45724 Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 

1 17 CFR 145.9. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

Stat. 1376 (2010). 

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

applicable standard established by 

section 325 of the Act, possess and rely 

upon a reasonable basis consisting of 

competent and reliable scientific tests 

substantiating the representation. For 

representations of the light output and 

life ratings of any covered product that 

is a general service lamp, unless 

otherwise provided by paragraph (a), the 

Commission will accept as a reasonable 

basis scientific tests conducted 

according to the following applicable 

IES test protocols that substantiate the 

representations: 

For measuring light output (in lumens): 

General Service Fluorescent ................................................................................................................................................................ IES LM 9. 

Compact Fluorescent ............................................................................................................................................................................ IES LM 66. 

General Service Incandescent (Other than Reflector Lamps) ............................................................................................................. IES LM 45. 

General Service Incandescent (Reflector Lamps) ................................................................................................................................ IES LM 20. 

For measuring laboratory life (in hours): 

General Service Fluorescent ......................................................................................................................................................... IES LM 40. 

Compact Fluorescent ..................................................................................................................................................................... IES LM 65. 

General Service Incandescent (Other than Reflector Lamps) ...................................................................................................... IES LM 49. 

General Service Incandescent (Reflector Lamps) ......................................................................................................................... IES LM 49. 

4. In § 305.15(d)(4) is revised to read 

as follows: 

§ 305.15 Labeling for lighting products. 

* * * * * 

(d) * * * 

(4) For any covered product that is a 

general service lamp and operates at 

discrete, multiple light levels (e.g., 800, 

1600, and 2500 lumens), the light 

output, energy cost, and wattage 

disclosures required by this section 

must be provided at each of the lamp’s 

levels of light output and the lamp’s life 

provided on the basis of the shortest 

lived operating mode. The multiple 

numbers shall be separated by a ‘‘/’’ 

(e.g., 800/1600/2500 lumens) if they 

appear on the same line on the label. 

* * * * * 

By direction of the Commission. 

Donald S. Clark, 

Secretary. 

[FR Doc. 2011–19041 Filed 7–29–11; 8:45 am] 

BILLING CODE 6750–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1 and 23 

RIN 3038–AD51 

Clearing Member Risk Management 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing rules to implement 

new statutory provisions enacted by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

These proposed rules address risk 

management for cleared trades by 

futures commission merchants, swap 

dealers, and major swap participants 

that are clearing members. 

DATES: Submit comments on or before 

September 30, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD51, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Courier: Same as mail above. 

Please submit your comments using 

only one method. RIN number, 3038– 

AD51, must be in the subject field of 

responses submitted via e-mail, and 

clearly indicated on written 

submissions. 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 CFTC 

to consider information that you believe 

is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the CFTC’s regulations.1

The CFTC reserves the right, but shall 

have no obligation, to review, prescreen, 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 this 

action 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: John 

C. Lawton, Deputy Director and Chief 

Counsel, 202–418–5480, 

jlawton@cftc.gov, or Christopher A. 

Hower, Attorney-Advisor, 202–418– 

6703, chower@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 Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act).2 Title VII of the 

Dodd-Frank Act amended the 

Commodity Exchange Act (CEA or Act) 3

to establish a comprehensive new 

regulatory framework for swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating rigorous 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commission’s oversight. Title VII also 

includes amendments to the federal 

securities laws to establish a similar 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 45725 

4See, e.g., 76 FR 3698 (Jan. 20, 2011) (Risk 

Management Requirements for Derivatives Clearing 

Organizations). These proposed regulations include 

a requirement that a DCO adopt rules addressing 

each clearing member’s risk management policies 

and procedures. See proposed § 39.13(h)(5). 

5See, e.g., 75 FR 91397 (Nov. 23, 2010) 

(Regulations Establishing Duties of Swap Dealers 

and Major Swap Participants). 

6See, e.g., the failure of Volume Investors 

Corporation in 1986, the failure of Griffin Trading 

Company in 1998, and the failure of Klein & 

Company Futures, Inc. in 2000. 

7S. Rep. No. 111–176, at 32 (2010) (report of the 

Senate Committee on Banking, Housing, and Urban 

Affairs). 

regulatory framework for security-based 

swaps under the authority of the 

Securities and Exchange Commission 

(SEC). 

II. Proposed Regulations 

A. Introduction 

A fundamental premise of the DoddFrank Act is that the use of properly 

regulated central clearing can reduce 

systemic risk. The Commission has 

proposed extensive regulations 

addressing open access and risk 

management at the derivatives clearing 

organization (DCO) level.4 The 

Commission also has proposed 

regulations addressing risk management 

for swap dealers (SDs) and major swap 

participants (MSPs).5

Clearing members provide the portals 

through which market participants gain 

access to DCOs as well as the first line 

of risk management. Accordingly, the 

Commission is proposing regulations to 

facilitate customer access to clearing 

and to bolster risk management at the 

clearing member level. The proposal 

addresses risk management for cleared 

trades by FCMs and SDs and MSPs that 

are clearing members. 

B. Clearing Member Risk Management 

Section 3(b) provides that one of the 

purposes of the Act is to ensure the 

financial integrity of all transactions 

subject to the Act and to avoid systemic 

risk. Section 8a(5) authorizes the 

Commission to promulgate such 

regulations that it believes are 

reasonably necessary to effectuate any of 

the provisions or to accomplish any of 

the purposes of the Act. Risk 

management systems are critical to the 

avoidance of systemic risks. 

Section 4s(j)(2) requires each SD and 

MSP to have risk management systems 

adequate for managing its business. 

Section 4s(j)(4) requires each SD and 

MSP to have internal systems and 

procedures to perform any of the 

functions set forth in Section 4s. 

Section 4d requires FCMs to register 

with the Commission. It further requires 

FCMs to segregate customer funds. 

Section 4f requires FCMs to maintain 

certain levels of capital. Section 4g 

establishes reporting and recordkeeping 

requirements for FCMs. 

These provisions of law and 

Commission regulations promulgated 

pursuant to these provisions create a 

web of obligations designed to secure 

the financial integrity of the markets 

and the clearing system, to avoid 

systemic risk, and to protect customer 

funds. Effective risk management by 

FCMs is essential to achieving these 

goals. For example, a poorly managed 

position in the customer account can 

cause an FCM to become 

undersegregated. A poorly managed 

position in the proprietary account can 

cause an FCM to fall out of compliance 

with capital requirements. 

Even more significantly, a failure of 

risk management can cause an FCM to 

become insolvent and default to a DCO. 

This can disrupt the markets and the 

clearing system and harm customers. 

Such failures have been predominately 

attributable to failures in risk 

management.6

As noted previously, the Dodd-Frank 

Act requires the increased use of central 

clearing. In particular, Section 2(h) 

establishes procedures for the 

mandatory clearing of certain swaps. As 

stated in the Senate Committee report: 

‘‘Increasing the use of central 

clearinghouses * * * will provide 

safeguards for American taxpayers and 

the financial system as a whole.7

The Commission has proposed 

extensive risk management standards at 

the DCO level. Given the increased 

importance of clearing and the expected 

entrance of new products and new 

participants into the clearing system, 

the Commission believes that enhancing 

the safeguards at the clearing member 

level is necessary as well. 

Bringing swaps into clearing will 

increase the magnitude of the risks 

faced by clearing members. In many 

cases, it will change the nature of those 

risks as well. Many types of swaps have 

their own unique set of risk 

characteristics. The Commission 

believes that the increased 

concentration of risk in the clearing 

system combined with the changing 

configuration of the risk warrant 

additional vigilance not only by DCOs 

but by clearing members as well. 

FCMs generally have extensive 

experience managing the risk of futures. 

