Federal Register, Volume 76 Issue 240 (Wednesday, December 14, 2011)[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]

[Proposed Rules]

[Pages 77728-77738]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-31646]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 37 and 38

RIN 3038-AD18

Process for a Designated Contract Market or Swap Execution

Facility To Make a Swap Available To Trade

AGENCY: Commodity Futures Trading Commission.

ACTION: Further notice of proposed rulemaking.

———————————————————————–

SUMMARY: The Commodity Futures Trading Commission (“Commission”) is

proposing regulations that establish a process for a designated

contract market (“DCM”) or swap execution facility (“SEF”) to make

a swap “available to trade” as set forth in new Section 2(h)(8) of

the Commodity Exchange Act (“CEA”) pursuant to Section 723 of the

[[Page 77729]]

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank

Act”). Only comments pertaining to the regulations proposed in this

document will be considered as part of this further notice of proposed

rulemaking (“Notice”).

DATES: Submit comments on or before February 13, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD18

and Process for a Designated Contract Market or Swap Execution Facility

to Make a Swap Available to Trade, by any of the following methods:

Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: David A. Stawick, Secretary of the Commission,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW., Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

http://www.cftc.gov. You should submit only information that you wish

to make available publicly. If you wish the Commission to consider

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the established procedures in

Sec. 145.9 of the Commission’s regulations, 17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of your

submission from www.cftc.gov that it may deem to be inappropriate for

publication, such as obscene language. All submissions that have been

redacted or removed that contain comments on the merits of the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

applicable laws, and may be accessible under the Freedom of Information

Act.

FOR FURTHER INFORMATION CONTACT: Bella Rozenberg, Associate Director,

Division of Market Oversight (“DMO”), (202) 418-5119,

[email protected], Amir Zaidi, Special Counsel, DMO, (202) 418-6770,

[email protected], or Nhan Nguyen, Attorney Advisor, DMO, (202) 418-5932,

[email protected], Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

The Dodd-Frank Act 1 requires that swap transactions subject to

the clearing requirement 2 must be executed on a DCM or SEF,3

subject to certain exceptions. Under Section 2(h)(8)(B) of the CEA, the

exceptions to the trade execution requirement are if no board of trade

4 or SEF “makes the swap available to trade” or the related

transaction is subject to the clearing exception under Section 2(h)(7)

(i.e., the end-user exception).5

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1 See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (2010).

2 Section 723(a)(3) of the Dodd-Frank Act amended the CEA to

add a clearing requirement. This clearing requirement, under new

Section 2(h)(1)(A) of the CEA, provides that “[i]t shall be

unlawful for any person to engage in a swap unless that person

submits such swap for clearing to a derivatives clearing

organization that is registered under this Act or a derivatives

clearing organization that is exempt from registration under this

Act if the swap is required to be cleared.”

3 Section 723(a)(3) of the Dodd-Frank Act amended the CEA to

add a trade execution requirement. This trade execution requirement,

under new Section 2(h)(8)(A) of the CEA, provides that with respect

to transactions involving swaps subject to the clearing requirement

of Section 2(h)(1), “counterparties shall (i) execute the

transaction on a board of trade designated as a contract market

under section 5; or (ii) execute the transaction on a swap execution

facility registered under 5h or a swap execution facility that is

exempt from registration under section 5h(f) of this Act.”

4 The logical interpretation of the phrase “board of trade”

in Section 2(h)(8)(B) means a board of trade designated as a

contract market given such reference in Section 2(h)(8)(A).

5 Section 2(h)(7) of the CEA provides an exception to the

clearing requirement (“the end-user exception”) if one of the

counterparties to a swap (i) is not a financial entity, (ii) is

using the swap to hedge or mitigate commercial risk, and (iii)

notifies the Commission how it generally meets its financial

obligations associated with entering into a non-cleared swap.

—————————————————————————

On January 7, 2011, the Commission published proposed rules,

guidance, and acceptable practices (“SEF NPRM”) to implement certain

statutory provisions for SEFs enacted by Title VII of the Dodd-Frank

Act.6 In the SEF NPRM, the Commission proposed, among other rules,

Sec. 37.10 related to implementation of the available to trade

provision under Section 2(h)(8) of the CEA.7 Proposed Sec. 37.10

requires each SEF to conduct an annual review and assessment of whether

it has made a swap available for trading and to provide a report to the

Commission regarding its assessment.8 In its review and assessment,

the SEF may consider the frequency of transactions, open interest, and

any other factor requested by the Commission.9 Proposed Sec. 37.10

also requires that all SEFs are required to treat a swap as made

available for trading, if at least one SEF has made the same or an

economically equivalent swap available for trading.10

—————————————————————————

6 Core Principles and Other Requirements for Swap Execution

Facilities, 76 FR 1214 (Jan. 7, 2011).

7 76 FR at 1241.

8 Id.

9 Id.

10 Id.

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The SEF NPRM sought general public comment regarding the meaning of

the phrase “made available for trading.” 11 The Commission also

asked for comment on two specific questions: (1) Whether SEFs should

consider the number of market participants trading a particular swap,

and, if so, whether there should be a required minimum number of

participants (e.g., two or three participants); and (2) whether SEFs

should consider any other factors or processes to make the

determination that swaps are made available for trading.12 The

Commission received 26 comments on the proposed “available to trade”

process.13 The Commission has considered these comments, which are

discussed below in the next section, in developing this Notice.

—————————————————————————

11 76 FR at 1222. Comments on all aspects of the SEF NPRM were

due by March 8, 2011. On May 4, 2011, the Commission reopened the

SEF NPRM’s comment period through June 3, 2011, as part of the

global extension of comment periods for various rulemakings

implementing the Dodd-Frank Act to allow the public additional time

to comment on the proposed new regulatory framework for swaps. See

Reopening and Extension of Comment Periods for Rulemakings

Implementing the Dodd-Frank Wall Street Reform and Consumer

Protection Act, 76 FR 25274 (May 4, 2011).

12 76 FR at 1222.

13 These comments are available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=955.

—————————————————————————

On December 22, 2010, the Commission also published proposed rules,

guidance, and acceptable practices (“DCM NPRM”) to implement certain

statutory provisions for DCMs enacted by Title VII of the Dodd-Frank

Act.14 The DCM NPRM did not establish any obligation for DCMs under

Section 2(h)(8) of the CEA, but it did establish certain swap reporting

obligations.15

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14 Core Principles and Other Requirements for Designated

Contract Markets, 75 FR 80572 (Dec. 22, 2010).

15 See e.g., proposed Sections 38.8, 38.10, and 38.451. Core

Principles and Other Requirements for Designated Contract Markets,

75 FR 80572 (Dec. 22, 2010).

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[[Page 77730]]

II. Notice

A. Introduction

In this Notice, the Commission is proposing regulations to

establish a process for a DCM or SEF to make a swap “available to

trade” under Section 2(h)(8) of the CEA.16 The proposed regulations

would be included in proposed parts 37 and 38 of the Commission’s

regulations to implement the available to trade provision in Section

2(h)(8) of the CEA.

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16 Sections 5(d)(1) and 5h(f)(1) of the CEA require DCMs and

SEFs, respectively, to comply with any requirement that the

Commission may impose by rule or regulation pursuant to Section

8a(5) of the CEA, 7 U.S.C. 12a(5), which authorizes the Commission

to promulgate such regulations as, in the judgment of the

Commission, are reasonably necessary to effectuate any of the

provisions or to accomplish any of the purposes of the CEA. In

addition, Section 721(b) of the Dodd-Frank Act provides the

Commission with authority to adopt rules to define “[any] term

included in an amendment to the Commodity Exchange Act * * * made by

[the Dodd-Frank Act].”

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B. Process for a Designated Contract Market or Swap Execution Facility

To Make a Swap Available To Trade Under Section 2(h)(8) of the CEA

1. Procedure To Make a Swap Available to Trade–Proposed Sec. Sec.

37.10(a) and 38.12(a)

a. Comments Regarding Available To Trade Process

A key theme to emerge from the SEF NPRM comments is that the

Commission should establish a process for determining when a swap is

available to trade that includes greater Commission involvement.17

For example, one commenter suggested that a SEF certify to the

Commission those swaps that qualify as available to trade and that,

following a public notice and comment period, the Commission confirm

(or reject) the SEF’s certification.18 Similarly, another commenter

recommended that a SEF submit to the Commission those swaps it

determines to be available to trade and that the Commission review the

submission and provide at least a thirty-day public comment period

regarding its decision.19 Another commenter encouraged the Commission

to institute a process through which market participants could petition

the Commission to review the appropriateness of a SEF’s determination

that a swap is available to trade.20

—————————————————————————

17 E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

18-19; Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 3;

Letter from Andrew Ertel, Evolution Markets Inc., dated Mar. 8, 2011

at 9; Letter from Wholesale Market Brokers’ Association, Americas,

dated Mar. 8, 2011 at 17-18.

18 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19.

19 Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 3.

20 Letter from Andrew Ertel, Evolution Markets Inc., dated

Mar. 8, 2011 at 9.

—————————————————————————

Some commenters requested that the Commission determine whether a

particular swap is available to trade 21 while other commenters

requested that SEFs make this determination.22 Many commenters that

supported a Commission determination noted that SEFs may have

incentives to prematurely make certain swaps available to trade in

order to mandate trading in these instruments on or through SEFs.23

The commenters that supported a SEF determination stated that SEFs

should have some discretion whether a swap is made available to

trade.24

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21 E.g., Letter from Craig Donohue, CME Group Inc., dated Mar.

8, 2011 at 10; Letter from Patrick Durkin, Barclays Capital, dated

Mar. 8, 2011 at 11; Letter from Kevin Budd and Todd Lurie, MetLife,

dated Mar. 8, 2011 at 4; Letter from Richard McVey, MarketAxess

Corporation, dated Mar. 8, 2011 at 27; Letter from Timothy Cameron,

Securities Industry and Financial Markets Association Asset

Management Group, dated Mar. 8, 2011 at 11; Letter from Richard

Whiting, Financial Services Roundtable, dated Mar. 8, 2011 at 8;

Letter from R. Martin Chavez, Goldman, Sachs & Co., dated Mar. 8,

2011 at 3; Letter from Warren Davis, Sutherland Asbill & Brennan

LLP, on behalf of the Federal Home Loan Banks, dated Jun. 3, 2011 at

14; Letter from Wayne Pestone, FX Alliance Inc., dated Nov. 4, 2011

at 9-10.

22 E.g., Letter from Wholesale Market Brokers’ Association,

Americas, dated Mar. 8, 2011 at 17-18; Letter from Lee Olesky and

Douglas Friedman, Tradeweb Markets LLC, dated Mar. 8, 2011 at 8-9;

Letter from Coalition for Derivatives End-Users, dated Mar. 8, 2011

at 7-8.

23 E.g., Letter from Craig Donohue, CME Group Inc., dated Mar.

8, 2011 at 10; Letter from Patrick Durkin, Barclays Capital, dated

Mar. 8, 2011 at 11; Letter from Kevin Budd and Todd Lurie, MetLife,

dated Mar. 8, 2011 at 4; Letter from Timothy Cameron, Securities

Industry and Financial Markets Association Asset Management Group,

dated Mar. 8, 2011 at 11; Letter from Wayne Pestone, FX Alliance

Inc., dated Nov. 4, 2011 at 9-10.

24 E.g., Letter from Wholesale Market Brokers’ Association,

Americas, dated Mar. 8, 2011 at 17-18; Letter from Lee Olesky and

Douglas Friedman, Tradeweb Markets LLC, dated Mar. 8, 2011 at 8-9;

Letter from Coalition for Derivatives End-Users, dated Mar. 8, 2011

at 7-8.

—————————————————————————

In light of these comments and the fact that the DCM NPRM did not

establish any obligation for DCMs under Section 2(h)(8) of the CEA, the

Commission has determined to issue this Notice.

b. Rule Submission Filing Procedure–Proposed Sec. Sec. 37.10(a) and

38.12(a)

Proposed Sec. Sec. 37.10(a) and 38.12(a) set forth the filing

procedure that SEFs and DCMs would utilize in order to demonstrate that

a swap is available to trade. Under this proposed procedure, a DCM or

SEF would initially determine that a swap is available to trade. The

Commission views such determination as a trading protocol issued by a

DCM or SEF. Such trading protocol falls under the definition of a rule

under Sec. 40.1 of the Commission’s regulations.25 Therefore,

pursuant to Section 5c(c) of the CEA, DCMs and SEFs would be required

as “registered entities” 26 to submit make available to trade

determinations to the Commission, either for approval or self-

certification, pursuant to the filing procedures of part 40 of the

Commission’s regulations.27

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25 Section 40.1(i) defines rule as “any constitutional

provision, article of incorporation, bylaw, rule, regulation,

resolution, interpretation, stated policy, advisory, terms and

conditions, trading protocol, agreement or instrument corresponding

thereto, including those that authorize a response or establish

standards for responding to a specific emergency, and any amendment

or addition thereto or repeal thereof, made or issued by a

registered entity or by the governing board thereof or any committee

thereof, in whatever form adopted.”

26 The term “registered entity” is defined in the CEA to

include both DCMs and SEFs. See Section 1a(40) of the CEA, 7 U.S.C.

1a(40).

27 See Sections 40.5 and 40.6 and Provisions Common to

Registered Entities, 76 FR 44776 (Jul. 27, 2011). The Commission

notes that the proposed procedures to make a swap available to trade

are different than the procedures to list a swap for trading. A DCM

or SEF may list a swap for trading by complying with the

certification or approval procedures under Sec. Sec. 40.2 or 40.3

of the Commission’s regulations. Under the certification procedures

of Sec. 40.2, a DCM or SEF may list a product on the business day

following the Commission’s receipt of the submission, if received by

the open of business. Under the approval procedures of Sec. 40.3, a

product is deemed approved by the Commission 45 days after receipt

by the Commission or at the conclusion of an extended review period.

A DCM or SEF may list the submitted product at that time. The

Commission notes, however, the mere listing or trading of a swap on

a DCM or SEF would not mean that the swap is available to trade

within the meaning of Section 2(h)(8) of the CEA. The Commission

further notes that a DCM or SEF must submit an available to trade

filing at the same time or after submitting a filing under Sections

40.2 or 40.3.

—————————————————————————

Specifically, under this proposal, a DCM or SEF would be required

to submit its determination that a swap is available to trade under

Sec. 40.5 or Sec. 40.6 of the Commission’s regulations. Under Sec.

40.5, a registered entity may request Commission approval of a new rule

prior to its implementation.28 Section 40.5(a) requires, among other

things,29 that a registered entity that requests Commission prior

approval provide an explanation and analysis of that

[[Page 77731]]

proposed rule and its compliance with applicable provisions of the CEA,

including core principles, and the Commission’s regulations

thereunder.30 This explanation and analysis would detail the manner

in which the SEF or DCM considered the factors under proposed

Sec. Sec. 37.10(b) or 38.12(b). Sections 40.5(c) and (d) provide the

Commission a 45-day review period, which may be extended for an

additional 45 days in specified circumstances.31 At any time during

its review, the Commission may notify the registered entity that it

will not, or is unable to, approve a rule because it is inconsistent or

appears to be inconsistent with the CEA or the Commission’s

regulations.32

—————————————————————————

28 Section 40.5(a).

29 E.g., Section 40.5(a)(6) requires a registered entity to

post notice and a copy of the rule submission on its Web site,

Section 40.5(a)(7) requires a registered entity to provide

additional information which may be beneficial to the Commission in

analyzing a new rule, and Section 40.5(a)(8) requires a registered

entity to provide in the rule submission a brief explanation of any

substantive opposing views.

30 Section 40.5(a)(5). This provision also requires, if

applicable, a description of the anticipated benefits to market

participants or others, any potential anticompetitive effects on

market participants or others, and how the rule fits into the

registered entity’s framework of self-regulation.

31 Sections 40.5(c) and (d). In determining whether to extend

the review period, the Commission will consider whether the proposed

rule raises novel or complex issues, the submission is incomplete,

or the requestor does not respond completely to Commission questions

in a timely manner. Section 40.5(d)(1).

32 Section 40.5(e).

—————————————————————————

Similar to the approval procedures under Sec. 40.5, if a

registered entity chooses to submit its available to trade

determination under the certification procedures of Sec. 40.6, then

the registered entity must provide to the Commission an explanation and

analysis of the proposed rule and a certification that the rule

complies with the CEA and the Commission’s regulations thereunder.33

As in Sec. 40.5, the explanation and analysis would detail the manner

in which the SEF or DCM considered the factors under proposed

Sec. Sec. 37.10(b) or 38.12(b). Sections 40.6(b) and (c) provide the

Commission 10 business days to review a rule before it is deemed

certified and can be made effective, unless the Commission issues a

stay of the certification for additional 90 days from the date of

notification to the registered entity.34 If the Commission issues a

stay of certification, then it must provide a 30-day public comment

period for the proposed rule.35 During a stay period, the Commission

may notify the registered entity that it objects to the proposed

certification on the grounds that the proposed rule is inconsistent

with the CEA or the Commission’s regulations.36

—————————————————————————

33 Section 40.6(a). Section 40.6(a)(2) requires a registered

entity to post notice and a copy of the rule submission on its Web

site, Section 40.6(a)(7)(vi) requires a registered entity to provide

in the rule submission a brief explanation of any substantive

opposing views, and Section 40.6(a)(8) requires a registered entity

to provide, if requested by Commission staff, additional evidence,

information, or data that may be beneficial to the Commission in

conducting due diligence of the filing.

34 Sections 40.6(b) and (c). In determining whether to stay a

certification, the Commission will consider whether the rule

presents novel or complex issues, is accompanied by inadequate

explanation, or is potentially inconsistent with the CEA. Section

40.6(c)(1).

35 Section 40.6(c)(2).

36 Section 40.6(c)(3).

—————————————————————————

Under this Notice, if the Commission either approves a DCM’s or

SEF’s rule providing that a swap is available to trade or permits a

certified available to trade filing to become effective, then the swap

involved would be deemed available to trade.37 If that swap also is

subject to the clearing requirement, pursuant to CEA Section 2(h)(8),

the swap must be executed pursuant to the rules of a DCM or SEF.38

Under this Notice, until such time, the swap is not subject to the CEA

Section 2(h)(8) trade execution requirement.

—————————————————————————

37 See proposed Sec. Sec. 37.10(c) and 38.12(c). Under these

sections, if a SEF or DCM makes a swap available to trade, all other

SEFs and DCMs listing or offering for trading such swap and/or any

economically equivalent swap, shall make those swaps available to

trade for purposes of the trade execution requirement. The

Commission notes that if a DCM or SEF makes a swap available to

trade, these proposed provisions would not require other DCMs and

SEFs to list or offer that swap, or an economically equivalent swap,

for trading.

38 See Swap Transaction Compliance and Implementation

Schedule: Clearing and Trade Execution Requirements under Section

2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011), for the time frame in

which a swap would be subject to the trade execution requirement.

The Commission notes that the available to trade determination may

precede the clearing requirement and vice versa; however, the trade

execution requirement would not be in effect until the clearing

requirement takes effect.

—————————————————————————

The Commission views the proposed procedure for DCMs and SEFs to

make a swap available to trade as a balanced approach whereby a DCM or

SEF–the facilities that may be most familiar with the trading of these

swaps–has responsibility to make a swap available to trade, while the

Commission has a role in reviewing such determination. Additionally,

this proposed procedure is responsive to comments that the Commission

should establish a process for DCMs and SEFs to make a swap available

to trade, with Commission involvement in the determination. The

Commission notes that as it gains experience with its oversight of

swaps markets, it may decide, in its discretion, to determine that a

swap is available to trade.

2. Factors To Consider To Make a Swap Available To Trade–Proposed

Sec. Sec. 37.10(b) and 38.12(b)

a. Comments Regarding Factors To Consider

Many commenters to the SEF NPRM supported a liquidity requirement

for a determination that a swap is available to trade.39 One

commenter, for example, stated that “Congress intended for the

Commission[] to establish a higher liquidity threshold for mandatory

execution than for mandatory clearing, and that a swap is not

`available to trade’ merely because it is listed on a DCM/exchange or

SEF.” 40 However, other commenters said that a minimum level of

liquidity should not be required for a determination that a swap is

available to trade.41 One commenter noted that a determination that a

swap is available to trade should apply to each swap that is subject to

the clearing requirement and that the determination should not require

a minimum level of trading activity.42

—————————————————————————

39 E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

18; Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 2; Letter

from Jeremy Barnum and Don Thompson, J.P. Morgan, dated Mar. 8, 2011

at 9; Letter from Robert Pickel and Kenneth Bentsen, International

Swaps and Derivatives Association and Securities Industry and

Financial Markets Association, dated Mar. 8, 2011 at 8; Letter from

R. Martin Chavez, Goldman, Sachs & Co., dated Mar. 8, 2011 at 3;

Letter from Craig Donohue, CME Group Inc., dated Mar. 8, 2011 at 9.

40 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18.

41 Letter from Dennis Kelleher, Better Markets, Inc., dated

Mar. 8, 2011 at 10-11; Letter from Wholesale Market Brokers’

Association, Americas, dated Mar. 8, 2011 at 17-18; Letter from Ian

K. Shepherd, Alice Corporation, dated May 31, 2011 at 7.

42 Letter from Dennis Kelleher, Better Markets, Inc., dated

Mar. 8, 2011 at 10-11.

—————————————————————————

Many commenters also recommended specific liquidity factors that a

SEF should consider in determining whether a swap is available to trade

such as trade frequency and average transaction size, bid/offer

spreads, number and types of market participants, and volume.43 Some

commenters further suggested that the Commission set mandatory

objective and transparent liquidity factors based upon an empirical

analysis of swap

[[Page 77732]]

trading data.44 One commenter stated that the Commission should

undertake empirical analyses of swap market liquidity to set specific

quantitative thresholds for metrics, such as minimum average daily

trading volume and number of transactions.45 Another commenter

asserted that objective measures for determining when a swap is

available to trade will provide for a consistent and meaningful

assessment.46

—————————————————————————

43 E.g., Letter from Kevin Gould, Markit, dated Mar. 8, 2011

at 2; Letter from Craig Donohue, CME Group Inc., dated Mar. 8, 2011

at 10; Letter from John Gidman, Association of Institutional

Investors, dated Jun. 10, 2011 at 3; Letter from Mark Vonderheide

and Robert Creamer, Geneva Energy Markets, LLC, dated Jul. 29, 2011

at 2; Meeting between Commission staff and Evolution Markets and

Ogilvy Government Relations, dated Jan. 19, 2011.

44 E.g., Letter from Edward Rosen, Cleary Gottlieb Steen &

Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

18; Letter from Ben Macdonald, Bloomberg L.P., dated Jun. 3, 2011 at

3; Letter from Stuart Kaswell, Managed Funds Association, dated Mar.

8, 2011 at 3-4; Letter from American Benefits Council and Committee

on Investment of Employee Benefit Assets, dated Mar. 8, 2011 at 4-5.

45 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18.

46 Letter from Ben Macdonald, Bloomberg L.P., dated Jun. 3,

2011 at 3.

—————————————————————————

b. Factors To Consider–Proposed Sec. Sec. 37.10(b) and 38.12(b)

Proposed Sec. Sec. 37.10(b) and 38.12(b) state that, to make a

swap available to trade, for purposes of Section 2(h)(8) of the CEA, a

SEF or DCM shall consider, as appropriate, the following factors with

respect to such swap: (1) Whether there are ready and willing buyers

and sellers; (2) The frequency or size of transactions on SEFs, DCMs,

or of bilateral transactions; (3) The trading volume on SEFs, DCMs, or

of bilateral transactions; (4) The number and types of market

participants; (5) The bid/ask spread; (6) The usual number of resting

firm or indicative bids and offers; (7) Whether a SEF’s trading system

or platform or a DCM’s trading facility will support trading in the

swap; or (8) Any other factor that the SEF or DCM may consider

relevant.47 No single factor would be dispositive, as the DCM or SEF

may consider any one factor or several factors to make a swap available

to trade. The Commission notes that, as the swaps markets evolve and

the Commission gains experience with overseeing these markets, it may

consider setting objective factors based upon an empirical analysis of

swap trading data in a future rulemaking.

—————————————————————————

47 As noted above, the mere listing or trading of a swap on a

DCM or SEF does not mean that the swap is available to trade.

—————————————————————————

3. Economically Equivalent Swap–Proposed Sec. Sec. 37.10(c) and

38.12(c)

a. Comments Regarding Economically Equivalent Swaps

In the SEF NPRM, the Commission proposed that all SEFs are required

to treat a swap as “made available for trading,” if at least one SEF

has made the same or an economically equivalent swap available for

trading.48 Many commenters to the SEF NPRM requested that the

Commission clarify the term economically equivalent swap and some

commenters provided recommendations as to how it should be defined.49

Several commenters recommended a stringent fungibility test to

determine whether a particular swap is economically equivalent to one

made available to trade on another SEF, such that a derivatives

clearing organization (“DCO”) would recognize the swaps as mutually

off-settable without residual market risk.50 Another commenter

suggested that only identical swaps should be made available to

trade.51 Furthermore, one commenter cautioned that without a

stringent fungibility test there may be unintended consequences,

including unduly concentrating trading volume on a single SEF or

preventing participants from entering into customized swaps in the same

general swap category.52

—————————————————————————

48 76 FR 1241.

49 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19; Letter

from Robert Pickel and Kenneth Bentsen, International Swaps and

Derivatives Association and Securities Industry and Financial

Markets Association, dated Mar. 8, 2011 at 9; Letter from Wholesale

Market Brokers’ Association, Americas, dated Mar. 8, 2011 at 18;

Letter from Richard Whiting, Financial Services Roundtable, dated

Mar. 8, 2011 at 7; Letter from Patrick Durkin, Barclays Capital,

dated Mar. 8, 2011 at 11.

50 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19; Letter

from Robert Pickel and Kenneth Bentsen, International Swaps and

Derivatives Association and Securities Industry and Financial

Markets Association, dated Mar. 8, 2011 at 9; Letter from Patrick

Durkin, Barclays Capital, dated Mar. 8, 2011 at 11.

51 Letter from Richard Whiting, Financial Services Roundtable,

dated Mar. 8, 2011 at 7.

52 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 19.

—————————————————————————

b. Economically Equivalent Swap–Proposed Sec. Sec. 37.10(c) and

38.12(c)

Under proposed Sec. Sec. 37.10(c)(1) and 38.12(c)(1), upon a

determination that a swap is available to trade, all other SEFs and

DCMs listing or offering for trading such swap and/or any economically

equivalent swap, must make those swaps available to trade for purposes

of the trade execution requirement set forth in Section 2(h)(8) of the

CEA. The Commission notes that if a DCM or SEF makes a swap available

to trade, these proposed provisions would not require other DCMs and

SEFs to list or offer that swap, or an economically equivalent swap,

for trading.

In this Notice, the Commission is proposing a definition for the

term “economically equivalent swap.” Proposed Sec. Sec. 37.10(c)(2)

and 38.12(c)(2) define the term “economically equivalent swap” as a

swap that the SEF or DCM determines to be economically equivalent with

another swap after consideration of each swap’s material pricing terms.

4. Annual Review of Available To Trade Determinations–Proposed

Sec. Sec. 37.10(d) and 38.12(d)

a. Comments Regarding Annual Review

Several commenters to the SEF NPRM supported a Commission review

requirement for swaps that have been determined to be available to

trade.53 One commenter asserted that SEF available to trade

determinations should be revisited and reconsidered because the

liquidity of swaps can experience significant changes over time and can

dry up completely in some circumstances.54 Similarly, another

commenter stated that SEFs should revisit available to trade

determinations on a quarterly basis because the level of liquidity for

a swap can vary significantly over time.55

—————————————————————————

53 E.g., Letter from Kevin Gould, Markit, dated Mar. 8, 2011

at 2; Letter from Dexter Senft, Morgan Stanley, dated Mar. 2, 2011

at 4; Letter from Stuart Kaswell, Managed Funds Association, dated

Mar. 8, 2011 at 4; Letter from Edward Rosen, Cleary Gottlieb Steen &

Hamilton LLP, on behalf of certain dealers, dated Apr. 5, 2011 at

18-19.

54 Letter from Kevin Gould, Markit, dated Mar. 8, 2011 at 2.

55 Letter from Edward Rosen, Cleary Gottlieb Steen & Hamilton

LLP, on behalf of certain dealers, dated Apr. 5, 2011 at 18-19.

—————————————————————————

b. Annual Review–Proposed Sec. Sec. 37.10(d) and 38.12(d)

The Commission is proposing to retain the annual review and

assessment requirement set forth in the SEF NPRM and also require that

DCMs perform an annual review and assessment. Regular reviews help

ensure that DCMs and SEFs routinely evaluate whether swaps previously

determined to be available to trade should continue to be treated in

that manner. Thus, in conducting this review and assessment, the

proposal would require a SEF or DCM to consider the factors in

Sec. Sec. 37.10(b) or 38.12(b), respectively. The Commission would

also encourage DCMs and SEFs, in conducting this review and assessment,

to evaluate their swaps that have not been determined to be available

to trade and to submit them to the Commission as appropriate. Upon

completion of the annual review, a DCM or SEF would be required to

provide electronically to the Commission a report of such review and

assessment, including any supporting information or data, no later than

30 days after its fiscal year end.

[[Page 77733]]

5. Notice to the Public of Available To Trade Determinations

a. Comments Regarding Notice to the Public

Some commenters to the SEF NPRM requested that the Commission

provide notice to market participants that a swap is available to

trade.56 One commenter, for example, suggested that the Commission

provide public notice that a swap will be deemed available to trade and

on which platform(s).57 Another commenter stated that “[w]ithout a

notification system, market participants may not know to cease over-

the-counter transactions in these swaps, stifling compliance with

applicable rules.” 58

—————————————————————————

56 E.g., Letter from Dexter Senft, Morgan Stanley, dated Mar.

2, 2011 at 4; Letter from Timothy Cameron, Securities Industry and

Financial Markets Association Asset Management Group, dated Mar. 8,

2011 at 12; Letter from Wayne Pestone, FX Alliance Inc., dated Nov.

4, 2011 at 9-10.

57 Letter from Dexter Senft, Morgan Stanley, dated Mar. 2,

2011 at 4.

58 Letter from Timothy Cameron, Securities Industry and

Financial Markets Association Asset Management Group, dated Mar. 8,

2011 at 12.

—————————————————————————

b. Public Notice

In consideration of the comments received, the Commission notes

that there is a process for notifying the public that a DCM or SEF has

made a swap available to trade. Sections 40.5 and 40.6 of the

Commission’s regulations require DCMs and SEFs to post a notice and a

copy of rule submissions on their Web site concurrent with the filing

of the submissions with the Commission.59 The Commission, consistent

with current practice, will also post DCM and SEF rule submission

filings on its Web site. The Commission is currently assessing the

feasibility of posting notices of all swaps that are determined to be

available to trade on an easily accessible page on its Web site.

—————————————————————————

59 See Sections 40.5(a)(6) and 40.6(a)(2).

—————————————————————————

6. Effective Date of Available To Trade Determinations

a. Comments Regarding Effective Date

Commenters to the SEF NPRM requested a waiting period before the

effective date of the available to trade determinations or before

imposing the trade execution requirement under CEA Section 2(h)(8) so

that other SEFs have adequate time to list or offer the swap or any

economically equivalent swap for trading.60 These commenters stated

that a reasonable waiting period will promote competition among SEFs by

reducing a SEF’s first-mover advantage.61 For example, the waiting

period would allow other SEFs additional time to build the required

connectivity.62 A waiting period would also allow market participants

the opportunity to make any related technological and trading strategy

amendments.63

—————————————————————————

60 Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

8, 2011 at 4; Letter from Dexter Senft, Morgan Stanley, dated Mar.

2, 2011 at 4; Letter from Stuart Kaswell, Managed Funds Association,

dated Mar. 8, 2011 at 3. Some of these commenters requested that the

Commission establish a waiting period after the available to trade

determination and before the trade execution requirement becomes

effective.

61 Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

8, 2011 at 4; Letter from Dexter Senft, Morgan Stanley, dated Mar.

2, 2011 at 4; Letter from Stuart Kaswell, Managed Funds Association,

dated Mar. 8, 2011 at 3.

62 Letter from Stuart Kaswell, Managed Funds Association,

dated Mar. 8, 2011 at 3.

63 Letter from Kevin Budd and Todd Lurie, MetLife, dated Mar.

8, 2011 at 4.

—————————————————————————

b. Effective Date

In response to commenters who requested a waiting period before the

effective date of a determination that a swap is available to trade or

before imposing the trade execution requirement under CEA Section

2(h)(8), the Commission has issued a notice of proposed rulemaking that

proposes a schedule to phase in compliance with the trade execution

requirement under CEA Section 2(h)(8).64 Under that proposed

rulemaking, a swap transaction shall be subject to the CEA Section

2(h)(8) trade execution requirement upon the later of the following:

(1) the applicable deadline established under the compliance schedule

for the clearing requirement or (2) 30 days after the swap is first

made available to trade on either a SEF or DCM.65

—————————————————————————

64 See Swap Transaction Compliance and Implementation

Schedule: Clearing and Trade Execution Requirements under Section

2(h) of the CEA, 76 FR 58186 (Sep. 20, 2011). Comments to this

notice of proposed rulemaking were due by November 4, 2011.

65 Id.

—————————————————————————

C. Comment Requested

The Commission requests and will consider comments only on proposed

regulations Sec. Sec. 37.10 and 38.12. The Commission may consider

alternatives to the proposed regulations and is requesting comment on

the following questions:

Should the Commission allow a SEF or DCM to submit its

available to trade determination with respect to a group, category,

type, or class of swaps based on the factors in Sec. Sec. 37.10(b) or

38.12(b)? How should the Commission define group, category, type, or

class of swaps?

Is the Commission’s proposed approach in Sec. Sec.

37.10(b) and 38.12(b) regarding the determination that a swap is

available to trade appropriate? If not, what approach is appropriate

and why? Should a SEF or DCM consider total open interest and notional

outstanding for similar tenors in Sec. Sec. 37.10(b) and 38.12(b)?

In evaluating the factors under proposed Sec. Sec.

37.10(b) and 38.12(b), should the Commission allow a SEF or DCM to

consider the same swap or an economically equivalent swap on another

SEF or DCM? What are the advantages and disadvantages of such an

approach? Should a SEF or DCM consider the amount of activity in the

same swap or an economically equivalent swap available primarily or

solely in bilateral transactions?

Should the Commission allow a SEF or DCM to submit an

available to trade determination under Sec. Sec. 37.10(a) or 38.12(a),

if such SEF or DCM does not itself list the subject swap for trading?

If so, in evaluating the factors under Sec. Sec. 37.10(b) or 38.12(b),

should the Commission allow the SEF or DCM to consider the same swap or

an economically equivalent swap on another SEF or DCM? What are the

advantages and disadvantages of such an approach? Should a SEF or DCM

consider the amount of activity in the same swap or an economically

equivalent swap available primarily or solely in bilateral

transactions?

When a DCM or SEF makes a swap available to trade, should

all other DCMs and SEFs listing or offering for trading such swap and/

or any economically equivalent swap be required to make those swaps

available to trade? What would be the economic impact on those DCMs and

SEFs that would be required to make same swaps and/or economically

equivalent swaps available to trade?

If a SEF or DCM is required to make an economically

equivalent swap available to trade, should that SEF or DCM be required

to submit, under part 40 procedures, its reasoning for deciding that a

certain swap is or is not economically equivalent to another swap?

Should a SEF or DCM be required to consider the factors under

Sec. Sec. 37.10(b) or 38.12(b)? Should a SEF or DCM be able to use the

factors under Sec. Sec. 37.10(b) or 38.12(b) to submit to the

Commission for consideration that an economically equivalent swap

should not be subject to the requirement under Sec. Sec. 37.10(c)(1)

or 38.12(c)(1)? Should a DCM or SEF provide the Commission notice that

an economically equivalent swap has been made available to trade? If

so, should the Commission provide notice to the

[[Page 77734]]

public? If so, how? How would market participants conducting bilateral

transactions know that an economically equivalent swap has been made

available to trade?

Is the Commission’s proposed definition of the term

“economically equivalent swap” appropriate? If not, how should the

Commission revise the definition as applicable to proposed Sec. Sec.

37.10 and 38.12 and why? Are there other factors that the Commission

should consider when defining the term economically equivalent swap?

Should the Commission require that DCMs and SEFs consider specific

material pricing terms? If so, what terms and why? For instance, should

DCMs and SEFs consider same tenor or same underlying instrument? Should

the Commission or DCMs and SEFs make the determination of which swaps

are economically equivalent?

Is the Commission’s proposal that DCMs and SEFs conduct

reviews and assessments appropriate? If not, what is appropriate and

why?

Should the Commission specify a process whereby a swap

that has been determined to be available to trade may be determined to

no longer be available to trade? If so, should the Commission use the

rule submission procedure under part 40 for this process and why?

Please explain the details of this approach, including who would make

the determination that a swap is no longer available to trade. Should

such a determination apply to all DCMs and SEFs universally or should

it only apply to the particular DCM or SEF that seeks to no longer make

a swap available to trade? What are the advantages and disadvantages of

such approach? If the Commission should not specify a process to no

longer make a swap available to trade, please explain why.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires that agencies

consider whether the rules they propose will have a significant

economic impact on a substantial number of small entities and, if so,

provide a regulatory flexibility analysis respecting the impact.66

The Commission previously determined that DCMs and SEFs are not “small

entities” for purposes of the RFA.67 In determining that these

registered entities are not “small entities,” the Commission reasoned

that it designates a contract market or registers a SEF only if the

entity meets a number of specific criteria, including the expenditure

of sufficient resources to establish and maintain an adequate self-

regulatory program.68 Because DCMs and SEFs are required to

demonstrate compliance with Core Principles, including principles

concerning the maintenance or expenditure of financial resources, the

Commission previously determined that SEFs, like DCMs, are not “small

entities” for the purposes of the RFA.

—————————————————————————

66 5 U.S.C. 601 et seq.

67 See 17 CFR part 40 Provisions Common to Registered

Entities, 75 FR 67282 (Nov. 2, 2010); see also 47 FR 18618, 18619

(Apr. 30, 1982) and 66 FR 45604, 45609 (Aug. 29, 2001).

68 See, e.g., Core Principle 2 applicable to DCMs under

Section 735 of the Dodd-Frank Act and Core Principle 2 applicable to

SEFs under Section 733 of the Dodd-Frank Act.

—————————————————————————

Accordingly, the Chairman, on behalf of the Commission, hereby

certifies pursuant to 5 U.S.C. 605(b) that the proposed rules will not

have a significant economic impact on a substantial number of small

entities. The Commission invites public comment on this determination.

B. Paperwork Reduction Act

The Paperwork Reduction Act (“PRA”) 69 imposes certain

requirements on federal agencies in connection with conducting or

sponsoring any collection of information as defined by the PRA. The

Commission may not conduct or sponsor, and a registered entity is not

required to respond to, a collection of information unless it displays

a currently valid Office of Management and Budget (“OMB”) control

number. This proposed rulemaking will result in new collection of

information requirements within the meaning of the PRA. The Commission

therefore is submitting this proposal to OMB for review in accordance

with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection

of information is “Parts 37 and 38–Process for a Swap Execution

Facility or Designated Contract Market to Make a Swap Available to

Trade.” The OMB has not yet assigned this collection a control number.

—————————————————————————

69 44 U.S.C. 3501 et seq.

—————————————————————————

Many of the responses to this new collection of information are

mandatory. The Commission protects proprietary information according to

the Freedom of Information Act and 17 CFR part 145, “Commission

Records and Information.” In addition, Section 8(a)(1) of the CEA

strictly prohibits the Commission, unless specifically authorized by

the CEA, from making public “data and information that would

separately disclose the business transactions or market positions of

any person and trade secrets or names of customers.” 70 The

Commission is also required to protect certain information contained in

a government system of records according to the Privacy Act of

1974.71

—————————————————————————

70 7 U.S.C. 12(a)(1).

71 5 U.S.C. 552a.

—————————————————————————

1. Information Provided by Reporting Entities/Persons

The proposed regulations require SEFs and DCMs to collect and

submit to the Commission information concerning available to trade

determinations pursuant to Sec. Sec. 37.10 and 38.12. For instance,

SEFs and DCMs must submit available to trade determinations to the

Commission as rules under part 40 pursuant to proposed Sec. Sec.

37.10(a) and 38.12(a). SEFs and DCMs must also submit annual reports to

the Commission pursuant to proposed Sec. Sec. 37.10(d) and 38.12(d).

The Commission has estimated the final information collection

burdens on DCMs and SEFs below. These estimates account for the

following: (1) The number of respondents; and (2) the average hours

required to produce each response. The Commission estimates that 50

registered entities will be required to file rule submissions and

annual reports.

SEFs and DCMs must submit available to trade determinations to the

Commission as rules under part 40 pursuant to proposed Sec. Sec.

37.10(a) and 38.12(a). The Commission previously estimated the hourly

burdens for DCMs and SEFs to comply with part 40. While the Commission

has no way of knowing the exact hourly burden upon a registered entity

prior to implementation of the regulations governing that registered

entity, the Commission estimates that the burden for a SEF or DCM under

proposed Sec. Sec. 37.10(a) and 38.12(a) will be similar to the

previously estimated hours of burden under part 40–2.00 hours.

However, the Commission notes that DCMs and SEFs would have to review

certain factors and data (if applicable) to make a swap available to

trade so these submissions may take additional time. Therefore, the

Commission estimates that the hourly burden for a SEF or DCM under

proposed Sec. Sec. 37.10(a) and 38.12(a) will be as follows:

Estimated number of respondents: 50.

Estimated average hours per response: 8.00.

The Commission recognizes that DCMs and SEFs may submit several

rule submission filings per year. At this time, it is not feasible to

estimate the number of rule submission filings per year, on average,

per DCM or SEF as the number

[[Page 77735]]

of swap contracts that will be traded on a DCM or SEF and the number of

those swaps that a DCM or SEF will determine to make available to trade

is presently unknown.

Proposed Sec. Sec. 37.10(d) and 38.12(d) require SEFs and DCMs to

submit annual reports, including any supporting information and data,

to the Commission of their review and assessment of the swaps they made

available to trade. The Commission previously estimated the number of

filings and the hourly burdens for submissions by each DCO regarding

swaps that they plan to accept for clearing under Section 39.5.72 The

Commission estimated that each DCO will submit to the Commission one

filing annually for the swaps that they plan to accept for clearing.

While the Commission has no way of knowing the exact hourly burden upon

a registered entity prior to implementation of the regulations

governing that registered entity, the Commission estimates that the

burden for a SEF or DCM under proposed Sec. Sec. 37.10(d) and 38.12(d)

will be similar to the previously estimated hours of burden under

Section 39.5–40.00 hours. The Commission estimates the burden for SEFs

and DCMs under proposed Sec. Sec. 37.10(d) and 38.12(d) as follows:

—————————————————————————

72 See Process for Review of Swaps for Mandatory Clearing, 76

FR 44464 (Jul. 26, 2011).

—————————————————————————

Estimated number of respondents: 50.

Annual responses by each respondent: 1.

Estimated average hours per response: 40.

Aggregate annual reporting burden hours (for all respondents):

2,000.

The Commission invites public comment on the accuracy of its

estimate of the collection requirements that would result from the

proposed regulations.

2. Information Collection Comments

The Commission invites the public and other federal agencies to

comment on the information collection requirements proposed in this

Notice. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits

comments to: (1) Evaluate whether the proposed collections of

information are necessary for the proper performance of the functions

of the Commission, including whether the information will have

practical utility; (2) evaluate the accuracy of the estimated burden of

the proposed information collection requirements, including the degree

to which the methodology and the assumptions that the Commission

employed were valid; (3) determine whether there are ways to enhance

the quality, utility, or clarity of the information proposed to be

collected; and (4) minimize the burden of the proposed collections of

information on DCMs and SEFs, including through the use of appropriate

automated, electronic, mechanical, or other technological information

collection techniques, e.g., permitting electronic submission of

responses.

The public and other federal agencies may submit comments directly

to the Office of Information and Regulatory Affairs, OMB, by fax at

(202) 395-6566 or by email at [email protected]. Please

provide the Commission with a copy of submitted comments so that they

can be summarized and addressed in the final rule. Refer to the

Addresses section of this Notice for comment submission instructions to

the Commission. A copy of the supporting statements for the collections

of information discussed above may be obtained by visiting RegInfo.gov.

OMB is required to make a decision concerning the collection of

information between 30 and 60 days after publication of this release.

Therefore, a comment to OMB is best assured of receiving full

consideration if OMB (and the Commission) receives it within 30 days of

publication of this Notice. Nothing in the foregoing affects the

deadline enumerated above for public comment to the Commission on the

proposed regulations.

C. Consideration of Costs and Benefits

In this section, the Commission addresses the costs and benefits of

its proposed regulations and also considers the five broad areas of

market and public concern under Section 15(a) of the CEA73 within the

context of the proposed regulations.

—————————————————————————

73 7 U.S.C. 19(a).

—————————————————————————

In this Notice, the Commission considers the costs and benefits

that result from the regulations proposed herein; these costs and

benefits are in addition to the costs and benefits associated with the

SEF NPRM as previously proposed. In other words, the Commission is only

considering the discrete costs and benefits of the regulations

specifically proposed in this Notice. To this end, the Commission

solicits comments only on the costs and benefits of the proposed

requirements herein; only comments pertaining to these cost and benefit

issues will be considered as part of this Notice.

1. Costs of Proposed Regulations

The Commission anticipates that the proposed regulations will

result in some additional operational and monitoring costs to DCMs and

SEFs. The Commission requests commenters provide quantitative estimates

of the additional costs and benefits to DCMs and SEFs from this Notice.

Under these proposed regulations, DCMs and SEFs may incur

additional costs in undertaking evaluations of whether a swap is

available to trade and submitting to the Commission their

determinations with respect to such swaps as rule submission filings

pursuant to the procedures under part 40 of the Commission’s

regulations. Proposed Sec. Sec. 37.10(b) and 38.12(b) require SEFs and

DCMs to consider certain factors to make a swap available to trade.

Proposed Sec. Sec. 37.10(a) and 38.12(a) require SEFs and DCMs to

submit to the Commission their determinations with respect to those

swaps that they make available to trade as a rule pursuant to the

procedures under part 40 of the Commission’s regulations.

The above-described assessment and submission may be performed

internally by one compliance personnel of the DCM or SEF. The

Commission estimates that it would take the compliance personnel

approximately eight hours, on average, to assess and submit the

available to trade determination per rule submission filing. The

compliance personnel would have to, for example, consider factors to

make a swap available to trade and write a cover submission to the

Commission, including a description of the swap or swaps that are

covered and an explanation and analysis of the available to trade

determination. The Commission notes that this is a general estimate and

that it is difficult to determine with reasonable precision the number

of hours involved given the novelty of this available to trade process.

The Commission estimates the cost per hour for one compliance personnel

to be $43.25 per hour.74 Therefore, the Commission estimates that it

would cost each DCM and SEF an additional $346.00 per rule submission

filing to comply with the proposed requirements.

—————————————————————————

74 See Report on Management & Professional Earnings in the

Securities Industry 2010, Securities Industry and Financial Markets

Association at 4 (Sep. 2010). The report lists the average total

annual compensation for a compliance specialist (intermediate) as

$59,878. The Commission estimated the personnel’s hourly cost by

assuming an 1,800 hour work year and by multiplying by 1.3 to

account for overhead and other benefits.

—————————————————————————

Certain additional factors may affect the cost estimates noted

above. For example, swaps with complex terms and conditions or requests

for

[[Page 77736]]

additional information or questions from Commission staff regarding the

available to trade determination may result in higher costs.

The Commission also recognizes that DCMs and SEFs may submit

several rule submission filings per year. At this time, it is not

feasible to estimate the number of rule submission filings per year per

DCM or SEF as the number of swap contracts that will be traded on a DCM

or SEF and the number of those swaps that a DCM or SEF will determine

to make available to trade is presently unknown.

Under proposed Sec. Sec. 37.10(c) or 38.12(c), if a SEF or DCM

makes a swap available to trade, all SEFs and DCMs listing or offering

such swap and/or any economically equivalent swap, shall make those

swaps available to trade for purposes of Section 2(h)(8) of the CEA.

Further, such contracts may not be traded on a bilateral basis. In

order to comply with this requirement, DCMs, SEFs, and market

participants would have to monitor and identify those contracts that

are either the same or economically equivalent to that swap made

available to trade. At this time, it is not feasible to estimate the

number of hours involved given the novelty of the available to trade

process.

The Commission seeks comment on all aspects of the cost estimates

provided above. Specifically, the Commission seeks comment on the

period of time, the number and type of personnel, and the cost

estimates for DCMs and SEFs to comply with the assessment process as

described above. The Commission also seeks comment on the number of

hours per year, on average, that a SEF or DCM will spend monitoring and

evaluating swap contracts in order to comply with proposed Sec. Sec.

37.10(c) and 38.12(c).

Proposed Sec. 38.12(d) would require DCMs to incur additional

costs to conduct an annual review and assessment of each swap it has

made available to trade and submit its review and assessment to the

Commission.75 This assessment may be performed internally by one

compliance personnel of the DCM. The Commission estimates that it would

take the compliance personnel approximately 40 hours, on average, to

conduct this review and assessment. The Commission notes that this is a

general estimate and that it is difficult to determine with reasonable

precision the number of hours involved given the novelty of this

process. As noted above, the Commission estimates the cost per hour for

one compliance personnel to be $43.25 per hour. Therefore, the

Commission estimates that it would cost each DCM an additional

$1,730.00 per review to comply with the proposed requirements.

—————————————————————————

75 The SEF NPRM imposed a review and assessment process for

SEFs.

—————————————————————————

2. Benefits of Proposed Regulations

The proposed regulations are expected to provide needed certainty

for DCMs, SEFs, and market participants for the available to trade

process. The proposed regulations, for example, set forth the procedure

to make a swap available to trade, the factors to consider in making a

swap available to trade, and visibility into which swaps are available

to trade. Additionally, the proposed regulations are expected to

promote the trading of swaps on DCMs and SEFs and promote competition

among these entities. DCMs and SEFs, who may be most familiar with the

trading of swaps, would make swaps available to trade based on factors

specified by the Commission. DCMs and SEFs have discretion to consider

any one factor or several factors to make a swap available to trade.

These aspects of the proposed regulations are intended to facilitate

DCMs and SEFs to make swaps available to trade, which is expected to

promote the trading of swaps on DCMs and SEFs and competition among

these entities. Finally, the proposed regulations are expected to

promote price discovery because those swaps that DCMs and SEFs make

available to trade would effectively be subject to the trade execution

requirement, which would require them to trade solely on DCMs and SEFs.

The Commission seeks comment on all aspects of the benefits of its

proposed regulations in this Notice.

3. Section 15(a) Discussion

Section 15(a) of the CEA 76 requires the Commission to consider

the costs and benefits of its action before promulgating a regulation

under the CEA. Section 15(a) of the CEA specifies that the costs and

benefits shall be evaluated in light of five broad areas of market and

public concern: (a) Protection of market participants and the public;

(b) efficiency, competitiveness and financial integrity of futures

markets; (c) price discovery; (d) sound risk management practices; and

(e) other public interest considerations. The Commission may in its

discretion give greater weight to any one of the five enumerated areas

and could in its discretion determine that, notwithstanding its costs,

a particular regulation is necessary or appropriate to protect the

public interest or to effectuate any of the provisions or accomplish

any of the purposes of the CEA.77

—————————————————————————

76 7 U.S.C. 19(a).

77 See, e.g., Fisherman’s Doc Co-op., Inc v. Brown, 75 F.3d

164 (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336

(DC Cir. 1985) (noting that an agency has discretion to weigh

factors in undertaking cost-benefit analysis).

—————————————————————————

a. Protection of Market Participants and the Public

The proposed regulations are intended to provide certainty for

DCMs, SEFs, and market participants for the available to trade process.

Under the proposed regulations, a SEF or DCM must consider certain

factors specified by the Commission under Sections 37.10(b) or

38.12(b), respectively, to make a swap available to trade. A DCM or SEF

must also submit available to trade determinations to the Commission,

either for approval or under certification procedures, pursuant to the

rule filing procedures of part 40 of the Commission’s regulations. Part

40 also requires DCMs and SEFs to post a notice and a copy of rule

submissions on their Web site concurrent with the filing of the

submissions with the Commission. The Commission, consistent with

current practice, will also post DCM and SEF rule submission filings on

its Web site. Therefore, under the proposed regulations, DCMs, SEFs,

and market participants would know the factors to consider in making a

swap available to trade, the procedure to make a swap available to

trade, and the swaps that are available to trade, which provides

certainty to the available to trade process. This certainty also

promotes the protection of market participants by ensuring that there

is transparency in the available to trade process.

The proposed regulations are also expected to promote the

protection of market participants and the public by providing for

Commission review and oversight and public participation. Under the

proposed regulations, the Commission would either approve or review the

DCM’s or SEF’s available to trade determination. To facilitate this

approval or review, the proposed regulations require DCMs and SEFs to

provide the Commission with a brief explanation of any substantive

opposing views in rule filings and, if the Commission extends the rule

review period under the self-certification procedure, then there will

be a 30-day public comment period. These aspects of the proposed

regulations are expected to provide appropriate oversight, and may

increase the transparency, of DCM and SEF available to trade

[[Page 77737]]

determinations. This oversight and transparency is expected to increase

the likelihood that all important issues will be identified and weighed

by the Commission, which may protect market participants and the

public.

b. Efficiency, Competitiveness, and Financial Integrity of the Markets

The proposed regulations are expected to promote the trading of

swaps on DCMs and SEFs and promote competition among these entities.

DCMs and SEFs, who may be most familiar with the trading of swaps,

would make swaps available to trade based on factors specified by the

Commission. DCMs and SEFs would have discretion to consider any one

factor or several factors to make a swap available to trade. These

aspects of the proposed regulations are intended to facilitate DCMs and

SEFs to make swaps available to trade, which is expected to promote the

trading of swaps on DCMs and SEFs and competition among these entities.

Additionally, the requirement that DCMs and SEFs must make the same

swap and any economically equivalent swap available to trade may

increase the number of swaps trading on DCMs and SEFs, which is

expected to promote the trading of swaps on DCMs and SEFs.

c. Price Discovery

As mentioned above, the proposed regulations are expected to

promote the trading of swaps on DCMs and SEFs. Those swaps that DCMs

and SEFs make available to trade could be subject to the trade

execution requirement. These swaps would be required to trade solely on

DCMs and SEFs, which would promote price discovery.

d. Sound Risk Management Practices

The proposed regulations are not expected to affect sound risk

management practices.

e. Other Public Interest Considerations

The proposed regulations are not expected to affect public interest

considerations other than those identified above.

The Commission specifically invites public comment on its

application of the criteria contained in Section 15(a) of the CEA and

further invites interested parties to submit any data, quantitative or

qualitative, that they may have concerning the costs and benefits of

the proposed regulations.

List of Subjects

17 CFR Part 37

Registered entities, Reporting and recordkeeping requirements, Swap

execution facilities, Swaps.

17 CFR Part 38

Designated contract markets, Registered entities, Reporting and

recordkeeping requirements, Swaps.

For the reasons stated in the preamble, the Commission proposes to

amend 17 CFR parts 37 and 38 as follows:

PART 37–SWAP EXECUTION FACILITIES

1. The authority citation for part 37 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as

amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform

and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

2. The heading of part 37 is revised to read as set forth above.

3. Add new Sec. 37.10 to read as follows:

Sec. 37.10 Process for a swap execution facility to make a swap

available to trade.

(a) Required submission. A swap execution facility that makes a

swap available to trade in accordance with paragraph (b) of this

section, shall submit to the Commission its determination with respect

to such swap pursuant to the procedures under part 40 of this chapter.

(b) Factors to consider. To make a swap available to trade, for

purposes of Section 2(h)(8) of the Commodity Exchange Act, a swap

execution facility shall consider, as appropriate, the following

factors with respect to such swap:

(1) Whether there are ready and willing buyers and sellers;

(2) The frequency or size of transactions on swap execution

facilities, designated contract markets, or of bilateral transactions;

(3) The trading volume on swap execution facilities, designated

contract markets, or of bilateral transactions;

(4) The number and types of market participants;

(5) The bid/ask spread;

(6) The usual number of resting firm or indicative bids and offers;

(7) Whether a swap execution facility’s trading system or platform

will support trading in the swap; or

(8) Any other factor that the swap execution facility may consider

relevant.

(c) Economically equivalent swap. (1) Upon a determination that a

swap is available to trade, all other swap execution facilities and

designated contract markets listing or offering for trading such swap

and/or any economically equivalent swap, shall make those swaps

available to trade for purposes of Section 2(h)(8) of the Commodity

Exchange Act.

(2) For purposes of this section, the term “economically

equivalent swap” means a swap that the swap execution facility or

designated contract market determines to be economically equivalent

with another swap after consideration of each swap’s material pricing

terms.

(d) Annual review. (1) A swap execution facility shall conduct an

annual review and assessment of each swap it has made available to

trade to determine whether or not each swap should continue to be

available to trade. The annual review shall be conducted at the swap

execution facility’s fiscal year end.

(2) When conducting its review and assessment pursuant to paragraph

(d)(1) of this section, a swap execution facility shall consider the

factors specified in paragraph (b) of this section.

(3) The swap execution facility shall provide electronically to the

Commission a report of its review and assessment, including any

supporting information or data, not more than 30 days after the swap

execution facility’s fiscal year end.

PART 38–DESIGNATED CONTRACT MARKETS

4. The authority citation for part 38 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,

6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as

amended by the Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

5. Add new Sec. 38.12 to read as follows:

Sec. 38.12 Process for a designated contract market to make a swap

available to trade.

(a) Required submission. A designated contract market that makes a

swap available to trade in accordance with paragraph (b) of this

section, shall submit to the Commission its determination with respect

to such swap pursuant to the procedures under part 40 of this chapter.

(b) Factors to consider. To make a swap available to trade, for

purposes of Section 2(h)(8) of the Commodity Exchange Act, a designated

contract market shall consider, as appropriate, the following factors

with respect to such swap:

(1) Whether there are ready and willing buyers and sellers;

(2) The frequency or size of transactions on designated contract

markets, swap execution facilities, or of bilateral transactions;

(3) The trading volume on designated contract markets, swap

execution facilities, or of bilateral transactions;

[[Page 77738]]

(4) The number and types of market participants;

(5) The bid/ask spread;

(6) The usual number of resting firm or indicative bids and offers;

(7) Whether a designated contract market’s trading facility will

support trading in the swap; or

(8) Any other factor that the designated contract market may

consider relevant.

(c) Economically equivalent swap. (1) Upon a determination that a

swap is available to trade, all other designated contract markets and

swap execution facilities listing or offering for trading such swap

and/or any economically equivalent swap, shall make those swaps

available to trade for purposes of Section 2(h)(8) of the Commodity

Exchange Act.

(2) For purposes of this section, the term “economically

equivalent swap” means a swap that the designated contract market or

swap execution facility determines to be economically equivalent with

another swap after consideration of each swap’s material pricing terms.

(d) Annual review. (1) A designated contract market shall conduct

an annual review and assessment of each swap it has made available to

trade to determine whether or not each swap should continue to be

available to trade. The annual review shall be conducted at the

designated contract market’s fiscal year end.

(2) When conducting its review and assessment pursuant to paragraph

(d)(1) of this section, a designated contract market shall consider the

factors specified in paragraph (b) of this section.

(3) The designated contract market shall provide electronically to

the Commission a report of its review and assessment, including any

supporting information or data, not more than 30 days after the

designated contract market’s fiscal year end.

Issued in Washington, DC, on December 5, 2011, by the

Commission.

David A. Stawick,

Secretary of the Commission.

Note: The following appendices will not appear in the Code of

Federal Regulations

Appendices to Process for a Designated Contract Market or Swap

Execution Facility To Make a Swap Available To Trade–Commissioners

Voting Summary and Statements of Commissioners

Appendix 1–Commissioners Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton,

O’Malia and Wetjen voted in the affirmative; Commissioner Sommers

voted in the negative.

Appendix 2–Statement of Chairman Gary Gensler

I support the proposed rule to implement a process for

designated contract markets (DCMs) and swap execution facilities

(SEFs) to make a swap “available to trade.” The Dodd-Frank Wall

Street Reform and Consumer Protection Act requires that swaps

subject to the clearing requirement be traded on a DCM or SEF,

unless no DCM or SEF makes the swap available to trade or the swap

transaction is subject to the end-user exception. This proposal will

bring transparency to the process for making a swap available to

trade on a DCM or SEF. It also will provide appropriate oversight of

the process through Commodity Futures Trading Commission review.

[FR Doc. 2011-31646 Filed 12-13-11; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 14, 2011