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Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations - PDF
Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations
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1 2136 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 45 RIN 3038 AD19 Swap Data Recordkeeping and Reporting Requirements Commodity Futures Trading Commission. ACTION: Final rule. AGENCY: The Commodity Futures Trading Commission ( Commission or CFTC ) is adopting rules to implement the Commodity Exchange Act ( CEA or Act ) relating to swap data recordkeeping and reporting requirements. These sections of the CEA were added by the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ). The rules being adopted apply to swap data recordkeeping and reporting requirements for swap data repositories, derivatives clearing organizations, designated contract markets, swap execution facilities, swap dealers, major swap participants, and swap counterparties who are neither swap dealers nor major swap participants. The recordkeeping and reporting requirements of this rule further the goals of the Dodd-Frank Act to reduce systemic risk, increase transparency and promote market integrity within the financial system. DATES: The effective date of this rule is March 13, Compliance dates: (1) Swap execution facilities, designated contract markets, derivatives clearing organizations, swap data repositories, swap dealers, and major swap participants shall commence full compliance with this part with respect to credit swaps and interest rate swaps on the later of: July 16, 2012; or 60 calendar days after the publication in the Federal Register of the later of the Commission s final rule defining the term swap or the Commission s final rule defining the terms swap dealer and major swap participant. (2) Swap execution facilities, designated contract markets, derivatives clearing organizations, swap data repositories, swap dealers, and major swap participants shall commence full compliance with this part with respect to equity swaps, foreign exchange swaps, and other commodity swaps on or before 90 days after the compliance date for credit swaps and interest rate swaps. (3) Non-SD/MSP counterparties shall commence full compliance with this part with respect to all swaps on or before 90 days after the compliance date applicable to swap execution facilities, SUMMARY: VerDate Mar<15> :13 Jan 12, 2012 Jkt designated contract markets, derivatives clearing organizations, swap data repositories, swap dealers, and major swap participants with respect to equity swaps, foreign exchange swaps, and other commodity swaps. FOR FURTHER INFORMATION CONTACT: David Taylor, Associate Director, Division of Market Oversight, (202) , or Anne Schubert, Economist, Division of Market Oversight, (202) , Commodity Futures Trading Commission, Three Lafayette Centre, st Street NW., Washington, DC SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Introduction B. Swap Data Provisions of the Dodd-Frank Act C. International Considerations D. Consultations With Other U.S. Financial Regulators E. Summary of the Proposed Part 45 Rule 1. Fundamental Goal 2. Swap Recordkeeping 3. Swap Data Reporting: Creation Data and Continuation Data 4. Unique Identifiers 6. Third-Party Facilitation of Reporting 7. Reporting a Swap to a Single SDR 8. Reporting Swaps in an Asset Class Not Accepted by Any SDR 9. Data Standards 10. Reporting Errors and Omissions in Previously Reported Data F. Overview of Comments Received II. Part 45 of the Commission s Regulations: The Final Rules A. Recordkeeping Requirements Proposed Rule 2. Comments Received 3. Final Rule: 45.2 B. Swap Data Reporting: Creation Data Proposed Rule 2. Comments Received 3. Final Rule: 45.3 C. Swap Data Reporting: Continuation Data Proposed Rule 2. Comments Received 3. Final Rule: 45.4 D. Summary of Creation Data and Continuation Data Reporting 45.3 and 45.4 F. Unique Swap Identifiers Proposed Rule 2. Comments Received 3. Final Rule: 45.5 G. Legal Entity Identifiers Proposed Rule 2. Comments Received 3. Final Rule: 45.6 H. Unique Product Identifiers Proposed Rule 2. Comments Received 3. Final Rule: 45.7 I. Determination of Which Counterparty Must Report Proposed Rule PO Frm Fmt 4701 Sfmt Comments Received 3. Final Rule: 45.8 J. Third-Party Facilitation of Swap Data Reporting Proposed Rule 2. Comments Received 3. Final Rule: 45.9 K. Reporting to a Single Swap Data Repository Proposed Rule 2. Comments Received 3. Final Rule: L. Data Reporting for Swaps in a Swap Asset Class Not Accepted by Any Swap Data Repository Proposed Rule 2. Comments Received 3. Final Rule: M. Voluntary Supplemental Reporting Proposed Rule 2. Comments Received 3. Final Rule: N. Required Data Standards Proposed Rule 2. Comments Received 3. Final Rule: O. Reporting of Errors and Omissions in Previously Reported Data Proposed Rule 2. Comments Received 3. Final Rule: III. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act 1. Introduction 2. Proposed Information Collection 3. Comments on Proposed Information Collection 4. Revised Information Collection Estimates C. Consideration of Costs and Benefits 1. Introduction 2. General Cost-Benefit Comments Received 3. Recordkeeping 4. Swap Data Reporting 5. Unique Identifiers IV. Compliance Dates A. Proposed Rule B. Comments Received 1. Initial Compliance Date 2. Phasing in the Start of Reporting C. Determination of Compliance Dates 1. Initial Compliance Dates 2. Phasing in the Start of Reporting 3. Compliance Dates Final Rules I. Background A. Introduction On July 21, 2010, President Obama signed into law the Dodd-Frank Act.1 Title VII of the Dodd-Frank Act 2 amended the CEA 3 to establish a comprehensive new regulatory framework for swaps and security-based 1 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L , 124 Stat (2010). The text of the Dodd-Frank Act may be accessed at 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 U.S.C. 1, et seq. E:\FR\FM\13JAR2.SGM 13JAR2
2 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2137 swaps. The legislation was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system by, among other things: Providing for the registration and comprehensive regulation of swap dealers ( SDs ) and major swap participants ( MSPs ); imposing clearing and trade execution requirements on standardized derivative products; creating rigorous recordkeeping and data reporting regimes with respect to swaps, including real time reporting; and enhancing the Commission s rulemaking and enforcement authorities with respect to, among others, all registered entities, intermediaries, and swap counterparties subject to the Commission s oversight. B. Swap Data Provisions of the Dodd-Frank Act To enhance transparency, promote standardization, and reduce systemic risk, Section 727 of the Dodd-Frank Act added to the CEA new section 2(a)(13)(G), which requires all swaps, whether cleared or uncleared, to be reported to swap data repositories ( SDRs ), 4 which are new registered entities created by section 728 of the Dodd-Frank Act to collect and maintain data related to swap transactions as prescribed by the Commission, and to make such data electronically available to regulators. 5 New section 21(b) of the CEA, added by section 728 of the Dodd-Frank Act, directs the Commission to prescribe standards for swap data recordkeeping and reporting. Specifically, CEA section 21(b)(1)(A) provides that: The Commission shall prescribe standards that specify the data elements for each swap that shall be collected and maintained by each registered swap data repository. These standards are to apply to both registered entities and counterparties involved with swaps. CEA section 21(b)(1)(B) provides that: In carrying out [the duty to prescribe data element standards], the Commission shall prescribe consistent data element standards applicable to registered entities and reporting counterparties. CEA section 21 also directs the Commission to prescribe data standards for SDRs. Specifically, CEA section 21(b)(2) provides that: The Commission shall prescribe data collection and data maintenance standards for swap data repositories. These standards are to be comparable to those for clearing organizations. CEA section 21(b)(3) provides that: The [data] standards prescribed by the Commission under this subsection shall be comparable to the data standards imposed by the Commission on derivatives clearing organizations in connection with their clearing of swaps. 4 See also CEA section 1a(40)(E). 5 Regulations governing core principles and registration requirements for, and the duties of, SDRs are the subject of part 49 of this chapter. In addition, CEA section 21(c)(3) provides that, once the data elements prescribed by the Commission are reported to an SDR, the SDR shall: Maintain the data [prescribed by the Commission for each swap] in such form, in such manner, and for such period as may be required by the Commission. Section 727 of the Dodd Frank Act, which added to the CEA new section 2(a)(13), provides that Each swap (whether cleared or uncleared) shall be reported to a registered swap data repository. 6 Section 729 of the Dodd- Frank Act added to the CEA new section 4r, which addresses reporting and recordkeeping requirements for uncleared swaps. Pursuant to this section, each swap not accepted for clearing by any derivatives clearing organization ( DCO ) must be reported to an SDR (or to the Commission if no repository will accept the swap). In a July 15, 2010 floor statement concerning swap data reporting as well as other aspects of the Dodd-Frank Act, Senator Blanche Lincoln emphasized that these provisions should be interpreted as complementary to one another to assure consistency between them, stating that: All swap trades, even those which are not cleared, would still be reported to regulators, a swap data repository, and subject to the public reporting requirements under the legislation. 7 CEA section 4r ensures that at least one counterparty to a swap has an obligation to report data concerning that swap. The determination of this reporting counterparty depends on the status of the counterparties involved. If only one counterparty is an SD, the SD is required to report the swap. If one counterparty is an MSP, and the other counterparty is neither an SD nor an MSP ( non-sd/msp counterparty ), the MSP must report. Where the counterparties have the same status two SDs, two MSPs, or two non-sd/ MSP counterparties the counterparties must select a counterparty to report the swap. 8 In addition, CEA section 4r provides for reporting to the Commission of swaps neither cleared nor accepted by any SDR. Under this provision, counterparties to such swaps must maintain books and records pertaining to their swaps in the manner and for the time required by the Commission, and must make these books and records available for inspection by the Commission or other specified 6 CEA section 2(a)(13)(G). 7 Senator Blanche Lincoln, Wall Street Transparency and Accountability Act, Congressional Record, July 15, 2010, at S See CEA section 4r(a)(3). VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 regulators if requested to do so. 9 It also requires counterparties to such swaps to provide reports concerning such swaps to the Commission upon its request, in the form and manner specified by the Commission. 10 Such reports must be as comprehensive as the data required to be collected by SDRs. 11 C. International Considerations Section 752 of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities regarding establishment of consistent international standards for the regulation of swaps and swap entities. The Commission is committed to a cooperative international approach to swap recordkeeping and swap data reporting, and has consulted extensively with various foreign regulatory authorities in the process of promulgating both its proposed and final part 45 rules. During this process, the Commission has served as Co-Chair of the Committee on Payment and Settlement Systems ( CPSS ) and the International Organization of Securities Commissions ( IOSCO ) Task Force that has prepared a Report on OTC Derivatives Data Reporting and Aggregation Requirement for presentation to the Financial Stability Board ( FSB ) in December The Commission also served as a member of the organizing committee for the FSB Legal Entity Identifier Workshop held in Basel, Switzerland in September In the course of preparing the proposed and final part 45 rules, Commission staff met with financial regulatory authorities from Argentina, Australia, Brazil, Canada, China, Dubai (United Arab Emirates), France, Germany, Hong Kong, Indonesia, India, Italy, Japan, Korea, Mexico, the Netherlands, Portugal, Russia, Saudi Arabia, Singapore, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. Staff also met with representatives of FSB, IOSCO, CPSS, the International Monetary Fund, the FSB Data Gaps and Systemic Linkages Group, the Bank for International Settlements, the Committee on the Global Financial System, the OTC Derivatives Regulatory Forum, the OTC Derivatives Supervisors Group, the European Central Bank, the European Commission, the European Union, the 9 CEA section 4r(c)(2) requires individuals or entities that enter into a swap transaction that is neither cleared nor accepted by an SDR to make required books and records open to inspection by any representative of the Commission; an appropriate prudential regulator; the Securities and Exchange Commission; the Financial Stability Oversight Council; and the Department of Justice. 10 CEA sections 4r(a)(1)(B) and 4r(c). 11 CEA section 4r(d).
3 2138 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations Commission of European Securities Regulators, the European Systemic Risk Board, the International Organisation for Standardisation ( ISO ), and the Association of National Numbering Agencies ( ANNA ). In September 2009, the G leaders made a number of commitments regarding OTC derivatives, including the statement that: All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. 13 The Commission s part 45 rules, if adopted by the Commission, which requires reporting of swap data to SDRs to begin in mid-2012, may be the first set of regulatory requirements in the world to fulfill this commitment. D. Consultations With Other U.S. Financial Regulators In developing the swap data recordkeeping and reporting rule, Commission staff has also engaged in extensive consultations with U.S. domestic financial regulators. The agencies and institutions consulted include the Federal Reserve Board of Governors ( Federal Reserve ) (including the Federal Reserve Bank of New York), the Federal Deposit Insurance Corporation ( FDIC ), the Office of Financial Research ( OFR ), the Office of the Comptroller of Currency ( OCC ), the Securities and Exchange Commission ( SEC ), and the Department of the Treasury. E. Summary of the Proposed Part 45 Rule 1. Fundamental Goal The fundamental goal of the part 45 Notice of Proposed Rulemaking ( NOPR ) was to ensure that complete data concerning all swaps subject to the Commission s jurisdiction is maintained in SDRs, where it would be available to the Commission and other financial regulators for fulfillment of their various regulatory mandates, including systemic risk mitigation, market monitoring, and market abuse prevention. 12 The G 20 include leaders and representatives of the core members of the G 20 major economies, which comprises 19 countries and the European Union which is represented by its two governing bodies, the European Council and the European Commission. 13 Leaders Statement, Pittsburgh Summit, September 25, 2009, at 9; available at pittsburgh_summit_leaders_statement_ pdf. 2. Swap Recordkeeping The NOPR called for registered entities and swap counterparties to keep records relating to swaps throughout the existence of each swap and for five years following final termination or expiration of the swap. These records would be required to be readily accessible during the life of the swap and for two years thereafter, and retrievable from storage within three business days during the remaining three years of the retention period. The NOPR would require that data in SDRs be readily accessible to the Commission throughout the retention period as required by the Dodd-Frank Act Swap Data Reporting: Creation Data and Continuation Data In order to ensure that complete data concerning swaps is maintained in SDRs and available to the Commission and other regulators, the NOPR called for reporting of swap data from each of two important stages of the existence of a swap: the creation of the swap, and the continuation of the swap over its existence until its final termination or expiration. a. Creation data reporting. To ensure timeliness, accuracy, and completeness with respect to data, the NOPR required reporting of two types of data relating to the creation of a swap: the primary economic terms of the swap verified or matched by the counterparties at or shortly after the time of execution; and all of the terms of the swap included in the legal confirmation of the swap. To ensure inclusion of primary economic terms necessary for regulatory purposes, the rule specified minimum data elements that must be reported for swaps in each asset class. b. Continuation data reporting. The NOPR provided that continuation data reporting for credit and equity swaps would follow the life cycle approach, and required reporting of all life cycle events affecting the terms of a swap. The NOPR directed reporting of continuation data for interest rate, currency, and other commodity swaps to follow the state or snapshot approach, and required reporting of a daily snapshot of all primary economic terms of a swap including any changes to such terms occurring since the previous snapshot. For all asset classes, the NOPR called for continuation data reporting to include specified valuation data. 14 The proposed rule also cross-referenced the detailed recordkeeping requirements specific to DCMs, SEFs, DCOs, SDs, and MSPs included in rulemakings specific to those entities and counterparties. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 4. Unique Identifiers The NOPR called for use of three unique identifiers in connection with swap data reporting: a unique swap identifier (USI), a unique counterparty identifier (UCI), and a unique product identifier (UPI). The Commission proposed requiring use of these unique identifiers because they would be crucial regulatory tools for linking data together and enabling data aggregation by regulators across counterparties, transactions, and asset classes, to fulfill the systemic risk mitigation, market manipulation prevention, and other important purposes of the Dodd-Frank Act. The Commission also noted that such identifiers would have great benefits for financial transaction processing, internal recordkeeping, compliance, due diligence, and risk management by financial entities. The NOPR called for the USI to be created at the time a swap is executed, shared with all registered entities and counterparties involved with the swap, and used to track that particular swap over its life. The UCI would identify the legal entity that is a counterparty to a swap. Pursuant to the NOPR, the Commission would require use of UCIs in all swap data reporting, selecting an internationally-developed legal entity identifier system for this purpose if one meeting the Commission s requirements is available prior to the compliance date when swap data reporting begins, or imposing a system created by the Commission if that were needed. Confidential reference data concerning the corporate or company affiliations of the legal entity involved would allow regulators to monitor swap exposures. The UPI would categorize or describe swaps with respect to the underlying products referenced in them, allowing regulators to aggregate, analyze, and report swap transactions by product type, and also enhancing position limit enforcement and real time reporting. 5. Who Reports In general, the NOPR called for reporting by the registered entity or counterparty having the easiest, fastest, and cheapest access to the data in question, and most likely to have automated systems suitable for reporting. Swap execution facilities ( SEFs ) or designated contract markets ( DCMs ) would report primary economic terms data ( PET data ) for swaps executed on a trading facility, and DCOs would report confirmation data for cleared swaps. Counterparty reporting would follow the hierarchy outlined in the statute, giving SDs or MSPs the duty to report when possible,
4 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2139 and limiting reporting by non-sd/msp counterparties to situations where there is no SD or MSP counterparty. Where both counterparties have the same hierarchical status, the proposed rule would require them to agree as one term of their swap which of them is to report, in order to avoid reporting delays. 6. Third-Party Facilitation of Reporting The NOPR would explicitly permit third-party facilitation of data reporting, without removing the reporting responsibility from the appropriate registered entity or counterparty. 7. Reporting a Swap to a Single SDR To avoid fragmentation of data for a given swap across multiple SDRs, the NOPR would require that all data for a particular swap must be reported to the same SDR. 8. Reporting Swaps in an Asset Class Not Accepted by Any SDR As required by the section 729 of the Dodd-Frank Act, the NOPR provided that if there were an asset class for which no SDR currently accepted data, registered entities or counterparties required to report concerning swaps in such an asset class would be required to report the same data to the Commission at a time and in a form and manner determined by the Commission. 9. Data Standards The NOPR would require SDRs to maintain data and transmit it to the Commission in the format required by the Commission. It would permit an SDR to allow those reporting data to it to use any data standard acceptable to the SDR, so long as the SDR remains able to provide data to the Commission in the Commission s required format. 10. Reporting Errors and Omissions in Previously Reported Data Finally, the NOPR provided that registered entities and counterparties required to report swap data must also report to the SDR any errors or omissions in data previously reported, using the same format used in the previous report. Non-reporting counterparties discovering an error or omission would be required to notify the reporting counterparty, for reporting to the SDR by the reporting counterparty. F. Overview of Comments Received The comment period for the NOPR closed on February 7, 2011, but was reopened pursuant to the Commission s Order Reopening and Extension of Comment Periods for Rulemakings Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, dated May 4, The reopened comment period closed on June 3, Seventy-five comment letters submitted to the Commission addressed the proposed part 45 swap data recordkeeping and reporting rule All comment letters are available on the Commission Web site at PublicComments/CommentList.aspx?id=920. Specific comment letters are identified by CL and the submitter. Comments addressing the NOPR were received from: (1) ACM Capital Management ( ACM ) June 15, 2011 ( CL ACM ); (2) Alice Corporation ( Alice ) June 1, 2011 ( CL Alice ); (3) American Bankers Association and the ABA Securities Association ( ABA/ABASA ) June 3, 2011 ( CL ABA/ABASA ); (4) American Benefits Council ( ABC ) February 7, 2011 ( CL ABC ); (5) American Benefits Council ( ABC ) and Committee on Investment of Employee Benefit Assets ( CIEBA ) February 7, 2011 ( CL ABC/CIEBA I ); (6) ABC and CIEBA March 25, 2011 ( CL ABC/ CIEBA II ); (7) American Gas Association ( AGA ) February 3, 2011 ( CL AGA I ); (8) AGA June 3, 2011 ( CL AGA II ); (9) Asset Management Group ( AMG ) and Securities Industry and Financial Markets Association ( SIFMA ) February 7, 2011 ( CL AMG/SIFMA ); (10) Japanese Banking Organizations Bank of Tokyo-Mitsubishi UFJ, Ltd. ( BTMU ), Mizuho Corporate Bank ( MHCB ), and Sumitomo Mitsui Banking Corporation ( SMBC ) May 5, 2011 ( CL Japanese Banks ); (11) Better Markets, Inc. ( Better Markets ) February 7, 2011 ( CL Better Markets I ); (12) Better Markets June 3, 2011 ( CL Better Markets II ); (13) BlackRock, Inc. ( BlackRock ) June 3, 2011 ( CL BlackRock I ); (14) BlackRock June 3, 2011 ( CL BlackRock II ); (15) Bloomberg, LP ( Bloomberg ) June 3, 2011 ( CL Bloomberg ); (16) Chatham Financial Corporation ( Chatham Financial ) February 7, 2011 ( CL Chatham Financial ); (17) Chris Barnard ( Barnard ) May 17, 2011 ( CL Barnard ); (18) Citadel, LLC ( Citadel ) June 3, 2011 ( CL Citadel ); (19) CME Group, Inc. ( CME ) February 7, 2011 ( CL CME I ); (20) CME June 3, 2011 ( CL CME II ); (21) Coalition of Derivatives End-Users ( CDEU ) February 25, 2011 ( CL CDEU ); (22) Coalition of Physical Energy Companies ( COPE ) February 7, 2011 ( CL COPE I ); (23) COPE June 3, 2011 ( CL COPE II ); (24) Committee on Capital Markets Regulation June 13, 2011 ( CL Committee on Capital Markets Regulation I ); (25) Committee on Capital Markets Regulation June 24, 2011 ( CL Committee on Capital Markets Regulation II ); (26) Committee on Futures and Derivatives Regulation, Bar Association of the City of New York June 13, 2011 ( CL Committee on Futures and Derivatives Regulation ); (27) Committee on the Investment of Employee Benefit Assets ( CIEBA ) June 3, 2011 ( CL CIEBA ); (28) Commodity Markets Council ( CMC ) February 6, 2011 ( CL CMC I ); (29) Commodity Markets Council ( CMC ) February 7, 2011 ( CL CMC II ); (30) Congressman James Renacci ( Renacci ) June 10, 2011 ( CL Renacci ); (31) CUSIP Global Services ( CUSIP ) February 7, 2011 ( CL CUSIP ); (32) Customer Data Management Group ( CDMG ) April 1, 2011 ( CL CDMG ); (33) DC Energy, LLC ( DC Energy ) June 3, 2011 ( CL DC Energy ); (34) Dominion Resources, Inc. ( Dominion Resources ) February 7, 2011 ( CL Dominion Resources ); (35) The Depository Trust & Clearing Corporation ( DTCC ) February 7, 2011 ( CL DTCC I ); (36) DTCCC June 3, 2011 ( CL DTCC II ); (37) Edison Electric Institute ( EEI ) June 3, 2011 ( CL EEI ); (38) Edison Electric Institute Electric Power Supply Association ( EPSA ) February 7, 2011 ( CL EPSA ); (39) Encana Marketing (USA), Inc. ( Encana ) February 7, 2011 ( CL Encana ); (40) Eris Exchange, LLC ( Eris Exchange ) June 3, 2011 ( CL Eris ); (41) Futures Industry Association ( FIA ), The Financial Services Roundtable VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 Comments were provided by a broad range of interested persons, including: Existing trade repositories, DCMs, and DCOs; providers of various third party services related to swaps; financial data and data management services and providers of various types of identifiers; both buy side and sell side swap counterparties of various types and sizes; trade associations involving securities, futures, and foreign exchange markets and firms; banks and mortgage lenders; managed funds and investment advisors; swap dealers; swap end users ; energy producers; and non-profit ( FSR ), Institute of International Bankers ( IIB ), Insured Retirement Institute ( IRI ), International Swaps and Derivatives Association ( ISDA ), Securities Industry and Financial Markets Association ( SIFMA ), and U.S. Chamber of Commerce, ( Chamber of Commerce ) June 1, 2011 ( CL Chamber of Commerce ); (42) Foreign Banking Organizations Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada, The Royal Bank of Scotland Group, Societe Generale, Credit Suisse, HSBC, UBS, Nomura Securities International, Inc., Rabobank Nederland ( Foreign Banks ) January 11, 2011 ( CL Foreign Banks I ); (43) Foreign Banks February 17, 2011 ( CL Foreign Banks II ); (44) Freddie Mac February 7, 2011 ( CL Freddie Mac ); (45) The Federal Home Loan Banks ( FHLB ) February 7, 2011 ( CL FHLB ); (46) Global Foreign Exchange Division ( Global Forex ) February 7, 2011 ( CL Global Forex ); (47) Green Exchange, LLC ( GreenEx ) June 3, 2011 ( CL GreenEx ); (48) GS1 US ( GS1 ) February 7, 2011 ( CL GS1 ); (49) Intercontinental Exchange, Inc. ( ICE ) February 7, 2011 ( CL ICE ); (50) International Energy Credit Association ( IECA ) February 7, 2011 ( CL IECA ); (51) International Swaps and Derivatives Association, Inc. ( ISDA ) June 2, 2011 ( CL ISDA ); (52) ISDA SIFMA February 7, 2011 ( CL ISDA SIFMA ); (53) Kansas City Board of Trade Clearing Corporation ( KCBT ) February 7, 2011 ( CL KCBT ); (54) Managed Funds Association ( MFA ) February 7, 2011 ( CL MFA ); (55) Markit June 3, 2011 ( CL Markit ); (56) MarkitSERV June 3, 2011 ( CL MarkitSERV I); (57) MarkitSERV June 3, 2011 ( CL MarkitSERV II ); (58) Minneapolis Grain Exchange ( MGEX ) June 3, 2011 ( CL MGEX ); (59) Not-For-Profit Electric End User Coalition consisting of the National Rural Electric Cooperative Association, American Public Power Association, Large Public Power Council, Edison Electric Institute Electric Power Supply Association, ( Electric Coalition ) February 7, 2011 ( CL Electric Coalition I ); (60) Electric Coalition June 3, 2011 ( CL Electric Coalition II ); (61) Noble Energy, Inc. ( Noble Energy ) July 7, 2011 ( CL Noble Energy ); (62) Office of the Comptroller of the Currency July 1, 2011 ( CL Office of the Comptroller of the Currency ); (63) REGIS TR February 7, 2011 ( CL REGIS TR ); (64) Reval.com, Inc. ( Reval ) January 24, 2011 ( CL Reval ); (65) Shell Energy North America (US), L.P. ( Shell Energy ) June 3, 2011 ( CL Shell Energy I ); (66) Shell Energy June 21, 2011 ( CL Shell Energy II ); (67) Society for Worldwide Interbank Financial Telecommunication SCRL ( SWIFT ) February 14, 2011 ( CL SWIFT ); (68) SunGard Energy & Commodities ( SunGard ) February 7, 2011 ( CL Sungard ); (69) Thomson Reuters February 7, 2011 ( CL Thomson Reuters ); (70) TradeWeb Markets, LLC ( TradeWeb ) June 3, 2011 ( CL TradeWeb ); (71) TriOptima February 7, 2011 ( CL TriOptima ); (72) Senator Sherrod Brown ( Brown ) June 13, 2011 ( CL Brown ); (73) Vanguard February 7, 2011 ( CL Vanguard ); (74) Working Group of Commercial Energy Firms ( WGCEF ) February 7, 2011 ( CL WGCEF I ); (75) WGCEF June 3, 2011 ( CL WGCEF II ).
5 2140 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations associations. Commission staff also held three public roundtables relating to swap data reporting, on September 14, 2010, January 28, 2011, and June 6, 2011, which provided input from a broad cross-section of industry and private sector experts concerning the issues addressed in the NOPR. While many commenters expressed support for the proposed part 45 rules, many also offered suggestions regarding swap data recordkeeping and reporting, as well as recommendations for clarification or modification of specific provisions of the proposed rule. Comments are addressed as appropriate in connection with the discussion below of the final rule provision or provisions to which they relate. Some comments received by the Commission requested further clarification relating to definitions provided in the NOPR, or regarding the application of NOPR provisions in various contexts. Definitions included in the final rule are provided for clarification and do not impose new substantive obligations. II. Part 45 of the Commission s Regulations: The Final Rules New part 45 contains provisions governing swap data recordkeeping and reporting. Definitions are set forth in Section 45.2 establishes swap recordkeeping requirements for registered entities and swap counterparties. Sections 45.3 and 45.4 establish swap data reporting requirements. Reporting of required swap creation data (the data association with the creation or execution of a swap) is addressed in 45.3, while reporting of required swap continuation data (the data associated with the continued existence of a swap until its final termination) is addressed in Required use of unique identifiers in swap data recordkeeping and reporting is addressed in 45.5, which sets forth requirements regarding unique swap identifiers ( USIs ); 45.6, which sets forth requirements regarding legal entity identifiers ( LEIs ); and 45.7, which sets forth requirements regarding unique product identifiers ( UPIs ). Determination of which counterparty must report swap data for each swap is established by Third-party facilitation of swap data reporting is addressed by Section establishes requirements for reporting all data concerning a swap to a single SDR. Section addresses data reporting for swaps in a swap asset class not accepted by any SDR. Section sets forth requirements concerning voluntary supplemental reporting of swap data to SDRs. Section establishes required data standards for swap data reporting. Finally, sets forth requirements for reporting concerning errors and omissions in previously reported swap data. A. Recordkeeping Requirements Proposed Rule The NOPR provided that all SEFS, DCMs, DCOs, SDs, and MSPs must keep full, complete, and systematic records, together with all pertinent data and memoranda, of all activities relating to the business of such entities or persons with respect to swaps, including, without limitation, records of all data required to be reported in connection with any swap. All such records would be required to be kept throughout the existence of the swap and for five years following final termination of the swap. Records would be required to be readily accessible by the registered entity or counterparty in question via real time electronic access throughout the life of the swap and for two years following the final termination of the swap, and retrievable within three business days through the remainder of the required retention period. The NOPR proposed lesser recordkeeping requirements for non-sd/ MSP counterparties, calling for them to keep full, complete, and systematic records, including all pertinent data and memoranda, with respect to each swap in which they are a counterparty (as opposed to all activities relating to the business of such entities with respect to swaps), in a way that makes the records retrievable by the counterparty within three business days during the required retention period. The NOPR provided that all records required to be kept by SDRs must be kept by the SDR both: (a) throughout the existence of the swap and for five years following final termination or expiration of the swap, during which time the records must be readily accessible by the SDR and available to the Commission via real time electronic access; and (b) thereafter, for a period determined by the Commission, in archival storage from which they are retrievable by the SDR within three business days. This provision was intended to make effective the statutory mandate that SDRs must provide direct electronic access to the Commission (or any designee of the Commission including another registered entity). 16 As proposed, part 45 would also require that all records required to be kept pursuant to the regulations must be open to inspection upon request by any representative of the Commission, the 16 CEA section 21(c)(4)(A). VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 Department of Justice, or the SEC, or by any representative of a prudential regulator as authorized by the Commission. 2. Comments Received The Commission received comments concerning the proposed recordkeeping provisions from both market participants who anticipated that they could be SDs and MSPs and market participants who anticipated that they could be non-sd/msp counterparties. Many commenters asked that non-sd/ MSP counterparties be allowed to keep fewer records and to keep records in paper form. Commenters suggested that required record retention periods should be shortened, and that retrievability requirements should be somewhat relaxed. Other commenters suggested that recordkeeping requirements for non-sd/msp counterparties should be phased in. a. Records required. American Gas Association ( AGA ) and Edison Electric Institute ( EEI ) asked the Commission to specify more precisely the information that non-sd/msp counterparties will be required to retain, defining in particular the meaning of all pertinent data and memoranda, with examples. Arguing that non-sd/ MSP counterparties should not be required to keep records of swap terms other than the final terms of the swap, EEI suggested that non-sd/msp counterparties be required to retain only master or bespoke agreements, long or short-form confirmations, amendments and associated swap transaction data stored in an end-user s trade capture system. The Committee on the Investment of Employee Benefit Assets ( CIEBA ) suggested that a non-sd/msp counterparty should only be required to retain the final confirmation of any swap where the other counterparty is an SD or MSP, and (presumably where no SD or MSP is involved) should only be required to retain swap creation or continuation data that the non-sd/msp is required to report. The Working Group of Commercial Energy Firms ( WGCEF ) asked that non-sd/msp counterparties to physical commodity swaps (or at least energy swaps) be excused from recordkeeping requirements altogether, arguing that the final rule should recognize the unique operational characteristics and abilities of different participants in swap markets for physical commodities, since such counterparties may not presently have the necessary technology, and the benefits of implementing it would not justify the costs imposed. The Not-for- Profit Electric End User Coalition ( Electric Coalition ) contended that the
6 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2141 rule should allow non-sd/msp counterparties to keep records in paper form. b. Record retention periods. The International Swap Dealers Association ( ISDA ) and the Securities Industry and Financial Markets Association ( SIFMA ) suggested that the Commission should analyze this requirement further before it is implemented. AGA argued that record retention for the life of the swap plus five years would impose substantial costs on non-sd/msp counterparties such as gas utilities, and asked that the record retention period for non-sd/msp counterparties be reduced to the life of the swap plus three years. WGCEF commented that there would be no benefit to record retention beyond five years following termination of a swap. Taking an opposite view, Chris Barnard recommended that all registered entities and swap counterparties should be required to keep records indefinitely. c. Record retrievability. ISDA and SIFMA commented that current recordkeeping practice for their members would normally mean accessibility within a reasonable period of time, such as two working days, and argued that instant access is impracticable to achieve. 17 The Global Foreign Exchange Division of SIFMA ( Global Forex ) suggested that after termination of the swap, real time access should only be required for an additional 30 days. With respect to retrieval by non-sd/msp counterparties, AGA argued that the three-business-day retrievability requirement is too onerous, and would preclude off-site storage of business records, forcing end users to maintain on-site record storage. The Electric Coalition suggested that the retrieval period for non-sd/msp counterparties be extended to 20 business days. d. Phasing in recordkeeping requirements for non-sd/msp counterparties. The Electric Coalition suggested that recordkeeping requirements for non-sd/msp counterparties be phased in. The Electric Coalition also suggested that the Commission define two sub-categories of non-sd/msps, namely financial and non-financial non-sd/msps, and that it delay the beginning of compliance with recordkeeping requirements even further for non-financial non-sd/msp counterparties. Dominion Resources commented that recordkeeping should 17 WGCEF asked the Commission to confirm that real time accessibility refers to access by the counterparty, not the Commission, and asked that the requirement be changed to require record retrieval by the close of business the day following a request. focus first on swaps involving platform execution or clearing, or involving SDs and MSPs. 3. Final Rule: 45.2 a. Records required. The Commission believes that the final rule should largely maintain the NOPR provisions regarding required records. Those provisions call for recordkeeping with respect to swaps that parallels the Commission s existing recordkeeping requirements with respect to futures and options. 18 Under those existing requirements, all DCMs, DCOs, futures commission merchants ( FCMs ), introducing brokers ( IBs ), and members of contract markets are generally required to keep full and complete records, together with all pertinent data and memoranda, of all activities relating to the business of the entity or person that is subject to the Commission s authority. The Commission believes that the rationale for requiring futures registrants and counterparties subject to its jurisdiction to keep full and complete records must also govern recordkeeping with respect to swaps. Such records are essential to carrying out the regulatory functions of not only the Commission but all other financial regulators, and for appropriate risk management by registered entities and swap counterparties themselves. 19 The Commission notes that the NOPR placed narrower recordkeeping obligations on non-sd/msp counterparties subject to the Commission s jurisdiction, requiring them to keep full, complete, and systematic records, including all pertinent data and memoranda, with respect to each swap to which they are a counterparty, rather than with respect to their entire business relating to swaps. This narrower requirement was designed to effectuate a policy choice made by the Commission to place lesser burdens on non-sd/msp counterparties to swaps, where this can be done 18 Recordkeeping requirements relating to futures and options are found in CEA sections 5(b) and 5(d); 1.31 and 1.35 of this chapter; Appendix B to Part 38 of the Commission s Regulations, Core Principle 17, Recordkeeping; and Appendix A to Part 39 of the Commission s Regulations, Core Principle K, Recordkeeping. 19 The need for such records is also recognized internationally. As CPSS has noted: it should be clear that the data recorded in a TR [trade repository] cannot be a substitute for the records of transactions at original counterparties. Therefore, it is important that even where TRs have been established and used, market participants maintain their own records of the transactions that they are a counterparty to and reconcile them with their counterparties or TRs on an ongoing basis (including for their own risk management purposes). Committee on Payment and Settlement Systems, Considerations for Trade Repositories in OTC Derivatives Markets, May 2010, at 1. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 without damage to the fundamental systemic risk mitigation, transparency, standardization, and market integrity purposes of the legislation. The Commission does not believe that it should further define or reduce the records required to be kept. The Commission s existing recordkeeping regulations in the futures context call for maintenance of full and complete records. Complete records regarding each swap should be required from all counterparties, including non-sd/msp counterparties to physical commodity swaps and other swaps, because such records are essential for effective market oversight and prosecution of violations by the Commission and other regulators. Experience with recordkeeping requirements in the context of futures suggests that all market participants are able to retain such records. The Commission also does not believe that it should specifically delineate the meaning of all pertinent data and memoranda. This phrase is not further defined in the Commission s existing futures regulations. With respect to paper recordkeeping, the Commission agrees with the comment suggesting that non-sd/msp counterparties should be permitted to keep required records in paper form, since this could serve to reduce burdens on some such counterparties while still ensuring that essential records are available. 20 The final rule provides that non-sd/msp counterparties may keep records in either electronic or paper form, so long as they are retrievable, and information in them is reportable, as required by part 45. Because SEFS, DCMs, DCOs, SDs, and MSPs are more likely to have automated systems suitable for electronic recordkeeping, and because electronic production of records is important to the Commission s enforcement functions, the final rule will permit such registrants to keep records in paper form only if they are originally created and exclusively maintained in paper form. b. Record retention periods. The Commission has determined that the final rule should maintain the NOPR provision calling for required records to be retained for the life of the swap plus five years. A swap can continue to exist for a substantial period of time prior to its final termination or expiration. During this time, which in some cases can extend for many years, the key economic terms of the swap can change. Thus, recordkeeping requirements with 20 Although the final rule requires data reporting in electronic form, a non-sd/msp counterparty could achieve this by entering information from paper records into a web interface provided by an SDR.
7 2142 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations respect to a swap must necessarily cover the entire period of time during which the swap exists, as well as an appropriate period following final produced immediately upon request. FCMs routinely comply with this requirement, and the Commission does not believe that SDs and MSPs should reporting of two sets of data generated in connection with the swap s creation: primary economic terms data, and confirmation data. termination or expiration of the swap. A be unable to do so as well. The NOPR defined primary economic five-year retention period following With respect to record retrievability terms as including all of the terms of the termination of the swap will ensure document retention consistent with the information that the Commission and other regulators need to carry out their oversight and enforcement for non-sd/msp counterparties, the Commission accepts the comments suggesting that retrieval from off-site storage within three business days could possibly involve additional costs or swap verified or matched by the counterparties at or shortly after the execution of the swap. In order to ensure that the array of primary economic terms reported to an SDR for responsibilities. It will also parallel the limit off-site storage options for some a swap is sufficient in each case for Commission s existing five-year record smaller non-sd/msp counterparties. In regulatory purposes and is comparable retention requirement in the context of order to lessen any burden on non-sd/ enough to permit data aggregation, the futures. Finally, this five-year period is MSP counterparties while maintaining NOPR required that the primary consistent with the Commission s final necessary accessibility of pertinent economic terms reported for each swap part 49 rules regarding SDR registration. records, the final rule will only require must include, at a minimum, all of the With respect to record retention by retrievability of non-sd/msp data elements listed by the Commission SDRs, the Commission has determined counterparty records within five in the asset class-specific tables of that SDRs must retain all required business days throughout the record minimum data elements appended to records both: (a) Throughout the retention period. The Commission the NOPR. The tables were designed to existence of the swap and for five years believes that this will not unduly include data elements reflecting the following final termination or expiration compromise its ability to conduct basic nature and essential economic of the swap, during which time the investigations and carry out its terms of the product involved. records must be readily accessible by enforcement responsibilities. The NOPR defined confirmation as the SDR and available to the d. Phasing in recordkeeping the full, signed, legal confirmation by Commission via real time electronic requirements for non-sd/msp the counterparties of all of the terms of access, as provided in the NOPR; and (b) counterparties. The Commission does a swap, and defined confirmation data thereafter, for an archival storage period not believe that it is necessary to as all of the terms of a swap matched of ten additional years, during which provide any phasing treatment with and agreed upon by the counterparties they must be retrievable by the SDR respect to recordkeeping requirements in confirming the swap. The NOPR within three business days. The for non-sd/msp counterparties beyond required reporting of confirmation data, Commission believes that extended the phasing by counterparty type in addition to the earlier reporting of retention of SDR records will assist provided in the final rule with respect primary economic terms data, in order regulators in discharging their systemic to compliance dates. As noted above, to help ensure the completeness and risk and market monitoring the final rule provides less onerous accuracy of the data maintained in an responsibilities, and aid market recordkeeping requirements and less SDR with respect to a swap. Reporting analysis. However, after a substantial onerous retrievability requirements for of the terms of the confirmation, which period of time has passed following non-sd/msp counterparties, in order to has the assent of both counterparties, final termination of a swap, the data ameliorate recordkeeping burdens for also provides a means of fulfilling the storage burden of retaining SDR records them. Excusing non-sd/msp statutory directive that an SDR shall concerning the swap could outweigh the counterparties from all recordkeeping confirm with both counterparties to the remaining benefit involved, and for an extended period could interfere swap the accuracy of the data that was accordingly the Commission does not with the ability of the Commission and submitted. 22 agree with the comment suggesting b. Who should report creation data. other regulators to carry out their indefinite record retention. The The NOPR s swap data reporting oversight and enforcement Commission may review the ten-year provisions were designed to streamline responsibilities. As previously noted, archival storage requirement for SDRs at and simplify the data reporting experience with recordkeeping a future time, after experience with its approach, by calling for reporting by the requirements in the context of futures operation is available. registered entity or counterparty that the suggests that all market participants do c. Record retrievability. The Commission believes has the easiest, retain records and that such Commission does not believe that it fastest, and cheapest access to the data recordkeeping is essential for effective should reduce record retrievability in question. As recognized in the NOPR, oversight and prosecution of violations. requirements for SEFS, DCMs, DCOs, such entities and counterparties are also SDs, and MSPs. The requirement that records be readily accessible for the life B. Swap Data Reporting: Creation Data 45.3 the most likely to have automated systems suitable for reporting. of the swap plus two years parallels the Because the Commission anticipated Commission s retrievability requirement 1. Proposed Rule that swap contract certification process during the first two years of the fiveyear retention period for futures-related records. 21 The Commission has routinely interpreted readily accessible to mean retrievable in real time or at least on the same day as the records are requested. Moreover, Commission Regulation 1.31 requires records maintained electronically to be 21 See 1.31 of this chapter. a. What creation data should be reported. In order to ensure timeliness, accuracy, and completeness with respect to the swap data available to regulators, the proposed rule called for reporting of swap data from each of two important stages of the existence of a swap: the creation of the swap, and the continuation of the swap over its existence until its final termination or expiration. The NOPR required for swaps listed by SEFs and DCMs would define all or most of the primary economic terms of a swap, the NOPR called for SEFs or DCMs to report PET data for swaps executed on a trading platform, as soon as technologically practicable after execution, with reporting counterparties reporting only PET data that for any reason was not 22 CEA section 21(c)(2). VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2
8 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2143 available to the SEF or DCM. For offfacility swaps, where PET data is created by the counterparties verification of the primary economic terms of the swap, the NOPR provided for the reporting counterparty (as defined) to report the required PET data for the swap. The NOPR called for this report to be made promptly, but in no event later than: 15 minutes after execution of a swap for which execution and verification of primary economic terms occur electronically; 30 minutes after execution of a swap which is not executed electronically but for which verification of primary economic terms occurs electronically; or, in the case of a swap for which neither execution nor verification of primary economic terms occurs electronically, within a time after execution to be determined by the Commission. For cleared swaps, where confirmation data will be generated by DCOs in the course of the normal clearing process, the NOPR called for DCOs to report confirmation data, doing so as soon as technologically practicable following clearing. For non-cleared swaps, where confirmation will be done by the counterparties, the NOPR required the reporting counterparty to report confirmation data, making this report promptly following confirmation, but in no event later than: 15 minutes after confirmation of a swap for which confirmation occurs electronically; or, in the case of a swap for which confirmation was done manually rather than electronically, within a time after confirmation to be determined by the Commission. The NOPR did not explicitly assign the right to select the SDR to which a swap is reported, but it effectively determined who will make this choice, through the interaction of two key aspects of the rule. First, in order to prevent fragmentation of data for a single swap across multiple SDRs, which would seriously impair the ability of the Commission and other regulators to view or aggregate all of the data concerning the swap, the proposed rule provided that, once an initial data report concerning a swap is made to an SDR, all data reported for that swap thereafter must be reported to that same SDR. 23 Second, in order to ensure that PET data concerning the swap is reported as soon as technologically practicable following execution in part PROPOSED RULE REPORTING COUNTERPARTY: SD OR MSP Execution and clearing Report Reporter Reporting time to facilitate real time reporting the proposed rule required the SEF or DCM to make the initial PET data report for swap executed on such a facility, and required the reporting counterparty (in the majority of cases, an SD or MSP) to make the initial report for an off-facility swap. Because subsequent reports must go to the SDR that received the initial report, in practice this meant that the SEF or DCM would select the SDR for platform-executed swaps, and the reporting counterparty would choose the SDR for off-facility swaps. c. Deadlines for creation data reporting. The NOPR established reporting deadlines for creation data reporting, including both PET data reporting and confirmation data reporting, determined by whether the swap is platform-executed and/or cleared, whether verification (matching) of primary economic terms by the counterparties occurs electronically, and whether the reporting counterparty is an SD or MSP on the one hand or a non-sd/msp counterparty on the other. The resulting deadlines were as shown in the following tables. SEF or DCM, DCO... PET data... SEF or DCM... As soon as technologically practicable following execution. Any PET data not reported by SEF SD or MSP... or DCM. After execution: * 15 minutes if execution and verification electronic. * 30 minutes if execution non-electronic but verification electronic. * 24 hours if neither execution nor verification electronic. Confirmation data... DCO... As soon as technologically practicable following clearing. SEF, Not cleared... PET data... SEF... As soon as technologically practicable following execution. Any PET data not reported by SEF SD or MSP... After execution: * 15 minutes if execution and verification electronic. * 30 minutes if execution non-electronic but verification electronic. * 24 hours if neither execution nor verification electronic. Confirmation data... SD or MSP... After confirmation: * 15 minutes if confirmation electronic. * 24 hours if confirmation non-electronic. No platform, DCO... PET data... SD or MSP... After execution: * 30 minutes if verification electronic. * 24 hours if verification non-electronic. Confirmation data... DCO... As soon as technologically practicable following clearing. No platform, Not cleared. PET data... SD or MSP... After execution: * 30 minutes if verification electronic. * 24 hours if verification non-electronic. Confirmation data... SD or MSP... After confirmation: * 15 minutes if confirmation electronic. * 24 hours if confirmation non-electronic. 23 This requirement received universal approbation in both comments and roundtables as appropriate and necessary. PROPOSED RULE REPORTING COUNTERPARTY: NON-SD/MSP Execution and clearing Report Reporter Reporting time SEF or DCM, DCO... PET data... SEF or DCM... As soon as technologically practicable following execution. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2
9 2144 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations PROPOSED RULE REPORTING COUNTERPARTY: NON-SD/MSP Continued Execution and clearing Report Reporter Reporting time Any PET data not reported by SEF or DCM. Non-SD/MSP.. After execution: * 15 minutes if execution and verification electronic. * 30 minutes if execution non-electronic but verification electronic. * 24 hours if neither execution nor verification electronic. Confirmation data... DCO... As soon as technologically practicable following clearing. SEF, Not cleared... PET data... SEF... As soon as technologically practicable following execution. Any PET data not reported by SEF SD or MSP... After execution: * 15 minutes if execution and verification electronic. * 30 minutes if execution non-electronic but verification electronic. * 24 hours if neither execution nor verification electronic. Confirmation data... Non-SD/MSP.. After confirmation: * To be determined by the Commission prior to final rule. No platform, DCO... PET data... Non-SD/MSP.. After execution: * 30 minutes if verification electronic. * 24 hours if verification non-electronic. Confirmation data... DCO... As soon as technologically practicable following clearing. No platform, Not cleared. PET data... Non-SD/MSP.. After execution: * 30 minutes if verification electronic. * 24 hours if verification non-electronic. Confirmation data... Non-SD/MSP.. After confirmation: * To be determined by the Commission prior to final rule. d. Reporting for multi-asset swaps and mixed swaps. As noted in the NOPR, a mixed swap is in part a security-based swap subject to SEC jurisdiction, and in part a swap subject to CFTC jurisdiction. 24 Multi-asset swaps are those that do not have one easily identifiable primary underlying asset, but instead involve multiple underlying assets belonging to different asset classes that are all within CFTC s jurisdiction. One way of stating the distinction between these two types of swaps is that SEC and CFTC will each have jurisdiction over part of a mixed swap, but only CFTC will have jurisdiction over the different parts of a multi-asset swap. The NOPR requested comment on how multi-asset and mixed swaps should be reported. 2. Comments Received The Commission received numerous comments from a variety of commenters concerning the proposed rule s provisions addressing creation data reporting. The broad themes of these 24 The Dodd-Frank Act defines mixed swap as follows: The term security-based swap includes any agreement, contract, or transaction that is as described in section 3(a)(68)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)(A)) and is also based on the value of 1 [sic] or more interest or other rates, currencies, commodities, instruments of indebtedness, indices, quantitative measures, other financial or economic interest or property of any kind (other than a single security or a narrowbased security index), or the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence (other than an event described in subparagraph (A)(iii). Dodd-Frank 721(21), CEA section 1a(47)(D). comments addressed what should be included in required primary economic terms data, who should make the initial creation data report, what deadlines should be set for making creation data reports, and how creation data should be reported with respect to multi-asset swaps, mixed swaps, and international swaps. a. What should be included in required PET data. Comments concerning various aspects of required minimum PET data are discussed below. Clarification of the catch-all PET data category. The tables of minimum PET data for each asset class appended to the NOPR included a field for reporting any other primary economic terms of the swap matched by the counterparties in verifying the swap. ISDA and SIFMA commented that the Commission should clarify or provide examples of what this requirement means. Clarification of particular PET data terms for other commodity swaps. Electric energy providers including EEI, the Electric Power Supply Association ( EPSA ), the Coalition of Physical Energy Companies ( COPE ), and Dominion Resources suggested that the terms timestamp, settlement method, grade, and total quantity should be clarified or else should not be included in the minimum PET data for other commodity swaps. They asserted that timestamps are not typically recorded under current energy market practice. They argued that the settlement method field implies a swap potentially involving physical delivery, VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 whereas they believe that swaps are not agreements intended to be physically settled. They also argued that the total quantity of a commodity in a swap is not a term typically captured by swap counterparties, who instead typically express the size of a swap in terms of the quantity aligned with a settlement period. Elimination or clarification of calculation and reporting of futures equivalents. The NOPR called for minimum PET data reporting to include futures contract equivalents and futures contract equivalent units of measure. Better Markets expressed support for required reporting of futures equivalents. However, the Depository Trust & Clearing Corporation ( DTCC ) commented that OTC derivatives cannot be mapped readily to futures contracts, and thus this data will not necessarily be able to be aggregated in a meaningful fashion. Global Forex asked the Commission to provide guidance on how to report futures equivalents for swaps whose tenor sits between two futures contracts dates; guidance on the case where multiple futures contracts exist for the same underlying product; and guidance on products for which no corresponding futures contracts exist. Clarification of creation data reporting in the context of structured transactions. ISDA and SIFMA commented that execution, affirmation, and confirmation may have somewhat different meanings in different asset classes, and requested clarification of the application of these terms with respect to creation data
10 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2145 reporting. More specifically, Global Forex requested clarification of creation data in the context of structured transactions, noting that the meaning given these terms under prevalent foreign exchange market conventions, which frequently involve structured transactions, may differ from their application in other contexts. Clarifications regarding foreign exchange transactions. Contending that cross-currency swaps should be classified as interest rate swaps rather than foreign exchange swaps, Global Forex argues that cross-currency swaps in fact are interest rate products with multi-payment schedules, that they are most often traded by interest rate desks with interest rate participants, and that they are captured and managed in interest rate systems and infrastructure using interest rate conventions. Global Forex notes that foreign exchange swaps are products traded by distinct foreign exchange desks with market participants and internal and external systems infrastructure that are different from the participants and infrastructure involved in cross-currency swaps. Existing trade repositories including TriOptima and DTCC also suggest that the Commission classify cross-currency swaps as interest rate swaps. Global Forex notes that foreign exchange swaps consist of a near and a far leg, and that the foreign exchange swap market currently lacks market conventions that suggest how to select a reporting counterparty responsible for reporting both legs, in situations where both parties have the same hierarchical level (e.g., two SDs). Global Forex also notes that current trade capture systems differ in how they handle foreign exchange swaps, and that some may book a foreign exchange swap as a single trade, but split it in back-office systems into two trades with separate trade identifiers. Global Forex does not advocate reporting both legs separately; it simply points out this potential issue in light of current, differing market practices. Combining all PET data and confirmation data reporting in a single report. Several comments suggest consolidating the requirements to report both PET data and confirmation data. Dominion Resources and Global Forex suggest a single report providing PET data plus confirmation status (rather than all terms confirmed). ISDA and SIFMA suggest replacing all creation data reporting with end-of-day snapshot reporting (including the first-day report). The Kansas City Board of Trade ( KCBT ) suggests that for swaps that are platform-executed and cleared, the DCO s clearing report should replace confirmation reporting. 25 DTCC suggests creation data reporting for fully-electronic trades should be limited to confirmation reporting, in the belief that fully electronic trades can be confirmed within 15 minutes. Thomson Reuters believes that creation data reporting should be limited to confirmation reporting for all swaps whether platform executed or voice executed. The Managed Funds Association ( MFA ) suggests defining time of execution to mean 24 hours after manual confirmation of the swap, arguing that the benefits of data reporting within minutes of execution as presently defined do not outweigh either the infrastructure costs or error risks involved. Harmonizing the data fields require for real time and regulatory reporting. ISDA, SIFMA, WGCEF, and Dominion Resources recommended harmonizing the Commission s required PET data fields and real time reporting data fields. The Electric Coalition suggested a need to coordinate these two types of reporting with respect to reporting triggers and the words used to define them (e.g. verification or confirmation), and requested clarification concerning the data elements required by the real time reporting rule and the swap data reporting rule. Allowing non-sd/msp counterparties to report less data. The NOPR requires the same minimum PET data fields to be reported for each swap in an asset class, regardless of the nature of the reporting entity or counterparty. Various energy producers commented concerning potential burdens for non-sd/msp counterparties in this regard. AGA suggested the rule should minimize the burdens of reporting for non-sd/msp counterparties, and EEI supported the principle that responsibility for reporting should rest with those having the best technology, such as SEFs, DCMs, SDs and MSPs. 26 EEI, EPSA, and COPE suggested limiting data reporting for non-sd/msp counterparties in physical energy to data they already maintain under current data capture practices, limiting their reporting of confirmation data to the confirmation information currently captured in their systems, rather than requiring them to report all confirmation terms. The International Energy Credit Association ( IECA ) suggested exempting physical 25 KCBT also suggests that DCOs should be allowed to report a day s cleared swaps in a single daily data file, rather than individually. 26 The NOPR takes this approach, calling for SEFs and DCMs to report all creation data in their possession for on-facility swaps, and making SDs and MSPs the reporting counterparties when they are involved. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 energy counterparties from reporting requirements entirely, or at least imposing lesser reporting requirements for them. The Electric Coalition suggested that non-sd/msp counterparties be subject only to a CFTC Lite reporting regime. Miscellaneous aspects of PET data. The NOPR specifies minimum PET data fields for each asset class. The SEC s proposed data reporting rule for swaps under the SEC s jurisdiction, i.e., security-based swaps in the credit and equity asset classes, sets out categories of required data rather than specific data fields. ISDA and SIFMA suggested that the Commission should adopt the SEC s approach, and expressed concern that the Commission s approach could negatively affect FpML development and result in some products not being adequately described. Eris Exchange suggested that the Commission determine where prescriptive rules are absolutely necessary to address systemic risk, and the Commodity Markets Council suggested that the Commission avoid a prescriptive regulatory model which would create detailed reporting requirements and thus require different reporting methods. SunGard Energy & Commodities ( SunGard ) suggested that for swaps executed on SEFs and DCMs, having the SEF or DCM report position changes to each account, instead of reporting individual swap transactions, would be more efficient and more advantageous for monitoring of positions and of risk. 27 b. Who makes the initial creation data report and selects the SDR. The NOPR did not explicitly assign the right to select the SDR to which a swap is reported, but it effectively determined who will make this choice, through the interaction of two key aspects of the proposed rule. First, in order to prevent fragmentation of data for a single swap across multiple SDRs, which would seriously impair regulators ability to view or aggregate all of the data concerning the swap, the NOPR provided that, once an initial data report concerning a swap is made to an SDR, all data reported for that swap thereafter must be reported to that same SDR. 28 Second, in order to ensure that PET data concerning the swap is reported as soon as practicable following execution in part to facilitate real time reporting the NOPR required the SEF or DCM to make the initial PET data report for swap 27 SunGard suggested that such position reports could be accompanied by a reference to the primary economic terms of the contract, rather than by data reflecting all primary economic terms. 28 This requirement received universal approbation in both comments and roundtables as appropriate and necessary.
11 2146 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations executed on such a facility, and required the reporting counterparty (in the majority of cases, an SD or MSP) to make the initial report for an off-facility swap. Because subsequent reports must go to the SDR that received the initial report, in practice this meant that the SEF or DCM would select the SDR for platform-executed swaps, and the reporting counterparty would choose the SDR for off-facility swaps. The Commission received a number of comments concerning who should select the SDR to which a swap is reported. WGCEF, COPE, EEI, and EPSA supported the NOPR approach of giving reporting obligations to SEFs, DCMs, and DCOs, arguing that this approach simplifies reporting and eases burdens on counterparties, which is especially important in the case of non-sd/msp counterparties. EEI and EPSA emphasized that the rules should ensure that SDR selection by a SEF, DCM, SD, or MSP does not result in costs or burdens for non-sd/msp counterparties. WGCEF also suggested that DCOs should make the initial report for cleared swaps executed off-platform, since (in WGCEF s view) execution technically will not occur until such a swap is accepted for clearing. Global Forex observed that if a platform makes the initial report and thus selects the SDR, other entities or counterparties with reporting obligations during the life of the swap would need to ensure that they can connect to the chosen SDR. ABC and CIEBA suggested that for swaps involving a benefit plan as a counterparty, the SDR selection should always be made by the plan. ISDA and SIFMA suggested that the reporting counterparty should always select the SDR, arguing that this would permit the market to determine and follow the most efficient manner of reporting. REGIS TR opposed having reporting obligations assigned based on platform execution or clearing. DTCC and ICE recommended that the reporting counterparty an SD or MSP in the majority of cases should always select the SDR, even for platformexecuted swaps. ICE also suggested that if a SEF or DCM makes the first report and thus selects the SDR for a swap that is to be cleared, the SEF or DCM should be permitted to select a DCO that is also registered as an SDR as both the DCO that will clear the swap and the SDR to which the swap is reported. Going further in this direction, CME contended that the final rule should require the initial report for each cleared swap to be made to a DCO that is also registered as an SDR or an SDR chosen by such a DCO. CME argued that the structure and wording of the Dodd- Frank Act demonstrate that this was Congress s intent, and that limiting reporting for cleared swaps to DCOs that are dually registered as SDRs or to SDRs chosen by a DCO would involve the lowest cost and least burden. The Commodity Markets Council echoed CME s cost-benefit argument, asserting that DCOs are the natural choice to act as SDRs for cleared trades, and that it would be costly, inefficient and unnecessary to require industry to establish a redundant set of expensive connections with non-dco SDRs for the purpose of making regulatory reports for cleared trades. c. Creation data reporting deadlines and deadline phasing. Extended creation data reporting deadlines. The Commission received a number of comments recommending extended deadlines for both PET data reporting and confirmation data reporting. The Electric Coalition commented that the NOPR reporting deadlines are far too short if the reporting party is a non-financial entity, because such an entity would need to manually extract reportable data elements from a customized swap. Several commenters urged the Commission to extend deadlines for PET data reporting, particularly in the case of non-sd/msp counterparties. EEI suggested a PET data report deadline of T+1 (i.e., by the close of business on the business day following the day of execution) in the case of either electronic or manual verification. CIEBA asked that the 24-hour deadline for PET data reporting where both execution and verification are non-electronic include only business days. COPE concurred that the 24-hour deadline where verification is non-electronic is too short for non-sd/msp counterparties, and asked the Commission not to set a deadline in the final rule, but to determine the deadline through ongoing consultations with industry following issuance of the final rule. Commenters also urged extension of the deadlines for confirmation data reporting. AGA asked that the confirmation data reporting deadline for non-sd/msp counterparties be set at T+1 for swaps electronically confirmed, and at T+2 (i.e., by the close of business on the second business day following the day of execution) for swaps not electronically confirmed. The Federal Home Loan Banks ( FHLB ) suggested a deadline of 24 hours following confirmation for reporting confirmation of a swap electronically confirmed, and a deadline of five business days following confirmation for a swap manually confirmed. DTCC suggested that a 15-minute deadline for reporting VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 confirmation of an electronically executed swap would require a level of straight-through processing not yet available, and that for similar reasons a somewhat longer deadline would be needed where the swap was not electronically executed but electronically cleared. DTCC recommended setting the initial deadline for confirmation data reporting for electronically executed swaps at 30 minutes, setting the deadline for swaps not electronically executed but electronically cleared at two hours, and phasing in confirmation data reporting deadlines. For manually confirmed swaps, DTCC advocated a confirmation data reporting deadline of five days after execution. Streamlined regulatory and real time reporting. The Commission also received comments from DTCC and from roundtable participants suggesting that it consider minimizing the number of swap creation data reports to be required of any given registered entity or swap counterparty, either by combining PET data reporting and confirmation data reporting in a single report, or by allowing a single PET data report to fulfill both regulatory reporting requirements under part 45 and real time reporting requirements under part 43. Phasing in reporting deadlines. DTCC suggested that the Commission consider phasing in creation data reporting deadlines where possible. d. Reporting of multi-asset swaps and mixed swaps. As noted in the preamble of the NOPR, generally, a mixed swap is in part a security-based swap subject to SEC jurisdiction, and in part a swap belonging to an asset class subject to CFTC jurisdiction. 29 Multi-asset swaps are those that do not have one easily identifiable primary underlying notional item, but instead involve multiple underlying notional items belonging to different asset classes that are all within CFTC s jurisdiction. One way of stating the distinction between these two types of swaps is that SEC and CFTC will each have jurisdiction over part of a mixed 29 The Dodd-Frank Act defines mixed swap as follows: The term security-based swap includes any agreement, contract, or transaction that is as described in section 3(a)(68)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)(A)) and is also based on the value of 1 [sic] or more interest or other rates, currencies, commodities, instruments of indebtedness, indices, quantitative measures, other financial or economic interest or property of any kind (other than a single security or a narrowbased security index), or the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence (other than an event described in subparagraph (A)(iii). Dodd-Frank 721(21), CEA section 1a(47)(D).
12 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2147 swap, but only CFTC will have jurisdiction over the different parts of a multi-asset swap. The NOPR requested comment on how multi-asset and mixed swaps should be reported, but did not directly address such reporting in the text of the proposed rule. Commenters provided differing views concerning reporting of mixed swaps and multi-asset swaps. Better Markets suggested that the different legs of mixed swaps and multi-asset swaps should be reported separately. ISDA and SIFMA suggested that multi-asset swaps should not be decomposed into their underlying asset classes but should be reported to an SDR that accepts swaps in the most significant asset class component of the swap, as determined by the reporting counterparty (in practice, usually the asset class of the desk that trades the swap). DTCC suggested that swaps in asset classes subject to joint SEC CFTC regulation could be reported to an SDR registered with both Commissions (except in cases where no such SDR is available), or that a practicable reporting regime for mixed swaps and multi-asset swaps may be to have the reporting counterparty for a mixed swap or multi-asset swap report the swap to an SDR serving each asset class, including the USI assigned in the context of the report to the first SDR in the report made to the second SDR. i. Reporting of international swaps. As noted above, the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities regarding establishment of consistent international standards for the regulation of swaps and swap entities. The Commission is committed to a cooperative international approach to swap recordkeeping and swap data reporting, and has consulted extensively with various foreign regulatory authorities in the process of preparing this final rule. International regulators consulted by the Commission have urged the Commission to include provisions in its final swap data reporting rules concerning international swaps, i.e., those swaps that may be required by U.S. law and the law of another jurisdiction to be reported both to an SDR registered with the Commission and to a different trade repository registered with the other jurisdiction. 3. Final Rule: 45.3 a. What should be included in required PET data. Clarification of the catch-all PET data category. The Commission s purpose in including in the tables of minimum PET data a field for reporting any other primary economic terms of the swap matched by the counterparties in verifying the swap is to provide a catch all category necessary to (1) ensure reporting of all price-forming terms agreed on at the time of swap verification, including any such terms not listed in the minimum PET data tables for the asset class in question, and (2) keep pace with market innovation and new varieties of swaps for which the Commission has not enumerated all relevant data fields. To clarify that this field is intended to include all terms agreed on at the time of swap verification, the final rule eliminates the words primary economic from the field description, specifies reporting of any other terms of the swap matched by the counterparties in verifying the swap, and adds some possible examples of such terms. This aligns the field description with the NOPR and final rule definition of primary economic terms as meaning all of the terms of a swap matched or affirmed by the counterparties in verifying the swap. Clarification of particular PET data terms for other commodity swaps. The Commission disagrees with comments suggesting that execution date and time should not be required to be reported for certain types of other commodity swaps. The Commission believes that the date and time of the execution of a swap constitute a basic primary economic term and a fundamental audit trail component for all swaps. This information is essential to the ability of the Commission and other regulators to fulfill their obligations to supervise swap markets and prosecute abuses. For swaps executed on a SEF or DCM, and for offfacility swaps executed via an automated system, a timestamp will be created automatically by the system involved. For off-facility swaps executed manually, counterparties can and must manually record and report the date and time of execution. Where current market practice does not include recording the date and time of execution of a swap, adjustment will be necessary. While the Commission notes that the parameters of what constitutes a swap will be provided by the final definition of swap issued jointly by the Commission and the SEC, the Commission believes that settlement method should be retained as a PET data field. The definition of a swap in CEA section 1a(47) could include options that potentially could require physical delivery of a commodity. Thus, while certain transactions that require delivery of a commodity, e.g., forward contracts or spot transactions that are excluded from the definition of a swap, VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 may not constitute swaps (as commenters argue), other derivative transactions involving delivery would be required to be reported as swaps. The Commission believes that grade should also be retained as a PET data field for other commodity swaps. Grade would typically be applicable as a defining characteristic of the swap for both physically delivered and cash settled transactions, in that this term is intended to identify the quality and other characteristics of the commodity that underlies the swap. For a cash settled swap, the Commission believes that separately accounting for grade in the terms reported is also necessary as a means of classifying and identifying the quality characteristics of the commodity underlying the swap. The Commission recognizes that in certain cases electricity being one example a grade may not exist. The final rule will indicate that where a particular PET data field does not apply to a given swap, the reporting entity or counterparty should report Not applicable for that field. As noted in the comments, some commodity swap counterparties use the convention of identifying the notional amount of a swap by specifying the quantity in terms of dollars or units of the commodity, whichever is used to calculate settlement period payment obligations. However, other counterparties account for the size of a swap by referring to the total quantity involved in a swap over its entire existence. Because a single convention does not apply in all cases, the final minimum PET data tables will retain the terms Quantity and Total quantity, but will also add the terms Quantity units and Notional quantity. Notional quantity will be defined as the amount of the underlying commodity that is used to calculate periodic settlement payments during the life of the swap. Quantity units will be defined as the units in which the notional quantity is expressed, e.g., bushels, gallons, barrels, pounds, or tons. Elimination or clarification of calculation and reporting of futures equivalents. The NOPR provision for reporting of futures contract equivalents was intended to assist the Commission in monitoring the positions of traders for the purpose of enforcing position limits mandated by the Dodd-Frank Act. However, in July 2011, subsequent to publication of the NOPR, the Commission adopted new reporting requirements for physical commodity swaps and swaptions. Part 150 of this chapter now requires routine position reports from clearing organizations, clearing members and swap dealers, and
13 2148 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations also applies to reportable swap trader positions. It also provides guidelines on how swaps should be converted into futures equivalents. The new regulations were issued in part to cover the period between the present, when the date by which SDRs registered with the Commission will be operational in all asset classes is not yet certain, and a future time when the Commission may be able to obtain swap position data by aggregating data across SDRs. 30 Accordingly, the final part 45 rule will drop futures contract equivalent and futures contract equivalent unit of measure from its minimum PET data tables. The Commission may revisit possible reporting of futures equivalents at a later time, after Commission staff has had an opportunity to evaluate the Commission s experience in collecting futures equivalent data under the new part 150 regulations. Clarification of creation data reporting in the context of structured transactions. In response to comments requesting clarification of creation data reporting in the context of structured transactions, the Commission provides the following explanation. As discussed below in the context of who reports creation data, for swaps executed on a SEF or DCM, the final rule requires the SEF or DCM to report all required swap creation data, as soon as technologically practicable after execution, in a single report that includes all primary economic terms data and all confirmation data for the swap. This will address some of the concerns raised in these comments for swaps executed on a SEF or DCM. For off-facility swaps, the final rule requires the reporting counterparty to report both (1) all primary economic terms data, within specified times following execution, and (2) all confirmation data, within specified times following confirmation by the counterparties. 31 The final rule requires both a PET data report and a confirmation data report in recognition that the elapsed time between execution and verification of primary economic terms on the one hand, and 30 An SDR would be able to report position data to the Commission only if it were the single SDR for an entire asset class. 31 The final rule will further provide that if an offfacility swap is accepted for clearing within the applicable deadline for PET data reporting by the reporting counterparty, and before the reporting counterparty reports any primary economic terms data, then the reporting counterparty will be excused from reporting creation data, and the DCO will report all required creation data in a single report that includes both confirmation data and PET data. The final rule will also define confirmation as the consummation of legally binding documentation memorializing the agreement of the parties to all terms of the swap. confirmation of all terms of the swap on the other, may differ for a given swap depending on context. The Commission understands that a major concern underlying these comments reflects uncertainty as to what reporting the final rule requires (a) in situations where give-up arrangements or block trade details may not be entirely finalized as of the time the counterparties verify primary economic terms, or (b) in the case of structured transactions, where the counterparties may negotiate primary economic terms in stages over a period of time before reaching agreement on their entire deal. The Commission therefore wishes to clarify that for offfacility swaps where execution and confirmation are not simultaneous, the final rule requires PET data reporting when execution has occurred and verification of primary economic terms is completed, even though details such as give-ups may still be in process. It also wishes to clarify that PET data reporting is to follow agreement on all primary economic terms of the complete transaction, and is not required or desired after each stage of negotiating a structured transaction or after agreement on some but not all of the primary economic terms of the swap. Clarifications regarding foreign exchange transactions. The Commission has considered and agrees with comments suggesting that crosscurrency swaps should be classified and reported as interest rate swaps, in line with prevailing market practice concerning the trading of such swaps. The final rule provides for reporting of cross-currency swaps as interest rate swaps. The Commission has also considered comments noting differences in current foreign exchange market practice concerning the booking of the near and far legs of some foreign exchange transactions. The Commission understands that a firm s financial statements will address both legs of a foreign exchange swap, and that confirmation is performed with respect to the whole swap rather than separately for each leg. The final rule provides for reporting of foreign exchange swaps as a single transaction by a single reporting counterparty selected as provided in The Commission notes that foreign exchange market conventions may need to adjust to this requirement The Commission also notes that the final rule addresses the reporting of foreign exchange instruments, defined as instruments that are both defined as a swap in part 1 of this chapter and included in the foreign exchange asset class. The definition specifies that instruments in the foreign exchange asset class include: any currency option, VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 Combining all PET data and confirmation data reporting in a single report. The Commission has considered the numerous comments suggesting that the final rule should provide for PET data and confirmation data reporting to be combined in a single report. The Commission agrees with these comments with respect to swaps executed on a SEF or DCM. As noted above, the final rule provides that for swaps executed on a SEF or DCM, a single report by the SEF or DCM, made as soon as technologically practicable after execution, will fulfill all creation data reporting that would otherwise be required of reporting counterparties. The Commission disagrees with these comments as they apply to off-facility swaps. The NOPR requirements for both PET data reporting and confirmation data reporting are designed to ensure both (a) timeliness of reporting, served by the initial PET data report, and (b) data accuracy and completeness, served by confirmation data reporting. 33 In addition, as noted above, the NOPR requirement for both a PET data report and a confirmation data report recognizes that the elapsed time between verification of primary economic terms and confirmation of all terms may differ in different contexts, and in some cases may be substantial. In a number of cases, delaying the initial data report for a swap until confirmation has occurred could prevent regulators from seeing a current picture of the entire swap market in the data present in SDRs. As provided in the NOPR and the final rule, reporting counterparties for off-facility swaps will be free to contract with third-party services providers to fulfill either or both of these reporting obligations, which could reduce costs associated with making these reports. The Commission notes that, for off-facility swaps not accepted for clearing within the applicable deadline for the reporting counterparty to report PET data, the reporting counterparty can avoid the foreign currency option, foreign exchange option, or foreign exchange rate option; any foreign exchange forward as defined in CEA section 1a(24); any foreign exchange swap as defined in CEA section 1a(25); and any non-deliverable forward involving foreign exchange. This definition and this approach to reporting are required by the fact that the Dodd- Frank Act defines the term foreign exchange swap, and the fact that foreign exchange swaps as so defined are only a subset of the foreign exchange instruments that will be defined as swaps. 33 The Commission notes that it is working to align the timeframes for regulatory swap data reporting pursuant to this part and the dissemination delays for real time swap data reporting pursuant to part 43, in order to permit a reporting entity or counterparty to fulfill both obligations by making a single report, should the reporting entity or counterparty choose to do so.
14 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2149 need for a separate confirmation data reporting by confirming the swap within the applicable deadline for PET data reporting, and reporting both PET data and confirmation data in a single report. Harmonizing the data fields required for real time and regulatory reporting. The Commission agrees in principle with comments suggesting harmonization of the data fields required for real time reporting pursuant to part 43 and those required for regulatory reporting pursuant to this part. While registered entities and reporting counterparties subject to the Commission s jurisdiction will remain responsible for complying with both part 43 and part 45, the Commission is working to substantially align the minimum PET data fields required by this part and the real time reporting data fields required by part 43, in order to reduce reporting burdens to the extent possible. Allowing non-sd/msp counterparties to report less data. The Commission disagrees with comments suggesting that it should require less data to be reported for a swap with respect to which a non-sd/msp counterparty is the reporting counterparty. The Commission believes that fulfilling the purposes of the Dodd-Frank Act requires that regulators have access to the same information for all swaps reported to SDRs. To address commenters concerns to the extent possible, the final rule will lessen burdens on non-sd/msp counterparties by phasing in their reporting which will begin as of a compliance date later than the compliance dates for other registered entities and counterparties and by providing extended deadlines for their reporting once it begins. Miscellaneous aspects of PET data. The Commission disagrees with comments suggesting that the final rule should only provide categories of data to be reported, rather than minimum PET data fields. The Commission believes the approach taken by the NOPR in this respect is appropriate. It is designed to ensure uniformity of essential data concerning swaps across all of the asset classes over which the Commission has jurisdiction, and across different SDRs, and to ensure that the Commission has the necessary information to characterize and understand the nature of reported swaps. Commission staff have consulted with SEC staff regarding data reporting for swaps in the credit and equity asset classes where the Commission and the SEC share jurisdiction, and the Commission has substantially aligned its data requirements in those asset classes with the data sought by the SEC. As a result, the Commission does not believe that SDRs and security-based SDRs will have difficulty in collecting the data needed by the two Commissions. The inclusion in minimum PET data of all terms of the swap matched by the counterparties in verifying the swap provides an avenue for reporting for newly-developed swap products. The Commission will also have the ability to amend its tables of required minimum PET data at futures times when this is desirable. The Commission disagrees with the comment suggesting that SEFs and DCMs should report positions rather than swap transactions. The Dodd-Frank Act requires each swap to be reported to an SDR, and does not address position reporting to an SDR. In addition, unlike most current futures exchanges, SEFs and DCMs will not necessarily have access to all of the transactions of a given counterparty in a particular product, and thus would be unable to report positions. b. Who makes the initial creation data report and selects the SDR. The Commission has considered the various comments received concerning who should make the initial creation data report for a swap, and by operation of the various parts of the rule thus select the SDR to which the swap is reported. The Commission has determined that the final rule should maintain the NOPR s approach, calling for initial creation data reporting by the registered entity or reporting counterparty that the Commission believes has the easiest and fastest access to the data required, and requiring that, once an initial data report concerning a swap is made to an SDR, all data reported for that swap thereafter must be reported to that same SDR. Cumulatively, these provisions prevent fragmentation of swap data that would impair the ability of the Commission and other regulators to use the swap data in SDRs for the purposes of the Dodd-Frank Act. Under this approach, competition may lead SEFs and DCMs to establish connections to multiple SDRs, and result in lower SDR fees charged, not only to SEFs and DCMs for swaps executed on such facilities, but also to reporting counterparties for off-facility swaps. The Commission believes that requiring that all cleared swaps be reported only to DCOs registered as SDRs or to SDRs chosen by a DCO would create a nonlevel playing field for competition between DCO SDRs and non-dco SDRs. The Commission also believes that it would make DCOs collectively, and could in time make a single DCO SDR, the sole recipient of data reported concerning cleared swaps. On the other VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 hand, the Commission believes that giving the choice of the SDR to the reporting counterparty in all cases could in practice give an SDR substantially owned by SDs a dominant market position with respect to swap data reporting within an asset class or even with respect to all swaps. The Commission believes that the rule as proposed favors market competition, avoids injecting the Commission into a market decision, and leaves the choice of SDR to be influenced by market forces and possible market innovations. The rule as proposed also addresses the major substance of the concerns expressed by non-sd/msp counterparties, since it calls for the initial data report to be made by a non- SD/MSP counterparty only in the case of an off-facility swap between two non- SD/MSP counterparties. c. Creation data reporting deadlines and deadline phasing. Extended creation data reporting deadlines. The Commission continues to believe, as it stated in the NOPR, that in order to fulfill the purposes of the Dodd-Frank Act while minimizing burdens for registered entities and swap counterparties, particularly including non-sd/msp counterparties, the final rule should establish a swap data reporting regime calling for reporting by the registered entity or counterparty that has the easiest, fastest, and cheapest access to the set of data in question. The Commission has also considered and evaluated the comments it has received regarding ways that reporting burdens could be reduced, either by allowing a single report to serve different required functions or by extending and phasing in reporting deadlines. The Commission has determined that the reporting regime established by the final rule should maintain many fundamental aspects of the reporting called for in the NOPR, while adjusting other aspects of that regime to streamline reporting and minimize reporting burdens where possible, while continuing to ensure that swap data for all swaps is reported to SDRs in a manner that ensures the ability of the Commission and other regulators to fulfill the systemic risk mitigation, market transparency, position limit monitoring and market surveillance objectives of the Dodd- Frank Act. Streamlined regulatory and real time reporting. The Commission agrees with comments suggesting that, where possible, the number of swap creation data reports should be minimized and streamlined by combining PET data reporting and confirmation data reporting in a single report.
15 2150 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations The Dodd-Frank Act does not specify the timeframes for reporting of swap data to SDRs for regulatory purposes. However, to further the objectives of the Dodd-Frank Act, the Commission believes it is important that swap data be reported to SDRs either immediately following execution of the swap or within a short but reasonable time following execution. The Commission does not believe that PET data reporting can wait until it is possible to report confirmation data in all cases, because in an appreciable number of instances confirmation of a swap can occur days, weeks, or even months after execution. Where execution and confirmation are simultaneous or nearly so, however, the Commission agrees with commenters suggestion that reporting both PET data and confirmation data in a single report would reduce reporting burdens without impairing regulatory purposes. The Commission is working to adopt final rules for SEFs and DCMs, and final rules with respect to straight-through processing, providing that execution of a swap on a SEF or DCM will constitute confirmation of all of the terms of the swap. This final part 45 rule requires that the terms of such contracts must include all of the minimum PET data required by part 45 for a swap in the asset class in question. The final rule therefore provides for a single creation data report, including both PET data and confirmation data, in the case of swaps executed on or pursuant to the rules of a SEF or DCM. Accordingly, no counterparty will be required to report creation data for a swap executed on or pursuant to the rules of a SEF or DCM. The Commission agrees with commenters that a reporting regime that, to the extent possible and practicable, permits reporting entities and counterparties to comply with the regulatory data reporting requirements of part 45 and the real time reporting requirements of part 43 by making a single report can reduce reporting burdens while still ensuring fulfillment of the purposes for which the Dodd- Frank Act requires such reporting. The Commission is working to align the reporting deadlines in this final rule with the public dissemination delays provided in the final part 43 real time reporting rule, to the extent possible and practicable, in order to achieve this goal. The Commission s final clearing rules in part 39 of this chapter provide that acceptance of the swap for clearing by a DCO constitutes confirmation of all of the terms of the swap. This final part 45 rule provides that the terms of such contracts must include all of the minimum PET data required by part 45 for a swap in the asset class in question. Because acceptance for clearing constitutes confirmation, the final rule provides that if an off-facility swap is accepted for clearing within the reporting deadlines applicable to the reporting counterparty, the reporting counterparty shall be excused for creation data reporting for the swap, and the DCO shall report all creation data report, including both PET data and confirmation data, in a single report made as technologically practicable after clearing. In such cases, reporting will be further streamlined, and burdens for counterparties will be further reduced. Phasing in and extending reporting deadlines. As noted above, counterparties will not be required to report creation data for swaps executed on a SEF or DCM, or for swaps accepted for clearing by a DCO within the applicable reporting deadlines. After considering comments advocating the extension and phasing in of counterparty reporting deadlines, the Commission has decided to extend and phase in such deadlines in the final rule with respect to off-facility swaps not accepted for clearing within such deadlines. PET data reporting deadlines for SD or MSP reporting counterparties will be phased in over two years. PET data reporting deadlines for non-sd/msp reporting counterparties will be extended and phased in over three years, and will exclude weekend days and legal holidays. For example, while the NOPR set the non-sd/msp reporting counterparty PET data reporting deadline for an uncleared swap at 24 hours, the final rule calls for reporting no later than 48 business hours after execution (during the first year of reporting), 36 business hours after execution (during the second year of reporting), or 24 business hours after execution (thereafter). To reduce possible burdens on small non-sd/msp counterparties entering into a swap with an SD or MSP, if the non-reporting counterparty is a non-sd/msp counterparty that is not a financial entity, and if primary economic terms are not verified electronically, PET data reporting deadlines for the SD or MSP reporting counterparty will be further extended and phased in over three years, and will exclude weekend days and legal holidays. Confirmation data reporting deadlines for SD or MSP reporting counterparties where confirmation is non-electronic will be extended, and will exclude weekend days and legal holidays. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 Confirmation data reporting deadlines for non-sd/msp reporting counterparties will be extended and phased in over three years, and will exclude weekend days and legal holidays. The final rule calls for such counterparties to report confirmation data no later than 48 business hours after confirmation (during the first year of reporting), 36 business hours after confirmation (during the second year of reporting), or 24 business hours after confirmation (thereafter). For off-facility, uncleared swaps, during the first six months following the applicable compliance date, while PET data will have to be reported electronically with data normalized in data fields, reporting counterparties for whom reporting confirmation data normalized in data fields is not yet technologically practicable may report required confirmation data by transmitting an image of all documents recording the confirmation. This will allow needed additional time for development of schemas for data reporting and implementation by non- SD/MSP counterparties. Electronic reporting of all confirmation data normalized in data fields will be required after this six month period. Charts showing the final rule reporting requirements with respect to both creation data reporting and continuation data reporting can be seen below at pages 70 and71. Reporting burden reductions for non- SD/MSP reporting counterparties. As a result of the streamlined reporting regime and extended, phased-in reporting deadlines noted above, the final rule eliminates all reporting obligations for non-sd/msp reporting counterparties in many cases, and phases in or reduces them in virtually all other cases. Non-SD/MSP reporting counterparties must report data only for the small minority of swaps in which both counterparties are non-sd/msp counterparties. Even within this small minority of swaps, a non-sd/msp reporting counterparty will have no reporting obligations for on-facility, cleared swaps, or for off-facility swaps accepted for clearing within the applicable deadline for PET data reporting. If an off-facility swap is accepted for clearing after the PET data reporting deadline, the non-sd/msp reporting counterparty is excused from reporting confirmation data and continuation data, which instead will be reported by the DCO. For on-facility, uncleared swaps, a non-sd/msp reporting counterparty s reporting obligations are limited to reporting continuation data during the existence of the swap. For off-facility, uncleared
16 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2151 swaps, creation data reporting deadlines for a non-sd/msp reporting counterparty have been extended and phased in as noted above, and no longer include weekend days or holidays. The deadline for a non-sd/msp reporting counterparty to report changes to primary economic terms over the life of the swap has been lengthened from reporting on the day such a change occurs to reporting by the end of the second business day following the date of such a change; and a non-sd/msp reporting counterparty will be required to report valuation data on only a quarterly rather than a daily basis. d. Allocations. As set forth more fully below in the discussion of USIs, the Commission received and has considered comments and industry requests for clarification concerning USI creation and swap creation data reporting in the case of swaps involving allocation by an agent to its clients who are the actual counterparties on one side of the swap. In response to these requests, the final rule will address both USI creation and creation data reporting for swaps involving allocation, as set forth in the discussion of USIs below. e. Reporting of multi-asset swaps and mixed swaps. After considering comments concerning how multi-asset swaps and mixed swaps should be reported, the Commission has determined that the final rule should provide for mixed swaps to be reported to both an SDR registered with CFTC and an SDR registered with SEC. 34 Reporting to a dual-registered SDR would satisfy this requirement, but would not be required. To ensure regulatory ability to track mixed swaps and aggregate data concerning them, the final rule will add a mixed swap checkbox field to the tables of minimum primary economic terms. To avoid double-counting of mixed swaps, the final rule requires the reporting entity or counterparty to obtain a USI for the swap from the first SDR to which the swap is reported, and to include that USI in the data concerning the swap reported to the second SDR to which the swap is reported. For multi-asset swaps, the final rule requires reporting to a single SDR accepting swaps in the asset class determined by the registered entity or counterparty reporting the swap to be the first or primary asset class involved in the swap. To ensure regulatory ability to track the swap in all asset classes involved, the final rule will add two 34 Such dual reporting would avoid any need for an SDR accepting swaps only in a CFTC-regulated asset class to dual-register with the SEC merely because it might receive a report for a mixed swap in part subject to SEC jurisdiction. data fields to the tables of minimum primary economic terms, one for indication of the first or primary asset class involved in the swap (which must be an asset class accepted by the SDR), and the second for indication of the other asset class or classes involved in the swap. f. Reporting of international swaps. The Commission agrees with international regulators with whom the Commission has consulted who have suggested that it is important for the final rule to include a mechanism that enables the Commission and other regulators to identify international swaps reported to multiple repositories, so that such swaps are not doublecounted by regulators. The Commission is mindful of the fact that the Dodd- Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities regarding establishment of consistent international standards for the regulation of swaps and swap entities. The Commission also believes that providing an accurate picture of the swap market to regulators is one of the fundamental purposes of the Dodd- Frank Act. For these reasons, and in order to clarify its intent concerning swap data reporting in this context, the Commission has determined that the final rule will address the reporting of international swaps, defined for clarity as those swaps that may be required by U.S. law and the law of another jurisdiction to be reported both to an SDR registered with the Commission and to a different trade repository registered with the other jurisdiction. 35 In order to help provide for international swaps the consistent international standards sought by the Dodd-Frank Act, the final rule provides that for each international swap that is reported to both a U.S.-registered SDR and a foreign trade repository, the reporting counterparty shall report to the U.S.-registered SDR, as soon as practicable, the identity of the foreign trade repository, and the swap identifier used by that foreign trade repository to identify that swap. 36 If necessary, the reporting counterparty shall obtain this information from the non-reporting counterparty. The Commission believes that these provisions are a logical outgrowth of the swap data reporting provisions of the NOPR and of the 35 This definition does not add a new requirement for the reporting of swaps not otherwise required to be reported. 36 Under the final rule provisions in 45.6 of this part concerning unique swap identifiers, the nonreporting counterparty will receive the USI for the swap from the SDR, and thus will be able to provide it to the non-u.s. trade repository on request. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 statutory call for international consultation and consistent international standards. C. Swap Data Reporting: Continuation Data Proposed Rule As noted above, in order to ensure timeliness, accuracy, and completeness with respect to the swap data available to regulators, the proposed rule called for reporting of swap data from each of two important stages of the existence of a swap: The creation of the swap, and the continuation of the swap over its existence until its final termination or expiration. During the continued existence of the swap, the NOPR required reporting of three types of continuation data: (a) Either life cycle event data or state data (depending on the reporting method involved) that reflects all changes to the swap; (b) contract-intrinsic data, meaning scheduled, anticipated events that do not change the contractual terms of the swap, such as an anticipated rate adjustment; and (c) valuation data that reflects the current value of the swap, such as the daily mark-to-market. As proposed, the rule specified the reporting method to be used in each asset class for reporting all changes to the swap. For credit swaps and equity swaps, the NOPR called for reporting life-cycle events meaning any event resulting in a change to data previously reported in connection with the swap, such as an assignment or novation, a partial or full termination of the swap, or a change in the cash flows originally reported on the day that such an event occurs. For foreign exchange transactions, interest rate swaps, and other commodity swaps, the NOPR called for a daily report of state data meaning all data necessary to provide a daily snapshot view of the primary economic terms of the swap, including any changes since the last snapshot. For cleared swaps, the NOPR required daily valuation data reporting by the DCO, daily valuation data reporting by SD or MSP reporting counterparties, and valuation data reporting by non-sd/ MSP reporting counterparties at intervals to be determined prior to issuance of the final rule. 2. Comments Received The Commission received several comments from a variety of commenters concerning the proposed rule s continuation data reporting provisions. These comments addressed reporting with respect to changes to the terms of the swap, contract intrinsic events,
17 2152 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations valuation, and master agreements and collateral. a. Reporting changes to a swap. The broad themes of the comments received concerning reporting changes to a swap addressed the reporting method life cycle or snapshot to be used, the timing and frequency of reports, and the choice of who should make the required reports. Reporting method. As noted above, the NOPR prescribed the data reporting method to be used in each asset class to report changes to the primary economic terms of the swap. TriOptima and the Electric Coalition agreed that the rule should specify the method used in each asset class, and supported the NOPR s choices in that respect. ICE recommended adopting the lifecycle method rather than the snapshot method for the other commodity asset class. ISDA, SIFMA, REGIS TR, and DTCC recommended having the rule not make the choice between the lifecycle and the snapshot reporting method for each asset class, but rather allowing SDRs to decide whether to accept data by either or both methods. SunGard recommended that the Commission delegate the choice to a self-regulatory organization or standards board. Timing for reporting changes. Various non-sd/msps involved in energy markets, including AGA, COPE, EEI, EPSA, and the Electric Coalition, argued that daily snapshot reporting would be unduly burdensome for non-sd/msp reporting counterparties. COPE, EEI, and EPSA advocated requiring a snapshot only when a change to primary economic terms has occurred. AGA suggested reporting a monthly snapshot, while the Electric Coalition advocated a quarterly snapshot. Change reporting for cleared swaps. ICE, a number of non-sd/msps involved in energy markets including WGCEF, EEI, EPSA, and Chris Barnard recommended having continuation data reporting for cleared swaps done solely by DCOs. WGCEF noted that counterparties to swaps that are both platform-executed and cleared, the counterparties may not know each other s identity, which could make determination of the reporting counterparty difficult. Reporting of contract-intrinsic events. ISDA and SIFMA suggested that the Commission should not require reporting of contract-intrinsic events, i.e., events that do not result in any change to the contractual terms of the swap. These commenters noted that the SEC s proposed data reporting rule for security-based swaps does not include such a requirement, and argued that reporting of such events is unnecessary if they are in the public domain. At a minimum, ISDA and SIFMA suggested limiting reporting of such events to reporting along with the next required life cycle event report. Reporting corporate events of the nonreporting counterparty. For non-cleared swaps, ISDA and SIFMA requested that the final rule allow additional time for the reporting counterparty to report corporate events of the non-reporting counterparty, arguing that the reporting counterparty may not know of such events on the same day that they happen. b. Valuation data reporting. The themes of the comments received regarding valuation data reporting included: Who should report valuation data for cleared swaps; valuation data reporting by non-sd/msp reporting counterparties; what valuation data should be reported; requiring independent valuations; and acceptable valuation methods. Who should report valuation data for cleared swaps. A number of commenters, including ICE, WGCEF, EEI, EPSA, and Chris Barnard, recommended that all valuation data reporting for cleared swaps should be done by the DCO. COPE, EEI, EPSA, and the Electric Coalition suggested that non-sd/msp reporting counterparties should not have to report valuation data for either cleared or uncleared swaps. Valuation data reporting by non-sd/ MSP reporting counterparties. The NOPR required non-sd/msp reporting counterparties to report valuation data for both cleared and non-cleared swaps, at intervals to be determined by the Commission prior to issuance of the final rule. FHLB and a number of commenters in the energy sector suggested that valuation reporting requirements for non-sd/msp counterparties be either loosened or eliminated. FHLB recommended weekly valuation reporting by non-sd/msp reporting counterparties, arguing that this should be sufficient for regulatory purposes and would avoid forcing end users to implement the costly infrastructure needed to generate daily valuation reports. AGA suggested monthly valuation reporting by non- SDs/MSPs, since daily reporting would be unduly burdensome for them. The Electric Coalition recommended quarterly reporting. Chatham Financial supported valuation reporting only when swap portfolios are reconciled, since (in their view) non-sd/msp counterparties will lack the systems and staff necessary to produce valuations and thus would have to pay third-party service providers for them. As noted above, COPE, EEI, EPSA, and the VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 Electric Coalition urged that non-sd/ MSP reporting counterparties should not have to report valuation data at all. 37 What valuation data should be reported. ISDA and SIFMA asked the Commission to note that valuation data for uncleared swaps will not be same day, but will refer to portfolio valuation on the close of the preceding day, since these valuations are typically performed overnight. Reval urged required reporting of all data elements necessary to determine the market value of the swap, and suggested that independent valuation calculations by third parties such as SDRs should be required. Reval also suggested requiring that valuation data be reported on a portfolio basis rather than a transaction basis. ICE suggested that DCO valuation data reports should consist solely of daily price marks, and that SDRs should be required to calculate valuation amounts for each open trade. SunGard asked the Commission to provide guidance on acceptable methods of valuation for uncleared swaps, either in the final rule or by industry consensus. c. Possible reporting of master agreements or collateral. The NOPR required registered entities and swap counterparties to keep full and complete records concerning swaps, which would include records of master agreements. The NOPR did not require reporting the terms of such agreements to SDRs, but requested comment on whether a separate master agreement library system should be established as part of an SDR. Should a master agreement library system be established? Commenters disagreed on whether master agreement reporting should be required. Chatham Financial and the Coalition of Derivatives End-Users ( CDEU ) recommended that the Commission carefully consider the costs and benefits of master agreement reporting prior to instituting such a requirement. They noted that if such reporting went beyond submission of PDF copies of master agreements, market participants (especially end users) would find it labor intensive and tedious to extract legal terms from the documents. The Electric Coalition, American Benefits Council ( ABC ), and CIEBA also emphasized the need to minimize 37 These commenters argued that valuation of swaps between non-sd/msp counterparties did not cause the financial crisis and was not the target of the Dodd Frank Act, and contended that the Dodd- Frank Act does not authorize requiring non-sd/ MSP counterparties (especially those that are not financial entities) to report valuation data. They also contended that the value of standardized swaps is transparent from market data, while the value of illiquid, non-standard swaps is merely based on a business judgment.
18 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2153 burdens involved in any required master agreement reporting. ISDA and SIFMA recommended against a master agreement library, stating that a centralized effort to capture documentation would need to be much wider than master agreements; would be duplicative of existing industry investments; would not provide regulators with particularly meaningful data given the slow rate of change of these documents; and would not provide information above and beyond that which would be readily obtained from regulated firms. Reval suggested establishment of a separate SDR for master agreements and related credit support agreements, in order to enhance regulators ability to measure systemic risk. ABC and CIEBA suggested that master agreements be reported once to a separate library at an SDR, with amendments reported to the same SDR. The Electric Coalition recommended limiting master agreement-related reporting to the reporting of master agreement identifiers rather than of agreements themselves, in order to lessen reporting burdens. Should a collateral warehouse system be established? The NOPR required registered entities and swap counterparties to keep full and complete records concerning swaps, which would include records concerning collateral. It did not require reporting concerning collateral, but requested comment on whether a separate collateral warehouse system should be established as part of an SDR, to enable prudential regulators to monitor collateral management and gross exposure on a portfolio level. SunGard, ISDA, SIFMA, DTCC, and TriOptima recommended establishing a separate collateral repository, noting that collateral information is important for systemic risk management, but not possible in transaction-based reporting since collateral is dealt with at a portfolio level. They suggested that this would also provide a superior form of valuation information. Chatham Financial suggested that the benefits of a collateral warehouse and reporting concerning collateral may not outweigh the costs involved, due to the potential for highly customized terms and the complexity and difficulty of representing the terms of relevant agreements electronically. 3. Final Rule: 45.4 The Commission has considered and evaluated these comments, and has made a number of changes in the final rule. Accordingly, the continuation data provisions of the final rule will include the following changes from the NOPR. a. Reporting changes to a swap. Reporting method. The Commission believes the general principle applicable to continuation data reporting should be that current information concerning all swaps must be available to regulators in SDRs in order to fulfill the purposes of the Dodd-Frank Act. Based on comments, meetings with market participants, roundtable discussions, and consultation with other regulators, the Commission has determined that the final rule can serve this principle without mandating one particular reporting method, whether life cycle or snapshot, for continuation data reporting. Accordingly, the final rule requires registered entities and reporting counterparties to report continuation data in a manner sufficient to ensure that the information in the SDR concerning the swap is current and accurate, and includes all changes to any of the primary economic terms of the swap. The final rule will leave to the SDR and registered entity and reporting counterparty marketplace the choice of the method, whether life cycle or snapshot, for reporting continuation data that is sufficient to meet this requirement. This approach could also help to address reporting time concerns raised by commenters, since reporting counterparties would not be required to report on a daily basis if the SDR in question accepts life cycle reporting. 38 Timing for reporting changes. Given the regulatory importance of ensuring that information in SDRs is current, and, in the Commission s view, the availability of automated systems and staff to DCOs, SDs, and MSPs, the Commission believes it is necessary to require DCOs and SD or MSP reporting counterparties to make continuation data reports, by either reporting method, no later than the same day a relevant change occurs. The Commission has considered comments suggesting that same-day reporting could impose greater burdens on non-sd/msp reporting counterparties than on SDs or MSPs, due to comparative differences in automated systems and staff, and the Commission is aware that swaps between non-sd/msp counterparties are likely to constitute only a minority of all swaps. Accordingly, the final rule will call for non-sd/msp reporting counterparties to report continuation data no later than the end of the second business day following the date of a relevant change during the first year of 38 The flexibility of this approach should also ensure harmonization of the final rule with SEC rules in this respect: even if the SEC rules specify a reporting method for reporting to security-based swap data repositories, SDRs that accept mixed swaps will be free to accept reporting by any reporting method mandated by the SEC. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 reporting, and no later than the end of the first business day following the date of a relevant change thereafter. The Commission has determined that this approach will lighten burdens on non- SD/MSP reporting counterparties without unduly degrading the currency of the information available to regulators in SDRs. Change reporting for cleared swaps. The Commission has considered, and agrees with, commenters suggestion that continuation data reporting will be best done by DCOs. For cleared swaps in all asset classes, the final rule will make DCOs the sole reporters of continuation data other than valuation data. Reporting of contract-intrinsic events. The Commission has considered the comments addressing reporting of contract-intrinsic events. In light of the fact that contract-intrinsic events do not involve changes to the primary economic terms of a swap, and that most such events are in the public domain, and in order to reduce reporting burdens to the extent this can be done without impairing the purposes for which the Dodd-Frank Act requires swap data reporting, the Commission has determined that the final rule will not require reporting of contractintrinsic events. Reporting corporate events of the nonreporting counterparty. The Commission has considered the comments relating to the time when corporate events of the non-reporting counterparty must be reported, and has made a number of changes in the final rule. As noted above, the final rule requires reporting of changes to primary economic terms by SDs or MSPs on the day they occur, and (after a one-year phase in period) by non-sds/msps by the end of the business day after they occur. With respect to reporting corporate events of the non-reporting counterparty, the final rule provides that SD and MSP reporting counterparties must report their own corporate events on the day they occur, and must report corporate events of the non-reporting counterparty by the end of the business day following the date when they occur. In order to further reduce related burdens for non-sd/msp reporting counterparties, the rule requires non-sd/msp reporting counterparties to report their own corporate events by the end of the business day after the date on which they occur, and to report corporate events of the non-reporting counterparty by the end of the second business day following the date on which they occur. In complying with the final rule, reporting counterparties should use due
19 2154 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations diligence to ensure that the nonreporting counterparty notifies the reporting counterparty promptly of the non-reporting counterparty s corporate events affecting any primary economic term of the swap. 39 b. Valuation data reporting for cleared swaps. Who should report valuation data for cleared swaps. After considering comments received, the Commission has determined that for cleared swaps where the reporting counterparty is a non-sd/msp, a DCO s valuation is sufficient for regulatory purposes. The final rule therefore will not require non- SD/MSP reporting counterparties to report valuation data for cleared swaps. Because prudential regulators have informed the Commission that counterparty valuations are useful for systemic risk monitoring even where valuations differ, the final rule requires SD and MSP reporting counterparties to report the daily mark for each of their swaps, on a daily basis. 40 The Commission notes that SDs and MSPs may choose, though they are not required, to provide to SDRs and to counterparties, in addition to the daily mark, methodologies and assumptions sufficient to independently validate the output from a model generating the daily mark, collectively referred to as the reference model. Provision of a reference model does not require an SD or MSP to disclose proprietary information. Valuation data reporting by non-sd/ MSP reporting counterparties. The Commission has considered the comments concerning valuation data reporting by non-sd/msp counterparties. As noted above, the final rule will lessen valuation data reporting burdens for non-sd/msp counterparties by eliminating the requirement that they report valuation data for cleared swaps. With respect to uncleared swaps between non-sd/msp counterparties, the Commission has determined that the final rule should lessen valuation data reporting burdens for the non-sd/msp 39 Such due diligence could consist of requiring as one term of the swap agreement that the nonreporting counterparty notify the reporting counterparty promptly of corporate events of the non-reporting counterparty. 40 The Commission notes that SDs and MSPs may choose, though they are not required, to provide to SDRs and to counterparties, in addition to the daily mark, methodologies and assumptions suffcient to validate the output from a model used to generate the daily mark, collectively referred to as the reference model. Non-SD/MSP counterparties may also choose, thought they are not required, to provide a reference model in connection with valuation data reporting. Provision of a reference model does not require an SD, MSP, or non-sd/ MSP counterparty to disclose proprietary information. reporting counterparty by requiring such reports less frequently than proposed, but should not eliminate such reporting entirely. While this category represents a minority of all swaps, the Commission believes that some valuation information should be present in SDRs for all swaps for regulatory purposes. The final rule requires non- SD/MSP reporting counterparties to report valuation data consisting of the current daily mark of the transaction as of the last day of each fiscal quarter, transmitting this report to the SDR within 30 calendar days of the end of each fiscal quarter. The Commission notes that non-sd/msp reporting counterparties may choose, though they are not required, to provide to SDRs and to counterparties, in addition to the daily mark, methodologies and assumptions sufficient to independently validate the output from a model generating the daily mark, collectively referred to as the reference model. Provision of a reference model does not require a non-sd/msp reporting counterparty to disclose proprietary information. The final rule will further provide that if a daily mark of the transaction is not available, the reporting counterparty satisfies the valuation data reporting requirement by reporting the current valuation of the swap recorded on its books in accordance with applicable accounting standards. The Commission believes that requiring valuation data reporting by non-sd/msp reporting counterparties on a quarterly basis, when applicable law and accounting standards may require them to value their swaps for purposes of their own accounting, will minimize reporting burdens for such counterparties to the greatest extent commensurable with ensuring that valuation data essential for regulatory purposes is reported for such swaps. What valuation data should be reported. The Commission is aware, as comments noted, that valuations of swaps are typically performed overnight. Accordingly, the final rule provides that the appropriate daily mark to report when a valuation data report is required is the most current daily mark available. The Commission disagrees with comments suggesting required reporting of all data necessary for an independent valuation of each swap and required performance of such valuations by SDRs or other third parties, calling for portfolio-level valuation data reporting, or suggesting that the final swap data reporting rule should determine the acceptable methods for valuing uncleared swaps. VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2 The Commission believes valuation is fundamentally in the purview of the market. Prudential regulators have informed the Commission that counterparty valuations are useful for systemic risk monitoring even where such valuations represent the view of one party, and even where such valuations may differ. The Commission believes that daily mark to market, the valuation required by the final rule, is the valuation appropriate for reporting on a transaction basis. c. Possible reporting of master agreements or collateral. Should a master agreement library system be established? After considering relevant comments, the Commission has determined that it should not require master agreement reporting in its first swap data reporting final rule. As noted in the Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives released by the CFTC and SEC in April 2011, at present the terms of such agreements are not readily reportable in an electronic format, as the industry has not developed electronic fields representing terms of a master agreement. 41 The Commission also understands that reporting of master agreements could be initiated by the other regulators pursuant to separate and different regulatory authority. The Commission may choose to revisit this issue at some point in the future, if and when industry and SDRs develop ways to represent the terms of such agreements electronically. Should a collateral warehouse system be established? After considering relevant comments, the Commission has determined that it should not require establishment of a collateral warehouse or reporting concerning collateral in its first swap data reporting final rule. As is the case with respect to the terms of master agreements, the industry has not yet developed electronic fields suitable for representing the terms required to report collateral. The Commission also understands that reporting with respect to collateral could be initiated by other regulators pursuant to separate and different regulatory authority. The Commission may choose to revisit this issue at some point in the future, if and when industry and SDRs develop ways to represent electronically the terms required for reporting concerning collateral. 41 Commodity Futures Trading Commission and Securities and Exchange Commission, Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives, April 7, 2011, available at
20 Federal Register / Vol. 77, No. 9 / Friday, January 13, 2012 / Rules and Regulations 2155 D. Summary of Creation Data and Continuation Data Reporting 45.3 and 45.4 As discussed above, the Commission is responding to comments concerning creation data reporting by creating a streamlined reporting regime that requires reporting by the registered entities or swap counterparties that the Commission believes have the easiest, fastest, and cheapest data access and those most likely to have the necessary automated systems; that minimizes burdens and costs for counterparties to the extent possible; and that provides certainty to the market. The final rule provisions regarding creation data reporting obligations and deadlines for SD or MSP reporting counterparties, and for non-sd/msp reporting counterparties, are summarized in the charts on the following two pages, respectively. BILLING CODE P VerDate Mar<15> :13 Jan 12, 2012 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\13JAR2.SGM 13JAR2
21278 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations
21278 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 23, 37, 38, and 39 RIN 3038 0092, 0094 Customer Clearing Documentation,
Tuesday, October 26, 2010 Part IV Securities and Exchange Commission 17 CFR Part 242 Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution