2010 32264a

Federal Register / Vol. 75, No.
248 / Tuesday, December 28, 2010 / Proposed Rules 81519
System, which describes the application List of Subjects in 14 CFR Part 71: CFTC) is proposing regulations to
procedure. Airspace, Incorporation by reference, implement new statutory provisions
Navigation (Air). established under Title VII of the Dodd-
The Proposal
Frank Wall Street Reform and Consumer
The FAA is considering an The Proposed Amendment Protection Act (Dodd-Frank Act).
amendment to Title 14, Code of Federal In consideration of the foregoing, the Section 731 of the Dodd-Frank Act
Regulations (14 CFR) part 71 to establish Federal Aviation Administration added a new section 4s(i) to the
Class E airspace at Wolfeboro, NH proposes to amend 14 CFR part 71 as Commodity Exchange Act (CEA), which
providing the controlled airspace follows: requires the Commission to prescribe
required to support the new Copter standards for swap dealers and major
RNAV GPS special standard instrument PART 71—DESIGNATION OF CLASS A, swap participants related to the timely
approach procedures for Huggins B, C, D, AND CLASS E AIRSPACE and accurate confirmation, processing,
Hospital Heliport. Controlled airspace AREAS; AIR TRAFFIC SERVICE netting, documentation, and valuation
extending upward from 700 feet above ROUTES; AND REPORTING POINTS of swaps. The proposed rules would
the surface is required for IFR 1. The authority citation for part 71 establish requirements for swap
operations within a 6-mile radius of the continues to read as follows: confirmation, portfolio reconciliation,
point in space coordinates for the and portfolio compression for swap
Authority: 49 U.S.C. 106(g); 40103, 40113, dealers and major swap participants.
heliport. 40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–
1963 Comp., p. 389. DATES: Submit comments on or before
Class E airspace designations are
published in Paragraph 6005 of FAA February 28, 2011.
§ 71.1 [Amended] ADDRESSES: You may submit comments,
order 7400.9U, dated August 18, 2010,
and effective September 15, 2010, which 2. The incorporation by reference in identified by RIN number 3038–AC96
is incorporated by reference in 14 CFR 14 CFR 71.1 of Federal Aviation and Confirmation, Portfolio
71.1. The Class E airspace designation Administration Order 7400.9U, Reconciliation, and Portfolio
listed in this document will be Airspace Designations and Reporting Compression Requirements for Swap
published subsequently in the Order. Points, dated August 18, 2010, effective Dealers and Major Swap Participants, by
September 15, 2010, is amended as any of the following methods:
The FAA has determined that this follows: • Agency Web site, via its Comments
proposed regulation only involves an Online process at http://
established body of technical Paragraph 6005 Class E Airspace Areas
Extending Upward from 700 Feet or More comments.cftc.gov. Follow the
regulations for which frequent and instructions for submitting comments
Above the Surface of the Earth.
routine amendments are necessary to through the Web site.
keep them operationally current. It, * * * * *
• Mail: David A. Stawick, Secretary of
therefore, (1) Is not a ‘‘significant ANE NH E5 Wolfeboro, NH [New] the Commission, Commodity Futures
regulatory action’’ under Executive Huggins Hospital Heliport, NH Trading Commission, Three Lafayette
Order 12866; (2) is not a ‘‘significant (Lat. 43°34′56″ N., long. 71°12′06″ W.) Centre, 1155 21st Street, NW.,
rule’’ under DOT Regulatory Policies Point in Space Coordinates Washington, DC 20581.
and Procedures (44 FR 11034; February (Lat. 43°35′15″ N., long. 71°11′19″ W.)
• Hand Delivery/Courier: Same as
26, 1979); and (3) does not warrant That airspace extending upward from 700 mail above.
preparation of a Regulatory Evaluation feet above the surface within a 6-mile radius
• Federal eRulemaking Portal: http://
as the anticipated impact is so minimal. of the Point in Space Coordinates (lat.
43°35′15″ N., long. 71°11′19″ W.) serving the www.regulations.gov. Follow the
Since this is a routine matter that will instructions for submitting comments.
Huggins Hospital Heliport.
only affect air traffic procedures and air Please submit your comments using
Issued in College Park, Georgia, on
navigation, it is certified that this only one method.
December 13, 2010.
proposed rule, when promulgated, All comments must be submitted in
Mark D. Ward,
would not have a significant economic English, or if not, accompanied by an
impact on a substantial number of small Manager, Operations Support Group, Eastern
Service Center, Air Traffic Organization. English translation. Comments will be
entities under the criteria of the posted as received to http://
Regulatory Flexibility Act. [FR Doc. 2010–32581 Filed 12–27–10; 8:45 am]
www.cftc.gov. You should submit only
BILLING CODE 4910–13–P
The FAA’s authority to issue rules information that you wish to make
regarding aviation safety is found in available publicly. If you wish the
Title 49 of the United States Code. Commission to consider information
Subtitle I, section 106 describes the COMMODITY FUTURES TRADING that may be exempt from disclosure
authority of the FAA Administrator. COMMISSION under the Freedom of Information Act,
Subtitle VII, Aviation Programs, a petition for confidential treatment of
17 CFR Part 23
describes in more detail the scope of the the exempt information may be
agency’s authority. This proposed RIN 3038–AC96 submitted according to the established
rulemaking is promulgated under the procedures in § 145.9 of the
authority described in subtitle VII, part Confirmation, Portfolio Reconciliation, Commission’s regulations, 17 CFR
and Portfolio Compression
emcdonald on DSK2BSOYB1PROD with PROPOSALS
A, subpart I, section 40103. Under that 145.9.

section, the FAA is charged with Requirements for Swap Dealers and The Commission reserves the right,
prescribing regulations to assign the use Major Swap Participants but shall have no obligation, to review,
of airspace necessary to ensure the AGENCY: Commodity Futures Trading pre-screen, filter, redact, refuse or
safety of aircraft and the efficient use of Commission. remove any or all of your submission
airspace. This proposed regulation is ACTION: Notice of proposed rulemaking. from http://www.cftc.gov that it may
within the scope of that authority as it deem to be inappropriate for
would establish Class E airspace at SUMMARY: The Commodity Futures publication, such as obscene language.
Huggins Hospital, Wolfeboro, NH. Trading Commission (Commission or All submissions that have been redacted
VerDate Mar<15>2010 21:26 Dec 27, 2010 Jkt 223001 PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 E:\FR\FM\28DEP1.SGM 28DEP1
81520 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules
or removed that contain comments on ‘‘governing documentation standards for maintain, and results in a more accurate
the merits of the rulemaking will be swap dealers and major swap expression of market size.
retained in the public comment file and participants.’’ The Commission is In the past few years, market
will be considered as required under the proposing the regulations on swap participants and regulators have paid
Administrative Procedure Act and other confirmation, portfolio reconciliation, particular attention to the post-trade
applicable laws, and may be accessible and portfolio compression 4 discussed processing of swaps. For example,
under the Freedom of Information Act. below, pursuant to the authority granted operational issues associated with the
FOR FURTHER INFORMATION CONTACT: under sections 4s(h)(1)(D), 4s(h)(3)(D), over-the-counter (OTC) derivatives
Sarah E. Josephson, Associate Director, 4s(i), and 8a(5) of the CEA. 5 The Dodd- market have been the focus of reports
202–418–5684, sjosephson@cftc.gov; Frank Act requires the Commission to and recommendations by the President’s
Frank N. Fisanich, Special Counsel, promulgate these provisions by July 15, Working Group on Financial Markets
202–418–5949, ffisanich@cftc.gov; or 2011. (PWG).6 In response to the financial
Jocelyn Partridge, Special Counsel, 202– The proposed regulations reflect crisis in 2008, the PWG called on the
418–5926, jpartridge@cftc.gov; Division consultation with staff of the following industry to improve trade matching and
of Clearing and Intermediary Oversight, agencies: (i) The Securities and confirmation and to promote portfolio
Commodity Futures Trading Exchange Commission; (ii) the Board of reconciliation.
Commission, Three Lafayette Centre, Governors of the Federal Reserve Since 2005, the Federal Reserve Bank
1155 21st Street, NW., Washington, DC System; (iii) the Office of the of New York (FRBNY) has led a
20581. Comptroller of the Currency; and (iv) targeted, supervisory effort to enhance
SUPPLEMENTARY INFORMATION: the Federal Deposit Insurance operational efficiency and performance
Corporation. Staff from each of these in the OTC derivatives market, by
I. Background increasing automation in processing and
agencies has had the opportunity to
On July 21, 2010, President Obama provide oral and/or written comments by promoting the timely confirmation of
signed the Dodd-Frank Act.1 Title VII of to the proposal, and the proposed trades. Known as the OTC Derivatives
the Dodd-Frank Act 2 amended the regulations incorporate elements of the Supervisors’ Group (ODSG), the FRBNY
Commodity Exchange Act (CEA) 3 to comments provided. leads an on-going effort with OTC
establish a comprehensive regulatory derivatives dealers’ primary supervisors,
framework to reduce risk, increase II. Proposed Regulations trade associations, industry utilities,
transparency, and promote market The proposed regulations would and private vendors, through which
integrity within the financial system by, prescribe standards for the timely and market participants (including buy-side
among other things: (1) Providing for the accurate confirmation of swaps and participants) regularly set goals and
registration and comprehensive would require the reconciliation and commitments to bring infrastructure,
regulation of swap dealers and major compression of swap portfolios. market design, and risk management
swap participants; (2) imposing clearing Confirmation, portfolio reconciliation, improvements to all OTC derivatives
and trade execution requirements on and portfolio compression have been asset classes. Over the years, the ODSG
standardized derivative products; (3) recognized as important post-trade has expanded its focus from credit
creating rigorous recordkeeping and processing mechanisms for reducing derivatives to include interest rate
real-time reporting regimes; and (4) risk and improving operational derivatives, equity derivatives, foreign
enhancing the Commission’s efficiency by both current market exchange derivatives, and commodity
rulemaking and enforcement authorities participants and their regulators. derivatives. Along with this expanded
with respect to all registered entities focus has come increased engagement
and intermediaries subject to the With respect to confirmation, prudent
with market participants on cross-asset
Commission’s oversight. practice requires that, after coming to an
class issues. Specifically, the ODSG
Section 731 of the Dodd-Frank Act agreement on the terms of a transaction,
encouraged the industry to commit itself
amends the CEA by adding a new parties document the transaction in a
to a number of reforms, including
Section 4s, which sets forth a number of complete and definitive written record
improved operational performance with
requirements for swap dealers and so there is legal certainty about the
respect to the OTC derivatives
major swap participants. Specifically, terms of their agreement. Through
confirmation process, portfolio
section 4s(i) of the CEA establishes portfolio reconciliation, counterparties
reconciliation, and portfolio
swap documentation standards for those are able to resolve any discrepancies or
compression. The regulations proposed
registrants. disputes as early as possible and arrive
by the Commission would build upon
Section 4s(i)(1) requires swap dealers at an understanding of their overall risk
the ODSG’s work.
and major swap participants to exposure to one another. Portfolio
It is important to note at the outset,
‘‘conform with such standards as may be compression allows for a reduction in
that the Commission expects that swap
prescribed by the Commission by rule or outstanding trade count and outstanding
dealers and major swap participants
regulation that relate to timely and gross notional value by replacing
would be able to comply with each of
accurate confirmation, processing, redundant trades with a smaller number
the proposed rules by executing a swap
netting, documentation, and valuation of trades and reduced gross notional
on a swap execution facility (SEF) or on
of all swaps.’’ Under section 4s(i)(2), the value. This process reduces operational
a designated contract market (DCM), or
Commission is required to adopt rules risk and increases operational efficiency
by clearing the swap through a
because there are fewer trades to

derivatives clearing organization (DCO).
1 See Dodd-Frank Wall Street Reform and
For swaps executed on a SEF or a DCM,
Consumer Protection Act, Public Law 111–203, 124 4 The Commission may propose additional rules
Stat. 1376 (2010). The text of the Dodd-Frank Act related to documentation provisions under section
the SEF or DCM will provide the
may be accessed at http://www.cftc.gov/ 4s(i) of the CEA. counterparties with a definitive written
LawRegulation/OTCDERIVATIVES/index.htm. 5 Section 8a(5) of the CEA authorizes the
2 Pursuant to Section 701 of the Dodd-Frank Act,
Commission to promulgate such regulations as, in 6 See, e.g., Press Release, ‘‘President’s Working
Title VII may be cited as the ‘‘Wall Street the judgment of the Commission, are reasonably Group on Financial Markets, Progress Summary on
Transparency and Accountability Act of 2010.’’ necessary to effectuate any of the provisions or to OTC Derivatives Operational Improvements’’ (Nov.
3 7 U.S.C. 1 et seq. accomplish any of the purposes of the CEA. 2008).
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81521
record of the terms of their agreement, A. Swap Confirmation CDS confirmations by 70%, and the
which will serve as a confirmation of number of CDS confirmations
1. Background
the swap. Similarly, if a swap is outstanding more than 30 days by 85%.
executed bilaterally, but subsequently Over the past several years, OTC The industry achieved these targets
submitted to a DCO for clearing, the derivatives market participants and largely by moving 80% of total trade
DCO will require a definitive written their regulators have paid particular volume in CDS to confirmation on
record of all terms to the counterparties’ attention to the timely confirmation of electronic platforms, eliminating
swaps. The Government Accountability backlogs in new trades. Today, over
agreement prior to novation by the DCO;
Office (GAO) found that the rapid 90% of ‘‘electronically eligible’’ 9 CDS
this too would serve as a confirmation
expansion of trading volume of swaps, trades are confirmed electronically, the
of the swap.
such as credit derivatives since 2002, majority on the day of execution and up
When a swap is cleared by a central caused stresses on the operational to 98% within two days.10
counterparty, the problems that infrastructure of market participants. The ODSG has established a
portfolio reconciliation is designed to These stresses in turn caused the supervisory goal for all transactions to
solve (agreement on all terms and the participants’ back office systems to fail be confirmed as soon as possible after
valuation of the swap) no longer exist to confirm the increased volume of the time of execution. Ideally, this
because the clearinghouse (1) requires a trades for a period of time.7 The GAO would mean that there would be a
definitive written record of all terms of found that the lack of automation in written or electronic document executed
the swap; and (2) arrives at a settlement trade processing and the purported by the parties to a swap for the purpose
price for all cleared swaps on a daily assignment of positions by transferring of evidencing all of the terms of the
basis. Additionally, the Commission is parties to third parties without notice to swap, including the terms of any
considering a proposed regulation that their counterparties were factors termination (prior to its scheduled
would require DCOs to offer portfolio contributing to this backlog. If maturity date), assignment, novation,
compression exercises on a regular transactions, whether newly executed or exchange, or similar transfer or
basis. The proposed rule for swap recently transferred to another party, are conveyance of, or extinguishing of rights
dealers and major swap participants has left unconfirmed, there is no definitive or obligations.
written record of the contract terms. In the case of electronically processed
been designed to complement the
Thus, in the event of a dispute, the transactions, all such transactions
proposed DCO rule.
terms of the agreement must be should be matched and confirmed, at a
In designing these rules, the reconstructed from other evidence, such minimum, on the same day the trade
Commission has taken care to minimize as e-mail trails or recorded trader was executed. For electronically
the burden on those parties that will not conversations. This process is processed transactions, confirmation
be registered with the Commission as cumbersome and may not be wholly typically is effected by a third-party
swap dealers or major swap accurate. Moreover, if purported ‘‘matching’’ process. If transactions are
participants. To the extent that market transfers of swaps, in whole or in part, not confirmed in a timely manner,
participants believe that additional are made without giving notice to the backlogs of outstanding unconfirmed
measures should be taken to reduce the remaining parties and obtaining their trades develop, increasing risk. Timely
burden or increase the benefits of consent, disputes may arise as to which and accurate confirmation of
confirmation, reconciliation, and parties are entitled to the benefits and transactions is critical for all
compression for the swaps market, the subject to the burdens of the transaction. downstream operational and risk
Commission welcomes all comments. As the work of the ODSG management processes, including the
demonstrates, the industry is capable of correct calculation of cash flows and
The Commission requests comment swift movement to contemporaneous discharge of settlement obligations as
on all aspects of proposed §§ 23.500 execution and confirmation. A large well as accurate measurement of
(definitions), 23.501 (confirmation), back-log of unexecuted confirmations in counterparty credit exposures. Timely
23.502 (portfolio reconciliation), and the credit default swap (CDS) market confirmation also allows any rejections,
23.503 (portfolio compression), as well created by prolonged negotiations and exceptions, and/or discrepancies to be
as comment on the specific provisions inadequate confirmation procedures identified and resolved more quickly.
and issues highlighted in the discussion were the subject of the first industry Another ODSG objective is a
below. The Commission further requests commitments made by participating marketplace that electronically
comment on an appropriate effective dealers to ODSG.8 In October 2005, the processes as many transactions as
date for final regulations, including participating dealers committed to possible in as many parts of the
comment on whether it would be reduce by 30% the number of processing life cycle as possible, but
appropriate to have staggered or delayed confirmations outstanding more than 30 particularly in the ‘‘upstream’’ parts of
effective dates for some regulations days within four months. In March the life cycle, where transaction
based on the nature or characteristics of 2006, the dealers committed to reduce information is first entered into the
the activities or entities to which they the number of outstanding system (trade capture). To achieve this
apply. The Commission recognizes that confirmations by 70% by June 30, 2006. objective, as many transactions as
there will be differences in the size and By September 2006, the industry had possible and practicable should be
scope of the business of particular swap reduced the number of all outstanding executed on electronic platforms, such
dealers and major swap participants.

7 U.S. Government Accountability Office, ‘‘Credit 9 It remains unclear precisely how much of the
Therefore, comments are solicited on
Derivatives: Confirmation Backlogs Increased total CDS market is not ‘‘electronically eligible,’’ as
whether certain provisions of the Dealers’ Operational Risks, But Were Successfully eligibility is determined by the OTC derivatives
proposed regulations should be Addressed After Joint Regulatory Action,’’ GAO–07– market participants.
modified or adjusted to reflect the 716 (2007) at pages 3–4. 10 See March 1, 2010 Summary of OTC
8 See October 4, 2005 industry commitment letter Derivatives Commitments provided to the Federal
differences among swap dealers and to the Federal Reserve Bank of New York, available Reserve Bank of New York, available at http://
major swap participants or differences at http://www.newyorkfed.org/newsevents/ www.newyorkfed.org/newsevents/news/markets/
among asset classes. news_archive/markets/2005/an050915.html. 2010/100301_table.pdf.
as SEFs, in order to approach the ideal after the transaction occurs. This swap acknowledgment and
of ‘‘straight-through processing.’’ approach to documenting ‘‘life cycle confirmation vary depending upon
Otherwise, transactions should be keyed event data’’ is consistent with the whether transactions are electronically
into electronic systems as soon as Commission’s proposed rules for executed or electronically processed.
possible after execution. reporting swap data to a swap data Under proposed § 23.501(a)(1), all swap
repository.12 dealers and major swap participants
2. Proposed Confirmation Rule The timely and accurate confirmation entering into swap transactions with
To promote the efficient operation of of all swaps and life cycle events for other swap dealers or major swap
the swap market, and to facilitate existing swaps would ensure that the participants would be required to
market participants’ overall risk parties know the terms of their executed confirm their swap transactions
management, the Commission is transactions and the identities of their according to the following timeframe:
proposing confirmation § 23.501. counterparties at all times. Confirming • For any swap transaction that has
For the purposes of proposed all swap transactions on the day of been executed and processed
§ 23.501, proposed § 23.500 would execution should be standard for all electronically, within 15 minutes of
provide certain critical definitions market participants. However, the execution;
pertaining to confirmation. An Commission recognizes some entities • For any swap transaction that is not
acknowledgment would be defined as a that will not be registered as swap electronically executed, but that will be
written or electronic record of all the dealers or major swap participants may processed electronically, within 30
terms of a swap signed and sent by one not have the operational capacity to minutes of execution; or
party to another. When one party confirm their swap transactions as • For any swap transaction that
acknowledges the terms of a swap and quickly as swap dealers and major swap cannot be processed electronically by
its counterparty verifies it, the result is participants. Accordingly, the the swap dealer or major swap
the issuance of a confirmation that Commission is proposing a bifurcated participant, within the same calendar
reflects the terms of the swap between approach for confirmations. Swap day as execution.
the parties. A confirmation thus would dealers and major swap participants Under proposed § 23.501(a)(2), swap
be defined as a written or electronic entering into swap transactions with dealers and major swap participants
record of a swap that has been signed other swap dealers or major swap entering into swap transactions with
and sent by one party and verified by participants would be required to obtain counterparties that are not swap dealers
the other where that record has been a confirmation on the same calendar day or major swap participants would be
manually, electronically, or by some as execution (i.e., no later than T+0). required to send an acknowledgment of
other legally equivalent means, signed On the other hand, swap dealers and each swap transaction according to the
by the receiving counterparty. Finally, major swap participants entering into following timeframe:
swap transactions with counterparties • For any swap transaction that has
proposed § 23.500 would define
that are not swap dealers or major swap been executed and processed
execution to be a legally-binding oral,
participants would be required to send electronically, within 15 minutes of
written, or electronic agreement by the
an acknowledgment for each swap on execution;
parties. For the purposes of the
the same calendar day as execution (i.e., • For any swap transaction that is not
confirmation rule, the term swap
no later than T+0). Swap dealers and executed electronically, but that will be
transaction is defined to include any
major swap participants would then processed electronically, within 30
event that would result in a new swap
have policies and procedures in place to minutes after execution; or
or a change in the terms of a swap, • For any swap transaction that
including execution, termination, confirm the swap with financial entities
as defined in proposed § 23.500 13 on cannot be processed electronically by
assignment, novation, exchange, the swap dealer or major swap
the same calendar day as execution and
transfer, amendment, conveyance, or participant, within the same calendar
with all other entities not later than the
extinguishing of rights or obligations day as execution.
next business day following execution.
under a swap. The Commission also is proposing For those swap transactions entered
With regard to both acknowledgments that the times prescribed for achieving into with counterparties that are not
and confirmations, the Commission swap dealers or major swap
intends that all the terms of a swap 12 The Notice of Proposed Rulemaking for Swap participants, under proposed
transaction be provided for Data Recordkeeping and Reporting Requirements is § 23.501(a)(3), swap dealers and major
acknowledgment and confirmation. The available on the Commission’s Web site: http:// swap participants would be required to
objective is that parties have full written comments.cftc.gov/FederalRegister/Proposed.aspx.
13 This definition is taken from the end user establish written policies and
agreement on all terms as soon as exception to the clearing requirement under section procedures reasonably designed to
practicable after execution and also 2(h)(7)(C)(i) of the CEA. The term financial entity ensure confirmation with financial
upon any ownership event during the includes the following eight entities: (i) A swap entities on the same calendar day as
life of the swap. Such life cycle events dealer; (ii) a security-based swap dealer; (iii) a
major swap participant; (iv) a major security-based execution and with all other entities by
would include any termination (prior to swap participant; (v) a commodity pool as defined the next business day after the swap
the scheduled maturity date of the in section 1a(10) of the CEA; (vi) a private fund as transaction is executed. These
swap), assignment, novation, exchange, defined in section 202(a) of the Investment Advisers procedures must include a requirement
transfer, amendment, or conveyance of, Act of 1940 (15 U.S.C. 80–b–2(a)); (vii) an employee
benefit plan as defined in paragraphs (3) and (32) that, prior to entering into any swap
or extinguishing of rights or obligations
of section 3 of the Employee Retirement Income transaction, the swap dealer or major
under the swap.11 For each of these Security Act of 1974 (29 U.S.C. 1002); or (viii) a swap participant furnish to a
events, the parties should have written person predominantly engaged in activities that are
prospective counterparty, or receive
documentation evidencing all the terms in the business of banking or financial in nature, as
defined in section 4(k) of the Bank Holding from a prospective counterparty, a draft
of the transaction, as soon as possible Company Act of 1956. See 7 U.S.C. 2(h)(7)(C)(i). acknowledgment specifying all terms of
The definition would include the statutory the swap transaction other than pricing
11 Life cycle events would also include corporate exclusion and limitation as contained in section
actions affecting a security or securities on which 2(h)(7)(C) and also would include any Commission
and terms to be definitively agreed to at
the swap is based (e.g., a merger, dividend, stock regulations promulgated pursuant to the statutory execution. As is currently the custom in
split or bankruptcy). section. many swap markets, including credit
and equity derivative markets, the quickly, particularly for transactions • Should clearing a swap through a
parties may rely on a standard that are executed or processed DCO be deemed to satisfy the
confirmation agreement. electronically? confirmation requirement?
Under proposed § 23.501(b), a swap • Does the proposed rule provide • Should the terms calendar day and
dealer or major swap participant would sufficient time for swap dealers and business day be further defined and has
be required to keep records regarding major swap participants to provide the rule properly accounted for
the processing of swap swap acknowledgments to their counterparties in different time zones
acknowledgments and confirmations. counterparties? executing swaps?
These records would include the time • Are there swap transactions for B. Swap Portfolio Reconciliation
and date of transmission or receipt of which all of the terms required to be
any acknowledgment or confirmation, included on an acknowledgment or in a 1. Background
the length of time between transmission confirmation would not be known on Section 4s(i) of the CEA directs the
of any acknowledgment to a the same calendar day as execution? If Commission to prescribe regulations for
counterparty and receipt of the signed so, please describe these swap the timely and accurate confirmation,
confirmation, and the length of time transactions and include the terms that processing, documentation, and
between execution and confirmation of would not be known on the same valuation of all swaps entered into by
the swap. calendar day as execution, as well as the swap dealers and major swap
In order to retain flexibility for all reason these terms would not be known. participants. Disputes related to
market participants, the proposed rules confirming the terms of a swap, as well
• Is it necessary to clarify further that
do not prescribe a particular venue or as swap valuation disputes,14 have long
the confirmation rule would apply to
platform for confirmation. As noted been recognized as a significant problem
life cycle events, such as termination,
above, currently many swap in the OTC derivatives market. Portfolio
assignment, novation, exchange,
transactions are electronically processed reconciliation is considered an effective
transfer, amendment, or conveyance?
by third-party ‘‘matching’’ services. means of identifying and resolving these
While the Commission encourages the • Are there other post-execution
events for which a confirmation should disputes. Specifically, portfolio
continued use and expansion of these reconciliation is a post-execution
services, the approach taken in the be executed?
processing and risk management
proposed rule would allow parties the • Should counterparties be permitted
technique that is designed to:
ability to confirm bilaterally through to agree expressly that certain life cycle
(1) Identify and resolve discrepancies
whatever means they select, so long as events (such as assignment of payable
between the counterparties with regard
they are able to meet the schedule laid rights), do not require subsequent
to the terms of a swap either
out in the rule. confirmations? Are there life cycle
immediately after execution or during
In a similar effort to retain flexibility, events that can be carved out of the rule the life of the swap; (2) ensure effective
at this time, the Commission is not while still achieving the purpose of the confirmation of all the terms of the
prescribing the acknowledgment or rule? Should more time be permitted for swap; and (3) identify and resolve
confirmation documentation that market confirmation of certain life cycle events, discrepancies between the
participants must use. The Commission such as transfers resulting from a counterparties regarding the valuation
encourages the use of master merger, consolidation, or transfer of all of the swap. In some instances, portfolio
confirmation agreements and other assets to another entity? reconciliation also may facilitate the
standardized documentation that has • Should the Commission require that identification and resolution of
been developed by the industry in an electronic matching services or discrepancies between the
effort to reduce confirmation backlogs, confirmation platforms be used where counterparties with regard to valuations
among other things. However, the most reasonably practicable? of collateral held as margin.
critical aspect of the confirmation rule • Does the term ‘‘processed The Commission recognizes that the
is that all the terms of the swap are electronically’’ require more industry has made significant progress
agreed to in writing and in a timely clarification? If so, what definition in adopting the use of portfolio
manner. would be effective and flexible enough reconciliation to decrease the number of
The proposed rules would apply to all to accommodate future market swap disputes.15 In December 2008, the
new swaps and to all swap transactions, innovation? ODSG’s group of 14 major dealers
as that term is defined in the rules, • Should the Commission require that committed to execute daily portfolio
entered into after the effective date of all swaps be processed electronically? reconciliations for collateralized
the regulation. • Are there circumstances where portfolios in excess of 500 trades
swap dealers and major swap between participating dealers by June of
3. Comments Requested
participants have the ability to process 2009.16 As of May 2009, all participating
The Commission requests comment dealers were satisfying this
a transaction electronically, but should
on all aspects of proposed § 23.501. In commitment. In October 2009, the
not be required to do so?
particular, the Commission requests
comment on the following questions: • Has the Commission properly 14 See ISDA Collateral Committee, ‘‘Commentary
• Does the proposed rule accounted for current industry practice to the Outline of the 2009 ISDA Protocol for
appropriately allocate the responsibility with respect to the time necessary to Resolution of Disputed Collateral Calls,’’ June 2,
confirm swap transactions?
2009 (stating ‘‘Disputed margin calls have increased

for providing the swap
acknowledgments? • Would the proposed rule unduly significantly since late 2007, and especially during
2008 have been the driver of large (sometimes > $1
• Is it feasible to require that all restrict the types of swaps that swap billion) un-collateralized exposures between
acknowledgments be provided dealers and major swap participants professional firms.’’).
electronically? may enter into or the persons that may 15 The Commission also recognizes and
• Should the proposed rule require be their counterparties? encourages the industry practice of immediately
transferring undisputed collateral amounts.
swap dealers and major swap • Should executing a swap on a SEF 16 See June 2, 2009 summary of industry
participants to provide a swap or DCM be deemed to satisfy the commitments, available at http://www.isda.org/
acknowledgment or confirmation more confirmation requirement? c_and_a/pdf/060209table.pdf.
ODSG committed to publishing a in proposed § 23.500 as the current have the technological capacity to
feasibility study on market-wide market value or net present value of a perform reconciliation processes
portfolio reconciliation that would set swap, and material terms would be electronically.
forth how regular portfolio defined as all terms of a swap required Under proposed § 23.502(a)(5), swap
reconciliation could be extended to be reported in accordance with part dealers and major swap participants
beyond the ODSG dealers to include 45 of this chapter. would be required to resolve any
smaller banks, buy-side participants, Proposed § 23.502(a) would require discrepancy in a valuation identified as
and derivative end users. Consistent swap dealers and major swap part of a portfolio reconciliation process
with this publication, the ODSG dealers participants to reconcile swap portfolios within one business day. The
expanded their portfolio reconciliation with other swap dealers or major swap Commission recognizes that there may
commitment in March 2010 to include participants with the following be reasonable grounds for some
monthly reconciliation of collateralized frequency: Daily for portfolios variation in the calculation of swap
portfolios in excess of 1,000 trades with consisting of 300 or more swaps, at least valuation at any given time.
any counterparty. Most recently, the weekly for portfolios consisting of 50 to Consequently, the proposed rule would
industry has been preparing a new 300 swaps, and at least quarterly for not require that swap dealers and major
‘‘Convention on the Investigation of portfolios consisting of fewer than 50 swap participants expend resources to
Disputed Margin Calls’’ and a new swaps. Swap dealers and major swap resolve all discrepancies in the
‘‘Formal Market Polling Procedure’’ that participants would be required to valuation of the swap, but only if the
are intended to ‘‘create a consistent and resolve immediately any discrepancy in difference between the lower valuation
predictable process * * * that a material term identified as part of a and the higher is greater than 10%.
eliminates present uncertainties and portfolio reconciliation process. The In addition, given that there are a
delays.’’ 17 Commission is proposing an immediate number of services and industry-led
Accordingly, the Commission is resolution requirement for material initiatives that may facilitate resolution
proposing § 23.502, which would terms for the same reasons that of valuation disputes, at this time the
require swap dealers and major swap necessitate timely confirmation—parties Commission is not proposing to
participants to reconcile their portfolios need to know the terms of their mandate that swap dealers and major
with one another and provide executed agreements with one another. swap participants implement any
counterparties who are not registered as A discrepancy in the terms of a swap specific procedure for resolution of a
swap dealers or major swap participants likely indicates that the parties have discrepancy in the valuation of a swap.
with regular opportunities for portfolio failed to confirm the swap in Rather, it is only proposing a deadline
reconciliation. In order for the accordance with Commission for dispute resolution of one business
marketplace to realize the full risk regulations, and, therefore, the parties day following discovery of such
reduction benefits of portfolio should take immediate action to resolve discrepancy.
reconciliation, the Commission is the discrepancy. This requirement For swap portfolios with entities other
proposing to expand portfolio would support and ensure compliance than swap dealers or major swap
reconciliation to all transactions, with proposed § 23.501, which requires participants, proposed § 23.502(b)
whether collateralized or a confirmation of all terms of a swap. would require swap dealers and major
uncollateralized. For the swap market to The Commission believes that swap participants to establish written
operate efficiently and to reduce requiring reconciliation of all swap policies and procedures to perform
portfolios among swap dealers and reconciliation, but would not prescribe
systemic risk, portfolio reconciliation
major swap participants (rather than the manner in which the reconciliation
should be a proactive process that
only collateralized portfolios, as must be performed. For example, the
delivers a consolidated view of
contemplated by the ODSG work) is exchange of terms and valuations
counterparty exposure down to the
appropriate because CEA section 4s(e) between the counterparties may consist
transaction level. By identifying and
requires that swap dealers and major of one party reviewing the details and
managing mismatches in key economic
swap participants will be subject to valuations delivered by the other party
terms and valuation for individual
minimum capital and margin and either affirming or objecting to such
transactions across an entire portfolio,
requirements. As a result, the details and valuations. The frequency
overall risk can be identified and
Commission anticipates that most, if not parameters of portfolio reconciliation
reduced. would be similar to those for swap
all, swaps entered by swap dealers and
2. Proposed Portfolio Reconciliation major swap participants will be subject portfolios between swap dealers or
Rule to some form of collateralization. The major swap participants.18 There are
For the purposes of proposed Commission also believes that requiring some important distinctions in the
§ 23.502, swap portfolio reconciliation more frequent reconciliation of smaller proposed treatment of swap portfolios
would be defined in proposed § 23.500 portfolios is appropriate because section between a swap dealer or major swap
as a process by which the two parties to 2(a)(13)(G) of the CEA requires all swaps participant and others that promote
one or more swaps: (1) Exchange the to be reported to a registered swap data flexibility for those entities that will not
terms of all swaps in the portfolio repository, and, therefore, the be registered with the Commission.
between the parties; (2) exchange each Commission anticipates that swap Swap dealers and major swap
party’s valuation of each swap in a dealers and major swap participants participants would be required simply
will be able to efficiently reconcile their to establish written procedures

portfolio between the parties as of the
internal records with their reasonably designed to resolve any
close of business on the immediately
counterparties electronically by discrepancies in the material terms or
preceding business day; and (3) resolve
reference to data in the repositories. The valuation of each swap identified as part
any discrepancy in material terms and
valuations. Valuation would be defined threshold of 300 swaps for daily
reconciliation is intended to capture 18 The frequency thresholds are similar: Daily for
swap portfolios where there is a high portfolios consisting of 500 or more swaps, at least
17 See ‘‘ISDA 2010 Convention on the weekly for portfolios consisting of 100–500 swaps,
Investigation of Disputed Margin Calls’’ and ‘‘ISDA likelihood that the swap dealer or major and at least quarterly for portfolios consisting of
2010 Formal Market Polling Procedure.’’ swap participant’s counterparty will less than 100 swaps.
of a portfolio reconciliation process in a • Should all discrepancies in swap process does not alter the risk profiles
timely fashion. Again, differences in transaction terms be resolved or just the of the individual participants beyond a
valuation of a swap need not be deemed material ones? level acceptable to the participant.
a discrepancy unless the difference • Should the definition of material Portfolio compression exercises can
between the lower valuation and the terms be clarified? be performed on a bilateral or
higher valuation is greater than 10% of • Should financial entities as defined multilateral basis. Multilateral
the higher valuation. in proposed § 23.500 be required to compression exercises are preferable
Proposed § 23.502(c) would create a participate in portfolio reconciliation because the larger number of
safe harbor for cleared swaps because under proposed § 23.502(a)? participants significantly increases the
portfolio reconciliation is needed C. Portfolio Compression number of trades that can be eliminated
primarily for uncleared swaps. When and removes the need for bilateral
swaps are cleared, the clearinghouse 1. Background negotiation between counterparties. In a
requires that each swap be matched Section 4s(i) of the CEA directs the multilateral portfolio compression
prior to novation by the clearinghouse. Commission to prescribe regulations for exercise, the replacement swaps may be
Moreover, once cleared, clearinghouses the timely and accurate processing and with the same or different
determine daily settlement prices, netting of all swaps entered into by counterparties.
which preclude any valuation disputes. swap dealers and major swap The benefits of portfolio compression
The proposed rule would apply to all participants. Portfolio compression is an to both individual market participants
swaps within a swap portfolio as of the important, post-trade processing and and to the market as a whole are
effective date of the regulation. netting mechanism that can be an considerable. The reduced transaction
Finally, proposed § 23.502(d) would effective and efficient tool for the timely count decreases operational risk
require that swap dealers and major and accurate processing and netting of generally as there are fewer trades to
swap participants maintain records of swaps by market participants. maintain, process, and settle.21 The
each discrepancy identified during Accordingly, the Commission is reduction in the outstanding gross
portfolio reconciliation and the length proposing § 23.503, which would notional value of the swaps also allows
of time taken to resolve that require swap dealers and major swap for increased capital liquidity and
discrepancy. participants to engage in certain efficiency. Firms can set aside less
3. Comments Requested bilateral and multilateral portfolio capital for their positions while
compression exercises. maintaining their desired risk positions
The Commission requests comment Portfolio compression is a mechanism in the market. The diminished
on all aspects of proposed § 23.502(d). whereby substantially similar operational risk for the individual
In particular, the Commission requests transactions among two or more market participants achieved by
comment on the following questions: counterparties are terminated and portfolio compression, in turn, may
• Are the proposed deadlines for lessen systemic risk and enhance the
replaced with a smaller number of
swap portfolio discrepancy resolution in overall stability of the financial markets.
transactions of decreased notional value
the proposed regulation appropriate? Compression also may provide a more
in an effort to reduce the risk, cost, and
• Are the reconciliation thresholds accurate expression of overall market
inefficiency of maintaining unnecessary
and frequency requirements size and composition, and provide
transactions on the counterparties’
appropriate? market participants with a more precise
• Are swap dealers and major swap books. In many cases, these redundant
or economically-equivalent positions picture of their exposures.
participants likely to have a large The usefulness of portfolio
number of counterparties with whom serve no useful business purpose, but
can create unnecessary risk,19 as well as compression as a risk management tool
they would be required to perform daily has been acknowledged widely. In 2008,
reconciliation that do not have the operational and capital inefficiencies. In
a portfolio compression exercise, swap the PWG identified frequent portfolio
technological capacity to perform compression of outstanding trades as a
reconciliation processes electronically? market participants whose combined
portfolios include outstanding key policy objective in the effort to
• Is the proposal that a valuation
transactions that contain substantially strengthen the OTC derivatives market
difference of less than 10% not be
similar economic terms and/or that infrastructure.22 Similarly, the 2010
deemed to be a discrepancy
would result in redundant payments staff report outlining policy perspectives
appropriate? If not, please provide a
wholly or partially net their swaps by on OTC derivatives infrastructure issued
suggested valuation discrepancy
terminating the original swaps and by the FRBNY identified trade
threshold.
• Should the proposed rule include a replacing them with a smaller number compression as an element of strong risk
provision that requires discrepancy of new transactions that have a lower management and recommended that
resolution if the aggregate of valuation gross notional value. market participants engage in regular,
differences of less than 10% across a Market vendors assert that as many as market-wide portfolio compression
portfolio exceeds a certain threshold? If 40,000 trades can be terminated in a exercises.23
single portfolio compression cycle.20 The value of portfolio compression
so, please provide a suggested
Because portfolio compression also is illustrated by existing market
threshold.
• How would the requirement to participants are permitted to establish participation in compression exercises.
their own credit, market, and cash
resolve valuation discrepancies in one 21 See ‘‘ISDA 2009 A Yearbook of ISDA

day for swaps among swap dealers and payment risk tolerances and to establish
Activities,’’ International Swaps and Derivatives
major swap participants affect the very their own mark-to-market values for the Association, Inc. (2009).
detailed and complex industry transactions to be compressed, the 22 ‘‘Policy Objectives for the OTC Derivatives
initiatives currently being considered Markets,’’ President’s Working Group on Financial

19 Federal Reserve Bank of New York Staff Report Markets (Nov. 14, 2008).
for resolving valuation disputes? No. 424: ‘‘Policy Perspectives on OTC Derivatives 23 Federal Reserve Bank of New York Staff Report
• Should all terms of a swap Market Infrastructure,’’ Jan. 2010 (revised Mar. No. 424: ‘‘Policy Perspectives on OTC Derivatives
transaction be reconciled or just the key 2010). Market Infrastructure,’’ Jan. 2010 (revised Mar.
economic terms? 20 See http://www.trioptima.com. 2010).
In March 2010, the Depository Trust and swap participant. A swap dealer or maintain written policies and
Clearing Corporation (DTCC) explicitly major swap participant also would be procedures for periodically terminating
attributed the reduction in the gross permitted to establish counterparty, all fully offsetting swaps and
notional value of the contracts in its market, cash payment, and other risk periodically engaging in compression
warehouse to industry supported tolerances and to exclude potential exercises.
portfolio compression.24 TriOptima, counterparties from the compression The proposed rule would apply to all
which offers the TriReduce portfolio exercise, provided that the swap dealer swaps within a swap portfolio as of the
compression service, estimates that it or major swap participant is not using effective date of the regulation.
has terminated $106.3 trillion gross the risk tolerances or counterparty
notional of interest rate swaps and $66.9 exclusions to evade the compression 3. Comments Requested
trillion gross notional of credit swaps requirements. The Commission is requesting
since its inception in 2003.25 Similarly, In recognition that portfolio
comment on all aspects of the portfolio
Creditex and Markit, which offer compression currently is not available
compression rule, and specifically
portfolio compression exercises in for all asset classes and all transactions
requests comment on the following
single name credit default swaps, have within an asset class,27 the Commission
questions:
enabled participating institutions to also is proposing that swap dealers and
eliminate $4.5 trillion in notional major swap participants be required to • Should the Commission require
between late 2008 through 2009.26 terminate bilaterally all fully offsetting swap dealers and major swap
swaps between them by the close of participants to engage in bilateral and
2. Proposed Compression Rule business on the business day following multilateral compression exercises,
Based upon these considerations, the the day the parties entered into the particularly with respect to transactions
Commission is proposing § 23.503, offsetting swap transaction and to where the counterparty is not a swap
which would impose certain portfolio engage annually in bilateral portfolio dealer or major swap participant?
compression requirements upon swap compression exercises with • Should the compression
dealers and major swap participants. counterparties that are also swap dealers requirement be restricted to particular
Specifically, swap dealers and major or major swap participants. Swap asset classes?
swap participants would be required to dealers and major swap participants • With what frequency should
participate in multilateral compression need not engage in bilateral portfolio bilateral or multilateral compression be
exercises that are offered by those DCOs compression exercises, however, to the required?
or self-regulatory organizations of which extent that the counterparties have • What are the costs associated with
the swap dealer or major swap mutually participated in a multilateral engaging in bilateral and multilateral
participant is a member. The exercise involving the swaps between compression and are such costs a barrier
Commission would encourage swap them during the same year. to participation?
dealers and major swap participants to The Commission anticipates that
• Should the Commission expressly
work with the DCOs and self-regulatory portfolio compression exercises will be
define the transactions that are eligible
organizations of which they are offered by additional vendors and will
for inclusion in a portfolio compression
members to develop portfolio encompass additional products and
exercise or leave that determination to
compression opportunities. asset classes as the industry progresses
The portfolio compression obligation those conducting the compression
toward increased product
would be limited to swaps in which the exercise and/or to those participating in
standardization and centralized
counterparty is also a swap dealer or the exercise?
clearing. To afford the Commission the
major swap participant and swaps that flexibility to react to the expected future • What factors (e.g., sufficiently
are eligible for inclusion in the exercise, availability and need for portfolio standardized terms) would render a
as determined by those conducting the compression exercises, proposed particular swap eligible or ineligible for
compression exercise and agreed to by § 23.503 also would require swap inclusion in a bilateral or multilateral
those participating in the exercise. A dealers and major swap participants to compression exercise?
swap dealer or major swap participant participate in all multilateral portfolio • Should the Commission provide
would be permitted to exclude swaps compression exercises required by specific risk management, accounting,
from a compression exercise if Commission regulation or order. regulatory, and other rationale under
including the swap would be reasonably Proposed § 23.503 would not mandate which a swap dealer or major swap
likely to increase significantly the risk portfolio compression exercises for participant may exclude particular
exposure of the swap dealer or major swaps outstanding between a swap swaps transactions from a multilateral
dealer or a major swap participant and portfolio compression exercise?
24 DTCC Press Release, ‘‘DTCC Trade Information
counterparties that are neither swap • How much time would be sufficient
Warehouse Completes Record Year Processing OTC dealers nor major swap participants.
Credit Derivatives’’ (Mar. 11, 2010). Notably,
to allow swap dealers and major swap
beginning in August 2008, ISDA encouraged Instead, swap dealers and major swap participants to come into compliance
compression exercises for credit default swaps by participants would be required to with the proposed portfolio
selecting the service provider and defining the compression requirements?
terms of service. 27 At the present time, the principal portfolio
25 See http://www.trioptima.com. Between 2007
compression vendors offer compression exercises
• Should the Commission require
participation in compression exercises
and 2008, TriOptima reduced $54.7 trillion gross for limited types of trades in a limited number of
notional of interest rate swaps and $49.1 trillion asset classes. Compression currently is available for conducted only by registered derivatives
gross notional of credit swaps. In March of 2010, certain interest rate swaps and credit default swaps clearing organizations or by all central
the staff of the Federal Reserve Bank of New York and, to a lesser degree, specific energy products. For
estimated that since 2008 nearly $50 trillion gross example, TriOptima’s TriReduce service provides
counterparties of which the swap dealer
notional of credit default swap positions has been portfolio compression services for: (1) Interest rate or major swap participant may be a
eliminated through portfolio compression. Federal swap transactions in twenty-three currencies; (2) member?
Reserve Bank of New York Staff Report No. 424: credit default swaps (index, single name, and
‘‘Policy Perspectives on OTC Derivatives Market tranches); and (3) a more limited number of energy
• Should financial entities as defined
Infrastructure,’’ Jan. 2010 (revised Mar. 2010). products. Markit and Creditex offer portfolio in proposed § 23.500 be subject to the
26 See http://www.isdacdsmarketplace.com. compression for credit default swaps. provisions of § 23.503(a), (b), and (c)?
III. Related Matters was indicative of the size of the ensuring that swap dealers and major
business. Major swap participants, by swap participants document the terms
A. Regulatory Flexibility Act
statutory definition, maintain of all of their swaps, reconcile their
The Regulatory Flexibility Act (RFA) substantial positions in swaps or swap portfolios to resolve any
requires that agencies consider whether maintain outstanding swap positions discrepancies or disputes, and wholly or
the rules they propose will have a that create substantial counterparty partially terminate some or all
significant economic impact on a exposure that could have serious outstanding swaps through regular
substantial number of small entities.28 adverse effects on the financial stability compression exercises. Commission
The Commission previously has of the United States banking system or staff would use the information related
established certain definitions of ‘‘small financial markets. Accordingly, for to each of these important risk-reducing
entities’’ to be used in evaluating the purposes of the RFA for this activities when conducting the
impact of its regulations on small rulemaking, the Commission is hereby Commission’s examination and
entities in accordance with the RFA.29 proposing that major swap participants oversight program with respect to the
The proposed rules would affect swap not be considered ‘‘small entities’’ for registrants.
dealers and major swap participants. essentially the same reasons that large If the proposed regulations are
Swap dealers and major swap traders have previously been adopted, responses to this collection of
participants are new categories of determined not to be small entities. information would be mandatory. The
registrants. Accordingly, the Moreover, the Commission is carrying Commission will protect proprietary
Commission has not previously out Congressional mandates by information according to the Freedom of
addressed the question of whether such proposing this regulation. Specifically, Information Act and 17 CFR part 145,
persons are, in fact, small entities for the Commission is proposing these ‘‘Commission Records and Information.’’
purposes of the RFA. However, the regulations to comply with the Dodd- In addition, section 8(a)(1) of the CEA
Commission previously has determined Frank Act, the aim of which is to reduce strictly prohibits the Commission,
that futures commission merchants systemic risk presented by swap dealers unless specifically authorized by the
should not be considered to be small and swap market participants through CEA, from making public ‘‘data and
entities for purposes of the RFA.30 The comprehensive regulation. The information that would separately
Commission’s determination was based, Commission does not believe that there disclose the business transactions or
in part, upon the obligation of futures are regulatory alternatives to those being market positions of any person and
commission merchants to meet the proposed that would be consistent with trade secrets or names of customers.’’
minimum financial requirements the statutory mandate. Accordingly, the The Commission also is required to
established by the Commission to Chairman, on behalf of the Commission, protect certain information contained in
enhance the protection of customers’ hereby certifies pursuant to 5 U.S.C. a government system of records
segregated funds and protect the 605(b) that the proposed rules will not according to the Privacy Act of 1974, 5
financial condition of futures have a significant economic impact on U.S.C. 552a.
commission merchants generally.31 Like a substantial number of small entities.
1. Information Provided by Reporting
futures commission merchants, swap B. Paperwork Reduction Act Entities/Persons
dealers will be subject to minimum
capital and margin requirements and are The Paperwork Reduction Act Proposed §§ 23.501, 23.502, and
expected to comprise the largest global (PRA) 33 imposes certain requirements 23.503 would require swap dealers and
financial firms. The Commission is on Federal agencies (including the major swap participants to make and
required to exempt from swap dealer Commission) in connection with their retain records of confirmations,
designation any entities that engage in conducting or sponsoring any collection portfolio reconciliations, and portfolio
a de minimis level of swaps dealing in of information as defined by the PRA. compression exercises. The proposed
connection with transactions with or on This proposed rulemaking would result regulations do not impose any reporting
behalf of customers. The Commission in new collection of information requirements. The proposed regulations
anticipates that this exemption would requirements within the meaning of the will be an important part of the
tend to exclude small entities from PRA. The Commission therefore is Commission’s regulatory program for
registration. Accordingly, for purposes submitting this proposal to the Office of swap dealers and major swap
Management and Budget (OMB) for participants. The information required
of the RFA for this rulemaking, the
review in accordance with 44 U.S.C. to be preserved would be used by
Commission is hereby proposing that
3507(d) and 5 CFR 1320.11. The title for representatives of the Commission and
swap dealers not be considered ‘‘small
this collection of information is any examining authority responsible for
entities’’ for essentially the same reasons
‘‘Confirmation, Portfolio Reconciliation, reviewing the activities of the swap
that futures commission merchants have
and Portfolio Compression dealer or major swap participant to
previously been determined not to be
Requirements for Swap Dealers and ensure compliance with the CEA and
small entities and in light of the
Major Swap Participants.’’ An agency applicable Commission regulations.
exemption from the definition of swap
may not conduct or sponsor, and a The annual burden associated with
dealer for those engaging in a de
person is not required to respond to, a these proposed regulations is estimated
minimis level of swap dealing.
collection of information unless it to be 1,282.5 hours, at an annual cost of
The Commission also has previously
displays a currently valid control $1,282,250 for each swap dealer and
determined that large traders are not
number. The OMB has not yet assigned major swap participant. Burden means
‘‘small entities’’ for RFA purposes.32 In
this collection a control number. the total time, effort or financial
that determination, the Commission
The collection of information under resources expended by persons to
considered that a large trading position
these proposed rules is necessary to generate, maintain, retain, disclose, or
28 5 U.S.C. 601 et seq. implement certain provisions of the provide information to or for a Federal
29 47 FR 18618, Apr. 30, 1982. CEA, as amended by the Dodd-Frank agency. Specifically, the Commission
30 Id. at 18619. Act. Specifically, it is essential to anticipates that swap dealers and major
31 Id. swap participants will spend an average
32 Id. at 18620. 33 44 U.S.C. 3501 et seq. of 40 hours per year drafting and
updating the policies and procedures Estimated aggregate annual hour Estimated aggregate number of
required by the proposed regulations; burden: 12,000 burden hours [300 annual responses: 2,436,000 [300
252 hours per year making and retaining registrants × 40 hours per registrant]. registrants × 8,120 responses].
the acknowledgment and confirmation Acknowledgment and Confirmation
Estimated annual hour burden per
records required by proposed § 23.501; Recordkeeping. This hourly burden
registrant: 812 hours [8,120 × .10 hours
812 hours per year making and retaining arises from the proposed requirement
that swap dealers and major swap per response].
the portfolio reconciliation records
required by proposed § 23.502; and participants make and maintain records Estimated aggregate annual hour
178.5 hours per year making and of the date and time of transmission to, burden: 243,600 burden hours [300
retaining the bilateral offset and or receipt from, a counterparty of an registrants × 812 hours per registrant].
portfolio compression records required acknowledgment or confirmation; the Portfolio Compression Recordkeeping.
by proposed § 23.503. length of time between the This hourly burden results from the
It is not currently known how many acknowledgment and confirmation of proposed requirement that swap dealers
swap dealers and major swap each swap; and the length of time and major swap participants make and
participants will become subject to between execution and confirmation of maintain records of the bilateral offsets
these rules, and this will not be known each swap.
and portfolio compression exercises in
to the Commission until the registration Number of registrants: 300.
Frequency of collection: daily. which they participate, including the
requirements for these entities become beginning and completion dates; the
effective after July 16, 2011, the date on Estimated number of annual
responses per registrant: 252 [252 swaps that were included and excluded;
which the Dodd-Frank Act becomes the applicable risk tolerance levels; and
effective. While the Commission trading days].
Estimated aggregate number of the results of the particular exercise.
believes there will be approximately 200
annual responses: 75,600 [300 The proposed regulations would require
swap dealers and 50 major swap
registrants × 252 trading days]. that each swap dealer and major swap
participants, it has taken a conservative
Estimated annual hour burden per participant terminate fully offsetting
approach, for PRA purposes, in
registrant: 252 [252 trading days × 1 swaps; participate in certain multilateral
estimating that there will be a combined
hour per day]. compression exercises; and participate
number of 300 swap dealers and major Estimated aggregate annual hour
swap participants who will be required in annual bilateral portfolio
burden: 75,600 burden hours [300 × 252 compression exercises with each
to comply with the recordkeeping hours].
requirements of the proposed rules. The counterparty that is also a swap dealer
Portfolio Reconciliation
Commission estimated the number of or major swap participant (except to the
Recordkeeping. This hourly burden
affected entities based on industry data. extent that the counterparties
arises from the proposed requirement
According to recent Bureau of Labor that swap dealers and major swap participate in multilateral compression
Statistics findings, the mean hourly participants make and maintain records exercises for the same swaps). Swap
wage of an employee under occupation of the portfolio reconciliation exercises dealers and major swap participants
code 11–3031, ‘‘Financial Managers,’’ in which they engage. Registrants would also would be required to maintain
(which includes operations managers) be required to reconcile portfolios with policies and procedures for periodically
that is employed by the ‘‘Securities and counterparties that are swap dealers and engaging in portfolio compression
Commodity Contracts Intermediation major swap participants on a daily, exercises with other counterparties.
and Brokerage’’ industry is $74.41.34 weekly, or quarterly basis, depending Number of registrants: 300.
Because swap dealers and major swap upon the size of the portfolio. They also
participants include large financial Frequency of collection: As needed.
would be required to maintain policies
institutions whose operations and procedures for conducting portfolio Estimated number of annual
management employees’ salaries may reconciliation with other counterparties responses per registrant: 1,029 [24
exceed the mean wage, the Commission with similar frequency. multilateral compression records 36] +
has estimated the cost burden of these Number of registrants: 300. [465 bilateral compression exercise
proposed regulations based upon an Frequency of collection: daily,
average salary of $100 per hour. weekly, or quarterly.
Accordingly, the estimated burden Estimated number of annual
was calculated as follows: responses per registrant: 8,120.35
Drafting and Updating Policies and
35 Due to the absence of prior experience in
Procedures. This hourly burden arises
regulating swap dealers and major swap
from the time necessary to develop and participants and with regulations similar to the
periodically update the policies and proposed rules, the actual, average number of
procedures required by the proposed counterparties that a swap dealer or major swap
proposed rulemakings, the Commission has
regulations. participant is likely to have and the average size of
its portfolio with particular counterparties is estimated that each of the 14 major swap dealers
Number of registrants: 300. uncertain. The estimate of 5,600 portfolio has an average 7,500 counterparties and the other
Frequency of collection: Initial reconciliation records is based upon the assumption 286 swap dealers and major swap participants have
that each swap dealer and major swap participant an average of 200 counterparties per year, for an
implementation, updating as needed.
engages in swap transactions with approximately average of 540 total counterparties per registrant.
Estimated number of annual one third (100) of the other swap dealers or major The Commission estimates that 440 of those
responses per registrant: 1. swap participants and that 10% of such portfolios counterparties would not be other swap dealers or
would require daily reconciliation; 20% would major swap participants.
Estimated aggregate number of require weekly reconciliation; and 70% would 36 This estimate assumes that swap dealers and
annual responses: 300. require quarterly reconciliation. The estimate also
major swap participants would engage in
Estimated annual hour burden per is based upon the assumption that a swap dealer or
major swap participant has an average of 440 other multilateral compression exercises for 2 asset
registrant: 40 hours. classes at an average rate of 12 multilateral
counterparties and that all of the portfolios with
those counterparties generally would be limited to compression exercises per year (approximately 1
34 http://www.bls.gov/oes/current/oes113031.htm. quarterly reconciliation. Consistent with other per month).
records 37] + [540 bilateral offset occupation code 15–1021 and computer Comments may be submitted directly
records 38]. software engineers under program codes to the Office of Information and
Estimated aggregate number of 15–1031 and 1032 are between $34.10 Regulatory Affairs, by fax at (202) 395–
annual responses: 308,700 [300 and $44.94.39 Because swap dealers and 6566 or by e-mail at
registrants × 1,029 responses per year]. major swap participants generally will OIRAsubmissions@omb.eop.gov. Please
Estimated annual hour burden per be large entities that may engage provide the Commission with a copy of
registrant: 178.5 hours [24 multilateral employees with wages above the mean, submitted comments so that all
compression records × .5 hours per the Commission has conservatively comments can be summarized and
records] + [465 bilateral compression chosen to use a mean hourly addressed in the final rule preamble.
exercise records × .3 hours per records] programming wage of $60 per hour. Refer to the Addresses section of this
+ [540 bilateral offset records × .05 Accordingly, the start-up burden notice of proposed rulemaking for
hours per record]. associated with the required comment submission instructions to the
Estimated aggregate annual hour technological improvements would be Commission.
burden: 53,550 burden hours [300 $2,400 [$60 × 40 hour per affected A copy of the supporting statements
registrants × 178.5 hours per registrant]. registrant] or $720,000 in the aggregate. for the collections of information
Based upon the above, the aggregate discussed above may be obtained by
hourly burden for all registrants is 2. Information Collection Comments visiting RegInfo.gov. OMB is required to
334,350 hours and $33,435,000 [334,350 The Commission invites the public make a decision concerning the
× $100 per hour]. and other Federal agencies to comment collection of information between 30
In addition to the per hour burden and 60 days after publication of this
on any aspect of the recordkeeping
discussed above, the Commission document in the Federal Register.
burdens discussed above. The
anticipates that swap dealers and major Therefore, a comment is best assured of
Commission specifically requests
swap participants may incur minimal having its full effect if OMB receives it
comment on the variables used in the
start-up costs in connection with the within 30 days of publication.
above-referenced hourly burden
proposed recordkeeping obligations.
calculations. For example, the C. Cost-Benefit Analysis
Such costs would include the
Commission requests comment on the
expenditures related to developing and Section 15(a) of the CEA40 requires
following:
installing new recordkeeping the Commission to consider the costs
technology or re-programming or • What is the total number of swap
and benefits of its actions before issuing
updating existing recordkeeping dealers and major swap participants in
a rulemaking under the CEA. By its
technology and systems to enable the the marketplace?
terms, Section 15(a) does not require the
swap dealer or major swap participant • What is the average number of
Commission to quantify the costs and
to collect, maintain, and re-produce any counterparties that a swap dealer or
benefits of a new regulation or to
newly required records. The major swap participant is likely to have? determine whether the benefits of the
Commission believes that swap dealers • What percentage of those rule outweigh its costs; rather, it
and major swap participants generally counterparties are other swap dealers or requires that the Commission ‘‘consider’’
could adapt their current infrastructure major swap participants? the costs and benefits of its actions.
to accommodate the new or amended • What is the average size (number of Section 15(a) further specifies that
technology and thus, no significant swaps) of a portfolio that a swap dealer costs and benefits of a proposed
infrastructure expenditures would be or major swap participant is likely to rulemaking shall be evaluated in light of
needed. The Commission estimates the have with a particular type of five broad areas of market and public
programming burden hours associated counterparty? concern: (1) Protection of market
with technology improvements to be 40 • What is the average number of participants and the public; (2)
hours. acknowledgment and confirmation efficiency, competitiveness, and
According to recent Bureau of Labor records that a swap dealer or major financial integrity of futures markets; (3)
Statistics findings, the mean hourly swap participant would likely be price discovery; (4) sound risk
wages of computer programmers under required to make under the proposed management practices; and (5) other
regulations? public interest considerations. The
37 As with other approximations set forth in this Pursuant to 44 U.S.C. 3506(c)(2)(B), Commission may, in its discretion, give
proposal, the estimate of 465 bilateral compression the Commission solicits comments in
exercise records is based upon the assumption that
greater weight to any one of the five
each swap dealer and major swap participant
order to: (i) Evaluate whether the enumerated considerations and could,
engages in swap transactions with approximately proposed collection of information is in its discretion, determine that,
one third (100) of the other swap dealers or major necessary for the proper performance of notwithstanding its costs, a particular
swap participants. Because it is anticipated that the functions of the Commission,
most swaps between swap dealers and major swap
regulation was necessary or appropriate
participants would be eligible for multilateral
including whether the information will to protect the public interest or to
portfolio compression exercises, the Commission have practical utility; (ii) evaluate the effectuate any of the provisions or to
expects that a swap dealer or major swap accuracy of the Commission’s estimate accomplish any of the purposes of the
participant would need to engage in annual of the burden of the proposed collection
bilateral compression with only one quarter of (25)
CEA.
such counterparties. The estimate also is based
of information; (iii) determine whether Summary of proposed requirements.
upon the assumption that the average swap dealer there are ways to enhance the quality, The proposed regulations would
or major swap participant has an average of 440 utility, and clarity of the information to implement new section 4s(i) of the CEA
non-swap dealer or major swap participant be collected; and (iv) minimize the
counterparties and would engage in 1 bilateral
which was added by section 731 of the
portfolio compression exercise with each. This
burden of the collection of information Dodd-Frank Act. The proposed
would result in a total of 465 bilateral portfolio on those who are to respond, including regulations would set forth certain
compression records (25 + 440). through the use of automated collection requirements for swap confirmations,
38 This estimate is based upon the assumption
techniques or other forms of information portfolio reconciliation, and portfolio
that each swap dealer and major swap participant technology.
will have an average of 1 set of swaps that is eligible compression applicable to swap dealers
for annual bilateral offset with each of its estimated
540 counterparties per year. 39 http://www.bls.gov/oes/current/oes113031.htm. 40 7 U.S.C. 19(a).
and major swap participants and related other information that they may have (d) Execution means, with respect to
recordkeeping requirements. quantifying or qualifying the costs and a swap transaction, an agreement by the
Costs. With respect to costs, the benefits of the proposed rules with their counterparties (whether orally, in
Commission has determined that the comment letters. writing, electronically, or otherwise) to
nominal cost that would be borne by the terms of the swap transaction that
swap dealers and major swap List of Subjects in 17 CFR Part 23
legally binds the counterparties to such
participants to institute the policies and Antitrust, Commodity futures, terms under applicable law.
procedures and recordkeeping systems Conduct standards, Conflict of Interests, (e) Financial entity has the meaning
necessary to satisfy the new regulatory Major swap participants, Reporting and given to the term in section 2h(7)(C) of
requirements are far outweighed by the recordkeeping, Swap dealers, Swaps. the Act and any Commission regulations
benefits that would accrue to the For the reasons stated in this release, promulgated thereunder, provided that
financial system as a whole as a result the Commission proposes to amend 17 the term shall not include a swap dealer
of the implementation of the rules. It is CFR part 23, as proposed to be added in or major swap participant.
expected that any additional cost FR Doc. 2010–XXXX, published on (f) Fully offsetting swaps means swaps
imposed by the confirmation, portfolio XXXX (75 FR XXXX), as follows: of equivalent terms where no net cash
reconciliation, and portfolio flow would be owed to either
compression requirements of proposed PART 23—SWAP DEALERS AND counterparty after the offset of payment
§§ 23.501, 23.502, and 23.503 would be MAJOR SWAP PARTICIPANTS obligations thereunder.
minimal because the confirmation, (g) Material terms means all terms of
1. The authority citation for part 23 to
reconciliation, and compression a swap required to be reported in
read as follows:
processes required under the rules are accordance with part 45 of this chapter.
already part of a prudent operational Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, (h) Multilateral portfolio compression
processing regime that many, if not 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, exercise means an exercise in which
most, swap dealers and major swap 18, 19, 21. multiple swap counterparties wholly or
participants already undertake as part of 2. Subpart I, (consisting of §§ 23.500, partially terminate some or all of the
their ordinary course of business. 23.501, 23.502, and 23.503) is added to swaps outstanding among those
Moreover, most swap dealers and read as follows: counterparties and replace the swaps
major swap participants have adequate with a smaller number of swaps whose
Subpart I—Swap Documentation
resources and existing back office combined notional value is less than the
operational systems that are capable of Sec. combined notional value of the original
adjusting to the new regulatory 23.500 Definitions.
23.501 Swap confirmation.
swaps included in the exercise. The
framework without material diversion of 23.502 Portfolio reconciliation. replacement swaps may be with the
resources away from commercial 23.503 Portfolio compression. same or different counterparties.
operations. As discussed in the (i) Portfolio reconciliation means any
preamble, there are also numerous Subpart I—Swap Documentation process by which the two parties to one
third-party vendors that provide or more swaps:
confirmation, compression, and § 23.500 Definitions. (1) Exchange the terms of all swaps in
reconciliation services. Some of these For purposes of subpart I, the the swap portfolio between the
providers charge fees based on results following terms shall be defined as counterparties;
achieved (such as number of swaps provided. (2) Exchange each counterparty’s
compressed) and, thus, the cost would (a) Acknowledgment means a written valuation of each swap in the swap
be necessarily proportionate to the or electronic record of all of the terms portfolio between the counterparties as
benefit. of a swap signed and sent by one of the close of business on the
Benefits. With respect to benefits, the counterparty to the other. immediately preceding business day;
Commission has determined that the (b) Bilateral portfolio compression and
proposed regulations would require a exercise means an exercise in which two (3) Resolve any discrepancy in
swap dealer or major swap participant swap counterparties wholly or partially material terms and valuations.
to confirm, reconcile, and compress terminate some or all of the swaps (j) Processed electronically means to
their swaps in a manner that will result outstanding between those be entered into a swap dealer or major
in reduced risk, increased transparency, counterparties and replace those swaps swap participant’s computerized
and greater market integrity in the with a smaller number of swaps whose processing systems to facilitate
swaps market. The proposed swap combined notional value is less than the clearance and settlement.
confirmation, portfolio reconciliation, combined notional value of the original (k) Prudential regulator has the
and portfolio compression rules would swaps included in the exercise. meaning given to the term in section
further the goal of avoiding market (c) Confirmation means the 1a(39) of the Commodity Exchange Act
disruptions and financial losses to consummation (electronically or and includes the Board of Governors of
market participants and the general otherwise) of legally binding the Federal Reserve System, the Office
public. Among other benefits, the documentation (electronic or otherwise) of the Comptroller of the Currency, the
proposed rules would promote levels of that memorializes the agreement of the Federal Deposit Insurance Corporation,
operational scalability and resilience counterparties to all of the terms of a the Farm Credit Association, and the
that are most evident in periods of swap transaction. A confirmation must Federal Housing Finance Agency, as
sustained high volume and market be in writing (whether electronic or applicable to the swap dealer or major
volatility. Therefore, the Commission otherwise) and must legally supersede swap participant. The term also
believes it is prudent to prescribe these any previous agreement (electronically includes the Federal Deposit Insurance
proposed regulations. or otherwise). A confirmation is created Corporation, with respect to any
Public Comment. The Commission when an acknowledgment is manually, financial company as defined in section
invites public comment on its cost- electronically, or by some other legally 201 of the Dodd-Frank Wall Street
benefit considerations. Commentators equivalent means, signed by the Reform and Consumer Protection Act or
are also invited to submit any data or receiving counterparty. any insured depository institution
under the Federal Deposit Insurance (3) Each swap dealer and major swap (i) Once each business day for each
Act, and with respect to each affiliate of participant shall establish, maintain, swap portfolio that includes 300 or
any such company or institution. and enforce written policies and more swaps;
(l) Swap portfolio means all swaps procedures reasonably designed to (ii) Once each week for each swap
currently in effect between a particular ensure that it executes a confirmation portfolio that includes more than 50 but
swap dealer or major swap participant for each swap transaction that it enters fewer than 300 swaps on any business
and a particular counterparty. into with a counterparty that is a day during any week; and
(m) Swap transaction means any financial entity within the same (iii) Once each calendar quarter for
event that results in a new swap or in calendar day as execution and with a each swap portfolio that includes no
a change to the terms of a swap, counterparty that is not a swap dealer, more than 50 swaps at any time during
including execution, termination, major swap participant, or a financial the calendar quarter.
assignment, novation, exchange, entity not later than the next business (4) Each swap dealer and major swap
transfer, amendment, conveyance, or day after execution. Such procedures participant shall resolve immediately
extinguishing of rights or obligations of shall include a requirement that, prior any discrepancy in a material term of a
a swap. to execution of any such swap, the swap swap identified as part of a portfolio
(n) Unwind proposal means a dealer or major swap participant furnish reconciliation.
proposal offered by the sponsor of a to a prospective counterparty, or receive (5) Each swap dealer and major swap
multilateral portfolio compression from a prospective counterparty, a draft participant shall resolve any
exercise which, if accepted, would acknowledgment specifying all terms of discrepancy in a valuation identified as
wholly or partially terminate some or all the swap transaction other than the part of a portfolio reconciliation within
of the original swaps included in the applicable pricing and other relevant one business day. A difference between
exercise. terms that are to be expressly agreed at the lower valuation and the higher
(o) Valuation means the current execution. valuation of less than 10% of the higher
market value or net present value of a (b) Recordkeeping. (1) Each swap valuation need not be deemed a
swap. dealer and major swap participant shall discrepancy.
make and retain a record of: (b) Swaps with entities other than
§ 23.501 Swap confirmation. swap dealers or major swap
(i) The date and time of transmission
(a) Confirmation. to, or receipt from, a counterparty of any participants. Each swap dealer and
(1) Each swap dealer and major swap acknowledgment; major swap participant shall establish,
participant entering into a swap (ii) The date and time of transmission maintain, and enforce written policies
transaction with a counterparty that is a to, or receipt from, a counterparty of any and procedures for engaging in portfolio
swap dealer or major swap participant confirmation; reconciliation as follows for all swaps in
shall execute a confirmation for the (iii) The length of time between which its counterparty is neither a swap
swap transaction according to the acknowledgment and confirmation of dealer nor a major swap participant.
following schedule: each swap; and (1) Each swap dealer or major swap
(i) For any swap transaction that has (iv) The length of time between participant shall agree in writing with
been executed and processed execution and confirmation of each each of its counterparties on the terms
electronically, within 15 minutes of swap. of the portfolio reconciliation.
execution; (2) All records required to be (2) The portfolio reconciliation may
(ii) For any swap transaction that is maintained pursuant to this section be performed on a bilateral basis by the
not executed electronically, but that will shall be maintained in accordance with counterparties or by a qualified third
be processed electronically, within 30 § 1.31 and shall be made available party.
minutes of execution; or promptly upon request to any (3) The portfolio reconciliation shall
(iii) For any swap transaction that representative of the Commission or any be performed no less frequently than:
cannot be processed electronically by applicable prudential regulator, or with (i) Once each business day for each
the swap dealer or major swap regard to swaps defined in section swap portfolio that includes 500 or
participant, within the same calendar 1a(47)(A)(v), to any representative of the more swaps;
day as execution. Commission, the Securities and (ii) Once each week for each swap
(2) Each swap dealer and major swap Exchange Commission, or any portfolio that includes more than 100
participant entering into a swap applicable prudential regulator. but fewer than 500 swaps on any
transaction with a counterparty that is business day during any week; and
not a swap dealer or a major swap § 23.502 Portfolio reconciliation. (iii) Once each calendar quarter for
participant shall send an (a) Swaps with swap dealers or major each swap portfolio that includes no
acknowledgment of such swap swap participants. Each swap dealer more than 100 swaps at any time during
transaction according to the following and major swap participant shall engage the calendar quarter.
schedule: in portfolio reconciliation as follows for (4) Each swap dealer or major swap
(i) For any swap transaction that has all swaps in which its counterparty is participant shall establish, maintain,
been executed and processed also a swap dealer or major swap and enforce written procedures
electronically, within 15 minutes of participant. reasonably designed to resolve any
execution; (1) Each swap dealer or major swap discrepancies in the material terms or
(ii) For any swap transaction that is participant shall agree in writing with valuation of each swap identified as part
not executed electronically, but that will each of its counterparties on the terms of a portfolio reconciliation process in a
be processed electronically, within 30 of the portfolio reconciliation. timely fashion. A difference between the
minutes of execution; or (2) The portfolio reconciliation may lower valuation and the higher
(iii) For any swap transaction that be performed on a bilateral basis by the valuation of less than 10% of the higher
cannot be processed electronically by counterparties or by a qualified third valuation need not be deemed a
the swap dealer or major swap party. discrepancy.
participant, within the same calendar (3) The portfolio reconciliation shall (c) Reconciliation of cleared swaps.
day as execution. be performed no less frequently than: Nothing in this section shall apply to a
swap that is cleared by a derivatives following with respect to each cash payment, or other risk tolerance
clearing organization. multilateral portfolio compression levels set by the swap dealer or major
(d) Recordkeeping. A record of each exercise in which it participates: swap participant; and the results of the
swap portfolio reconciliation, including (i) Transactions included. Each swap compression, including the
a record of each discrepancy and the dealer and major swap participant shall identification of the swaps that were
length of time for resolution of each include in the multilateral portfolio terminated and any new swaps and the
discrepancy not resolved within one compression exercise all swaps in counterparties thereto that resulted from
business day, shall be maintained in which its counterparty is also a swap the exercise.
accordance with § 1.31 and shall be dealer or major swap participant that are
(2) All records required to be
made available promptly upon request eligible to be included in the particular
maintained pursuant to this section
to any representative of the Commission exercise, unless including the swap
shall be maintained in accordance with
or any applicable prudential regulator, would be reasonably likely to
§ 1.31 and shall be made available
or with regard to swaps defined in significantly increase the risk exposure
promptly upon request to any
section 1a(47)(A)(v) of the Act, to any of the swap dealer or major swap
representative of the Commission or any
representative of the Commission, the participant.
(ii) Counterparty, market, and cash applicable prudential regulator, or with
Securities and Exchange Commission, regard to swaps defined in section
or any applicable prudential regulator. payment risk tolerances.
Notwithstanding § 23.503(c)(3)(i), a 1a(47)(A)(v) of the Act, to any
§ 23.503 Portfolio compression. swap dealer or a major swap participant representative of the Commission, the
(a) Bilateral offset. Each fully may establish counterparty, market, Securities and Exchange Commission,
offsetting swap between a swap dealer cash payment, or other risk tolerances or or any applicable prudential regulator.
or major swap participant and another exclude specific potential Issued in Washington, DC on December 16,
swap dealer or major swap participant counterparties, provided that the swap 2010, by the Commission.
shall be terminated no later than the dealer or major swap participant does David A. Stawick,
close of business on the business day not use such risk tolerances or Secretary of the Commission.
following the day on which the counterparty exclusions to evade the
counterparties entered into the fully requirements of this regulation. Appendices to Confirmation, Portfolio
offsetting swap. (iii) Acceptance of unwind proposal. Reconciliation, and Portfolio
(b) Bilateral compression. Each swap No swap dealer or major swap Compression Requirements for Swap
dealer and major swap participant shall participant shall unreasonably Dealers and Major Swap Participants—
engage in a bilateral portfolio withhold, delay, or condition consent to Commissioners Voting Summary and
compression exercise for each swap in an unwind proposal. Statements of Commissioners
which the counterparty is also a swap (d) Policies and procedures.
(1) Each swap dealer and major swap Note: The following appendices will not
dealer or major swap participant at least appear in the Code of Federal Regulations.
once per calendar year, except to the participant shall establish, maintain,
extent that the swap dealer or major and enforce written policies and
Appendix 1—Commissioners Voting
swap participant and the counterparty procedures for engaging in the bilateral
Summary
have participated in a multilateral and multilateral portfolio compression
compression exercise involving such exercises required by this section with On this matter, Chairman Gensler and
swap during the same calendar year. respect to all swaps in which its Commissioners Dunn, Sommers, Chilton and
(c) Multilateral compression. Each counterparty is also a swap dealer or O’Malia voted in the affirmative. No
major swap participant. Commissioner voted in the negative.
swap dealer and major swap participant
shall engage in the following portfolio (2) Each swap dealer and major swap Appendix 2—Statement of Chairman
compression exercises for each swap in participant shall establish, maintain, Gary Gensler
which its counterparty is also a swap and enforce written policies and
procedures for periodically terminating I support the proposed rulemaking that
dealer or major swap participant: establishes essential business conduct
(1) Each swap dealer and major swap fully offsetting swaps and for
standards for swap dealers and major swap
participant shall participate in all periodically engaging in portfolio participants. Today’s rule establishes
multilateral portfolio compression compression exercises with respect to confirmation, portfolio reconciliation and
exercises required by Commission swaps in which its counterparty is an portfolio compression requirements for such
regulation or order. entity other than a swap dealer or major parties. The proposed regulations are
(2) Each swap dealer and major swap swap participant, to the extent that the consistent with Congress’s direction through
participant shall participate in all outstanding swaps are able to be the Dodd-Frank Act to prescribe standards
multilateral portfolio compression terminated through a portfolio for the timely and accurate confirmation,
exercises that are initiated, offered, or compression exercise. processing, netting and valuation of swap
(e) Recordkeeping. (1) Each swap transactions. One of the primary goals of
sponsored by any of the following
dealer and major swap participant shall Dodd-Frank Act was to establish a
entities to the extent that any swap in comprehensive regulatory framework that
the portfolio of the swap dealer or major make and maintain a record of each
would reduce risk, increase transparency and
swap participant is eligible for inclusion bilateral offset and each bilateral or promote market integrity. The proposed
in the exercise: multilateral portfolio compression regulations accomplish this goal by
(i) Any derivatives clearing exercise in which it participates, establishing procedures that will promote
organization of which the swap dealer including the beginning and completion legal certainty regarding swap transactions,
or major swap participant is a member; dates of the offset or exercise; the early resolutions of valuation disputes,
or included swaps and counterparties enhanced understanding of one
(ii) Any self-regulatory organization of thereto; the swaps that were eligible for counterparty’s risk exposure to another,
which the swap dealer or major swap inclusion in the exercise, but were reduced operational risk and increased
participant is a member. excluded by the swap dealer or major operational efficiency.
(3) Each swap dealer and major swap swap participant and the reason for the [FR Doc. 2010–32264 Filed 12–27–10; 8:45 am]
participant shall comply with the exclusion; the counterparty, market, BILLING CODE 6351–01–P

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Federal Register / Vol. 75, No.

248 / Tuesday, December 28, 2010 / Proposed Rules 81519

A, subpart I, section 40103. Under that 145.9.

because there are fewer trades to

dealers and major swap participants.

2009 (stating ‘‘Disputed margin calls have increased

will be able to efficiently reconcile their to establish written procedures

resolve valuation discrepancies in one 21 See ‘‘ISDA 2009 A Yearbook of ISDA

initiatives currently being considered Markets,’’ President’s Working Group on Financial

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