonymity on an 
ongoing basis. While cap sizes for some transactions could exceed 
appropriate minimum block sizes in certain circumstances (resulting in 
the public dissemination of notional/principal-amount information after 
a time delay), the Commission intends and expects that for the vast 
majority of (if not all) impacted swap transactions, the proposed cap-
size process and methodology is sufficient to distinguish correctly 
between those for which masking of notional or principal amount is 
required to maintain anonymity and those for which it is not.\372\
---------------------------------------------------------------------------

    \372\ The Commission recognizes that adoption of rules that 
delineate cap sizes insufficient to provide anonymity could cause 
prospective counterparties to forego swap transactions, thus 
adversely impacting market liquidity.
---------------------------------------------------------------------------

b. Efficiency, Competitiveness and Financial Integrity \373\
---------------------------------------------------------------------------

    \373\ Although by its terms, section 15(a)(2)(B) applies to 
futures and not swaps, the Commission finds this factor useful in 
analyzing the costs and benefits of swaps regulation, as well. 7 
U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

    The Commission anticipates that proposed amendments to Sec.  
43.4(h) would promote market efficiencies and competitiveness since the 
proposed approach would provide market participants with the ability to 
continue transacting swaps with the protection of anonymity, while 
promoting greater price transparency.
    The Commission has identified no potential impact on financial 
integrity that would result from the implementation of the proposed 
election process.
c. Price Discovery
    As noted above, the Commission anticipates that the proposed cap 
size amendments to Sec.  43.4(h) would benefit market participants, 
registered entities and the general public by providing greater price 
transparency with respect to swaps with notional amounts that fall in 
between the post-initial appropriate minimum block size and post-
initial cap size for a particular swap category. During the post-
initial period, the Commission would set appropriate minimum block 
sizes based on the 67-percent notional amount calculation \374\ and cap 
sizes based on the 75-percent notional amount calculation.\375\ 
Although swaps with notional amounts that fall in between these two 
sizes would be subject to a time delay, the exact notional amounts of 
these swaps eventually would be publicly disclosed.
---------------------------------------------------------------------------

    \374\ See proposed Sec.  43.6(c)(1).
    \375\ See proposed Sec.  43.6(c)(2).
---------------------------------------------------------------------------

    The proposed masking provisions in the amendment to Sec.  
43.4(d)(4) and proposed appendix D to part 43 could furt-er benefit 
market participants, registered entities and the general public by 
enhancing price discovery with respect to swaps that currently are not 
required to be publicly disclosed under part 43. The proposed amendment 
creating new Sec.  43.4(d)(4)(iii) would require the public 
dissemination of data on these swaps. The Commission anticipates that 
the real-time public reporting of these swaps would enhance price 
discovery in the other commodity asset class.
d. Sound Risk Management Practices
    To the extent that the proposed amendments to Sec.  43.4 mask the 
identity, business transactions and market positions of swap 
counterparties, the Commission anticipates that the proposed amendments 
to Sec.  43.4 would preserve the viability of swaps as a risk 
management tool for those traders that otherwise might feel compelled 
to switch to a less well-suited risk management tool.
e. Other Public Interest Considerations
    The Commission does not anticipate that the proposed amendment to 
Sec.  43.4(h) would have a material effect on public interest 
considerations other than those identified above.
6. Specific Questions Regarding the Proposed Amendments to Sec.  43.4
    The Commission requests comments on its cost and benefit 
considerations with respect to the proposed amendments to Sec.  43.4. 
While commenters are welcome to comment on all aspects of this Further 
Proposal, the Commission is particularly interested in the following:
    Q105. Please provide comments regarding the Commission's estimates 
of direct and indirect costs to SDRs of the proposed amendments to 
Sec.  43.4.
    Q105a. Please provide comments regarding any potential direct or 
indirect costs to non-financial end-users.
    Q106. Please provide comments regarding views on the accuracy and/
or inaccuracy of the facts cited in support of the Commission's 
analysis of the identified considerations relating to the proposed 
anonymity protections.
    Q107. Are there any other public interest considerations not 
discussed above that the Commission should examine in finalizing the 
proposed amendments to Sec.  43.4?
    Q108. Please provide comments regarding the sufficiency of the 
Commission's proposed rules to protect market participant anonymity and 
whether the rules could be expected to cause certain swap 
counterparties to forego swap transactions and, if so, the magnitude of 
any likely liquidity impact.

VII. Example of a Post-Initial Appropriate Minimum Block Size 
Determination Using the 67-Percent Notional Amount Calculation

    The example below describes the steps necessary for the Commission 
to determine the post-initial appropriate minimum block size based on 
Sec.  43.6(c)(1) for a sample set of data in ``Swap Category Z.'' For 
the purposes of this example, Swap Category Z had 35 transactions over 
the given observation period. The observations are described in table A 
below and are ordered by time of execution (i.e., Transaction 
1 was executed prior to Transaction 2).

[[Page 15513]]

[GRAPHIC] [TIFF OMITTED] TP15MR12.000

    Step 1: Remove the transactions that do not fall within the 
definition of ``publicly reportable swap transactions'' as described in 
Sec.  43.2.
    In this example, assume that five of the 35 transactions in Swap 
Category Z do not fall within the definition of ``publicly reportable 
swap transaction.'' These five transactions, listed in table B below 
would be removed for the data set that will be used to determine the 
post-initial appropriate minimum block size.

    Table B--Transactions That Do Not Fall Within the Definition of ``Publicly Reportable Swap Transaction''
----------------------------------------------------------------------------------------------------------------
 Transaction 4                    i>13                   i>16                   i>20                  i>21
----------------------------------------------------------------------------------------------------------------
               1.05             25,000,000            100,000,000             50,000,000            75,000,000
----------------------------------------------------------------------------------------------------------------

    Step 2A: Convert the publicly reportable swap transactions in the 
swap category to the same currency or units.
    In order to accurately compare the transactions in a swap category 
and apply the appropriate minimum block size calculation, the 
transactions must be converted to the same currency or unit.
    In this example, the publicly reportable swap transactions were all 
denominated in U.S. dollars, so no conversion was necessary. If the 
notional amounts of any of the publicly reportable swap transactions in 
Swap Category Z had been denominated in a currency other than U.S. 
dollars, then the notional amounts of such publicly reportable swap 
transactions would have been adjusted by the daily exchange rates for 
the period to arrive at the U.S. dollars equivalent notional amount.
    Step 2B: Examine the remaining data set for any outliers and remove 
any such outliers, resulting in a trimmed data set.
    The publicly reportable swap transactions are examined to identify 
any outliers. If an outlier is discovered, then it would be removed 
from the data set. To conduct this analysis, the notional amounts of 
all of the publicly reportable swap transactions remaining after step 1 
and step 2A are transformed by Log10. The average and 
standard deviation (``STDEV'') of these transformed notional amounts 
would then be calculated. Any transformed notional amount of a publicly 
reportable swap transaction that is larger than the average of all 
transformed notional amounts plus four times the standard deviation 
would be omitted from the data set as an outlier.
    In the data set used in this example, none of the observations were 
large enough to qualify as an outlier, as shown in the calculations 
described in Table C.
[GRAPHIC] [TIFF OMITTED] TP15MR12.001

    Step 3: Sum the notional amounts of the remaining publicly 
reportable swap transactions in the data set resulting after step 2B. 
Note: The notional amounts being summed in this step are the original 
amounts following step 2A

[[Page 15514]]

and not the Log10 transformed amounts used for the process 
in step 2B used to identify and omit any outliers.
    Using the equation described immediately below, the notional 
amounts are added to determine the sum total of all notional amounts 
remaining in the data set for a particular swap category. In this 
example, the notional amounts of the 30 remaining publicly reportable 
swap transactions in Swap Category Z are added together to come up with 
a net value of 2,989,706,421.
[GRAPHIC] [TIFF OMITTED] TP15MR12.002

    Step 4: Calculate the 67 Percent Notional Amount.
    Using the resulting amount from step 2B, a 67-percent notional 
amount value would be calculated by using the equation:

PRSTNV * 0.67 = G
G = 67 percent of the sum total of the notional amounts of all 
remaining publicly reportable swap transactions in the set
G = 2,003,103,302
    Step 5: Order and rank the observations based on notional amount of 
the publicly reportable swap transaction from least to greatest.
    The remaining publicly reportable swap transactions having 
previously been converted to U.S. dollar equivalents must be ranked, 
based on the notional sizes of such transactions, from least to 
greatest. The resulting ranking yields the PRSTt. Table D below 
reflects the ranking of the remaining publicly reportable swap 
transactions based on their notional amount sizes for this example.
    PRSTt = a publicly reportable swap transaction in the data set 
ranked from least to greatest based on the notional amounts of such 
transactions.
    Step 6A: Calculate the running sum of all PRSTt.
    A running sum would be calculated by adding together the ranked and 
ordered publicly reportable swap transactions from step 5 (PRSTt) in 
least to greatest order. The calculations of running sum values with 
respect to this example are reflected in Table D below.

[[Page 15515]]

[GRAPHIC] [TIFF OMITTED] TP15MR12.003

    Step 6B: Select first RS Value that is greater than or equal to G.
    In this example, G is equal to 2,003,103,302, meaning that the RS 
Value that must be selected would have to be greater than that number. 
The first RS Value that is greater than or equal to G can be found in 
the observation that corresponds to Rank Order 28 (see Table 
D). The RS Value of the Rank Order 28 observation is 
2,024,706,421.
    Step 7: Select the PRSTt that corresponds to the observation 
determined in step 6B.
    In this example, the PRSTt that corresponds to the RS Value 
determined in step 6B (Rank Order 28) is 265,000,000.
    Step 8: Determine the rounded notional amount.
    Calculate the rounded notional amount under the process described 
in the proposed amendment to Sec.  43.2. The 265,000,000 amount would 
be rounded to the nearest 10 million for public dissemination, or 
270,000,000.
    Step 9: Set the appropriate minimum block size at the amount 
calculated in step 8.
    In this example, the appropriate minimum block size for swap 
category Z would be 270,000,000 for the observation period.

Post-Initial Appropriate Minimum Block Size = $270,000,000

VIII. List of Commenters Who Responded to the Initial Proposal

1. Markit.
2. Asset Management Group of the Securities Industry and Financial 
Markets Association (``SIFMA AMG'').
3. Managed Funds Association (``MFA'').
4. Argus Media, Inc. (``Argus'').
5. J.P. Morgan (``JP Morgan'').
6. Gibson Dunn on behalf of the Coalition for Derivatives End-Users 
(``Coalition for Derivatives End-Users'').
7. Committee on Capital Markets Regulation (``CCMR'').
8. Goldman Sachs & Co. (``Goldman'').
9. Barclays Capital, Inc. (``Barclays'').
10. Air Transport Association (``ATA'').
11. Pacific Investment Management Company, LLC (``PIMCO'').
12. Committee on the Investment of Employee Benefit Assets & American 
Benefits Council (``ABC/CIEBA'').
13. Better Markets, Inc. (``Better Markets'').
14. Investment Company Institute (``ICI'').
15. MarkitSERV.
16. Coalition of Physical Energy Companies (``COPE'').
17. International Options Markets Association/World Federation of 
Exchanges (``World Federation of Exchanges'').
18. UBS Securities LLC (``UBS'').
19. Global Foreign Exchange Division of Association for Financial 
Markets in Europe (``AFME''), the Securities Industry and Financial 
Markets Association (``SIFMA'') and the Asia Securities Industry and 
Financial Markets Association (``ASIFMA'') (collectively, ``SIFMA/AFME/
ASIFMA'').
20. CME Group, Inc. (``CME'').
21. Coalition of Energy End-Users.
22. International Swaps and Derivatives Association & Securities 
Industry and Financial Markets Association (``ISDA/SIFMA'').
23. Morgan Stanley.
24. Hunton & Williams LLP on behalf of the Working Group of Commercial 
Energy Firms (``Hunton & Williams'').
25. Freddie Mac.
26. Vanguard.
27. TriOptima.
28. BlackRock, Inc. (``BlackRock'').
29. Dominion Resources, Inc. (``Dominion'').
30. Sadis & Goldberg LLP (``Sadis & Goldberg'').
31. Metlife, Inc. (``Metlife'').
32. Wholesale Markets Brokers' Association, Americas (``WMBAA'').

