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This section of the FEDERAL REGISTERcontains notices to the public of the proposedissuance of rules and regulations. The

purpose of these notices is to give interestedpersons an opportunity to participate in therule making prior to the adoption of the finalrules.

Proposed Rules Federal Register

75432

Vol. 75, No. 232

Friday, December 3, 2010

1See Dodd-Frank Act, Public Law. 111203, 124Stat. 1376 (2010). The text of the Dodd-Frank Actmay be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

2Pursuant to Section 701 of the Dodd-Frank Act,Title VII may be cited as the Wall StreetTransparency and Accountability Act of 2010.

37 U.S.C. 1 et seq.4 In this release, the terms swap dealer and

major swap participant shall have the meaningsset forth in Section 721(a) of the Dodd-Frank Act,which added Sections 1a(49) and (33) of the CEA.However, Section 721(c) of the Dodd-Frank Actdirects the Commission to promulgate rules tofurther define, among other terms, swap dealerand major swap participant. The Commissionanticipates that such rulemaking will be completed

by the statutory deadline of July 15, 2011. See, e.g.,Http://Www.Cftc.Gov/Lawregulation/Otcderivatives/OTC_2_Definitions.Html.

5Commission regulation (Regulation) 190.01(f)defines commodity broker as any person who isregistered or required to register as a futurescommission merchant under the CommodityExchange Act including a person registered as suchunder Parts 32 and 33 of this chapter, and acommodity options dealer, foreign futurescommission merchant, clearing organization, andleverage transaction merchant with respect towhich there is a customer as those terms aredefined in this section, but excluding a personregistered as a futures commission merchant undersection 4f(a)(2) of the Commodity Exchange Act.Pursuant to the Bankruptcy Code, 11 U.S.C. 101 et

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Parts 23 and 190

RIN 3038AD28

Protection of Collateral ofCounterparties to Uncleared Swaps;Treatment of Securities in a Portfolio

Margining Account in a CommodityBroker Bankruptcy

AGENCY: Commodity Futures TradingCommission.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Commodity FuturesTrading Commission (theCommission) hereby proposes rules toimplement new statutory provisionsenacted by Title VII of the Dodd-FrankWall Street Reform and ConsumerProtection Act (the Dodd-Frank Act).Specifically, the proposed rulescontained herein impose requirements

on swap dealers (SDs) and major swapparticipants (MSPs) with respect tothe treatment of collateral posted bytheir counterparties to margin,guarantee, or secure uncleared swaps.Additionally, such proposed rulesensure that, for purposes of subchapterIV of chapter 7 of the Bankruptcy Code:Securities held in a portfolio marginingaccount that is a futures accountconstitute customer property; andowners of such account constitutecustomers.

DATES: Submit comments on or beforeFebruary 1, 2011.

ADDRESSES: You may submit comments,identified by RIN number 3038AD28,by any of the following methods:

Agency Web site, via its CommentsOnline process: http://comments.cftc.gov.Follow theinstructions for submitting commentsthrough the Web site.

Mail: David A. Stawick, Secretary ofthe Commission, Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street, NW.,Washington, DC 20581.

Hand Delivery/Courier: Same asmail above.

Federal eRulemaking Portal: http://www.regulations.gov.Follow theinstructions for submitting comments.

Please submit your comments by onlyone method.

All comments must be submitted inEnglish, or if not, accompanied by anEnglish translation. Comments will beposted as received to http://www.cftc.gov.You should submit onlyinformation that you wish to makeavailable publicly. If you wish theCommission to consider informationthat you believe is exempt fromdisclosure under the Freedom of

Information Act, a petition forconfidential treatment of the exemptinformation may be submitted accordingto the procedures established in CFTCRegulation 145.9, 17 CFR 145.9.

The Commission reserves the right,but shall have no obligation, to review,pre-screen, filter, redact, refuse orremove any or all of your submissionfrom http://www.cftc.govthat it maydeem to be inappropriate forpublication, such as obscene language.All submissions that have been redactedor removed that contain comments onthe merits of the rulemaking will be

retained in the public comment file andwill be considered as required under theAdministrative Procedure Act and otherapplicable laws, and may be accessibleunder the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:Robert B. Wasserman, AssociateDirector, Division of Clearing andIntermediary Oversight (DCIO), at 2024185092 or [email protected];Martin White, Assistant GeneralCounsel, at 2024185129 [email protected];Nancy Liao Schnabel,Special Counsel, DCIO, at 2024185344 or [email protected];in each

case, also at the Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street, NW.,Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

On July 21, 2010, President Obamasigned the Dodd-Frank Act.1 Title VII of

the Dodd-Frank Act 2 amended theCommodity Exchange Act (CEA) 3 toestablish a comprehensive newregulatory framework for swaps andcertain security-based swaps. Thelegislation was enacted to reduce risk,increase transparency, and promotemarket integrity within the financialsystem by, among other things: (i)Providing for the registration andcomprehensive regulation of SDs andMSPs;4 (ii) imposing mandatory clearingand trade execution requirements onclearable swap contracts; (iii) creatingrobust recordkeeping and real-timereporting regimes; and (iv) enhancingthe rulemaking and enforcementauthorities of the Commission with

respect to, among others, all registeredentities and intermediaries subject tothe oversight of the Commission.

Section 724(c) of the Dodd-Frank Actamends the CEA to add, as section 4s(l)thereof, provisions concerning the rightsof counterparties to SDs and MSPs withrespect to the treatment of margin foruncleared swaps. As discussed furtherin Part II of this preamble, these changesare implemented in proposed newSubpart L to Part 23 of Title 17, 23.600 through 23.609.

Section 713(c) of the Dodd-Frank Actamends the CEA to add, as section 20(c)thereof, a provision that requires theCommission to exercise its authority toclarify the legal status, in the event ofa commodity broker 5 bankruptcy, of (i)

VerDate Mar2010 16:15 Dec 02, 2010 Jkt 223001 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 E:\FR\FM\03DEP1.SGM 03DEP1
http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htmhttp://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htmhttp://comments.cftc.gov/http://comments.cftc.gov/http://www.regulations.gov/http://www.regulations.gov/http://www.cftc.gov/http://www.cftc.gov/http://www.cftc.gov/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.cftc.gov/http://www.cftc.gov/http://www.cftc.gov/http://comments.cftc.gov/http://comments.cftc.gov/http://www.regulations.gov/http://www.regulations.gov/http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htmhttp://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm

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75433Federal Register / Vol. 75, No. 232/ Friday, December 3, 2010/ Proposed Rules

seq., if a commodity broker experiences bankruptcy,it must be liquidated in accordance with chapter 7,subchapter IV (Subchapter IV). In the event ofsuch liquidation, Subchapter IV provides certainprotections for collateral that customers depositwith the commodity broker. Pursuant to itsauthority under Section 20 of the CEA, theCommission has interpreted Subchapter IV inpromulgating Regulation Part 190.

6Section 761(4) of the Bankruptcy Code, 11U.S.C. 761(4), defines commodity contract.

7Regulation 190.01(n) defines customerproperty as the property subject to pro ratadistribution in a commodity broker bankruptcywhich is entitled to the priority set forth in Section766(h) of the Bankruptcy Code and includes certaincash, securities, and other property as set forth in 190.08(a).

8 It should be noted that this rulemakingaddresses segregation of margin, and does notaddress what amount of margin, if any, acounterparty is required to post.

9Such requirements do not apply to variationmargin payments. Section 724(c) of the Dodd-Frank Act does not set forth a definition for suchterm. The Commission has proposed such adefinition below.

10See also CEA Section 4s(l)(4) (referring to caseswhere the counterparty does not choose to requiresegregation of margin).

securities in a portfolio marginingaccount held as a futures account, and(ii) an owner of such account. Asdiscussed further in Part III of thispreamble, these changes areimplemented in proposed amendmentsto 190.01(k) and 190.08(a)(1)(i).

Part IV below describes proposedtechnical amendments to Regulation

part 190 that are not required by theDodd-Frank Act, but rather address thechanges to 11 U.S.C. 764(b)implemented by Public Law 11116, theStatutory Time-Periods TechnicalAmendments Act of 2009. Specifically,such act changed the time period (i.e.,from five (5) business days to seven (7)calendar days) during which a transferofcommodity contracts 6 andcustomer property 7 becomes notavoidable by the trustee in a commoditybroker bankruptcy.

The Commission requests commenton all aspects of this release.

II. Segregation of Margin for SD andMSP Counterparties With Respect toUncleared Swaps

New Section 4s(l) of the CEA, enactedby Section 724(c) of the Dodd-FrankAct, sets forth certain requirementsconcerning the rights of counterpartiesof SDs and MSPs with respect to thesegregation of collateral supplied formargining, guaranteeing, or securinguncleared swaps.8 Such requirements 9include:

An SD or MSP must notify eachcounterparty at the beginning of a swaptransaction that the counterparty has the

right to require segregation of the fundsor other property that it supplies tomargin, guarantee, or secure itsobligations; and

At the request of the counterparty,the SD or MSP must segregate such

funds or other property with anindependent third party.

To implement the statute, theCommission proposes new subpart L topart 23 of title 17.

A. Regulation 23.600: Definitions

The Commission proposes to definesegregate according to its commonly-understood meaning: To keep two ormore items in separate accounts, and toavoid combining them in the sametransfer between two accounts.

The Commission has never beforedefined initial margin (for which acounterparty has the right to segregationpursuant to CEA Section 4s(l)) orvariation margin (for which acounterparty does not have such a right)in a regulation. The distinction betweeninitial margin and variation marginestablished in proposed 23.600 istemporally-based:

1. Initial MarginInitial margin is defined as an

amount calculated based on anticipatedexposure to future changes in the valueof a swap.

2. Variation Margin

Variation margin is defined as anamount calculated to cover the currentexposure arising from changes in themarket value of the position since thetrade was executed or the previous timethe position was marked to market.

The Commission may also consider,in a future rulemaking, placing an

expanded version of these definitions(to include initial and variation marginwith respect to futures and options onfutures) in Part 1, and incorporatingthose definitions by reference here.

The Commission seeks comment onthe appropriateness of these definitionsin this context, and on the potential useof such expanded definitions.

B. Regulation 23.601: Notification ofRight to Segregation

1. Required Notification

Proposed Regulation 23.601(a)incorporates the statutory requirementof Section 4s(l)(1)(A) of the CEA that aSD or MSP must notify eachcounterparty with respect to anuncleared swap that the counterpartyhas the right to require that initialmargin posted by that counterparty besegregated in accordance with theserules. The Commission interprets thelanguage of Section 4s(l)(1)(A) of theCEA that the counterparty must benotified * * * [of a] right to requiresegregation to mean that this right canbe grasped or renounced, at the election

of the counterparty.10 Congresssdescription as a right of what wouldotherwise be a simple matter forcommercial negotiation suggests thatthis decision is an important one, witha certain degree of favor given to anaffirmative election.

The Commission has not proposedany particular disclosure requirements

with respect to this notification. Shouldthe SD or MSP be required to disclosethe cost of segregation, whether the costof fees to be paid to the custodian (if theSD or MSP is aware of the amount ofsuch fees), or differences in the terms ofthe swap that the SD or MSP is willingto offer to the counterparty (e.g.,differences in the fixed interest rate foran interest rate swap) if the counterpartyelects or renounces the right tosegregation?

2. Limitation of RightVariation Margin

Proposed Regulation 23.601(b)incorporates the limitation in Section4s(l)(2)(B)(i) of the CEA that the right tosegregation does not apply to variationmargin.

3. Counterparty Notification

The Commission regards theinclusion of the term right to requiresegregation as requiring that thisdecision is taken at an appropriate levelof the counterparty organization.Proposed Regulation 23.601(c) requiresthat such notification be made to certainsenior decisionmakers, in descendingorder of preference. Notification is madeto the Chief Risk Officer, or the Chief

Executive Officer, or to the highest leveldecisionmaker for the counterparty. TheCommission seeks comment as towhether this list of decision-makers isappropriate, in particular, whether it isappropriate for Special Entities assuch term is defined in Section4s(h)(1)(C) of the CEA (e.g. amunicipality).

4. Required Confirmation

Proposed 23.601(d) requires that theSD or MSP must obtain from thecounterparty confirmation of receipt ofsuch notification by the specifieddecisionmaker, and the election to

require segregation or not, before theterms of the swap are confirmed. TheSD or MSP must maintain records ofsuch confirmation and election asbusiness records in accordance withRegulation 1.31.

5. Limitation of Responsibility To Notify

The requirement in Section 4s(l)(1)(A)of the CEA that notification be made at


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11 If the SD or MSP and the counterparty were tomake competing claims to the collateral, and if thecustodian did not have a means under theagreement among the parties to decide betweensuch claims without risking legal liability, thecustodian would likely choose to interplead the

collateral.12See 18 U.S.C. 1621 (Perjury Generally).13The importance of taking steps to ensure that

unauthorized withdrawals are not made isenhanced by the findings of the CommissionsDivision of Clearing and Intermediary Oversight inFinancial and Segregation Interpretation 101, 20FR 24768, 24770 (May 11, 2005) (Findings by bothCommission audit staff and the SROs of actualreleases of customer funds [from third-partycustodial accounts], without the requiredknowledge or approval of the FCMs, furtherdemonstrate that the risks associated with third-party custodial accounts are real and material, notmerely theoretical.).

14See generally Investment of Customer Fundsand Funds Held in an Account for Foreign Futuresand Foreign Options Transactions, 75 FR 67642,6765253 (Nov. 3, 2010) (Release proposingamendments to Commission Regulation 1.25).

the beginning of a swap transactioncould be read to require suchnotification at the beginning of eachswap transaction. Such repetitivenotification could, however, beredundant. On the other hand, theimportance of the decision discussedabove suggests that some periodicreconsideration might be appropriate.

Proposed 23.601(e) seeks to balancethese considerations by providing thatnotification of a particular counterpartyby a particular SD or MSP need only bemade once in any calendar year.

6. Power To Change Election WithRegard to Segregation

Proposed 23.601(f) makes clear thata counterpartys election to requiresegregation of initial margin, or not torequire such segregation, may bechanged at the discretion of thecounterparty upon delivery of writtennotice, and shall be applicable with

respect to swaps entered into betweenthe parties after such delivery.The Commission seeks comments on

the issues referred to in this section I(B).

C. Regulation 23.602: Requirements forSegregated Collateral

1. Independent Custodian and SeparateAccount

Pursuant to Section 4s(l)(3) of theCEA, proposed Regulation 23.602(a)(1)requires initial margin segregated inaccordance with an election underproposed Regulation 23.601 to besegregated with a custodian that is

independent of both the SD or MSP andthe counterparty. Proposed 23.602(a)(2) requires the initial marginto be held in an account designated asa segregated account for and on behalfof the counterparty. While, as notedabove, the right to segregation does notapply to variation margin, the regulationprovides the swap dealer or major swapparticipant and the counterparty mayagree that variation margin may also beheld in such an account.

Proposed 23.602(a)(1) does notrequire that the initial margin be held inan account that is independent of any

affiliate of the SD or MSP or thecounterparty, in order to permit partiesto engage in swaps transactions withaffiliates of their usual depositories.Comment is requested as to whether thisapproach is appropriate. Moreover, theproposed regulation does not specifywhich party (the counterparty, or the SDor MSP) has the right to designate acustodian, thus, by implication, leavingthe choice to the agreement of theparties. Is this approach appropriate?Should either party be entitled tochoose a custodian? If so, what

restrictions, if any, should be placed onthat choice?

2. Requirements for Custody Agreement

Proposed 23.602(b) is intended toprovide a balance between theminimum interests of (i) thecounterparty posting the initial margin,

(ii) the SD or MSP for whom the initialmargin is posted, and (iii) the custodian,while avoiding the necessity for time-consuming and expensive interpleaderproceedings.11 The custody agreementapplicable to such initial margin mustbe in writing, and must include thecustodian as a party. To ensure that theSD or MSP receives the initial marginpromptly in case it is entitled to do so,and that the initial margin is returned tothe counterparty in case it is entitled tosuch return, the agreement must providethat turnover of control shall be madepromptly upon presentation of a

statement in writing, signed by anauthorized person under penalty ofperjury, that one party is entitled tosuch turnover pursuant to an agreementbetween the parties. The requirement ofa signature under oath or under penaltyof perjury pursuant to 28 U.S.C. 1746 isintended to ensure that such statementis not lightly made.12 Otherwise,withdrawal of collateral may only bemade pursuant to the agreement of boththe counterparty and the SD or MSP,with the non-withdrawing party alsoreceiving immediate notice of suchwithdrawal.13 The Commission requests

comment on whether the foregoingapproach is appropriate, including onwhether a statement under penalty ofperjury should be required, and onwhether such a statement, if required,should be required to be based onpersonal knowledge.

D. Regulation 23.603: Investment ofSegregated Collateral

1. Limitations on Investments

Section 4s(l)(2)(B)(ii)(I) of the CEArefers to commercial arrangementsregarding the investment of segregatedfunds or other property that may only beinvested in such investments as the

Commission may permit by rule orregulation. Proposed 22.603(a)accordingly provides that segregatedinitial margin may only be investedconsistent with the standards forinvestment of customer funds that theCommission applies to exchange-tradedfutures, Regulation 1.25. Thatregulation has been designed to permitan appropriate degree of flexibility inmaking investments with segregatedproperty, while safeguarding suchproperty for the parties who have postedit, and decreasing the credit, market,and liquidity risk exposures of theparties who are relying on that margin.14

This regulation governs onlyinvestments of initial margin posted bythe counterparty, and does not governwhat collateral is eligible to be postedas such margin.

2. Commercial Arrangements RegardingInvestments and Allocations

As required by new Section4s(l)(2)(B)(ii) of the CEA, proposedRegulation 22.603(b) provides that theSD or MSP and the counterparty mayenter into any commercial arrangement,in writing, regarding the investment ofsegregated initial margin and the related

allocation of gains and losses resultingfrom such investment.

E. Regulation 23.604: Requirements forNon-Segregated Collateral

Section 4s(l)(4) of the CEA mandatesthat, if the counterparty does not chooseto require segregation, the SD or MSPshall report to the counterparty, on aquarterly basis, that the back officeprocedures of the swap dealer or majorswap participant relating to margin andcollateral requirements are incompliance with the agreement of thecounterparties. This provision isimplemented in proposed 22.604(a),which requires that such reports bemade no later than the fifteenth (15th)business day of each calendar quarterfor the preceding calendar quarter.Proposed Regulation 22.604(a) makesthe Chief Compliance Officer of the SDor MSP required by Section 4s(k) of theCEA responsible for such report.


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15See 11 U.S.C. 544, 545, 547, 548, 724(a).16See supra note 6.17See supra note 7.18See supra note 5.

195 U.S.C. 601 et seq.205 U.S.C. 603, 604.2147 FR 18618 (Apr. 30, 1982).22 Id. at 18619.23 Id. at 18620.24 Id.

Proposed 22.604(b) provides that thisobligation shall apply no earlier thanthe 90th calendar day after the firstswap is transacted between thecounterparties.

F. Effective Date

The Commission requests commenton the appropriate timing of

effectiveness for the final rules for Part23. Specifically, is six months after thepromulgation of final rules sufficient? Ifnot, please specify a recommended timeperiod, and explain in detail the reasonswhy a shorter period will not besufficient.

III. Portfolio Margining Accounts

Section 713(c) of the Dodd-Frank Actadded Section 20(c) of the CEA, whichspecifies that the Commission shallexercise its authority to ensure thatsecurities held in a portfolio marginingaccount carried as a futures account are

customer property and the owners ofthose accounts are customers for thepurposes of Subchapter IV. Toimplement this provision, theCommission proposes changes to 190.01(k) and 190.08(a)(1)(i).

A. Regulation 190.01(k): Definition ofCustomer

The customer portion of thisprovision is implemented in theproposed amendment to 190.01(k),which adds to the definition ofcustomer the sentence To the extentnot otherwise included, customer shallinclude the owner of a portfolio

margining account carried as a futuresaccount.

B. Regulation 190.08(a)(1)(i)(F):Definition of Customer Property

The customer property portion ofthis provision is implemented inproposed 190.08(a)(1)(i)(F), whichadds to the definition ofcustomerproperty the sentence To the extentnot otherwise included, securities heldin a portfolio margining account carriedas a futures account.

C. Effective Date of Proposal

The Commission believes that theserule amendments clarify existing law,and thus may be made effectiveimmediately upon promulgation of afinal rule. Comment is solicited withrespect to these conclusions.

IV. Statutory Time-Periods TechnicalAmendments Act of 2009

The purpose of this portion of therulemaking is to implement Public Law11116, the Statutory Time-PeriodsTechnical Amendments Act of 2009,which (in relevant part) changed the

time period in 11 U.S.C. 764(b),discussed below, from five (business)days to seven (calendar) days. As notedabove, these changes are not related tothe Dodd-Frank Act.

Certain sections of the BankruptcyCode15 provide the trustee of a debtorthe power to avoid (i.e., retract) certaintransfers of property from the debtor,

whether shortly before or after thebankruptcy filing, that would otherwiseallow a creditor to obtain more than thatcreditor would in a bankruptcydistribution. Section 764(b) of theBankruptcy Code provides that a trusteemay not avoid a transfer of commoditycontracts 16 or customer property 17that is authorized by the Commission,whether before or after the transfer,before the specified time period after thebankruptcy order for relief.

The change in the statutory deadlineshould be reflected in the relevantCommission regulations. Moreover,under current business and legalpractice, emergency matters (such astransfers during a bankruptcy) may beaccomplished outside of business hours.Accordingly, the words the close ofbusiness on the fourth business dayafter the order for relief are replaced bythe words 11:59 P.M. on the seventhday after the order for relief inproposed 190.02(e)(1) (trustee to usebest efforts to effect transfer before thistime), 190.02(f)(1) (deadline fortransfer of dealer option contracts), 190.06(g)(2)(i)(A) (prohibition ofavoidance of transfers of which theCommission is notified prior to the

transfer pursuant to 190.02(a)(2) anddoes not disapprove), and 190.06(g)(2)(ii) (prohibition ofavoidance of transfers at the direction ofthe Commission).

These amendments would only affectcommodity brokers 18 in bankruptcy,and are meant to make Part 190consistent with amendments to theBankruptcy Code. Accordingly, theCommission proposes to make theforegoing amendments to part 190effective immediately uponpromulgation of a final rule.

V. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act(RFA) was adopted to address theconcerns that government regulationsmay have a significant and/ordisproportionate effect on smallbusinesses. To mitigate this risk, theRFA requires agencies to conduct an

initial and final regulatory flexibilityanalysis for each rule of generalapplicability for which the agencyissues a general notice of proposedrulemaking.19 These analyses mustdescribe the impact of the proposed ruleon small entities, including a statementof the objectives and the legal bases forthe rulemaking; an estimate of the

number of small entities to be affected;identification of federal rules that mayduplicate, overlap, or conflict with theproposed rules; and a description of anysignificant alternatives to the proposedrule that would minimize anysignificant impacts on small entities.20

The proposed Regulations willimpose regulatory obligations on SDsand MSPs. The Commission has alreadyestablished certain definitions ofsmallentities to be used in evaluating theimpact of its rules on such small entitiesin accordance with the RFA.21 SDs andMSPs are new categories of registrant.

Accordingly, the Commission has notpreviously decided whether suchpersons are, in fact, small entities forpurposes of the RFA.

The Commission previously hasdetermined that FCMs should not beconsidered to be small entities forpurposes of the RFA. The Commissionsdetermination was based in part upontheir obligation to meet the minimumfinancial requirements established bythe Commission to enhance theprotection of customers segregatedfunds and protect the financialcondition of FCMs generally.22 LikeFCMs, SDs will be subject to minimumcapital and margin requirements, andare expected to comprise the largestglobal financial firms. The Commissionis required to exempt from designationentities that engage in a de minimislevel of swaps dealing in connectionwith transactions with or on behalf ofcustomers. Accordingly, for purposes ofthe RFA, the Commission is herebydetermining that SDs not be consideredsmall entities for essentially the samereasons that FCMs have previously beendetermined not to be small entities.

The Commission has also previouslydetermined that large traders are not

small entities for RFA purposes.23 TheCommission considered the size of atraders position to be the onlyappropriate test for purposes of largetrader reporting.24 MSPs maintainsubstantial positions in swaps, creatingsubstantial counterparty exposure that


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2544 U.S.C. 3501 et seq.26 Id.27See generally75 FR 66014, Notice of Proposed

Rulemaking, Privacy of Consumer FinancialInformation; Conforming Amendments UnderDodd-Frank Act(October 27, 2010).

28This estimate is based on the assumption thatthere will be about 250 SDs and 50 MSPs.

29The estimate of the number of counterpartiesreceiving disclosure from each swap dealer or major

swap participant takes into consideration thepossibility that a single counterparty may deal withmore than one swap dealer or major swapparticipant in a year. Thus, the total number ofrequired disclosures may exceed the total numberof counterparties making use of uncleared swapssubject to the disclosure requirement.

30The time and level of personnel required forthe disclosure required by proposed 23.604 inparticular transactions will depend, to some extent,on the specifics of the agreement of the parties withregard to the back-office procedures of the SDrelating to margin and collateral requirements, andthe extent to which such agreements with regard toprocedures are standardized at a particular SD. Theaverage burden figure thus reflects a varying levelof burden in particular transactions.

could have serious adverse effects onthe financial stability of the UnitedStates banking system or financialmarkets. Accordingly, for purposes ofthe RFA, the Commission is herebydetermining that MSPs not beconsidered small entities foressentially the same reasons that largetraders have previously been

determined not to be small entities.Accordingly, the Chairman, on behalf

of the Commission, hereby certifiespursuant to 5 U.S.C. 605(b) that theproposed rules will not have asignificant economic impact on asubstantial number of small entities.

B. Paperwork Reduction Act

Provisions of proposed newRegulation Part 23 include newinformation disclosure andrecordkeeping requirements thatconstitute the collection of informationwithin the meaning of the PaperworkReduction Act of 1995 (PRA).25 TheCommission therefore is submitting thisproposed collection of information tothe Office of Management and Budget(OMB) for review in accordance with44 U.S.C. 3507(d) and 5 CFR 1320.11.Under the PRA, an agency may notconduct or sponsor, and a person is notrequired to respond to, a collection ofinformation unless it displays acurrently valid control number.26 Thetitle for this collection of information isDisclosure and Retention of CertainInformation Relating to Swaps CustomerCollateral, OMB Control Number 3038NEW. The collection of information will

be mandatory. The information inquestion will be held by private entitiesand, to the extent it involves consumerfinancial information, may be protectedunder Title V of the Gramm-Leach-Bliley Act as amended by the Dodd-Frank Act.27 An agency may notconduct or sponsor, and a person is notrequired to respond to, a collection ofinformation unless it displays acurrently valid OMB control number.This collection of information has notyet been assigned an OMB controlnumber.

1. Information Provided by Reporting

EntitiesProposed 23.601 requires SDs and/

or MSPs to notify each counterparty toan uncleared swap transaction that thecounterparty may require that thecounterpartys initial margin be held ina segregated account. The notification

must be provided at the beginning ofeach swap transaction. However,notification need only be given once ayear to any particular counterparty. TheSD or MSP must provide thenotification to the chief risk officer ofthe counterparty, if such an officerexists; and otherwise to anotherappropriate official of the counterparty

as specified in the regulation. The SD orMSP must obtain a receipt of thenotification and maintain it as abusiness record. The purpose ofproposed 23.601 is to implementSection 4s(l)(1)(A) of the CEA whichrequires SDs and MSPs in unclearedswaps transactions to notifycounterparties that they have the rightto require segregation of their initialmargin deposits.

Proposed 23.604 requires the chiefcompliance officer of each SD or MSPto report on a quarterly basis to eachcounterparty that does not choose to

require segregation of initial margin onwhether or not the back-officeprocedures of the SD or MSP relating tomargin and collateral requirementswere, at any point during the previousquarter, not in compliance with theagreement of the counterparties. Thepurpose of this requirement is toimplement Section 4s(1)(4) of the CEA,which requires these reports.

The disclosure requirement ofproposed 23.601 is expected to applyto about 300 entities.28 Each such entitywill be required to make the requireddisclosure once each year to each of itscounterparties in uncleared swapstransactions. It is expected that eachdisclosure would require approximately0.3 hours of staff time by staff with asalary level of approximately $20 perhour. Because of the absence ofexperience under the new requirementsof the Dodd-Frank Act, it is uncertainwhat average number of unclearedswaps counterparties will be dealt withannually by swap dealers and majorswap participants. Assuming that eachof 14 major swap dealers or major swapparticipants makes the requireddisclosure to 5,00010,000counterparties per year, and each of the

286 remaining swap dealers or majorswap participants makes the requireddisclosure to 200 counterparties peryear, there would be a total ofapproximately 130,000200,000disclosures per year, and thus theestimated total annual burden would beapproximately 40,00060,000 hours and$800,000$1,200,000.29

The disclosure requirement ofproposed Regulation 23.604 will applyto the same 300 entities as therequirement of proposed Regulation23.601. Each such entity will berequired to make the required disclosurefour times each year to each of itsuncleared swaps counterparties thatdoes not choose to require segregation of

capital. Because there is as yet noexperience with the effect of thedisclosure of the right to segregation ofcollateral and other requirements of theDodd-Frank Act, it is uncertain howmany uncleared swaps counterpartieswill decline such segregation. Assumingthat half of all uncleared swapscounterparties do not choosesegregation of collateral, proposed 23.604 would require a total ofapproximately 260,000400,000disclosures annually. It is expected thateach disclosure would, on average,require approximately 0.3 hours of staff

time by staff with a salary level of about$30 per hour.30 The estimated totalannual burden would be approximately80,000120,000 hours and $2,400,000$3,500,000.

2. Information Collection Comments

The Commission invites the publicand other federal agencies to commenton any aspect of the reporting andrecordkeeping burdens discussed above.Pursuant to 44 U.S.C. 3506(c)(2)(B), theCommission solicits comments in orderto: (i) Evaluate whether the proposedcollection of information is necessaryfor the proper performance of the

functions of the Commission, includingwhether the information will havepractical utility; (ii) evaluate theaccuracy of the Commissions estimateof the burden of the proposed collectionof information; (iii) determine whetherthere are ways to enhance the quality,utility, and clarity of the information tobe collected; and (iv) minimize theburden of the collection of informationon those who are to respond, includingthrough the use of automated collectiontechniques or other forms of informationtechnology.


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317 U.S.C. 19(a).

Comments may be submitted directlyto the OMB Office of Information andRegulatory Affairs, by fax at (202) 3956566 or by e-mail [email protected] the Commission with a copy ofsubmitted comments so that allcomments can be summarized andaddressed in the final rule preamble.

Refer to the ADDRESSES section of thisnotice of proposed rulemaking forcomment submission instructions to theCommission. A copy of the supportingstatements for the collections ofinformation discussed above may beobtained by visiting RegInfo.gov. OMBis required to make a decisionconcerning the collection of informationbetween 30 and 60 days afterpublication of this release.Consequently, a comment to OMB ismost assured of being fully effective ifreceived by OMB (and the Commission)within 30 days after publication of this

notice of proposed rulemaking.C. Cost-Benefit Analysis

Section 15(a) of the CEA 31 requiresthe Commission to consider the costsand benefits of its actions before issuinga rulemaking under the CEA. By itsterms, Section 15(a) of the CEA does notrequire the Commission to quantify thecosts and benefits of a rule or todetermine whether the benefits of therulemaking outweigh its costs; rather, itrequires that the Commission considerthe costs and benefits of its actions.Section 15(a) of the CEA furtherspecifies that the costs and benefitsshall be evaluated in light of five broadareas of market and public concern: (1)Protection of market participants andthe public; (2) efficiency,competitiveness, and financial integrityof futures markets; (3) price discovery;(4) sound risk management practices;and (5) other public interestconsiderations. The Commission may inits discretion give greater weight to anyone of the five enumerated areas andcould in its discretion determine that,notwithstanding its costs, a particularrule is necessary or appropriate toprotect the public interest or to

effectuate any of the provisions oraccomplish any of the purposes of theCEA.

1. Cost-Benefit Analysis of ProposedPart 23

a. Summary of Proposed Requirements

Proposed Part 23 of the Commissionsregulations implements the requirementof newly-enacted Section 4s(l) of theCEA that counterparties to uncleared

swaps transactions with SDs and MSPsbe given the right to require to requiresegregation of their initial margin in anaccount separate from those of the SD orMSP. Proposed Part 23 also implementsthe statutory requirement that SDs andMSPs notify their counterparties of thisright. Additionally, amendments arebeing made to Part 190 of the

Commissions regulations that wouldclarify existing law, particularly that (i)customer property, for purposes ofRegulation Part 190, includes securitiesheld in a portfolio margining accountcarried as a futures account, and (ii)customers, for purposes of Regulationpart 190, includes owners of such aportfolio margining account. Technicalamendments also are being proposed forpart 190. These amendments wouldchange the deadline for certain actionsin bankruptcy proceedings to conformwith recent amendments to theBankruptcy Code, as well as current

business and legal practice.b. Costs

The costs directly imposed byproposed part 23 and the amendmentsto Part 190 relate to the protection ofmarket participants, the riskmanagement practices of marketparticipants, and the efficiency ofbankruptcy proceedings. If proposedpart 23 and the proposed amendmentsto Part 190 are not implemented, it willbe less likely that a market participantwill be informed of their option torequire segregation of their initialmargin from the assets of the SD or MSP

opposite which the market participantwill be transacting swaps. Thesegregation option is intended topreserve the assets of the marketparticipant in the event of an insolvencyof the SD or MSP.

c. Benefits

The benefits of proposed part 23relate to the protection of marketparticipants and the financial integrityof the futures and swap markets. Theproposed regulatons would ensure thatsegregated accounts for initial marginare available in all uncleared swaps

transactions involving SDs or MSPs andthat counterparties are informed of theiravailability. This could result in theincreased use of segregated accountswith resulting reduced risk of loss ofcollateral by counterparties in the eventof the insolvency of an SD or MSP andreduced chance of counterparty assetsbeing intentionally or inadvertentlymisused. In addition proposedRegulation Part 23 can be expected toincrease the likelihood that any lack ofuse of segregated collateral accounts byuncleared swaps counterparties is the

result of genuine choices bycounterparties and reduce thelikelihood that it is the result of inertia,market power, or other marketimperfections.

The definitions and technicalamendments being proposed for Part190 similarly are intended to relate tothe protection of market participants, as

well as to efficiency associated withbankruptcy proceedings. Thedefinitional changes are expected toincrease legal certainty in somecircumstances. The technicalamendments are intended to increasethe efficiency with which certain acts inbankruptcy proceedings of commoditybrokers are carried out by insuringconsistency between the Regulations,the Bankruptcy Code, and currentbankruptcy practice.

3. Public Comment

The Commission invites public

comment on its cost-benefitconsiderations. Commenters are also areinvited to submit any data or otherinformation that they may havequantifying or qualifying the costs andbenefits of the proposal with theircomment letters.

List of Subjects

17 CFR Part 23

Consumer protection, Reporting andrecordkeeping requirements, Swaps.

17 CFR Part 190

Bankruptcy, Brokers, Commodity

futures, Reporting and recordkeepingrequirements, Swaps.

For the reasons stated in this release,the Commission hereby proposes toamend 17 CFR part 23 as previouslyproposed in FR Doc. 201029024,published on November 23, 2010 (75 FR71379) and part 190 as follows:

PART 23SWAP DEALERS ANDMAJOR SWAP PARTICIPANTS

1. The authority citation for Part 23continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6p,6s, 9, 9a, 13b, 13c, 16a, 18, 19, 21 as amendedby Pub. L. 111203, 124 Stat. 1376 (Jul. 21,2010).

2. Add subpart L to read as follows:

Subpart LSegregation of Assets Held asCollateral in Uncleared Swap Transactions

Sec.23.600 Definitions.23.601 Notification of right to segregation.23.602 Requirements for segregated margin.23.603 Investment of segregated initial

margin.23.604 Requirements for non-segregated

margin.

mailto:[email protected]:[email protected]

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Subpart LSegregation of Assets Heldas Collateral in Uncleared SwapTransactions

23.600 Definitions.

Initial Margin means money,securities, or property posted by a partyto a swap as performance bond to coverpotential future exposures arising from

changes in the market value of theposition.

Margin means both Initial Marginand Variation Margin.

Segregate. To segregate two or moreitems is to keep them in separateaccounts, and to avoid combining themin the same transfer between twoaccounts.

Variation Margin means a paymentmade by a party to a swap to cover thecurrent exposure arising from changesin the market value of the position sincethe trade was executed or the previoustime the position was marked to market.

23.601 Notification of right tosegregation.

(a) At the beginning of each swaptransaction that is not submitted forclearing, a swap dealer or major swapparticipant shall notify eachcounterparty to such transaction that thecounterparty has the right to require thatany Initial Margin the counterpartyprovides in connection with suchtransaction be segregated in accordancewith 23.602 and 23.603 of this part.

(b) The right referred to in paragraph(a) of this section does not extend toVariation Margin.

(c) The notification referred to inparagraph (a) of this section shall bemade to the Chief Risk Officer, or, ifthere is no such Officer, the ChiefExecutive Officer, or if none, thehighest-level decisionmaker for thecounterparty.

(d) Prior to confirming the terms ofany such swap, the swap dealer or majorswap participant shall obtain from thecounterparty confirmation of receipt bythe person specified in paragraph (c) ofthis section of the notification specifiedin paragraph (a) of this section, and anelection to require such segregation or

not. The swap dealer or major swapparticipant shall maintain suchconfirmation and such election asbusiness records pursuant to 1.31 ofthis chapter.

(e) Notification pursuant to paragraph(a) of this section to a particularcounterparty by a particular swap dealeror major swap participant need only bemade once in any calendar year.

(f) A counterpartys election to requiresegregation of initial margin, or not torequire such segregation, may bechanged at the discretion of the

counterparty upon written noticedelivered to the swap dealer or majorswap participant, which changedelection shall be applicable to all swapsentered into between the parties aftersuch delivery.

23.602 Requirements for segregatedmargin.

(a) Initial margin that is segregatedpursuant to an election under 23.601of this part must be:

(1) Segregated with a custodian that isindependent of both the swap dealer ormajor swap participant and thecounterparty, and

(2) Held in an account segregated, anddesignated as such, for and on behalf ofthe counterparty. Such an account may,if the swap dealer or major swapparticipant and the counterparty agree,also hold Variation Margin.

(b) Any agreement for the segregationof Margin pursuant to this section shallbe in writing, shall include the

custodian as a party, and shall providethat:

(1) Turnover of control of suchmargin, either to the counterparty or tothe swap dealer or major swapparticipant, shall be made promptlyupon presentation to the custodian of astatement in writing, made under oathor under penalty of perjury as specifiedin 28 U.S.C. 1746, by an authorizedrepresentative of either such party,stating that such party is entitled tosuch control pursuant to an agreementbetween such parties. The other partyshall be immediately notified of such

turnover, and(2) Any withdrawal of such margin,other than pursuant to paragraph (b)(1)of this section, shall only be madepursuant to the agreement of both thecounterparty and the swap dealer ormajor swap participant, and notificationof such withdrawal shall be givenimmediately to the non-withdrawingparty.

23.603 Investment of segregated initialmargin.

(a) Initial Margin that is segregatedpursuant to an election under 23.601may only be invested consistent with

1.25 of this chapter.(b) Subject to paragraph (a) of this

section, the swap dealer or major swapparticipant and the counterparty mayenter into any commercial arrangement,in writing, regarding the investment ofsuch Initial Margin, and the relatedallocation of gains and losses resultingfrom such investment.

23.604 Requirements for non-segregatedmargin.

(a) The chief compliance officer ofeach swap dealer or major swap

participant shall report to eachcounterparty that does not choose torequire segregation of Initial Marginpursuant to 23.601(a), no later than thefifteenth business day of each calendarquarter, on whether or not the backoffice procedures of the swap dealer ormajor swap participant relating tomargin and collateral requirements

were, at any point during the previouscalendar quarter, not in compliancewith the agreement of thecounterparties.

(b) The obligation specified inparagraph (a) of this section shall applywith respect to each counterparty noearlier than the 90th calendar day afterthe date on which the first swap istransacted between the counterpartyand the swap dealer or major swapparticipant.

PART 190BANKRUPTCY

3. The authority citation for Part 190continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a,12, 19, and 24, and 11 U.S.C. 362, 546, 548,556, and 761766, unless otherwise noted.

4. Amend 190.01(k) to read asfollows:

190.01 Definitions.

* * * * *(k) Customershall have the same

meaning as that set forth in section761(9) of the Bankruptcy Code. To theextent not otherwise included, customershall include the owner of a portfolio

margining account carried as a futuresaccount.

* * * * *

190.02 [Amended]

5. In 190.02, amend paragraphs(e)(1) and (f)(1)(i) by removing thewords the close of business on thefourth business day after the order forrelief and adding, in their place, thewords 11:59 P.M. on the seventh dayafter the order for relief.

190.06 [Amended]

6. In 190.06, amend paragraph(g)(2)(i)(A) by removing the words theclose of business on the fourth businessday after the entry of the order for reliefand adding, in their place, the words11:59 P.M. on the seventh day after theorder for relief; and amend paragraph(g)(2)(ii) by removing the words theclose of business on the fourth businessday after the order for relief andadding, in their place, the words 11:59P.M. on the seventh day after the orderfor relief.

7. Amend 190.08 by redesignatingparagraph (a)(1)(i)(F) as


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