Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6715 

Federal Register on November 23, 2010 

(75 FR 71379), and as proposed to be 

amended elsewhere in this issue of the 

Federal Register, as follows: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

1. The authority citation for part 23 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 

6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21. 

2. Amend proposed § 23.504 by 

adding paragraph (b)(5) to read as 

follows: 

§ 23.504 Swap trading relationship 

documentation. 

* * * * * 

(b) * * * 

(5) The swap trading relationship 

documentation shall include written 

documentation in which the 

counterparties agree that in the event a 

counterparty is a covered financial 

company (as defined in section 201(a)(8) 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act) or an 

insured depository institution (as 

defined in 12 U.S.C. 1813) for which the 

Federal Deposit Insurance Corporation 

(FDIC) has been appointed as a receiver 

(the ‘‘covered party’’): 

(i) The counterparty that is not the 

covered party may not exercise any right 

that such counterparty that is not the 

covered party has to terminate, 

liquidate, or net any swap solely by 

reason of the appointment of the FDIC 

as receiver for the covered party (or the 

insolvency or financial condition of the 

covered party): 

(A) Until 5 p.m. (U.S. eastern time) on 

the business day following the date of 

the such appointment; or 

(B) After the counterparty that is not 

the covered party has received notice 

that the swap has been transferred 

pursuant to section 210(c)(9)(A) of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act or 12 U.S.C. 

1821(e)(9)(A); 

(ii) A transfer pursuant to section 

210(c)(9)(A) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act or 12 U.S.C. 1821(e)(9)(A) may 

include: 

(A) All swaps between a counterparty 

that is not a covered party, or any 

affiliate of such counterparty that is not 

a covered party, and the covered party; 

(B) All claims of a counterparty that 

is not a covered party, or any affiliate of 

such counterparty that is not a covered 

party, against the covered party under 

any such swap (other than any claim 

which, under the terms of any such 

swap, is subordinated to the claims of 

general unsecured creditors of such 

covered party); 

(C) All claims of the covered party 

against a counterparty that is not a 

covered party, or any affiliate of such 

counterparty that is not a covered party, 

under any such swap; and 

(D) All property securing or any other 

credit enhancement for any swap 

described in paragraph (b)(5)(i)(A) of 

this section or any claim described in 

paragraphs (b)(5)(i)(B) or (C) of this 

section under any such swap; and 

(iii) The counterparty that is not the 

covered party consents to any transfer 

described in paragraph (b)(5)(ii) of this 

section. 

* * * * * 

Issued in Washington, DC, on January 20, 

2011 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices To Swap Trading 

Relationship Documentation 

Requirements for Swap Dealers and 

Major Swap Participants— 

Commissioners Voting Summary and 

Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commissioners Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers and Chilton 

voted in the affirmative; Commissioner 

O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rulemaking that 

establishes documentation requirements for 

swap dealers and major swap participants, 

ensuring consistency with statutory 

provisions in the event of an orderly 

liquidation of a swap dealer or major swap 

participant. The proposed regulation requires 

the inclusion of a provision in the swap 

trading relationship documentation that 

would inform counterparties that, if a swap 

dealer or major swap participant becomes a 

covered financial company subject to the 

resolution authority of the Federal Deposit 

Insurance Corporation, there may be a oneday stay on the ability of its counterparties 

to terminate, liquidate or net their uncleared 

swaps. The proposed rulemaking should 

lower litigation risk during times of 

significant market stress and promote an 

orderly and effective resolution process for 

large financial entities. 

[FR Doc. 2011–2642 Filed 2–7–11; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 23 

RIN 3038–AC96 

Swap Trading Relationship 

Documentation Requirements for 

Swap Dealers and Major Swap 

Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing regulations to 

implement new statutory provisions 

established under Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). 

Section 731 of the Dodd-Frank Act 

added a new section 4s(i) to the 

Commodity Exchange Act (CEA), which 

requires the Commission to prescribe 

standards for swap dealers and major 

swap participants related to the timely 

and accurate confirmation, processing, 

netting, documentation, and valuation 

of swaps. The proposed rules would 

establish requirements for swap trading 

relationship documentation for swap 

dealers and major swap participants. 

DATES: Submit comments on or before 

April 11, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AC96 

and Swap Trading Relationship 

Documentation Requirements for Swap 

Dealers and Major Swap Participants, by 

any of the following methods: 

• Agency Web site, via its Comments 

Online process 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 http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6716 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

2Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

3 7 U.S.C. 1 et seq. 

4Section 8a(5) of the CEA authorizes the 

Commission to promulgate such regulations as, in 

the judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to 

accomplish any of the purposes of the CEA. 

5This is the sixth rulemaking to be proposed 

regarding internal business conduct standards for 

swap dealers and major swap participants. Prior 

notices of proposed rulemaking are available on the 

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

6See Financial Stability Board, ‘‘Implementing 

OTC Derivatives Market Reforms: Report of the OTC 

Derivatives Working Group,’’ (Oct. 10, 2010), 

available at http://www.financialstabilityboard.org/ 

publications/r_101025.pdf. 

7The International Swaps and Derivatives 

Association (ISDA) is a trade association for the 

OTC derivatives industry (http://www.isda.org). 

8Enforceable bilateral netting arrangements are a 

common commercial practice and are an important 

part of risk management and minimization of 

capital costs. 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in § 145.9 of the 

Commission’s regulations, 17 CFR 

145.9. 

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 http://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: 

Sarah E. Josephson, Associate Director, 

202–418–5684, sjosephson@cftc.gov; 

Frank N. Fisanich, Special Counsel, 

202–418–5949, ffisanich@cftc.gov; or 

Jocelyn Partridge, Special Counsel, 202– 

418–5926, jpartridge@cftc.gov; Division 

of Clearing and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.1 Title VII of 

the Dodd-Frank Act 2 amended the 

Commodity Exchange Act (CEA) 3 to 

establish a comprehensive regulatory 

framework to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; (3) 

creating rigorous recordkeeping and 

real-time reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight. 

Section 731 of the Dodd-Frank Act 

amends the CEA by adding a new 

section 4s, which sets forth a number of 

requirements for swap dealers and 

major swap participants. Specifically, 

section 4s(i) of the CEA establishes 

swap documentation standards for those 

registrants. 

Section 4s(i)(1) requires swap dealers 

and major swap participants to 

‘‘conform with such standards as may be 

prescribed by the Commission by rule or 

regulation that relate to timely and 

accurate confirmation, processing, 

netting, documentation, and valuation 

of all swaps.’’ Under section 4s(i)(2), the 

Commission is required to adopt rules 

‘‘governing documentation standards for 

swap dealers and major swap 

participants.’’ The Commission is 

proposing the regulations governing 

swap documentation discussed below, 

pursuant to the authority granted under 

sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(i), 

and 8a(5) of the CEA.4 The Dodd-Frank 

Act requires the Commission to 

promulgate these provisions by July 15, 

2011.5

The proposed regulations reflect 

consultation with staff of the following 

agencies: (i) The Securities and 

Exchange Commission; (ii) the Board of 

Governors of the Federal Reserve 

System; (iii) the Office of the 

Comptroller of the Currency; and (iv) 

the Federal Deposit Insurance 

Corporation. Staff from each of these 

agencies has had the opportunity to 

provide oral and/or written comments 

to the proposal, and the proposed 

regulations incorporate elements of the 

comments provided. 

In designing these rules, the 

Commission has taken care to minimize 

the burden on those parties that will not 

be registered with the Commission as 

swap dealers or major swap 

participants. To the extent that market 

participants believe that additional 

measures should be taken to reduce the 

burden or increase the benefits of 

documenting swap transactions, the 

Commission welcomes all comments. 

II. Proposed Regulations 

The proposed regulations would set 

forth certain requirements for 

documenting the swap trading 

relationship between swap dealers, 

major swap participants, and their 

counterparties. Documentation of swaps 

is a critical component of the bilaterallytraded, over-the-counter (OTC) 

derivatives market and has been the 

focus of significant domestic and 

international attention in recent years. 

A. Background on Documentation and 

Standardization 

The OTC derivatives markets 

traditionally have been characterized by 

privately negotiated transactions 

entered into by two counterparties, in 

which each party assumes and manages 

the credit risk of the other. While OTC 

derivatives are traded by a diverse set of 

market participants, such as banks, 

hedge funds, pension funds, and other 

institutional investors, as well as 

corporate, governmental, and other endusers, a relatively few number of dealers 

are, by far, the most significantly active 

participants. As such, the default of a 

dealer may result in significant losses 

for the counterparties of that dealer, 

either from the counterparty exposure to 

the defaulting dealer or from the cost of 

replacing the defaulted trades in times 

of market stress.6

OTC derivatives market participants 

typically have relied on the use of 

industry standard legal documentation, 

including master netting agreements, 

definitions, schedules, and 

confirmations, to document their swap 

trading relationships. This industry 

standard documentation, such as the 

widely used ISDA Master Agreement 

and related definitions, schedules, and 

confirmations specific to particular asset 

classes, offers a framework for 

documenting the transactions between 

counterparties for OTC derivatives 

products.7 The standard documentation 

is designed to set forth the legal, trading, 

and credit relationship between the 

parties and to facilitate cross-product 

netting of transactions in the event that 

parties have to close-out their position 

with one another. 

One important method of addressing 

the credit risk that arises from OTC 

derivatives transactions is the use of 

bilateral close-out netting. Parties seek 

to achieve enforceable bilateral netting 

by documenting all of their transactions 

under master netting agreements.8

Following the occurrence of a default by 

one of the counterparties (such as 

bankruptcy or insolvency), the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6717 

9See e.g., 11 U.S.C. 561 (protecting contractual 

right to terminate, liquidate, accelerate, or offset 

under a master netting agreement and across 

contracts). 

10See 12 CFR 3, Appendix C; 12 CFR 208, 

Appendix F; 12 CFR 225, Appendix G; and 12 CFR 

325, Appendix D (banking regulations regarding 

qualifying master netting agreements). 

11See Group of Twenty, ‘‘Leaders’ Statement: The 

Pittsburgh Summit,’’ (Sept. 24–25, 2009), available 

at http://www.pittsburghsummit.gov/mediacenter/ 

129639.htm. 

12See The G–20 Toronto Summit Declaration 

(Jun. 26–27, 2010), available at 

http://www.g20.utoronto.ca/2010/ 

g20_declaration_en.pdf. In Annex II, the declaration 

stated, ‘‘We pledged to work in a coordinated 

manner to accelerate the implementation of overthe-counter (OTC) derivatives regulation and 

supervision and to increase transparency and 

standardization.’’ 

13 ‘‘It is expected that the standardized, plain 

vanilla, high volume swaps contracts—which 

according to the Treasury Department are about 90 

percent of the $600 trillion swaps market—will be 

subject to mandatory clearing.’’ 156 Cong. Rec. 

S5921 (daily ed. Jul. 15, 2010) (statement of Sen. 

Lincoln). 

14These benefits were articulated by the 

Financial Stability Board’s OTC Derivatives 

Working Group in its report, ‘‘Implementing OTC 

Derivatives Market Reforms,’’ (Oct. 10, 2010), 

available at http://www.financialstabilityboard.org/ 

publications/r_101025.pdf. 

15Since 2005, the Federal Reserve Bank of New 

York (FRBNY) has led a targeted, supervisory effort 

to enhance operational efficiency and performance 

in the OTC derivatives market, among other things, 

by increasing standardization. Known as the OTC 

Derivatives Supervisors’ Group (ODSG), the FRBNY 

leads an on-going effort with OTC derivatives 

dealers’ primary supervisors, trade associations, 

industry utilities, and private vendors, through 

which market participants (including buy-side 

participants) regularly set goals and commitments 

to bring infrastructure, market design, and risk 

management improvements to all OTC derivatives 

asset classes. 

16See 2009 ISDA Credit Derivatives 

Determinations Committees and Auction Settlement 

CDS Protocol, available at: http://www.isda.org/ 

bigbangprot/docs/Big-Bang-Protocol.pdf. 

exposures from individual transactions 

between the two parties are netted and 

consolidated into a single net ‘‘lump 

sum’’ obligation. A party’s overall 

exposure is therefore limited to this net 

sum. That exposure then may be offset 

by the available collateral previously 

provided being applied against the net 

exposure. As such, it is critical that the 

netting provisions between the parties 

are legally enforceable and that the 

collateral may be used to meet the net 

exposure. In recognition of the riskreducing benefits of close-out netting, 

many jurisdictions provide favorable 

treatment of netting arrangements in 

bankruptcy,9 and favorable capital and 

accounting treatment to parties that 

have enforceable netting agreements in 

place.10

There is also a risk that inadequate 

documentation of open swap 

transactions could result in collateral 

and legal disputes, thereby exposing 

counterparties to significant 

counterparty credit risk. By way of 

contrast, adequate documentation 

between counterparties offers a 

framework for establishing the trading 

relationship between the parties. The 

use of common legal documentation 

also encourages standardization of 

traded products. This, in turn, may 

facilitate central clearing and trading as 

sufficient standardization is a 

prerequisite for central clearing and 

trading on an exchange or electronic 

platform. 

In response to the global economic 

crisis, in September 2009, G–20 Leaders 

agreed in Pittsburgh to critical elements 

relating to OTC derivatives reform, 

including a provision that ‘‘[a]ll 

standardized OTC derivative contracts 

should be traded on exchanges or 

electronic trading platforms, where 

appropriate, and cleared through central 

counterparties. * * *’’ 11 In June 2010 in 

Toronto, the G–20 Leaders reaffirmed 

this commitment, and expressly stated 

their objective of increasing 

standardization in the OTC derivatives 

markets.12 With the passage of the 

Dodd-Frank Act in July 2010, Congress 

expressly recognized the link between 

standardized swaps and clearing, as 

well.13

In addition, increasing 

standardization of swap documentation 

should improve the market in a number 

of other ways, including: Facilitating 

automated processing of transactions; 

increasing the fungibility of the 

contracts, which enables greater market 

liquidity; improving valuation and risk 

management; increasing the reliability 

of price information; reducing the 

number of problems in matching trades; 

and facilitating reporting to swap data 

repositories.14

Product and process standardization 

are also key conditions for increased 

automation and central clearing of OTC 

derivatives. As a result of targeted 

supervisory encouragement since 

2005,15 credit derivative market 

participants have standardized CDS 

product design and post-trade processes 

in tandem, leading to greater operational 

efficiencies, encouraging higher 

volumes of standardized transactions, 

and most significantly, providing the 

requisite operational environment for 

the implementation of centralized riskreducing infrastructure, including 

central counterparty clearing. 

Many standardized processes have 

been established for CDS legal 

documentation and trading conventions, 

and in turn, the standardization of 

product design has enabled market 

participants to implement infrastructure 

that automates and centralizes trading, 

recordkeeping, trade compression, and 

clearing. For example, the 

standardization of coupons in the 

single-name CDS product was largely 

motivated by the desire to create an 

efficient process for offsetting contracts. 

The market-wide adoption of fixed 

coupons allowed single-name CDS 

instruments to be centrally cleared, in 

effect standardizing counterparty credit 

risk management in these products. The 

‘‘Big Bang Protocol’’ further standardized 

a number of critical operational 

processes.16 The protocol: (i) 

‘‘Hardwired’’ a standard auction 

mechanism into CDS trading 

documentation, eliminating the need for 

ad hoc protocols; (ii) incorporated the 

resolutions of the ISDA Determinations 

Committees into the terms of standard 

CDS documentation; and (iii) instituted 

a common standard effective date for 

CDS transactions. Codifying key 

standardized processes into CDS 

products has brought greater certainty to 

managing the risk of CDS transactions 

and has provided the structural 

foundation for greater automation, 

higher volumes in standardized 

transactions, and ultimately the 

establishment of centralized riskreducing infrastructure, such as central 

counterparties. 

B. Proposed Swap Trading Relationship 

Documentation Rule 

To promote the ‘‘timely and accurate 

* * * documentation * * * of all 

swaps’’ under § 4s(i)(1) of the CEA, 

proposed § 23.504(a) would require that 

swap dealers and major swap 

participants establish, maintain, and 

enforce written policies and procedures 

reasonably designed to ensure that each 

swap dealer or major swap participant 

and its counterparties have agreed in 

writing to all of the terms governing 

their swap trading relationship and have 

executed all agreements required by 

proposed § 23.504. 

Proposed § 23.504(b)(1) would specify 

that the swap trading relationship 

documentation include written 

agreement by the parties on terms 

relating to payment obligations, netting 

of payments, events of default or other 

termination events, netting of 

obligations upon termination, transfer of 

rights and obligations, governing law, 

valuation, and dispute resolution 

procedures. Proposed § 23.504(b)(2) 

would establish that all confirmations of 

swap transactions, as required under 

previously proposed § 23.501, would be 

considered to be part of the required 

swap trading relationship 

documentation. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6718 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

17See 75 FR 75432, Notice of Proposed 

Rulemaking, Protection of Collateral of 

Counterparties to Uncleared Swaps; Treatment of 

Securities in a Portfolio Margining Account in a 

Commodity Broker Bankruptcy, Dec. 3, 2010. 

18See 75 FR 75438 (‘‘Initial margin means money, 

securities, or property posted by a party to a swap 

as performance bond to cover potential future 

exposures arising from changes in the market value 

of the position.’’). 

19Standard Master Confirmation Agreements that 

have been published include: 

2004 Sovereign Master Credit Derivatives 

Confirmation Agreement. 

2003 Master Credit Derivatives Confirmation 

Agreement (Asia-Pacific). 

2003 Master Credit Derivatives Confirmation 

Agreement (European-North American). 

2009 Americas Master Equity Derivatives 

Confirmation Agreement. 

2008 Americas Master Designated/ExchangeTraded Contract Option Confirmation Agreement. 

2007 Americas Master Variance Swap 

Confirmation Agreement. 

2004 Americas Interdealer Master Equity 

Derivatives Confirmation Agreement. 

20See ISDA Collateral Committee, ‘‘Commentary 

to the Outline of the 2009 ISDA Protocol for 

Resolution of Disputed Collateral Calls,’’ June 2, 

2009 (stating ‘‘Disputed margin calls have increased 

significantly since late 2007, and especially during 

2008 have been the driver of large (sometimes > $1 

billion) uncollateralized exposures between 

professional firms.’’). 

21The failure of the market to set a price for 

mortgage-backed securities led to wide disparities 

in the valuation of CDS referencing mortgagebacked securities (especially collateralized debt 

obligations). Such wide disparities led to large 

collateral calls from dealers on AIG, hastening its 

downfall. See CBS News, ‘‘Calling AIG? Internal 

Docs Reveal Company Silent About Dozens Of 

Collateral Calls,’’ Jun. 23, 2009, available at: 

Swap trading relationship 

documentation under proposed 

§ 23.504(b)(3)(i) and (ii) also would 

include credit support arrangements 

containing initial and variation margin 

requirements at least as high as those set 

by the Commission (for swap dealers 

and major swap participants that are not 

banks) and by prudential regulators (for 

entities that are banks). These credit 

support arrangements also would be 

required to identify the forms of eligible 

assets that may be used as margin and 

asset valuation haircuts. 

Under proposed § 23.504(b)(3)(iii) and 

(iv), the credit support arrangements 

between swap dealers and major swap 

participants would include 

documentation of the treatment of any 

assets used as margin for uncleared 

swaps. These provisions are intended to 

work together with the rules previously 

proposed under section 4s(l) of the 

CEA,17 and thus require documentation 

as to whether the funds and other 

property are to be segregated with an 

independent third party, in accordance 

with § 23.601(e). The provisions also are 

designed to work together with rules to 

be proposed under section 4s(e) of the 

CEA that relate to margin requirements. 

Under § 23.601, as previously 

proposed, swap dealers and major swap 

participants trading uncleared swaps 

would be required to notify each 

counterparty that the counterparty has 

the right to require segregation of the 

funds or other property that it supplies 

as ‘‘initial margin,’’ a term defined in 

previously proposed § 23.600.18 At the 

request of the counterparty, the swap 

dealer or major swap participant would 

be required to segregate such initial 

margin with an independent third party. 

Under section 4s(l) of the CEA, this 

segregation requirement would not 

apply to variation margin payments. 

Proposed § 23.602(a)(2), however, 

would permit the swap dealer or major 

swap participant and the counterparty 

to agree that variation margin also may 

be held in a segregated account. Under 

proposed § 23.601(e), swap dealers and 

major swap participants would notify 

each counterparty of the opportunity to 

revisit their segregation decision once 

per calendar year. 

Swap dealers and major swap 

participants also must comply with 

proposed § 23.603(a), which would 

provide that segregated initial margin 

may only be invested consistent with 

the standards for investment of 

customer funds that the Commission 

applies to exchange-traded futures (see 

§ 1.25 of Commission regulations), and 

with proposed § 23.603(b), which would 

provide that swap dealers and major 

swap participants and their 

counterparties may enter into any 

commercial arrangement, in writing, 

regarding the investment of segregated 

initial margin and the related allocation 

of the gains and losses resulting from 

such investments. The Commission 

anticipates that documentation of the 

foregoing matters would be included in 

the trading relationship documentation 

required pursuant to proposed 

§ 23.504(b)(3)(iii). 

Swap dealers and major swap 

participants could maintain standard 

templates for documenting their trading 

relationships as a way of complying 

with the requirements of § 23.504. The 

Commission would also consider it a 

sound practice for swap dealers and 

major swap participants to require 

senior management in the business 

trading and risk management units to 

approve all templates, and any material 

modifications to them. The Commission 

recognizes the work that the industry 

has undertaken over the past several 

years to update and standardize the 

documentation it relies upon for various 

asset classes, and the Commission 

encourages market participants to adopt 

standardized confirmation templates, 

standardized master confirmation 

agreements,19 standardized product 

definitions, and other standardized 

documentation developed by the 

industry. Standardized documentation 

and definitions promote standardized 

products, which may lead to greater 

liquidity and more efficient pricing. In 

addition, increased product 

standardization may bring systemic riskreduction benefits as the risks 

associated with standardized products 

are better understood by the entire 

marketplace. 

C. Proposed Swap Valuation Provisions 

Swap valuation disputes have long 

been recognized as a significant problem 

in the OTC derivatives market.20 The 

ability to determine definitively the 

value of a swap at any given time lies 

at the center of many of the OTC 

derivatives market reforms contained in 

the Dodd-Frank Act and is a cornerstone 

of risk management. Swap valuation is 

also crucial for determining capital and 

margin requirements applicable to swap 

dealers and major swap participants and 

therefore plays a primary role in risk 

mitigation for uncleared swaps. 

The Commission recognizes that swap 

valuation is not always an easy task. In 

some instances, there is widespread 

agreement on valuation methodologies 

and the source of formula inputs for 

frequently traded swaps. These swaps 

are the proverbial ‘‘low-hanging fruit,’’ 

and many have been accepted for 

clearing (i.e., commonly traded interest 

rate swaps and credit default swaps). 

However, parties often dispute 

valuations of thinly traded swaps where 

there is not widespread agreement on 

valuation methodologies or the source 

for formula inputs. Many of these swaps 

are thinly traded either because of their 

limited use as risk management tools or 

because they are simply too customized 

to have comparable counterparts in the 

market. As many of these swaps are 

valued by dealers internally by 

‘‘marking-to-model,’’ their counterparties 

may dispute the inputs and 

methodologies used in the model. As 

uncleared swaps are bilateral, privately 

negotiated contracts, on-going swap 

valuation for purposes of initial and 

variation margin calculation and swap 

terminations or novations, has also been 

largely a process of on-going negotiation 

between the parties. The inability to 

agree on the value of a swap became 

especially acute during the 2007–2009 

financial crisis when there was 

widespread failure of the market inputs 

needed to value many swaps.21


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6719 

http://www.cbsnews.com/stories/2009/06/23/ 

cbsnews_investigates/main5106672.shtml. 

22Such information includes the date and time 

the swap was accepted for clearing, the name of the 

DCO clearing the swap, the name of the clearing 

member clearing the swap for the swap dealer or 

major swap participant, and, if known, the name of 

the clearing member clearing the swap for the 

counterparty. 

23The proposed Notice of Proposed Rulemaking, 

Risk Management Requirements for Derivatives 

Clearing Organizations under part 39 are available 

on the Commission’s Web site at http:// 

www.cftc.gov. 

24See Swap Data Recordkeeping and Reporting 

Requirements, 75 FR 76573, Dec. 8, 2010, and EndUser Exception to Mandatory Clearing of Swaps, 75 

FR 80747, Dec. 23, 2010. 

25 75 FR at 80748. 

26 75 FR at 80749 and 80755. 

27 75 FR at 76593; see also section 4r of the CEA. 

The Commission believes that 

prudent risk management requires that 

market participants be able to value 

their own swaps in a predictable and 

objective manner; the failure to do so 

may lead to systemic risk. Accordingly, 

to promote the ‘‘timely and accurate 

* * * valuation of all swaps’’ under 

§ 4s(i)(1) of the CEA, proposed 

§ 23.504(b)(4) would require that the 

swap trading documentation include 

written documentation in which the 

parties agree on the methods, 

procedures, rules and inputs for 

determining the value of each swap at 

any time from execution to the 

termination, maturity, or expiration of 

the swap. The agreed methods, 

procedures, rules and inputs would be 

required to constitute a complete and 

independently verifiable methodology 

for valuing each swap entered into 

between the parties. Proposed 

§ 23.504(b)(4)(iii) would require that the 

methodology include complete 

alternative methods for determining the 

value of the swap in the event that one 

or more inputs to the methodology 

become unavailable or fail, such as 

during times of market stress or 

illiquidity. All agreements on valuation 

would be considered part of the swap 

trading relationship documentation. 

This proposed rule is an important 

complement to previously proposed 

§ 23.502 (portfolio reconciliation), 

which requires swap dealers and major 

swap participants to resolve a dispute 

over the valuation of a swap within one 

business day. By requiring agreement 

with each counterparty on the methods 

and inputs for valuation of each swap, 

it is expected that § 23.504(b)(4) will 

assist swap dealers and major swap 

participants to resolve valuation 

disputes in a timely manner, thereby 

reducing risk. 

D. Submission of Swaps for Clearing 

Under proposed § 23.504(b)(6), upon 

acceptance of a swap by a registered 

derivatives clearing organization (DCO), 

each swap dealer and major swap 

participant would be required to create 

a record containing certain items of 

information,22 along with a statement 

that in accordance with the rules of the 

DCO, the original swap is extinguished 

and is replaced by equal and opposite 

swaps between clearing members and 

the DCO. This provision would require 

that all terms of the cleared swap 

conform to the templates established 

under the DCO’s rules, and that all 

terms of the swap, as carried on the 

books of the clearing member, conform 

to the terms of the cleared swap 

established under the DCO’s rules. 

Proposed § 23.504(b)(6), while 

addressing the issues prescribed under 

§ 4s(i)(1) of the CEA, is intended to 

correspond to proposed § 39.12(b)(4).23

The purpose of these provisions is to 

encourage the standardization of swaps 

and to avoid differences that could 

compromise the benefits of clearing 

between the terms of a swap as carried 

at the DCO level and at the clearing 

member level. Any such differences 

would raise both customer protection 

and systemic risk concerns. From a 

customer protection standpoint, if the 

terms of the swap at the customer level 

differ from those at the clearing level, 

then the customer will not receive the 

full transparency and liquidity benefits 

of clearing, and legal and basis risk will 

be introduced into the customer 

position. Similarly, from a systemic 

perspective, any differences could 

diminish overall price discovery and 

liquidity and increase uncertainties and 

unnecessary costs into the insolvency 

resolution process. Standardizing the 

terms of a swap upon clearing would 

facilitate trading and promote the 

mitigation of risk for all participants in 

the swap markets. 

Standardization also will impose 

structure on the general economic 

function of the contract and will 

facilitate automated processing and the 

ability for participants to replicate the 

trade easily. This allows market 

participants to trade in and out of 

contracts easily and lowers transaction 

costs, which in turn enables greater 

market liquidity and expansion of the 

market to more participants. 

E. Documentation Audit and 

Recordkeeping 

In keeping with prudent risk 

management, § 23.504(c) would require 

an annual audit of the swap trading 

relationship documentation required by 

§ 23.504 to ensure compliance with 

approved documentation policies and 

procedures and Commission 

regulations. Proposed § 23.504(d) would 

require swap dealers and major swap 

participants to keep records in 

compliance with this section. 

F. Reporting Swap Valuation Disputes 

Proposed § 23.504(e) would require 

that swap dealers and major swap 

participants promptly notify the 

Commission, any applicable prudential 

regulator, and the Securities and 

Exchange Commission with regard to 

security-based swap agreements if any 

swap valuation dispute is not resolved 

within one business day, if the dispute 

is with a counterparty that is a swap 

dealer or major swap participant; or 

within five business days, if the dispute 

is with a counterparty that is not a swap 

dealer or major swap participant. This 

proposed rule would complement 

previously proposed § 23.502, which 

requires portfolio reconciliation and 

resolution of valuation disputes. It also 

would allow authorities to recognize 

and respond to outstanding swap 

valuation disputes, which if left 

uncollateralized, may lead to systemic 

risk. 

G. Proposed End User Exception 

Documentation Rule 

Proposed § 23.505 would work 

together with the swap data 

recordkeeping and reporting 

requirements rules and end-user 

exception to mandatory clearing rules, 

both previously proposed by the 

Commission.24 Under these previously 

proposed rules, ‘‘a swap otherwise 

subject to mandatory clearing is subject 

to an elective exception from clearing if 

one party to the swap is not a financial 

entity, is using the swaps to hedge or 

mitigate commercial risk, and notifies 

the Commission * * * how it generally 

meets its financial obligations 

associated with entering into noncleared swaps (the ‘end-user clearing 

exception’).’’ 25 Under previously 

proposed § 39.6, the end-user clearing 

exception is elected by providing ten 

additional items of information to a 

swap data repository (SDR) through a 

‘‘check-the-box notification process.’’ 26

As explained in the swap data 

recordkeeping and reporting rules, swap 

dealers and major swap participants 

will have the responsibility for reporting 

to SDRs ‘‘with respect to the majority of 

swaps.’’ 27 In order to ensure that swap 

dealers and major swap participants 

comply with all mandatory clearing 

requirements and in light of their 

unique reporting obligations, it is 

critical that they possess documentation 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6720 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

28 5 U.S.C. 601 et seq. 

29 47 FR 18618, Apr. 30, 1982. 

sufficient to support a reasonable belief 

that their counterparties meet the 

statutory requirements for electing an 

exception from mandatory clearing. 

Accordingly, the Commission is 

proposing § 23.505. 

Proposed § 23.505 would require 

swap dealers and major swap 

participants to obtain documentation 

from any counterparty seeking to 

exercise its rights under the end-user 

clearing exception from the mandatory 

clearing requirement under section 

2h(7) of the CEA. For swaps subject to 

the mandatory clearing requirement, the 

proposed rule would require that swap 

dealers and major swap participants 

comply with any mandatory clearing 

requirement by obtaining 

documentation sufficient to provide the 

swap dealer or major swap participant 

with a reasonable basis to believe that 

its counterparty meets the statutory 

conditions required for an exception 

from a mandatory clearing requirement, 

as defined in section 2h(7) of the CEA. 

H. Application of Proposed Regulations 

to Existing Swap Documentation 

The Commission recognizes that 

amending all existing trading 

relationship documentation would 

present a substantial undertaking for the 

market. Therefore, the Commission 

invites comment on the implementation 

of proposed § 23.504. While much of the 

existing swap documentation among 

swap dealers, major swap participants, 

and their counterparties likely would be 

in compliance with § 23.504(b), the 

Commission requests comment on an 

appropriate interval following the 

effective date of the regulations after 

which to require compliance. This 

interval is expected to be somewhat 

shorter for swap documentation among 

swap dealers and major swap 

participants, and somewhat longer for 

swap documentation between swap 

dealers, major swap participants, and 

counterparties that are not swap dealers 

or major swap participants. 

The Commission also recognizes that 

many swap dealers and major swap 

participants may have dormant trading 

relationships with counterparties where 

swap documentation has been executed, 

but no trades are presently in effect 

thereunder or there are trades that will 

run-off over a short period of time, and 

there is no intention to enter into new 

trades. Therefore, the Commission 

invites comment on whether to provide 

a safe harbor for dormant trading 

relationships. 

I. Comment Requested 

The Commission requests comment 

on all aspects of proposed §§ 23.504 and 

23.505. The Commission recognizes that 

there will be differences in the size and 

scope of the business of particular swap 

dealers and major swap participants. 

Therefore, comments are solicited on 

whether certain provisions of the 

proposed regulations should be 

modified or adjusted to reflect the 

differences among swap dealers and 

major swap participants or differences 

among asset classes. In particular, the 

Commission requests comment on the 

following questions: 

• How long would swap dealers and 

major swap participants require to bring 

their existing documentation into 

compliance with § 23.504? Will 

compliance take less time for existing 

documentation between such registrants 

and longer for existing documentation 

between registrants and non-registrants? 

Would three months following the 

effective date of the rules be long 

enough for registrants to bring existing 

documentation among themselves into 

compliance? Would six months 

following the effective date of the rules 

be long enough for registrants to bring 

existing documentation with nonregistrants into compliance? 

• Should § 23.504 include a safe 

harbor for swaps entered into on, or 

subject to the rules of, a board of trade 

designated as a contract market? 

• Should § 23.504 require that the 

governing body of each swap dealer or 

major swap participant approve the 

policies and procedures for agreeing 

with each counterparty to all the terms 

governing the trading relationship? 

• Should any other aspects of the 

trading relationship be required to be 

included in § 23.504? 

• Should the requirement for 

agreement on events of default or 

termination events be further defined? 

For example, should parties be required 

to specify all cross default implications 

and potential claims with regard to their 

respective affiliates and any other 

present or future debt obligations or 

transactions? 

• Should § 23.504 specifically 

delineate the types of payment 

obligation terms that must be included 

in the trading relationship 

documentation? 

• Should specific requirements for 

dispute resolution be included in 

§ 23.504 (such as time limits), and if so, 

what requirements are appropriate for 

all swaps? 

• Should the valuation agreement in 

§ 23.504(b)(4) require greater specificity? 

If so, what level of detail should be 

required? 

• Should the valuation methodology 

provision in § 23.504(b)(4) expressly 

prohibit use of internal and/or 

proprietary inputs and methods and if 

not, why are inputs and methods 

developed and verifiable only by one 

party to the swap transaction acceptable 

given the safety and soundness and 

transparency objectives of the DoddFrank Act? 

• If internal and/or proprietary inputs 

or procedures are permitted under 

§ 23.504(b)(4), should the swap dealer or 

major swap participant be required to 

disclose such information and the 

sources thereof to the counterparty and 

regulators in sufficient detail for them to 

undertake comparative analysis of such 

information and verify the valuation 

calculations? 

• Under proposed § 23.504(b)(6)(v), 

should all the terms of the cleared swap 

be required to conform to the templates 

established by the DCO or are there 

particular terms or rights under the 

swap that could be retained without 

prejudice to the need to standardize 

swaps for the purposes of clearing? 

• Is the requirement that each swap 

dealer and major swap participant 

conduct an independent internal or 

external audit of no less than 5% of the 

swap trading relationship 

documentation required by the rule 

executed during the previous twelve 

month period appropriate? 

• Would a failure of swap trading 

relationship documentation to comply 

with the requirements of proposed 

§ 23.504 create uncertainty regarding the 

enforceability of swaps transacted under 

such non-compliant documentation? If 

so, how should this uncertainty be 

addressed in the rules? 

• Are the requirements of proposed 

§ 23.505 appropriate? How should swap 

dealers and major swap participants 

verify that their counterparties are 

properly claiming an exception from a 

given mandatory clearing requirement? 

• Are there any anticompetitive 

implications to the proposed rules? If 

so, how could the proposed rules be 

implemented to achieve the purposes of 

the CEA in a less anticompetitive 

manner? 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities.28

The Commission previously has 

established certain definitions of ‘‘small 

entities’’ to be used in evaluating the 

impact of its regulations on small 

entities in accordance with the RFA.29


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6721 

30 Id. at 18619. 

31 Id. 

32 Id. at 18620. 33 44 U.S.C. 3501 et seq. 

The proposed rules would affect swap 

dealers and major swap participants. 

Swap dealers and major swap 

participants are new categories of 

registrants. Accordingly, the 

Commission has not previously 

addressed the question of whether such 

persons are, in fact, small entities for 

purposes of the RFA. The Commission 

previously has determined, however, 

that futures commission merchants 

should not be considered to be small 

entities for purposes of the RFA.30 The 

Commission’s determination was based, 

in part, upon the obligation of futures 

commission merchants to meet the 

minimum financial requirements 

established by the Commission to 

enhance the protection of customers’ 

segregated funds and protect the 

financial condition of futures 

commission merchants generally.31 Like 

futures commission merchants, swap 

dealers will be subject to minimum 

capital and margin requirements and are 

expected to comprise the largest global 

financial firms. The Commission is 

required to exempt from swap dealer 

designation any entities that engage in 

a de minimis level of swaps dealing in 

connection with transactions with or on 

behalf of customers. The Commission 

anticipates that this exemption would 

tend to exclude small entities from 

registration. Accordingly, for purposes 

of the RFA for this rulemaking, the 

Commission is hereby proposing that 

swap dealers not be considered ‘‘small 

entities’’ for essentially the same reasons 

that futures commission merchants have 

previously been determined not to be 

small entities and in light of the 

exemption from the definition of swap 

dealer for those engaging in a de 

minimis level of swap dealing. 

The Commission also has previously 

determined that large traders are not 

‘‘small entities’’ for RFA purposes.32 In 

that determination, the Commission 

considered that a large trading position 

was indicative of the size of the 

business. Major swap participants, by 

statutory definition, maintain 

substantial positions in swaps or 

maintain outstanding swap positions 

that create substantial counterparty 

exposure that could have serious 

adverse effects on the financial stability 

of the United States banking system or 

financial markets. Accordingly, for 

purposes of the RFA for this 

rulemaking, the Commission is hereby 

proposing that major swap participants 

not be considered ‘‘small entities’’ for 

essentially the same reasons that large 

traders have previously been 

determined not to be small entities. 

Moreover, the Commission is carrying 

out Congressional mandates by 

proposing this regulation. Specifically, 

the Commission is proposing these 

regulations to comply with the DoddFrank Act, the aim of which is to reduce 

systemic risk presented by swap dealers 

and swap market participants through 

comprehensive regulation. The 

Commission does not believe that there 

are regulatory alternatives to those being 

proposed that would be consistent with 

the statutory mandate. 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 significant economic impact on 

a substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 33 imposes certain requirements 

on Federal agencies (including the 

Commission) in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

This proposed rulemaking would result 

in new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management and Budget (OMB) for 

review in accordance with 44 U.S.C. 

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

this collection of information is ‘‘Swap 

Trading Relationship Documentation 

Requirements for Swap Dealers and 

Major Swap Participants.’’ An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number. The OMB has not yet assigned 

this collection a control number. 

The collection of information under 

these proposed rules is necessary to 

implement new section 4s(i) the CEA, 

which expressly requires the 

Commission to adopt rules governing 

documentation standards for swap 

dealers and major swap participants and 

explicitly obligates such registrants to 

conform to the documentation standards 

established by the Commission. The 

required recordkeeping is particularly 

essential to ensuring that each swap 

dealer and major swap participant 

documents all of the terms of its swap 

trading relationships with its 

counterparties. Obligating certain swap 

market participants to memorialize, in 

writing, their mutual agreement with 

respect to margin requirements, margin 

assets, payment and netting, termination 

events, the calculation and netting of 

obligations upon termination, transfer of 

rights and obligations, governing law, 

valuation methods and inputs, and 

dispute resolution procedures would 

decrease the likelihood of significant 

counterparty disputes; promote 

transaction standardization; enhance the 

parties’ abilities to engage in riskreducing exercises such as bilateral 

offset, portfolio reconciliation, and 

portfolio compression; provide for more 

timely and orderly resolution of events 

of default; and enhance the stability of 

the market place as a whole. The 

proposed regulations also would ensure 

that certain important information 

regarding cleared swaps would be 

preserved and would assist in ensuring 

compliance with the mandatory clearing 

requirements of the Act and 

Commission regulations by requiring 

the maintenance of documentation 

demonstrating that the statutory 

conditions for an exception to those 

requirements have been satisfied. The 

reporting requirement established by the 

proposed rules would ensure that the 

Commission is provided with timely 

notification of swap valuation disputes 

that relevant market participants have 

been unable to resolve promptly. 

The proposed regulation would be an 

important part of the Commission’s 

regulatory program for swap dealers and 

major swap participants. The 

information required to be preserved 

would be used by representatives of the 

Commission and any examining 

authority responsible for reviewing the 

activities of the swap dealer or major 

swap participant to ensure compliance 

with the CEA and applicable 

Commission regulations. 

If the proposed regulations are 

adopted, responses to this collection of 

information would be mandatory. The 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and Information.’’ 

In addition, section 8(a)(1) of the CEA 

strictly prohibits the Commission, 

unless specifically authorized by the 

CEA, from making public ‘‘data and 

information that would separately 

disclose the business transactions or 

market positions of any person and 

trade secrets or names of customers.’’ 

The Commission also is required to 

protect certain information contained in 

a government system of records 

according to the Privacy Act of 1974, 5 

U.S.C. 552a. 

1. Information Provided By Reporting 

Entities/Persons 

Proposed § 23.504 generally would 

require swap dealers and major swap 

participants to develop and retain 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6722 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

34The information collection burden associated 

with the maintenance of confirmations of swaps 

transactions was calculated and accounted for in 

previously proposed regulations. See Confirmation, 

Portfolio Reconciliation, and Portfolio Compression 

Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519, Dec. 28, 2010. 

written swap trading relationship 

documentation (including the parties’ 

agreement with respect to the terms 

specified in the regulation; credit 

support arrangements; valuation 

methods, procedures and inputs; 

records of important information 

regarding their cleared swaps; and 

written policies and procedures for 

maintaining the documentation required 

by the proposed rule). It also would 

require swap dealers and major swap 

participants to report to the Commission 

and, as applicable, to the Securities and 

Exchange Commission or prudential 

regulators, swap valuation disputes that 

have not been resolved between the 

parties within designated time frames. 

Proposed § 23.505 would require swap 

dealers and major swap participants to 

obtain documentation sufficient to 

provide a reasonable basis on which to 

believe that a counterparty meets the 

statutory conditions necessary for an 

exception from the mandatory clearing 

requirements, where applicable. 

The information collection burden 

associated with the proposed 

regulations is estimated to be 6,168 

hours per year, at an initial annual cost 

of $684,300 for each swap dealer and 

major swap participant. The aggregate 

information collection burden is 

estimated to be 1,850,400 hours per 

year, at an initial annual aggregate cost 

of $205,290,000. Burden means the total 

time, effort or financial resources 

expended by persons to generate, 

maintain, retain, disclose, or provide 

information to or for a Federal agency. 

The Commission has characterized the 

annual costs as initial costs as the 

Commission anticipates that the cost 

burdens will be reduced dramatically 

over time as the agreements and other 

records required by the proposed 

regulations become increasingly 

standardized within the industry. 

The Commission anticipates that the 

majority of the information collection 

burden would arise from the 

recordkeeping obligations contained in 

§ 23.504(b). Proposed § 23.504(b) would 

require each swap dealer and major 

swap participant to create and maintain 

written trading relationship 

documentation that contains the parties’ 

agreement with respect to all of the 

terms of the parties’ trading relationship 

including, without limitation, the terms 

delineated in § 23.504(b)(1); the parties’ 

credit support arrangements, including 

the margin-related terms described in 

§ 23.504(b)(3); and the parties’ 

agreement with respect to the particular 

procedures and inputs that will be used 

to determine the value of a swap from 

execution to termination, maturity, or 

expiration in a manner that can be 

independently replicated as required by 

§ 23.504(b)(4). It also requires swap 

dealers and major swap participants to 

make and maintain records of cleared 

swaps containing the data contained in 

proposed § 23.504(b)(6). 

Maintenance of written credit support 

arrangements and other trading 

relationship documentation that contain 

the terms required to be memorialized 

by the proposed §§ 23.504(b)(1) and (3) 

is prudent business practice and the 

Commission anticipates that swap 

dealers and major swap participants 

already maintain some form of this 

documentation with each of their 

counterparties in the ordinary course of 

their business. Moreover, proposed 

§ 23.504(b)(2) provides that the swap 

transaction confirmations described 

under previously proposed § 23.501 

would be considered part of the parties’ 

trading relationship documentation and 

thus, pre-existing swap confirmations 

that include the terms required by 

§ 23.504 would obviate the need for the 

parties to develop new documentation 

with respect to those terms.34

Accordingly, any additional 

expenditure related to §§ 23.504(b)(1) 

and (3) likely would be limited to the 

time initially required to review and, as 

needed, to re-negotiate and amend, 

existing trading relationship 

documentation to ensure that it 

encompasses all of the required terms 

and to develop a system for maintaining 

any newly created records. Many of the 

amended provisions are likely to apply 

to multiple counterparties, thereby 

reducing the per counterparty hour 

burden. 

With respect to the valuation 

agreement requirement established by 

proposed § 23.504(b)(4), the 

Commission believes that swap dealers 

and major swap participants are likely 

to have existing, internal mechanisms 

for valuing their swaps transactions and 

thus, the hour burden associated with 

this obligation would be limited to the 

time needed to negotiate agreements 

with counterparties on mutually 

acceptable valuation methods, should 

their individual valuation procedures 

differ, and to commit the agreement to 

writing as part of the parties’ swap 

trading relationship documentation. It is 

likely that the need for new valuation 

agreements may be limited further to 

instances of complex or highly 

customized swaps transactions, as the 

valuation methods for ‘‘plain vanilla’’ 

swaps are likely to be somewhat 

standardized. 

The Commission estimates the initial 

annual hour burden associated with 

negotiating, drafting, and maintaining 

the swap trading relationship 

documentation described above that is 

required by proposed § 23.504(b) 

(excluding the cleared swap records 

required by proposed § 23.504(b)(6)), to 

be 10 hours per counterparty, or an 

average of 5,400 hours per swap dealer 

or major swap participant. As stated 

above, the Commission expects that this 

annual per registrant burden would be 

reduced considerably over time as there 

would be little need to modify the swap 

trading relationship documentation on 

an ongoing basis. Once a swap dealer or 

major swap participant modifies its preexisting documentation with each of its 

counterparties, the annual burden 

associated with the swap trading 

relationship documentation would be 

minimal. In addition, because all swap 

dealers and major swap participants 

would be required to maintain the swap 

trading relationship documentation 

established by the proposed regulation, 

the Commission believes that it is likely 

that many of the terms of such 

documentation would become 

progressively more standardized within 

the industry, further reducing the 

bilateral negotiation and drafting 

responsibilities associated with the 

regulation. 

With respect to the required records 

of cleared swaps, the Commission 

estimates that swap dealers and major 

swap participants will spend an average 

of 2 hours per trading day, or 504 hours 

per year, maintaining the required data 

for these transactions. The Commission 

notes that the specific information 

required for each transaction is limited 

and is of the type that would be 

maintained in a prudent market 

participant’s ordinary course of 

business. The Commission also notes 

that the statement required to be 

preserved for each cleared swap likely 

would become common to each 

derivatives clearing organization. 

In addition to the above, the 

Commission anticipates that swap 

dealers and major swap participants 

will spend an average of 16 hours per 

year drafting and, as needed, updating 

the written policies and procedures 

required by proposed § 23.504(a); 4 

hours per year maintaining records of 

the results of the annual documentation 

compliance audits mandated by 

proposed § 23.504(c); and 220 hours per 

year, or 1 hour per end user, 

maintaining records of the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6723 

35The written policies and procedures also may 

be drafted and maintained by the chief compliance 

officer of the swap dealer or major swap participant. 

According to recent Bureau of Labor Statistics 

findings, the mean hourly wage of any employee 

under occupation code 13–1401, ‘‘Compliance 

Officers, Except Agriculture, Construction, Health 

and Safety, and Transportation,’’ that is employed 

by the ‘‘Securities and Commodity Contracts 

Intermediation and Brokerage Industry is $38.77. 

http://www.bls.gov/oes/current/oes131041.htm. 

36http://www.bls.gov/oes/2099/ 

mayowe23.1011.htm. 

37http://www.bls.gov/oes/current/oes113031.htm. 

38Consistent with the Commission’s proposed 

regulations that would require swap dealers and 

major swap participants to compile and maintain 

certain transaction records (including daily trading 

records), the Commission has estimated the hour 

burden associated with the cleared swap 

recordkeeping requirement by approximating the 

number of hours per trading day that an employee 

of a swap dealer or major swap participant likely 

would spend compiling and retaining the relevant 

records. See Reporting, Recordkeeping, and Daily 

Trading Record Requirements for Swap Dealers and 

Major Swap Participants, 75 FR 76666, Dec. 9, 2010. 

documentation required by proposed 

§ 23.505. 

The only reporting requirement 

contained in the proposed rules is the 

obligation of swap dealers and major 

swap participants to report swap 

valuation disputes that are not resolved 

between the participants within 

designated time periods. The 

Commission expects that swap dealers 

and major swap participants will spend 

an average of 24 hours per year 

satisfying this requirement. 

The hour burden calculations below 

are based upon a number of variables 

such as the number of swap dealers and 

major swap participants in the 

marketplace, the average number of 

counterparties of each of these 

registrants, and the average hourly wage 

of the employees of these registrants 

that would be responsible for satisfying 

the obligations established by the 

proposed regulation. Swap dealers and 

major swap participants are new 

categories of registrants. Accordingly, it 

is not currently known how many swap 

dealers and major swap participants 

will become subject to these rules, and 

this will not be known to the 

Commission until the registration 

requirements for these entities become 

effective after July 16, 2011, the date on 

which the Dodd-Frank Act becomes 

effective. While the Commission 

believes there will be approximately 200 

swap dealers and 50 major swap 

participants, it has taken a conservative 

approach, for PRA purposes, in 

estimating that there will be a combined 

number of 300 swap dealers and major 

swap participants who will be required 

to comply with the recordkeeping 

requirements of the proposed rules. The 

Commission estimated the number of 

affected entities based on industry data. 

Similarly, due to the absence of prior 

experience in regulating swap dealers 

and major swap participants and with 

regulations similar to the proposed 

rules, the actual, average number of 

counterparties that a swap dealer or 

major swap participant is likely to have 

and the average size of its portfolio with 

particular counterparties is uncertain. 

Consistent with other proposed 

rulemakings, the Commission has 

estimated that each of the 14 major 

swap dealers has an average 7,500 

counterparties and the other 286 swap 

dealers and major swap participants 

have an average of 200 counterparties 

per year, for an average of 540 total 

counterparties per registrant. 

The Commission anticipates that the 

written policies and procedures 

required by the proposed regulations, 

along with the recordkeeping and 

reporting requirements, typically would 

be drafted and maintained by in-house 

counsel and financial or operational 

managers within the firm.35 According 

to the Bureau of Labor Statistics 

findings, the mean hourly wage of an 

employee under occupation code 23– 

1011, ‘‘Lawyers,’’ that is employed by 

the ‘‘Securities and Commodity 

Contracts Intermediation and Brokerage 

Industry’’ is $82.22.36 The mean hourly 

wage of an employee under occupation 

code 11–3031, ‘‘Financial Managers,’’ 

(which includes operations managers) 

in the same industry is $74.41.37

Because swap dealers and major swap 

participants include large financial 

institutions whose employees’ salaries 

may exceed the mean wage provided, 

however, the Commission generally has 

estimated the cost burden of the 

proposed regulations based upon an 

average salary of $100 per hour. To 

account for the possibility that the 

services of outside counsel may be 

required to satisfy the requirements 

associated with negotiating, drafting, 

and maintaining the required trading 

relationship documentation (except the 

cleared swap records), the Commission 

has used an average salary of $125 per 

hour to calculate this burden for one 

half of the necessary hours. 

Based upon the above, the estimated 

hour burden was calculated as follows: 

Drafting and Updating Policies and 

Procedures. This hour burden arises 

from the time necessary to develop and 

periodically update the policies and 

procedures required by the proposed 

regulations. 

Number of registrants: 300. 

Frequency of collection: Initial 

drafting, updating as needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 300. 

Estimated annual hour burden per 

registrant: 16 hours. 

Estimated aggregate annual hour 

burden: 4,800 burden hours [300 

registrants × 16 hours per registrant]. 

Swap Trading Relationship 

Documentation (excluding cleared 

swaps records). This hour burden arises 

from the proposed obligation that swap 

dealers and major swap participants 

execute and maintain swap trading 

relationship documentation. 

Number of registrants: 300. 

Frequency of collection: At least once 

per counterparty. 

Estimated number of annual 

responses per registrant: 540 [one set of 

agreements per counterparty]. 

Estimated aggregate number of 

annual responses: 162,000 [300 

registrants × 540 counterparties]. 

Estimated annual hour burden per 

registrant: 5,400 [540 counterparties × 

10 hours per counterparty]. 

Estimated aggregate annual hour 

burden: 1,620,000 [300 registrants × 

5,400 hours per registrant]. 

Cleared Swap Recordkeeping. This 

hourly burden arises from the proposed 

requirement that swap dealers and 

major swap participants make and 

maintain records of specified 

information related to each swap 

accepted for clearing by a derivatives 

clearing organization. 

Number of registrants: 300. 

Frequency of collection: Daily. 

Estimated number of annual 

responses per registrant: 252 [252 

trading days per year].38

Estimated aggregate number of 

annual responses: 75,600 [300 

registrants × 252 trading days]. 

Estimated annual hour burden per 

registrant: 504 [252 trading days × 2 

hours per trading day]. 

Estimated aggregate hour burden: 

151,200 [300 registrants × 504 hours]. 

Audit Recordkeeping. This hourly 

burden arises from the proposed 

requirement that swap dealers and 

major swap participants make and 

maintain records of the results of their 

annual internal or external audits to 

examine for compliance with the 

requirements of the proposed 

regulations. 

Number of registrants: 300. 

Frequency of collection: Annually. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 300 [300 registrants × 

1]. 

Estimated annual hour burden per 

registrant: 4. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6724 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

39The Commission estimates that half of the 

counterparties that are not swap dealers or major 

swap participants may claim the end user exception 

on an annual basis. 40http://www.bls.gov/oes/current/oes113031.htm. 41 7 U.S.C. 19(a). 

Estimated aggregate annual hour 

burden: 1,200 [300 registrants × 4 

hours]. 

Valuation Dispute Reporting. This 

hourly burden arises from the proposed 

requirement that swap dealers and 

major swap participants submit reports 

of certain unresolved valuation 

disputes. 

Number of registrants: 300. 

Frequency of collection: As 

applicable. 

Estimated number of annual 

responses per registrant: 240. 

Estimated aggregate number of 

annual responses: 72,000 [300 

registrants × 240 responses]. 

Estimated annual hour burden per 

registrant: 24. 

Estimated aggregate annual hour 

burden: 7,200 [300 registrants × 24 

hours]. 

End user Exception Documentation 

Recordkeeping. This hourly burden 

arises from the proposed requirement 

that swap dealers and major swap 

participants make and maintain records 

of its end user exception 

documentation. 

Number of registrants: 300. 

Frequency of collection: Once per 

applicable counterparty. 

Estimated number of annual 

responses per registrant: 220.39

Estimated aggregate number of 

annual responses: 66,000 [300 

registrants × 220 responses]. 

Estimated annual hour burden per 

registrant: 220 [220 responses × 1 hour 

per response]. 

Estimated aggregate annual hour 

burden: 66,000 [300 registrants × 220 

responses]. 

In addition to the per hour burden 

discussed above, the Commission 

anticipates that swap dealers and major 

swap participants may incur certain 

start-up costs in connection with the 

proposed recordkeeping obligations. 

Such costs would include the 

expenditures related to developing and 

installing new recordkeeping 

technology or re-programming or 

updating existing recordkeeping 

technology and systems to enable the 

swap dealer or major swap participant 

to collect, maintain, and re-produce any 

newly required records. The 

Commission believes that swap dealers 

and major swap participants generally 

could adapt their current infrastructure 

to accommodate the new or amended 

technology and thus, no significant 

infrastructure expenditures would be 

needed. The Commission estimates the 

programming burden hours associated 

with technology improvements to be 40 

hours. 

According to recent Bureau of Labor 

Statistics findings, the mean hourly 

wages of computer programmers under 

occupation code 15–1021 and computer 

software engineers under program codes 

15–1031 and 1032 are between $34.10 

and $44.94.40 Because swap dealers and 

major swap participants generally will 

be large entities that may engage 

employees with wages above the mean, 

the Commission has conservatively 

chosen to use a mean hourly 

programming wage of $60 per hour. 

Accordingly, the start-up burden 

associated with the required 

technological improvements would be 

$2,400 [$60 × 40 hours per affected 

registrant] or $720,000 in the aggregate. 

2. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the recordkeeping 

burdens discussed above. The 

Commission specifically requests 

comment on the variables used in the 

above-referenced hourly burden 

calculations. For example, the 

Commission requests comment on the 

following: 

• What is the total number of swap 

dealers and major swap participants in 

the marketplace? 

• What is the average number of 

counterparties that a swap dealer or 

major swap participant is likely to have? 

• What percentage of those 

counterparties are other swap dealers or 

major swap participants? 

• What percentage of those 

counterparties is likely to meet the 

statutory qualifications required for an 

exception from the mandatory clearing 

requirement, as defined in section 2h(7) 

of the CEA and § 39.6? 

• What is the average size (number of 

swaps) of a portfolio that a swap dealer 

or major swap participant is likely to 

have with a particular type of 

counterparty? 

• To what extent do swap dealers and 

major swap participants currently enter 

into agreements that would satisfy the 

requirements of proposed § 23.504? 

• To what extent would swap dealers 

and major swap participants be able to 

standardize the swap trading 

relationship documentation required by 

§ 23.504? 

• To what extent would swap dealers 

and major swap participants be required 

to utilize the services of outside counsel 

in negotiating and drafting the swap 

trading relationship documentation and 

valuation and termination rights 

agreements that would be required by 

proposed § 23.504? 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments in 

order to: (i) Evaluate whether the 

proposed collection of information is 

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 collection 

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 collection 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, by fax at (202) 395– 

6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the ADDRESSES section of this 

notice of proposed rulemaking for 

comment submission instructions to the 

Commission. 

A copy of the supporting statements 

for the collections 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 

document in the Federal Register. 

Therefore, a comment is best assured of 

having its full effect if OMB receives it 

within 30 days of publication. 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA 41 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

a rulemaking under the CEA. By its 

terms, section 15(a) does not require the 

Commission to quantify the costs and 

benefits of a new regulation or to 

determine whether the benefits of the 

rule outweigh its costs; rather, it 

requires that the Commission ‘‘consider’’ 

the costs and benefits of its actions. 

Section 15(a) further specifies that 

costs and benefits of a proposed 

rulemaking shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6725 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may, in its discretion, give 

greater weight to any one of the five 

enumerated considerations and could, 

in its discretion, determine that, 

notwithstanding its costs, a particular 

regulation was necessary or appropriate 

to protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

CEA. 

Summary of proposed requirements. 

The proposed regulations would 

implement new section 4s(i) of the CEA, 

which was added by section 731 of the 

Dodd-Frank Act. The proposed 

regulations would establish certain 

documentation requirements applicable 

to swap dealers and major swap 

participants and related recordkeeping 

and reporting obligations. 

Costs. With respect to costs, the 

Commission has determined that the 

cost that would be borne by swap 

dealers and major swap participants to 

institute the policies and procedures, 

make and maintain the records, and 

perform the event-based reporting 

necessary to satisfy the new regulatory 

requirements are far outweighed by the 

benefits that would accrue to the 

financial system as a whole as a result 

of the implementation of the rules. 

For example, memorializing the 

specific terms of the swap trading 

relationship and swap transactions 

between counterparties is prudent 

business practice and, in fact, many 

market participants already use 

standardized documentation. 

Accordingly, it is believed that many, if 

not most, swap dealers and major swap 

participants currently execute and 

maintain trading relationship 

documentation of the type required by 

proposed § 23.504 in the ordinary 

course of their businesses, including 

documentation that contains several of 

the terms that would be required by the 

proposed rules. Thus, the hour and 

dollar burdens associated with the swap 

trading relationship documentation 

requirements may be limited to 

amending existing documentation to 

expressly include any additional terms 

required by the proposed rules. 

The Commission recognizes that swap 

dealers and major swap participants 

may face certain costs, such as the legal 

fees associated with negotiating and 

drafting the required documentation 

modifications, as they and their 

counterparties come into compliance 

with the new regulations. However, the 

Commission also believes that, to the 

extent that any substantial amendments 

or additions to existing documentation 

would be needed, such revisions would 

likely apply to multiple counterparties, 

thereby reducing the per counterparty 

burden imposed upon swap dealers and 

major swap participants. The 

Commission further expects the per 

hour and dollar burdens to be incurred 

predominantly in the first year or two 

after the effective date of the final 

regulations. Once a swap dealer or 

major swap participant has changed its 

pre-existing documentation with each of 

its counterparties to comply with the 

proposed rules, there likely will be little 

need to further modify such 

documentation on an ongoing basis. In 

addition, the Commission anticipates 

that standardized swap trading 

relationship documentation will 

develop quickly and progressively 

within the industry, dramatically 

reducing the cost to individual 

participants. 

The Commission expects the per hour 

burden associated with the remaining 

requirements of §§ 23.504 and 23.505 to 

be relatively minimal. The same is true 

of the sole reporting requirement 

contained in § 23.504. Such reporting is 

event-based and the Commission 

expects that instances of valuation 

disputes will decrease over time as 

valuation agreements are committed to 

writing pursuant to the proposed 

regulations. 

Finally, the Commission notes that 

most swap dealers and major swap 

participants have back office personnel, 

operational systems, and resources 

capable of maintaining the required 

records, performing the periodic 

reporting, and otherwise adjusting to the 

new regulatory framework without 

material diversion of resources away 

from commercial operations or 

substantial capital investment. 

Benefits. With respect to benefits, the 

Commission has determined that the 

proposed regulations that would require 

a swap dealer or major swap participant 

to document its swap trading 

relationship with each of its 

counterparties will promote 

standardization of documents and 

transactions, facilitate central trading 

and clearing, promote legal and 

financial certainty, decrease the number 

and scope of counterparty disputes, 

promote the timely resolution of 

disputes when they occur, and enhance 

the parties’ abilities to engage in riskreducing activities and will result in 

reduced risk, increased transparency, 

and greater liquidity and market 

integrity in the swaps marketplace. 

Moreover, the cleared swap records that 

are required to be preserved and the 

mandatory reporting of unresolved 

valuation disputes will be valuable tools 

in the Commission’s oversight of the 

affected registrants. Therefore, the 

Commission believes it is prudent to 

prescribe these proposed regulations. 

Public Comment. The Commission 

invites public comment on its costbenefit considerations. Commentators 

are also invited to submit any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits of the proposed rules with their 

comment letters. 

List of Subjects in 17 CFR Part 23 

Antitrust, Commodity futures, 

Conduct standards, Conflict of Interests, 

Major swap participants, Reporting and 

recordkeeping, Swap dealers, Swaps. 

For the reasons stated in this release, 

the Commission proposes to amend 17 

CFR part 23, as proposed to be added in 

FR Doc. 2010–29024, published in the 

Federal Register on November 23, 2010 

(75 FR 71379), and as proposed to be 

amended in FR Doc. 2010–32264, 

published in the Federal Register on 

December 28, 2010 (75 FR 81519) as 

follows: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

1. The authority citation for part 23 is 

revised to read as follows: 

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

6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21. 

2. Revise the table of contents for part 

23, subpart I to read as follows: 

Subpart I—Swap Documentation 

Sec. 

23.500 Definitions. 

23.501 Swap confirmation. 

23.502 Portfolio reconciliation. 

23.503 Portfolio compression. 

23.504 Swap trading relationship 

documentation. 

23.505 End user exception documentation. 

3. Add § 23.504 and § 23.505 to part 

23, subpart I, to read as follows: 

§ 23.504 Swap trading relationship 

documentation. 

(a) Policies and procedures. Each 

swap dealer and major swap participant 

shall establish, maintain, and enforce 

written policies and procedures 

reasonably designed to ensure that, 

prior to or contemporaneously with 

entering into a swap transaction with 

any counterparty, other than a 

derivatives clearing organization, the 

swap dealer or major swap participant 

executes written swap trading 

relationship documentation with its 

counterparty that complies with the 

requirements of this section. The 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
6726 Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 

policies and procedures shall be 

approved in writing by senior 

management of the swap dealer and 

major swap participant, and a record of 

the approval shall be retained. 

(b) Swap trading relationship 

documentation. (1) The swap trading 

relationship documentation shall be in 

writing and shall include all terms 

governing the trading relationship 

between the swap dealer or major swap 

participant and its counterparty, 

including, without limitation, terms 

addressing payment obligations, netting 

of payments, events of default or other 

termination events, calculation and 

netting of obligations upon termination, 

transfer of rights and obligations, 

governing law, valuation, and dispute 

resolution procedures. 

(2) The swap trading relationship 

documentation shall include all 

confirmations of swap transactions 

under § 23.501. 

(3) The swap trading relationship 

documentation shall include credit 

support arrangements, which shall 

contain, in accordance with applicable 

requirements under Commission 

regulations or regulations adopted by 

prudential regulators and without 

limitation, the following: 

(i) Initial and variation margin 

requirements; 

(ii) Types of assets that may be used 

as margin and asset valuation haircuts; 

(iii) Investment and rehypothecation 

terms for assets used as margin for 

uncleared swaps; and 

(iv) Custodial arrangements for 

margin assets, including whether 

margin assets are to be segregated with 

an independent third party, in 

accordance with § 23.601(e). 

(4) The swap trading relationship 

documentation shall include written 

documentation in which the parties 

agree on the methods, procedures, rules, 

and inputs for determining the value of 

each swap at any time from execution 

to the termination, maturity, or 

expiration of such swap. To the 

maximum extent practicable, the 

valuation of each swap shall be based 

on objective criteria, such as recentlyexecuted transactions or valuations 

provided by independent third parties 

such as derivatives clearing 

organizations. 

(i) Such methods, procedures, rules, 

and inputs shall be agreed for each swap 

prior to or contemporaneously with 

execution and shall be stated with the 

specificity necessary to allow the swap 

dealer, major swap participant, 

counterparty, the Commission, and any 

applicable prudential regulator to 

determine the value of the swap 

independently in a substantially 

comparable manner. 

(ii) Such methods, procedures, and 

rules shall include alternative methods 

for determining the value of the swap in 

the event of the unavailability or other 

failure of any input required to value 

the swap, provided that the alternative 

methods for valuing the swap comply 

with the requirements of this section. 

(iii) Provided that the requirements of 

this paragraph, including the 

independent valuation requirement of 

paragraph (b)(4)(i) of this section, are 

satisfied, a swap dealer or major swap 

participant is not required to disclose to 

the counterparty confidential, 

proprietary information about any 

model it may use internally to value a 

swap for its own purposes. 

(5) [Reserved] 

(6) Upon acceptance of a swap by a 

derivatives clearing organization, the 

swap trading relationship 

documentation shall include a record of 

the following information: 

(i) The date and time the swap was 

accepted for clearing; 

(ii) The name of the derivatives 

clearing organization; 

(iii) The name of the clearing member 

clearing for the swap dealer or major 

swap participant; 

(iv) The name of the clearing member 

clearing for the counterparty, if known; 

and 

(v) A statement that in accordance 

with the rules of the derivatives clearing 

organization: 

(A) The original swap is extinguished; 

(B) The original swap is replaced by 

equal and opposite swaps between 

clearing members and the derivatives 

clearing organization; 

(C) All terms of the cleared swap 

conform to templates established under 

the derivatives clearing organization’s 

rules; and 

(D) All terms of the swap, as carried 

on the books of the clearing member, 

conform to the terms of the cleared 

swap established under the derivatives 

clearing organization’s rules. 

(c) Audit of swap trading relationship 

documentation. At least once during 

each calendar year, each swap dealer 

and major swap participant shall have 

an independent internal or external 

auditor examine no less than 5% of the 

swap trading relationship 

documentation required by this section 

created during the previous twelve 

month period to ensure compliance 

with Commission regulations and the 

written policies and procedures 

established pursuant to this section. A 

record of the results of each audit shall 

be retained. 

(d) Recordkeeping. Each swap dealer 

and major swap participant shall 

maintain all documents required to be 

created pursuant to this section in 

accordance with § 1.31 of this chapter 

and shall make them available promptly 

upon request to any representative of 

the Commission or any applicable 

prudential regulator, or with regard to 

swaps defined in section 1a(47)(A)(v) of 

the Act, to any representative of the 

Commission, the Securities and 

Exchange Commission, or any 

applicable prudential regulator. 

(e) Reporting. Each swap dealer and 

major swap participant shall promptly 

notify the Commission and any 

applicable prudential regulator, or with 

regard to swaps defined in section 

1a(47)(A)(v) of the Act, the Commission, 

the Securities and Exchange 

Commission, and any applicable 

prudential regulator, of any swap 

valuation dispute not resolved within: 

(1) One (1) business day, if the 

dispute is with a counterparty that is a 

swap dealer or major swap participant; 

or 

(2) Five (5) business days, if the 

dispute is with a counterparty that is 

not a swap dealer or major swap 

participant. 

§ 23.505 End user exception 

documentation. 

(a) For swaps excepted from a 

mandatory clearing requirement. Each 

swap dealer and major swap participant 

shall obtain documentation sufficient to 

provide a reasonable basis on which to 

believe that its counterparty meets the 

statutory conditions required for an 

exception from a mandatory clearing 

requirement, as defined in section 2h(7) 

of the Act and § 39.6 of this chapter. 

Such documentation shall include: 

(1) The identity of the counterparty; 

(2) That the counterparty has elected 

not to clear a particular swap under 

section 2h(7) of the Act and § 39.6 of 

this chapter; 

(3) That the counterparty is a nonfinancial entity, as defined in section 

2h(7)(C) of the Act; 

(4) That the counterparty is hedging 

or mitigating a commercial risk; and 

(5) That the counterparty generally 

meets its financial obligations 

associated with non-cleared swaps. 

(b) Recordkeeping. Each swap dealer 

and major swap participant shall 

maintain all documents required to be 

obtained pursuant to this section in 

accordance with § 1.31 of this chapter 

and shall make them available promptly 

upon request to any representative of 

the Commission or any applicable 

prudential regulator, or with regard to 

swaps defined in section 1a(47)(A)(v) of 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 26 / Tuesday, February 8, 2011 / Proposed Rules 6727 

the Act, to any representative of the 

Commission, the Securities and 

Exchange Commission, or any 

applicable prudential regulator. 

Issued in Washington, DC on January 13, 

2011 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Swap Trading 

Relationship Documentation 

Requirements for Swap Dealers and 

Major Swap Participants— 

Commissioners Voting Summary and 

Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commissioners Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers, Chilton and 

O’Malia voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rulemaking that 

establishes swap trading relationship 

documentation requirements for swap 

dealers and major swap participants. The 

proposed regulations are consistent with the 

express mandate of the Dodd-Frank Act to 

prescribe standards for the timely and 

accurate confirmation, processing, netting, 

documentation and valuation of swap 

transactions. One of the primary goals of the 

Dodd-Frank Act was to establish a 

comprehensive regulatory framework that 

would reduce risk, increase transparency and 

promote market integrity within the financial 

system. The proposed regulations accomplish 

this objective by establishing procedures that 

will promote legal certainty regarding terms 

of swap transactions, early resolutions of 

valuation disputes, enhanced understanding 

of one counterparty’s risk exposure to 

another, reduced operational risk and 

increased operational efficiency. One of the 

key chapters from the 2008 financial crisis 

was when large financial players, including 

AIG, had valuation disputes and other 

problems regarding documentation 

standards. These rules will directly address 

many of these issues, highlighting issues for 

senior management and regulators earlier and 

lowering risk to the public. 

Appendix 3—Commissioner Scott D. 

O’Malia 

I respectfully dissent from the 

Commission’s decision to propose 

requirements regarding the inclusion of Title 

II of the Dodd-Frank Act (Title II) and the 

Federal Deposit Insurance Act (FDIA) in the 

swap documentation used by swap dealers 

(Dealers) and major swap participants (MSP). 

This proposal would require Dealers and 

MSP to include a provision in their swap 

documentation which will prevent their 

counterparties from exercising certain 

private, contractual rights in the event that a 

swap becomes subject to the processes of 

either Title II or FDIA. In particular, the 

proposal requires counterparties to explicitly 

consent to the resolution processes set forth 

in Title II or FDIA, which includes a one-day 

stay on the termination, liquidation or 

netting of swaps with a ‘‘covered financial 

company’’ as that term is defined under Title 

II. Title II also provides the Federal Deposit 

Insurance Company (FDIC) with an 

unchecked authority to repudiate contracts 

and preference which creditors receive 

payments. Finally, the proposal asks whether 

swap agreements which contain cross default 

provisions should also subject counterparty 

affiliates to a ‘‘covered financial company’’ 

designation or treat them as an insured 

depository institution under FDIA. 

The Commission’s proposal relies on its 

authorities in Title VII of the Dodd-Frank Act 

regarding swap documentation. Asking 

parties to agree upon and include valuation 

language in their swap agreements under this 

authority is one thing, but dictating that one 

party forego its legal contractual rights 

simply because its counterparty becomes 

subject to an overly vague and far reaching 

statute intended to address ‘‘systemic risk to 

the financial system’’ is quite another. If the 

FDIC authority to require this provision 

under Title II was clear, then there would be 

no need for the Commission to prop up the 

banking regulator’s ability to exercise its 

resolution authority. In its best attempt to 

justify the proposal, the Commission claims 

that it is merely trying to put counterparties 

on notice of the already existing 

requirements of Title II and FDIA, but neither 

the proposal regarding an explicit consent to 

transfer, nor the discussion regarding 

affiliates and cross default agreements is a 

reflection of language already included in 

Title II or FDIA. At the very least, if the CFTC 

had any specific role under Title II or FDIA, 

then it would be clear how we would inform 

the treatment of the market participants that 

we regulate and their transactions in the case 

of a default. We do not. 

By raising these objections, I hope that 

market participants will become fully aware 

of the legal regime that they will be subject 

to by virtue of entering into a swap 

agreement. I don’t believe it is in our best 

interest to adopt seemingly redundant and 

unnecessary requirements into our 

regulations or to adopt requirements under 

the guise of our Title VII authorities that 

clearly exceeds the already broad statutory 

authority Congress decided to provide the 

FDIC under both Title II and FDIA. As a 

result, I cannot support this proposal. 

[FR Doc. 2011–2643 Filed 2–7–11; 8:45 am] 

BILLING CODE 6351–01–P 

DELAWARE RIVER BASIN 

COMMISSION 

18 CFR Part 410 

Proposed Amendments to the Water 

Quality Regulations, Water Code and 

Comprehensive Plan To Provide for 

Regulation of Natural Gas 

Development Projects 

AGENCY: Delaware River Basin 

Commission. 

ACTION: Proposed rule; supplemental 

notice of public hearing. 

SUMMARY: The Delaware River Basin 

Commission published in the Federal 

Register of January 4, 2011 a proposed 

rule containing tentative dates and 

locations for public hearings on 

proposed amendments to its Water 

Quality Regulations, Water Code and 

Comprehensive Plan relating to natural 

gas development projects. The public 

hearing dates have been changed and 

locations and times established, as set 

forth below. 

DATES: Public hearings will be held at 

two locations on February 22, 2011 and 

at a third on February 24, 2011. 

Hearings will run from 1:30 p.m. until 

5 p.m. and from 6 p.m. until 9:30 p.m. 

at each location. Written comments will 

be accepted through the close of 

business on March 16, 2011. 

Locations: The hearings on February 

22, 2011 will take place in the 

Honesdale High School auditorium, 459 

Terrace Street, Honesdale, Pennsylvania 

and the Liberty High School auditorium, 

125 Buckley Street, Liberty, New York. 

The hearings on February 24, 2011 will 

take place in Patriots Theater at the War 

Memorial, 1 Memorial Drive, Trenton, 

New Jersey. 

FOR FURTHER INFORMATION CONTACT: Ms. 

Paula Schmitt at 609–883–9500, ext. 

224. 

SUPPLEMENTARY INFORMATION: This 

document supplements the 

Commission’s proposed rule published 

in the Federal Register of January 4, 

2011 (76 FR 295) by providing the dates, 

times and locations of the public 

hearings to be held on proposed 

amendments to the Commission’s Water 

Quality Regulations, Water Code and 

Comprehensive Plan relating to the 

conservation and development of water 

resources of the Delaware River Basin 

during the implementation of natural 

gas development projects. The tentative 

hearing dates published in the notice of 

January 4, 2011 have been changed. The 

exact locations and times of the public 

hearings were not included in the 

January 4 notice and are provided here. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS