U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21 st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

Office of the

Commissioner

February 23, 2012

The Honorable Jeffrey Zients

Acting Director

Office ofManagement and Budget

The White House

1650 Pennsylvania Avenue

Washington, D.C. 20500

Dear Director Zients:

Scott O'Malia

Commissioner

202-418-5870

somalia@cftc.gov

I am writing to request that the Office of Management and Budget (OMB) review the

costlbenefit analysis of the Swap Dealer and Major Swap Participant Recordkeeping and

Reporting, Duties, and Conflict of Interest Policies and Procedures; Futures Commission

Merchant and Introducing Broker Conflicts of Interest Policies and Procedures; Swap

Dealer, Major Swap Participant, and Futures Commission Merchant Chief Compliance

Officer Rule ( the "Internal Business Conduct Rules") voted on by the Commodity Futures

Trading Commission (the "Commission" or "CFTC") earlier today. It is my concern that the

Commission's cost-benefit analysis has failed to comply with the standards for regulatory review

outlined in OMB Circular A-4, Executive Order 12866, and President Obama's Executive Orders

13,563 and 13,579.

I believe the Commission has failed to carefully and precisely identify a clear baseline against

which the Commission measured costs and benefits and the range of alternatives under

consideration in this rule. Specifically, the Commission's cost-benefit analysis with regard to

this rule fails to comply with the basic direction in OMB Circular A-4 (the "Circular") to

establish an appropriate baseline that includes an evaluation ofthe pre-statutory baseline in light

of the range of Commission discretion as to the manner in which the rules implement the

statutory goals ofsection 4s. 1 The Circular also directs the Commission to consider alternatives

available "for the key attributes or provisions ofthe rule.,,2 The Circular goes on to recommend

that, "It is not adequate simply to report a comparison of the agency's preferred option to the

chosen baseline. Whenever you report the benefits and the costs of alternative options, you

should present both total and incremental benefits and costs.,,3 It is at this most basic level of

1 0MB Circular A-4 at 15-16.

2 Id. at 16.

3 Id.
February 23, 2012

Page 2

analysis where the Commission has failed to provide alternative options for consideration or has

failed to justify its choice ofregulation with a specific cost-benefit analysis.

In two examples articulated by the Commission, the Internal Business Conduct Rules dismiss out

of hand, and without specific justification the concerns raised by two commenters: (1) the

Federal Home Loan Banks who raised concerns regarding compliance burdens and duplicative

nature of regulations for comparably regulated entities; and (2) The Working Group of

Commercial Energy Firms, which raised concerns that the rules failed to provide benefits with

regard to risk management and compliance that matched, much less exceeded, the cost of

compliance. Both concerns were dismissed without consideration of alternatives and without

any attempt to quantify the cited costs.

With regard to recordkeeping requirements, the Internal Business Conduct Rules impose a

substantial burden on Swap Dealers ("SDs") and Major Swap Participants ("MSPs") to maintain

extensive audio recordings including the requirement to tag each taped conversation and make it

searchable by transaction and counterparty. Understandably, section 4s(g) does require the

maintenance ofsuch daily trading records for each counterparty and that they be identifiable with

each swap transaction. However, in spite of enormous technological challenges it is unclear as

to whether or not the Commission undertook any independent effort to determine the technical

challenges ofimplementing such a system, including, whether such technology currently exists,

the costs of acquiring and installing such technology, and whether such a system could be

developed and/or installed within the timetable set by the Commission. The Commission has

failed the fundamental test in OMB Circular A-4 to establish an appropriate baseline and

consider a range of alternatives with associated costs and benefits. Although the Commission

modified its original proposal to not require each telephone record to be kept as a single file, it

fails to quantify the specific cost of complying with a costly and technically challenging

mandate. Moreover, in determining that such audio recordings are to be maintained for a oneyear period, the Commission provides no analytical support for this retention period over a more

reasonable six-month period other than to say that such period will be "most useful for the

Commission's enforcement purposes.,,4

Further, the Commission also ignored commenters' requests to allow firms to rely on swap data

repositories ("SDRs") for recordkeeping requirements. The analysis states:

The Commission considered this alternative to its.recordkeeping

rules, but determined that it is premature at this time to permit SDs

and MSPs to rely solely on SDRs to meet their recordkeeping

obligations under the rules.... At present, SDRs are new entities

4See Swap Dealer and Major Swap Participant Recordkeeping and Reporting, Duties, and

Conflicts ofInterest Policies and Procedures; Futures Commission Merchant and Introducing

Broker Conflicts ofInterest Policies and Procedures; Swap Dealer, Major Swap Participant,

and Futures Commission Merchant ChiefCompliance Officer, Final Rule, 77 Fed. Reg. [ ]

([ D, at Section N ofthe Preamble.
February 23,2012

Page 3

under the Dodd-Frank Act with no track record of operations; and,

for particular swap asset classes, SDRs have yet to be established.S

In addition to finalizing rules governing registration standards, duties and core principles for

SDRs6

, the Commission has already voted on the final rules that establish and compel the

reporting ofswap transaction information to SDRs for purposes ofreal-time public reporting (the

"Real-Time Reporting Rule") and to ensure that complete data concerning swaps is available to

regulators throughout the existence ofthe swap and for fifteen years following termination.7 In

addition, the track record of entities that will likely be our first registered SDRs is considered

proven as data from these repositories in both rates and credit have been used to establish the

foundation for today's re-proposal of Procedures to Establish Appropriate Minimum Block Sizes

For Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the

Identities ofParties to Swap Transactions (the "Block Proposal"). I

Ifthe Commission truly has doubts as to the fidelity and reliability SDR data, than it ought not to

have relied upon it in a proposed rulemaking. That being said, although the analysis seems to

indicate that the Commission considered alternatives, it is curious as to how the Commission

came to the conclusion that the Internal Business Conduct Rules are cost-effective, given that

they require frrms to keep duplicative and redundant trade records when all trades must be

reported to an SDR and stored by the SDR for the life of the swap, plus an additional fifteen

years-which is ten years more than our rules require that such records be kept by registrants.

I would also point out that the Real-Time Reporting Rule provides that a party to a publiclyreportable swap transaction satisfies its real-time reporting requirements by executing the swap

on or pursuant to the rules of an exchange or swap execution facility.8 That is, SDs and MSPs,

among others, may rely on exchanges and swap execution facilities to report all on-exchange

trades; there is no mandated separate reporting requirement. However, the Internal Business

Conduct Rilles undermine this relief by requiring redundant recordkeeping and by mandating

that SDs and MSPs save all transaction records and by failing to trust our own regulatorycreation to actually serve as a repository for all trade data as envisioned by Dodd-Frank Act. I

have serious concerns about the Commission's ability to monitor and reconcile two sets of

records, which is the rationale put forth in this final rule.

Ironically, the SDRs were created in the Dodd-Frank Act to facilitate market transparency and

reporting. The Commission could provide greater transparency into its own cost-benefit analysis

SId

6 Swap Data Repositories: Registration Standards, Duties and Core Principles, 76 Fed. Reg.

54,538 (Sept. 1,2011) (to be codified at 17 C.F.R. pt. 49).

7 Real-Time Public Reporting of Swap Transaction Data, 76 Fed. Reg. 1,182 (Jan. 9,2012) (to be

codified at 17 C.F.R. pt. 43); Swap Data Recordkeeping and Reporting Requirements, 76

Fed. Reg. 2,136 (Jan. 13,2012) (to be codified at 17 C.F.R. pt. 45).

8 Real-Time Public Reporting of Swap Transaction Data, 76 Fed. Reg. 1,182, 1,244 (Jan. 9,

2012) (to be codified at 17 C.F.R. pt. 43).
February 23, 2012

Page 4

by disclosing its assumptions and data to support its conclusions. Circular A-4 outlines

standards for transparency with the following direction, "A good analysis should be transparent

and your results must be reproducible. You should clearly set out the basic assumptions,

methods and data underlying the analysis and discuss the uncertainties associated with your

estimates.,,9 It goes on to recommend that, "To provide greater access to your analysis, you

should generally post it, with all the supporting documents, on the internet so the public can

review the findings."lo The Commission has not provided any insight into its economic analysis,

which is inconsistent with OMB Circular A-4.

I believe the directives in Circular A-4 provide for a fully transparent cost-benefit analysis.

However, the Commission has failed to follow OMB direction and has not shared its supporting

documentation to validate and replicate its conclusions. I hope that you will direct the OMB to

undertake a complete review of this rulemaking to determine whether or not this rule fully

complies with Executive Orders 12866, 13563, and 13579 and OMB Circular A-4. To the extent

that OMB finds any concerns with the Commission's cost-benefit and other regulatory analyses,

I hope you will provide specific recommendations as to how the Commission can improve its

methodologies and analytical capabilities.

Finally, I would like to share with you my concerns with regard to the OIRA Major/Nonmajor

Rule Determination. The Commission has shared with OMB its determination that the Internal

Business Conduct Rules "may have an annual effect on the economy ofmore than $100 million."

It is interesting to me that this document makes such a claim without including a single dollar

figure to support its conclusion and the costs are not delineated in the rule that would support

such a conclusion. I would appreciate an explanation as to how this estimate was developed and

the data your staff used in concurring with the Commission's determination. Since this decision

provides the foundation under the Congressional Review Act, I am also interested to know what,

ifany, supporting data was provided to Congress to validate this analysis.

President Obama was very clear in his two Executive Orders that he expected the highest

standards of analysis to validate th~ necessity of government rulemaking to ensure we don't

impose undue and unfounded economic burdens on market participants and the public as a

whole. I don't believe the Commission's rulemakings comply with this directive or OMB

Circular A-4. I hope you will undertake a review of the Internal Business Conduct Rules to

determine whether or not the Commission has set the appropriate baseline, included appropriate

alternatives, and used proper economic analysis that can be reproduced.

90MB Circular A-4 at 17

10 Ide
February 23,2012

PageS

Thank you for your immediate attention to this important matter.