[[Page 15516]]

33. Depository Trust & Clearing Corporation (``DTCC'').
34. Cleary Gottlieb on behalf of Bank of America Merrill Lynch, BNP 
Paribas, Citi; Credit Agricole Corporate and Investment Bank; Credit 
Suisse Securities (USA), Deutsche Bank AG, Morgan Stanley, Nomura 
Securities International, In., PNC Bank, National Association, 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS Securities LLC, Wells 
Fargo & Company (``Cleary Gottlieb'').
35. Financial Industry Regulatory Authority (``FINRA'').
36. International Swaps and Derivatives Association (``ISDA'').
37. Association of Institutional Investors (``AII'').
38. Swaps & Derivatives Market Association (``SDMA'').

List of Subjects in 17 CFR Part 43

    Real-time public reporting; Block trades; Large notional off-
facility swaps; Reporting and recordkeeping requirements.

    Accordingly, 17 CFR Part 43, as proposed to be added at 77 FR 
1,243, January 9, 2012, is proposed to be further amended as follows.

PART 43--REAL-TIME PUBLIC REPORTING

    1. The authority citation for part 43 shall continue to read as 
follows:

    Authority:  7 U.S.C. 2(a), 12a(5) and 24a, amended by Pub. L. 
111-203, 124 Stat. 1376 (2010).

    2. Amend Sec.  43.2 by adding the following definitions in 
alphabetical order to read as follows:

Sec.  43.2  Definitions.

* * * * *
    Cap size means, for each swap category, the maximum notional or 
principal amount of a publicly reportable swap transaction that is 
publicly disseminated.
* * * * *
    Economically related means a direct or indirect reference to the 
same commodity at the same delivery location or locations, or with the 
same or a substantially similar cash market price series.
* * * * *
    Futures-related swap means a swap (as defined in section 1a(47) of 
the Act and as further defined by the Commission in implementing 
regulations) that is economically related to a futures contract.
    Major currencies means the currencies, and the cross-rates between 
the currencies, of Australia, Canada, Denmark, New Zealand, Norway, 
South Africa, South Korea, Sweden, and Switzerland.
    Non-major currencies means all other currencies that are not super-
major currencies or major currencies.
* * * * *
    Physical commodity swap means a swap in the other commodity asset 
class that is based on a tangible commodity.
* * * * *
    Reference price means a floating price series (including 
derivatives contract prices and cash market prices or price indices) 
used by the parties to a swap or swaption to determine payments made, 
exchanged or accrued under the terms of a swap contract.
* * * * *
    Super-major currencies means the currencies of the European 
Monetary Union, Japan, United Kingdom, and United States.
* * * * *
    Swaps with composite reference prices means swaps based on 
reference prices that are composed of more than one reference price 
from more than one swap category.
    Trimmed data set means a data set that has had extraordinarily 
large notional transactions removed by transforming the data into a 
logarithm with a base of 10, computing the mean, and excluding 
transactions that are beyond four standard deviations above the mean.
* * * * *
    3. Revise section 43.4(h) to read as follows:
    Sec.  43.4 Swap transaction and pricing data to be publicly 
disseminated in real-time.
* * * * *

    (h) Cap sizes. (1) Initial cap sizes. Prior to the effective 
date of a Commission determination to establish an applicable post-
initial cap size for a swap category as determined pursuant to 
paragraph (h)(2), the initial cap sizes for each swap category shall 
be equal to the greater of the initial appropriate minimum block 
size for the respective swap category in appendix F to this part or 
the respective cap sizes in paragraphs (h)(1)(i) through (v) of this 
section. If appendix F to this part does not provide an initial 
appropriate minimum block size for a particular swap category, the 
initial cap size for such swap category shall be equal to the 
appropriate cap size as set forth in paragraphs (h)(1)(i) through 
(v) of this section.

    (i) For swaps in the interest rate asset class, the publicly 
disseminated notional or principal amount for an interest rate swap 
subject to the rules in this part 43 the cap size shall be:
    (A) USD 250 million swaps with a tenor greater than zero up to and 
including two years;
    (B) USD 100 million for swaps with a tenor greater than two years 
up to and including ten years; and
    (C) USD 75 million for swaps with a tenor greater than ten years;
    (ii) For swaps in the credit asset class, the publicly disseminated 
notional or principal amount for a credit swap subject to the rules in 
this part 43 shall be USD 100 million;
    (iii) For swaps in the equity asset class, the publicly 
disseminated notional or principal amount for an equity swap subject to 
the rules in this part 43 shall be USD 250 million;
    (iv) For swaps in the foreign exchange asset class, the publicly 
disseminated notional or principal amount for a foreign exchange swap 
subject to the rules in this part 43 shall be USD 250 million; and
    (v) For swaps in the other commodity asset class, the publicly 
disseminated notional or principal amount for any other commodity swap 
subject to the rules in this part 43 shall be USD 25 million.
    (2) Post-initial cap sizes. Pursuant to the process described in 
Sec.  43.6(f)(1), the Commission shall establish post-initial cap sizes 
using reliable data collected by registered swap data repositories, as 
determined by the Commission, based on the following:
    (i) A three-year rolling window (beginning with a minimum of one 
year and adding one year of data for each calculation until a total of 
three years of data is accumulated) of swap transaction and pricing 
data corresponding to each relevant swap category recalculated no less 
than once each calendar year; and
    (ii) The 75-percent notional amount calculation described in 
paragraph (c)(2) of this section applied to the swap transaction and 
pricing data described in paragraph (h)(2)(i) of this section.
    (3) Commission publication of post-initial cap sizes. The 
Commission shall publish post-initial cap sizes on its Web site at 
http://www.cftc.gov.
    (4) Effective date of post-initial cap sizes. Unless otherwise 
indicated on the Commission's Web site, the post-initial cap sizes 
shall be effective on the first day of the second month following the 
date of publication. * * *
    4. Amend Sec.  43.4(d)(4)(i) by deleting ``Sec.  43.4(d)(4)(ii).'' 
and replacing it with ``Sec. Sec.  43.4(d)(4)(ii) and (iii).''
    5. Amend Sec.  43.4(d)(4)(ii)(B) by deleting ``; and'' and 
replacing it with ``; or''; and
    6. Add Sec.  43.4(d)(4)(iii) to read as follows:

[[Page 15517]]

    (iii) The underlying assets of swaps in the other commodity asset 
class that are not described in 43.4(d)(4)(ii) shall be publicly 
disseminated by limiting the geographic detail of the underlying 
assets. The identification of any specific delivery point or pricing 
point associated with the underlying asset of such other commodity swap 
shall be publicly disseminated pursuant to appendix E to this part.
    7. Add section 43.6 to part 43 to read as follows:

Sec.  43.6  Block trades and large notional off-facility swaps.

    (a) Commission determination. The Commission shall establish the 
appropriate minimum block size for publicly reportable swap 
transactions based on the swap categories set forth in Sec.  43.6(b) in 
accordance with the provisions set forth in Sec. Sec.  43.6(c), (d), 
(e), (f) or (h), as applicable.
    (b) Swap categories. Swap categories shall be established for all 
swaps, by asset class, in the following manner:
    (1) Interest rates asset class. Interest rate asset class swap 
categories shall be based on unique combinations of the following:
    (i) Currency by:
    (A) Super-major currency;
    (B) Major currency; or
    (C) Non-major currency; and
    (ii) Tenor of swap as follows:
    (A) Zero to three months (0 to 107 days);
    (B) Three months to six months (108 to 198 days);
    (C) Greater than six months to one year (199 to 381 days);
    (D) Greater one to two years (382 to 746 days);
    (E) Greater than two to five years (747 to 1,842 days);
    (F) Greater than five to ten years (1,843 to 3,668 days);
    (G) Greater than ten to 30 years (3,669 to 10,973 days); or
    (H) Greater than 30 years (10,974 days and above).
    (2) Credit asset class. Credit asset class swap categories shall be 
based on unique combinations of the following:
    (i) Traded Spread rounded to the nearest basis point (0.01) as 
follows:
    (A) 0 to 175 points;
    (B) 176 to 350 points; or
    (C) 351 points and above; and
    (ii) Tenor of swap as follows:
    (A) Zero to two years (0-746 days);
    (B) Greater than two to four years (747-1,476 days);
    (C) Greater than four to six years (1,477-2,207 days)
    (D) Greater than six to eight-and-a-half years (2,208-3,120 days);
    (E) Greater than eight-and-a-half to 12.5 years (3,121-4,581 days); 
and
    (F) Greater than 12.5 years (4,581 days and above).
    (3) Equity asset class. There shall be one swap category consisting 
of all swaps in the equity asset class.
    (4) Foreign exchange asset class. Swap categories in the foreign 
exchange asset class shall be grouped as follows:
    (i) By the unique currency combinations of super-major currencies, 
major currencies and the currencies of Brazil, China, Czech Republic, 
Hungary, Israel, Mexico, Poland, Russia, and Turkey; or
    (ii) By unique currency combinations not included in subparagraph 
(i) of this section.
    (5) Other commodity asset class. Swap contracts in the other 
commodity asset class shall be grouped into swap categories as follows:
    (i) For swaps that are economically related to contracts in 
appendix B to this part, by the relevant contract as referenced in 
appendix B to this part; or
    (ii) For swaps that are not economically related to contracts in 
appendix B to this part, by the following futures-related swaps--
    (A) CME Cheese;
    (B) CBOT Distillers' Dried Grain;
    (C) CBOT Dow Jones-UBS Commodity Index Excess Return;
    (D) CBOT Ethanol;
    (E) CME Frost Index;
    (F) CME Goldman Sachs Commodity Index (GSCI), (GSCI Excess Return 
Index);
    (G) NYMEX Gulf Coast Gasoline;
    (H) NYMEX Gulf Coast Sour Crude Oil;
    (I) NYMEX Gulf Coast Ultra Low Sulfur Diesel;
    (J) CME Hurricane Index;
    (K) CME International Skimmed Milk Powder;
    (L) NYMEX New York Harbor Ultra Low Sulfur Diesel;
    (M) CME Nonfarm Payroll;
    (N) CME Rainfall Index;
    (O) CME Snowfall Index;
    (P) CME Temperature Index;
    (Q) CME U.S. Dollar Cash Settled Crude Palm Oil; or
    (R) CME Wood Pulp; or
    (iii) For swaps that are not covered in subparagraphs (i) and (ii) 
of this section, the relevant product type as referenced in appendix D 
to this part.
    (c) Methodologies to determine appropriate minimum block sizes and 
cap sizes. In determining appropriate minimum block sizes and cap sizes 
for publicly reportable swap transactions, the Commission shall utilize 
the following statistical calculations--
    (1) 67-percent notional amount calculation. The Commission shall 
use the following procedure in determining the 67-percent notional 
amount calculation: (i) Select all of the publicly reportable swap 
transactions within a specific swap category using a rolling three-year 
window of data beginning with a minimum of one year's worth of data and 
adding one year of data for each calculation until a total of three 
years of data is accumulated; (ii) convert to the same currency or 
units and use a trimmed data set; (iii) determine the sum of the 
notional amounts of swaps in the trimmed data set; (iv) multiply the 
sum of the notional amount by 67 percent; (v) rank order the 
observations by notional amount from least to greatest; (vi) calculate 
the cumulative sum of the observations until the cumulative sum is 
equal to or greater than the 67-percent notional amount calculated in 
(iv); (vii) select the notional amount associated with that 
observation; (viii) round the notional amount of that observation to 
two significant digits, or if the notional amount associated with that 
observation is already significant to two digits, increase that 
notional amount to the next highest rounding point of two significant 
digits; and (ix) set the appropriate minimum block size at the amount 
calculated in (viii).
    (2) 75-percent notional amount calculation. The Commission shall 
use the following procedure in determining the 75-percent notional 
amount calculation: (i) Select all of the publicly reportable swap 
transactions within a specific swap category using a rolling three-year 
window of data beginning with a minimum of one year's worth of data and 
adding one year of data for each calculation until a total of three 
years of data is accumulated; (ii) convert to the same currency or 
units and use a trimmed data set; (iii) determine the sum of the 
notional amounts of swaps in the trimmed data set; (iv) multiply the 
sum of the notional amount by 75 percent; (v) rank order the 
observations by notional amount from least to greatest; (vi) calculate 
the cumulative sum of the observations until the cumulative sum is 
equal to or greater than the 75-percent notional amount calculated in 
(iv); (vii) select the notional amount associated with that 
observation; (viii) round the notional amount of that observation to 
two significant digits, or if the notional amount associated with that 
observation is already significant to two digits, increase that 
notional amount to the next highest rounding point of two significant 
digits; and (ix) set the appropriate minimum block size at the amount 
calculated in (viii).
    (d) No appropriate minimum block sizes for swaps in the equity 
asset class.

[[Page 15518]]

Publicly reportable swap transactions in the equity asset class shall 
not be treated as block trades or large notional off-facility swaps.
    (e) Initial appropriate minimum block sizes. Prior to the 
Commission making a determination as described in paragraph (f)(1) of 
this section, the following initial appropriate minimum block sizes 
shall apply:
    (1) Prescribed appropriate minimum block sizes. Except as otherwise 
provided in paragraph (e)(1) of this section, for any publicly 
reportable swap transaction that falls within the swap categories 
described in Sec. Sec.  43.6(b)(1), (b)(2), (b)(4)(i), (b)(5)(i) and 
(b)(5)(ii), the initial appropriate minimum block size for such 
publicly reportable swap transaction shall be the appropriate minimum 
block size that is in appendix F to this part.
    (2) Certain swaps in the foreign exchange and other commodity asset 
classes. All swaps or instruments in the swap categories described in 
Sec. Sec.  43.6(b)(4)(ii) and (b)(5)(iii) shall be eligible to be 
treated as a block trade or large notional off-facility swap, as 
applicable.
    (3) Exception. Publicly reportable swap transactions described in 
Sec.  43.6(b)(5)(i) that are economically related to a futures contract 
in appendix B to this part shall not qualify to be treated as block 
trades or large notional off-facility swaps (as applicable), if such 
futures contract is not subject to a designated contract market's block 
trading rules.
    (f) Post-initial process to determine appropriate minimum block 
sizes.
    (1) Post-initial period. After a registered swap data repository 
has collected at least one year of reliable data for a particular asset 
class, as determined by Commission, the Commission shall establish by 
swap categories, the post-initial appropriate minimum block sizes as 
described in this subsection. No less than once each calendar year 
thereafter, the Commission shall update the post-initial appropriate 
minimum block sizes.
    (2) Post-initial appropriate minimum block sizes certain swaps. The 
Commission shall determine post-initial appropriate minimum block sizes 
for the swap categories described in Sec. Sec.  43.6(b)(1), (b)(2), 
(b)(4) and (b)(5) by utilizing a three-year rolling window (beginning 
with a minimum of one year and adding one year of data for each 
calculation until a total of three years of data is accumulated) of 
swap transaction and pricing data corresponding to each relevant swap 
category reviewed no less than once each calendar year, and by applying 
the 67-percent notional amount calculation to such data.
    (3) Commission publication of post-initial appropriate minimum 
block sizes. The Commission shall publish the appropriate minimum block 
sizes determined pursuant to Sec.  43.6(f)(1) on its Web site at http://www.cftc.gov.
    (4) Effective date of post-initial appropriate minimum block sizes. 
Unless otherwise indicated on the Commission's Web site, the post-
initial appropriate minimum block sizes described in Sec.  43.6(f)(1) 
shall be effective on the first day of the second month following the 
date of publication.
    (g) Required notification.
    (1) Block trade election. (i) The parties to a publicly reportable 
swap transaction that has a notional amount at or above the appropriate 
minimum block size shall notify the registered swap execution facility 
or designated contract market, as applicable, pursuant to the rules of 
such registered swap execution facility or designated contract market, 
of its election to have the publicly reportable swap transaction 
treated as a block trade.
    (ii) The registered swap execution facility or designated contract 
market, as applicable, pursuant to the rules of which a block trade is 
executed shall notify the registered swap data repository of such a 
block trade election when transmitting swap transaction and pricing 
data to such swap data repository in accordance with Sec.  43.3(b)(1).
    (2) Large notional off-facility swap election. A reporting party 
who executes an off-facility swap that has a notional amount at or 
above the appropriate minimum block size shall notify the applicable 
registered swap data repository that such swap transaction qualifies as 
a large notional off-facility swap concurrent with the transmission of 
swap transaction and pricing data in accordance with part 43.
    (h) Special provisions relating to appropriate minimum block sizes 
and cap sizes. The following special rules shall apply to the 
determination of appropriate minimum block sizes and cap sizes--
    (1) Swaps with optionality. The notional amount of swaps with 
optionality shall equal the notional amount of the component of the 
swap that does not include the option component.
    (2) Swaps with composite reference prices. The parties to a swap 
transaction with composite reference prices may elect to apply the 
lowest appropriate minimum block size or cap size applicable to one 
component swap category of such publicly reportable swap transaction.
    (3) Notional amounts for physical commodity swaps. Unless otherwise 
specified in this part, the notional amount for a physical commodity 
swap shall be based on the notional unit measure utilized in the 
related futures contract market or the predominant notional unit 
measure used to determine notional quantities in the cash market for 
the relevant, underlying physical commodity.
    (4) Currency conversion. Unless otherwise specified in this part 
43, when the appropriate minimum block size or cap size for a publicly 
reportable swap transaction is denominated in a currency other than 
U.S. dollars, parties to a swap and registered entities may use a 
currency exchange rate that is widely published within the preceding 
two business days from the date of execution of the swap transaction in 
order to determine such qualification.
    (5) Successor currencies. For currencies that succeed a super-major 
currency, the appropriate currency classification for such currency 
shall be based on the corresponding nominal gross domestic product 
classification (in U.S. dollars) as determined in the most recent World 
Bank, World Development Indicator at the time of succession. If the 
gross domestic product of the country or nation utilizing the successor 
currency is:
    (i) Greater than $2 trillion, then the successor currency shall be 
included among the super-major currencies;
    (ii) Greater than $500 billion but less than $2 trillion, then the 
successor currency shall be included among the major currencies; or
    (iii) Less than $500 billion, then the successor currency shall be 
included among the non-major currencies.
    8. Add section 43.7 to part 43 to read as follows:

Sec.  43.7  Delegation of authority.

    (a) Authority. The Commission hereby delegates, until it orders 
otherwise, to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time, the authority:
    (1) To determine whether swaps fall within specific swap categories 
as described in Sec.  43.6(b);
    (2) To determine post-initial, appropriate minimum block sizes as 
described in Sec.  43.6(f); and
    (3) To determine post-initial cap sizes as described in Sec.  
43.4(h).
    (b) Submission for Commission consideration. The Director of the 
Division of Market Oversight may submit to the Commission for its

[[Page 15519]]

consideration any matter that has been delegated pursuant to this 
section.
    (c) Commission reserves authority. Nothing in this section 
prohibits the Commission, at its election, from exercising the 
authority delegated in this section. * * *
    9. Amend appendix B to part 43 to add the following after ``Brent 
Crude Oil (ICE)'':

SP-15 Financial Day-Ahead LMP Peak Contract
SP-15 Financial Day-Ahead LMP Off-Peak Contract
PJM WH Real Time Peak Contract
PJM WH Real Time Off-Peak Contract
Mid-C Financial Peak Contract
Mid-C Financial Off-Peak Contract
ICE Chicago Financial Basis Contract
HSC Financial Basis Contract
Socal Border Financial Basis Contract
Waha Financial Basis Contract
AECO Financial Basis Contract
NWP Rockies Financial Basis Contract
PG&E Citygate Financial Basis Contract
    10. Add ``Appendix D to Part 43--Other Commodity Swap Categories'' 
after ``Appendix C to Part 43--Time Delays for Public Dissemination'' 
to read as follows:

Appendix D--Other Commodity Swap Categories

Other Commodity Group

Individual Other Commodity

GRAINS
    OATS
    WHEAT
    CORN
    RICE
    GRAINS--OTHER
LIVESTOCK/MEAT PRODUCTS
    LIVE CATTLE
    PORK BELLIES
    FEEDER CATTLE
    LEAN HOGS
    LIVESTOCK/MEAT PRODUCTS-OTHER
DAIRY PRODUCTS
    MILK
    BUTTER
    CHEESE
    DAIRY PRODUCTS--OTHER
OILSEED AND PRODUCTS
    SOYBEAN OIL
    SOYBEAN MEAL
    SOYBEANS
    OILSEED AND PRODUCTS--OTHER
FIBER
    COTTON
    FIBER--OTHER
FOODSTUFFS/SOFTS
    COFFEE
    FROZEN CONCENTRATED ORANGE JUICE
    SUGAR
    COCOA
    FOODSTUFFS/SOFTS--OTHER
PETROLEUM AND PRODUCTS
    JET FUEL
    ETHANOL
    BIODIESEL
    FUEL OIL
    HEATING OIL
    GASOLINE
    NAPHTHA
    CRUDE OIL
    DIESEL
    PETROLEUM AND PRODUCTS--OTHER
NATURAL GAS AND RELATED PRODUCTS
    NATURAL GAS LIQUIDS
    NATURAL GAS
    NATURAL GAS AND RELATED PRODUCTS--OTHER
ELECTRICITY AND SOURCES
    COAL
    ELECTRICITY
    URANIUM
    ELECTRICITY AND SOURCES--OTHER
PRECIOUS METALS
    PALLADIUM
    PLATINUM
    SILVER
    GOLD
    PRECIOUS METALS--OTHER
BASE METALS
    STEEL
    COPPER
    BASE METALS--OTHER
WOOD PRODUCTS
    LUMBER
    PULP
    WOOD PRODUCTS--OTHER
REAL ESTATE
    REAL ESTATE
CHEMICALS
    CHEMICALS
PLASTICS
    PLASTICS
EMISSIONS
    EMISSIONS
WEATHER
    WEATHER
MULTIPLE COMMODITY INDEX
    MULTIPLE COMMODITY INDEX
OTHER AGRICULTURAL
    OTHER AGRICULTURAL
OTHER NON-AGRICULTURAL
    OTHER NON-AGRICULTURAL

    11. Add ``Appendix E to Part 43--Other Commodity Geographic 
Identification for Public Dissemination Pursuant to Sec.  
43.4(d)(4)(iii)'' after ``Appendix D to Part 43--Other Commodity 
Product Swap Categories'' to read as follows:

Appendix E--Other Commodity Geographic Identification for Public 
Dissemination Pursuant to Sec.  43.4(d)(4)(iii)

    Registered swap data repositories shall publicly disseminate any 
specific delivery point or pricing point associated with publicly 
reportable swap transactions in the ``other commodity'' asset class 
(as described in Sec.  43.4(d)(4)(iii)) pursuant to Tables E1 and 
E2. If the underlying asset of a publicly reportable swap 
transaction described in Sec.  43.4(d)(4)(iii) has a delivery or 
pricing point that is located in the United States, such information 
shall be publicly disseminated pursuant to the regions described in 
Table E1. If the underlying asset of a publicly reportable swap 
transaction described in Sec.  43.4(d)(4)(iii) has a delivery or 
pricing point that is not located in the United States, such 
information shall be publicly disseminated pursuant to the countries 
or sub-regions, or if no country or sub-region, by the other 
commodity region, described in Table E2.

Table E1--U.S. Delivery or Pricing Points

Other Commodity Group

Region

NATURAL GAS AND RELATED PRODUCTS
    MIDWEST
    NORTHEAST
    GULF
    SOUTHEAST
    WESTERN
    OTHER--U.S.
PETROLEUM AND PRODUCTS
    NEW ENGLAND (PADD 1A)
    CENTRAL ATLANTIC (PADD 1B)
    LOWER ATLANTIC (PADD 1C)
    MIDWEST (PADD 2)
    GULF COAST (PADD 3)
    ROCKY MOUNTAINS (PADD 4)
    WEST COAST (PADD 5)
    OTHER--U.S.
ELECTRICITY AND SOURCES
    CALIFORNIA (CAISO)
    MIDWEST (MISO)
    NEW ENGLAND (ISO-NE)
    NEW YORK (NYISO)
    NORTHWEST
    PJM
    SOUTHEAST
    SOUTHWEST
    SOUTHWEST POWER TOOL (SPP)
    TEXAS (ERCOT)
    OTHER--U.S.
ALL REMAINING OTHER COMMODITIES (PUBLICLY DISSEMINATE THE REGION. IF 
PRICING OR DELIVERY POINT IS NOT REGION SPECIFIC, INDICATE ``U.S.'')
    REGION 1--(INCLUDES CONNECTICUT, MAINE, MASSACHUSETTS, NEW 
HAMPSHIRE, RHODE ISLAND, VERMONT)
    REGION 2--(INCLUDES NEW JERSEY, NEW YORK)
    REGION 3--(INCLUDES DELAWARE, DISTRICT OF COLUMBIA, MARYLAND, 
PENNSYLVANIA, VIRGINIA, WEST VIRGINIA)
    REGION 4--(INCLUDES ALABAMA, FLORIDA, GEORGIA, KENTUCKY, 
MISSISSIPPI, NORTH CAROLINA, SOUTH CAROLINA, TENNESSEE)
    REGION 5--(INCLUDES ILLINOIS, INDIANA, MICHIGAN, MINNESOTA, 
OHIO, WISCONSIN)
    REGION 6--(INCLUDES ARKANSAS, LOUISIANA, NEW MEXICO, OKLAHOMA, 
TEXAS)
    REGION 7--(INCLUDES IOWA, KANSAS, MISSOURI, NEBRASKA)
    REGION 8--(INCLUDES COLORADO, MONTANA, NORTH DAKOTA, SOUTH 
DAKOTA, UTAH, WYOMING)
    REGION 9--(INCLUDES ARIZONA, CALIFORNIA, HAWAII, NEVADA)
    REGION 10--(INCLUDES ALASKA, IDAHO, OREGON, WASHINGTON)

Table E2--Non-U.S. Delivery or Pricing Points

Other Commodity Regions With Countries or Sub-Regions

NORTH AMERICA (OTHER THAN U.S.)

[[Page 15520]]

    CANADA
    MEXICO
CENTRAL AMERICA
SOUTH AMERICA
    BRAZIL
    OTHER SOUTH AMERICA
EUROPE
    WESTERN EUROPE
    NORTHERN EUROPE
    SOUTHERN EUROPE
    EASTERN EUROPE (EXCLUDING RUSSIA)
RUSSIA
AFRICA
    NORTHERN AFRICA
    WESTERN AFRICA
    EASTERN AFRICA
    CENTRAL AFRICA
    SOUTHERN AFRICA
ASIA-PACIFIC
    NORTHERN ASIA (EXCLUDING RUSSIA)
    CENTRAL ASIA
    EASTERN ASIA
    WESTERN ASIA
    SOUTHEAST ASIA
    AUSTRALIA/NEW ZEALAND/PACIFIC ISLANDS

    12. Add ``Appendix F to Part 43--Initial Appropriate Minimum Sizes 
for Block Trades and Large Notional Off-facility Swaps'' after 
``Appendix E to Part 43--Other Commodity Geographic Identification for 
Public Dissemination Pursuant to Sec.  43.4(d)(4)(iii)(B)'' to read as 
follows:

   Appendix F--Initial Appropriate Minimum Block Sizes by Asset Class
------------------------------------------------------------------------
        Currency group                         Currencies
------------------------------------------------------------------------
Super-Major Currencies.......  United States dollar (USD), European
                                Union Euro Area euro (EUR), United
                                Kingdom pound sterling (GBP), and Japan
                                yen (JPY).
Major Currencies.............  Australia dollar (AUD), Switzerland franc
                                (CHF), Canada dollar (CAD), Republic of
                                South Africa rand (ZAR), Republic of
                                Korea won (KRW), Kingdom of Sweden krona
                                (SEK), New Zealand dollar (NZD), Kingdom
                                of Norway krone (NOK), and Denmark krone
                                ( DKK).
Non-Major Currencies.........  All other currencies.
------------------------------------------------------------------------

                                               Interest Rate Swaps
----------------------------------------------------------------------------------------------------------------
                                                                      Tenor less than or equal  67% Notional (in
             Currency group                  Tenor greater than                  to                 millions)
----------------------------------------------------------------------------------------------------------------
Super-Major............................  ..........................  Three months (107 days)..             6,400
Super-Major............................  Three months (107 days)...  Six months (198 days)....             1,900
Super-Major............................  Six months (198 days).....  One year (381 days)......             1,600
Super-Major............................  One year (381 days).......  Two years (746 days).....               750
Super-Major............................  Two years (746 days)......  Five years (1,842 days)..               380
Super-Major............................  Five years (1,842 days)...  Ten years (3,668 days)...               290
Super-Major............................  Ten years (3,668 days)....  30 years (10,973 days)...               210
Super-Major............................  30 years (10,973 days)....  .........................               130
Major..................................  ..........................  Three months (107 days)..               970
Major..................................  Three months (107 days)...  Six months (198 days)....               470
Major..................................  Six months (198 days).....  One year (381 days)......               320
Major..................................  One year (381 days).......  Two years (746 days).....               190
Major..................................  Two years (746 days)......  Five years (1,842 days)..               110
Major..................................  Five years (1,842 days)...  Ten years (3,668 days)...                73
Major..................................  Ten years (3,668 days)....  30 years (10,973 days)...                50
Major..................................  30 years (10,973 days)....  .........................                22
Non-Major..............................  ..........................  Three months (107 days)..               320
Non-Major..............................  Three months (107 days)...  Six months (198 days)....               240
Non-Major..............................  Six months (198 days).....  One year (381 days)......               160
Non-Major..............................  One year (381 days).......  Two years (746 days).....                79
Non-Major..............................  Two years (746 days)......  Five years (1,842 days)..                40
Non-Major..............................  Five years (1,842 days)...  Ten years (3,668 days)...                22
Non-Major..............................  Ten years (3,668 days)....  30 years (10,973 days)...                24
Non-Major..............................  30 years (10,973 days)....  .........................                22
----------------------------------------------------------------------------------------------------------------

                                                  Credit Swaps
----------------------------------------------------------------------------------------------------------------
                                                                     Traded tenor less than or  67% Notional (in
      Spread group  (basis points)        Traded tenor greater than           equal to              millions)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 175..............  ..........................  Two years (746 days).....               510
Less than or equal to 175..............  Two years (746 days)......  Four years (1,477 days)..               300
Less than or equal to 175..............  Four years (1,477 days)...  Six years (2,207 days)...               190
Less than or equal to 175..............  Six years (2,207 days)....  Eight years and six                     250
                                                                      months (3,120 days).
Less than or equal to 175..............  Eight years and six months  Twelve years and six                    130
                                          (3,120 days).               months (4,581 days).
Less than or equal to 175..............  Twelve years and six        .........................               110
                                          months (4,581 days).
Greater than 175 and less than or equal  ..........................  Two years (746 days).....               210
 to 350.
Greater than 175 and less than or equal  Two years (746 days)......  Four years (1,477 days)..               130
 to 350.
Greater than 175 and less than or equal  Four years (1,477 days)...  Six years (2,207 days)...                36
 to 350.

[[Page 15521]]

 
Greater than 175 and less than or equal  Six years (2,207 days)....  Eight years and six                      26
 to 350.                                                              months (3,120 days).
Greater than 175 and less than or equal  Eight years and six months  Twelve years and six                     64
 to 350.                                  (3,120 days).               months (4,581 days).
Greater than 175 and less than or equal  Twelve years and six        .........................               120
 to 350.                                  months (4,581 days).
Greater than 350.......................  ..........................  Two years (746 days).....               110
Greater than 350.......................  Two years (746 days)......  Four years (1,477 days)..                73
Greater than 350.......................  Four years (1,477 days)...  Six years (2,207 days)...                51
Greater than 350.......................  Six years (2,207 days)....  Eight years and six                      21
                                                                      months (3,120 days).
Greater than 350.......................  Eight years and six months  Twelve years and six                     21
                                          (3,120 days).               months (4,581 days).
Greater than 350.......................  Twelve years and six        .........................                51
                                          months (4,581 days).
----------------------------------------------------------------------------------------------------------------

BILLING CODE 6351-01-P

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BILLING CODE 6351-01-C

    Issued in Washington, DC, on February 23, 2012, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Procedures To Establish Appropriate Minimum Block Sizes 
for Large Notional Off-Facility Swaps and Block Trades--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 Chilton and 
Wetjen voted in the affirmative; Commissioners Sommers and O'Malia 
voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the block rule proposal, which promotes both pre-trade 
and post-trade transparency. The derivatives reforms in the Dodd-
Frank Wall Street Reform and Consumer Protection Act, including 
bringing transparency to the swaps market, will lead to significant 
benefits for the real economy--that which makes up over 94 percent 
of private sector jobs in America. Transparency also helps all 
Americans who depend on pension funds, mutual funds, community banks 
and insurance companies.

[FR Doc. 2012-5950 Filed 3-14-12; 8:45 am]
BILLING CODE 6351-01-P
```