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[Federal Register Volume 76, Number 26 (Tuesday, February 8, 2011)]
[Proposed Rules]
[Pages 6708-6715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2642]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96

Orderly Liquidation Termination Provision in Swap Trading 
Relationship Documentation for Swap Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing regulations to implement new statutory provisions 
established under Title VII of the Dodd-Frank 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 rule would set forth parameters for the inclusion 
of an orderly liquidation termination provision in the 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 Orderly Liquidation Termination Provision in Swap Trading 
Relationship Documentation 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 under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the established procedures in 
Sec.  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:

[[Page 6709]]

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.
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    \1\ See 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.
    \2\ Pursuant 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.
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    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.''
    On January 13, 2011, the Commission voted to issue a notice of 
proposed rulemaking entitled, ``Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants.'' This 
proposed regulation supplements that proposal and sets forth another 
element of the swap trading relationship documentation that swap 
dealers, major swap participants, and their counterparties must include 
in their documentation. The Commission is proposing the regulation 
discussed below, pursuant to the authority granted under sections 
4s(h)(1)(D), 4s(h)(3)(D), 4s(a), 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\
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    \4\ Section 8a(5) of the CEA authorizes the Commission to 
promulgate such regulations as, in the judgment of the Commission, 
are reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of the CEA.
    \5\ This is the seventh 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.
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    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 (Board of 
Governors); (iii) the Office of the Comptroller of the Currency; and 
(iv) the Federal Deposit Insurance Corporation (FDIC). Staff from each 
of these agencies has had the opportunity to provide 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 Regulation

    This proposed rulemaking supplements a prior notice of proposed 
rulemaking under which two rules were proposed--Sec. Sec.  23.504 and 
23.505. This proposal would set forth another element of the swap 
trading relationship documentation that swap dealers, major swap 
participants, and their counterparties must include in their 
documentation under Sec.  23.504(b). The provision would require that 
swap dealers and major swap participants include in the documentation 
with each of their counterparties a provision that confirms both 
parties' understanding of how the new orderly liquidation authority 
under the Title II of the Dodd-Frank Act and the Federal Deposit 
Insurance Act (FDIA) may affect their portfolios of uncleared, over-
the-counter, bilateral swaps.\6\
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    \6\ As proposed, this provision would not apply to swaps cleared 
by a derivatives clearing organization (DCO). The Commission does 
not believe it is necessary to address cleared swaps in this 
rulemaking because they are addressed in section 210(c)(8)(G) of the 
Dodd-Frank Act, but solicits comment on this issue.
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    The Commission believes that the inclusion of this type of 
provision in the swap trading relationship documentation used by swap 
dealers and major swap participants registered with the Commission 
would promote legal certainty for market participants and lower 
litigation risk during times of significant market stress. In 
particular, the proposal would ensure both counterparties to a swap 
understand that under particular, unique circumstances, described in 
detail below, if one of the counterparties defaults, the non-defaulting 
party's positions could be transferred to a new, solvent counterparty 
by the FDIC, and the non-defaulting party may not be able to terminate 
its claims against the defaulting counterparty until 5 p.m. (U.S. 
eastern time) on the business day following the day the FDIC is 
appointed receiver. This stay would facilitate the FDIC's orderly 
liquidation of the defaulting counterparty's swap positions. This stay 
also is critical because it would allow the FDIC the requisite time to 
transfer the defaulter's open swap positions, claims, and collateral 
with the objective of avoiding widespread market disruption in the form 
of fire sales and contagion risk.

A. Background

    The recent financial crisis, particularly the tumultuous events of 
2008, revealed that U.S. financial regulatory authorities lacked an 
orderly resolution mechanism for certain large financial companies. The 
lack of such a resolution mechanism led to the need for government bail 
outs of financial companies considered ``too big to fail'' and 
contributed to major financial market dislocations resulting from the 
disorderly insolvency of Lehman Brothers Inc. and its affiliates under 
the Federal bankruptcy code.
    One of the key lessons of the financial crisis is that for 
systemically important institutions, the traditional bankruptcy process 
may be too slow and cumbersome to effectively deal with defaults that 
require near instant action to diminish their effect on other entities 
and the financial system as a whole.\7\ This is especially true for 
financial companies with significant derivatives positions that require 
frequent adjustments based on trading strategies

[[Page 6710]]

and the need to manage exposure to market risk.
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    \7\ For example, over two years after the bankruptcy process for 
Lehman Brothers Holding Inc. began, it remains ongoing and active. 
On December 15, 2010, creditors filed a plan of reorganization by an 
ad hoc group of Lehman creditors despite Lehman's filing of a plan 
of reorganization on March 15, 2010. By contrast, under the special 
provisions under Commission regulation for treatment of cleared 
futures contracts, Lehman's futures business was resolved within a 
matter of weeks.
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    With the passage of the Dodd-Frank Act, Congress sought to address 
these problems though the enactment of Title II, which establishes an 
``orderly liquidation authority'' under which systemically important 
financial companies can be resolved in an orderly manner. This 
authority is separate from, but consistent with, the Federal bankruptcy 
and State dissolution laws.

B. Orderly Liquidation Under Title II of Dodd-Frank

    Under Title II of the Dodd-Frank Act, Congress provided ``the 
necessary authority to liquidate failing financial companies \8\ that 
pose a significant risk to the financial stability of the United States 
in a manner that mitigates such risk and minimizes moral hazard.'' \9\ 
To this end, Title II establishes a process under which, upon the 
recommendation of the FDIC and the Board of Governors, and after 
consultation with the President, the Secretary of the Treasury appoints 
the FDIC as the receiver to wind down the affairs of, and liquidate the 
assets of, the financial company whose default may pose a systemic risk 
to the financial markets. Accordingly, the decision to act under Title 
II would be taken under conditions that would have ``serious adverse 
effects on financial stability in the United States.'' \10\
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    \8\ Under Title II, section 201(a)(11), a financial company 
includes, among other things, a bank holding company, a nonbank 
financial company supervised by the Board of Governors, or a 
company, or a subsidiary (other than an insured depository 
institution or an insurance company) of a company, that is 
predominantly engaged in activities that the Board of Governors has 
determined are financial in nature or incidental thereto.
    \9\ Section 204(a) of the Dodd-Frank Act.
    \10\ Section 203(b)(2) of the Dodd-Frank Act.
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1. Entities Eligible for Liquidation Under Title II
    Title II provides certain Federal financial regulatory authorities 
with the power, but not the obligation, to conduct an orderly wind down 
of a financial company. If the authorities decide not to act, the 
regular insolvency processes under the Federal bankruptcy code or 
banking laws would apply. For instance, non-bank swap dealers and major 
swap participants would be subject to the bankruptcy code's chapter 7 
or chapter 11 proceedings.\11\
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    \11\ In general, Chapter 7 allows for the liquidation of a 
debtor entity and Chapter 11 allows a debtor entity to reorganize 
its affairs.
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    Title II applies to a class of business entities, referred as 
``covered financial companies,'' that meet certain criteria as 
determined by the Secretary of the Treasury under a process described 
in the next section. This class potentially could include swap dealers 
and major swap participants registered with the Commission. For 
example, under Title II, any company that is registered as a swap 
dealer or major swap participant with the Commission and designated as 
a systemically important financial institution (SIFI) by the Financial 
Stability Oversight Council (FSOC) under a process laid out in Title I 
of the Dodd-Frank Act,\12\ could be deemed to be a ``covered financial 
company'' under Title II.\13\
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    \12\ Section 113 of the Dodd-Frank Act sets forth the process by 
which U.S. nonbank financial companies may be designated as 
systemically important. The term U.S. nonbank financial company is 
defined in section 102(a)(4)(B) of the Dodd-Frank Act.
    \13\ Entities that are designated as SIFIs under Title I of the 
Dodd-Frank Act are considered to be supervised by the Board of 
Governors of the Federal Reserve System, and thus meet the 
definition of financial company under section 201(a)(11)(B)(ii).
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    It also is possible that a swap dealer or a major swap participant 
might be deemed to be a ``covered financial company'' independent of 
Title I's FSOC designation process. Under Title II, such a company 
could be deemed to be a ``financial company'' if that entity is (1) 
predominantly engaged in financial activities \14\ and (2) those 
financial activities generate 85% or more of the company's 
revenues.\15\ A ``covered financial company'' is a financial company 
for which a determination has been made under section 203(b) of the 
Dodd-Frank Act by the Secretary of the Treasury. A prerequisite to that 
determination process is the written recommendation of both the FDIC 
and the Board of Governors.
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    \14\ Financial activities are defined by reference to section 
4(k) of the Bank Holding Company Act, 12 U.S.C. 1843(k), which 
includes activities such as dealing in or making a market in 
securities and any other activity that may be identified under rules 
or orders issued by the Board of Governors. See 12 U.S.C. 1843(k)(4) 
and 12 CFR 225.28.
    \15\ Section 201(a)(11)(B)(iii) or (iv) and section 201(b) of 
the Dodd Frank Act.
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2. Process for Determining Whether Title II Authority Should Be Invoked
    In making a determination to act under Title II, the Secretary of 
the Treasury (in consultation with the President) must determine that, 
among other things: (1) The financial company is in default or in 
danger of default; \16\ (2) the default of the financial company would 
have a serious adverse effect on the financial stability of the United 
States; and (3) no viable private sector alternative is available to 
prevent the default. The Secretary must make a specific determination 
that any effect on the claims or interests of creditors, 
counterparties, and shareholders is appropriate.\17\
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    \16\ The phrase ``default or in danger of default'' is defined 
in Title II, section 203(c)(4), to include situations where an 
entity has, or likely will promptly, be subject to a bankruptcy 
action; the entity has incurred losses that have or are likely to 
deplete all of its capital and there is no reasonable prospect of 
avoiding such a depletion; the entity's assets are less than its 
obligations to creditors and others; and the entity is, or is likely 
to be, unable to make its payments in the normal course of business. 
See also 12 U.S.C. 1813(x)(2) (providing a similar definition under 
the FDIA).
    \17\ Section 203(b) of the Dodd-Frank Act. Additional factors 
the Secretary must consider include: (1) Any action under the 
liquidation authority would avoid or mitigate such adverse effects 
on the financial system, the cost to the general fund of the 
Treasury, and the potential to increase excessive risk taking on the 
part of creditors, counterparties, and shareholders in the financial 
company; (2) a Federal regulatory agency has ordered the covered 
financial company to convert all of its convertible debt instruments 
that are subject to a regulatory order; and (3) the company 
satisfies the definition of ``financial company'' in section 
201(a)(11) of the Dodd-Frank Act.
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    In order to meet each of these criteria, it is likely that a 
financial company would have to have a significant level of market and 
credit exposure and its default would be likely to pose a grave risk to 
financial markets. Only after these determinations have been made would 
the FDIC be granted resolution authority under Title II.

C. Resolution by the FDIC Under FDIA.

    Before describing the FDIC's resolution authority under Title II, 
it is important to note that the FDIC also may have resolution 
authority over a swap dealer or major swap participant that is an 
insured depository institution. Generally speaking, an insured 
depository institution is defined under section 3(c) of the Federal 
Deposit Insurance Act (FDIA) as any bank or savings association the 
deposits of which are insured by the FDIC.\18\ Under the FDIA, the FDIC 
has the authority to liquidate or wind up the affairs of an insured 
depository institution. Some swap dealers and major swap participants 
registered with the Commission may be insured depository institutions.
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    \18\ 12 U.S.C. 1813(c).
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D. Role of the FDIC in the Orderly Liquidation of Swap Dealers and 
Major Swap Participants Under Either Title II or the FDIA

    In many ways, the Title II resolution approach is modeled upon the 
FDIA. Indeed, as discussed below, certain Title II provisions are 
identical to provisions in FDIA. Consequently, the FDIC would be able 
to exercise similar powers with regard to swap dealers and major swap

[[Page 6711]]

participants regardless of whether the FDIC was acting under Title II 
or FDIA. Under either statutory authority, it is likely that the 
orderly wind-down and liquidation of those large firms whose demise may 
have systemic implications would have similar characteristics. For 
example, under both Title II and the FDIA, the FDIC would have the 
authority to transfer open positions, claims, and collateral to a 
receiving entity in an effort to move quickly to stabilize what could 
be deteriorating market conditions.\19\
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    \19\ The FDIC also would have the authority to merge the covered 
financial company with another company under section 210(a)(1)(G) of 
the Dodd-Frank Act.
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    As part of the resolution authority in Title II and in the existing 
provisions of the FDIA for insured depository institutions, the FDIC is 
given a one business day period in which to transfer swaps and certain 
other contracts to a solvent third party financial institution. For 
this transfer authority to be effective, a brief stay on the ability of 
counterparties to terminate, liquidate, or net is necessary.
    Specifically, under section 210(c)(10) of Dodd-Frank or 11(e)(10) 
of FDIA, parties to qualified financial contracts \20\ are prohibited 
from terminating, liquidating, or netting out positions solely by 
reason of the appointment of the FDIC as receiver or the financial 
condition of the insured depository institution, covered financial 
company, or covered subsidiary in receivership until the close of the 
next business day following the date of appointment of the FDIC as 
receiver. A party is also precluded from exercising any such 
contractual rights after it has received notice that its qualified 
financial contract has been transferred to another financial 
institution--including a bridge financial company. The effect of these 
provisions is to provide the FDIC one day after its appointment as 
receiver to consummate a transfer of a qualified financial contract to 
either a private acquirer or to a newly created bridge bank or 
financial company. Absent one of these two types of transfers within 
the allotted time frame, parties may exercise their contractual rights.
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    \20\ Qualified financial contracts include any securities 
contract, commodity contract, forward contract, repurchase 
agreement, swap agreement, and any similar agreement as determined 
by the FDIC. Section 210(c)(8)(D) of the Dodd-Frank Act and section 
11(e)(8)(D) of FDIA.
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E. Application to Swaps

    Swaps subject to the Commission's jurisdiction under Title VII of 
the Dodd-Frank Act would appear to be subject to orderly liquidation 
under either Title II or the FDIA by virtue of the fact that they fall 
under the definition of ``qualified financial contract'' under those 
two statutes.\21\ The definition of qualified financial contract is 
identical under both Title II and FDIA and includes securities 
contracts, commodity contracts,\22\ forward contracts, repurchase 
agreements, swap agreements, and any other contract determined by the 
FDIC to be a qualified financial contract.
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    \21\ Section 210(c) applies to contracts entered into before the 
appointment of a receiver under Title II. There is an analogous 
provision under the FDIA. See section 210(c)(8)(D) of the Dodd-Frank 
Act and section 11(e)(8)(D) of FDIA.
    \22\ Under this definition, futures contracts subject to the 
Commission's jurisdiction are considered to be qualified financial 
contracts.
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    The Commission recognizes the potential for regulatory arbitrage if 
the definition of qualified financial contract does not apply to swaps 
under Title VII. Moreover, the Commission believes that should the need 
for an orderly liquidation of any systemically important swap dealer or 
major swap participant arise, it would be most appropriate and 
practicable for all swaps held on the books of those entities to be 
considered to be part of a comprehensive and orderly resolution 
process.

F. Commission Involvement in an Orderly Liquidation

    While the Commission is not granted explicit authority under Title 
II, that section does recognize the need for all U.S. financial 
authorities to work together and to ``take all steps necessary and 
appropriate to assure that all parties * * * having responsibility for 
the condition of the financial company bear losses consistent with 
their responsibility * * *.'' \23\ In addition, if the FDIC is 
appointed receiver of a swap dealer or major swap participant for which 
the Commission is the primary regulator, the FDIC is required to 
consult with the Commission ``for purposes of ensuring an orderly 
liquidation of the entity.'' \24\ As part of its consultative role, the 
Commission might have information on defaulting swap dealers or major 
swap participants that is relevant to the resolution process. Moreover, 
the Commission may have responsibility for potential transferees, i.e., 
firms to which open swap positions might be transferred.
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    \23\ Section 204(a)(3) of the Dodd-Frank Act.
    \24\ Section 204(c)(1) and (3) of the Dodd-Frank Act.
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G. Proposed Regulation Sec.  23.504(b)(5)

    Previously proposed Sec.  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. 
Under previously proposed Sec.  23.504(b), swap trading relationship 
documentation would include written agreement by the parties on certain 
terms, including general provisions on payment obligations, netting of 
payments, events of default or other termination events, transfer of 
rights and obligations, and governing law.
    Proposed Sec.  23.504(b)(5) would supplement the prior proposal by 
requiring the inclusion of a written agreement by the parties to comply 
with the FDIC's transfer authority under section 210(c)(9) and (10) of 
the Dodd-Frank Act and with the nearly identical sections under the 
FDIA.\25\ This provision under the swap trading relationship 
documentation could be invoked only if a party to the documentation is 
deemed to be a ``covered financial company'' under Title II or is an 
insured depository institution and the FDIC is appointed as a receiver. 
Under either scenario, the proposed rule refers to this party as the 
``covered party.''
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    \25\ Sections 11(e)(9) and (10) of the FDIA; codified at 12 
U.S.C. 1821(e)(9) and (10).
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    The language of proposed Sec.  23.504(b)(5)(i) very closely tracks 
the statutory language of section 210(c)(10)(B) of the Dodd-Frank Act 
and section 11(e)(10)(B) of the FDIA. Under this provision, 
counterparties will acknowledge in their trading relationship 
documentation that neither will exercise any right to terminate a swap 
due to the appointment of the FDIC as a receiver under Title II or the 
FDIA \26\ until the close of the next business day after such 
appointment, or it receives notice that the FDIC has transferred its 
swaps to a performing third party (including a bridge bank, bridge 
financial institution, or other government-run financial institution). 
This stay provision would expire at 5 p.m. on the business day after 
the FDIC is appointed as receiver or as soon as the non-defaulting 
party receives notice that the FDIC has transferred the defaulting 
party's swaps positions, claims, and property supporting the positions 
pursuant to section 210(c)(9)(A) of the Dodd-Frank Act or section 
11(e)(9)(A) of the FDIA.
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    \26\ The counterparties may be able to specify in their 
individual documentation that only Title II would apply if neither 
counterparty would be subject to resolution under the FDIA, i.e. 
neither party is an insured depository institution.

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[[Page 6712]]

    Proposed Sec.  23.504(b)(5)(ii) would track the language of section 
210(c)(9)(A) of the Dodd-Frank Act and section 11(e)(9)(A) of the FDIA 
and would require the parties to agree that if the FDIC decides to 
transfer swaps of the party in receivership, the FDIC will transfer all 
swaps between the parties to one financial institution, along with all 
claims and credit support related to such swaps.
    Proposed Sec.  23.504(b)(5)(iii) would require each party to 
consent to any transfer described in Sec.  23.504(b)(5)(ii). Including 
an agreement to consent to the transfer of swaps to a solvent entity 
under the strict requirements of Title II or FDIA will facilitate the 
orderly wind-down of the defaulting firm and promote the prompt 
resolution of market uncertainty and allow a return to regular trading 
strategy for non-defaulting counterparties.
    The Commission believes that the proposed regulation is important 
insofar as it will ensure that counterparties to swap transactions are 
on notice that, under particular, unique circumstances, their swap 
positions, claims, and the property supporting those positions may be 
transferred and that there may be a brief stay on their ability to 
terminate a swap. As described above, the provision would only be 
applicable in situations where the counterparties are financial 
institutions that could be designated covered financial companies under 
Title II or are insured depository institutions under FDIA.
    The Commission also believes that this provision would facilitate 
the resolution process by minimizing the potential litigation when such 
resolution authority is exercised. Minimizing litigation risk is 
important for facilitating a quick and effective resolution process; 
particularly when the alternative, the sudden collapse of the covered 
financial company, poses systemic risk.
    It is also worth noting that the inclusion of this provision in 
swap trading relationship documentation may help bring about broad 
equivalence with regard to the treatment of swaps globally. This is 
relevant because Congress recognized the need for greater international 
coordination relating to the orderly liquidation of financial companies 
by directing the Comptroller General of the United States to study ways 
to increase effective international coordination.\27\
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    \27\ Section 202(f) of the Dodd-Frank Act.
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H. Comment Requested

    The Commission requests comment on all aspects of proposed Sec.  
23.504(b)(5). In particular, the Commission requests comment on the 
following questions:
     Are there any swaps as defined under Title VII of the 
Dodd-Frank Act that should not be considered to be qualified financial 
contracts as that term is defined under Title II of the Dodd-Frank Act 
and FDIA?
     Under what circumstances could the requirements of Sec.  
23.504(b)(5) allow for recognition of non-US authorities operating 
under legal provisions similar to that provided under Title II of the 
Dodd-Frank Act? Would inclusion of non-US authorities be useful with 
respect to financial companies that may have global operations through 
multiple subsidiaries and branches, including insured depository 
institutions?
     What steps can be taken to encourage standard 
documentation templates developed by industry groups, such as ISDA, to 
recognize the need to include termination stay provisions similar to 
those provided for under Title II and FDIA?
     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?
     Given the use in swaps of cross default provisions 
referencing agreements with affiliates, should ``covered party'', as 
defined in Sec.  23.504(b)(5), also include affiliates of entities that 
may be designated as covered financial companies under Title II or that 
are insured depository institutions under FDIA?
     Does the Commission have legal authority to include 
affiliates in this way?

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\ The proposed rules would 
affect swap dealers and major swap participants.
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    \28\ 5 U.S.C. 601 et seq.
    \29\ 47 FR 18618, Apr. 30, 1982.
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    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.
---------------------------------------------------------------------------

    \30\ Id. at 18619.
    \31\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \32\ Id. at 18620.
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    Moreover, the Commission is carrying out Congressional mandates by 
proposing this regulation. Specifically, the Commission is proposing 
these regulations to comply with the Dodd-

[[Page 6713]]

Frank 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 ``Orderly 
Liquidation Termination Provision in Swap Trading Relationship 
Documentation 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.
---------------------------------------------------------------------------

    \33\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collection of information under this proposed regulation is 
necessary to implement new section 4s(i) of 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 documentation required to be 
executed and maintained would be an important part of the Commission's 
regulatory program for swap dealers and major swap participants. 
Specifically, the required recordkeeping is essential to ensuring that 
swap dealers and major swap participants include in their trading 
relationship documentation certain agreements that are designed to 
enhance the consistent treatment of swaps in the event the FDIC is 
appointed receiver under Title II of the Dodd-Frank Act or the FDIA. 
The records 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 Sec.  23.504(b)(5) supplements previously proposed 
regulations that would establish trading swap relationship 
documentation requirements for swap dealers and major swap 
participants. Specifically, proposed Sec.  23.504(b)(5) would require 
swap dealers and major swap participants to include in the 
documentation they execute with each counterparty a written agreement 
about events that will transpire if the FDIC is appointed as receiver 
under Title II of the Dodd-Frank Act or the FDIA.
    The information collection burden associated with drafting and 
maintaining the agreements required by the proposed regulation is 
estimated to be 270 hours per year, at an initial annual cost of 
$27,000 for each swap dealer and major swap participant. The aggregate 
information collection burden is estimated to be 81,000 hours per year, 
at an initial annual aggregate cost of $8,100,000. 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 cost as an initial cost 
as the Commission anticipates that the agreements required by the 
proposed regulation generally would not require significant bilateral 
negotiation and, therefore, are likely to become standardized within 
the industry rather rapidly. Moreover, the Commission expects that 
there would be little need to modify the agreements on an ongoing 
basis. Accordingly, once a swap dealer or major swap participant has 
drafted the required agreements and incorporated them into its swaps 
trading documentation, the annual burden associated with the proposed 
regulation would be quite minimal.\34\
---------------------------------------------------------------------------

    \34\ The Commission notes that swap dealers and major swap 
participants also would be required to develop written policies and 
procedures to maintain the obligatory agreements as part of their 
swaps trading relationship documentation. The costs associated with 
these policies and procedures have been accounted for in the 
Commission's prior proposal of the rest of regulation Sec.  23.504.
---------------------------------------------------------------------------

    The hour burden calculation set forth below is based upon certain 
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 that would be responsible for satisfying the obligation 
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 that 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 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 agreements required by the proposed 
regulations typically would be drafted and maintained by a swap dealer 
or major swap participant's in-house

[[Page 6714]]

counsel or by financial or operational managers within the firm. 
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.\35\ 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.\36\ Because swap 
dealers and major swap participants include large financial 
institutions whose employees' salaries may exceed the mean wage, 
however, the Commission has estimated the cost burden of the proposed 
regulations based upon an average salary of $100 per hour.
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    \35\ http://www.bls.gov/oes/2099/mayowe23.1011.htm.
    \36\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

    Based upon the above, the estimated hour burden was calculated as 
follows:
    Agreement to Orderly Liquidation Termination Provision.
    Number of registrants: 300.
    Frequency of collection: At least once per counterparty.
    Estimated number of annual responses per registrant: 540 [one per 
counterparty].
    Estimated aggregate number of annual responses: 162,000 [300 
registrants x 540 counterparties].
    Estimated annual hour burden per registrant: 270 [540 
counterparties x .5 hours per counterparty].
    Estimated aggregate annual hour burden: 81,000 [300 registrants x 
270 hours per registrant].
    As stated above, the agreements required by proposed Sec.  
23.504(b)(5) would be required to be incorporated into the swaps 
trading relationship documentation obligations established by 
previously proposed subsections of Sec.  23.504(b). The Commission does 
not anticipate that swap dealers and major swap participants would 
incur any start-up costs in connection with the proposed recordkeeping 
obligations, other than those previously noted and accounted for in the 
prior proposal.
2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the recordkeeping burden 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 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 \37\ 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.
---------------------------------------------------------------------------

    \37\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    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 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 regulation would 
implement new section 4s(i) of the CEA, which was added by section 731 
of the Dodd-Frank Act. The proposed regulation would establish certain 
swap trading relationship documentation requirements applicable to swap 
dealers and major swap participants and related recordkeeping 
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 satisfy the new regulatory requirement is far 
outweighed by the benefits that would accrue to the financial system as 
a whole as a result of the implementation of the rule. The Commission 
believes that the annual cost burden per registrant ultimately would be 
quite minimal as the agreements it requires are likely to become 
standardized and applicable to most counterparties, thereby negating 
the need for individual negotiation and drafting. They also would be 
able to be maintained using a registrant's pre-existing recordkeeping 
mechanisms.
    Benefits. With respect to benefits, the Commission believes that 
the proposed regulation would ensure that swaps are treated 
consistently in the event of an appointment of the FDIC under either 
Title II of the Dodd-Frank Act or the FDIA. Providing the opportunity 
for swap dealers, major swap participants, and their counterparties to 
reach a written agreement about events that will transpire if the FDIC 
is appointed as receiver under Title II of the Dodd-Frank Act or the 
FDIA, will promote legal certainty and lower litigation risk at crucial 
times of market stress. Therefore, the Commission believes it is 
prudent to prescribe this proposed regulation.
    Public Comment. The Commission invites public comment on its cost-
benefit 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

[[Page 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 Sec.  23.504 by adding paragraph (b)(5) to read 
as follows:

Sec.  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 one-day 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
```