They generally have less experience 

managing the risks of swaps. The 

Commission believes that it is a 

reasonable precaution to require that 

certain safeguards be in place. It would 

ensure that FCMs, who clear on behalf 

of customers, are subject to standards at 

least as stringent as those applicable to 

SDs and MSPs, who clear only for 

themselves. Failure to require SDs, 

MSPs, and FCMs that are clearing 

members to maintain such safeguards 

would frustrate the regulatory regime 

established in the CEA, as amended by 

the Dodd-Frank Act. Accordingly, the 

Commission believes that applying the 

risk-management requirements in the 

proposed rules to SDs, MSPs, and FCMs 

that are clearing members are 

reasonably necessary to effectuate the 

provisions and to accomplish the 

purposes of the CEA. 

Proposed § 1.73 would apply to 

clearing members that are FCMs; 

proposed § 23.609 would apply to 

clearing members that are SDs or MSPs. 

These provisions would require these 

clearing members to have procedures to 

limit the financial risks they incur as a 

result of clearing trades and liquid 

resources to meet the obligations that 

arise. The proposal would require 

clearing members to: 

(1) Establish credit and market riskbased limits based on position size, 

order size, margin requirements, or 

similar factors; 

(2) Use automated means to screen 

orders for compliance with the riskbased limits; 

(3) Monitor for adherence to the riskbased limits intra-day and overnight; 

(4) Conduct stress tests of all positions 

in the proprietary account and all 

positions in any customer account that 

could pose material risk to the futures 

commission merchant at least once per 

week; 

(5) Evaluate its ability to meet initial 

margin requirements at least once per 

week; 

(6) Evaluate its ability to meet 

variation margin requirements in cash at 

least once per week; 

(7) Evaluate its ability to liquidate the 

positions it clears in an orderly manner, 

and estimate the cost of the liquidation 

at least once per month; and 

(8) Test all lines of credit at least once 

per quarter. 

Each of these items has been observed 

by Commission staff as an element of an 

existing sound risk management 

program at a DCO or an FCM. 

The Commission does not intend to 

prescribe the particular means of 

fulfilling these obligations. As is the 

case with DCOs, clearing members will 

have flexibility in developing 

procedures that meet their needs. For 

example, items (1) and (2) could be 

addressed through simple numerical 

limits on order or position size or 

through more complex margin-based 

limits. Further examples could include 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
45726 Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 

8The report can be found at http://www.iosco.org. 

9 5 U.S.C. 601 et seq. 

10 47 FR 18618, Apr. 30, 1982. 

11 Id. at 18619. 

12 Id. 

13See 66 FR 45605, 45609, Aug. 29, 2001. 

14 Id. at 18620. 

price limits to reject orders that are too 

far away from the market, or limits on 

the number of orders that could be 

placed in a short time. 

The following are examples of tools 

that could be used to monitor for risk 

and to mitigate it: 

—The ability to see all working and 

filled orders for intraday risk 

management; 

—A ‘‘kill button’’ that cancels all open 

orders for an account and disconnects 

electronic access. 

The Commission believes that these 

proposals are consistent with 

international standards. In August 2010, 

the International Organization of 

Securities Commissions issued a report 

entitled ‘‘Direct Electronic Access to 

Markets.’’ 8 The report set out a number 

of principles to guide markets, 

regulators, and intermediaries. Principle 

6 states that: 

A market should not permit DEA [direct 

electronic access] unless there are in place 

effective systems and controls reasonably 

designed to enable the management of risk 

with regard to fair and orderly trading 

including, in particular, automated pre-trade 

controls that enable intermediaries to 

implement appropriate trading limits. 

Principle 7 states that: 

Intermediaries (including, as appropriate, 

clearing firms) should use controls, including 

automated pre-trade controls, which can 

limit or prevent a DEA Customer from 

placing an order that exceeds a relevant 

intermediary’s existing position or credit 

limits. 

Stress tests are an essential risk 

management tool. The purpose in 

conducting stress tests is to determine 

the potential for significant losses in the 

event of extreme market events and the 

ability of traders and clearing members 

to absorb the losses. As was the case 

with the DCO risk management 

proposal, the Commission does not 

intend to prescribe the manner in which 

clearing members conduct stress tests. 

Rather, the Commission would monitor 

to determine whether clearing members 

were routinely conducting stress tests 

reasonably designed for the types of risk 

the clearing members and their 

customers face. 

The proposal also would require 

clearing members to evaluate their 

ability to meet calls for initial and 

variation margin. This includes testing 

for liquidity of financial resources 

available to cover exposures due to 

market events. Routine testing of this 

sort diminishes the chance of a default 

based on liquidity problems. 

Each clearing member also would be 

required to evaluate periodically its 

ability to liquidate, in an orderly 

manner, the positions in the proprietary 

and customer accounts and estimate the 

cost of the liquidation. In recent years, 

Commission staff has observed 

instances where a trader was unable to 

meet its financial obligations and the 

FCM had to assume responsibility for 

the trader’s portfolio. Under these 

conditions, an FCM would normally 

liquidate the portfolio promptly. In 

some instances, however, where the 

portfolio contained large and complex 

options positions, the FCM found that it 

was not easy to liquidate. The 

Commission believes that clearing 

members should periodically review 

portfolios to ensure that they have the 

ability to liquidate them and to estimate 

the cost of such liquidation. The 

exercise should also address the ability 

of the FCM to put on appropriate hedges 

to mitigate risk pending liquidation. 

Such an exercise would take into 

account the size of the positions, the 

concentration of the positions in 

particular markets, and the liquidity of 

the markets. 

Finally, the proposal would require 

each clearing member to establish 

written procedures to comply with this 

regulation and to keep records 

documenting its compliance. The 

Commission believes that these are 

important elements of a good risk 

management program. 

The Commission requests comments 

on all aspects of the risk management 

proposal. In particular the Commission 

requests comment on: 

• The extent to which each DCO 

already (i) Requires clearing member 

FCMs, SDs, and MSPs to have each 

component, and (ii) audits compliance 

with such requirement; 

• The extent to which each 

component has otherwise been 

incorporated into exsisting risk 

management systems of clearing 

member FCMs, SDs, and MSPs; and 

• The potential costs and benefits of 

each component. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the regulations they propose will have 

a significant economic impact on a 

substantial number of small entities.9

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.10

The proposed regulations would affect 

FCMs, DCOs, SDs, and MSPs. 

The Commission previously has 

determined, however, that FCMs should 

not be considered to be small entities for 

purposes of the RFA.11 The 

Commission’s determination was based, 

in part, upon the obligation of FCMs to 

meet the minimum financial 

requirements established by the 

Commission to enhance the protection 

of customers’ segregated funds and 

protect the financial condition of FCMs 

generally.12 The Commission also has 

previously determined that DCOs are 

not small entities for the purpose of the 

RFA.13

SDs and MSPs 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. Like FCMs, SDs 

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 SD registration any entities 

that engage in a de minimis level of 

swap 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 SDs not be 

considered ‘‘small entities’’ for 

essentially the same reasons that FCMs 

have previously been determined not to 

be small entities and in light of the 

exemption from the definition of SD 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.14 In 

that determination, the Commission 

considered that a large trading position 

was indicative of the size of the 

business. MSPs, 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 MSPs not be considered 

‘‘small entities’’ for essentially the same 

reasons that large traders have 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 45727 

15 44 U.S.C. 3501 et seq. 

previously been determined not to be 

small entities. 

Accordingly, the Chairman, on behalf 

of the Commission, hereby certifies 

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

proposed regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

The Commission invites the public to 

comment on whether SDs and MSPs 

should be considered small entities for 

purposes of the RFA. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 15 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 

‘‘Clearing Member Position Risk 

Management.’’ An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number. The 

OMB has not yet assigned this 

collection a control number. 

The collection of information under 

these proposed regulations is necessary 

to implement certain provisions of the 

CEA, as amended by the Dodd-Frank 

Act. Specifically, it is essential both for 

effective risk management and for the 

efficient operation of trading venues 

among swap dealers, major swap 

participants, and futures commission 

merchants. The position risk 

management requirement established by 

the proposed rules diminishes the 

chance for a default, thus ensuring the 

financial integrity of markets as well as 

customer protection. 

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 is also 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

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

1. Information Provided by Reporting 

Entities/Persons 

Swap dealers, major swap 

participants, and futures commission 

merchants would be required to develop 

and monitor procedures for position risk 

management in accordance with 

proposed rules 1.73 and 23.609. 

The annual burden associated with 

these proposed regulations is estimated 

to be 524 hours, at an annual cost of 

$52,400 for each futures commission 

merchant, swap dealer, and major swap 

participant. Burden means the total 

time, effort, or financial resources 

expended by persons to generate, 

maintain, retain, disclose, or provide 

information to or for a federal agency. 

The Commission has characterized the 

annual costs as initial costs because the 

Commission anticipates that the cost 

burdens will be reduced dramatically 

over time as the documentation and 

procedures required by the proposed 

regulations become increasingly 

standardized within the industry. 

This hourly burden primarily results 

from the position risk management 

obligations that would be imposed by 

proposed regulations 1.73 and 23.609. 

Proposed 1.73 and 23.609 would require 

each futures commission merchant, 

swap dealer, and major swap participant 

to establish and enforce procedures to 

establish risk-based limits, conduct 

stress testing, evaluate the ability to 

meet initial and variation margin, test 

lines of credit, and evaluate the ability 

to liquidate, in an orderly manner, the 

positions in the proprietary and 

customer accounts and estimate the cost 

of the liquidation. The Commission 

believes that each of these items is 

currently an element of existing risk 

management programs at a DCO or an 

FCM. Accordingly, any additional 

expenditure related to §§ 1.73 and 

23.609 likely would be limited to the 

time initially required to review and, as 

needed, amend, existing risk 

management procedures to ensure that 

they encompass all of the required 

elements and to develop a system for 

performing these functions as often as 

required. 

In addition, proposed §§ 1.73 and 

23.609 would require each futures 

commission merchant, swap dealer, and 

major swap participant to establish 

written procedures to comply, and 

maintain records documenting 

compliance. Maintenance of compliance 

procedures and records of compliance is 

prudent business practice and the 

Commission anticipates that swap 

dealers and major swap participants 

already maintain some form of this 

documentation. 

With respect to the required position 

risk management, the Commission 

estimates that futures commission 

merchants, swap dealers, and major 

swap participants will spend an average 

of 2 hours per trading day, or 504 hours 

per year, performing the required tests. 

The Commission notes that the specific 

information required for these tests is of 

the type that would be performed in a 

prudent market participant’s ordinary 

course of business. 

In addition to the above, the 

Commission anticipates that futures 

commission merchants, 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 to ensure 

compliance required by proposed 

§§ 1.73 and 23.609, and 4 hours per year 

maintaining records of the compliance. 

The hour burden calculations below 

are based upon a number of variables 

such as the number of futures 

commission merchants, swap dealers, 

and major swap participants in the 

marketplace and the average hourly 

wage of the employees of these 

registrants that would be responsible for 

satisfying the obligations established by 

the proposed regulation. 

There are currently 134 futures 

commission merchants based on 

industry data. 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. 

According to recent Bureau of Labor 

Statistics, the mean hourly wage of an 

employee under occupation code 11– 

3031, ‘‘Financial Managers,’’ (which 

includes operations managers) that is 

employed by the ‘‘Securities and 

Commodity Contracts Intermediation 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
45728 Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 

16http://www.bls.gov/oes/current/oes113031.htm. 17http://www.bls.gov/oes/current/oes113031.htm. 

and Brokerage’’ industry is $74.41.16

Because swap dealers, major swap 

participants, and futures commission 

merchants include large financial 

institutions whose operations 

management employees’ salaries may 

exceed the mean wage, the Commission 

has estimated the cost burden of these 

proposed regulations based upon an 

average salary of $100 per hour. 

Accordingly, the estimated hour 

burden was calculated as follows: 

Developing and Conducting Position 

Risk Management Procedures for Swap 

Dealers and Major Swap Participants. 

This hourly burden arises from the 

proposed requirement that swap dealers 

and major swap participants establish 

and perform testing of clearing member 

risk management procedures. 

Number of registrants: 300. 

Frequency of collection: Daily. 

Estimated number of responses per 

registrant: 252 [252 trading days]. 

Estimated aggregate number of 

responses: 75,600 [300 registrants × 252 

trading days]. 

Estimated annual burden per 

registrant: 504 hours [252 trading days 

× 2 hours per record]. 

Estimated aggregate annual hour 

burden: 151,200 hours [300 registrants × 

252 trading days × 2 hours per record]. 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for Swap 

Dealers and Major Swap Participants. 

This hourly burden arises from the 

proposed requirement that swap dealers 

and major swap participants make and 

maintain records documenting 

compliance related to clearing member 

risk management. 

Number of registrants: 300. 

Frequency of collection: As needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 300. 

Estimated annual hour burden per 

registrant: 20 hours. 

Estimated aggregate annual hour 

burden: 6,000 burden hours [300 

registrants × 20 hours per registrant]. 

Developing and Conducting Position 

Risk Management Procedures for 

Futures Commission Merchants: This 

hourly burden arises from the proposed 

requirement that futures commission 

merchants establish and perform testing 

of clearing member risk management 

procedures. 

Number of registrants: 134. 

Frequency of collection: Daily. 

Estimated number of responses per 

registrant: 252 [252 trading days]. 

Estimated aggregate number of 

responses: 33,768 [134 registrants × 252 

trading days]. 

Estimated annual burden per 

registrant: 504 hours [252 trading days 

× 2 hours per record]. 

Estimated aggregate annual hour 

burden: 67,536 hours [134 registrants × 

252 trading days × 2 hours per record]. 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for Futures 

Commission Merchants. This hourly 

burden arises from the proposed 

requirement that futures commission 

merchants make and maintain records 

documenting compliance related to 

clearing member risk management. 

Number of registrants: 134. 

Frequency of collection: As needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 134. 

Estimated annual hour burden per 

registrant: 20 hours. 

Estimated aggregate annual hour 

burden: 2,680 burden hours [134 

registrants × 20 hours per registrant]. 

Based upon the above, the aggregate 

hour burden cost for all registrants is 

227,416 burden hours and $22,741,600 

[227,416 × $100 per hour]. 

In addition to the per hour burden 

discussed above, the Commission 

anticipates that swap dealers, major 

swap participants, and futures 

commission merchants may incur 

certain start-up costs in connection with 

the proposed recordkeeping obligations. 

Such costs would include the 

expenditures related to re-programming 

or updating existing recordkeeping 

technology and systems to enable the 

swap dealer, major swap participant, or 

futures commission merchant to collect, 

capture, process, maintain, and reproduce any newly required records. 

The Commission believes that swap 

dealers, major swap participants, and 

futures commission merchants generally 

could adapt their current infrastructure 

to accommodate the new or amended 

technology and thus no significant 

infrastructure expenditures would be 

needed. The Commission estimates the 

programming burden hours associated 

with technology improvements to be 60 

hours. 

According to recent Bureau of Labor 

Statistics, the mean hourly wages of 

computer programmers under 

occupation code 15–1021 and computer 

software engineers under program codes 

15–1031 and 1032 are between $34.10 

and $44.94.17 Because swap dealers, 

major swap participants, and futures 

commission merchants 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 

$3,600 [$60 × 60 hours] per affected 

registrant or $1,562,400 [$3,600 × 434 

registrants] 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. 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 collection of 

information discussed above may be 

obtained by visiting http:// 

www.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. Consideration of Costs and Benefits 

Under Section 15(a) of the CEA 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its action before 

promulgating a regulation under the 

CEA. Section 15(a) of the CEA specifies 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 45729 

that costs and benefits shall be 

evaluated in light of five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may in 

its discretion give greater weight to any 

one of the five enumerated areas and 

could in its discretion determine that, 

notwithstanding its costs, a particular 

order is 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. 

The proposed rules involve risk 

management for cleared trades by 

futures commission merchants, swap 

dealers, and major swap participants 

that Are clearing members. The 

discussion below will consider the 

proposed rule in light of each section 

15(a) concerns. 

Position Risk Management for Cleared 

Trades by Futures Commission 

Merchants, Swap Dealers, and Major 

Swap Participants That Are Clearing 

Members 

The Commission is proposing 

regulations that would require FCMs, 

SDs, and MSPs to put into place certain 

risk management procedures. 

1. Protection of Market Participants 

Good risk management practices 

among FCMs, SDs, and MSPs help 

insulate DCOs from financial distress. 

Moreover, while the rule calls for 

standard risk mitigation measures, it 

allows FCMs, SDs, and MSPs to use 

diverse techniques to implement those 

measures. This makes it less likely that 

multiple FCMs, SDs, and MSPs would 

be exposed to identical blind spots 

during unexpected market 

developments. 

As far as costs are concerned, regular 

testing of various systems and financial 

positions requires significant personnel 

hours and potentially the services of 

external vendors. The requirement that 

records be created and maintained may 

impose costs on FCMs, SDs, and MSPs. 

The Commission believes that some 

costs might only be incremental because 

it believes that well-managed firms 

would generally already create and 

maintain records of this type. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The integrity of the markets is 

enhanced with the certainty that the 

customer’s counterparties (i.e., FCMs, 

SDs, and MSPs, as well as DCOs) are 

more likely to remain solvent during 

strenuous financial conditions. 

As for the costs related to this rule, 

rigorous stress tests may encourage 

conservative margin requirements that 

reduce customers’ ability to leverage 

their positions. Also, higher costs 

associated with maintaining more 

stringent risk management practices will 

ultimately be passed along to customers, 

likely in the form of larger spreads, 

which may reduce the liquidity and 

efficiency of the market. However, more 

conservative margin requirements and 

stringent risk management practices will 

also help reduce systemic risk thereby 

protecting the integrity of the financial 

system as a whole. 

3. Sound Risk Management Practices 

The rule extends the range of parties 

responsible for rigorous risk 

management practices which promotes 

further stability of the entire financial 

system. However, as mentioned 

previously, risk management systems 

can be costly to implement. The 

Commission does not know at this time, 

and requests comment on, how many 

parties will need to upgrade their 

systems, if any. Additionally, the 

Commission requests comment from the 

public as to what the costs might be to 

upgrade existing systems or install new 

systems to comply with the proposed 

regulation. 

4. Other Public Interest Considerations 

Requiring a significant investment in 

risk mitigation structures and 

procedures by all FCMs, SDs, and MSPs 

increases the number of entities 

committing time and resources to 

development of new techniques that 

have the potential to advance the 

practice across the entire industry. Such 

measures contribute to the overall 

stability of our global financial system. 

List of Subjects 

17 CFR Part 1 

Conflicts of interest, Futures 

commission merchants, Major swap 

participants, Swap dealers. 

17 CFR Part 23 

Conflicts of interests, Futures 

commission merchants, Major swap 

participants, Swap dealers. 

In light of the foregoing, the 

Commission hereby proposes to amend 

Part 1, and Part 23, as proposed to be 

added at 75 FR 71390, November 23, 

2010, and further amended at 75 FR 

81530, December 28, 2010, of Title 17 of 

the Code of Federal Regulations as 

follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 

6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 

6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 

12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, 

and 24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 

1376 (2010). 

2. Add § 1.73 to part 1 to read as 

follows: 

§ 1.73 Clearing futures commission 

merchant risk management. 

(a) Each futures commission merchant 

that is a clearing member of a 

derivatives clearing organization shall: 

(1) Establish risk-based limits in the 

proprietary account and in each 

customer account based on position 

size, order size, margin requirements, or 

similar factors; 

(2) Use automated means to screen 

orders for compliance with the riskbased limits; 

(3) Monitor for adherence to the riskbased limits intra-day and overnight; 

(4) Conduct stress tests of all positions 

in the proprietary account and in each 

customer account that could pose 

material risk to the futures commission 

merchant at least once per week; 

(5) Evaluate its ability to meet initial 

margin requirements at least once per 

week; 

(6) Evaluate its ability to meet 

variation margin requirements in cash at 

least once per week; 

(7) Evaluate its ability to liquidate, in 

an orderly manner, the positions in the 

proprietary and customer accounts and 

estimate the cost of the liquidation at 

least once per month; and 

(8) Test all lines of credit at least once 

per quarter. 

(b) Each futures commission merchant 

that is a clearing member of a 

derivatives clearing organization shall: 

(1) Establish written procedures to 

comply with this regulation; and 

(2) Keep full, complete, and 

systematic records documenting its 

compliance with this regulation. 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

3. 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. 

4. Add § 23.609 to part 23, subpart J, 

to read as follows: 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
45730 Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules 

1 17 CFR 145.9. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

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

§ 23.609 Clearing member risk 

management. 

(a) With respect to clearing activities 

in futures, security futures products, 

swaps, agreements, contracts, or 

transactions described in section 

2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the 

Act, commodity options authorized 

under section 4c of the Act, or leveraged 

transactions authorized under section 

19 of the Act, each swap dealer or major 

swap participant that is a clearing 

member of a derivatives clearing 

organization shall: 

(1) Establish risk-based limits based 

on position size, order size, margin 

requirements, or similar factors; 

(2) Use automated means to screen 

orders for compliance with the riskbased limits; 

(3) Monitor for adherence to the riskbased limits intra-day and overnight; 

(4) Conduct stress tests of all positions 

at least once per week; 

(5) Evaluate its ability to meet initial 

margin requirements at least once per 

week; 

(6) Evaluate its ability to meet 

variation margin requirements in cash at 

least once per week; 

(7) Test all lines of credit at least once 

per quarter; and 

(8) Evaluate its ability to liquidate the 

positions it clears in an orderly manner, 

and estimate the cost of the liquidation. 

(b) Each swap dealer or major swap 

participant that is a clearing member of 

a derivatives clearing organization shall: 

(1) Establish written procedures to 

comply with this regulation; and 

(2) Keep full, complete, and 

systematic records documenting its 

compliance with this regulation. 

Issued in Washington, DC, on July 19, 

2011, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Clearing Member Risk 

Management—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn and Chilton voted in 

the affirmative; Commissioners O’Malia and 

Sommers voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rulemaking for 

enhanced risk management for clearing 

members. One of the primary goals of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act was to reduce the 

risk that swaps pose to the economy. The 

proposed rule would require clearing 

members, including swap dealers, major 

swap participants and futures commission 

merchants to establish risk-based limits on 

their house and customer accounts. The 

proposed rule also would require clearing 

members to establish procedures to, amongst 

other provisions, evaluate their ability to 

meet margin requirements, as well as 

liquidate positions as needed. These risk 

filters and procedures would help secure the 

financial integrity of the markets and the 

clearing system and protect customer funds. 

[FR Doc. 2011–19362 Filed 7–29–11; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 23, and 39 

RIN 3038–AD51 

Customer Clearing Documentation and 

Timing of Acceptance for Clearing 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing rules to implement 

new statutory provisions enacted by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

These proposed rules address: The 

documentation between a customer and 

a futures commission merchant that 

clears on behalf of the customer, and the 

timing of acceptance or rejection of 

trades for clearing by derivatives 

clearing organizations and clearing 

members. 

DATES: Submit comments on or before 

September 30, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD51, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Courier: Same as mail above. 

Please submit your comments using 

only one method. RIN number, 3038– 

AD51, must be in the subject field of 

responses submitted via e-mail, and 

clearly indicated on written 

submissions. 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 CFTC 

to consider information that you believe 

is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the CFTC’s regulations.1

The CFTC reserves the right, but shall 

have no obligation, to review, prescreen, 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 this 

action 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: John 

C. Lawton, Deputy Director and Chief 

Counsel, 202–418–5480, 

jlawton@cftc.gov, or Christopher A. 

Hower, Attorney-Advisor, 202–418– 

6703, chower@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 Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act).2 Title VII of the 

Dodd-Frank Act amended the 

Commodity Exchange Act (CEA or Act) 3

to establish a comprehensive new 

regulatory framework for swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating rigorous 

recordkeeping and real-time reporting 


emcdonald on DSK2BSOYB1PROD with PROPOSALS