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Federal Register, Volume 77 Issue 51 (Thursday, March 15, 2012)[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]
[Proposed Rules]
[Pages 15460-15527]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5950]
[[Page 15459]]
Vol. 77
Thursday,
No. 51
March 15, 2012
Part II
Commodity Futures Trading Commission
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17 CFR Part 43
Procedures To Establish Appropriate Minimum Block Sizes for Large
Notional Off-Facility Swaps and Block Trades; Proposed Rule
Federal Register / Vol. 77 , No. 51 / Thursday, March 15, 2012 /
Proposed Rules
[[Page 15460]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 43
RIN 3038-AD08
Procedures To Establish Appropriate Minimum Block Sizes for Large
Notional Off-Facility Swaps and Block Trades
AGENCY: Commodity Futures Trading Commission.
ACTION: Further notice of proposed rulemaking.
———————————————————————–
SUMMARY: The Commodity Futures Trading Commission is proposing
regulations to implement certain statutory provisions enacted by Title
VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Specifically, in accordance with section 727 of the Dodd-Frank Act, the
Commission is proposing regulations that would define the criteria for
grouping swaps into separate swap categories and would establish
methodologies for setting appropriate minimum block sizes for each swap
category. In addition, the Commission is proposing further measures
under the Commission’s regulations to prevent the public disclosure of
the identities, business transactions and market positions of swap
market participants.
DATES: Comments must be received on or before May 14, 2012.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD08,
by any of the following methods:
The agency’s Web site, 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
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that you believe is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec. 145.9 of the Commission’s regulations.1
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1 See 17 CFR 145.9.
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Commenters to this further notice of proposed rulemaking are
requested to refrain from providing comments with respect to the
provisions in part 43 of the Commission’s regulations that are beyond
the scope of this proposed rulemaking. The Commission only plans to
address those comments that are responsive to the policies, merits and
substance of the proposed provisions set forth in this further notice
of proposed rulemaking.
Throughout this further notice of proposed rulemaking, the
Commission requests comment in response to several specific questions.
For convenience, the Commission has numbered each of these requests for
comment. The Commission asks that, in submitting comments, commenters
kindly identify the specific number of each request to which their
comments are responsive.
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: Carl E. Kennedy, Counsel, Office of
the General Counsel, 202-418-6625, [email protected]; or George
Pullen, Economist, Division of Market Oversight, 202-418-6709,
[email protected]; Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The Dodd-Frank Act
B. The Initial Proposal
C. Public Comments in Response to the Initial Proposal
1. Public Comments Regarding the Proposed Determination of
Appropriate Minimum Block Sizes
2. Public Comments Regarding the Proposed Anonymity Protections
3. Public Comments Regarding Implementation
D. Analysis of Swap Market Data; Issuance of the Adopting
Release
II. Further Proposal–Block Trades
A. Policy Goals
B. Summary of the Proposed Approach
C. Proposing Criteria for Distinguishing Among Swap Categories
in Each Asset Class
1. Interest Rate and Credit Asset Classes
a. Background
b. Interest Rate Swap Categories
i. Interest Rate Swap Data Summary
ii. Interest Rate Swap Data Analysis
c. Credit Swap Categories
i. Credit Swap Data Summary
ii. Credit Swap Data Analysis
2. Swap Category in the Equity Asset Class
3. Swap Categories in the FX Asset Class
4. Swap Categories in the Other Commodity Asset Class
D. Proposed Appropriate Minimum Block Size Methodologies for the
Initial and Post-Initial Periods
1. Methodology for Determining the Appropriate Minimum Block
Sizes in the Interest Rate and Credit Asset Classes
2. Treatment of Swaps Within the Equity Asset Class
3. Methodologies for Determining the Appropriate Minimum Block
Sizes in the FX Asset Class
a. Initial Period Methodology for Determining Appropriate
Minimum Block Sizes in the FX Asset Class
b. Post-Initial Period Methodology for Determining Appropriate
Minimum Block Sizes in the FX Asset Class
4. Methodologies for Determining Appropriate Minimum Block Sizes
in the Other Commodity Asset Class
a. Initial Period Methodology for Determining Appropriate
Minimum Block Sizes in the Other Commodity Asset Class (Other Than
Natural Gas and Electricity Swaps Proposed To Be Listed in Appendix
B to Part 43)
b. Initial Period Methodology for Natural Gas and Electricity
Swaps in the Other Commodity Asset Class Proposed To Be Listed in
Appendix B to Part 43
c. Post-Initial Period Methodology for Determining Appropriate
Minimum Block Sizes in the Other Commodity Asset Class
5. Special Provisions for the Determination of Appropriate
Minimum Block Sizes for Certain Types of Swaps
a. Swaps With Optionality
b. Swaps With Composite Reference Prices
c. Physical Commodity Swaps
d. Currency Conversion
e. Successor Currencies
E. Procedural Provisions
1. Proposed Sec. 43.6(a) Commission Determination
2. Proposed Sec. 43.6(f)(3) and(4) Publication and Effective
Date of Post-Initial Appropriate Minimum Block Sizes
3. Proposed Sec. 43.6(g) Notification of Election
4. Proposed Sec. 43.7 Delegation of Authority
III. Further Proposal–Anonymity Protections for the Public
Dissemination of Swap Transaction and Pricing Data
A. Policy Goals
B. Establishing Notional Cap Sizes for Swap Transaction and
Pricing Data To Be Publicly Disseminated in Real-Time
1. Policy Goals for Establishing Notional Cap Sizes
[[Page 15461]]
2. Proposed Amendments Related to Cap Sizes–Sec. 43.2
Definitions and Sec. 43.4 Swap Transaction and Pricing Data To Be
Publicly Disseminated in Real-Time
a. Initial Cap Sizes
b. Post-Initial Cap Sizes and the 75-Percent Notional Amount
Calculation
c. Alternative Cap Size Calculations
C. Masking the Geographic Detail of Swaps in the Other Commodity
Asset Class
1. Policy Goals for Masking the Geographic Detail for Swaps in
the Other Commodity Asset Class
2. Proposed Amendments to Sec. 43.4
3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed
Appendix E to Part 43–Geographic Detail for Delivery or Pricing
Points
a. U.S. Delivery of Pricing Points
i. Natural Gas and Related Products
ii. Petroleum and Products
iii. Electricity and Sources
iv. All Remaining Other Commodities
b. Non-U.S. Delivery or Pricing Points
c. Basis Swaps
4. Further Revisions to Part 43
a. Additional Contracts Added to Appendix B to Part 43
b. Technical Revisions to Part 43
IV. Regulatory Flexibility Act
A. Potential Economic Impact–Proposed Sec. 43.6(g)–
Notification of Election
B. Identification of Duplicative, Overlapping or Conflicting
Federal Rules
C. Alternatives to Proposed Rules That Will Have an Impact
D. Certification
V. Paperwork Reduction Act
A. Background
B. Description of the Collection
1. Proposed Sec. 43.6(g)–Notification of Election
2. Proposed Amendments to Sec. Sec. 43.4(d)(4) and 43.4(h)
C. Request for Comments on Collection
VI. Cost-Benefit Considerations
A. Introduction
B. The Requirements of Section 15(a)
C. Structure of the Commission’s Analysis; Cost Estimation
Methodology
D. Background; Objectives of This Further Proposal
E. Costs and Benefits Relevant to the Block Trade Rules Section
of the Further Proposal (Sec. Sec. 43.6(a)-(f) and (h))
1. Costs and Benefits Relevant to the Proposed Criteria and
Methodology
a. Proposed Sec. 43.6(a) Commission Determination
b. Proposed Sec. 43.6(b) Swap Category
c. Proposed Sec. Sec. 43.6(c)-(f) and (h) Methods for
Determining Appropriate Minimum Block Sizes
d. Proposed Sec. Sec. 43.6(a)-(f) and (h) Costs Relevant to the
Proposed Criteria and Methodology
e. Benefits Relevant to Proposed Sec. Sec. 43.6(a)-(f) and (h)
f. Application of the Section 15(a) Factors to Proposed
Sec. Sec. 43.6(a)-(f) and (h)
i. Protection of Market Participants and the Public
ii. Efficiency, Competitiveness and Financial Integrity of
Markets
iii. Price Discovery
iv. Sound Risk Management Practices
v. Other Public Interest Considerations
g. Specific Questions Regarding the Proposed Criteria and
Methodology
2. Cost-Benefit Considerations Relevant to the Proposed Block
Trade/Large Notional Off-Facility Swap Election Process (Proposed
Sec. 43.6(g))
a. Costs Relevant to the Proposed Election Process (Proposed
Sec. 43.6(g))
i. Incremental, Non-Recurring Expenditure to a Non-Financial
End-user, SEF or DCM To Update Existing Technology
ii. Incremental, Non-Recurring Expenditure to a Non-Financial
End-User, SEF or DCM To Provide Training to Existing personnel and
Update Written Policies and Procedures
iii. Incremental, Recurring Expenses to a Non-Financial End-
User, DCM or SEF Associated With Incremental Compliance, Maintenance
and Operational Support in Connection With the Proposed Election
Process
iv. Incremental, Non-Recurring Expenditure to an SDR To Update
Existing Technology To Capture and Publicly Disseminate Swap Data
for Block Trades and Large Notional Off-Facility Swaps
b. Benefits Relevant to the Proposed Election Process (Proposed
Sec. 43.6(g))
c. Application of the Section 15(a) Factors to Proposed Sec.
43.6(g)
i. Protection of Market Participants and the Public
ii. Efficiency, Competitiveness and Financial Integrity
iii. Price Discovery
iv. Sound Risk Management Practices
v. Other Public Interest Considerations
d. Specific Questions Regarding the Proposed Election Process
F. Costs and Benefits Relevant to Proposed Anonymity Protections
(Amendments to Sec. Sec. 43.4(d)(4) and (h))
1. Proposed Amendments to Sec. 43.4(d)(4)
2. Proposed Amendments to Sec. 43.4(h)
3. Costs Relevant to the Proposed Amendments to Sec. Sec.
43.4(d)(4) and (h)
4. Benefits Relevant to the Proposed Amendments to Sec. 43.4
5. Application of the Section 15(a) Factors to the Proposed
Amendments to Sec. 43.4
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness and Financial Integrity
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
6. Specific Questions Regarding the Proposed Amendments to Sec.
43.4
VII. Example of a Post-Initial Appropriate Minimum Block Size
Determination Using the 50-Percent Notional Amount Calculation
VIII. List of Commenters Who Responded to the Initial Proposal
I. Background
A. The Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank Act”).2 Title VII
of the Dodd-Frank Act 3 amended the Commodity Exchange Act (“CEA”)
4 to establish a comprehensive, new regulatory framework for swaps
and security-based swaps. This legislation was enacted to reduce risk,
increase transparency and promote market integrity within the financial
system by, inter alia: (1) Providing for the registration and
comprehensive regulation of swap dealers (“SDs”) and major swap
participants (“MSPs”); (2) imposing mandatory clearing and trade
execution requirements on standardized derivative products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the Commission’s rulemaking and enforcement authorities with
respect to, among others, all registered entities and intermediaries
subject to the Commission’s oversight.
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2 See Public Law 111-203, 124 Stat. 1376 (2010).
3 The short title of Title VII of the Dodd-Frank Act is the
“Wall Street Transparency and Accountability Act of 2010.”
4 See 7 U.S.C. 1 et seq.
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Section 727 of the Dodd-Frank Act created section 2(a)(13) of the
CEA, which authorizes and requires the Commission to promulgate
regulations for the real-time public reporting of swap transaction and
pricing data.5 Section 2(a)(13)(A) provides that the definition of
“real-time public reporting” means reporting “data relating to a
swap transaction, including price and volume, as soon as
technologically practicable after the time at which the swap
transaction has been executed.” 6 Section 2(a)(13)(B) states that
the purpose of section 2(a)(13) is “to authorize the Commission to
make swap transaction and pricing data available to the public in such
form and at such times as the Commission determines appropriate to
enhance price discovery.”
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5 See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).
6 CEA section 2(a)(13)(A).
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In general, section 2(a)(13) of the CEA directs the Commission to
prescribe regulations “providing for the public availability of
transaction and pricing data” for certain swaps. Section 2(a)(13) also
places two other statutory requirements on the Commission that are
relevant to this further notice of proposed rulemaking (“Further
Proposal”). First, sections 2(a)(13)(E)(ii) and (iii) of the CEA
respectively require the Commission to prescribe regulations specifying
“the criteria for determining what constitutes a large notional swap
transaction (block trade) for particular markets and contracts” and
“the appropriate time delay for reporting
[[Page 15462]]
large notional swap transactions (block trades) to the public.” 7 In
promulgating regulations under section 2(a)(13), section
2(a)(13)(E)(iv) directs the Commission to take into account whether
public disclosure of swap transaction and pricing data will
“materially reduce market liquidity.” 8
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7 See CEA sections 2(a)(13)(E)(ii) and (iii). Section
2(a)(13)(E) explicitly refers to the swaps described only in
sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA (i.e.,
clearable swaps, including swaps that are exempt from clearing). As
noted in the Commission’s Initial Proposal (as defined below) and
its Adopting Release (as defined below), the Commission interprets
the provisions in section 2(a)(13)(E) to apply to all categories of
swaps described in section 2(a)(13)(C) of the CEA.
8 CEA section 2(a)(13)(E)(iv). Similarly, section 5h(f)(2)(C)
of the CEA directs a registered swap execution facility (“SEF”) to
set forth rules for block trades for swap execution purposes.
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The second statutory requirement relevant to this Further Proposal
is found in sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.
Section 2(a)(13)(E)(i) requires the Commission to protect the
identities of counterparties to mandatorily-cleared swaps, swaps
excepted from the mandatory clearing requirement and voluntarily-
cleared swaps. Section 2(a)(13)(C)(iii) of the CEA requires the
Commission to prescribe rules that maintain the anonymity of business
transactions and market positions of the counterparties to an uncleared
swap.9 Indeed, Congress sought to “ensure that the public reporting
of swap transaction and pricing data [would] not disclose the names or
identities of the parties to [swap] transactions.” 10
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9 This provision does not cover swaps that are “determined to
be required to be cleared but are not cleared.” See CEA section
2(a)(13)(C)(iv).
10 156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement
of Sen. Blanche Lincoln).
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In carrying out these two statutory requirements under section
2(a)(13), the Commission issued a notice of proposed rulemaking. A
discussion of that notice is described immediately below.
B. The Initial Proposal
On December 7, 2010, the Commission published in the Federal
Register a notice of proposed rulemaking to implement section 2(a)(13)
of the CEA (the “Initial Proposal”), which included, among others,
specific provisions pursuant to sections 2(a)(13)(E)(i)-(iv) and
2(a)(13)(C)(iii).11 In the Initial Proposal, the Commission set out
proposed provisions to satisfy the statutory requirements discussed
above. With respect to the first statutory requirement, the Commission
proposed: (1) Definitions for the terms “large notional off-facility
swap” and “block trade” 12; (2) a method for determining the
appropriate minimum block sizes for large notional off-facility swaps
and block trades; 13 and (3) a framework for timely reporting of such
transactions and trades.14 Proposed Sec. 43.5(g) provided that
registered swap data repositories (“SDRs”) shall be responsible for
calculating the appropriate minimum block size for each “swap
instrument” using the greater result of the distribution test 15 and
the multiple test.16 Proposed Sec. 43.2(y) broadly defined “swap
instrument” as “a grouping of swaps in the same asset class with the
same or similar characteristics.” 17 Proposed Sec. 43.5(h) provided
that for any swap listed on a SEF or DCM, the SEF or DCM must set the
appropriate minimum block trade size.18
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11 See Real-Time Public Reporting of Swap Transaction Data, 75
FR 76,139, Dec. 7, 2010, as corrected in Real-Time Public Reporting
of Swap Transaction Data Correction, 75 FR 76,930, Dec. 10, 2010.
Interested persons are directed to the Initial Proposal for a full
discussion of each of the proposed part 43 rules.
12 The Initial Proposal defined the term “large notional
swap.” See proposed Sec. 43.2(l), 75 FR 76,171. The Adopting
Release finalized the term as “large notional off-facility swap,”
to denote, in relevant part, that the swap is not executed pursuant
to a SEF or designated contract market’s (“DCM”) rules and
procedures. See Sec. 43.2, 77 FR 1,182, 1,244, Jan. 9, 2012
(“Adopting Release”). Specifically, the Adopting Release defined
the term as an “off-facility swap that has a notional or principal
amount at or above the appropriate minimum block size applicable to
such publicly reportable swap transaction and is not a block trade
as defined in Sec. 43.2 of the Commission’s regulations.” Id.
Throughout this Further Proposal, the Commission uses the term
“large notional off-facility swap” as adopted in the Adopting
Release.
The Initial Proposal’s definition of “block trade” was similar
to the final definition in the Adopting Release. See proposed Sec.
43.2(f), 75 FR 76,171. The Adopting Release defines the term “block
trade” as a publicly reportable swap transaction that: “(1)
[i]nvolves a swap that is listed on a SEF or DCM; (2) [o]ccurs away
from the [SEF’s or DCM’s] trading system or platform and is executed
pursuant to the [SEF’s or DCM’s] rules and procedures; (3) has a
notional or principal amount at or above the appropriate minimum
block applicable to such swap; and (4) [i]s reported subject to the
rules and procedures of the [SEF or DCM] and the rules described in
[part 43], including the appropriate time delay requirements set
forth in Sec. 43.5.” See Sec. 43.2, 77 FR 1,243.
13 See proposed Sec. 43.5, 75 FR 76,174-76.
14 Proposed Sec. 43.5(k)(1) in the Initial Proposal provided
that the time delay for the public dissemination of data for a block
trade or large notional off-facility swap shall commence at the time
of execution of such trade or swap. See 75 FR 76,176. Proposed Sec.
43.5(k)(2) provided that the time delay for standardized block
trades and large notional off-facility swaps (i.e., swaps that fall
under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from
the time of execution. Id. The Initial Proposal did not provide
specific time delays for large notional off-facility swaps (i.e.,
swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,
proposed Sec. 43.5(k)(3) provided that the time delay for such
swaps shall be reported subject to a time delay that may be
prescribed by the Commission. Id.
The Adopting Release established time delays for the public
dissemination of block trades and large notional off-facility swaps
in Sec. 43.5. See 77 FR 1,247-49.
15 The distribution test, described in proposed Sec.
43.5(g)(1)(i) of the Initial Proposal, required that an SDR take the
rounded transaction sizes of all trades executed over a period of
time for a particular swap instrument and create a distribution of
those trades. An SDR would then determine the minimum threshold
amount as an amount that is greater than 95 percent of the notional
or principal transaction sizes for the swap instrument for an
applicable period of time. See 75 FR 76,175.
16 The multiple test, described in proposed Sec.
43.5(g)(1)(ii) in the Initial Proposal, required that an SDR
multiply the block trade multiple by the “social size” of a
particular swap instrument. Proposed Sec. 43.2(x) defined “social
size” as the greatest of the mean, median or mode for a particular
swap instrument. The Commission proposed a block trade multiple of
five. Id.
17 See proposed Sec. 43.2(y), 75 FR 76,172. For the reasons
described in section II.B. infra, the Commission is proposing to use
the term “swap category” instead of “swap instrument.” The
Commission is of the view that the term swap category is a more
descriptive term to convey the concept of a grouping of swap
contracts that would be subject to the same appropriate minimum
block size.
18 See 75 FR 76,176.
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With respect to the second statutory requirement relevant to this
Further Proposal, the Initial Proposal set forth several provisions to
address issues pertinent to protecting the identities of parties to a
swap. Essentially, these proposed provisions sought to protect the
identities of parties to a swap through the limited disclosure of
information and data relevant to the swap. In particular, proposed
Sec. 43.4(e)(1) in the Initial Proposal provided that an SDR could not
publicly report swap transaction and pricing data in a manner that
discloses or otherwise facilitates the identification of a party to a
swap. Proposed Sec. 43.4(e)(2) would have placed a requirement on
SEFs, DCMs and reporting parties to provide an SDR with a specific
description of the underlying asset and tenor of a swap. This proposed
section also included a qualification with respect to the reporting of
the specific description. In particular, this section provided that
“[the] description must be general enough to provide anonymity but
specific enough to provide for a meaningful understanding of the
economic characteristics of the swap.” 19 This qualification would
have applied to all swaps.
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19 See 75 FR 76,174.
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In the Initial Proposal, the Commission acknowledged that swaps
that are executed on or pursuant to the rules of a SEF or DCM do not
raise the same level of concerns in protecting the identities, business
transactions or market positions of swap counterparties since these
swaps generally lack
[[Page 15463]]
customization.20 As a result, the Commission provided that SEFs and
DCMs should tailor the description required by proposed section 43.2(e)
depending on the asset class and place of execution of each swap.
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20 See 75 FR 76,151 (“In contrast, for those swaps that are
executed on a swap market, the Commission believes that since such
contracts will be listed on a particular trading platform or
facility, it will be unlikely that a party to a swap could be
inferred based on the reporting of the underlying asset and
therefore parties to swaps executed on swap markets must report the
specific underlying assets and tenor of the swap.”).
—————————————————————————
In contrast, the Commission acknowledged that the public
dissemination of a description of the specific underlying asset and
tenor of swaps that are not executed on or pursuant to the rules of a
SEF or DCM (i.e., swaps that are executed bilaterally) may result in
the unintended disclosure of the identities, business transactions or
market positions of swap counterparties, particularly for swaps in the
other commodity asset class.21 To address this issue, the Commission
proposed in Sec. 43.4(e)(2) that an SDR publicly disseminate a more
general description of the specific underlying asset and tenor.22 In
the Initial Proposal, the Commission provided a hypothetical example of
how an SDR could mask or otherwise protect the underlying asset from
public disclosure in a manner too specific so as to divulge the
identity of a swap counterparty. The Commission, however, did not set
forth a specific manner in which SDRs should carry out this
requirement.23
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21 See 75 FR 76,150-51.
22 See 75 FR 76,174.
23 See 75 FR 76,150. The Initial Proposal further provided
that the requirement in proposed Sec. 43.4(e)(2) was separate from
the requirement that a reporting party report swap data to an SDR
pursuant to section 2(a)(13)(G) of the CEA. See 75 FR 76,174.
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To further protect the identities, business transactions or market
positions of swap counterparties, proposed Sec. 43.4(i) of the Initial
Proposal included a rounding convention for all swaps, which included a
“notional cap” provision. The proposed notional cap provision
provided, for example, that if the notional size of a swap is greater
than $250 million, then an SDR only would publicly disseminate a
notation of “$250+” to reflect the notional size of the swap.24
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24 See 75 FR 76,152.
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The Commission issued the Initial Proposal for public comment for a
period of 60 days, but later reopened the comment period for an
additional 45 days.25 The comments that were submitted in response to
the Initial Proposal are discussed in the section that follows.
—————————————————————————
25 The initial comment period for the Initial Proposal closed
on February 7, 2011. The comment periods for most proposed
rulemakings implementing the Dodd-Frank Act–including the proposed
part 43 rules–subsequently were reopened for the period of April 27
through June 2, 2011.
—————————————————————————
C. Public Comments in Response to the Initial Proposal
After issuing the Initial Proposal, the Commission received 105
comment letters and held 40 meetings with interested parties regarding
the proposed provisions.26 The commenters provided general and
specific comments relating to the proposed provisions regarding the
determination of appropriate minimum block sizes and anonymity
protections for the identities, business transactions and market
positions of swap counterparties.27 Subsection 1 below sets out a
discussion of the comments submitted in response to the Initial
Proposal regarding the provisions that pertain to the determination of
appropriate minimum block sizes. Subsection 2 below sets out a
discussion of the comments submitted in response to the Initial
Proposal regarding the proposed provisions that provide anonymity
protections for the identities, business transactions or market
positions of swap counterparties. Subsection 3 below sets out a
discussion of the comments submitted in response to the Initial
Proposal regarding the implementation of proposed part 43.
—————————————————————————
26 The interested parties who either submitted comment letters
or met with Commission staff included end-users, potential swap
dealers, asset managers, industry groups/associations, potential
SDRs, a potential SEF, multiple law firms on behalf of their clients
and a DCM. Of the 105 comment letters submitted in response to the
Initial Proposal, 42 letters focused on various issues relating to
block trades and large notional off-facility swaps. Of the 40
meetings, five meetings focused on various issues relating to block
trades and large notional off-facility swaps. All comment letters
received in response to the Initial Proposal may be found on the
Commission’s Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.
27 A list of the full names and abbreviations of commenters
who responded to the Initial Proposal and who the Commission refers
to in this Further Proposal is included in section VI below. As
noted above, letters from these commenters and others submitted in
response to the Initial Proposal are available through the
Commission’s Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.
—————————————————————————
1. Public Comments Regarding the Proposed Determination of Appropriate
Minimum Block Sizes
In terms of general comments, many commenters argued that the
potential effects of the large notional off-facility swap and block
trade provisions (including the provisions regarding the appropriate
time delay) would adversely affect market liquidity.28 Several
commenters generally argued that the Commission’s proposed methodology
was not supported by actual swap market data.29 In support of these
comments, a few commenters also argued that the Commission should
examine swap markets over a sufficient period of time to obtain a
comprehensive view of market liquidity.30 Other commenters also
contended that the proposed methodology to determine appropriate
minimum block sizes would increase transaction costs if the appropriate
minimum block sizes are set too large or if time delays are not long
enough.31
—————————————————————————
28 See, e.g., Freddie Mac CL at 2; ICI CL at 2; ABC/CIEBA CL
at 1-2; ISDA/SIFMA CL at 2-4; Cleary Gottlieb CL at 6; JP Morgan CL
at 2; WMBAA CL at 3.
29 See, e.g., Cleary Gottlieb CL at 4-5; SIFMA/AFME/ASIFMA CL
at 12; AII CL at 3-5. In their joint comment letter, for example,
ISDA and SIFMA urged the Commission to conduct an empirical study on
the impact of post-trade transparency on the over-the-counter
(“OTC”) markets prior to finalizing the rulemaking. See ISDA/SIFMA
CL at 4-5. In addition, ISDA and SIFMA argued that the Commission
should conduct a three-month study, during which time the Commission
should prescribe interim block trade rules. Id.
30 Commenters did not agree on what constitutes a sufficient
period of time to obtain a comprehensive view of liquidity. See,
e.g., ISDA/SIFMA CL at 4 (three months); but see AII CL at 4 (one
year); ABC/CIEBA CL at 5-6 (at least one year); UBS (six month
consultation period).
31 See, e.g., UBS CL at 1; AII CL at 4; SIFMA/AFME/ASIFMA CL
at 11-13; BlackRock CL at 3-4; Hunton & Williams CL at 20; Cleary
Gottlieb CL at 4-6; CCMR CL at 4; Coalition of Derivatives End-Users
CL at 4-7; MFA CL at 3-4; MetLife CL at 2-3.
—————————————————————————
Some commenters made specific recommendations regarding the
Commission’s proposed method for determining appropriate minimum block
sizes for large notional off-facility swaps and block trades.32 For
example, four commenters proffered alternative methods in which to
group or categorize swaps for the purposes of the appropriate minimum
block size determination.33 Ten commenters recommended ways to modify
the multiple test.34 Specifically, four commenters suggested that the
Commission remove the mean from the calculation of social size.35
Several of
[[Page 15464]]
these commenters also suggested that the Commission use a multiple of
less than five, with a multiple of two as the most often suggested
alternative.36
—————————————————————————
32 See, e.g., BlackRock CL at attachment 3; Coalition of
Derivatives End-Users CL at 2-4.
33 See, e.g., UBS CL at 1; Coalition of Derivatives End-Users
CL at 2-4; Cleary Gottlieb CL at 5-6; SIFMA AMG CL at 5; Goldman CL
at 3-4; ICI CL at 3.
34 See e.g., JP Morgan CL at 9; BlackRock CL at 4; Goldman CL
at 5.
35 See, e.g., Goldman CL at 5 (“[W]e encourage the
[Commission] to modify the multiple test by eliminating the mean
prong. Defining the social size of a swap category with reference to
the mean of transaction sizes would make the calculation susceptible
to skewing * * *.”). See also JPM CL at 8, UBS CL at 2, Federal
National Mortgage Association CL at 2.
36 See, e.g., UBS CL at 2 (multiple of 2); JP Morgan CL at 9
(multiple of 2). But see MetLife CL at 5 (multiple of 1.5).
—————————————————————————
Ten commenters also recommended that the Commission alter the
distribution test in a way that they would support it as a test, which
should be used individually or used in combination with the multiple
test.37 The majority of these commenters suggested that the
Commission use a lower percentage than the proposed 95th
percentile.38 Specifically, these commenters suggested a percentile
between the 50th and 80th percentile.39
—————————————————————————
37 See e.g., PIMCO CL at 4; SIFMA AMG CL at 4; UBS CL at 2.
38 See, e.g., BlackRock CL at 4; SIFMA AMG CL at 5; Vanguard
CL at 5 . See also UBS CL at 2.
39 See, e.g., BlackRock CL at 4 (use 75th percentile); SIFMA
AMG CL at 5 (recommending “somewhere in the range of the 66th to
80th percentiles”); Vanguard CL at 5 (80th percentile); JP Morgan
CL at 9 (50th percentile). See also UBS CL at 2.
—————————————————————————
A few commenters focused their recommendations on the methodologies
that an SDR would use to calculate the appropriate minimum block sizes
for specific asset classes. For example, three commenters made specific
recommendations regarding the calculation and criteria of large
notional off-facility swaps and block trades in the interest rate swap
market.40 A third commenter made specific recommendations regarding
the calculation and criteria of large notional off-facility swaps and
block trades in the credit default swap market.41
—————————————————————————
40 See PIMCO CL at 3 (for interest rate swaps, “$250 million
for swaps of 0-2 years, $200 million for swaps of 2-5 years, $100
million for swaps of 6-10 years, $75 million for swaps of 11-20
years, and $50 million for swaps over 20 years.”); AII CL at 5
(“For interest rate swaps 0-5 year interest rate swaps, it may be
appropriate to set the limit at approximately $100 million. For 5-10
year interest rate swaps, the threshold might be approximately $50
million and for 10-30 year interest rate swaps, the appropriate
threshold could be approximately $25 million.”); BlackRock CL at
attachment 3 (for interest rate swaps, “$300K DV01 (approximately
$350 million 10 year equivalent)”).
41 See BlackRock CL at attachment 3. See also SIFMA/AFME/
ASIFMA CL at 12 (recommending criteria for swaps and other
instruments in the FX asset class).
—————————————————————————
One commenter shared its view regarding whether the block trade
rules that are applied in the futures markets are an appropriate
analogy for determining appropriate minimum block sizes in related
swaps markets. In its comment letter to the Initial Proposal, this
commenter argued that the appropriate minimum block sizes in place for
the futures market should be used as a comparison for determining
appropriate minimum block sizes in the swaps market.42 The commenter
stated that where an economically-equivalent futures contract is listed
on a DCM, then the rules establishing appropriate minimum block sizes
for a swap should be comparable to such futures contracts.43 The
commenter also suggested that the Commission use comparable futures
contracts in determining, inter alia, appropriate minimum block sizes
and reporting and recordkeeping requirements.44 The commenter warned
otherwise that, if the Commission was to adopt a different approach,
then such action would unintentionally “[tilt] the playing field in
favor of one class of instruments.” 45 The commenter further argued
that this consequence would not be consistent with Congress’s intent
when it enacted the Dodd-Frank Act.
—————————————————————————
42 See CME CL at 12.
43 See id.
44 See id.
45 Id. at 13.
—————————————————————————
In contrast, other commenters suggested that the appropriate
minimum block sizes in place for futures contracts would be an
inappropriate comparative measure for the swaps market.46 Some of
these commenters, for example, argued that the futures market is not an
appropriate basis for setting appropriate minimum block sizes for block
trades and large notional off-facility swaps because the swap market is
significantly different than the futures market.47
—————————————————————————
46 See, e.g., Freddie Mac CL at 2; Barclays CL at 2; ICI CL at
2-3; ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at 5; CCMR
CL at 3.
47 See ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at
5; Freddie Mac CL at 2; Barclays CL at 2; ICI CL at 2-3; CCMR CL at
3.
—————————————————————————
Many commenters to the Initial Proposal contended that the
Commission should determine appropriate minimum block sizes based on
the liquidity of a “swap instrument.” 48 Two commenters suggested
that markets with differing levels of liquidity should be subject to
different block size methodologies.49 Another commenter suggested
that a volume of less than five transactions per day be used to
classify certain swap categories as illiquid and therefore subject to
lower relative block size thresholds.50 Yet another commenter
suggested utilizing a benchmark volume level to classify swaps within
an asset class for the purpose of determining appropriate block
sizes.51 One commenter suggested considering the turnover in a market
to determine appropriate block sizes and time delays.52 Finally,
another commenter recommended that the Commission review historical
swap transaction data and consult with market participants in
determining a liquidity spectrum for each swap category, with liquidity
determined based on the average number of transactions per day (based
on true risk transfer) over the preceding six months and the number of
market makers regularly trading the instrument.53
—————————————————————————
48 See note 17 supra for the Commission’s proposal to use the
term “swap category” instead of “swap instrument.”
49 See ISDA/SIFMA CL at 4; Coalition of Derivatives End-Users
CL at 4.
50 See Morgan Stanley CL at 11.
51 See Vanguard CL at 5.
52 See TriOptima CL at 5.
53 See UBS CL at 2.
—————————————————————————
2. Public Comments Regarding the Proposed Anonymity Protections
Several commenters expressed concerns that the Initial Proposal did
not address possible disclosure of the identities, business
transactions and market positions of swap counterparties.54 Many
commenters stated that the failure to adequately protect the identities
and business transactions of the counterparties in connection with
transacting block trades or large notional off-facility swaps would
result in harm to the market.55 These commenters argued that the
proposal would increase the risk that sophisticated market participants
or some counterparties would be able to detect either the asset being
offset or the identity of the end-user doing the offsetting,
notwithstanding the anonymity protections proposed in the Initial
Proposal.56 According to these commenters, this issue is of
particular concern when a swap market participant enters into multiple
swap transactions to place a large offsetting position and some or all
of those transactions involve thinly-traded products or illiquid
markets.57 Under
[[Page 15465]]
those circumstances, the commenters asserted that the parties to a swap
would face an increased risk that their identities or transactions
would be revealed to the public in violation of sections 2(a)(13)(E)(i)
and 2(a)(13)(C)(iv) of the CEA.58 The commenters concluded that, as a
result, swap counterparties could experience difficulty in offsetting
their positions at a competitive price.59
—————————————————————————
54 See e.g., Sutherland CL at 4-5; PIMCO CL at 3; Cleary
Gottlieb CL at 5; Bracewell & Giuliani CL at 2-7; DTCC CL at 12;
FINRA CL at 5; Dominion CL at 6-9; Commission staff meeting with
Argus Media, Inc. on Feb. 3, 2011. See also ISDA and SIFMA, Block
trade reporting over-the-counter derivatives markets, 6 (Jan. 2011),
available at http://www.isda.org/speeches/pdf/Block-Trade-Reporting.pdf.
55 See, e.g., Dominion CL at 5-6; PIMCO CL at 3; ABC/CEIBA CL
at 16; WMBAA CL at 10; MFA CL at 2-3; Coalition for Derivatives End-
Users CL at 10; Sutherland CL at 5; Argus CL at 3-4; ATA CL at 5;
Sadis Goldberg CL at 2-4.
56 See, e.g., Sutherland CL at 5; Coalition for Derivatives
End-Users CL at 10; ATA CL at 5.
57 See, e.g., Argus CL at 3-4 (“In situations where only a
few entities trade a certain type of underlying asset, real-time
reporting may inadvertently reveal the identity of the swap
participants, particularly where the underlying asset is a
commodity.”); see also Dominion CL at 5-6; Sutherland CL at 5;
Coalition for Derivatives End-Users CL at 10.
58 See, e.g., Argus CL at 3-4; ATA CL at 5; Dominion CL at 5-
6; Sadis Goldberg CL at 2-4.
59 Id. See note 58 supra.
—————————————————————————
To address concerns regarding limited disclosure, several
commenters recommended that the Commission establish a “masking
rule.” 60 For example, one commenter suggested that the Commission
set masking thresholds at or near the level that represents the
dividing line between retail and institutional trades.61 Another
commenter suggested that the Commission develop a masking rule for the
swaps market that is similar to the one established by the Financial
Industry Regulatory Authority (“FINRA”) for the bond market.62
These commenters suggested, however, that the Commission establish
alternative methodologies to ensure limited public disclosure of swap
transaction and pricing data.63
—————————————————————————
60 JP Morgan CL at 12-14 (“The masking rule is similar in
concept to the so-called `5+ rule’ in TRACE. Under TRACE,
transactions involving bonds in excess of $5 [m]illion are reported
as `5+’ * * *.”); see also WMBAA CL at 10; ABC/CIEBA CL at 8-9.
61 See JP Morgan CL at 12-13.
62 See WMBAA CL at 10.
63 See, e.g., ABC/CIEBA CL at 9 (“We ask the Commission adopt
a rule * * * which will require that the volume of those swaps which
are not block trades be disseminated in the form of ranges.”).
—————————————————————————
Some commenters expressed general concerns regarding anonymity as
well as specific concerns with respect to swaps in the other commodity
asset class. One commenter provided specific examples of how the
identities of the counterparties could be revealed by publicly
disseminating information relating to energy products.64 Another
commenter suggested the use of broad geographic regions when publicly
disseminating data for commodity swaps with very specific underlying
assets or delivery points (e.g., natural gas) in order to protect the
anonymity of the parties to these swaps.65 In commenting on the
hypothetical example provided in the Initial Proposal,66 the
commenter suggested that instead of reporting Lake Charles, Louisiana
as the delivery point, an SDR could publicly disseminate “Louisiana”
or “Gulf Coast.” 67
—————————————————————————
64 See MS CL at 3.
65 See Argus CL at 1-3.
66 See 75 FR 76,150-76,151.
67 See Argus CL at 1-3.
—————————————————————————
Six commenters argued that the proposed anonymity provisions are
not sufficient for certain swaps or certain markets (e.g., large,
bespoke trades offsetting energy assets; illiquid contracts entered
into by non-financial end-users; etc.). These commenters further argued
that the public dissemination requirement in the Initial Proposal may
result in undue harm to the swap market by increasing the risk of
public disclosure of the identities, business transactions and market
positions of swap counterparties.68
—————————————————————————
68 See Argus CL at 1-3; Coalition for Derivatives End-Users CL
at 8-9; Dominion CL at 6-9; Cleary Gottlieb CL at 5; MS CL at 3;
Bracewell & Giuliani CL at 2-7. See also Commission staff meeting
with NFPEEU, June 11, 2011.
—————————————————————————
3. Public Comments Regarding Implementation
In the Initial Proposal, the Commission solicited comments in
response to specific questions regarding the implementation of real-
time public reporting, including, inter alia, the timetable in which
the Commission would require the public dissemination of swap
transaction and pricing data for block trades and large notional off-
facility swaps. In response to the Initial Proposal, several commenters
suggested that the Commission phase-in the block trade thresholds and
time delays, starting with lower thresholds and longer time delays.69
These commenters further suggested that the Commission phase-in
stricter methodologies and time delays over time.70 For example, one
commenter stated in its comment letter that the Commission should
specify appropriate minimum block sizes in advance and readjust those
sizes over time in order to provide certainty to the market.71 In
contrast, another commenter argued that the Commission should use data
that is currently available to set appropriate minimum block sizes
without any delay.72
—————————————————————————
69 See, e.g., Barclays Capital CL at 5; World Federation of
Exchanges CL at 2; ISDA/SIFMA CL at 11-12; and Cleary Gottlieb CL at
18-19.
70 See, e.g., Freddie Mac CL at 2-3; Barclays Capital CL at 5.
71 See CCMR CL at 2-4. Accord Freddie Mac CL at 2-3 (“As the
Commission collects data about the liquidity of the swaps market and
the effects of the Commission’s reporting rules, it may be
appropriate to revisit the initial parameters for block trade
reporting in order to further increase transparency.”).
72 See SDMA CL at 3.
—————————————————————————
Following the close of the comment period, the Commission took
several actions in consideration of the comments received regarding the
proposed methodology to determine appropriate minimum block sizes, the
proposed anonymity protections and the proposed implementation
approach.73 A discussion of the Commission’s actions and their impact
on this Further Proposal is set out immediately below.
—————————————————————————
73 Commission staff also consulted with the staffs of several
other federal financial regulators in connection with the issuance
of this Further Proposal.
—————————————————————————
D. Analysis of Swap Market Data; Issuance of the Adopting Release
In consideration of the public comments submitted in response to
the Initial Proposal, the Commission obtained and analyzed swap data in
order to better understand the trading activity of swaps in certain
asset classes.74 The Commission also reviewed additional information,
including a recent study pertaining to the mandatory execution
requirements and post-trade transparency concerns that arose out of two
of the Commission’s proposed rulemakings,75 as well as a report
issued by two industry trade associations on block trade reporting in
the swaps market.76 In addition, the Commission and the Securities
and Exchange Commission, held a two-day public roundtable on Dodd-Frank
Act implementation on May 2 and 3, 2011 (“Public Roundtable”).77
During the Public Roundtable and in comment letters submitted in
support thereof, interested parties recommended that the Commission
adopt a phased-in approach with respect to the establishment of block
trade rules.
—————————————————————————
74 A detailed discussion of the Commission staff’s review and
analysis process is set out below in section II.B.1.a. of this
Further Proposal.
75 See ISDA, Costs and Benefits of Mandatory Electronic
Execution Requirements for Interest Rate Products, 24 (ISDA
Discussion Paper No. 2, Nov. 2011), available at http://www2.isda.org/attachment/Mzc0NA==/ISDA%20Mandatory%20Electronic%20Execution%20Discussion%20Paper.pdf.
This paper cited the Commission’s notice of proposed rulemaking with
respect to SEFs (Core Principles and Other Requirements for Swap
Execution Facilities, 76 FR 1,214, 1,220, Jan. 7, 2011) and the
Initial Proposal.
76 See Block trade reporting for over-the-counter derivatives
markets, note 54 supra.
77 See Joint Public Roundtable on Issues Related to the
Schedule for Implementing Final Rules for Swaps and Security-Based
Swaps Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR 23,211, Apr. 26, 2011. A copy of the
transcript is accessible at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf.
—————————————————————————
Recently, the Commission issued the Adopting Release that finalized
several provisions that were proposed in the Initial Proposal.78
Those provisions,
[[Page 15466]]
once effective, will implement, among other things: (1) Several
definitions proposed in the Initial Proposal relevant to this Further
Proposal 79; (2) the scope of part 43; (3) the reporting
responsibilities of the parties to each swap; (4) the requirement that
SDRs publicly disseminate swap transaction and pricing data; (5) the
data fields that SDRs will publicly disseminate; (6) the time-stamping
and recordkeeping requirements of SDRs, SEFs, DCMs and the “reporting
party” to each swap 80; (7) the interim time delays for public
dissemination and the time delays for public dissemination of large
notional off-facility swaps and block trades; and (8) interim notional
cap sizes for all swaps that are publicly disseminated.81
—————————————————————————
78 See 77 FR 1,182.
79 The Adopting Release includes final definitions for the
following terms: (1) Block trade; (2) large notional off-facility
swap; (3) appropriate minimum block size; and (4) asset class. As
noted above, the Adopting Release did not define the term swap
instrument. This Further Proposal puts forth a new term swap
category, which groups swaps for the purpose of determining whether
a swap transaction qualifies as a large notional off-facility swap
or block trade. See note 17 supra.
80 See Sec. 43.2 of the Commission’s regulations. 77 FR
1,244. The Adopting Release finalized the definition of “reporting
party” as a “party to a swap with the duty to report a publicly
reportable swap transaction in accordance with this part [43] and
section 2(a)(13)(F) of the [CEA].” 77 FR 1,244.
81 See 77 FR 1,244.
—————————————————————————
Based on the public comments received in response to the Initial
Proposal, and in order to successfully implement the real-time public
reporting regulatory framework established in the Adopting Release, the
Commission has decided to further propose provisions that: (1) Specify
the criteria for determining swap categories and methodologies for
determining the appropriate minimum block sizes for large notional off-
facility swaps and block trades; and (2) provide increased protections
to the identities of swap counterparties to large swap transactions and
certain other commodity swaps, which were not fully addressed in the
Adopting Release.82
—————————————————————————
82 In several places in the Adopting Release, the Commission
stated that it plans to address these requirements in a separate,
forthcoming release. See, e.g., 77 FR 1,185, 1,191, 1,193 and 1,217.
This Further Proposal is that release.
Commenters to this Further Proposal are requested to refrain
from providing comments with respect to the provisions adopted in
the Adopting Release. Those provisions are not the subject of this
Further Proposal. The Commission will not address the policy merits
or substance of those provisions in its final rulemaking to this
Further Proposal.
—————————————————————————
In section II of this Further Proposal, the Commission sets out its
proposal with respect to the criteria for determining swap categories
and the methodologies for determining appropriate minimum block sizes
for block trades and large notional off-facility swaps. In section III
of this Further Proposal, the Commission sets out its proposal with
respect to methodologies that provide anonymity to the swap
counterparties to large swap transactions and certain other commodity
swaps.
II. Further Proposal–Block Trades
A. Policy Goals
In section 2(a)(13) of the CEA, Congress intended that the
Commission consider both the benefits of enhanced market transparency
and the effects such transparency would have on market liquidity.83
The Commission anticipates that the public dissemination of swap
transaction and pricing data will generally reduce costs associated
with price discovery and prevent information asymmetries between market
makers and end users.84 The Commission is of the view that the
benefits of enhanced market transparency are not boundless,
particularly in swap markets with limited liquidity. As noted above,
section 2(a)(13)(E)(iv) of the CEA places constraints on the
requirements for the real-time public reporting of swap transaction and
pricing data. Specifically, this section provides that the Commission
shall “take into account whether the public disclosure [of swap
transaction and pricing data] will materially reduce market
liquidity.” 85
—————————————————————————
83 In considering the benefits and effects of enhanced market
transparency, the Commission notes that the “guiding principle in
setting appropriate block trade levels [is that] the vast majority
of swap transactions should be exposed to the public market through
exchange trading.” Congressional Record–Senate, S5902, S5922 (July
15, 2010).
84 See e.g., CEA section 2(a)(13)(B) (“The purpose of this
section is to authorize the Commission to make swap transaction and
pricing data available to the public in such form and at such times
as the Commission determines appropriate to enhance price
discovery.”).
85 CEA section 2(a)(13)(E)(iv). See also CEA section
5h(f)(2)(C) (concerning the treatment of block trades for execution
purposes).
—————————————————————————
The Commission believes that the publication of detailed
information regarding “outsize swap transactions” 86 could expose
swap counterparties to higher trading costs.87 In this regard, the
publication of detailed information about an outsize swap transaction
may alert the market to the possibility that the original liquidity
provider to the outsize swap transaction will be re-entering the market
to offset that transaction.88 Other market participants might be
alerted to the liquidity provider’s need to offset risk and therefore
would have a strong incentive to exact a premium from the liquidity
provider. As a result, liquidity providers possibly could be deterred
from becoming counterparties to outsize swap transactions if swap
transaction and pricing data is publicly disseminated before liquidity
providers can offset their positions. The Commission anticipates that,
in turn, this result could negatively affect market liquidity in the
swaps market. In consideration of these potential outcomes, this
Further Proposal seeks to provide maximum transparency while taking
into account reductions in market liquidity through more detailed
criteria to establish: (1) Swap categories (relative to the definition
of swap instrument in the Initial Proposal); and (2) a phased-in
approach to determining appropriate minimum block sizes for block
trades and large notional off-facility swaps. A summary of the
Commission’s proposed approach is described below.
—————————————————————————
86 As used in this Further Proposal, an “outsize swap
transaction” is a transaction that, as a function of its size and
the depth of the liquidity of the relevant market (and equivalent
markets), leaves one or both parties to such transaction unlikely to
transact at a competitive price.
87 The Commission’s proposed SEF rulemaking, would require
pre-trade transparency for swap transactions that: (1) Are subject
to the mandatory clearing requirement; (2) involves a swap that a
SEF makes available to trade; and (3) are not block trades. See
proposed Sec. 37.9(a)(2)(v), 76 FR 1,220. This Further Proposal
also would require SEFs to utilize the Commission’s rules for block
trades (i.e., the subject matter of this Further Proposal) in
determining the trading procedures that apply to swap transactions.
Therefore, swap transactions exceeding an appropriate minimum block
size would therefore be exempt from the mandatory trading
requirements.
88 The price of such a transaction would reflect market
conditions for the underlying commodity or reference index and the
liquidity premium for executing the swap transaction. The time
delays in part 43 of the Commission’s regulations will protect end-
users and liquidity providers from the expected price impact of the
disclosure of publicly reportable swap transactions. Trading that
exploits the need of traders to reduce or offset their positions has
been defined in financial economics literature as “predatory
trading.” See e.g., Markus Brunnermeier and Lasse Heje Pedersen,
Predatory Trading, Journal of Finance LX 4, Aug. 2005, available at
http://pages.stern.nyu.edu/~lpederse/papers/predatory_trading.pdf.
—————————————————————————
B. Summary of the Proposed Approach
The Commission is proposing a two-period, phased-in approach to
implement of regulations for determining appropriate minimum block
sizes.89 That is, the Commission is
[[Page 15467]]
proposing to phase-in its regulations during an initial period and
thereafter on an ongoing basis (i.e., the post-initial period) so that
market participants can better adjust their swap trading strategies to
manage risk, secure new technologies and make necessary arrangements in
order to comply with part 43. The Commission is proposing two
provisions relating to the Commission’s determination of appropriate
minimum block sizes: (1) Initial appropriate minimum block sizes under
proposed Sec. 43.6(e); and (2) post-initial appropriate minimum block
sizes under proposed Sec. 43.6(f).
—————————————————————————
89 The Commission is proposing the same phased-in approach for
determining cap sizes. For a more detailed discussion of the
Commission’s proposed approach with respect to cap sizes, see
section III of this Further Proposal infra.
The two-period, phased-in approach would become effective after
the implementation of the part 43 provisions in the Adopting
Release. Until the date on which the proposed provisions in this
Further Proposal become effective, all swaps would be subject to a
time delay pursuant to the provisions in part 43.
—————————————————————————
In proposed Sec. 43.6(e), the Commission is establishing initial
appropriate minimum block sizes for each category of swaps within the
interest rate, credit, foreign exchange (“FX”) and other commodity
asset classes.90 The Commission has listed the prescribed initial
appropriate minimum block sizes in proposed appendix F to part 43 based
on these swap categories.91 For interest rate and credit swaps, the
Commission reviewed actual market data and has prescribed initial
appropriate minimum block sizes for swap categories in these asset
classes based on that data. For the other asset classes, the Commission
did not have access to relevant market data. As such, during the
initial period, the Commission is proposing to use a methodology based
on whether a swap or swap category is “economically related” to a
futures contract.92 Swaps and swap categories that are not
economically related to a futures contract would remain subject to a
time delay (i.e., treated as block trades or large notional off-
facility swaps, as applicable, regardless of notional amount). All
initial appropriate minimum block sizes in proposed appendix F to part
43 would become effective 60 days following the publication in the
Federal Register of a final rule adopting the provisions set forth in
this Further Proposal.
—————————————————————————
90 The Commission is proposing that swaps in the equity asset
class do not qualify as block trades and large notional off-facility
swaps. See proposed Sec. 43.6(d). Otherwise, the Commission is
prescribing swap categories for each asset class as set forth in
proposed Sec. 43.6(b). These swap categories would remain the same
during the initial and post-initial periods.
91 The Commission notes SEFs and DCMs would not be prohibited
under this Further Proposal from setting block sizes for swaps at
levels that are higher than the appropriate minimum block sizes as
determined by the Commission.
92 A discussion of the term “economically related” is set
forth below in section II.C.4 of this Further Proposal.
—————————————————————————
In proposed Sec. 43.6(f)(1), the Commission provides that the
duration of this initial period would be no less than one year after an
SDR has collected reliable data for a particular asset class as
determined by the Commission. During the initial period, the Commission
would review reliable data for each asset class. For the purposes of
this proposed provision, reliable data would include all data collected
by an SDR for each asset class in accordance with the compliance chart
in the adopting release to part 45 of the Commission’s regulations.93
The proposed initial period would expire following the publication of a
Commission determination of post-initial appropriate minimum block
sizes in accordance with the publication process set forth in proposed
Sec. Sec. 43.6(f)(3) and (4). Thereafter, the Commission would set
post-initial appropriate minimum block sizes for swap categories no
less than once each calendar year using the calculation methodology set
forth in proposed Sec. 43.6(c)(1).94
—————————————————————————
93 See Swap Data Recordkeeping and Reporting Requirements, 77
FR 2,136, 2,196, Jan. 13, 2012. The Commission is currently of the
view, however, that data is per se reliable if it is collected by an
SDR for an asset class after the respective compliance date for such
asset class as set forth in part 45 of the Commission’s regulations.
94 In particular, the Commission is proposing a 67-percent
notional amount calculation, which is discussed in more detail infra
in section II.D.1 of this Further Proposal.
—————————————————————————
The Commission is also proposing special rules for determining
appropriate minimum block sizes in certain instances. In particular, in
proposed Sec. 43.6(d), the Commission prescribes special rules for
swaps in the equity asset class. In proposed Sec. 43.6(h), the
Commission is establishing special rules for determining appropriate
minimum block sizes in certain circumstances including, for example,
rules for converting currencies and rules for determining whether a
swap with optionality qualifies for block trade or large notional off-
facility swap treatment.
Section C below describes the Commission’s proposed approach to
establish swap categories across the five asset classes. A discussion
of the Commission’s proposed methodologies to determine appropriate
minimum block sizes follows in section D.
C. Proposing Criteria for Distinguishing Among Swap Categories in Each
Asset Class
The Commission is proposing to use the term “swap category” to
convey the concept of a grouping of swap contracts that would be
subject to a common appropriate minimum block size.95 Specifically,
the Commission is proposing specific criteria for defining swap
categories in each asset class. These proposed criteria are intended to
address the following two policy objectives: (1) Categorizing together
swaps with similar quantitative or qualitative characteristics that
warrant being subject to the same appropriate minimum block size; and
(2) minimizing the number of the swap categories within an asset class
in order to avoid unnecessary complexity in the determination
process.96 In the Commission’s view, balancing these policy
objectives and considering the characteristics of different types of
swaps within an asset class are necessary in establishing appropriate
criteria for determining swap categories within each asset class. The
five asset classes established by the Commission in the Adopting
Release are discussed briefly in the paragraph below, followed by a
discussion of the proposed swap category criteria for each asset class.
—————————————————————————
95 Proposed Sec. 43.6(b) does not set out a definition for
the term “swap category.” Instead, proposed Sec. 43.6(b) sets out
the provisions that group swaps within each asset class with common
risk and liquidity profiles, as determined by the Commission.
96 These objectives are specific to the determination of
appropriate swap category criteria and are intended to promote the
general policy goals described above in section II.A.of this Further
Proposal.
—————————————————————————
Section 43.2 of the Commission’s regulations currently defines
“asset class” as “a broad category of commodities, including without
limitation, any `excluded commodity’ as defined in section 1a(19) of
the [CEA], with common characteristics underlying a swap.” 97
Section 43.2 also identifies the following five swap asset classes:
interest rates; 98 equity; credit; FX; 99 and other
commodities.100
—————————————————————————
97 See Sec. 43.2, 77 FR 1,243.
98 In the Adopting Release, the Commission determined that
cross-currency swaps are a part of the interest rate asset class.
See 77 FR 1,193. The Commission noted that this determination is
consistent with industry practice. See id.
—————————————————————————
In this Further Proposal, the Commission is proposing to breakdown
each asset class further into separate swap categories for the purpose
of determining appropriate minimum block sizes for such categories.
During the initial and post-initial periods, the Commission would group
swaps in the five asset classes into the prescribed swap categories as
set forth in proposed Sec. 43.6(b). In the subsections that follow,
the Commission discusses in detail the proposed criteria for further
delineating groups of swaps in the interest rate, credit, equity, FX,
and other commodity
[[Page 15468]]
asset classes into separate swap categories.
—————————————————————————
99 To the extent that FX swaps or forwards, or both, are
excluded from the definition of “swap” pursuant to a determination
by United States Department of the Treasury (“Treasury”), the
requirements of section 2(a)(13) of the CEA would not apply to those
transactions, and such transactions would not be subject to part 43
of the Commission’s regulations. Treasury issued a proposed
determination on April 29, 2011, in which it stated that FX swaps
and forwards would be excluded from the definition of “swap,” and
thereby exempt from certain requirements established in the Dodd-
Frank Act, including registration and clearing. See Determination of
Foreign Exchange Swaps and Foreign Exchange Forwards Under the
Commodity Exchange Act, 76 FR 25,774, May 5, 2011. Treasury’s
proposed determination may also be found at http://www.treasury.gov/initiatives/wsr/Documents/FX%20Swaps%20and%20Forwards%20NPD.pdf.
The CEA provides, however, that, even if Treasury determines
that FX swaps and forwards may be excluded from the definition of
“swap”, these transactions still are not excluded from regulatory
reporting requirements to an SDR. Nonetheless, as stated, such
transactions would not be subject to part 43 of the Commission’s
regulations. See 77 FR 1,188. Treasury has proposed to act pursuant
to the authority in section 721 of the Dodd-Frank Act that permits a
determination that certain FX swaps and forwards should not be
regulated as swaps and are not structured to evade the Dodd-Frank
Act. The Commission has noted that, as proposed, Treasury’s
determination would exclude FX swaps and forwards, as defined in CEA
section 1a, but would not apply to FX options or non-deliverable
forwards. FX instruments that are not covered by Treasury’s final
determination would still be subject to part 43 of the Commission’s
regulations.
100 The Adopting Release defines the term “other commodity”
to mean any commodity that is not categorized in the other asset
classes as may be determined by the Commission. See 77 FR 1,244. The
definition of asset class in Sec. 43.2 also provides that the
Commission may later determine that there are other asset classes
not identified currently in that section. See 77 FR 1,243.
—————————————————————————
Request for Comment
Q1. Should the Commission provide for special swap categories and
appropriate minimum block size methodologies for bilateral versus
cleared swap transactions? If so, why?
1. Interest Rate and Credit Asset Classes
a. Background
The Commission was able to obtain and review non-public swap data
to make inferences about patterns of trading activity, price impact and
liquidity in the market for swaps in the interest rate and credit asset
classes. Based on that review, the Commission is proposing criteria for
determining swap categories in these two asset classes. Specifically,
the Commission is proposing to define swap categories for: (1) Interest
rate swaps based on unique combinations of tenor 101 and currency;
and (2) credit default swaps (“CDS”) based on unique combinations of
tenor and conventional spreads.102
—————————————————————————
101 As used in the Further Proposal, the tenor of a swap
refers to the amount of time from the effective or start date of a
swap to the end date of such swap. In circumstances where the
effective or start date of the swap was different from the trade
date of the swap, the Commission used the later occurring of the two
dates to determine tenor.
102 As generally used in the industry, the term “conventional
spread” represents the equivalent of a swap dealer’s quoted spread
(i.e., an upfront fee based on a fixed coupon and using standard
assumptions such as auctions and recovery rates. More information
regarding the use of this term can be found at Markit, The CDS Big
Bang: Understanding the Changes to the Global CDS Contract and North
American Conventions, at http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf, (Mar. 2009), at 19.
—————————————————————————
The Commission obtained transaction-level data for these asset
classes from two third-party service providers with the assistance of
the Over-the-Counter Derivatives Supervisors Group (“ODSG”).103 The
ODSG was established in 2005 and is chaired by the Federal Reserve Bank
of New York. The ODSG is comprised of domestic and international
supervisors of representatives from major OTC derivatives market
participants.104 In particular, the ODSG coordinated with the “G-14
banks” in order to gain written permission to access the non-public
swap data.105
—————————————————————————
103 Section 8(a) of the CEA protects non-public, transaction-
level data from public disclosure. Section 8(a)(1) provides, in
relevant part, that “the Commission may not publish data and
information that would separately disclose the business transactions
or market positions of any person and trade secrets or names of
customers * * *.” To assist commenters, this Further Release
includes various tables and summary statistics depicting the ODSG
data in aggregate forms. In the discussion that follows, the
Commission additionally has described the methodology it employed in
reviewing, analyzing and drawing conclusions based on the ODSG data.
104 See OTC Derivatives Supervisors Group–Federal Reserve
Bank of New York, http://www.ny.frb.org/markets/otc_derivatives_supervisors_group.html (last visited Jan. 15, 2012). The ODSG was
formed “in order to address the emerging risks of inadequate
infrastructure for the rapidly growing market in the credit
derivatives * * *.” The ODSG works directly with market
participants to plan, monitor and coordinate industry progress
toward collective commitments made by firms.
105 The G-14 banks are: Bank of America-Merrill Lynch;
Barclays Capital; BNP Paribas; Citigroup; Credit Suisse; Deutsche
Bank AG; Goldman Sachs & Co.; HSBC Group; J.P. Morgan; Morgan
Stanley; The Royal Bank of Scotland Group; Societe Generale; UBS AG;
and Wells Fargo Bank, N.A.
—————————————————————————
MarkitSERV, a post-trade processing company jointly owned by Markit
and The Depository Trust & Clearing Corporation (“DTCC”), provided
the interest rate swap data set. The interest rate swap data set
covered transactions confirmed on the MarkitWire platform between June
1, 2010 and August 31, 2010 where at least one party was a G-14
Bank.106
—————————————————————————
106 The interest rate swap data was limited to transactions
and events submitted to the MarkitWire platform. MarkitWire is a
trade confirmation service offered by MarkitSERV.
—————————————————————————
The Warehouse Trust Company LLC (“The Warehouse Trust”) provided
the CDS data set.107 The CDS data set covered CDS transactions for a
three-month period beginning on May 1, 2010 and ending on July 31,
2010.108
—————————————————————————
107 The Warehouse Trust, a subsidiary of DTCC DerivSERV LLC,
is regulated as a member of the U.S. Federal Reserve System and as a
limited purpose trust company by the New York State Banking
Department. The Warehouse Trust provides the market with a trade
database and centralized electronic infrastructure for post-trade
processing of OTC credit derivatives contracts over their entire
lifecycle. See DTCC, The Warehouse Trust Company, About the
Warehouse Trust Company, http://www.dtcc.com/about/subs/derivserv/warehousetrustco.php. (last visited Jan. 31, 2012).
108 The Warehouse Trust data contained “allocation-level
data,” which refers to refers to transactional data that does not
distinguish between isolated transactions and transactions that,
although documented separately, comprise part of a larger
transaction.
The Commission notes the work of other regulators in aggregating
observations believed to be part of a single transaction. See
Kathryn Chen, et al., Federal Reserve Bank of New York Staff Report,
An Analysis of CDS Transactions: Implications for Public Reporting,
(Sept. 2011), at 25, http://www.newyorkfed.org/research/staff_reports/sr517.html. The Commission notes that this allocation-level
information could produce a downward bias in the notional amounts of
the swap transactions in the data sets provided by the ODSG. In
turn, this downward bias would produce smaller appropriate minimum
block trade sizes relative to a data set that, if available with
appropriate execution time stamps, would reflect the aggregate
notional amount of swaps completed in a single transaction.
—————————————————————————
b. The Commission filtered both data sets in order to analyze only
transaction-level data corresponding to “publicly reportable swap
transactions,” as defined in Sec. 43.2 of the Adopting Release.109
As such, the Commission excluded from its analysis duplicate and non-
price forming transactions.110 The
[[Page 15469]]
Commission also converted the notional amount of each swap transaction
into a common currency denominator the U.S. dollar.111 Interest Rate
Swap Categories.
—————————————————————————
109 “Publicly reportable swap transaction” means, unless
otherwise provided in this part: (1) Any executed swap that is an
arm’s-length transaction between two parties that results in a
corresponding change in the market risk position between the two
parties; or (2) any termination, assignment, novation, exchange,
transfer, amendment, conveyance, or extinguishing of rights or
obligations of a swap that changes the pricing of the swap. Examples
of an executed swap that does not fall within the definition of
publicly reportable swap transaction may include: (1) Certain
internal swaps between 100-percent-owned subsidiaries of the same
parent entity; and (2) portfolio compression exercises. These
examples represent swaps that are not at arm’s length, but that do
result in a corresponding change in the market risk position between
two parties. See 77 FR 1,244.
110 The excluded records represented activities such as option
exercises or assignments for physical, risk optimization or
compression transactions, and amendments or cancellations that were
assumed to be mis-confirmed. A transaction was assumed to be mis-
confirmed when it was canceled without a fee, which the Commission
has inferred was the result of a confirmation correction. The
Commission also excluded interest rate transactions that were
indicated as assignments, terminations, and structurally excluded
records since the Commission was unable to determine if these
records were price-forming. The Commission also excluded CDS
transactions that were notated as single name transactions. The data
sets also included transaction records created for workflow purposes
(and therefore redundant), duplicates and transaction records
resulting from name changes or mergers.
111 The Commission calculated the average daily exchange rates
between relevant currencies and the U.S. dollar for the relevant
three-month period covered by the data. This average daily exchange
rate was then applied to the notional amounts for non-U.S. dollar
denominated swap transactions.
—————————————————————————
i. Interest Rate Swap Data Summary
The filtered transaction records in the interest rate swap data set
contained 166,874 transactions with a combined notional value of
approximately $45.4 trillion dollars.112 These transactions included
trades with a wide range of notional amounts, 28 different currencies,
eight product types, 57 different floating rate indexes and tenors
ranging from under one week to 55 years. Summary statistics of the
filtered interest rate swap data set are presented in Table 1.113
—————————————————————————
112 The Commission only reviewed relevant transaction records
in the interest rate swap data set. As noted above, the Commission
excluded duplicate and non-price forming transactions from its
review. See note 110 supra for a list of excluded transaction
records.
113 See the International Organization for Standardization
(ISO) standard ISO 4217 for information on the currency codes used
by the Commission. For information on floating rate indexes, see
also ISDA, 2006 Definitions (2006), and supplements.
114 In producing Table 1, the Commission counted tenors for
swaps with an end date within four calendar days of a complete month
relative to the swap’s start date as ending on the nearest complete
month.
Table 1–Summary Statistics for the Interest Rate Swap Data Set by Product Type, Currency, Floating Index and
Tenor 114
—————————————————————————————————————-
Notional
Number of Percentage of amount Percentage of
transactions total (billions of total notional
transactions USD) amount (%)
—————————————————————————————————————-
Product Type:
Single Currency Interest Rate Swap………. 128,658 77 16,276 36
Over Night Index Swap (OIS)…………….. 12,816 8 16,878 37
Forward Rate Agreement (FRA)……………. 5,936 4 7,071 16
Swaption……………………………… 11,042 7 2,256 5
Other………………………………… 8,395 5 2,909 6
Currency:
European Union Euro Area euro (EUR)……… 46,412 28 18,648 41
United States dollar (USD)……………… 50,917 31 11,377 25
United Kingdom pound sterling (GBP)……… 16,715 10 7,560 17
Japan yen (JPY)……………………….. 19,502 12 4,253 9
Other………………………………… 33,301 20 3,553 8
Floating Index:
USD-LIBOR-BBA…………………………. 48,651 29 9,411 21
EUR-EURIBOR-Reuters……………………. 39,446 24 9,495 21
EUR-EONIA-OIS-COMPOUND…………………. 6,517 4 9,122 20
JPY-LIBOR-BBA…………………………. 19,194 12 4,010 9
GBP-LIBOR-BBA…………………………. 12,835 8 2,419 5
GBP-WMBA-SONIA-COMPOUND………………… 2,014 1 5,123 11
Other………………………………… 38,190 23 5,809 13
Tenor:
1 Month………………………………. 3,171 2 11,859 26
3 Month………………………………. 10,229 6 11,660 26
6 Month………………………………. 2,822 2 1,701 4
1 Year……………………………….. 9,522 6 3,484 8
2 Year……………………………….. 16,450 10 3,347 7
3 Year……………………………….. 9,628 6 1,488 3
5 Year……………………………….. 26,139 16 2,712 6
7 Year……………………………….. 6,599 4 661 1
10 Year………………………………. 34,000 20 2,746 6
30 Year………………………………. 9,616 6 448 1
Other………………………………… 38,671 23 5,284 12
—————————————————————
Sample Totals……………………… 166,847 100 45,390 100
—————————————————————————————————————-
Table 2 below sets out the notional amounts of the interest rate
swap data set organized by product type, currency, floating index and
tenor. The table also includes the notional amounts in each percentile
of a distribution of the data set.
[[Page 15470]]
Table 2–Notional Amounts of Interest Rate Swap Data Set Organized by Product Type, Currency, Floating Index and
Tenor
[In millions of USD]
—————————————————————————————————————-
Mean Percentiles
notional —————————————————————
amount 5th 10th 25th 50th 75th 90th 95th
—————————————————————————————————————-
Product Type:
Single Currency Interest Rate 127 4 9 23 52 117 252 438
Swap……………………….
OIS………………………… 1,293 6 13 63 341 1,261 3,784 5,282
FRA………………………… 1,168 90 133 266 631 1,039 2,000 3,018
Swaption……………………. 204 3 20 50 100 226 500 642
Other………………………. 346 * 1 23 89 250 631 1,132
Currency:
EUR………………………… 400 6 15 38 91 249 631 1,617
USD………………………… 221 5 12 31 89 200 500 1,000
GBP………………………… 435 1 1 15 57 167 755 1,698
JPY………………………… 221 11 13 28 57 124 339 790
Other………………………. 108 4 6 13 30 78 175 308
Floating Index:
USD-LIBOR-BBA……………….. 192 5 12 30 76 180 500 803
EUR-EURIBOR-Reuters………….. 241 8 17 38 79 189 416 757
EUR-EONIA-OIS-COMPOUND……….. 1,385 4 10 61 315 1,261 3,784 6,306
JPY-LIBOR-BBA……………….. 211 11 12 28 57 113 339 658
GBP-LIBOR-BBA……………….. 181 1 4 23 54 151 377 755
GBP-WMBA-SONIA-COMPOUND………. 2,450 75 113 283 1,509 3,018 6,037 9,055
Other………………………. 152 2 4 12 31 88 264 500
Tenor:
1 Month…………………….. 3,523 37 252 1,251 2,522 3,784 7,546 12,074
3 Month…………………….. 1,081 11 38 208 604 1,250 2,000 3,018
6 Month…………………….. 581 19 49 150 377 747 1,261 1,892
1 Year……………………… 348 20 31 70 151 341 755 1,261
2 Year……………………… 205 10 16 39 111 243 453 631
3 Year……………………… 154 10 16 44 95 169 315 500
5 Year……………………… 107 5 9 25 63 113 226 316
7 Year……………………… 105 7 13 29 57 113 221 315
10 Year…………………….. 83 5 10 23 50 95 175 252
30 Year…………………….. 47 4 7 18 26 50 95 132
Other………………………. 249 2 4 15 50 126 340 883
—————————————————————————————————————-
The Commission also analyzed the interest rate swap data set to
classify the counterparties into broad groups.115 The Commission’s
analysis of the interest rate swap data set revealed that approximately
50 percent of transactions were between buyers and sellers who were
both identified as G-14 banks and that these transactions represented a
combined notional amount of approximately $22.85 trillion or 50 percent
of the relevant IRS data set’s total combined notional amount.
—————————————————————————
115 MarkitSERV anonymized the identities of the counterparties
and indicated whether a G-14 bank was a party to the swap
transaction. Summary statistics relating to these anonymous numbers
included: (1) Total count of unique counterparties was equal to
approximately 300; (2) the average notional size of transactions
involving two G-14 banks was equal to approximately $280 million;
(3) the average notional size of transactions involving both a G-14
bank and a non G-14 bank (which traded at least 100 swap
transactions) was equal to approximately $260 million.
—————————————————————————
ii. Interest Rate Swap Data Analysis
As noted above, the Commission is proposing swap categories in the
interest rate asset class based on tenor and underlying currency. The
Commission is of the view that these criteria would meet the objectives
of grouping swaps with economic similarity and reducing unnecessary
complexity for market participants in determining whether their swaps
are classified within a particular swap category. Tenors were
associated with concentrations of liquidity at commonly recognized
points along the yield curve. In general, the Commission observed that
transactions in the data set (and related market liquidity) tended to
cluster at certain tenors.116
—————————————————————————
116 The Commission alternatively considered using tenor solely
to determine interest rate swap categories. While this alternative
approach would result in fewer swap categories (and would be based
on the strongest single variable indicator of notional size in
statistical regressions performed by the Commission on the interest
rate swap data set), it may result in overbroad swap categories
treating, for example, interest rate swaps denominated in U.S.
dollars the same as those denominated in Polish zlotys, despite
relative liquidity differences. As a result, this alternative
approach may result in the super-major currency-denominated interest
rate swaps setting the block size for all other currencies because
of the super-major currency’s relatively higher trading frequency.
See note 123 infra for the Commission’s definition of “super-
majority currency.”
—————————————————————————
The Commission is proposing interest rate swap tenor groupings
based on two observations regarding the data in the interest rate swap
data set.117 First, the Commission observed that price-notation
conventions and points of concentrated transaction activity correspond
with specific tenors (e.g., three months, six months, one year, two
years, etc.). Second, the Commission observed a similarity in the
transaction amounts within a given tenor grouping (e.g., longer-dated
tenors in the data set generally had lower average notional sizes).
Based on these observations, table 3 below details the proposed tenor
groups for the interest rate asset class.
—————————————————————————
117 Through the performance of statistical regressions on the
interest rate swap data set, the Commission found that tenor was the
single strongest indicator of variations in notional amounts.
118 The Commission chose to extend the tenor groups about one-
half month beyond the commonly observed tenors to group similar
tenors together and capture variations in day counts. The Commission
added an additional 15 days beyond a multiple of one year to the
number of days in each group to avoid ending each group on specific
years.
[[Page 15471]]
Table 3–Proposed Tenor Groups for Interest Rates Asset Class 118
————————————————————————
And tenor less than
Tenor group Tenor greater than or equal to
————————————————————————
1……………………… ……………….. Three months (107
days).
2……………………… Three months (107 Six months (198
days). days).
3……………………… Six months (198 One year (381 days).
days).
4……………………… One year (381 days). Two years (746
days).
5……………………… Two years (746 days) Five years (1,842
days).
6……………………… Five years (1,842 Ten years (3,668
days). days).
7……………………… Ten years (3,668 30 years (10,973
days). days).
8……………………… 30 years (10,973
days).
————————————————————————
Similarly, through its analysis of the interest rate swap data set,
the Commission found that the currency referenced in a swap explains a
significant amount of variation in notional size and, hence, can be
used to categorize interest rate swaps given this relationship.119
The Commission is proposing currency groupings after considering: (1)
Price-notation conventions; (2) the relative development of currency
groups in the interest rate and FX futures markets; (3) the relative
swap transaction total notional amounts and transaction volumes of each
currency group; and (4) the relative average transaction notional
amounts and lack of evidence of large transacted notional amounts or
substantial volume of each currency group.120 After considering these
factors, the Commission is proposing three currency categories for the
interest rate asset class: (1) Super-major currencies, which are
currencies with large volume and total notional amounts; 121 (2)
major currencies, which generally exhibit moderate volume and total
notional amounts; 122 and (3) non-major currencies, which generally
exhibit moderate to very low volume and notional amounts.
—————————————————————————
119 The Commission considered alternative approaches of using
the individual floating rate indexes or currencies to determine swap
categories in the interest rate asset class. These alternative
approaches would have the benefit of being more correlated to an
underlying curve than the recommended currency and tenor groupings.
The data contained 57 floating rate indexes and 28 currencies, which
would result in 456 and 224 categories respectively, after sorting
by the eight identified tenor groups. The Commission anticipates,
however, that grouping swaps using individual rates or currencies
would not substantially increase the explanation of variations in
notional amounts, while it could result in cells with relatively few
observations in some currency-tenor categories. Hence, the
Commission does not believe there would be a significant benefit to
offset the additional compliance burden that a more granular
approach would impose on market participants.
120 Non-major currencies represent less than two percent of
the total notional and about 10 percent of the transactions. These
currencies typically do not have corresponding futures markets.
121 Super-major currencies represent over 92 percent of the
total notional amounts and 80 percent of the total transactions in
the data set. It is noteworthy that these currencies have well-
developed futures markets for general interest rates and exchange
rates.
122 Major currencies represent about six percent of the total
notional amount and about 10 percent of the transactions. Some of
these currencies host liquid futures markets for interest rates, and
all exhibit liquid foreign exchange markets.
—————————————————————————
Table 4 below summarizes the Commission’s three proposed currency
swap categories.
—————————————————————————
123 The Commission selected these currencies for inclusion in
the definition of major currencies based on the relative liquidity
of these currencies in the interest rate and FX futures markets. The
Commission is of the view that this list of currencies is
consistent, in part, with the Commission’s existing regulations in
Sec. 15.03(a), which defines “major foreign currency as “the
currency, and the cross-rates between the currencies, of Japan, the
United Kingdom, Canada, Australia, Switzerland, Sweden and the
European Monetary Union.” 17 CFR 15.03(a).
Table 4–Proposed Currency Categories for Interest Rates Asset Class
————————————————————————
Currency category Component currencies
————————————————————————
Super-Major Currencies……. United States dollar (USD), European
Union Euro Area euro (EUR), United
Kingdom pound sterling (GBP), and Japan
yen (JPY).
Major Currencies 123……. Australia dollar (AUD), Switzerland franc
(CHF), Canada dollar (CAD), Republic of
South Africa rand (ZAR), Republic of
Korea won (KRW), Kingdom of Sweden krona
(SEK), New Zealand dollar (NZD), Kingdom
of Norway krone (NOK) and Denmark krone
(DKK).
Non-Major Currencies……… All other currencies.
————————————————————————
Table 5 below presents details on the sample characteristics of the
interest rate swap data set organized by currency and tenor swap
categories.
—————————————————————————
124 Table 5 does not include swap categories with less than
200 transactions in order to preserve the anonymity of the parties
to these transactions.
Table 5–Sample Characteristics of Proposed Interest Rate Swap Categories 124
—————————————————————————————————————-
Percent of Notional Percent of
Currency category Tenor group Number of transactions (billions of total notional
transactions (%) USD) (%)
—————————————————————————————————————-
Super-major………………… 1 11,394 7 22,347 50
Super-major………………… 2 2,563 2 1,813 4
Super-major………………… 3 6,277 4 3,302 7
Super-major………………… 4 12,395 7 3,420 8
Super-major………………… 5 32,148 19 4,818 11
Super-major………………… 6 42,675 26 4,220 9
Super-major………………… 7 24,237 15 1,433 3
Super-major………………… 8 1,857 1 56 0
[[Page 15472]]
Major……………………… 1 2,305 1 1,818 4
Major……………………… 2 445 0 124 0
Major……………………… 3 2,113 1 302 1
Major……………………… 4 2,639 2 226 1
Major……………………… 5 5,380 3 293 1
Major……………………… 6 3,707 2 129 0
Major……………………… 7 704 0 19 0
Major……………………… 8 <200
Non-Major………………….. 1 403 0 64 0
Non-Major………………….. 2 247 0 26 0
Non-Major………………….. 3 2,073 1 165 0
Non-Major………………….. 4 3,354 2 256 1
Non-Major………………….. 5 5,873 4 116 0
Non-Major………………….. 6 3,935 2 41 0
Non-Major………………….. 7 <200 ………….. ………….. …………..
Non-Major………………….. 8 <200 ………….. ………….. …………..
—————————————————————————————————————-
Table 6 below sets out the notional amounts of the interest rate
swap data set organized by currency and tenor categories. The table
includes the mean notional amount of each currency and tenor category,
as well as the notional amounts in each percentile of a distribution of
the data set.
Table 6–Notional Amounts of Interest Rate Swap Data Set Organized by the Proposed Interest Rate Swap Categories
[In millions of USD]
—————————————————————————————————————-
Transactions percentiles
Currency group Tenor Mean ————————————————————–
group 5th 10th 25th 50th 75th 90th 95th
—————————————————————————————————————-
Super-major……………….. 1 1,961 10 36 500 1,000 2,260 4,000 6,306
Super-major……………….. 2 708 13 41 200 500 883 1,500 2,260
Super-major……………….. 3 526 47 75 150 272 565 1,179 1,809
Super-major……………….. 4 276 19 43 100 176 304 565 848
Super-major……………….. 5 150 9 21 50 100 158 301 482
Super-major……………….. 6 99 6 12 30 54 100 204 305
Super-major……………….. 7 59 1 5 14 31 63 126 200
Super-major……………….. 8 30 0 0 1 13 37 65 118
Major…………………….. 1 789 80 133 175 312 573 921 1,313
Major…………………….. 2 279 50 70 120 210 350 480 921
Major…………………….. 3 143 13 26 52 97 175 264 438
Major…………………….. 4 86 9 16 33 66 104 184 240
Major…………………….. 5 54 4 8 19 44 72 109 145
Major…………………….. 6 35 4 7 13 23 46 72 96
Major…………………….. 7 27 5 7 11 20 31 49 75
Major…………………….. 8 <200
Non-major…………………. 1 160 19 37 64 129 225 315 450
Non-major…………………. 2 106 16 23 39 72 145 233 311
Non-major…………………. 3 79 8 22 31 56 102 157 224
Non-major…………………. 4 76 6 9 16 27 50 78 108
Non-major…………………. 5 20 2 4 8 14 23 39 54
Non-major…………………. 6 10 2 2 4 8 13 21 29
Non-major…………………. 7 <200 ……. ……. ……. ……. ……. ……. …….
Non-major…………………. 8 <200 ……. ……. ……. ……. ……. ……. …….
—————————————————————————————————————-
Request for Comment
Q2. Please provide comments regarding the Commission’s proposed two
criteria (tenor and underlying currency type) for determining swap
categories in the interest rate asset class.
Q3. As a variation of the proposed approach, should specific
currencies as proposed to be assigned be moved to other proposed
currency categories?
Q4. As a second variation to the proposed approach, the Commission
is considering, for super-major currency interest rate swaps,
bifurcating the less than three month tenor category into two separate
swap categories: (1) A swap category composed of super-major currency
interest rate swaps with a less than 21 day tenor; and (2) a swap
category composed of super-major currency interest rate swaps with a
greater than 21 day tenor, but less than three month tenor (107 days).
The Commission requests comment on the appropriateness of this
variation.125
—————————————————————————
125 This approach would yield an appropriate minimum block
size for super-major currency interest rate swaps with a less than
21 day tenor of $13 billion based on the 67-percent notional amount
calculation proposed in Sec. 43.6(c)(1). The appropriate minimum
block size for interest rate swaps with a tenor of 21 days to three
months would remain at $6.4 billion in the super-major currency swap
category. See proposed appendix F to part 43 of the Commission’s
regulations infra.
—————————————————————————
[[Page 15473]]
Q5. As a third variation to the proposed approach, the Commission
considered floating rate index, product type, duration equivalents,
tenor, individual currencies,126 and currency categories in
determining the economic similarities among the swaps in the interest
rate asset class before settling on tenor and currency groupings as the
sole criteria. Should the Commission use one or more of these other
characteristics in addition to, or instead of, the proposed swap
categories in the interest rate asset class?
—————————————————————————
126 The Commission found that the precision of an approach
utilizing the above-mentioned tenor groupings along with individual
currencies was only marginally improved.
—————————————————————————
Q6. The proposed interest rate swap categories generally resulted
in the grouping of swaps characterized by similar market activity–
i.e., high, medium, and low volumes and notional sizes. The Commission
requests comment as to whether other measures of market activity or
swap characteristics should be used to group or validate the grouping
of swaps.
Q7. What considerations should the Commission take into account
related to the approach for calculating the tenor of back-dated swaps
(i.e., those swaps in which the start date is prior to the execution
date)? How should back-dated swaps be categorized for the purposes of
determining the tenor?
Q8. Should the Commission consider expanding or contracting the
number of currency categories, and, if so, which currencies should be
placed in each category? The Commission asks commenters to describe any
specific recommendations and include market data in support of such
recommendations.
c. Credit Swap Categories
i. Credit Swap Data Summary
The CDS data set contained 98,931 CDS index records that would fall
within the definition of publicly reportable swap transaction,127
with a combined notional value of approximately $4.6 trillion
dollars.128 The CDS data set contained transactions based on 26 broad
credit indexes.129 Of those indexes, each of the iTraxx Europe Series
and the Dow Jones North America investment grade CDS indexes
(“CDX.NA.IG”) served as the basis for over 20 percent of the total
number of transactions and over 33 percent of the total notional value
in the relevant CDS data set. Table 7 sets out summary statistics of
the CDS data set and includes those CDS indexes with greater than five
transactions per day on average.
—————————————————————————
127 See note 109 supra.
128 The CDS index transactions in the data set made up
approximately 33 percent of the total filtered records and 75
percent of the CDS markets’ notional amount for the three months of
data provided. The data set contained over 250 different reference
indexes; 400 reference index and tenor combinations; and 450
reference index, tenor, and tranche combinations. The data set also
contained three different currencies: USD (53%), EUR (46%), and JPY
(1%). The Commission notes that in all but a handful of records,
each reference index transaction was denoted in a single currency.
129 Those indexes were: (1) ABX.HE; (2) CDX.EM; (3) CDX.NA.HY;
(4) CDX.NA.IG; (5) CDX.NA.IG.HVOL; (6) CDX.NA.XO; (7) CMBX.NA; (8)
IOS.FN30; (9) iTRAXX Asia ex-Japan HY; (10) iTRAXX Asia ex-Japan IG;
(11) iTRAXX Australia; (12) iTRAXX Europe Series; (13) iTRAXX Europe
Subs; (14) iTRAXX Japan 80; (15) iTRAXX Japan HiVol; (16) iTRAXX
Japan Series; (17) iTRAXX LEVX Senior; (18) iTRAXX SOVX Asia; (19)
iTRAXX SOVX CEEMA; (20) iTRAXX Western Europe; (21) LCDX.NA; (22)
MCDX.NA; (23) PO.FN30; (24) PRIMEX.ARM; (25) PRIMEX.FRM; and (26)
TRX.NA.
Table 7–Summary Statistics by CDS Index Name
—————————————————————————————————————-
Percentage of Notional
Number of total amount (in Percentage of
Names transactions transactions millions of total notional
(%) USD) amount (%)
—————————————————————————————————————-
ITRAXX EUROPE SERIES 13 V1…………………. 18,287 18.48 1,138,362 24.83
CDX.NA.IG.14……………………………… 12,611 12.75 1,083,974 23.64
ITRAXX EUROPE XO SERIES 13 V1………………. 8,713 8.81 153,365 3.34
CDX.NA.HY.14……………………………… 7,984 8.07 172,599 3.76
ITRAXX EUROPE SENIOR FINANCIALS SERIES 13 V1…. 4,774 4.83 187,978 4.10
CDX.NA.IG.9………………………………. 4,134 4.18 388,650 8.48
ITRAXX EUROPE XO SERIES 13 V2………………. 3,959 4.00 66,894 1.46
CDX.NA.IG.9 TRANCHE……………………….. 3,357 3.39 112,411 2.45
ITRAXX SOVX CEEMEA SERIES 3 V1……………… 3,252 3.29 32,291 0.70
CDX.EM.13………………………………… 3,052 3.08 34,952 0.76
ITRAXX SOVX WESTERN EUROPE SERIES 3 V1………. 2,377 2.40 74,068 1.62
ITRAXX AUSTRALIA SERIES NUMBER 13 V1………… 2,138 2.16 31,540 0.69
ITRAXX EUROPE SERIES 9 V1………………….. 1,893 1.91 188,364 4.11
ITRAXX EUROPE SUB FINANCIALS SERIES 13 V1……. 1,779 1.80 50,241 1.10
ITRAXX EUROPE SERIES 9 V1 TRANCHE…………… 1,577 1.59 50,269 1.10
ITRAXX JAPAN SERIES NUMBER 13 V1……………. 1,406 1.42 19,100 0.42
ITRAXX ASIA EX-JAPAN IG SERIES NUMBER 13 V1….. 1,319 1.33 15,856 0.35
ITRAXX SOVX ASIA PACIFIC SERIES 3 V1………… 1,001 1.01 11,666 0.25
ITRAXX EUROPE HIVOL SERIES 13 V1……………. 788 0.80 30,585 0.67
CMBX.NA.AAA.1…………………………….. 463 0.47 13,384 0.29
ITRAXX EUROPE SERIES 12 V1…………………. 452 0.46 71,161 1.55
CMBX.NA.AJ.3……………………………… 392 0.40 6,332 0.14
CMBX.NA.AAA.2…………………………….. 381 0.39 8,433 0.18
LCDX.NA.14……………………………….. 380 0.38 7,063 0.15
MCDX.NA.14……………………………….. 350 0.35 2,798 0.06
CMBX.NA.AAA.4…………………………….. 337 0.34 6,024 0.13
CMBX.NA.A.1………………………………. 332 0.34 3,834 0.08
IOS.FN30.500.09…………………………… 317 0.32 7,836 0.17
—————————————————————
Total………………………………… 87,805 88.75 3,970,029 86.59
—————————————————————————————————————-
[[Page 15474]]
The Commission identified the following seven terms as the most
relevant for the purposes of the Commission’s analysis: 130 (1)
Notional amount; (2) notional currency; (3) tranche indicator; (4)
fixed rate; (5) tenor; (6) spread; and (7) RED code.131 Summary
statistics for the relevant CDS data set included: Average notional
amount of approximately $46 million; median notional amount of
approximately $24 million; mode notional amount of approximately $32
million; and skewness of 13 and kurtosis over 450, indicating that the
sample’s notional amounts were not normally distributed.132 After
rounding,133 the smallest 25 percent of transactions had notional
values of $9 million or less and the largest five percent of trades had
notional values greater than $150 million. The swaps with the top ten
most frequently traded notional sizes accounted for nearly 65 percent
of all transactions and 40 percent of the total notional value.134
—————————————————————————
130 Each transaction record contained up to 75 fields
identifying information such as the anonymized counterparty
identifier, trade date, submit date, transaction type, RED code
(i.e., the particular index series, version, or vintage), notional
amount, notional currency, fixed rate, confirm date, spread, points
upfront and several other variables.
131 The RED code is the industry standard identifier for CDS
contracts. RED codes are nine character codes (similar to CUSIP
codes for securities) where the first six characters refer to the
reference entity (or index) when the last three characters refer to
the reference obligation, that is, the version or series of an
index, and where the first five characters refer to the reference
entity (or index) when the last four refer to the vintage of an
index. RED codes are used by DTCC to confirm CDS trades on the DTCC
Deriv/SERV platform. See also Markit Credit Indices, A Primer, Nov.
2008, 30, available at https://www.markit.com/news/Credit%20Indices%20Primer.pdf.
132 Two times the “social size” see note 16 supra, for the
relevant CDS data set was $93 million, covered 87 percent of the
number of transactions, and 49 percent of the cumulative notional
amount. Five times the social size, or $230 million, covered 97
percent of transactions and 75 percent of the cumulative notional
amount.
133 The Commission used the rounding convention set forth in
Sec. 43.4(g) of the Commission’s regulations.
134 In descending order and in millions of dollars, the ten
most frequently traded rounded notional amounts included: 32 (the
mode); 10; 25; 13; 50; 63; 5; 100; 6; and 20.
—————————————————————————
The Commission also analyzed the CDS data set to classify the
counterparties into broad groups.135 The Commission’s analysis of the
CDS data set revealed that approximately 55 percent of transactions
were between buyers and sellers who were both identified as G-14 banks
and that these transactions represented a combined notional amount of
approximately $3.1 trillion, or 66 percent of the relevant CDS data
set’s total combined notional amount.136
—————————————————————————
135 The Commission notes that the CDS data set was anonymized
by The Warehouse Trust, but counterparties were identified by a
number value and an account number in one of the following eleven
groups: Asset managers, bank, custodian, dealer, financial services,
G14 dealer, hedge fund, insurance, non-financial, other, and pension
plan. Summary statistics relating to these identifiers included: (1)
Total count of buyer account identifiers equal to approximately
1,900; (2) total count of seller account identifiers equal to
approximately 1,700; (3) total count of unique buyer and seller
account identifiers equal to approximately 2,600; (4) total count of
buyers equal to approximately 600; (5) total count of sellers equal
to approximately 500; and (6) total count of unique buyers and
sellers equal to approximately 700. The CDS data set identified
counterparties as belonging to one of the eleven groups, and the
average notional size of transactions in the eight tenor groups
which contained more than 100 transactions ranging from
approximately $19 million to $92 million.
136 The Commission notes that the CDS data set only included
transaction records where a G-14 bank was one of the counterparties,
and did not include transaction records with two buy-side
counterparties. A natural bias was present in the percentage of
market share that G-14 banks have in the CDS market.
—————————————————————————
ii. Credit Swap Data Analysis
As noted above, the Commission is proposing to use tenor and
conventional spread criteria to define swap categories for CDS indexes.
The Commission anticipates that these proposed criteria would provide
an appropriate way to group swaps with economic similarities and to
reduce unnecessary complexity for market participants in determining
whether their swaps are classified within a particular swap category.
The Commission is proposing the following six broad tenor groups in the
credit asset class: (1) Zero to two years (0-746 days); (2) over two to
four years (747-1,476 days); (3) over four to six years (1,477-2,207
days) (which include the five-year tenor); (4) over six to eight-and-a-
half years (2,208-3,120 days); (5) over eight-and-a-half to 12.5 years
(3,121-4,581 days) and (6) greater than 12.5 years (4,581 days).137
The Commission added an additional 15 days to each tenor group beyond a
multiple of one year in order to avoid ending each group on specific
years.
—————————————————————————
137 The Commission assessed the possibility of applying the
tenor categories proposed for swaps in the interest rate asset class
to the distribution of notional sizes in the CDS indexes and
anticipates the level of granularity proposed to categorize swaps in
the interest rate asset class by tenor would be inappropriate for
the CDS index market. The Commission anticipates that this level of
granularity would be inappropriate because the vast majority of CDS
index transactions in the data set were for five years (or
approximately 1,825 days). Based on the concentration of CDS index
transactions in five-year tenors, the Commission is proposing a six
tenor bands for CDS indexes.
—————————————————————————
The Commission is proposing these swap categories based on the way
transactions in the CDS data set clustered towards the center of each
tenor band. While the majority of transactions in the CDS data set
consisted of corporate credit default index swaps with a five-year
tenor, the Commission found that trading of corporate credit default
index swaps also occurred in other tenor ranges.138 The Commission
believes that its proposed approach is appropriate since CDS on indexes
other than corporate indexes (e.g., asset backed indexes, municipal
indexes, sovereign indexes) may also trade at tenors other than five
years.139
—————————————————————————
138 For example, based on the observed CDS data set, off-the-
run swaps (i.e., previous five-year tenor swaps for corporate credit
default index swaps) have less than five years to maturity and
displayed different trading patterns than the five-year, on-the-run
swaps.
139 For example, based on the observed CDS data set, the
majority of municipal credit default index swaps traded with tenors
of around 10 years.
—————————————————————————
With respect to the conventional spread criterion, the Commission
is proposing ranges of spread values based on the Commission’s review
of the distribution of spreads in the entire CDS data set.140 In
particular, the Commission observed that the relevant CDS data set
partitioned at the 175 basis points (“bps”) and 350 bps levels.141
The Commission found that significant differences existed in the CDS
data set between CDS indexes with spread values under 175 bps and those
in the other two swap categories. Table 8 shows the summary statistics
of the proposed criteria to determine swap categories for swaps in the
credit asset class.142
—————————————————————————
140 See note 102 supra for a definition of conventional
spread.
141 The Commission is proposing partition levels by a
qualitative examination of multiple histogram distributions of the
traded and fixed spreads from the CDS data set. This qualitative
examination was confirmed through a partition test (using JMP
software), including both before and after controlling for the
effects of tenor on the distribution. The Commission observed that
175 bps explained the greatest difference in means of the two data
sets resulting from a single partition of the data. The Commission
also observed that 350 bps was an appropriate partition for CDS
index transactions with spreads over 175 bps.
142 Table 8 uses tenor and spread criteria discussed above, in
a standardized, least squared regression utilizing observed log
notional amounts.
[[Page 15475]]
Table 8–CDS Index Sample Statistics by Proposed Swap Category Criteria
————————————————————————
Sum of notional
Spread amounts (in billions Number of trades
of USD)
————————————————————————
<175…………………… 3,761 59,887
175-to-350……………… 233 11,045
350>…………………… 577 27,998
Tenor (in calendar days):
0-746………………. 146 1,421
747-1,476…………… 569 6,774
1,477-2,207…………. 3,490 79,357
2,208-3,120…………. 159 2,724
3,121-4,581…………. 18 497
4,582+……………… 190 8,157
————————————————————————
Request for Comment
Q9. The Commission seeks comment on all aspects of its proposed
approach to define swap categories for the credit asset class for the
purpose of setting appropriate minimum block sizes. More specifically,
the Commission seeks comment as to whether the proposed grouping,
alternatives or some other combination of alternatives offer the best
means to identify swap categories.
Q10. As an alternative to the proposed criteria, should the
Commission use other criteria? 143 The Commission considered the
following alternative criteria: (1) The underlying reference CDS index
or the more specific RED code (of which there were hundreds); 144 (2)
the tranche level; 145 (3) on-the-run versus off-the-run version or
series; 146 and (4) the difference in the average notional amounts of
transactions by groupings of counterparties.147
—————————————————————————
143 The Commission notes that the investment grade of an
underlying asset is a material economic term of each CDS contract.
When reviewing the CDS data set, the Commission considered using
investment grade as an alternative criterion through which to group
CDS into separate swap categories. The Commission, however, is of
the view that using this alternative criterion would be
inappropriate in light of the statutory prohibition against
references to credit ratings in federal regulations. This
prohibition is set forth in section 939 of the Dodd-Frank Act.
Section 939A(a) of the Dodd-Frank Act provides, in relevant
part, that “each Federal agency shall, to the extent applicable,
review–(1) any regulation issued by such agency that requires the
use of an assessment of the creditworthiness of a security or money
market instrument; and (2) any references to or requirement in such
regulations regarding credit ratings.” In addition, section 939A(b)
further provides that “[e]ach such agency shall modify any such
regulations identified by the review * * * to remove any reference
to or requirement of reliance on credit ratings and to substitute in
such regulations such standard of credit-worthiness as each
respective agency shall determine as appropriate for such
regulations.” 15 U.S.C. 78o-7 note.
Pursuant to the directive set forth in section 939A of the Dodd-
Frank Act, the Commission has issued final rules removing all
references to credit ratings in the Commission’s regulations. See 76
FR 78,776, Dec. 19, 2011; 76 FR 44,262, July 25, 2011.
144 While the underlying indexes and the RED codes helped
explain average notional size in the CDS data set, the Commission is
of the view–based on the large number of currently offered indexes,
the frequency with which new indexes may be created, and the large
number of RED codes–that such an approach may not be practicable
and may impose unnecessary complexity on market participants trying
to determine what appropriate minimum block sizes apply to what
transactions.
145 In the CDS market, a “tranche” means a particular
segment of the loss distribution of the underlying CDS index. For
example, tranches may be specified by the loss distribution for
equity, mezzanine (junior) debt, and senior debt on the referenced
entities. The Commission found that the tranche-level data was even
more granular than index-level data. Similarly, the Commission
anticipates that grouping the relevant CDS data set in tranche
criterion may not be practicable because it may produce too many
swap categories and as a result would impose unnecessary complexity
on market participants.
146 An on-the-run CDS index represents the most recently
issued version of an index. For example, every six months, Dow Jones
selects 125 investment grade entities domiciled in North America to
make up the Dow Jones North American investment grade index
(“CDX.NA.IG”). Each new CDX.NA.IG index is given a new series
number while market participants continue to trade the old or “off-
the-run” CDX.NA.IG series. The Commission observed that an on-the-
run index series was more actively traded than off-the-run index
series. Each version or series of an index had a distinct group of
tenors and, in most cases, the five year tenor was most active. The
index provider determines the composition of each index though a
defined list of reference entities. The index provider has
discretion to change the composition of the list of reference
entities for each new version or series of an index. In its analysis
of the CDS data set, the Commission generally observed either no
change or a small change (ranging from one percent to ten percent)
of existing composition in the reference entities underlying a new
version or series of an index. Because of these two dynamics (tenor
and index composition), the CDS data set contained transactions
within a given index with different versions and series that were in
some instances identical and in others not identical across varying
tenors. While the off-the-run transactions were generally larger on
average than the on-the-run transactions, trading activity in the
on-the-run indexes was more active than in the off-the-run indexes.
The Commission decided not to use this level of detail for
grouping CDS indexes into categories because: (i) The underlying
components of swaps with differing versions or series based on the
same named index are broadly similar, if not the same, indicative of
economic substitutability across versions or series; (ii)
differences in the average notional amount across differing versions
or series were explained by differences in tenor; and (iii) and
using versions or series as the criterion for defining CDS swap
categories may result in an unnecessary level of complexity.
147 Although the Commission was not able to examine non-
anonymized data, the Commission did observe differences of
approximately 50 percent from the average notional amount for
transactions involving different groups based on the counterparty
identifiers provided by The Warehouse Trust. The Commission,
however, believes that it would be neither practical nor equitable
to base a swap category and related appropriate minimum block size
based on the predominant business activity of a counterparty.
—————————————————————————
Q11. As another alternative, the Commission seeks comment on the
possibility of establishing two swap categories in the credit asset
class based on “activity groupings” of notional amounts of
transactions: A “more active group”; and a “less active group.” The
more active group would be calculated by ordering, from most to least,
the sum of non-rounded notional amounts of all swaps reported to SDRs
by a CDS index (e.g., CDX.NA.IG) and then selecting the CDS indexes
represented in the first 50 percent of aggregate notional amount. If
only one index accounted for the first 50 percent of aggregate notional
amount, then the next largest index also would be included in the more
active group. The less active group would be comprised of the remainder
of all credit index transactions that are not within the more active
group. Should the Commission use this activity grouping approach to
categorize CDS indexes? If so, how should the Commission determine
appropriate minimum block sizes and cap sizes?
Q12. As a third alternative, the Commission seeks comment on the
possibility of establishing swap categories in the credit asset class
based on sector groupings of the underlying reference entities. Under
this alternative approach, the Commission would group the CDS index
market into the following four sectors: Corporate; sovereign;
municipal; and mortgage-backed security. An index with a mix of sectors
represented in the reference entities
[[Page 15476]]
would be categorized by the sector representing the majority of
entities. The Commission is of the view that in addition to these four
distinct sectors, a fifth catch-all group (other) would be necessary to
categorize any new swap index that either does not fall into any of
these four enumerated sectors or is in mixed sectors not predominated
by a single sector.
Q13. As a fourth alternative, should the Commission consider basing
swap categories for the credit asset class on individual CDS indexes?
For example, CDX.NA.IG would constitute its own swap category.
Q14. Should the Commission combine aspects of the above
alternatives? For example, should the Commission distinguish between
on-the-run and off-the-run series under an index grouping approach? The
Commission seeks comment on whether distinguishing between on-the-run
and off-the-run series and tenor would be appropriate under this
approach, given the underlying economic similarity of swaps utilizing
the same underlying CDS index.
2. Swap Category in the Equity Asset Class
The Commission is proposing a single swap category for swaps in the
equity asset class. The Commission is proposing this approach based on:
(1) The existence of a highly liquid underlying cash market; (2) the
absence of time delays for reporting block trades in the underlying
equity cash market; (3) the small relative size of the equity index
swaps market relative to the futures, options, and cash equity index
markets; and (4) the Commission’s goal to protect the price discovery
function of the underlying equity cash market and futures market by
ensuring that the Commission does not create an incentive to engage in
regulatory arbitrage among the cash, swaps, and futures markets.148
—————————————————————————
148 As used in this Further Proposal, the term “regulatory
arbitrage” means engaging in financial structuring or a series of
transactions without economic substance in order to avoid unwelcome
regulation or to exploit inconsistencies in regulations.
—————————————————————————
Request for Comment
Q15. Please provide specific comments regarding the Commission’s
proposed approach with respect to having one swap category in the
equity asset class.
Q16. As an alternative to the proposed approach, should the
Commission establish one or more swap categories for swaps in the
equity asset class based on any of the following criteria or a
combination of such criteria: (1) Tenor; (2) publicly-listed equity
indexes and custom equity indexes; 149 (3) market capitalization of
the underlying index components; 150 and/or (4) whether a swap is
based on an “open market” versus a “closed market”? 151
—————————————————————————
149 Under this alternative approach, “publicly-listed”
equity indexes would be defined as equity swaps with reference
prices economically related to equity indexes with publicly
available index weightings. “Custom equity index swaps,” in
contrast, would be defined as equity swaps that utilize reference
prices that are not economically related to equity indexes with
publicly known index weightings. This alternative approach would be
based on the premise that a custom equity index swap would have a
higher probability of being subject to liquidity risk.
150 For example, if an equity index is composed of the
weighted average of ten equity components, A Corp., B Corp., C
Corp., D Corp., E Corp., F Corp., G Corp., H Corp., I Corp., and J
Corp. corresponding to a market capitalization on the day prior to
the related swap transaction of $100 million, $200 million, $300
million, $400 million, $500 million, $200 million, $100 million,
$200 million, $300 million, and $500 million, respectively, then it
would result in an average market capitalization of $280 million.
This alternative approach is premised on market capitalization
serving as indicia of cash market liquidity for derivatives on the
index.
151 Under ISDA’s Master Confirmation Templates, “open
market” references ISDA annexes with underlying shares or indices
in Australia, Hong Kong, New Zealand or Singapore. “Closed market”
references ISDA annexes with underlying shares or indices in India,
Indonesia, Korea, Malaysia, Taiwan and Thailand. For more
information, see ISDA, ISDA Equity Derivatives, ISDA Master
Confirmation Templates (by region), http://www.isda.org/c_and_a/equity_der.html#defs.
Under this alternative, other countries outside of Asia could be
added to the list in a similar fashion.
—————————————————————————
Q16.a. If the Commission follows the alternative approach to use
tenor as a criterion to distinguish between swap categories, how should
the Commission address the practice of long-tenured swaps that are
terminated prior to maturity?
3. Swap Categories in the FX Asset Class
The Commission proposes to establish swap categories for the FX
asset class based on unique currency combinations. The Commission bases
this approach on the observation that FX swaps and instruments with
identical currency combinations draw upon the same liquidity pools. The
Commission proposes in Sec. Sec. 43.6(b)(4)(i) and (b)(4)(ii) to
distinguish between FX swaps and instruments based on the existence of
a related futures contract. Accordingly, the Commission would establish
swap categories under proposed Sec. 43.6(b)(4)(i) based on the unique
currency combinations of super-major currencies, major currencies and
the currencies of Brazil, China, Czech Republic, Hungary, Israel,
Mexico, New Zealand, Poland, Russia, and Turkey (e.g., euro (EUR) and
Canadian dollar (CAD) combination would be a separate swap category;
Swedish kronor (SEK) and U.S. dollar (USD) combination would be a
separate swap category; etc.). These currency combinations currently
have sufficient liquidity in the underlying futures market, which may
suggest that there may be sufficient liquidity in the swaps market for
these currency combinations. In proposed Sec. 43.6(b)(4)(ii), the
Commission would establish swap categories based on unique currency
combinations not included in proposed Sec. 43.6(b)(4)(i).
Request for Comment
Q17. The Commission requests specific comments, data and analysis
in respect of its proposed approach to determining swap categories for
the FX asset class.
Q18. As an alternative to the proposal, should the Commission
establish swap categories based on currency class pairings? In other
words, swap categories that correspond to: (i) Super-major-to-super-
major; (ii) super-major-to-major; (iii) super-major-to-non-major; (iv)
major-to-major; (v) major-to-non-major; and (vi) non-major-to-non-major
currency class pairings? 152
—————————————————————————
152 This approach would result in fewer swap categories,
thereby easing administrative burdens related to determining the
appropriate swap category corresponding to a swap. At the same time,
however, this approach would require the use of a common denominator
currency (e.g., the U.S. dollar) for determining the applicable
notional amount. This would imply a currency conversion, thereby
increasing administrative burdens associated with currency
conversions.
—————————————————————————
Q18.a. Should the Commission develop currency and tenor swap
categories similar to what it is proposing for swaps in the interest
rate asset class? The currency and tenor categories could be adjusted
to reflect current trading activity in the FX swap and instrument
markets.
Q19. In the post-initial period, should the Commission include
tenor as a criterion for distinguishing FX swap categories? For
example, should the Commission separate FX swaps with short-dated
tenors (e.g., less than one or three months) from those with long-dated
tenors (e.g., greater than one or three months)? 153
—————————————————————————
153 This approach would be predicated on expected differing
liquidity and notional size distributions between FX swaps with
differing tenors.
—————————————————————————
Q20. The Commission is considering as a variation of its proposed
approach to characterize certain swap categories within the FX asset
class as “infrequently transacted.” Infrequently-transacted swaps
would exhibit all or some of the following features: (1) The
constituent swap or swaps to which they are economically related are
not
[[Page 15477]]
executed on, or pursuant to the rules of, a SEF or DCM; (2) few market
participants have transacted in these swaps or in economically-related
swaps; or (3) few swap transactions are executed during a historic
period in these swaps or in economically-related swaps.154
—————————————————————————
154 The Commission considered applying a methodology resulting
in less relative transparency to such infrequently transacted swap
categories (e.g., a 50-percent notional amount calculation).
—————————————————————————
4. Swap Categories in the Other Commodity Asset Class
The Commission proposes to determine swap categories in the other
commodity asset class based on groupings of economically related swaps
under proposed Sec. Sec. 43.6(b)(5)(i) and (ii) and based on groupings
of swaps sharing a common product type under proposed Sec.
43.6(b)(5)(iii). Swap contracts and futures contracts that are
economically related to one another–as defined by the Commission in a
proposed amendment to Sec. 43.2–are economic substitutes that should
be subject to the same appropriate minimum block sizes or block trade
rules for futures contracts, as applicable.155 Accordingly, the
Commission is proposing to define “economically related” in Sec.
43.2 as a direct or indirect reference to the same commodity at the
same delivery location or locations,156 or with the same or
substantially similar cash market price series.157 The Commission
anticipates that this proposed definition would: (1) Ensure that swap
contracts with shared reference price characteristics indicating
economic substitutability (i.e., an ability to offset some or all of
the risks across swaps in a specific category) are grouped together
within a common swap category; and (2) provide further clarity as to
which swaps are described in Sec. 43.4(d)(4)(ii)(B).158 This
definition would apply to the use of the term “economically related”
throughout all of part 43 of the Commission’s regulations.
—————————————————————————
155 In the Adopting Release, the Commission explained: “For
the purposes of part 43, swaps are economically related, as
described in Sec. 43.4(d)(4)(ii)(B), if such contract utilizes as
its sole floating reference price the prices generated directly or
indirectly from the price of a single contract described in appendix
B to part 43.” 77 FR 1,211. Further, the Commission explained that
“an `indirect’ price link to an Enumerated Physical Commodity
Contract or an Other Contract described in appendix B to part 43
includes situations where the swap reference price is linked to
prices of a cash-settled contract described in appendix B to part 43
that itself is cash-settled based on a physical-delivery settlement
price to such contract.” Id. at n.289.
156 For example, a swap utilizing the Platts Gas Daily/Platts
IFERC reference price is economically related to the Henry Hub
Natural Gas (NYMEX) (futures) contract because it is based on the
same commodity at the same delivery location as that underlying the
Henry Hub Natural Gas (NYMEX) (futures) contract.
157 For example, a swap utilizing the Standard and Poor’s
(“S&P”) 500 reference price is economically related to the S&P 500
Stock Index futures contract because it is based on the same cash
market price series.
158 The Commission is proposing to amend Sec. 43.2 to define
“reference price” as a floating price series (including
derivatives contract and cash market prices or price indices) used
by the parties to a swap or swaption to determine payments made,
exchanged or accrued under the terms of a swap contract. The
Commission is proposing to use this term in connection with the
establishment of a method through which parties to a swap
transaction may elect to apply the lowest appropriate minimum block
size applicable to one component swap category of such swap
transaction.
—————————————————————————
Under proposed Sec. 43.6(b)(5)(i), the Commission would establish
separate swap categories for swaps that are economically related to one
of the contracts listed on appendix B to part 43. Appendix B to part 43
currently lists 28 enumerated physical commodity contracts and other
contracts (i.e., Brent Crude Oil (ICE)) for which an SDR must ensure
the public dissemination of the actual underlying asset for the
applicable publicly reported swap transactions under Sec.
43.4(d)(4)(ii) of the Commission’s regulations.159 The Commission
previously has identified these other commodity contracts as: (1)
Having high levels of open interest and significant cash flow; and (2)
serving as a reference price for a significant number of cash market
transactions. The Commission is proposing to establish an initial
appropriate minimum block size for the swap categories corresponding to
each of these contracts to the extent that a DCM has set a block trade
size for such a contract.
—————————————————————————
159 The Commission is proposing to add 13 contracts to
appendix B to part 43, as described in detail in section III.C.4
infra. Each of these additional swap contracts would be categorized
in its own other commodity swap grouping.
—————————————————————————
Under proposed Sec. 43.6(b)(5)(ii), the Commission would establish
swap categories based on swaps in the other commodity asset class that
are: (1) Not economically related to one of the futures or swap
contracts listed in appendix B to part 43; (2) futures related; and (3)
economically related to the relevant futures contract that is subject
to the block trade rules of a DCM. Proposed Sec. 43.6(b)(5)(ii) lists
the futures contracts to which these swap categories are economically
related; 160 these swap categories would include any swap that is
economically related to such contracts. The swap categories established
by proposed Sec. 43.6(b)(5)(i) (discussed in the paragraphs above)
differ from the swap categories established by proposed Sec.
43.6(b)(5)(ii) in that the former may be economically related to
futures contracts that are not subject to the block trade rules of a
DCM, whereas the latter are economically related to futures contracts
that are subject to the block trade rules of a DCM.161
—————————————————————————
160 Specifically, these additional other commodity swap
categories would be based on the following futures contracts: CME
Cheese; CBOT Distillers’ Dried Grain; CBOT Dow Jones-UBS Commodity
Index Excess Return; CBOT Ethanol; CME Frost Index; CME Goldman
Sachs Commodity Index (GSCI) (GSCI Excess Return Index); NYMEX Gulf
Coast Gasoline; NYMEX Gulf Coast Sour Crude Oil; NYMEX Gulf Coast
Ultra Low Sulfur Diesel; CME Hurricane Index; CME International
Skimmed Milk Powder; NYMEX New York Harbor Ultra Low Sulfur Diesel;
CBOT Nonfarm Payroll; CME Rainfall Index; CME Snowfall Index; CME
Temperature Index; CME U.S. Dollar Cash Settled Crude Palm Oil; and
CME Wood Pulp.
161 This distinction is noteworthy because proposed Sec.
43.6(e)(3) provides that “[p]ublicly reportable swap transactions
described in Sec. 43.6(b)(5)(i) that are economically related to a
futures contract in appendix B to this part [43] shall not qualify
to be treated as block trades or large notional off-facility swaps
(as applicable) [during the initial period], if such futures
contract is not subject to a designated contract market’s block
trading rules.” See the discussion of this proposed provision in
section II.D.4(a) infra.
—————————————————————————
Under proposed Sec. 43.6(b)(5)(iii), the Commission would
establish swap categories for all other commodity swaps that are not
categorized under proposed Sec. Sec. 43.6(b)(5)(i) or (ii). These
swaps are not economically related to one of the contracts listed in
appendix B to part 43 or in proposed Sec. 43.6(b)(5)(ii). In
particular, the Commission would determine the appropriate swap
category based on the product types described in appendix D to part 43
to which the underlying asset(s) of the swap would apply or otherwise
relate. Proposed appendix D to part 43 establishes “Other Commodity
Groups” and certain “Individual Other Commodities” within those
groups. To the extent that there is an “Individual Other Commodity”
listed, the Commission would deem the “Individual Other Commodity” as
a separate swap category. For example, regardless of whether the
underlying asset to an off-facility swap is “Sugar No. 16” or “Sugar
No. 5,” the underlying asset would be grouped as “Sugar.” The
Commission thereafter would set the appropriate minimum block size for
each of the swap categories listed in appendix D to part 43.
In circumstances where a swap does not apply or otherwise relate to
a specific “Individual Other Commodity” listed under the “Other
Commodity Group” in appendix D to part 43, the Commission would
categorize such swap as falling under the respective
[[Page 15478]]
“Other” swap categories. For example, an emissions swap would be
categorized as “Emissions,” while a swap in which the underlying
asset is aluminum would be categorized as “Base Metals–Other.”
Additionally, in circumstances where the underlying asset of swap does
not apply or otherwise relate to an “Individual Other Commodity” or
an “Other” swap category, the Commission would categorize such swap
as either “Other Agricultural” or “Other Non-Agricultural.”
Request for Comment
Q21. The Commission requests specific comments, data and analysis
with respect to its proposed approach for determining swap categories
for the other commodity asset class.
Q22. Does the proposed definition of economically related
appropriately capture swaps that are economic substitutes within a
single swap category? Should the Commission define economically related
to mean swaps that have historically correlated changes in daily prices
within a swap category (e.g., a correlation coefficient of 0.95 or
greater)? This alternative approach would be based on the notion that
historical correlation is indicative of economic substitutability.
Q23. In the post-initial period, should the Commission include
tenor as a criterion for determining swap categories for the other
commodity asset class? For example, should the Commission separate
other commodity swaps with short-dated tenors (e.g., less than one or
three months) from those with long-dated tenors (e.g., greater than one
or three months)? 162
—————————————————————————
162 This approach would be predicated on expected differing
liquidity and notional size distributions between other commodity
swaps with differing tenors.
—————————————————————————
Q24. As a variation of the proposal, should the Commission create
additional product types in order to provide specific swap categories
for commodities not specifically listed in proposed appendix D to part
43? 163
—————————————————————————
163 These additional product types would allow the Commission
to set an appropriate minimum block size for a swap category based
on a distribution of transactions with more similar underlying
physical commodity market characteristics. For example, swaps
utilizing a reference price based on an aluminum or iron underlier
would be included in the same “other base metal” swap category.
Under this variation to the proposed approach, there could be
additional specific product types corresponding to specific
commodities not included in proposed appendix D to part 43 (e.g.,
aluminum or iron).
—————————————————————————
Q25. As a variation of the proposal, should the Commission further
refine the swap categories in Sec. 43.6(b)(5)(iii) (i.e., those based
on product types listed in proposed appendix D to part 43) on the basis
of geography? If so, on what basis and for which product types?
Q26. As a variation on the proposed approach, should the Commission
include inflation index futures contracts in proposed Sec.
43.6(b)(5)(ii)?
Q27. As an alternative approach, the Commission is considering
characterizing certain swap categories within the other commodity asset
class as “infrequently transacted.” This alternative approach is
consistent with the approach discussed in Q20 above.
Q27.a. Should this alternative approach apply to asset classes in
addition to the FX and other commodity asset classes?
Q28. As another alternative, should the Commission consider
dividing the swaps in the other commodity asset class into swap
categories based on relative market concentration? For example, a
variation of the Herfindahl-Hirschman Index (“HHI”) based on the
average daily or average month-end HHI score to determine swap
categories for the other commodity asset class? 164 Would a daily or
month-end average long-short swap position HHI 165 for a three-year
rolling window (beginning with a minimum of one year and adding one
year of data for each calculation until a total of three years of data
is accumulated) of lower than 2,500, 2,000, or 1,500 be indicative of a
market that is not concentrated? 166
—————————————————————————
164 An “HHI score” would be defined as the sum of the
squared percentages, in whole numbers, of relative positions or
transactions on the long or short side of a grouping of swap
positions or transactions during a specified period. This
alternative approach would be based on the distribution of
percentages of positions or transactions held or executed by non-
affiliated market participants on the long and short side of a swap
market. In addition, this alternative approach would be predicated
on the notion that reduced market concentration is indicative of a
degree market liquidity depth that warrants greater transparency
because of reduced liquidity concerns, as well as reduced concerns
with the anonymity of transactions in such swap categories.
165 This figure would be the simple average of the HHI score
on the short and long sides of a swap market based on the
concentration of open interest on either side of such a market.
166 The Commission may consider applying a methodology
resulting in less relative transparency to concentrated swap
categories (e.g., a 50-percent notional amount calculation).
—————————————————————————
Q28.a. Should the Commission use this approach for other asset
classes?
D. Proposed Appropriate Minimum Block Size Methodologies for the
Initial and Post-Initial Periods
The Commission is proposing a tailored approach for determining
appropriate minimum block sizes during the initial and post-initial
periods for each asset class. In the subsections below, the Commission
sets out a more detailed discussion of the appropriate minimum block
methodologies for swaps within: (1) The interest rate and credit asset
classes; (2) the single swap category in the equity asset class; (3)
swap categories in the FX asset class; and (4) swap categories in the
other commodity asset class. Thereafter, the Commission discusses
special rules for determining the appropriate minimum block sizes
across asset classes. For convenience, the chart immediately below
summarizes swap categories and calculation methodologies that the
Commission is proposing for each asset class.
Proposed Approach
—————————————————————————————————————-
Post-initial
Asset class Swap category criteria Initial implementation implementation period
period 167
—————————————————————————————————————-
Interest Rates………………….. By unique currency and 67-percent notional 67-percent notional
tenor grouping 168. amount calculation by amount calculation by
swap category 169. swap category.170
Credit…………………………. By tenor and
conventional spread
grouping 171.
FX…………………………….. By numerated FX Based on DCM futures
currency combinations block size by swap
(i.e., futures category 173.
related) 172.
By non-enumerated FX All trades may be
currency combinations treated as block
(i.e., non-futures trades 175.
related) 174.
[[Page 15479]]
Other Commodity…………………. By economically-related Based on DCM futures
Appendix B to part 43 block size by swap
contract if the swap category 177.
is (1) futures related
and (2) the relevant
futures contract is
subject to DCM block
trade rules 176.
By economically-related No trades may be
Appendix B to part 43 treated as blocks
contract if the swap 179.
is: (1) futures
related and (2) the
relevant futures
contract is not
subject to DCM block
trade rules 178.
By economically-related Appropriate minimum
Appendix B to part 43 block size equal to
contract if the swap $25 million 181.
is (1) a listed
natural gas or
electricity swap
contract and (2) the
relevant Appendix B
contract is not
futures related 180.
By swaps that are Based on DCM futures
economically related block size by swap
to the list of 18 category 183.
contracts listed in
Sec. 43.6(b)(5)(ii)
182.
By Appendix D to part All trades may be
43 commodity group, treated as block
for swaps not trades 185.
economically related
to a contract listed
in Appendix B to part
43 or to the list of
18 contracts listed in
Sec. 43.6(b)(5)(ii)
184.
————————————————-
Equity…………………………. All equity swaps 186. No trades may be treated as blocks.187
—————————————————————————————————————-
Request for Comment
—————————————————————————
167 This post-initial implementation period would commence at
a minimum of one year after the initial period. Thereafter, the
Commission would determine appropriate minimum block sizes a minimum
of once annually. See proposed Sec. 43.6(f)(1).
168 See proposed Sec. 43.6(b)(1).
169 See proposed Sec. 43.6(c)(1).
170 See proposed Sec. 43.6(f)(2).
171 See proposed Sec. 43.6(b)(2).
172 See proposed Sec. 43.6(b)(4)(i).
173 See proposed Sec. 43.6(e)(1).
174 See proposed Sec. 43.6(b)(4)(ii).
175 See proposed Sec. 43.6(e)(2).
176 See proposed Sec. 43.6(b)(5)(i).
177 See proposed Sec. 43.6(e)(1).
178 See proposed Sec. 43.6(b)(5)(i).
179 See proposed Sec. 43.6(e)(3).
180 See proposed Sec. 43.6(b)(5)(i).
181 See proposed Sec. 43.6(e)(3).
182 See proposed Sec. 43.6(b)(5)(ii).
183 See proposed Sec. 43.6(e)(1).
184 See proposed Sec. 43.6(b)(5)(iii) and the product types
groupings listed in proposed appendix D to part 43.
185 See proposed Sec. 43.6(e)(2).
186 See proposed Sec. 43.6(b)(3).
187 See proposed Sec. 43.6(d).
—————————————————————————
Q29. The Commission requests general comment regarding its proposed
methodologies to determine appropriate minimum block sizes in both
implementation periods.
Q29.a. In the post-initial period, should the Commission consider
using the previous period’s appropriate minimum block size or one of
the alternative calculation methodologies (as discussed in Q35 below)
if the calculated appropriate minimum block size during the current
period is extraordinarily high or low, or where the number of
transactions in a swap category is small (e.g., less than 60
transactions each six month period)?
Q30. Should the updates of post-initial appropriate minimum block
sizes and related calculations occur at regular periods of time? If so,
is the proposed time frame for updating the appropriate minimum block
sizes sufficient? 188
—————————————————————————
188 See proposed Sec. 43.6(f)(1).
—————————————————————————
Q31. During the initial period, should the Commission update the
appropriate minimum block sizes based on the methodologies or
alternatives described in this proposed rulemaking?
1. Methodology for Determining the Appropriate Minimum Block Sizes in
the Interest Rate and Credit Asset Classes
The Commission is proposing to use a 67-percent notional amount
calculation to determine initial and post-initial appropriate minimum
block sizes for swaps in the interest rate and credit asset classes
pursuant to proposed Sec. Sec. 43.6(c)(1) and 43.6(e)(1).189 The 67-
percent notional amount calculation is a methodology under which the
Commission would: (step 1) Select all of the publicly reportable swap
transactions within a specific swap category using a rolling three-year
window of data beginning with a minimum of one year’s worth of data and
adding one year of data for each calculation until a total of three
years of data is accumulated ;190 (step 2) convert to the same
currency or units and use a “trimmed data set;” 191 (step 3)
determine the sum of the notional amounts of swaps in the trimmed data
set; (step 4) multiply the sum of the notional amount by 67 percent;
(step 5) rank order the observations by notional amount from least to
greatest; (step 6) calculate the cumulative sum of the observations
until the cumulative sum is equal to or greater than the 67-percent
notional amount calculated in step 4; (step 7) select the notional
amount
[[Page 15480]]
associated with that observation; (step 8) round the notional amount of
that observation to two significant digits, or if the notional amount
associated with that observation is already significant to two digits,
increase that notional amount to the next highest rounding point of two
significant digits 192; and (step 9) set the appropriate minimum
block size at the amount calculated in step 8. An example of how the
Commission would apply this proposed methodology is set forth in
section VII of this Further Proposal.
—————————————————————————
189 Proposed Sec. 43.6(c)(1) describes the 67-percent
notional amount calculation. Proposed Sec. 43.6(e)(1) provides the
provisions relating to the methodology for determining appropriate
minimum block sizes during the initial period for swaps in the
interest rate and credit asset classes, inter alia.
190 See note 109 supra for the definition of publicly
reportable swap transaction. Since the Commission is proposing to
determine all appropriate minimum block sizes based on reliable data
for all publicly reportable swap transactions within a specific swap
category, the Commission does not view the fact that more than one
SDR may collect such data as raising any material concerns.
191 See proposed amendment to Sec. 43.2 and the discussion
infra in this section.
192 For example, if the observed notional amount is
$1,250,000, the amount should be increased to $1,300,000. This
adjustment is made to assure that at least 67 percent of the total
notional amount of transactions in a trimmed data set are publicly
disseminated in real time.
—————————————————————————
There were three swap categories in the interest rate and credit
asset classes, which contained less than 30 transaction records that
would meet the definition of publicly reportable swap transaction. For
these swap categories, the Commission is proposing to use the lowest
appropriate minimum block size for their respective asset classes based
on the respective data set. The three swap categories are: (1) Interest
rate swap category major currency/30 years +; (2) interest rate swap
category non-major currency/30 years +; and (3) CDS index swap category
350 bps/six-to-eight years and six months. If the Commission were to
use the proposed 67-percent notional calculation method, then two of
the three swap categories would have resulted in appropriate minimum
block sizes higher than those proposed. The remaining swap category
contained no data.
The proposed 67-percent notional amount calculation is intended to
ensure that within a swap category, approximately two-thirds of the sum
total of all notional amounts are reported on a real-time basis. Thus,
this approach would ensure that market participants have a timely view
of a substantial portion of swap transaction and pricing data to assist
them in determining, inter alia, the competitive price for swaps within
a relevant swap category. The Commission anticipates that enhanced
price transparency would encourage market participants to provide
liquidity (e.g., through the posting of bids and offers), particularly
when transaction prices moves away from the competitive price. The
Commission also anticipates that enhanced price transparency thereby
would improve market integrity and price discovery, while also reducing
information asymmetries enjoyed by market makers in predominately
opaque swap markets.193
—————————————————————————
193 The proposed calculation stands in contrast to the
proposed 95th percentile-based distribution test set out in the
Initial Proposal. See the discussion supra in section I.B. of this
Further Proposal.
—————————————————————————
In the Commission’s view, using the proposed 67-percent notional
amount calculation also would minimize the potential impact of real-
time public reporting on liquidity risk. The Commission views this
calculation methodology as an incremental approach to achieve real-time
price transparency in swap markets. The Commission believes that its
methodology represents a more tailored and incremental step (relative
to the approach set out in the Initial Proposal) towards achieving the
goal of “a vast majority” of swap transactions becoming subject to
real-time public reporting.194
—————————————————————————
194 See note 83 supra. This phased-in approach seeks to
improve transparency while not having a negative impact on market
liquidity.
—————————————————————————
As noted above, CEA section 2(a)(13)(E)(iv) directs the Commission
to take into account whether the public disclosure of swap transaction
and pricing data “will materially reduce market liquidity.” 195 If
market participants reach the conclusion that the Commission has set
appropriate minimum block sizes for a specific swap category in a way
that will materially reduce market liquidity, then those participants
are encouraged to submit data in support their conclusion. In response
to such a submission, the Commission has the legal authority to take
action by rule or order to mitigate the potential effects on market
liquidity with respect to swaps in that swap category. In addition, if
through its own surveillance of swaps market activity, the Commission
becomes aware that an appropriate minimum block size would reduce
market liquidity for a specific swap category, then under those
circumstances the Commission may exercise its legal authority to take
action by rule or order to mitigate the potential effects on marketing
liquidity with respect to swaps in that swap category.
—————————————————————————
195 7 U.S.C. 2(a)(13)(E)(iv).
—————————————————————————
As referenced above, the Commission is proposing to amend Sec.
43.2 of the Commission’s regulations to define the term “trimmed data
set” as a data set that has had extraordinarily large notional
transactions removed by transforming the data into a logarithm with a
base of ten (Log10), computing the mean, and excluding
transactions that are beyond four standard deviations above the mean.
Proposed Sec. 43.6(c) uses this term in connection with the
calculations that the Commission would undertake in determining
appropriate minimum block sizes and cap sizes.
The Commission is proposing to use a trimmed data set since it
believes that removing the largest transactions, but not the smallest
transactions, may provide a better data set for establishing the
appropriate minimum block size, given that the smallest transactions
may reflect liquidity available to offset large transactions. Moreover,
in the context of setting a block trade level (or large notional off-
facility swap level), a method to determine relatively large swap
transactions should be distinguished from a method to determine
extraordinarily large transactions; the latter may skew measures of the
central tendency of transaction size (i.e., transactions of usual size)
away from a more representative value of the center.196 Therefore,
trimming the data set increases the power of these statistical
measures.
—————————————————————————
196 A measure of central tendency, also known as a measure of
location, in a distribution is a single value that represents the
typical transaction size. Two such measures are the mean and the
median. For a general discussion of statistical methods, see e.g.,
Wilcox, R. R., Fundamentals of Modern Statistical Methods (Springer
2d ed. 2010), (2010).
—————————————————————————
Request for Comment
Q32. Please provide specific comment regarding the Commission’s
proposed approach to determine appropriate minimum block sizes for
swaps in the interest rates and credit asset classes.
Q32.a. Is the Commission’s proposed approach reasonable with
respect to those swap categories for which there were less than 30
transaction records? Is there another appropriate minimum block size
(either higher or lower) that the Commission should use for these swap
categories? If so, then why? Should the Commission continue to use this
approach in the post-initial period by determining whether there are
less than 30 transaction records within a six-month period?
Q33. As a variation of the proposed approach, should the Commission
use a 50-percent notional amount calculation methodology for
determining the appropriate block sizes for these asset classes? If so,
please explain why. If so, what affects would a 50-percent notional
amount calculation have on the costs imposed on, and the benefits that
would inure to, market participants and registered entities? 197 Are
there some
[[Page 15481]]
parts of the swaps market for which 50-percent notional amount
calculation would be a more appropriate methodology (e.g., actively-
traded swap categories in the interest rates and credit asset classes)?
The following two charts compare the proposed initial appropriate
minimum block sizes (using the 67-percent notional amount calculation)
for swaps in the interest rate and credit asset classes with
appropriate minimum block sizes that would result if the Commission
were to use the 50-percent notional amount calculation.198
—————————————————————————
197 The Commission is actively considering the use of a 50-
percent notional amount calculation methodology in the initial and/
or post-initial periods. The rule text for the 50-percent notional
amount calculation would be nearly identical to proposed Sec.
43.6(c)(1) and (2), except for the insertion of “50-percent” where
appropriate.
198 Using the ODSG data for interest rate swaps, the
Commission notes that the proposed 67-percent notional amount
calculation would result in 94 percent of trades being reported in
real-time, compared with 86 percent of trades that would be reported
in real-time under the alternative 50-percent notional amount
calculation.
Using the ODSG data for CDS, the Commission notes that the
proposed 67-percent notional amount calculation would result in 94
percent of trades being reported in real-time, compared with 85
percent of trades that would be reported in real-time under the
alternative 50-percent notional amount calculation.
Comparison of Initial Appropriate Minimum Block Sizes
[Interest rate swaps]
—————————————————————————————————————-
Tenor less than or 50% Notional 67% Notional
Currency group Tenor greater than equal to (in millions) (in millions)
—————————————————————————————————————-
Super-Major………………….. ……………….. Three months (107 3,800 6,400
days).
Super-Major………………….. Three months (107 Six months (198 1,200 1,900
days). days).
Super-Major………………….. Six months (198 One year (381 days). 1,100 1,600
days).
Super-Major………………….. One year (381 days). Two years (746 days) 460 750
Super-Major………………….. Two years (746 days) Five years (1,842 240 380
days).
Super-Major………………….. Five years (1,842 Ten years (3,668 170 290
days). days).
Super-Major………………….. Ten years (3,668 30 years (10,973 120 210
days). days).
Super-Major………………….. 30 years (10,973 ……………….. 67 130
days).
Major……………………….. ……………….. Three months (107 700 970
days).
Major……………………….. Three months (107 Six months (198 440 470
days). days).
Major……………………….. Six months (198 One year (381 days). 220 320
days).
Major……………………….. One year (381 days). Two years (746 days) 130 190
Major……………………….. Two years (746 days) Five years (1,842 88 110
days).
Major……………………….. Five years (1,842 Ten years (3,668 49 73
days). days).
Major……………………….. Ten years (3,668 30 years (10,973 37 50
days). days).
Major……………………….. 30 years (10,973 ……………….. 15 22
days).
Non-Major……………………. ……………….. Three months (107 230 320
days).
Non-Major……………………. Three months (107 Six months (198 150 240
days). days).
Non-Major……………………. Six months (198 One year (381 days). 110 160
days).
Non-Major……………………. One year (381 days). Two years (746 days) 54 79
Non-Major……………………. Two years (746 days) Five years (1,842 27 40
days).
Non-Major……………………. Five years (1,842 Ten years (3,668 15 22
days). days).
Non-Major……………………. Ten years (3,668 30 years (10,973 16 24
days). days).
Non-Major……………………. 30 years (10,973 ……………….. 15 22
days).
—————————————————————————————————————-
Comparison of Initial Appropriate Minimum Block Sizes
[Credit default swaps]
—————————————————————————————————————-
Traded tenor greater Traded tenor less
Spread group (basis points) than than or equal to 50% Notional 67% Notional
—————————————————————————————————————-
Less than or equal to 175……… ……………….. Two years (746 days) 320 510
Less than or equal to 175……… Two years (746 days) Four years (1,477 200 300
days).
Less than or equal to 175……… Four years (1,477 Six years (2,207 110 190
days). days).
Less than or equal to 175……… Six years (2,207 Eight years and six 110 250
days). months (3,120 days).
Less than or equal to 175……… Eight years and six Twelve years and six 130 130
months (3,120 days). months (4,581 days).
Less than or equal to 175……… Twelve years and six ……………….. 46 110
months (4,581 days).
Greater than 175 and less than or ……………….. Two years (746 days) 140 210
equal to 350.
Greater than 175 and less than or Two years (746 days) Four years (1,477 82 130
equal to 350. days).
Greater than 175 and less than or Four years (1,477 Six years (2,207 32 36
equal to 350. days). days).
Greater than 175 and less than or Six years (2,207 Eight years and six 20 26
equal to 350. days). months (3,120 days).
Greater than 175 and less than or Eight years and six Twelve years and six 26 64
equal to 350. months (3,120 days). months (4,581 days).
Greater than 175 and less than or Twelve years and six ……………….. 63 120
equal to 350. months (4,581 days).
Greater than 350……………… ……………….. Two years (746 days) 66 110
Greater than 350……………… Two years (746 days) Four years (1,477 41 73
days).
Greater than 350……………… Four years (1,477 Six years (2,207 26 51
days). days).
Greater than 350……………… Six years (2,207 Eight years and six 13 21
days). months (3,120 days).
[[Page 15482]]
Greater than 350……………… Eight years and six Twelve years and six 13 21
months (3,120 days). months (4,581 days).
Greater than 350……………… Twelve years and six ……………….. 41 51
months (4,581 days).
—————————————————————————————————————-
Q34. As another variation of the proposed methodology, should the
Commission change specific aspects of its methodology?
Q34.a. For example, should the Commission define the term “trimmed
data set” to exclude greater or fewer extremely large transactions
from the data set used to determine appropriate minimum block sizes?
Or, should the term be defined to exclude transactions that are three
or five standard deviations beyond the mean? If so, should this be done
for all asset classes?
Q34.b. Should the Commission use another method for excluding
outliers?
Q35. As an alternative to the proposed 67-percent notional amount
calculation methodology, should the Commission use any of the following
in the initial and/or post-initial periods:
Q35.a. As an alternative approach, should the Commission determine
appropriate minimum block sizes based on a measure of market depth and
breadth? Market depth and breadth is one of several approaches in which
the Commission could preserve market liquidity.199 Under this
alternative, market depth and breadth would be determined using the
following methodology: (step 1) Identify swap contracts with pre-trade
price transparency within a swap category 200; (step 2) calculate the
total executed notional volumes for each swap contract in the set from
step 1 and calculate the sum total for the swap category over the look
back period; (step 3) collect a market depth snapshot 201 of all of
the bids and offers once each minute for the pre-trade price
transparency set of contracts identified in step 1 202; (step 4)
identify the four 30-minute periods that contain the highest amount of
executed notional volume each day for each contract of the pre-trade
price transparency set identified in step 1 and retain 120 observations
related to each 30-minute period for each day of the look-back period
203; (step 5) determine the average bid-ask spread over the look-back
period of one year by averaging the spreads observed between the
largest bid and executed offer for all the observations identified in
step 3; (step 6) for each of the observations 120 observations
determined in step 4, calculate the sum of the notional amount of all
orders collected from step 3 that fall within a range,204 calculate
the average of all of these observations for the look-back period and
divide by two; (step 7) to determine the trimmed market depth,
calculate the sum of the market depth determined in step 6 for all swap
contracts within a swap category; (step 8) to determine the average
trimmed market depth, use the executed notional volumes determined in
step 2 and calculate a notional volume weighted average of the notional
amounts determined in step 6; (step 9) using the calculations in steps
7 and 8, calculate the market breadth based on the following formula–
market breadth = averaged trimmed market depth + (trimmed market depth-
average trimmed market depth) x .75; (step 10) set the appropriate
minimum block size equal to the lesser of the values from steps 8 and
9. Would the Commission have to establish special swap categories for
this approach? Would the collection of snapshots from a central limit
order book be too burdensome (i.e., costly and time consuming) for DCMs
and SEFs? What are the costs and benefits of adopting this approach?
—————————————————————————
199 Although this alternative approach presents several
limitations (e.g., the impact of collecting market depth data on a
regular basis), the Commission considers this alternative to be a
viable option to its proposed approach discussed above.
200 Swap contracts would be determined to have pre-trade price
transparency if they have electronically displayed and executable
bids and offers along with displayed available volumes for
execution.
201 CEA sections 4g(b), 4g(d), 5(d)(1), 5(d)(10) and 5(d)(18)
authorize the Commission to request this data from a DCM. CEA
sections 5h(f)(5) and 5h(f)(10) authorize the Commission to request
this data from a SEF. The Commission would request such data as part
of a special call process.
202 Note that this is a snapshot observation for a single
moment in time. The Commission is not specifying which second within
the minute would be analyzed when taking a snapshot of market depth.
203 These periods may vary from day to day and from contract
to contract and would be defined on the 48 30-minute periods set to
the top and bottom of each hour of each day (e.g., 1-1:29 p.m. 1:30-
1:59 p.m., etc.). In instances when tie occurs in identifying the
four 30-minute periods based on executed notional volumes,
preference would first be given to the period with the largest total
notional volume for the largest bid and offer. If a tie still
results, then preference would be given to the period with the
smallest difference in bids minus asks. Lastly, if a tie is still
remains, then the period of time after and nearest to 12 p.m. New
York time would be selected.
204 The range would be determined by the average of the
largest bid and offer for that observation plus or minus three time
the average bid-ask spread (as determined in step 5) for all 120
observations.
—————————————————————————
Q35.b. Should the Commission use a confidence interval test for
calculating the appropriate minimum block sizes for these asset
classes?
The confidence interval test calculates the minimum notional value
as the point where the publicly disseminated average notional size is
within the 95-percent confidence interval using the following process:
(step 1) Select the swap transaction data for a specific swap category;
(step 2) convert to the same currency or units and determine the
transaction distribution of notional amounts using the natural
logarithm and trimmed data set for the swap category 205; (step 3)
calculate the average notional size and the 95-percent confidence
interval around this average 206; (step 4) drop the largest
[[Page 15483]]
remaining transaction from the distribution 207; (step 5) conditional
on the full-sample 95-percent confidence interval, calculate the sample
average notional size using the data resulting from step 4; (step 6) if
the sample average notional size is not outside of the 95-percent
confidence interval, repeat steps 4 and 5 until it is just outside of
the 95-percent confidence interval; (step 7) once the sample average
notional size is outside the 95-percent confidence interval, set the
minimum notional value equal to the notional value; (step 8) round the
notional amount of that observation to two significant digits, or if
the notional amount associated with that observation is already
significant to two digits, increase that notional amount to the next
highest rounding point of two significant digits; and (step 9) set the
appropriate minimum block size equal to the largest transaction of the
distribution for which the sample average notional size was still
within the 95-percent confidence interval. What are the costs and
benefits associated with using this alternative approach?
—————————————————————————
205 In practice, the natural logarithm of the notional value
is preferred over the nominal value to reduce the effect of skewness
on sample statistics. In addition to classical statistical methods,
the calculation of the confidence interval may be improved by using
“bootstrapping” methods to estimate the distribution of the
average notional trade size. See generally, Bradley Efron, Bootstrap
Methods: Another Look at the Jackknife, Ann. Statist. Vol. 7, No. 1
(1979), 1-26, http://projecteuclid.org/DPubS?service=UI&version=1.0&verb=Display&handle=euclid.aos/1176344552 (last visited Jan. 31, 2012).
206 The confidence interval test assumes sufficient data is
available in a swap category such that a normal distribution is a
good approximation to compute an interval estimate. To the extent
that the actual distribution diverges significantly from a normal
distribution, the interval estimate may not reflect the probability
at the desired (95 percent) confidence interval. In which case,
other methods such as “bootstrapping” may be necessary to compute
the confidence intervals around the full sample average notional
size. The Commission notes the ODSG data sets were not normally
distributed, but were nearly symmetric after trimming. Further,
according to a TABB Group survey, many market participants expected
the average notional transaction size to decline, which would have
implied change in the distribution. See the presentation of Kevin
McPartland, Principal, Tabb Group, CFTC Technology Advisory
Committee Meeting, Dec. 13, 2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.
207 The Commission is also considering dropping transactions
in one-percent increments until the sample average moves outside the
95-percent confidence interval. The Commission would then drop
transactions within the last one-percent increment until the actual
transaction is found that moves the sample mean outside of the
confidence interval.
—————————————————————————
Q35.c. Should the Commission use a stability test that makes use of
“CUSUM” and/or “CUSUM of Square” methods? 208 The Commission
would define the stability test calculation as a process whereby the
Commission would: (step 1) In the post-initial period, select swap
transaction data for a specific swap category over a specified period
(e.g., a rolling window of three years of such data at one year
intervals) 209; (step 2) trim the extraordinarily large notional
transactions from the swap transaction data by converting the data
series into natural logarithm value equivalents, determining the mean,
and excluding transactions that are beyond four standard deviations
above the mean; (step 3) reposition the largest transactions back into
a time-ordered trade sequence based on the reporting delay using one-
percent sample increments of the largest transactions; (step 4) measure
stability of this repositioning by calculating the fraction of
observations violating the 95-percent confidence interval in the
“CUSUM” and “CUSUM of Squares” methods 210; and (step 5) identify
the increment that causes the least change in stability of the average
notional trade size compared to a non-repositioned sequence. The
notional size cutoff for this increment would become the appropriate
minimum block size in that swap category. If the test above does not
produce a disruption in the stability of the average notional trade
size, then the Commission would use the 67-percent notional amount
calculation methodology. What are the costs and benefits associated
with using this alternative approach?
—————————————————————————
208 Brown, R.L., J. Durbin, and J.M. Evans, “Techniques for
Testing the Constancy of Regression Relationships over Time,”
Journal of the Royal Statistical Society, B, 37, 149-163 (1975).
209 If the Commission were applying this methodology to the
initial period, then a rolling three-year window of data, beginning
with a minimum of one year’s worth of data, may not be available. In
that case, the Commission would use the ODSG data where applicable.
210 As with the confidence interval test, this test assumes a
normal distribution, and as such, will follow similar procedures to
those outlined in note 206 supra.
—————————————————————————
Q35.d. Should the Commission utilize a percentile-based methodology
to determine appropriate minimum block sizes that would focus on the
number of trades? 211
—————————————————————————
211 For example, the Commission would order all publicly
reportable swap transactions in a swap category by notional amount.
After ordering these swap transactions, the Commission would set the
appropriate minimum block size at the notional amount that
corresponds to the 80th percentile. See note 15 supra for a
discussion of the distribution test, which was proposed in the
Initial Proposal.
—————————————————————————
Q35.e. Should the Commission use a measure of average volume in a
given time period 212 as a proxy for liquidity in order to calculate
the appropriate minimum block size? The Commission is considering two
alternatives for calculating appropriate minimum block size using this
methodology: (1) Setting the initial appropriate minimum block size
using daily volume when time-stamped transactions are not available; or
(2) setting the post-initial block sizes once time-stamped transactions
become available.213 The methodology for setting initial appropriate
minimum block size in the swap categories in the interest rate and
credit asset classes would use the ODSG data sets to calculate the
minimum notional value for a block using the following procedure for a
given swap category: (step 1) Sum the notional volume of all trades
within the swap category for each day for the ODSG data set; (step 2)
calculate an estimate of the average volume in a 15-minute time period
for each day by dividing the sum from step 1 by 32 (there are 32, 15-
minute increments in an 8-hour time period, which is the presumed
active trading period) 214; (step 3) calculate the daily average for
the ODSG data set by summing each day’s estimated 15-minute average
volume calculated in step 2 and dividing it by the total number of
business days in the ODSG data set; and (step 4) multiply the daily
average of the 15-minute average volume in time (“AVIT”) by a factor
of two to determine the minimum block size.
—————————————————————————
212 The Commission is considering using a measure of the
average volume in time (“AVIT”) to determine the minimum block
size since liquidity may not be directly observable in the market
and historical trading volume is one indicator of (or proxy for)
liquidity. Incorporating a measure of liquidity into the calculation
of block sizes is important given that section 2(a)(13)(E)(iv) of
the CEA requires the Commission to take into account whether public
disclosure will materially reduce market liquidity. Moreover,
calculating the AVIT for a 15-minute time period may serve as a
proxy for the expected volume that could normally be transacted in
the time between a block trade being executed and being publicly
reported. See 7 U.S.C. 2(a)(13)(E)(iv).
213 The transactions in the data sets for the interest rate
and credit asset classes which the Commission is using in the
initial period are not time stamped. However, SDRs will receive
time-stamped swap transactions under real time reporting rules,
which will then be remitted to the Commission.
214 In the post-initial period when time-stamped transaction
data will be available, the Commission could use a calculation based
on actual transaction times. For example, the average volume could
be calculated for each clock hour (e.g., 8:00-:859 a.m.) in each
business day by summing the notional sizes of all transactions for a
12-month time period in each clock hour and dividing by the total
number of business days. Thereafter, the Commission would calculate
the 15-minute volume.
—————————————————————————
Q35.f. As a variation of the AVIT methodology, should the
Commission instead examine the volume of a portion of trades? For
example, should the Commission examine volumes during the most active
periods of a day, month or quarter? Or should the Commission only
examine volume associated with a net change in position by
counterparties during the delay period or the end of the day?
Q35.g. Should the Commission consider using a combination of the
proposed and alternative tests as part of a composite test? 215 A
composite test
[[Page 15484]]
would combine a number of methods to determine potential block size and
would include switching rules to select the appropriate block size from
among the methods. An example of a simple switching rule is to select
the largest result from among a number of alternative methods. For
example, a general composite test to calculate the block size would
consist of setting the appropriate minimum block size to the greater of
the results using (a) 50-percent distribution test,216 (b) AVIT
method and (c) social size. In this example, three methods are used and
a simple switching rule would use the largest value resulting from the
three methods. The example composite test ensures that a minimum block
size would be equal to the larger of the three component tests, and
thus ensures a minimal acceptable level of transparency.217 The
Commission recognizes that alternative switching rules may be more
appropriate, such as taking the lower of two or more individual tests
or taking the average of two or more tests to produce the appropriate
minimum block size, and seeks comments on the use of alternative
switching methods. The Commission invites comments on the use of a
composite test as an alternative to a single method and on whether a
composite test should be used to determine the appropriate minimum
block size. If so, which methods should be included and what switching
rule(s) should be used? Why would such an alternative be appropriate?
—————————————————————————
215 The Commission believes a composite test may increase the
flexibility (i.e., robustness) of setting minimum block sizes by
using methods which are more appropriate in certain circumstances.
For example, the Commission recognizes that certain methods may have
limitations, including statistical breakdown points given certain
distributions of transactions. Hence, it may be that no single test
optimally sets block sizes under all distributions of transactions.
A composite test may be more appropriate than any single test in
setting block sizes across the wide variety of products that
comprise the various swap categories and asset classes. In the event
sample sizes are small, methods such as the social size, 50-percent
distribution test, and AVIT may not produce results that adequately
differentiate large swap transactions in need of block
consideration. In addition, the 95% confidence interval test could
be included in a composite test to ensure that the level of
transparency provided by the real-time publicly reported tape is
representative of the actual data.
216 See note 15 supra.
217 For example, shredding by market participants may cause a
marked decrease in the average notional size of transactions as a
participant executes numerous smaller transactions as opposed to a
single large transaction. It is possible that even as total notional
volume in a market increases, and by assumption liquidity increases,
measures of average trade size fall, causing calculations based on
the notional distribution of transactions to suggest lower block
sizes. If shredding becomes standard practice in a market, then
using only the social size or the 67-percent notional amount
calculation method would result in low minimum block sizes which
would not reflect the true size of a transaction and would not
adequately determine what constitutes “large notional swap
transactions” (i.e., block trades) in particular markets. Section
2(a)(13)(E)(ii) of the CEA requires that the Commission “specify
the criteria for determining what constitutes a large notional swap
transaction (block trade) for particular markets and contracts.” 7
U.S.C. 2(a)(13)(E)(ii).
—————————————————————————
Q35.h. Should the Commission use a methodology that takes into
consideration the impact of trade sizes on prices in the swap markets
while determining post-interim minimum block sizes?
Q35.i. Should the Commission use a variation of the multiple test,
which was proposed in the Initial Proposal? 218 For example, should
the Commission remove one or more of the components of the test (i.e.,
should the Commission remove the mean, median or mode)? Should the
components be weighted? Should the multiplier be increased or
decreased?
—————————————————————————
218 See note 16 supra for a description of the multiple test.
—————————————————————————
2. Treatment of Swaps Within the Equity Asset Class
The Commission is proposing under Sec. 43.6(d) that all swaps in
the equity asset class would not qualify for treatment as a block trade
or large notional off-facility swap (i.e., these swaps would not be
subject to a time delay under part 43). As noted above, the Commission
is proposing this approach based on: (1) The existence of a highly
liquid underlying cash market; (2) the absence of time delays for
reporting block trades in the underlying equity cash market; (3) the
small relative size of the equity index swaps market relative to the
futures, options and cash equity index markets; and (4) the
Commission’s goal to protect the price discovery function of the
underlying equity cash market and futures market by ensuring that the
Commission does not create an incentive to engage in regulatory
arbitrage among the cash, swaps, and futures markets.
Request for Comment
Q36. Please provide specific comments regarding the Commission’s
proposed approach to disallow swaps in the equity asset class from
being eligible for treatment as a block trade or large notional off-
facility swap.
Q37. In the alternative, should the Commission employ a phased-in
approach with respect to swaps in the equity asset class, whereby
during the initial period all swaps in this asset class would be
eligible for treatment as block trades or large notional off-facility
swaps?
Q37.a. If so, then on what basis would the Commission follow this
alternative approach?
Q38. As a second alternative, should the Commission establish post-
initial appropriate minimum block sizes for swaps in the equity asset
class using the 50-percent notional amount calculation?
Q38.a. If not a 67-percent notional amount calculation, then what
other calculation methodology could the Commission adopt? For example,
the Commission could establish appropriate minimum block sizes for
swaps in the equity asset class at 0.002 percent of average market
capitalization for publicly-listed equity indexes, and at some lower
threshold (e.g., 0.00175 percent) for custom equity indexes in
recognition of possible marginal increased liquidity risk associated
with these indexes.
Q38.b. Should the Commission establish post-initial appropriate
minimum block sizes for swaps in the equity asset class using one of
the alternative methodologies discussed in Q35 above?
Q39. As a third alternative, should the Commission adopt and then
increase the 67-percent notional amount calculation over time? If so,
why? For example, for each year after the implementation of post-
initial appropriate minimum block sizes, should the notional amount
calculation threshold increase by five or ten percentage points until a
maximum of 95-percent notional amount is reached? Is this alternative
appropriate for swaps in other asset classes?
Q40. As a fourth alternative, should the Commission apply an
approach that uses a different calculation methodology based on the
underlying liquidity in a swap category to determine the calculation
methodology used to determine the appropriate minimum block size? If
so, what measures of liquidity should the Commission use to determine
appropriate categorization of swap categories into low, medium, or high
liquidity swaps within the equity asset class? Is this alternative
appropriate for swaps in other asset classes?
Q40.a. Would a 33, 50 and 67-percent notional amount calculation be
appropriate for low, medium, or high liquidity swap categories
respectively?
3. Methodologies for Determining the Appropriate Minimum Block Sizes in
the FX Asset Class
The Commission is proposing to use different methodologies for the
initial and post-initial periods to determine appropriate minimum block
sizes for swaps categories in the FX asset class. The Commission’s
proposed approach is premised on the absence of actual market data on
which to determine appropriate minimum block sizes in the initial
period. Subsection a. below includes a discussion of the initial period
methodology. Subsection b. below includes a discussion of the post-
initial period methodology.
[[Page 15485]]
a. Initial Period Methodology for Determining Appropriate Minimum Block
Sizes in the FX Asset Class
During the initial period, the Commission is proposing under Sec.
43.6(e)(1) to set the appropriate minimum block sizes for swaps in the
FX asset class based on whether such swap is economically related to a
futures contract. For futures-related swaps in the FX asset class,
proposed Sec. 43.6(e)(1) provides that the Commission would establish
the appropriate minimum block sizes for futures-related swaps 219
based on the block trade size thresholds set by DCMs for economically-
related futures contracts.220 The Commission has set forth the
initial appropriate minimum block sizes in proposed appendix F to part
43 of the Commission’s regulations.221 The Commission anticipates
that this approach would encompass the most liquid FX swaps and
instruments, including most super-major currencies combinations, as
well as most super-major and major currencies combinations. This
approach also would further encompass many important super-major-and-
major combinations and super-major-and-non-major currency
combinations.222 The Commission believes that this proposed approach
is appropriate during the initial period in the absence of actual swap
data for two reasons. First, the Commission aims to deter regulatory
arbitrage opportunities with respect to swaps that are economically
related to futures contracts. In the Commission’s experience, futures
and swap contracts that are economically related form one part of a
larger derivatives market and, as such, should be subject to consistent
block trade regulations (i.e., time delays, methodologies for
calculating block trade sizes, etc.) in order to minimize the potential
for regulatory arbitrage.
—————————————————————————
219 The Commission is proposing to amend Sec. 43.2 to define
“futures related swap” to mean a swap (as defined in section
1a(47) of the Act and as further defined by the Commission in
implementing regulations) that is economically related to a futures
contract.
220 For example, if swap A is economically related to futures
F, and futures F is subject to the block trade rules of a DCM that
applies at a notional amount of $1 million, then swap A would
qualify for treatment as a block trade or large notional off-
facility swap if the notional amount of swap A exceeds $1 million.
221 In situations when two or more DCMs offer for trading
futures contracts that are economically related, the Commission has
selected the lowest applicable non-zero futures block size as the
initial appropriate minimum block size. The Commission believes that
this approach would reduce the chance that the appropriate minimum
block size established by the Commission in the initial period would
have an unintended adverse effect on market liquidity for the
relevant swap category.
222 See Q18 supra, which sets forth an alternative approach to
proposed swap categories based on unique currency combinations.
—————————————————————————
Second, this proposed approach during the initial period would draw
upon the experience of DCMs in considering the potential impacts on
liquidity risk that enhanced transparency may cause in connection with
futures contract execution.223 The Commission understands that DCMs
have set block sizes primarily in consideration of the objectives of
enhancing pre-trade transparency and reducing liquidity risk.224 The
Commission notes that DCMs are required to set block sizes for futures
in compliance with relevant core principles (including Core Principle
9) 225 and part 40 of the Commission’s regulations.226
—————————————————————————
223 The Commission notes further that DCMs historically have
had the appropriate incentive to balance these considerations
because they benefit from liquidity generally (i.e., commissions
from transaction volume in block and non-block trades provides DCMs
with their primary source of revenue).
224 The Commission is of the view that the pre-trade and post-
trade contexts are sufficiently similar in that policies directed at
balancing transparency and liquidity concerns in a pre-trade context
are relevant in considering what an appropriate balance is in the
post-trade context. In the pre-trade context, block sizes are set
near or at the point where a trader would be able to offset the risk
of an equally large transaction without bearing liquidity risk.
225 Core Principle 9 of section 5(d) of the CEA provides that
a DCM “shall provide a competitive, open, and efficient market and
mechanism for executing transactions * * *.” 7 U.S.C. 7(d)(9).
Current appendix B to part 38 of the Commission’s regulations
provides that in order to maintain compliance with core principle 9,
DCMs allowing block trading “should ensure that the block trading
does not operate in a manner that compromises the integrity of
prices or price discovery on the relevant market.” See 17 CFR 38
app. B.
226 Section 40.6 of the Commission’s regulations include a
process by which registered entities may certify rules or rule
amendments that establish or change block trade sizes for futures
contracts. See 17 CFR 40.6.
—————————————————————————
Swap contracts and futures contracts that are economically
related–as defined by the Commission in the proposed amendment to
Sec. 43.2–are economic substitutes for the purpose of determining an
appropriate minimum block size.227 Where swap positions are
economically related to futures positions, parties would likely have an
incentive to conduct regulatory arbitrage by trading swaps. This
incentive is created because swap positions provide counterparties with
the ability to keep the nature of their trade confidential.
Accordingly, the Commission is proposing to adopt the same block sizes
established by DCMs in futures markets for futures-related swaps in
order to ensure consistent levels of market transparency across futures
and swaps markets that are economically related.
—————————————————————————
227 Correlations among all members of a group of economically
related swaps or futures contracts may vary, for the purpose of
determining appropriate minimum block sizes. As a general matter,
however, such swaps correlate closely in price. See Sec. 36.3 of
the Commissions regulations.
—————————————————————————
For non-futures related swaps in the FX asset class in the initial
period of implementation, the Commission is proposing under Sec.
43.6(e)(2) that all non-futures-related swaps in the FX asset class
would qualify to be treated as block trades or large notional off-
facility swaps (i.e., these swaps would be subject to a time delay
under part 43 of the Commission’s regulations). The Commission expects
that this provision only would apply to the most illiquid swaps.
Request for Comment
Q41. Please provide specific comments regarding the Commission’s
proposed approach to prescribe initial appropriate minimum block sizes
for swaps in the FX asset class.
Q41.a. As a variation of the proposed approach, should the
Commission use a “triangulated” approach for setting specific
appropriate minimum block sizes in the initial period for FX swaps and
instruments involving pairings of currencies that are not included in a
single FX futures contract but whose currency legs can be indirectly
paired through a common FX futures contract pairing with a third
currency? 228 That is, the Commission would infer an appropriate
minimum block size for pairings not subject to a common block size by
comparing the DCM block sizes that apply to each pair with respect to
the U.S. dollar and choosing the lower of the two block sizes.229
This approach would enable the Commission to prescribe an appropriate
minimum block size for all pairings involving all combinations of
super-major and major currencies (except those involving the Danish
krone).
—————————————————————————
228 For example, futures based on Canadian dollar (CAD) and
Australian dollar (AUD) currency pairings are not offered on a DCM
while Canadian dollar/U.S. dollar DCM futures contracts and
Australian dollar/U.S. dollar futures contracts are offered on a
DCM. Therefore, the Canadian dollar and Australian dollar can be
indirectly paired through their common relationship with U.S.
dollar-linked FX futures.
229 For example, the Canadian dollar/U.S. dollar DCM futures
contract is subject to a block size of 10,000,000 CAD and the
Australian dollar/U.S. dollar is subject to a block size of
10,000,000 AUD. The Commission would base the appropriate minimum
block size for AUD/CAD swaps on the lower of 10,000,000 CAD and
10,000,000 AUD.
—————————————————————————
Q42. As an alternative to the proposed approach, should the
Commission treat all FX swaps and instruments in the same manner as it
is proposing to treat all equity swaps under Sec. 43.6(d) (i.e., all
FX swaps and instruments would not be subject to a time delay and as a
result
[[Page 15486]]
would have to be publicly disseminated as soon as technological
practicable)? The Commission would premise this alternative on: (1) The
existence of very liquid FX spot, futures and forwards markets; and (2)
the absence of a centralized FX market structure.
Q43. For longer-dated tenor transactions, should the Commission
establish appropriate minimum block sizes at a fraction of the block
trade sizes set by DCMs? This variation to the proposed approach would
be based on the premise that longer-dated swaps may be less liquid.
Q43.a. If so, then for which specific futures-related swap
contracts? What is an appropriate fraction? For which tenors should the
fraction apply (e.g., tenors beyond three months, one year, two years,
etc.)?
b. Post-Initial Methodology for Determining Appropriate Minimum Block
Sizes in the FX Asset Class
In the post-initial period, the Commission is proposing under Sec.
43.6(f)(2) to utilize the 67-percent notional amount calculation to
determine appropriate minimum block sizes for swap categories in the FX
asset class. That is, the Commission would group all publicly
reportable swap transactions in the FX asset class into their
respective swap categories and then apply the 67-percent notional
amount calculation to determine the appropriate minimum block sizes.
Request for Comment
Q44. Should the Commission continue to utilize the initial
appropriate minimum block sizes for futures-related FX swaps as a
minimum or floor appropriate minimum block size in the post-initial
period? Should this floor level only apply to short-dated tenors? 230
—————————————————————————
230 For example, swaps with a tenor of less than one or three
months.
—————————————————————————
Q45. Should the Commission establish post-initial appropriate
minimum block sizes for swaps in the FX asset class using one of the
alternative methodologies discussed in Q35 above?
4. Methodologies for Determining Appropriate Minimum Block Sizes in the
Other Commodity Asset Class
The Commission is proposing to use different methodologies for the
initial and post-initial periods to determine appropriate minimum block
sizes for swaps categories in the other commodity asset class. The
proposed methodology for determining the appropriate minimum block
sizes in the initial period differs based on the three types of other
commodity swap categories: (1) Those swaps based on contracts listed in
appendix B to part 43 of the Commission’s regulations 231; (2) swaps
that are economically related to certain futures contracts 232; and
(3) other swaps.233 The Commission has set initial appropriate
minimum block sizes for publicly reportable swap transactions in which
the underlying asset directly references or is economically related to
the natural gas or electricity swap contracts proposed to be listed in
appendix B to part 43 of the Commission’s regulations.234 The
proposed methodology for determining the appropriate minimum block
sizes for other commodity swaps in the post-initial period follows the
same methodology used for determining the post-initial appropriate
minimum block sizes in the interest rate, credit and FX asset classes.
A more detailed description of the methodologies during the initial and
post-initial periods, as well as the rules for the special treatment of
listed natural gas and electricity swaps are presented in the
subsections below.
—————————————————————————
231 See proposed Sec. 43.6(b)(5)(i).
232 These futures contracts are: CME Cheese; CBOT Distillers’
Dried Grain; CBOT Dow Jones-UBS Commodity Index Excess Return; CBOT
Ethanol; CME Frost Index; CME Goldman Sachs Commodity Index (GSCI)
(GSCI Excess Return Index); NYMEX Gulf Coast Gasoline; Gulf Coast
Sour Crude Oil; NYMEX Gulf Coast Ultra Low Sulfur Diesel; CME
Hurricane Index; CME International Skimmed Milk Powder; NYMEX New
York Harbor Ultra Low Sulfur Diesel; CBOT Nonfarm Payroll; CME
Rainfall Index; CME Snowfall Index; CME Temperature Index; CME U.S.
Dollar Cash Settled Crude Palm Oil; and CME Wood Pulp. See proposed
Sec. 43.6(b)(5)(ii).
233 See proposed Sec. 43.6(b)(5)(iii).
234 The Commission notes that pursuant to proposed Sec.
43.6(b)(5)(i), each of the listed natural gas and electricity swap
contracts proposed to be listed in appendix B to part 43 would be
considered its own swap category.
—————————————————————————
a. Initial Period Methodology for Determining Appropriate Minimum Block
Sizes in the Other Commodity Asset Class (Other Than Natural Gas and
Electricity Swaps Proposed To Be Listed in Appendix B to Part 43)
With respect to swaps that reference or are economically related to
one of the futures contracts listed in appendix B to part 43 235 or
proposed Sec. 43.6(b)(5)(ii), the Commission would set the appropriate
minimum block size based on the block sizes for related futures
contracts set by DCMs.236 For swaps that reference or are
economically related to a futures contract listed in appendix B to part
43 that is not subject to a DCM block trade rule, the Commission
proposes in Sec. 43.6(e)(3) to disallow treatment as a block trade or
large notional off-facility swap. The Commission bases this approach on
an inference that DCMs have not set block trade rules for certain
futures contracts because of the degree of liquidity in those futures
markets.
—————————————————————————
235 The futures contracts that are currently listed on
appendix B to part 43 are the 28 Enumerated Reference Contracts plus
Brent Crude Oil (ICE). The 13 swap contracts that the Commission is
proposing to add to appendix B to part 43 of the Commission’s
regulations in this Further Proposal are not futures contracts.
236 In situations when two or more DCMs offer for trading
futures contracts that are economically related, the Commission has
selected the lowest applicable non-zero futures block size among the
DCMs as the initial appropriate minimum block size. The Commission
believes that this approach would reduce the chance that the
appropriate minimum block size established by the Commission in the
initial period would have an unintended adverse effect on market
liquidity for the relevant swap category.
—————————————————————————
In the initial period, the Commission provides in proposed Sec.
43.6(e)(2) to treat all non-futures-related swaps 237 in the other
commodity asset class as block trades or large notional off-facility
swaps (i.e., these swaps would be subject to a time delay under part
43, irrespective of notional amount). The Commission currently believes
that non-futures-related swaps in the other commodity asset class
generally have lower liquidity in contrast to the more liquid interest
rate, credit and equity asset classes, as well as other commodity swaps
that are economically related to liquid futures contracts (i.e., those
futures contracts listed in proposed appendix B to part 43).
—————————————————————————
237 These non-futures related swaps are not economically
related to one of the futures contracts listed in proposed appendix
B to part 43 or in proposed Sec. 43.6(b)(5)(ii). See proposed Sec.
43.6(b)(5)(iii).
—————————————————————————
Request for Comment
Q46. Should the Commission allow swaps that are economically
related to futures contracts listed on appendix B to part 43 (but are
not subject to a DCM’s block trade rules) to qualify as block trades or
large notional off-facility swaps–i.e., should the Commission not
finalize Sec. 43.6(e)(3) as proposed? If so, how should the Commission
determine the initial appropriate minimum block size for such
contracts? 238
—————————————————————————
238 For example, the Commission could set an appropriate
minimum block size at $25 million or treat all of these swaps as
block trades or large notional off-facility swaps.
—————————————————————————
Q47. Please provide comment regarding the Commission’s current
belief that non-futures-related swaps in the other commodity asset
class generally have lower liquidity in contrast to the more liquid
interest rate, credit and equity asset classes, as well
[[Page 15487]]
as in contrast to other commodity swaps that are economically related
to liquid futures contracts.
b. Initial Period Methodology for Natural Gas and Electricity Swaps in
the Other Commodity Asset Class Proposed To Be Listed in Appendix B to
Part 43
For swaps in which the underlying asset references or is
economically related to one of the natural gas or electricity swaps
listed in appendix B to part 43, the Commission is proposing to treat
such natural gas and electricity swaps differently than other publicly
reportable swap transactions in the other commodity asset class when
setting the initial appropriate minimum block sizes. The Commission
recognizes that traders typically offset their positions in the natural
gas and electricity markets through trading OTC forward contracts,
swaps, plain vanilla options, non-standard options and other customized
arrangements since existing futures contracts listed on DCMs only cover
a limited number of electricity delivery points.239 As discussed in
section III.C.4 below, the Commission is proposing to amend appendix B
to part 43 of the Commission’s regulations to add 13 natural gas and
electricity swap contracts, which the Commission previously has
determined to be liquid contracts serving a price discovery function.
Accordingly, the Commission is proposing that for all swaps that
reference natural gas or electricity swap contracts proposed to be
listed in appendix B to part 43 of the Commission’s regulations, the
Commission would set the initial appropriate minimum block size at $25
million, which corresponds to the level of the interim and initial cap
sizes.240 The $25 million initial appropriate minimum block size
would be applied to natural gas and electricity swaps that reference or
are economically related to the natural gas and electricity swap
contracts proposed to be listed in appendix B to part 43 of the
Commission’s regulations.
—————————————————————————
239 See, e.g., Statement of Richard McMahon, on Behalf of the
Edison Electric Institute, the American Gas Association and the
Electric Power Supply Association, before the Committee on
Agriculture, U.S. House of Representatives, Mar. 31, 2011
(“[Utilities and energy companies] need the ability to use OTC
swaps because existing futures contracts cover limited natural gas
and electricity delivery points. The derivatives market has proven
to be an extremely effective tool in insulating [their] customers
from this risk and price volatility. Utilities and energy companies
use both exchange traded and cleared and OTC swaps for natural gas
and electric power to hedge commercial risk. About one-half of our
gas swaps and about one-third of our power swaps are traded on
exchanges.”).
240 For a discussion of interim and initial cap sizes, see
section III.A supra of this Further Proposal.
—————————————————————————
Request for Comment
Q48. Please provide specific comments regarding the Commission’s
proposed approach to determine the initial appropriate minimum block
sizes for publicly reportable swap transactions that reference or are
economically related to natural gas or electricity swap contracts
proposed to be listed in appendix B to part 43 of the Commission’s
regulations.
Q49. Should the initial appropriate minimum block size for the
publicly reportable swap transactions that reference the natural gas or
electricity swaps proposed to be listed be greater than or lower than
$25 million? If so, then why?
Q50. Should the appropriate minimum block sizes for the gas and
electricity swap contracts proposed to be listed in appendix B to part
43 of the Commission’s regulations be different based on the referenced
underlying assets? If so, how should the appropriate minimum block
sizes be differentiated and at what levels should the appropriate
minimum block sizes be set? Please provide data to support your
comment.
Q51. Are there other swaps within the other commodity asset class
that should be treated in a manner similar to the manner being proposed
for the publicly reportable swap transactions that reference or are
economically related to the natural gas and electricity swap contracts
proposed to be listed in appendix B to part 43 of the Commission’s
regulations? If so, which underlying assets should be treated the same
and why?
c. Post-Initial Period Methodology for Determining Appropriate Minimum
Block Sizes in the Other Commodity Asset Class
In the post-initial period, the Commission provides in proposed
Sec. 43.6(f)(3) to determine appropriate minimum block sizes for swaps
in the other commodity asset class by using the 67-percent notional
amount calculation set forth in proposed Sec. 43.6(c)(1). The 67-
percent notional amount calculation would be applied to publicly
reportable swap transactions in each swap category observed during the
appropriate time period.
Request for Comment
Q52. The Commission requests specific comment regarding its
proposed methodology to determine post-initial appropriate minimum
block sizes for the swap categories in the other commodity asset class.
Q53. As an alternative to the proposed methodology, should the
Commission continue to utilize the initial appropriate minimum block
sizes for futures-related swaps in the other commodity asset class as a
minimum or floor in the post-initial period? If so, then should this
floor only apply to short-dated tenors? 241
—————————————————————————
241 For example, swaps with a tenor of less than one or three
months.
—————————————————————————
Q54. As another alternative, for the swap categories in the other
commodity class that fall under proposed Sec. 43.6(b)(5)(iii), should
the Commission group these swaps under a single category and apply a
single default appropriate minimum block size to all swaps in the
category?
Q54.a. If so, then should the Commission set the default
appropriate minimum block size without regard to observed data or by
some other mechanism?
Q54.b. If the Commission sets the default appropriate minimum block
size without regard to observed data, then at what levels should the
Commission set appropriate minimum block sizes? For example, should the
Commission set the appropriate minimum block size at $25 million?
5. Special Provisions for the Determination of Appropriate Minimum
Block Sizes for Certain Types of Swaps
The Commission recognizes the complexity of the swap market may
make it difficult to determine appropriate minimum block sizes for
particular types of swaps under the methodologies discussed above. For
that reason, the Commission is proposing Sec. 43.6(h), which sets out
a series of special rules that apply to the determination of the
appropriate minimum block sizes for particular types of swaps. The
Commission is proposing special rules in respect of: (a) Swaps with
optionality; (b) swaps with composite reference prices 242; (c)
“physical commodity swaps” 243; (d) currency conversions; and (e)
successor
[[Page 15488]]
currencies. Each of these special rules is discussed in the subsections
below.
—————————————————————————
242 The Commission is proposing to amend Sec. 43.2 to define
“swaps with composite reference prices” as swaps based on
reference prices composed of more than one reference price that are
in differing swap categories. The Commission is proposing to use
this term in connection with the establishment of a method through
which parties to a swap transaction can determine whether a
component to their swap would qualify the entire swap as a block
trade or large notional off-facility swap.
243 The Commission is proposing to amend Sec. 43.2 of the
Commission’s regulations by defining the term “physical commodity
swap” as a swap in the other commodity asset class that is based on
a tangible commodity.
—————————————————————————
a. Swaps With Optionality
A swap with optionality highlights special concerns in terms of
determining whether the notional size of such swap would be treated as
a block trade or large notional off-facility swap. Proposed Sec.
43.6(h)(1) addresses these concerns and provides that the notional size
of swaps with optionality shall equal the notional size of the swap
component without the optional component. For example, a LIBOR 3-month
call swaption with a calculated notional size of $9 billion for the
swap component–regardless of option component, strike price, or the
appropriate delta factor–would have a notional size of $9 billion for
the purpose of determining whether the swap would qualify as a block
trade or large notional off-facility swap.244
—————————————————————————
244 In essence, this approach would assume a delta factor of
one with respect to the underlying swap for swaptions.
—————————————————————————
The Commission is proposing to take this approach with respect to
swaps with optionality because, in the Commission’s view, it provides
an easily calculable method for market participants to ascertain
whether their swaps with optionality features would qualify as a block
trade or large notional off-facility swap. The Commission is aware that
this approach does not take into account the risk profile of a swap
with optionality compared to that of a “plain-vanilla swap,” but
believes that this approach is reasonable to minimize complexity.
b. Swaps With Composite Reference Prices
Swaps with two or more reference prices (i.e., composite reference
prices) raise concerns as to which reference price market participants
should use to determine whether such swap qualifies as a block trade or
large notional off-facility swap.245 Proposed Sec. 43.6(h)(2)
provides that the parties to a swap transaction with composite
reference prices (i.e., two or more reference prices) may elect to
apply the lowest appropriate minimum block size applicable to any
component swap category. This provision also would apply to: (1)
Locational or grade-basis swaps that reflect differences between two or
more reference prices; and (2) swaps utilizing a reference price based
on weighted averages of component reference prices.246 The Commission
is proposing Sec. 43.6(h)(2) in order to provide market participants
with a straightforward and uncomplicated way in which determine whether
such swap would qualify as a block trade or large notional off-facility
swap.
—————————————————————————
245 Swaps with composite reference prices are composed of
reference prices that relate to one another based on the difference
between two or more underlying reference prices–for example, a
locational basis swap (e.g., a natural gas Rockies Basis swap) that
utilizes a reference price based on the difference between a price
of a commodity at one location (e.g., a Henry Hub index price) and a
price at another location (e.g., a Rock Mountains index price)).
246 In other words, swaps with a composite reference price
composed of reference prices that relate to one another based on an
additive relationship. This term would include swaps that are priced
based on a weighted index of reference prices.
—————————————————————————
Under proposed Sec. 43.6(h)(2), market participants would need to
decompose their composite reference price swap transaction in order to
determine whether their swap would qualify as a block trade or large
notional off-facility swap. For example, assume that the appropriate
minimum block sizes for futures A-related swaps is $3 million, for
futures B-related swaps is $800,000, for futures C-related swaps is
$1.2 million and for futures D-related swaps is $1 million. If a swap
is based on a composite reference price that itself is based on the
weighted average of futures price A, futures price B, futures price C,
and futures price D (25% equal weightings for each), and the notional
size of the swap is $4 million (i.e., $1 million for each component
swap category), then the swap would qualify as a block trade or large
notional off-facility swap based on the futures B-related swap
appropriate minimum block size.
c. Physical Commodity Swaps
Block trade sizes for physical commodities are generally expressed
in terms of notional quantities (e.g., barrels, bushels, gallons,
metric tons, troy ounces, etc.). The Commission is proposing a similar
convention for determining the appropriate minimum block sizes for
block trades and large notional off-facility swaps. In particular,
proposed Sec. 43.6(h)(3) provides that notional sizes for physical
commodity swaps shall be expressed in terms of notional quantities
using the notional unit measure utilized in the related futures
contract market or the predominant notional unit measure used to
determine notional quantities in the cash market for the relevant,
underlying physical commodity. This approach ensures that appropriate
minimum block size thresholds for physical commodities are not subject
to volatility introduced by fluctuating prices. This approach also
eliminates complications arising from converting a physical commodity
transaction in one currency into another currency to determine
qualification for treatment as a block trade or large notional off-
facility swap.
d. Currency Conversion
Under proposed Sec. 43.6(h)(4), the Commission provides that when
determining whether a swap transaction denominated in a currency other
than U.S. dollars qualifies as a block trade or large notional off-
facility swap, swap counterparties and registered entities may use a
currency exchange rate that is widely published within the preceding
two business days from the date of execution of the swap transaction in
order to determine such qualification. This proposed approach would
enable market participants to use a currency exchange rate that they
deem to be the most appropriate or easiest to obtain.
e. Successor Currencies
As noted above, the Commission is proposing to use currency as a
criterion to determine swap categories in the interest rate asset
class.247 The Commission is also proposing to classify the euro (EUR)
as a super-major currency, among other currencies.248 Proposed Sec.
43.6(h)(5) provides that for currencies that succeed a super-major
currency, the appropriate currency classification for such currency
would be based on the corresponding nominal gross domestic product
(“GDP”) classification (in U.S. dollars) as determined in the most
recent World Bank World Development Indicator at the time of
succession. This proposed provision is intended to address the possible
removal of one or more of the 17 eurozone member states that use the
euro.249
—————————————————————————
247 See proposed Sec. 43.6(b)(1)(i) and the related
discussion in section II.B.1. of this Further Proposal.
248 See the proposed amendment to Sec. 43.2, defining
“super-major currencies.”
249 The 17 countries that use the euro are: Austria, Belgium,
Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and
Spain.
—————————————————————————
Proposed Sec. 43.6(h)(5)(i)-(iii) further specifies the manner in
which the Commission would classify a successor currency for each
nation that was once a part of the predecessor currency. Specifically,
the Commission proposes to use GDP to determine how to classify a
successor currency. For countries with a GDP greater than $2 trillion,
the Commission would classify the successor currency to be a super-
major currency.250 For countries with a GDP
[[Page 15489]]
greater than $500 billion but less than $2 trillion, the Commission
would classify the successor currency as a major currency.251 For
nations with a GDP less than $500 billion, the Commission would
classify the successor currency as a non-major currency.252
—————————————————————————
250 See proposed Sec. 43.6(h)(6)(i).
251 See proposed Sec. 43.6(h)(6)(ii).
252 See proposed Sec. 43.6(h)(6)(iii).
—————————————————————————
Request for Comment
Q55. The Commission requests general comments on its proposed
special rules in proposed Sec. 43.6(h).
Q56. As an alternative to the proposed method for determining
whether a swap with optionality would qualify as a block trade or large
notional off-facility swap (i.e., proposed Sec. 43.6(h)(1), should the
Commission use a delta-equivalent or gamma-equivalent approach to
determine the notional size of swaps with optionality?
Q56.a. What are the direct and indirect costs to market
participants of determining delta or gamma equivalents?
Q57. As an alternative to proposed Sec. 43.6(h)(3), should the
Commission base notional sizes for physical commodities on the notional
amount in the applicable currency?
Q58. As an alternative to proposed Sec. 43.6(h)(4), should the
Commission mandate that market participants use the most recent
currency exchange rate set at some specified time and location (e.g., 4
p.m. London time from the preceding business day)? This alternative
approach could provide greater certainty as to the appropriate
conversion rates at the cost of the providing market participants with
greater flexibility.
Q59. As another alternative to proposed Sec. 43.6(h)(4), should
the Commission publish a currency exchange rate on the Commission’s Web
site in connection with its regular post-initial appropriate minimum
block size determination? If so, then how should the Commission
determine the currency exchange rate?
Q60. As an alternative to proposed Sec. 43.6(h)(5), should the
Commission classify all successor currencies as major currencies?
Q60.a. Some critics have argued that too much emphasis is currently
placed on the importance of GDP as a measure of progress. Should the
Commission use a measure other than GDP (e.g., the Index of Sustainable
Economic Welfare)?
E. Procedural Provisions
1. Proposed Sec. 43.6(a) Commission Determination
The Commission is proposing that it determine the appropriate
minimum block size for any swap listed on a SEF or DCM, and for large
notional off-facility swaps. Proposed Sec. 43.6(a) specifically
provides that the Commission would establish the appropriate minimum
block sizes for publicly reportable swap transactions based on the swap
categories set forth in proposed Sec. 43.6(b) in accordance with the
provisions set forth in proposed Sec. Sec. 43.6(c), (d), (e), (f) and
(h), as applicable. In the Commission’s view, this proposed approach
would be the least burdensome from a cost-benefit perspective because
it significantly reduces the direct costs imposed on SDRs and other
registered entities. As noted above, nothing in this Further Proposal
would prohibit SEFs and DCMs from setting block sizes for swaps at
levels that are higher than the appropriate minimum block sizes
determined by the Commission.
Request for Comment
Q61. The Commission requests specific comments on its proposal that
the Commission determine appropriate minimum block sizes.
Q62. In the alternative, should the Commission permit SEFs or DCMs
to determine the appropriate minimum block size for swaps that the SEFs
or DCMs list? Would this alternative lead to unnecessary market
fragmentation?
Q62.a. What would be the appropriate parameters or guidance that
the Commission should give to SEFs or DCMs in setting appropriate
minimum block sizes?
Q62.b. What procedure could the Commission use to ensure that there
are standard appropriate minimum block size determinations across all
markets?
2. Proposed Sec. 43.6(f)(3) and(4) Publication and Effective Date of
Post-Initial Appropriate Minimum Block Sizes
Proposed Sec. 43.6(f)(3) provides that the Commission would
publish the post-initial appropriate minimum block sizes on its Web
site. Proposed Sec. 43.6(f)(4) provides that these sizes would become
effective on the first day of the second month following the date of
publication. Per proposed Sec. 43.6(f)(1), the Commission would
publish updated post-initial appropriate minimum block sizes in the
same manner no less than once each calendar year.
Request for Comment
Q63. The Commission requests specific comment on proposed
Sec. Sec. 43.6(f)(3) and (4).
Q64. Instead of publishing initial appropriate minimum block sizes
through proposed appendix F to part 43, should the Commission publish
these initial appropriate minimum block sizes on the Commission’s Web
site at http://www.cftc.gov? This approach would ensure that in the
post-initial period, no confusion arises in terms of the method for
publication and the relevant appropriate minimum block sizes.
3. Proposed Sec. 43.6(g) Notification of Election
Proposed Sec. 43.6(g) sets forth the election process through
which a qualifying swap transaction would be treated as a block trade
or large notional off-facility swap, as applicable. Proposed Sec.
43.6(g)(1) establishes a two-step notification process relating to
block trades. Proposed Sec. 43.6(g)(2) establishes the notification
process relating to large notional off-facility swaps.
Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this
section provides that the parties to a publicly reportable swap
transaction that has a notional amount at or above the appropriate
minimum block size are required to notify the SEF or DCM (pursuant to
the rules of such SEF or DCM) of their election to have their
qualifying publicly reportable swap transaction treated as a block
trade. With respect to the second step, proposed Sec. 43.6(g)(1)(ii)
provides that the SEF or DCM, as applicable, that receives an election
notification is required to notify the relevant SDR of such block trade
election when transmitting swap transaction and pricing data to the SDR
for public dissemination.
Proposed Sec. 43.6(g)(2) is very similar to the first step set
forth in proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2)
provides, in part, that a reporting party who executes an off-facility
swap with an notional amount at or above the applicable appropriate
minimum block size is required to notify the relevant SDR of its
election to treat such swap as a large notional off-facility swap. This
section provides further that the reporting party is required to notify
the relevant SDR in connection with the reporting party’s transmission
of swap transaction and pricing data to the SDR pursuant to Sec. 43.3
of the Commission’s regulations.
[[Page 15490]]
Request for Comment
Q65. The Commission requests specific comments regarding proposed
Sec. 43.6(g), the proposed notification process for the election to
treat a qualifying swap transaction as a block trade or large notional
off-facility swap.
Q66. As a variation of the proposed approach, should the Commission
also require SEFs, DCMs and reporting parties to indicate under which
swap category they are claiming block trade or large notional off-
facility swap treatment in connection with the transmission of an
election notification?
Q67. Are there alternative methods through which a reporting party
can elect to treat its qualifying swap transaction as a block trade or
large notional off-facility?
Q68. Should the Commission establish a special method of election
for small end-users when those end users are the reporting party to a
qualifying swap transaction?
4. Proposed Sec. 43.7 Delegation of Authority
Under proposed Sec. 43.7(a), the Commission would delegate the
authority to undertake certain Commission actions to the Director of
the Division of Market Oversight (“Director”) and to other employees
as designated by the Director from time to time. In particular, this
proposed delegation would grant to the Director the authority to
determine: (1) The new swap categories as described in proposed Sec.
43.6(b); (2) the post-initial appropriate minimum block sizes as
described in proposed Sec. 43.6(f); and (3) the post-initial cap sizes
as described in the proposed amendments to Sec. 43.4(h) of the
Commission’s regulations.253 The purpose of this proposed delegation
provision is to facilitate the Commission’s ability to respond
expeditiously to ever-changing swap market and technological
conditions. The Commission is of the view that this delegation would
help ensure timely and accurate real-time public reporting of swap
transaction and pricing data and further ensure anonymity in connection
with the public reporting of such data. Proposed Sec. 43.7(b) provides
that the Director may submit to the Commission for its consideration
any matter that has been delegated pursuant to this authority. Proposed
Sec. 43.7(c) provides that the delegation to the Director does not
prevent the Commission, at its election, from exercising the delegated
authority.
—————————————————————————
253 See the discussion of post-initial cap sizes in section
III.B. infra. As noted above, the Commission is proposing an
amendment to Sec. 43.2 to define the term “cap size” as the
maximum limit of the principal, notional amount of a swap that is
publicly disseminated. This term applies to the cap sizes determined
in accordance with the proposed amendments to Sec. 43.4(h) of the
Commission’s regulations.
—————————————————————————
Request for Comment
Q69. The Commission requests specific comment on its proposed
delegation of authority to the Director of certain Commission actions.
Q70. Should the Director be given the authority to take other
actions not identified in proposed Sec. 43.7 on behalf of the
Commission in connection with the calculation of post-initial
appropriate minimum block sizes and cap sizes? If so, then what other
actions?
III. Further Proposal–Anonymity Protections for the Public
Dissemination of Swap Transaction and Pricing Data
A. Policy Goals
Section 2(a)(13)(E)(i) of the CEA directs the Commission to protect
the identities of counterparties to swaps subject to the mandatory
clearing requirement, swaps excepted from the mandatory clearing
requirement and voluntarily cleared swaps. Similarly, section
2(a)(13)(C)(iii) of the CEA requires that the Commission prescribe
rules that maintain the anonymity of business transactions and market
positions of the counterparties to an uncleared swap.254 In proposed
amendments to Sec. Sec. 43.4(h) and 43.4(d)(4), the Commission is
prescribing measures to protect the identities of counterparties and to
maintain the anonymity of their business transactions and market
positions in connection with the public dissemination of publicly
reportable swap transactions. The Commission is proposing to follow the
practices used by most federal agencies when releasing to the public
company-specific information–by removing obvious identifiers, limiting
geographic detail (e.g., disclosing the general, non-specific
geographical information about the delivery and pricing points) and
masking high-risk variables by truncating extreme values for certain
variables (e.g., capping notional values).255 Further details about
the proposals to determine cap sizes and applying them to various swap
categories are described below in section III.B of this Further
Proposal. Further details regarding the limitations placed on SDRs in
connection with the public disclosure of geographic details for the
other commodity asset class are provided below in section III.C of this
Further Proposal.
—————————————————————————
254 This provision does not cover swaps that are “determined
to be required to be cleared but are not cleared.” See 7 U.S.C.
2(a)(13)(C)(iv).
255 The Commission is following the necessary procedures for
releasing microdata files as outlined by the Federal Committee on
Statistical Methodology: (i) Removal of all direct personal and
institutional identifiers, (ii) limiting geographic detail, and
(iii) top-coding high-risk variables which are continuous. See
Federal Committee on Statistical Methodology, Report on Statistical
Disclosure Limitation Methodology 94 (Statistical Policy Working
Paper 22, 2d ed. 2005), http://www.fcsm.gov/working-papers/totalreport.pdf. The report was originally prepared by the
Subcommittee on Disclosure Limitation Methodology in 1994 and was
revised by the Confidentiality and Data Access Committee in 2005.
—————————————————————————
B. Establishing Notional Cap Sizes for Swap Transaction and Pricing
Data To Be Publicly Disseminated in Real-Time
1. Policy Goals for Establishing Notional Cap Sizes
In addition to establishing appropriate minimum block sizes, the
Commission is also proposing to amend Sec. 43.4(h) to establish cap
sizes for notional and principal amounts that would mask the total size
of a swap transaction if it equals or exceeds the appropriate minimum
block size for a given swap category. For example, if the block size
for a category of interest rate swaps was $1 billion, the cap size was
$1.5 billion, and the actual transaction had a notional value of $2
billion, then this swap transaction would be publicly reported with a
delay and with a notional value of $1.5+ billion.
The proposed cap size provisions are consistent with the two
relevant statutory requirements in section 2(a)(13) of the CEA. First,
the cap size provisions would help to protect the anonymity of
counterparties’ market positions and business transactions as required
in section 2(a)(13)(C)(iii) of the CEA.256 Second, the masking of
extraordinarily large positions also takes into consideration the
requirement under section 2(a)(13)(E)(iv), which provides that the
Commission take into account the impact that real-time public reporting
could have in reducing market liquidity.257
—————————————————————————
256 See 7 U.S.C. 2(a)(13)(C)(iii).
257 See id. at 2(a)(13)(E)(iv).
—————————————————————————
2. Proposed Amendments Related to Cap Sizes–Sec. 43.2 Definitions and
Sec. 43.4 Swap Transaction and Pricing Data To Be Publicly
Disseminated in Real-Time
The Commission is proposing an amendment to Sec. 43.2 to define
the term “cap size” as the maximum limit of the principal, notional
amount of a swap that is publicly disseminated. This term applies to
the cap sizes determined in accordance with the proposed
[[Page 15491]]
amendments to Sec. 43.4(h) of the Commission’s regulations.
Section 43.4(h) of the Commission’s regulations currently
establishes interim cap sizes for rounded notional or principal amounts
for all publicly reportable swap transactions. In the Adopting Release,
the Commission finalized Sec. 43.4(h) to provide that the notional or
principal amounts shall be capped in a manner that adjusts in
accordance with the appropriate minimum block size that corresponds to
a publicly reportable swap transaction.258 Section 43.4(h) further
provides that if no appropriate minimum block size exists, then the cap
size on the notional or principal amount shall correspond to the
interim cap sizes that the Commission has established for the five
asset classes.259 In Sec. 43.4(h) and as described in the Adopting
Release, the Commission notes that SDRs will apply interim cap sizes
until such time as appropriate minimum block sizes are
established.260 The Commission continues to believe that the interim
cap sizes for each swap category should correspond with the applicable
appropriate minimum block size, to the extent that an appropriate
minimum block size exists.261
—————————————————————————
258 See 77 FR 1,247.
259 Sections 43.4(h)(1)-(5) established the following interim
cap sizes for the corresponding asset classes: (1) Interest rate
swaps at $250 million for tenors greater than zero up to and
including two years, $100 million for tenors greater than two years
up to and including 10 years, and $75 million for tenors greater
than 10 years; (2) credit swaps at $100 million; (3) equity swaps at
$250 million; (4) foreign exchange swaps at $250 million; and (5)
other commodity swaps at $25 million.
260 See 77 FR 1,215.
261 Leading industry trade associations agree that cap sizes
are an appropriate mechanism to ensure that price discovery remains
intact for block trades, while also protecting post-block trade risk
management needs from being anticipated by other market
participants. See ISDA and SIFMA, Block Trade Reporting for Over-
the-Counter Derivatives Market, Jan. 18, 2011.
—————————————————————————
The Commission is now proposing to amend Sec. 43.4(h) both to
establish initial cap sizes for each swap category within the five
asset classes and also to delineate a process for the post-initial
period through which the Commission would establish post-initial cap
sizes for each swap category.262 This Further Proposal would change
the term “interim” as it is used in Sec. 43.4(h) to “initial” in
order to correspond with the description of the initial period in
proposed Sec. 43.6(e).
—————————————————————————
262 The Commission does not intend the provisions in this
Further Proposal to prevent a SEF or DCM from sharing the exact
notional amounts of a swaps transacted on or pursuant to the rules
of its platform with market participants on such platform
irrespective of the cap sizes set by the Commission. To share the
exact notional amounts of swaps, the SEF or DCM must comply with
Sec. 43.3(b)(3)(i) of the Commission’s regulations. See 77 FR
1,245.
—————————————————————————
a. Initial Cap Sizes
In the initial period,263 proposed Sec. 43.4(h)(1) sets the cap
size for each swap category as the greater of the interim cap sizes set
forth in the Adopting Release (existing Sec. 43.4(h)(1)-(5)) or the
appropriate minimum block size for the respective swap category.264
If such appropriate minimum block size does not exist, then the cap
sizes shall be set at the interim cap sizes set forth in the Adopting
Release (existing Sec. 43.4(h)(1)-(5)).
—————————————————————————
263 The initial period is the period prior to the effective
date of a Commission determination to establish an applicable post-
initial cap sizes. See proposed Sec. 43.4(h)(1).
264 See 77 FR 1,249.
—————————————————————————
b. Post-Initial Cap Sizes and the 75-Percent Notional Amount
Calculation
In proposed Sec. 43.6(c)(2), the Commission would use the 75-
percent notional amount calculation as a means to set post-initial cap
sizes for the purpose of reporting block trades or large notional off-
facility swaps of significant size. This calculation methodology is
different from the 67-percent notional amount calculation methodology
that the Commission proposes in Sec. 43.6(c)(1) for determining
appropriate minimum block sizes. The Commission is proposing to use the
former methodology to set post-initial cap sizes because setting cap
sizes above appropriate minimum block sizes would provide additional
pricing information with respect to large swap transactions, which are
large enough to be treated as block trades (or large notional off-
facility swaps), but small enough that they do not exceed the
applicable post-initial cap size. This additional information may
enhance price discovery by publicly disseminating more information
relating to market depth and the notional sizes of publicly reportable
swap transactions, while still protecting the anonymity of swap
counterparties and their ability lay off risk when executing
extraordinarily large swap transactions.
The Commission notes that the appropriate minimum block sizes and
the cap sizes seek to achieve the statutory goals set forth in CEA
section 2(a)(13)(E)(iv) in different ways.265 Appropriate minimum
block sizes achieve this statutory requirement by providing market
participants transacting large notional swaps with a time delay in the
public dissemination of swap transaction and pricing data relating to
such swaps. As a result of these time delays, market participants are
able to offset the risk associated with these swaps. Cap sizes achieve
the statutory requirement of CEA section 2(a)(13)(E)(iv) by masking the
notional size of large transactions permanently from public
dissemination. As a result, market participants conducting
extraordinarily large swap transactions would be able to offset risk
since an SDR would not publicly disseminate the actual notional amount
of such transactions.
—————————————————————————
265 Section 2(a)(13)(E)(iv) of the CEA requires that the
Commission ensure that public reporting does not materially reduce
market liquidity. See 7 U.S.C. 2(a)(13)(E)(iv).
—————————————————————————
While appropriate minimum block sizes and cap sizes both seek to
achieve the statutory mandate in CEA section 2(a)(13)(E)(iv), they also
seek to address different statutory requirements. As noted above, CEA
sections 2(a)(13)(E)(ii) and (iii) require that the Commission specify
criteria for determining block trades and large notional off-facility
swaps for the purpose of subjecting those trades and swaps to a time
delay from public dissemination. In addition, CEA sections
2(a)(13)(C)(iii) and 2(a)(13)(E)(i) require that the Commission
promulgate regulations ensuring that public reporting does not disclose
the identities, business transactions and market positions of any
person. Cap sizes primarily address the statutory requirements in CEA
sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i), while appropriate minimum
block sizes primarily address the statutory requirements in
2(a)(13)(E)(ii) and (iii).
Pursuant to proposed Sec. 43.4(h)(2)(ii), the Commission would use
a 75-percent notional amount calculation to determine the appropriate
post-initial cap sizes for all swap categories.266 For the 75-percent
notional amount calculation, the Commission would determine the
appropriate cap size through the following process, pursuant to
proposed Sec. 43.6(c)(2): (step 1) Select all of the publicly
reportable swap transactions within a specific swap category using a
rolling three-year window of data beginning with a minimum of one
year’s worth of data and adding one year of data for each calculation
until a total of three years of data is accumulated; (step 2) convert
to the same currency or units and use a trimmed data set; (step 3)
determine the sum of the notional amounts of swaps in the trimmed data
set; (step 4) multiply the sum of the notional amount by 75 percent;
(step 5) rank order the observations by notional amount from least to
greatest; (step 6) calculate the cumulative sum of the
[[Page 15492]]
observations until the cumulative sum is equal to or greater than the
75-percent notional amount calculated in step 4; (step 7) select the
notional amount associated with that observation; (step 8) round the
notional amount of that observation to two significant digits, or if
the notional amount associated with that observation is already
significant to two digits, increase that notional amount to the next
highest rounding point of two significant digits; and (step 9) set the
appropriate minimum block size at the amount calculated in step 8.
—————————————————————————
266 See proposed Sec. 43.6(c)(2).
—————————————————————————
Consistent with the Commission’s proposed process to determine the
appropriate post-initial minimum block sizes, proposed Sec. 43.4(h)(3)
provides that the Commission would publish post-initial cap sizes on
its Web site. Proposed Sec. 43.4(h)(4) provides that unless otherwise
indicated on the Commission’s Web site, the post-initial cap sizes
would become effective on the first day of the second month following
the date of publication.
c. Alternative Cap Size Calculations
In addition to the 75-percent notional amount calculation, the
Commission is considering alternative calculations that it would use to
set post-initial cap sizes. These calculations are based on common
statistical disclosure controls used by other agencies in making data
publicly available.267
—————————————————————————
267 These are typical of statistical disclosure practices used
by other Federal agencies as described in the Report on Statistical
Disclosure Limitation Methodology, see note 255 supra.
—————————————————————————
Specifically, the Commission is considering the following six
alternative calculations to the 75-percent notional amount calculation
of cap sizes during the post-initial period:
67-percent Notional Amount Calculation with a Floor. As a
variation of the 75-percent notional amount calculation the Commission
is considering determining post-initial cap sizes as the greater of the
result of the 75-percent notional amount calculation or the interim cap
sizes described in the Adopting Release (existing Sec. Sec.
43.4(h)(1)-(5)). The Commission recognizes that in certain markets
“shredding” may result in smaller transaction sizes,268 thereby
impacting the resulting cap size as determined pursuant to the 75-
percent notional amount calculation. As a result, post-initial cap
sizes could reach levels that are significantly lower than those
adopted as interim cap sizes in Sec. 43.4(h). In order to ensure that
the public and market participants are provided with meaningful data
related to notional amounts and market depth, the Commission believes
that requiring this variation may appropriately enhance price discovery
consistent with the purpose of CEA section 2(a)(13)(B).
—————————————————————————
268 The term “shredding” refers to the practice of breaking
up a large swap transaction into a number of smaller ones. The
practice is often done to avoid causing a large impact on prices or
to conceal the existence of a large trade originating from a single
source. When traders attempt to execute a single large trade they
may be required to pay a liquidity or risk premium to encourage
traders on the other side of the market to take on the trade.
Shredding by market participants may cause a marked decrease in the
average notional size of transactions as a participant executes
numerous smaller transactions as opposed to a single large
transaction. For a further discussion of shredding, see note 217
supra.
—————————————————————————
Appropriate Minimum Block Size with a Floor. The
Commission is considering whether to set the post-initial cap sizes
equal to the greater of the post-initial appropriate minimum block size
or the interim cap sizes described in the Adopting Release (existing
Sec. Sec. 43.4(h)(1)-(5)). This alternative method for determining
post-initial cap sizes would directly link the post-initial cap sizes
to the post-initial appropriate minimum block sizes.
Number of Non-affiliated Markets Participant Calculation.
The Commission is also considering whether to set post-initial cap
sizes using a calculation that determines the minimum notional value
cap size based on the number of non-affiliated market participants who
have transactions with notional values greater than the cap size. This
process would determine the post-initial cap size through the following
process: (1) Select the swap transaction data for a specific swap
category; (2) convert to the same currency or units and use a trimmed
data set; (3) determine the transaction distribution of notional
amounts using the trimmed data set for the swap category; (4) find the
minimum notional value where, for transactions with a notional value
greater than that value, there are 10 non-affiliated market
participants. The Commission anticipates that under this alternative
approach, all market participants from the same legal entity would be
considered as one non-affiliated market participant.
Non-affiliated Market Participants and Minimum
Concentration Calculation. The Commission is also considering whether
to set post-initial cap sizes using a calculation that determines the
minimum notional value cap size based on number of market participants
and the market concentration of transactions with notional sizes above
the cap size. This process would determine the post-initial cap size
through the following process: (1) Select the swap transaction data for
a specific swap category; (2) convert to the same currency or units and
use a trimmed data set; (3) determine the transaction distribution of
notional amounts using the trimmed data set for the category; (4) find
the minimum notional size such that the number of unique participants
in a swap category with transactions greater than that value exceeds
10, the maximum share of any one participant in trades above the
minimum notional value is less than 25 percent, or the maximum share of
notional value by a participant for transactions greater than the
minimum notional value is less than 25 percent.
Confidence Interval Test. The Commission is also
considering whether to set post-initial cap sizes using a confidence
interval test, which determines the point at which masking one more
transaction causes the average notional size–calculated from the data
for all publicly reportable swap transactions–to be outside of the
expected range of the true notional size. This alternative test takes
into account the impact of information loss on the transparency for
swap transaction and pricing data. The confidence interval test
calculates the minimum notional value as the point where the publicly
disseminated average notional size is within the 95-percent confidence
interval using the following process: (step 1) Select the swap
transaction data for a specific swap category; (step 2) convert to the
same currency or units and determine the transaction distribution of
notional amounts using the logged 269 and trimmed data set for the
swap category; (step 3) calculate the average notional size and the 95-
percent confidence interval around this average; 270 (step 4) drop
the largest
[[Page 15493]]
remaining transaction from the distribution 271; (step 5) conditional
on the full-sample 95-percent confidence interval, calculate the sample
average notional size using the data resulting from step 4; (step 6) if
the sample average notional size is not outside of the 95-percent
confidence interval, repeat steps 4 and 5 until it is just outside of
the 95-percent confidence interval; and (step 7) once the sample
average notional size is outside the 95-percent confidence interval,
set the minimum notional value equal to the notional value, rounded
pursuant to Sec. 43.4(g), of the largest transaction of the
distribution for which the sample average notional size was still
within the 95-percent confidence interval.272
—————————————————————————
269 In practice, the natural logarithm of the notional value
is preferred over the nominal value to reduce the effect of skewness
on sample statistics. In addition to classical statistical methods,
the calculation of the confidence interval may be improved by using
“bootstrapping” methods to estimate the distribution of the
average notional trade size.
270 The confidence interval test assumes sufficient data in a
swap category such that a normal distribution is a good
approximation to compute an interval estimate. To the extent the
actual distribution diverges significantly from a normal
distribution, the interval estimate may not reflect the probability
at the desired (95 percent) confidence interval. In which case,
other methods such as “bootstrapping” may be necessary to compute
the confidence intervals around the full sample average notional
size. The Commission notes the ODSG data sets were not normally
distributed, but were nearly symmetric after transforming the
notional size by the natural logarithm. Further, according to a TABB
Group survey, many market participants expected the average notional
transaction size to decline, which may imply a change in the
distribution. See the presentation of Kevin McPartland, Principal,
Tabb Group, CFTC Technology Advisory Committee Meeting, Dec. 13,
2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.
271 The Commission is also considering dropping transactions
in one-percent increments until the sample average moves outside the
95-percent confidence interval. The Commission would then drop
transactions within the last one-percent increment until the actual
transaction is found that moves the sample mean outside of the
confidence interval.
272 See Sec. 43.4(g), which provides that the notional or
principal amount of a publicly reportable swap transaction, “as
described in appendix A to this part [43], shall be rounded and
publicly disseminated by [an SDR]” based on the range of notional
or principal amounts.
—————————————————————————
Variation of the Confidence Interval Test. The Commission
is also considering a slightly different methodology for the confidence
interval test. This variation still would calculate the average of the
entire distribution using all of the available data and the 95-percent
confidence interval for that average. However, instead of completely
dropping the largest remaining transactions (step 4, as referenced in
the previous alternative) and then calculating the sample average
notional size for the publicly disseminated information without any
information from these “dropped” transactions (step 5), this
alternative methodology would use the notional value of the largest
transaction (that would otherwise have been dropped) as though it were
the cap size and would calculate the average notional size of the
publicly disseminated data by setting the notional values above that
size equal to the cap. This approach would simulate the information
known by the public if the notional value of that last transaction was
the notional cap size. Since the Commission would calculate the average
of publicly disseminated transactions with an approximation of the
notional value of such transactions above the cap size, the cap size
would be lower than the methodology where all information about the
size of the transaction is dropped from the estimation.
Request for Comment
Q71. Please provide specific comments regarding the Commission’s
proposed approach regarding cap sizes in the initial period.
Q72. Please provide specific comments regarding the Commission’s
proposed approach to set cap sizes in the post-initial period.
Q73. As an alternative to the proposed approach, should initial and
post-initial cap sizes always be equal to the appropriate minimum block
size for a particular swap category?
Q74. Please provide comments regarding the above-described
alternative methods for determining post-initial cap sizes.
Q74.a. Specifically, would any of these alternatives lead to the
unintended public disclosure of the identities, market positions and
business transactions of swap counterparties?
Q75. Should the Commission provide a fixed cap size for each asset
class rather than varying the cap size by swap category?
Q76. Should the Commission consider using linear sensitivity
measures or other statistical disclosure controls outlined in the
Report on Statistical Disclosure Limitation Methodology from the
Federal Committee on Statistical Methodology to set post-initial cap
sizes?
Q77. Is the definition of a “non-affiliated market participant’s
as described in the alternative methods for calculating the post-
initial cap sizes the correct definition for the purpose of calculating
the minimum notional amounts that are publicly disseminated?
Q78. Are there other alternative methods for determining the post-
initial notional cap sizes that the Commission should consider that are
not described in this Further Proposal? If yes, please explain those
methods, as well as any data, studies or additional information to
support such method.
C. Masking the Geographic Detail of Swaps in the Other Commodity Asset
Class
1. Policy Goals for Masking the Geographic Detail for Swaps in the
Other Commodity Asset Class
In the Adopting Release, the Commission sets forth general
protections for the identities, market positions and business
transactions of swap counterparties in Sec. 43.4(d). Section 43.4(d)
generally prohibits an SDR from publicly disseminating swap transaction
and pricing data in a manner that discloses or otherwise facilitates
the identification of a swap counterparty.273 Notwithstanding that
prohibition, Sec. 43.4(d)(3) provides that SDRs are required to
publicly disseminate data that discloses the underlying asset(s) of
publicly reportable swap transactions.
—————————————————————————
273 See Sec. 43.4(d)(1) of the Commission’s regulations.
—————————————————————————
Section 43.4(d)(4) contains special provisions for swaps in the
other commodity asset class. These swaps raise special concerns because
the public disclosure of the underlying asset(s) may in turn reveal the
identities, market positions and business transactions of the swap
counterparties. To address these concerns, Sec. 43.4(d)(4) limits the
types of swaps in the other commodity asset class that are subject to
public dissemination. Specifically, Sec. 43.4(d)(4)(ii) of the
Commission’s regulations provides that, for publicly reportable swap
transactions in the other commodity asset class, SDRs must publicly
disseminate the actual underlying assets only for: (1) Those swaps
executed on or pursuant to the rules of a SEF or DCM; (2) those swaps
referencing one of the contracts described in appendix B to part 43;
and (3) those swaps that are economically related to one of the
contracts described in appendix B to part 43.274 Essentially, the
Commission has determined that these three categories of swap have
sufficient liquidity such that the disclosure of the underlying asset
would not reveal the identities, market positions and business
transactions of the swap counterparties.
—————————————————————————
274 Appendix B to part 43 provides a list of 28 “Enumerated
Physical Commodity Contracts” as well as one contract under the
“Other Contracts” heading. See 77 FR 1,182 app. B.
—————————————————————————
In its Adopting Release, the Commission included in appendix B to
part 43 a list of contracts that, if referenced as an underlying asset,
should be publicly disseminated in full without limiting the commodity
or geographic detail of the asset. In this Further Proposal, the
Commission is proposing to add 13 contracts to appendix B to part 43
under the “Other Contracts” heading.275 The Commission believes
that since it previously has determined that these 13 contracts have
material liquidity and price references, among other things, the public
dissemination of the full underlying asset for publicly reportable swap
transactions that reference such contracts (and any underlying assets
[[Page 15494]]
that are economically related thereto) would not disclose the
identities, market positions and business transactions of swap
counterparties.
—————————————————————————
275 Appendix B to part 43 currently lists only Brent Crude Oil
(ICE) under the “Other Contracts” heading.
—————————————————————————
Pursuant to the Adopting Release, any publicly reportable swap
transaction in the other commodity asset class that is excluded under
Sec. 43.4(d)(4)(ii) would not be subject to the reporting and public
dissemination requirements for part 43 upon the effective date of the
Adopting Release. The Commission noted in the Adopting Release that it
planned to address the group of other commodity swaps that were not
subject to the rules of part 43 in a forthcoming release.276
Accordingly, the Commission is proposing rules in this Further Proposal
to address the public dissemination of swap transaction and pricing
data for the group of other commodity swaps that are not covered
currently by Sec. 43.4(d)(4)(ii).
—————————————————————————
276 See 77 FR 1,211.
—————————————————————————
The Commission is of the view that given the lack of data on the
liquidity for certain swaps in the other commodity asset class, the
lack of data on the number of market participants in these other
commodity swaps markets, and the statutory requirement to protect the
anonymity of market participants,277 the public dissemination of less
specific information for swaps with specific geographic or pricing
detail may be appropriate. The Commission anticipates that the public
dissemination of the exact underlying assets for swaps in this group of
the other commodity asset class may subject the identities, market
positions and business transactions of market participants to
unwarranted public disclosure if additional protections are not
established with respect to the geographic detail of the underlying
asset. For that reason, the Commission is proposing that SDRs mask or
otherwise disguise the geographic details related to the underlying
assets of a swap in connection with the public dissemination of such
swap transaction and pricing data.278
—————————————————————————
277 See sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the
CEA. 7 U.S.C. 2(a)(13)(C)(iii), (E)(i).
278 Limiting the geographical detail is a typical statistical
disclosure control used by other federal agencies as described in
the Report on Statistical Disclosure Limitation Methodology, see
note 255 supra.
—————————————————————————
2. Proposed Amendments to Sec. 43.4
In order to accommodate the policy goals described above, the
Commission is proposing to add Sec. 43.4(d)(4)(iii) to part 43 to
establish rules regarding the public dissemination of the remaining
group of swaps in the other commodity asset class (i.e., those not
described in Sec. 43.4(d)(4)(ii)). In the Commission’s view, proposed
Sec. 43.4(d)(4)(iii) would ensure that the public dissemination of
swap transaction and pricing data would not unintentionally disclose
the identities, market positions and business transactions of any swap
counterparty to a publicly reportable swap transaction in the other
commodity asset class. In particular, proposed Sec. 43.4(d)(4)(iii)
provides that SDRs must publicly disseminate the details about the
geographic location of the underlying assets of the other commodity
swaps not described in Sec. 43.4(d)(4)(ii) (i.e., other commodity
swaps that have a specific delivery or pricing point) pursuant to
proposed appendix E to part 43. Proposed appendix E to part 43 is
discussed in the next subsection to this Further Proposal.
The Commission recognizes that requiring the public dissemination
of less specific geographic detail for an other commodity swap may, to
some extent, diminish the price discovery value of swap transaction and
pricing data for such swap. The Commission anticipates, however, that
the public dissemination of such data would continue to provide the
market with useful information relating to market depth, trading
activity and pricing information for similar types of swaps. Further,
sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i) of the CEA expressly
require that the Commission protect the identity, market positions and
business transactions of swap counterparties.
The Commission is also proposing to make conforming amendments to
Sec. 43.4(d). Specifically, the Commission is proposing to amend the
introductory language to Sec. 43.4(d)(4)(i) by deleting “Sec.
43.4(d)(4)(ii)” and adding in its place “Sec. Sec. 43.4(d)(4)(ii)
and (iii)” to make clear that SDRs have to publicly disseminate swaps
data under Sec. 43.4(d)(4)(iii) in accordance with part 43.279
—————————————————————————
279 In addition to proposing limitations on the geographic
detail for public dissemination of underlying assets for certain
swaps in the other commodity asset class, the Commission is also
proposing to amend Sec. Sec. 43.4(g) and (h) to make conforming
changes.
—————————————————————————
3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed Appendix
E to Part 43–Geographic Detail for Delivery or Pricing Points
Proposed appendix E to part 43 includes the system that SDRs must
use to mask the specific delivery or pricing points that are a part of
an underlying asset in connection with the public dissemination of swap
transaction and pricing data for certain swaps in the other commodity
asset class. To the extent that the underlying asset of a publicly
reportable swap transaction described in proposed Sec. 43.4(d)(4)(iii)
does not have a specific delivery or pricing point, then the provisions
of proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part 43
would not be applicable. Specifically, proposed appendix E to part 43
provides top-coding for various geographic regions, both in the United
States and internationally.
Subsection (a) below includes a description of the top-coding U.S.
regions. Subsection (b) below includes a description of the top-coding
non-U.S. regions. Finally, subsection (c) below proposes a system for
SDRs to publicly disseminate “basis swaps”.280
—————————————————————————
280 For the purposes of this Further Proposal, basis swaps are
defined as swap transactions in which one leg of the swap references
a contract described in appendix B to part 43 (or is economically
related thereto) and the other leg of the swap does not.
—————————————————————————
a. U.S. Delivery or Pricing Points
Table E1 in appendix E to part 43 lists the geographic regions that
an SDR would publicly disseminate for an off-facility swap in the other
commodity asset class that is described in proposed Sec.
43.4(d)(4)(iii). The Commission is proposing that an SDR publicly
disseminate swap transaction and pricing data for certain energy and
power swaps in the other commodity asset class, as described in more
detail below, in a different manner than the remaining other
commodities. In order to mask the specific delivery or pricing detail
of these energy and power swaps, the Commission is proposing to use
established regions or markets that are associated with these
underlying assets.
i. Natural Gas and Related Products
In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part
43, the Commission is setting forth a method to describe the publicly
reportable swap transactions that have natural gas or related products
as an underlying asset and have a specific delivery or pricing point in
the United States. In particular, this proposed section would require
SDRs to publicly disseminate a description of the specific delivery or
pricing point based on one of the five industry specific natural gas
markets set forth by the Federal Energy Regulatory Commission
(“FERC”).281 The FERC Natural Gas Markets reflect natural
deviations found in the spot prices in different markets.282 The
Commission
[[Page 15495]]
anticipates that a distinction for natural gas is necessary to enhance
price discovery while protecting the identities of the parties,
business transactions and market positions of market participants.
—————————————————————————
281 See FERC, National Gas Markets–Overview, http://www.ferc.gov/market-oversight/mkt-gas/overview.asp (last viewed Jan.
31, 2012).
282 See FERC, Natural Gas Market Overview: Spot Gas Prices,
http://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-avg-spt-ng-pr.pdf (updated Jan. 1, 2012). In addition, there is evidence
that the spot prices in these markets and the corresponding futures
prices are highly correlated. D. Murray, Z. Zhu, “Asymmetric price
responses, market integration and market power: A study of the U.S.
natural gas market,” Energy Economics, 30 (2008) 748-765.
—————————————————————————
The proposed five markets for public dissemination of delivery or
pricing points for natural gas swaps are as follows: (i) Midwest
(including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan,
Indiana, Illinois, Iowa, Nebraska, Kansas, Oklahoma, Missouri and
Arkansas); (ii) Northeast (including Maine, New Hampshire, Vermont,
Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania,
Kentucky, Ohio, West Virginia, New Jersey, Delaware, Maryland and
Virginia) 283 (iii) Gulf (including Louisiana and Texas); (iv)
Southeast (including Tennessee, North Carolina, South Carolina,
Georgia, Florida, Alabama and Mississippi); and (v) Western (including
Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington,
Oregon, California, Nevada and Arizona). For any other pricing points
in the United States, SDRs would publicly disseminate “Other U.S.” in
place of the actual pricing or delivery point for such natural gas
swaps.
—————————————————————————
283 The District of Columbia would be included in this region,
if any specific delivery or pricing points existed at the time of
this Further Proposal.
—————————————————————————
The Commission is considering alternatives for how to break down
the regions or markets with respect to the public dissemination of
specific delivery or pricing points for natural gas. The Commission is
considering using FERC’s Natural Gas Futures Trading Markets, which are
different from the FERC Natural Gas Markets described above. The public
dissemination regions for delivery or pricing points for such natural
gas swaps for this alternative would be as follows: (i) Midwest
(including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan,
Indiana, Illinois, Iowa, Nebraska, Missouri, Ohio and Kentucky); (ii)
Northeast (including Maine, New Hampshire, Vermont, Massachusetts,
Rhode Island, Connecticut, Pennsylvania, West Virginia, New York, New
Jersey, Delaware and Maryland); (iii) South Central (including Kansas,
Oklahoma, Arkansas, Louisiana and Texas); (iv) Southeast (including
Virginia, Tennessee, North Carolina, South Carolina, Georgia, Florida,
Alabama and Mississippi); (v) Western (including Montana, Wyoming,
Colorado, New Mexico, Idaho, Utah, Washington, Oregon, California,
Nevada and Arizona).284 For any other pricing points in the United
States, SDRs would publicly disseminate “Other U.S.” in place of the
actual pricing or delivery point for such natural gas swaps.285
—————————————————————————
284 See FERC, Gas Futures Trading, Natural Gas Futures Trading
Markets, http://www.ferc.gov/market-oversight/mkt-gas/trading/2011/11-2011-gas-tr-fut-archive.pdf. (Nov. 2011).
285 See section III.C.3.a.iv infra.
—————————————————————————
Finally, the Commission is also considering whether one of the
public dissemination methods described for the “All Remaining Other
Commodities” would be appropriate with respect to the public
dissemination for the specific delivery or pricing points related to
natural gas swaps.
ii. Petroleum and Products
In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part
43, the Commission is setting forth a method to describe the publicly
reportable swap transactions that have petroleum products as an
underlying asset and have a specific delivery or pricing point in the
United States. In particular, this proposed section would require SDRs
to publicly disseminate a description of the specific delivery or
pricing point based on one of the seven Petroleum Administration for
Defense Districts (“PADD”) regions.286 The PADD regions indicate
economically and geographically distinct regions for the purposes of
administering oil allocation. The Department of Energy’s Energy
Information Administration (“EIA”) collects and publishes oil supply
and demand data with respect to the PADD regions.287 Accordingly, to
provide consistency with EIA publications and information regarding
regional patterns, the Commission is proposing that specific delivery
or pricing points with respect to such petroleum product swaps are
publicly disseminated based on PADD regions.
—————————————————————————
286 See PADD Map, Appendix A, Petroleum Administration for
Defense Districts, http://205.254.135.24/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/paddmap.htm. (last viewed
Jan. 31, 2012).
287 See U.S. Energy Information Administration (EIA)–
Petroleum & Other Liquids, http://www.eia.gov/petroleum/data.cfm
(last viewed Jan. 31, 2012).
—————————————————————————
The PADD regions for public dissemination of delivery or pricing
points for such petroleum product swaps are as follows: (i) PADD 1A
(New England); (ii) PADD 1B (Central Atlantic); (iii) PADD 1C (Lower
Atlantic); (iv) PADD 2 (Midwest); (v) PADD 3 (Gulf Coast); (vi) PADD 4
(Rocky Mountains); and (vii) PADD 5 (West Coast).288 For any other
pricing points in the United States, SDRs would publicly disseminate
the term “Other U.S.” in place of the actual pricing or delivery
point for such petroleum product swaps.
—————————————————————————
288 Alternatively, the Commission is considering combining the
East Coast PADD into one category, such that any oil swap with a
specific delivery or pricing point as PADD 1A (New England), PADD 1B
(Central Atlantic), or PADD 1C (Lower Atlantic) would be publicly
disseminated as PADD 1 (East Coast).
—————————————————————————
The Commission is also considering whether one of the public
dissemination methods described for the “All Remaining Other
Commodities” would be appropriate with respect to the public
dissemination for the specific delivery or pricing points related to
petroleum product swaps.289
—————————————————————————
289 See section III.C.3.a.iv infra.
—————————————————————————
iii. Electricity and Sources
In proposed Sec. 43.4(d)(4)(iii), the Commission also is setting
forth a method to describe publicly reportable swap transactions that
have electricity and sources as an underlying asset and have a specific
delivery or pricing point in the United States. In particular, this
proposed section would require SDRs to publicly disseminate the
specific delivery or pricing point based on a description of one of the
FERC Electric Power Markets.290
—————————————————————————
290 See FERC, Electric Power Markets–Overview, http://www.ferc.gov/market-oversight/mkt-electric/overview.asp (last viewed
Jan. 31, 2012).
—————————————————————————
The markets for public dissemination of delivery or pricing points
for such electricity swaps are as follows: (i) California (CAISO); (ii)
Midwest (MISO); (iii) New England (ISO-NE); (iv) New York (NYISO); (v)
Northwest; (vi) PJM; (vii) Southeast; (viii) Southwest; (ix) Southwest
Power Pool (SPP); and (x) Texas (ERCOT). For any other pricing points
in the United States, SDRs would publicly disseminate the term “Other
U.S.” in place of the actual pricing or delivery point for such
electricity and sources swaps.
Alternatively, the Commission is considering using the North
American Electric Reliability Corporation (“NERC”) regions for
publicly disseminating delivery or pricing points for electricity swaps
described in proposed Sec. 43.4(d)(4)(iii). The NERC regions are
broader than the FERC regions and include much of Canada. Specifically,
the NERC regions are as follows: (i) Florida Reliability Coordinating
Council (FRCC); (ii) Midwest Reliability Organization (MRO); (iii)
Northeast Power Coordinating Council (NPCC); (iv)
[[Page 15496]]
ReliabilityFirst Corporation (RFC); (v) SERC Reliability Corporation
(SERC); (vi) Southwest Power Pool, RE (SPP); (vii) Texas Regional
Entity (TRE); (viii) Western Electricity Coordinating Council
(WECC).291
—————————————————————————
291 See NERC, Key Players: Regional Entities, http://www.nerc.com/page.php?cid=1%7C9%7C119 (last visited Jan. 31, 2012).
—————————————————————————
Finally, the Commission is also considering whether one of the
public dissemination methods described below for the “All Remaining
Other Commodities” would be appropriate with respect to the public
dissemination for the specific delivery or pricing points related to
electricity and sources swaps.
iv. All Remaining Other Commodities
In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part
43, the Commission is setting forth a method to describe any swaps in
the other commodity asset class that do not have oil, natural gas or
electricity as an underlying asset, but have specific delivery or
pricing points in the United States. In particular, the Commission is
proposing in this section that SDRs publicly disseminate information
with respect to these swaps based on the 10 federal regions established
by the U.S. Energy Information Administration (“EIA”). The Commission
anticipates that the use of the 10 federal regions would provide
consistency among different types of underlying assets in the other
commodity asset class with respect to delivery and pricing point
descriptions. The Commission anticipates, however, that for some
underlying assets, the public dissemination of delivery or pricing
points by region may still result in thinly-populated swap categories.
The 10 federal regions that SDRs would use for public dissemination
for all remaining other commodity swaps are as follows: (i) Region I
(including Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island and Vermont); (ii) Region II (including New Jersey and New
York); (iii) Region III (including Delaware, District of Columbia,
Maryland, Pennsylvania, Virginia and West Virginia); (iv) Region IV
(including Alabama, Florida, Georgia, Kentucky, Mississippi, North
Carolina, South Carolina and Tennessee); (v) Region V (including
Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin); (vi)
Region VI (including Arkansas, Louisiana, New Mexico, Oklahoma and
Texas); (vii) Region VII (including Iowa, Kansas, Missouri and
Nebraska); (viii) Region VIII (including Colorado, Montana, North
Dakota, South Dakota, Utah and Wyoming); (ix) Region IX (including
Arizona, California, Hawaii and Nevada); and (x) Region X (including
Alaska, Idaho, Oregon and Washington).292 The Commission is also
considering whether the use of these 10 federal regions is appropriate
for the natural gas, oil and/or electricity swap markets as described
above.
—————————————————————————
292 See U.S. Energy Information Administration, U.S. Federal
Region Map, http://www.eia.gov/cneaf/electricity/page/channel/fedregstates.html (last visited Jan. 31, 2012).
—————————————————————————
Alternatively, the Commission is considering whether SDRs should
publicly disseminate information with respect to these swaps based on
one of the four U.S. Census regions.293 The Commission is also
considering whether the use of the four U.S. Census regions is
appropriate for the natural gas, oil and/or electricity swaps markets
as described above. Using the U.S. Census regions, however, might
provide fewer reporting categories and, as a result, market
participants and the public may lose some price discovery as compared
to a description system based on the 10 federal regions. The four U.S.
Census regions are: (i) Midwest (including North Dakota, South Dakota,
Minnesota, Wisconsin, Michigan, Indiana, Illinois, Iowa, Nebraska,
Missouri, Ohio, Kentucky and Kansas); (ii) Northeast (including Maine,
New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New
York, Pennsylvania and New Jersey); (iii) South (including Oklahoma,
Arkansas, Louisiana, Texas, West Virginia, Maryland, Delaware, District
of Columbia, Virginia, Tennessee, North Carolina, South Carolina,
Georgia, Florida, Alabama and Mississippi); and (iv) West (including
Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington,
Oregon, California, Nevada, Arizona, Alaska and Hawaii).294
—————————————————————————
293 See U.S. Department of Commerce, Economics and Statistics
Administration, Census Bureau, Census Regions and Divisions of the
United States, http://www.census.gov/geo/www/us_regdiv.pdf (last
viewed Jan. 31, 2012).
294 See note 293 supra.
—————————————————————————
Finally, the Commission is considering whether it is appropriate to
publicly disseminate the specific delivery or pricing points in the
United States for certain types of swaps in the other commodity asset
class that are not described in proposed Sec. 43.4(d)(4)(ii).
Specifically, the Commission is considering whether public disclosure
of such information would disclose the identities, business
transactions and market positions of any persons and whether price
discovery would be enhanced by publicly disseminating more specific
information.
b. Non-U.S. Delivery or Pricing Points
Table E2 in proposed appendix E to part 43 provides the appropriate
manner for SDRs to publicly disseminate non-U.S. delivery or pricing
points for all publicly reportable swap transactions described in the
proposed Sec. 43.4(d)(4)(iii). The Commission is of the view that SDRs
should not publicly disseminate the actual location for these
international delivery or pricing points since the public disclosure of
such information may disclose the identities of parties, business
transactions and market positions of market participants. In Table E2,
the Commission is proposing the countries and regions that an SDR must
publicly disseminate. In proposing the use of these geographic
breakdowns for the public reporting of international delivery or
pricing points, the Commission considered world regions that have
significant energy consumption, whether ISDA-specific documentation
exists for a particular country, and whether public disclosure would
compromise the anonymity of the swap counterparties.
The Commission is proposing the following international regions for
publicly disseminating specific delivery or pricing points of publicly
reportable swap transactions described in Sec. 43.4(d)(4)(iii): (i)
North America (publicly disseminate “Canada” or “Mexico”); (ii)
Central America (publicly disseminate “Central America”); (iii) South
America (publicly disseminate “Brazil” or “Other South America”);
(iv) Europe (publicly disseminate “Western Europe,” “Northern
Europe,” “Southern Europe,” or “Eastern Europe”); (v) Russia
(publicly disseminate “Russia”) 295; (vi) Africa (publicly
disseminate “Northern Africa,” “Western Africa,” “Eastern
Africa,” “Central Africa,” or “Southern Africa”); (vii) Asia-
Pacific (publicly disseminate “Northern Asia,” “Central Asia,”
“Eastern Asia,” “Western Asia,” “Southeast Asia” or “Australia/
New Zealand/Pacific Islands”). The Commission is considering whether a
more granular approach is necessary for certain regions in order to
enhance price discovery while still protecting anonymity. For example,
Mexico, Canada and Russia may benefit from a more granular public
dissemination of delivery or pricing points given the
[[Page 15497]]
amount of energy production in those regions.
—————————————————————————
295 Note that Russia is not included in “Eastern Europe” or
in “Northern Asia” and instead should be publicly disseminated as
“Russia.”
—————————————————————————
Alternatively, the Commission is considering a broader approach to
the public dissemination of non-U.S. delivery or pricing points for
swaps described in proposed Sec. 43.4(d)(4)(iii). Specifically, the
Commission is considering public dissemination of only the top-level
regions for certain regions (e.g., “Africa” instead of “North
Africa”). The Commission is considering this alternative approach in
order to prevent the public disclosure of the identities, business
transactions and market positions of swap counterparties.
Finally, the Commission is considering whether it is appropriate to
publicly disseminate the specific delivery or pricing points outside
the United States for certain types of swaps in the other commodity
asset class that are not described in Sec. 43.4(d)(4)(ii).
Specifically, the Commission is considering whether public disclosure
of such information would disclose the identities, business
transactions and market positions of any persons and whether price
discovery would be enhanced by publicly disseminating more specific
information.
To the extent that a publicly reportable swap transaction described
in proposed Sec. 43.4(d)(4)(iii) references the United States as a
whole and not a specific delivery or pricing point, proposed appendix E
would require an SDR to publicly disseminate that reference. For
example, an SDR would publicly disseminate a weather swap that
references “U.S. Heating Monthly” as “U.S. Heating Monthly.”
c. Basis Swaps
The Commission is proposing to require SDRs to ensure that specific
underlying assets are publicly disseminated for basis swaps that
qualify as publicly reportable swap transactions. The Commission
recognizes that basis swaps exist in which one leg of the swap
references a contract described in appendix B to part 43 (or is
economically related to one such contract) and the other leg of the
swap references an asset or pricing point not listed in appendix B to
part 43. With respect to the leg of a basis swap that does not
reference a contract in appendix B to part 43, the Commission is
proposing to require SDRs to publicly disseminate the underlying asset
of the basis swap pursuant to proposed Sec. 43.4(d)(4)(iii) and
proposed appendix E to part 43. That is, Sec. 43.4(d)(4) currently
requires an SDR to publicly disseminate the underlying asset of the leg
of the basis swap that references a contract listed in appendix B to
part 43. To the extent that a basis swap is executed on or pursuant to
the rules of a SEF or DCM, an SDR would publicly disseminate the
specific underlying asset (i.e., the top-coding provisions of proposed
Sec. 43.4(d)(4)(iii) would not apply since those basis swaps are
executed on or pursuant to the rules of a SEF or DCM).
Request for Comment
Q79. The Commission requests specific comment on all aspects of the
proposed anonymity protections for the public dissemination of publicly
reportable swap transactions in the other commodity asset class.
Q80. As an alternative to the proposed approach, should the
Commission narrow the limited transaction reporting detail provisions
of proposed Sec. 43.4(d)(4)(iii) to exclude other commodity swaps
involving many non-affiliated market participants during a sufficiently
long observation period–for example, an observation period of at least
one year? This alternative approach would be predicated on the notion
that reduced market concentration is indicative of a market with very
limited or non-existent anonymity concerns.
Q80.a. Would this alternative approach enhance price discovery in
other commodity swap markets by providing more granular data to the
public? 296
—————————————————————————
296 See, e.g., IEA, IEF, OPEC, and IOSCO, Oil Price Reporting
Agencies, http://www.g20.org/Documents2011/11/IOs%20Report%20on%20PRA%20Report.pdf. (Oct. 2011).
—————————————————————————
Q80.b. Does this approach create a risk that SDRs would publicly
disclose details regarding the identities of swap counterparties and
their business transactions in these markets in light of the other
anonymity protections (e.g., the rounded notional or principal amounts
provisions of Sec. Sec. 43.4(g)-(h), the applicable cap size
provisions, and any relevant reporting delay)?
Q80.c. Should the Commission adopt a combination of the alternative
approach and the proposed top-coding approach? If yes, then how should
the Commission apply the combination of these two approaches?
Q81. Would any of the alternatives in the discussion of proposed
appendix E to part 43 above improve price discovery? Would any of these
alternatives improve anonymity protections?
Q82. From the standpoint of enhancing price discovery and
protecting anonymity, would public dissemination of specific delivery
or pricing points based on the FERC Natural Gas Futures Trading Markets
be a better alternative than the regions established by the FERC
Natural Gas Markets?
Q83. Would the benefits of using the same categories or regions for
all types of other commodities outweigh the potential loss of enhanced
price discovery and/or the potential increased risk of disclosure?
Q84. Would the proposal to use U.S. regions for natural gas
products, petroleum and products, electricity and sources and other
commodity groups enhance or limit price discovery? Would these regions
or markets adequately protect the identities, business transactions and
market positions of swap counterparties?
Q85. Would the proposed international regions or markets adequately
protect the identities, business transactions and market positions of
swap counterparties? Is there sufficient volume to support these
different international regions within the different types of other
commodities?
Q86. Should the international regions vary for each of the
different types of commodities within the other commodities asset class
(i.e., natural gas and related products, petroleum and products,
electricity and sources, all remaining other commodities)? Are there
specific regions which should be identified for each of these different
types of other commodities?
Q87. Should the Commission limit the proposed requirement for SDRs
to anonymize delivery and pricing points for natural gas and related
products to only natural gas?
Q88. Should the Commission limit the proposed requirement for SDRs
to anonymize specific delivery and pricing points for electricity and
sources to only electricity?
Q89. Should SDRs publicly disseminate the delivery or pricing point
with respect to coal in the same manner as the “All Remaining Other
Commodities”?
Q90. For thinly-traded products or illiquid markets, is a less
specific delivery or pricing point necessary to protect anonymity? For
example, should there only be a distinction between “U.S.” and
“International?” Would such a broad description limit price discovery
to market participants and the public?
Q91. As an alternative approach, please provide comments regarding
the use of the other commodity groupings in proposed appendix D to part
43 of the Commission regulations as a means to top-code the public
dissemination of the underlying commodities for swaps in
[[Page 15498]]
the other commodity asset class that are not described in Sec.
43.4(d)(4)(ii). That is, an SDR would publicly disseminate the
individual other commodity swap grouping rather than the specific
underlying assets.
Q91.a. Should the Commission apply this additional masking to other
commodity swaps that are not described in Sec. 43.4(d)(4)(ii)? If yes,
please provide specific examples.
Q91.b. Would the public dissemination of proposed “Individual
Other Commodity” groups per proposed appendix D to part 43 of the
Commission’s regulations enhance price discovery?
Q91.c. Do the swap categories in proposed appendix D to part 43 of
the Commission’s regulations adequately mask the actual underlying
commodity in such a way that would protect the anonymity of the
identities, market positions and business transactions of swap
counterparties?
4. Further Revisions to Part 43
a. Additional Contracts Added to Appendix B to Part 43
Appendix B to part 43 currently lists contracts that, if referenced
as an underlying asset, would require SDRs to publicly disseminate the
full geographic detail of the asset. In the Adopting Release, the
Commission provided that SDRs were required to publicly disseminate any
underlying asset of a publicly reportable swap transaction that
references or is economically related to any contract or contracts
listed in appendix B to part 43 in the same manner.
As noted above, the Commission is proposing to add 13 contracts
under the “Other Commodity” heading in appendix B to part 43. The
addition of these 13 contracts effectively would require SDRs to
publicly disseminate these contracts the same way as the other
contracts that are currently listed in appendix B to part 43. That is,
an SDR would publicly disseminate the actual underlying asset (and any
underlying asset(s) that are economically related) without any
limitation of the geographic detail.
The Commission previously has determined that these 13 contracts
are significant price discovery contracts (“SPDCs”) in connection
with trading on exempt commercial markets (“ECMs”).297 Each of the
13 contracts has undergone an analysis in which the Commission
considered the following five criteria: (i) Price linkage (the extent
to which the contract uses or otherwise relies on a daily or final
settlement price of a contract listed for trade on or subject to the
rules of a DCM); (ii) arbitrage (the extent to which the price of the
contract is sufficiently related to the price of a contract listed on a
DCM to permit market participants to effectively arbitrage between the
two markets); (iii) material price reference (the extent to which, on a
frequent and recurring basis, bids, offers or transactions in a
commodity are directly based on, or are determined by referencing, the
prices generated by contracts being traded or executed on the ECM);
(iv) material liquidity (the extent to which volume of the contract is
sufficient to have a material effect on other contracts listed for
trading); and (v) other material factors.298
—————————————————————————
297 The Commission is proposing to add the following SPDC
designated contracts to appendix B to part 43. The Commission has
previously issued orders finding that these contracts perform a
significant price discovery function: AECO Financial Basis Contract
traded on the IntercontinentalExchange, Inc. (“ICE”) (See 75 FR
23,697); NWP Rockies Financial Basis Contract traded on ICE (See 75
FR 23,704); PG&E Citygate Financial Basis Contract traded on ICE
(See 75 FR 23,710); Waha Financial Basis Contract traded on ICE (See
75 FR 24,655); Socal Border Financial Basis Contract traded on ICE
(See 75 FR 24,648); HSC Financial Basis Contract traded on ICE (See
75 FR 24,641); ICE Chicago Financial Basis Contract traded on ICE
(See 75 FR 24,633); SP-15 Financial Day-Ahead LMP Peak Contract
traded on ICE (See 75 FR 42,380); SP-15 Financial Day-Ahead LMP Off-
Peak Contract traded on ICE (See 75 FR 42,380); PJM WH Real Time
Peak Contract traded on ICE (See 75 FR 42,390); PJM WH Real Time
Off-Peak Contract traded on ICE (See 75 FR 42,390); Mid-C Financial
Peak Contract traded on ICE (See 75 FR 38,469); Mid-C Financial Off-
Peak Contract traded on ICE (See 75 FR 38,469).
298 The Dodd-Frank Act deleted and replaced CEA section
2(h)(7), which contained the five criteria for determining a SPDC.
The Dodd-Frank Act amended CEA section 4a(a) to include CEA section
4a(a)(4), which contains a similar version of the five criteria for
determining a SPDC in the context of excessive speculation.
—————————————————————————
The Commission anticipates that since the Commission already has
determined these 13 contracts to have material liquidity and material
price reference, among other things, the public dissemination of the
full underlying asset for publicly reportable swap transactions that
reference such contracts (and any underlying assets that are
economically related thereto) would not disclose the identities, market
positions and business transactions of market participants and would
enhance price discovery in the related markets.
The Commission notes that the Commission already has determined one
additional contract, “Henry Financial LD1 Fixed Price Contract,” is a
SPDC.299 The Commission, however, is not proposing to add this
contract under the heading “Other Contracts” in appendix B to part
43. This contract is economically related to the “New York Mercantile
Exchange Henry Hub Natural Gas,” which is listed under “Enumerated
Physical Commodity Contracts” in appendix B to part 43. Therefore,
listing this contract again would be redundant.
—————————————————————————
299 See 74 FR 37,988.
—————————————————————————
b. Technical Revisions to Part 43
In the Adopting Release, the Commission states that the
transactions described Sec. Sec. 43.4(d)(4)(ii)(A)-(C) are meant to be
exclusive of one another. Under these sections, an SDR is required to
publicly disseminate the underlying asset(s) of a swap in the other
commodity asset class that is executed on or pursuant to the rules of a
SEF or DCM regardless of whether the underlying asset is listed on
appendix B to part 43 or is economically related to such contracts.
Accordingly, the Commission is proposing a technical clarification to
Sec. 43.4(d)(4)(ii)(B) to clarify the intent that these elements are
exclusive of one another, as articulated in the preamble to the
Adopting Release.
Request for Comment
Q92. How would reporting the 13 contracts that the Commission is
proposing to list in appendix B to part 43 impact price discovery and
anonymity of those contracts and other publicly reportable swap
transactions in the other commodity asset class? For example, does the
exact reporting of the PJM WH Real Time Peak Contract impact the
remaining volume of publicly reportable swap transactions in the other
commodity asset class that would be publicly disseminated with a PJM
delivery or pricing point?
IV. Regulatory Flexibility Act
The Regulatory Flexibility Act (“RFA”) was adopted in 1980 to
address concerns that government regulations may have a significant
and/or disproportionate effect on small businesses. To mitigate this
risk, the RFA requires federal agencies to issue an initial and final
regulatory flexibility analysis for each rule of general applicability
for which the agency issues a general notice of proposed
rulemaking.300 These analyses must describe: (i) The economic impact
of the proposed rule on small entities, including a statement of the
objectives and the legal bases for the rulemaking; (ii) an estimate of
the number of small entities to be affected; (iii) identification of
federal rules that may duplicate, overlap or conflict with the proposed
[[Page 15499]]
rules; and (iv) a description of any significant alternatives to the
proposed rule that would minimize any significant impacts on small
businesses.301 The RFA focuses on direct impact to small businesses
and not on indirect impacts on these businesses, which may be tenuous
and difficult to discern.302
—————————————————————————
300 See 5 U.S.C. 601 et seq.
301 See 5 U.S.C. 603, 604.
302 See Whitman v. Am. Trucking Ass’ns, 531 U.S. 457 (2001);
Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (DC Cir. 1985); Mid-
Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).
—————————————————————————
As noted above, section 2(a)(13)(E)(ii) of the CEA directs the
Commission to prescribe regulations specifying “the criteria for
determining what constitutes a large notional off-facility swap
transaction (block trade) for particular markets and contracts.” In
general, proposed Sec. 43.6 sets out, inter alia, the criteria to
determine swap categories and the methodologies that the Commission
would employ in determining the appropriate minimum block sizes for
those swap categories. In addition, the proposed amendments to Sec.
43.4 set out a system to mask the notional amounts of swaps of relative
large size, as well as a system to anonymize geographic and underlying
asset detail for certain other commodity swaps. The Commission is of
the view that these proposed provisions would impose only one direct
requirement on businesses, including small businesses.303 Proposed
43.6(a) would require reporting parties to notify an SDR of its
election to treat a qualifying publicly reportable swap transaction as
a large notional off-facility swap. The Commission anticipates that the
direct impact of this requirement would not be significant for the
purposes of the RFA.
—————————————————————————
303 As discussed below, the Commission is of the view that
registered entities such as SDs and MSPs are not small businesses.
—————————————————————————
Indeed, proposed Sec. 43.6(g) would impose minimal notice
requirements on market participants that are subject to part 43 of the
Commission’s regulations. A more fulsome analysis of the implications
that proposed Sec. 43.6(g) may have on small businesses is described
immediately below.
A. Potential Economic Impact–Proposed Sec. 43.6(g)–Notification of
Election
Proposed Sec. 43.6(g) contains the provisions regarding the
election to have a swap transaction treated as a block trade or large
notional off-facility swap, as applicable. Proposed Sec. 43.6(g)(1)
establishes a two-step notification process relating to block trades.
Proposed Sec. 43.6(g)(2) establishes the notification process relating
to large notional off-facility swaps.
Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this
section provides that the reporting party to a swap that is executed at
or above the appropriate minimum block size is required to notify the
SEF or DCM (as applicable) of its election to have its qualifying swap
transaction treated as a block trade. With respect to the second step,
proposed Sec. 43.6(g)(1)(ii) provides that the SEF or DCM, as
applicable, that receives an election notification is required to
notify an SDR of a block trade election when transmitting swap
transaction and pricing data to such SDR for public dissemination.
Proposed Sec. 43.6(g)(2) is similar to the first step set forth in
proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2) provides,
in part, that a reporting party who executes a bilateral swap
transaction that is at or above the appropriate minimum block size is
required to notify the SDR of its election to treat such swap as a
large notional off-facility swap. This section provides further that
the reporting party is required to notify the SDR in connection with
the reporting party’s transmission of swap transaction and pricing data
to the SDR for public dissemination.
The second step in the two-step process in proposed Sec.
43.6(g)(1) imposes direct burdens on SEFs and DCMs. The Commission
previously has determined that these entities are not small businesses
for the purposes of the RFA.304
—————————————————————————
304 See 17 CFR part 40 Provisions Common to Registered
Entities, 75 FR 67,282 (Nov. 2, 2010); see also 47 FR 18,618,
18,619, Apr. 30, 1982 and 66 FR 45,604, 45,609, Aug. 29, 2001.
—————————————————————————
In contrast, the first step in the two-step process in proposed
Sec. 43.6(g)(1) and the notification election in proposed Sec.
43.6(g)(2) would impose direct burdens on parties to a swap, which the
Commission has determined previously may include a percentage of small
end users that are considered small businesses for the purposes of the
RFA.305 Notwithstanding the imposition of this burden, however, the
Commission anticipates that the notification requirements in proposed
Sec. Sec. 43.6(g)(1)(i) and 43.6(g)(2) would not create significant
economic burdens on small end users. The Commission anticipates that
the notification requirements imposed in proposed Sec. Sec.
43.6(g)(1)(i) and 43.6(g)(2) will likely be automated and electronic.
Section 43.3 of the Commission’s regulations already requires these
entities to report their swap transaction and pricing data to an
SDR.306 The Commission is of the view that requiring these entities
to include an additional notification or field in conjunction with the
reporting of such data would impose, at best, a marginal and
incremental cost.
—————————————————————————
305 See 77 FR 1,240 (“[T]he Commission recognized that the
proposed rule could have an economic effect on certain single end
users, in particular those end users that enter into swap
transactions with another end-user. Unlike the other parties to
which the proposed rulemaking would apply, these end users are not
subject to designation or registration with or to comprehensive
regulation by the Commission. The Commission recognized that some of
these end users may be small entities.”). The term reporting party
also includes swap dealers and major swap participants.
The Commission previously has determined that these entities do
fall within the definition of small business for the purpose of the
RFA. See 75 FR at 76,170.
306 See 77 FR 1,240.
—————————————————————————
Moreover, as stated in prior RFA determinations, the Commission
anticipates the percentage of end users that would fall within the
definition of reporting party 307 would likely be minimal since,
according to industry data, most end users transact swaps with a swap
dealer.308 Thus, the percentage of small end users that would be
required to notify SDRs directly of their election to treat a swap as a
block trade or large notional off-facility swap would not likely be
significant.
—————————————————————————
307 See 77 FR 1,244.
308 See ISDA/SIFMA Jan. 18, 2011, Block trade reporting over-
the-counter derivatives markets, 13-14. See also Costs and Benefits
of Mandatory Electronic Execution Requirements for Interest Rate
Products, note 75 supra. (“In contrast with the current environment
where swap dealers are principals on every trade * * *.”).
—————————————————————————
B. Identification of Duplicative, Overlapping or Conflicting Federal
Rules
The Commission has not identified any existing federal rules exist
that are duplicative, overlapping or conflicting with the provisions in
this Further Proposal, including the provisions in proposed Sec.
43.6(g).
C. Alternatives to Proposed Rules That Will Have an Impact
Under the RFA, the Commission is not required to identify
alternatives as a result of its determination that the provisions in
proposed Sec. 43.6(g) would not have a significant economic impact on
a significant number of small businesses.
D. Certification
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
[[Page 15500]]
significant economic impact on a substantial number of small
businesses. Nonetheless, the Commission specifically requests comment
on the economic impact that this Further Proposal may have on small
businesses.
V. Paperwork Reduction Act
A. Background
The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501
et seq. (“PRA”) are, among other things, to minimize the paperwork
burden to the private sector, ensure that any collection of information
by a government agency is put to the greatest possible uses, and
minimize duplicative information collections across the
government.309 The PRA applies with extraordinary breadth to all
information, “regardless of form or format,” whenever the government
is “obtaining, causing to be obtained [or] soliciting” information,
and includes requires “disclosure to third parties or the public, of
facts or opinions,” when the information collection calls for
“answers to identical questions posed to, or identical reporting or
recordkeeping requirements imposed on ten or more persons.” 310 The
PRA requirements have been determined to include not only mandatory but
also voluntary information collections, and include both written and
oral communications.311
—————————————————————————
309 See 44 U.S.C. 3501.
310 See 44 U.S.C. 3502.
311 See 5 CFR 1320.3(c)(1).
—————————————————————————
To effectuate the purposes of the PRA, Congress requires all
agencies to quantify and justify the burden of any information
collection it imposes.312 This requirement includes submitting each
collection, whether or not it is contained in a rulemaking, to the
Office of Management and Budget (“OMB”) for review. The OMB
submission process includes completing a form 83-I and a supporting
statement with the agency’s burden estimate and justification for the
collection. When an information collection is established within a
rulemaking, the agency’s burden estimate and justification should be
provided in the proposed rulemaking, subjecting the proposed
information collection to the rulemaking’s public comment process.
—————————————————————————
312 See 44 U.S.C. 3506.
—————————————————————————
Proposed Sec. 43.6 and amendments to Sec. 43.4 would result in
amendments to an existing collection of information within the meaning
of the PRA in two respects. Accordingly, the Commission is submitting
this Further Proposal to the OMB for review pursuant to 44 U.S.C.
3507(d) and 5 CFR1320.11. OMB has assigned control number 3038-0070 to
the existing collection of information, which is titled “Part 43–
Real-Time Public Reporting.” If adopted, then responses to this
amended collection of information would be mandatory.
B. Description of the Collection
Recently, the Commission issued the Adopting Release, which
includes three collections of information requirements within the
meaning of the PRA. The first collection of information requirement
under Part 43 imposed a reporting requirement on a SEF or DCM when a
swap is executed on a trading facility or on the parties to a swap
transaction when the swap is executed bilaterally. The second
collection of information requirement under Part 43 created a public
dissemination requirement on SDRs. The third collection of information
requirement created a recordkeeping requirement for SEFs, DCMs, SDRs
and any reporting party (as such term is defined in part 43 of the
Commission’s regulations).
Proposed amendments to Sec. 43.4 and proposed Sec. 43.6 would
amend the first and second collections of information within the
meaning of the PRA as described below. The analysis with respect to the
amended collections as a result of proposed Sec. 43.6 is set out in
section 1 below. The analysis with respect to the amended collections
as a result of proposed amendments to Sec. 43.4 is set out in section
2 below.
1. Proposed Sec. 43.6(g)–Notification of Election
Proposed Sec. 43.6(g) would amend the first and second collections
of information within the meaning of the PRA. In particular, proposed
Sec. 43.6(g) contains the provisions regarding the election to have a
swap transaction treated as a block trade or large notional off-
facility swap, as applicable. Proposed Sec. 43.6(g)(1) establishes a
two-step notification process relating to block trades. Proposed Sec.
43.6(g)(2) establishes the notification process relating to large
notional off-facility swaps. Proposed Sec. 43.6(g) is an essential
part of this rulemaking because it provides the mechanism through which
market participants will be able to elect to treat their qualifying
swap transaction as a block trade or large notional off-facility swap.
Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this
section provides that the parties to a swap that are executed at or
above the appropriate minimum block size for the applicable swap
category are required to notify the SEF or DCM (as applicable) of their
election to have their qualifying swap transaction treated as a block
trade. The Commission understands that SEFs and DCMs use automated,
electronic, and in some cases, voice processes to execute swap
transactions; therefore, the transmission of the notification of a
block trade election also would either be automated, electronic or
communicated through voice.
The Commission estimates that there are 125 SDs and MSPs, and 1,000
other non-financial end-user parties.313 The Commission estimates
that, on average, SD/MSP reporting parties would likely notify a SEF or
DCM of a block trade election approximately 1,000 times per year while
non-SD/MSP reporting parties likely would notify a SEF or DCM of a
block trade election approximately five times per year.314 Thus, the
Commission estimates that there would be 130,000 notifications of a
block trade election by reporting parties under proposed Sec. 43.6(g)
each year.315
—————————————————————————
313 The Commission has previously estimated that 125 SDs and
MSPs will register with the Commission and 1,000 non-financial end-
users (i.e., non-SD/non-MSPs) will be required to report swap
transactions annually. 77 FR 1,229-30.
314 The Commission anticipates that these figures will change
as a function of changes in the market structure and practices in
the U.S. swaps markets.
315 The Commission estimates the total number of notifications
as follows: 125 SDs/MSPs x 1,000 notifications = 125,000
notifications per year; 1,000 non-SDs/non-MSPs x 5 notifications =
5,000 notifications per year; therefore, the total across all types
of entities would be 130,000 notifications per year.
—————————————————————————
The Commission estimates that the burden hours associated with the
Sec. 43.6(g)(1)(i) would include: (i) 30 seconds on average for
parties to a swap to determine whether a particular swap transaction
qualifies as a block trade based on the appropriate minimum block size
of the applicable swap category; and (ii) 30 seconds on average for the
parties to electronically transmit or otherwise communicate their
notice of election. SDs, MSPs and reporting parties would use existing
traders (or other professionals earning similar salaries) to
electronically transmit or otherwise communicate their notice of
election. Based on the Securities Industry and Financial Market
Association’s 2010 Securities Industry Salary Survey, the Commission
estimates that these block traders would earn approximately $140.93 per
hour in total compensation.316 Accordingly, the
[[Page 15501]]
Commission estimates that the total annual burden hour costs associated
with the first step in proposed Sec. 43.6(g)(1)(i) would be 2,167
hours 317 or $305,396 in total annual burden hours costs 318 and
$11.2 million in total start-up capital costs.319
—————————————————————————
316 The Commission previously has utilized wage rate estimates
based on average salary and average prior year bonus information for
the securities industry compiled by SIFMA. These wage estimates are
derived from an industry-wide survey of participants and thus
reflect an average across entities; the Commission notes that the
actual costs for any individual company or sector may vary from the
average.
The Commission estimated the dollar costs of hourly burdens for
different types of relevant professionals using the following
calculations:
(1) [(2009 salary + bonus) * (salary growth per professional
type, 2009-2010)] = Estimated 2010 total annual compensation. The
most recent data provided by the SIFMA report describe the 2009
total compensation (salary + bonus) by professional type, the growth
in base salary from 2009 to 2010 for each professional type, and the
2010 base salary for each professional type; therefore, the
Commission estimated the 2010 total compensation for each
professional type, but, in the absence of similarly granular data on
salary growth or compensation from 2010 to 2011 and beyond, did not
estimate dollar costs beyond 2010.
(2) [(Estimated 2010 total annual compensation)/(1,800 annual
work hours)] = Hourly wage per professional type.]
(3) [(Hourly wage) * (Adjustment factor for overhead and other
benefits, which the Commission has estimated to be 1.3)] = Adjusted
hourly wage per professional type.]
(4) [(Adjusted hourly wage) * (Estimated hour burden for
compliance)] = Dollar cost of compliance for each hour burden
estimate per professional type.]
The sum of each of these calculations for all professional types
involved in compliance with a given element of this Further Proposal
represents the total cost for each counterparty, reporting party,
swap dealer, major swap participant, SEF, DCM, or SDR, as applicable
to that element of the proposal.
317 To comply with the election process in proposed Sec.
43.6(g), a market participant likely would need to provide training
to its existing personnel and update its written policies and
procedures to account for this new process. The total annual burden
hours equals the total hours for swap dealers and major swap
participants plus the total hours for non-swap dealers and non-major
swap participants.
318 The underlying adjusted labor cost estimate of $140.93 per
hour used in this estimate is calculated based on the adjusted wages
of swap traders. See note 316 supra.
319 The estimated costs are based on the Commission’s estimate
of the incremental, non-recurring expenditures to reporting
entities, including non-SD/non-MSPs (i.e., non-financial end-users)
to: (1) update existing technology, including updating its OMS
system ($6,761.20); and (2) provide training to existing personnel
and update written policies and procedures ($3,195.00). See section
VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs
would incur similar non-recurring start-up costs. The Commission has
previously estimated that 125 SDs and MSPs will register with the
Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs)
will be required to report in a year. See 77 FR 1229-30.
—————————————————————————
With respect to the second step, proposed Sec. 43.6(g)(1)(ii)
provides that the SEF or DCM, as applicable, that receives an election
notification is required to notify an SDR of a block trade election
when transmitting swap transaction and pricing data to such SDR for
public dissemination. As noted above, the Commission anticipates that
SEFs and DCMs would use automated, electronic and, in some cases, voice
processes to execute swap transactions. The Commission estimates that
there will be approximately 58 SEFs and DCMs. Accordingly, the
Commission estimates that the total annual burden associated with the
second step in proposed Sec. 43.6(g)(1)(ii) would be approximately
$577,460 in non-recurring annualized capital and start-up costs.320
The Adopting Release already has addressed the recurring annualized
costs for the hour burden, as well as ongoing operational and
maintenance costs.
—————————————————————————
320 The Commission bases this estimate on 58 projected SEFs
and DCMs, each of which will incur costs of investing in update
technology, including updating its OMS system ($6,761.20); and
training existing personnel and updating written policies and
procedures ($3,195.00). See section VI(E)(2)(a)(i)-(ii) infra.
—————————————————————————
Proposed Sec. 43.6(g)(2) is similar to the first step set forth in
proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2) provides,
in part, that a reporting party who executes a bilateral swap
transaction that is at or above the appropriate minimum block size is
required to notify the SDR of its election to treat such swap as a
large notional off-facility swap. This section provides further that
the reporting party is required to notify the SDR in connection with
the reporting party’s transmission of swap transaction and pricing data
to the SDR for public dissemination. The Commission anticipates that
reporting parties may have various methods through which they will
transmit information to SDRs, which would include a large notional off-
facility swap election. Most reporting parties would use automated and
electronic methods to transmit this information; other reporting
parties, because of the expense associated with building an electronic
infrastructure, may contract with third parties (including their swap
counterparty) to transmit the notification of a large notional off-
facility swap election.
The Commission estimates that the incremental time and cost burden
associated with the Sec. 43.6(g)(2) would include: (i) One minute for
a reporting party to determine whether a particular swap transaction
qualifies as a large notional off-facility swap based on the
appropriate minimum block size of the applicable swap category; and
(ii) one minute for the reporting party (or its designee) to
electronically transmit or communicate through voice processes its
notice of election. The Commission estimates that, of the approximately
2,255 hours incurred by 125 SDs/MSPs and 1,000 non-SD/MSPs, all of
those hours would be spent by traders and market analysts (or
designee).321 SIFMA’s report states that traders and market analysts
make $140.93 per hour in total compensation.322
—————————————————————————
321 The economic costs associated with entering into a third
party service arrangement to transmit an electronic notice to an SDR
are difficult to determine. There are too many variables that are
involved in determining those costs. Notwithstanding this
difficulty, the Commission foresees that, for many reporting parties
that infrequently trade swaps, the annualized cost of entering into
a third-party service arrangement of this type would likely be less
than the total annual cost of building an electronic infrastructure
to transmit electronic notices directly to an SDR.
322 See note 316 supra.
—————————————————————————
The Commission estimates that, on average, each of the estimated
125 SD/MSP counterparties would likely notify an SDR of a large
notional off-facility swap election approximately 500 times per year
while each of the estimated 1,000 non-SD/MSP counterparties would
notify an SDR approximately five times per year. Accordingly, the
Commission estimates that there are, on average, approximately 67,500
notifications large notional off-facility swaps under proposed Sec.
43.6 each year. Accordingly, the Commission estimates that the total
annual burden associated with proposed Sec. 43.6(g)(2) would be
approximately 2,255 annual labor hours or $317,797 in annual labor
costs.323
—————————————————————————
323 The labor hour estimate is calculated as follows: (125
SDs/MSPs x 500 notifications) + (1,000 non-SDs/non-MSPs x 5
notifications) = 67,500 notifications x 2 minutes/notification =
135,000 minutes/60 minutes/hour = 2,255 hours. The labor cost
estimate is calculated as follows: 2,255 labor hours x $140.93 per
hour total compensation = $317,797.
—————————————————————————
In addition, the Commission estimates that proposed Sec.
43.6(g)(2) would result in $11.2 million in non-recurring annualized
capital and start-up costs.324 The Adopting Release addressed all
ongoing operational and maintenance costs.325
—————————————————————————
324 The estimated costs are based on the Commission’s estimate
of the incremental, non-recurring expenditures to reporting
entities, including non-SD/non-MSPs (i.e., non-financial end-users)
to (1) update existing technology, including updating its OMS system
($6,761.20); and (2) provide training to existing personnel and
update written policies and procedures ($3,195.00). See section
VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs
would incur similar non-recurring start-up costs. The Commission has
previously estimated that 125 SDs and MSPs will register with the
Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs)
will be required to report in a year. 77 FR 1,229-30.
325 See 77 FR at 1,232.
—————————————————————————
2. Proposed Amendments to Sec. Sec. 43.4(d)(4) and 43.4(h)
The Commission addresses the public dissemination of certain swaps
in the other commodity asset class in Sec. 43.4(d)(4). Section
43.4(d)(4)(ii)
[[Page 15502]]
provides that for publicly reportable swaps in the other commodity
asset class, the actual underlying assets must be publicly disseminated
for: (1) Those swaps executed on or pursuant to the rules of a SEF or
DCM; (2) those swaps referencing one of the contracts described in
appendix B to part 43; and (3) any publicly reportable swap transaction
that is economically related to one of the contracts described in
appendix B to part 43. Pursuant to the Adopting Release, any swap that
is in the other commodity asset class that does not fall under Sec.
43.4(d)(4)(ii) would not be subject to reporting and public
dissemination requirements upon the effective date of the Adopting
Release.
In this Further Proposal, the Commission is proposing a new
provision (proposed Sec. 43.4(d)(4)(iii)), which would develop a
system for the public dissemination of exact underlying assets in the
other commodity asset class with a “mask” based on geographic detail.
The Commission is proposing a new appendix to part 43, which contains
the geographical top-codes that SDRs would use in masking certain other
commodity swaps in connection with such swaps public dissemination of
swap transaction and pricing data under part 43. The Commission
anticipates that there will be approximately 50,000 additional swaps
reported to an SDR each year in the other commodity asset class, which
the Commission estimates would be $117,395 in annualized hour burden
costs.326
—————————————————————————
326 The Commission estimates that there will be 5 SDRs, which
will collect swaps data in the other commodity asset class. Each SDR
would collect swaps data on approximately 10,000 swap transactions
in the other commodity asset class. The commission estimates that it
will take each SDR on average approximately 1 minute to publicly
disseminate swaps data related to these new swap transactions. The
number of burden hours for these SDRs would be 833 hours. As
referenced in note 318 supra, the total labor costs for a swap
trader is $140.93. Thus, the total number of burden hour costs equal
the total number of burden hours (833 burden hours) x $140.93.
—————————————————————————
The Commission’s regulations currently provide a system
establishing cap sizes. Section 43.4(h) of the Commission’s regulations
provides that cap sizes for swaps in each asset class shall equal the
appropriate minimum block size corresponding to such publicly
reportable swap transaction. If no appropriate minimum block size
exists, then Sec. 43.4(h) sets out specific interim cap sizes for each
asset class.327
—————————————————————————
327 The Adopting Release calculated and addressed the total
ongoing burden hours and burden hour costs. See 77 FR 1,1232.
—————————————————————————
This Further Proposal would amend Sec. 43.4(h) to establish new
cap sizes in the post-initial period using a 75-percent notional amount
calculation. Under this proposed amendment, the Commission would
perform the calculation; however, SDRs would update their technology
and other systems at a minimum of once per year to publicly disseminate
swap transaction and pricing data with the cap sizes issued by the
Commission.
The Commission estimates that the incremental, start-up costs
associated with proposed amendment to Sec. Sec. 43.4(d)(4) and 43.4(h)
for an SDR would include: (1) Reprograming its technology
infrastructure to accommodate the proposed masking system and proposed
post-initial cap sizes methodology; (2) updating its written policies
and procedures to ensure compliance with proposed Sec. 43.4(d)(4)(iii)
and the proposed amendment to Sec. 43.4(h); and (3) training staff on
the new policies and procedures.328 The Commission estimates that the
total annual burden associated with proposed Sec. 43.4(d)(4)(iii) and
the proposed amendments to 43.4(h) would be 1,000 labor hours and
approximately $75,900.329
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328 The economic costs associated with entering into a third
party service arrangement to transmit an electronic notice to an SDR
are difficult to determine because of too many variables involved in
determining those costs. Notwithstanding this difficulty, the
Commission believes that, for many reporting parties that
infrequently trade swaps, the annualized cost of entering into a
third-party service arrangement of this type would likely be less
than the total annual cost of building an electronic infrastructure
to transmit electronic notices directly to an SDR.
329 This estimate is calculated as follows: Senior Programmer
cost ($81.52 adjusted hourly wage x 250 hours) + Systems Analyst
($54.89 adjusted hourly wage x 250 hours) + Compliance Manager
($77.77 adjusted hourly wage x 250 hours) + Compliance Attorney
(i.e., Assistant General Counsel) ($89.43 adjusted hourly wage x 250
hours).
—————————————————————————
C. Request for Comments on Collection
The Commission requests comments on the accuracy of these estimates
provided in these proposed amendments to existing collections of
information. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i) Evaluate whether the burden of the
proposed amendments to the collections of information that are
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (ii) evaluate the accuracy of the Commission’s estimate of the
burden of the proposed amendments to the collections of information;
(iii) determine whether there are ways to enhance the quality, utility
and clarity of the information to be collected; and (iv) minimize the
burden of the proposed amendments to the collections of information on
those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs of OMB by fax at (202) 395-6566 or by email at
[email protected]. Please provide the Commission with a copy
of the submitted comments so that all comments can be summarized and
addressed in the final rule preamble. Refer to the “Addresses”
section of this Further Proposal for comment submission instructions to
the Commission. A copy of the supporting statements for the collection
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.
Consequently, a comment to OMB is most assured of being fully effective
if received by OMB and the Commission within 30 days after publication
of this Further Proposal. Nothing in this Further Proposal affects the
deadline enumerated above for public comment to the Commission.
VI. Cost-Benefit Considerations
A. Introduction
Title VII of the Dodd-Frank Act added section 2(a)(13) to the CEA
to direct the Commission to promulgate rules requiring the real-time
public reporting of swap transaction and pricing data, while protecting
market liquidity for block trades and large notional off-facility
swaps. Transaction reporting is a fundamental component of the Dodd-
Frank Act’s general objectives to reduce risk, increase transparency
and promote market integrity within the financial system and the swaps
market in particular.
Four provisions in section 2(a)(13) are relevant to this Further
Proposal. Section 2(a)(13)(E)(ii) requires the Commission to establish
criteria for determining what constitutes a large notional off-facility
swap or block trade for particular markets and contracts. Section
2(a)(13)(E)(iii) requires the Commission to specify the appropriate
time delay for reporting large notional off-facility swaps and block
trades. Finally, sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii)
collectively require the Commission to protect the identities of
counterparties to swaps and to maintain the anonymity of business
transactions
[[Page 15503]]
and market positions of those counterparties.
The Commission has implemented three of the four provisions in
section 2(a)(13). The Adopting Release issued on January 9, 2012 sets
forth, inter alia: (i) Definitions for the terms “large notional off-
facility swap” and “block trade”; (ii) the appropriate time delay
for reporting these swaps and trades; and (iii) a system to protect the
anonymity of parties to a swap, including the establishment of interim
cap sizes and the creation of an exception from the real-time public
reporting requirement for certain swaps in the other commodity asset
class.
While part 43 defines the terms large notional off-facility swap
and block trade and sets forth time delays for reporting such swaps and
trades, part 43 as adopted does not “specify the criteria for
determining what constitutes a large notional [off-facility] swap
transaction [or block trade] for particular markets and contracts.”
330 Since the Commission has not yet specified criteria, by default,
all publicly reportable swap transactions are now subject to a time
delay. The provisions of this Further Proposal would, if adopted,
become effective against this baseline–that is, at a point in time
when all publicly reportable swap transactions are subject to a time
delay and are not publicly reported in real-time (i.e., as soon as
technologically practicable).
—————————————————————————
330 See CEA section 2(a)(13)(E)(ii). 7 U.S.C. 2(a)(13)(E)(ii).
—————————————————————————
This Further Proposal seeks to amend part 43 by establishing
criteria to group swaps into categories and methodologies to determine
appropriate minimum block sizes for each swap category. In addition,
this Further Proposal seeks to establish additional measures to protect
the identities of swap counterparties and their business transactions.
This Further Proposal does not affect provisions relating to the
appropriate time delay for block trades and large notional off-facility
swaps. Similarly, this Further Proposal does not amend or further
propose provisions that would require swap market participants to
develop a completely new infrastructure or hire new personnel in order
to comply with the existing provisions of part 43.331
—————————————————————————
331 For a discussion of the costs and benefits of the time
delay and development of an infrastructure for block trades and
large notional off-facility swaps, see the Adopting Release, 77 FR
1,232.
—————————————————————————
In the sections that follow, the Commission identifies and
considers certain costs and benefits associated with the Further
Proposal to amend part 43 as required by section 15(a) of the CEA. The
Commission requests comment on all aspects of its proposed
consideration of costs and benefits, including identification and
assessment of any costs and benefits not discussed in this analysis. In
addition, the Commission requests that commenters provide data and any
other information or statistics that the commenters relied on to reach
any conclusions on the Commission’s proposed consideration of costs and
benefits.
B. The Requirements of Section 15(a)
Section 15(a) of the CEA 332 requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. To the extent that these new regulations reflect the
statutory requirements of the Dodd-Frank Act, they will not create
costs and benefits beyond those resulting from Congress’s statutory
mandates in the Dodd-Frank Act. However, to the extent that the new
regulations reflect the Commission’s own determinations regarding
implementation of the Dodd-Frank Act’s provisions, such Commission
determinations may result in other costs and benefits. It is these
other costs and benefits resulting from the Commission’s own
determinations pursuant to and in accordance with the Dodd-Frank Act
that the Commission considers with respect to the section 15(a)
factors.
—————————————————————————
332 7 U.S.C. 19(a).
—————————————————————————
C. Structure of the Commission’s Analysis; Cost Estimation Methodology
Of the two parts to this Further Proposal, “Part One” establishes
block trade rules, and “Part Two” addresses anonymity protections.
Part One further proposes regulations specifying criteria for
categorizing swaps and determining the appropriate minimum block size
for each swap category. In particular, in Part One the Commission is
proposing: (i) The criteria for determining swap categories and the
methodologies that it would use to determine the initial and post-
initial appropriate minimum block sizes for large notional off-facility
swaps and block trades; and (ii) a method by which parties to a swap,
SEFs, and DCMs would elect to treat the parties’ qualifying swap
transactions as block trades or large notional off-facility swaps, as
applicable. The Commission has considered the costs and benefits
associated with Part One separately for each of the two above-specified
groups of provisions since different parties would bear primary
compliance obligations for each group. That is, the provisions
establishing criteria for determining swap categories and appropriate
minimum block size methodologies primarily impose obligations on the
Commission, and the provisions establishing election methodology
primarily impose obligations on parties to a swap and registered
entities.
Part Two provides: (i) A methodology for determining post-initial-
period cap sizes; and (ii) a system for the public dissemination of
swap transaction and pricing data for certain other commodity swaps
with specific underlying assets and geographic detail in a manner that
does not disclose the business transactions and market positions of
swap market participants. Since Part Two’s provisions would impose the
same or similar costs (e.g., technology re-programming costs) and
confer the same or similar benefits on swap market participants (e.g.,
anonymity protections with respect to the identities of the parties to
a swap and their market transactions), the Commission analyzed the
costs and benefits of these provisions in one group section.
Wherever reasonably feasible, the Commission has endeavored to
quantify the costs and benefits of this Further Proposal. In a number
of instances, however, the Commission lacks or is otherwise unaware of
information needed as a basis for quantification. In these instances,
the Commission has requested data from the public to aid the Commission
in considering the quantitative effects of its rulemaking. Where it has
not been feasible to quantify (e.g., because of the lack of accurate
data), the Commission has considered the costs and benefits of this
Further Proposal in qualitative terms.
The conditions now existent under part 43–i.e., all publicly
reportable swap transactions qualify for a time-delay–provide the
baseline for the Commission’s consideration of incremental costs and
benefits that would arise from this Further Proposal.333 These
baseline costs and benefits are discussed in the Adopting Release. As a
reference point for estimating the incremental costs and benefits
against this baseline, the Commission has used a non-financial
[[Page 15504]]
end-user that already has developed the technical capability and
infrastructure necessary to comply with the requirements set forth in
part 43.334 Relative to this reference point, however, the Commission
anticipates that in many cases the actual costs to established market
participants (including swap counterparties, SDRs and other registered
entities) would be lower–perhaps significantly so, depending on the
type, flexibility, and scalability of systems already in place.
Moreover, the Commission anticipates that with respect to SDRs
specifically, they may recover their incremental costs by passing them
on as fees assessed on reporting parties–SEFs and DCMs–for use of the
SDRs’ public dissemination services.335 In addition, the Commission
recognizes that its choice of an alternative method for determining
appropriate minimum block sizes and cap sizes may alter the cost and
benefit estimates described below.
—————————————————————————
333 See 77 FR 1,232.
334 A non-financial end-user is a new market entrant with no
prior swaps market participation or infrastructure. This reference
point is different from the reference point(s) used in the PRA
analysis in section V above for the following two reasons: (1) The
burdens in the PRA are narrower than the costs discussed in this
section (i.e., the PRA analysis solely discusses costs relating to
collections of information, whereas this cost-benefit analysis
considers all costs relating to the proposed rules); and (2) as
discussed above, the cost-benefit analysis determines costs relative
to one market participant that presumably would bear the highest
burdens in implementing the proposed rules, whereas the PRA analysis
seeks to estimate the costs of the proposed rules on all market
participants.
335 See Sec. 43.3(i) of the Commission’s regulations, which
authorizes an SDR to charge fees to persons reporting swap
transaction and pricing data for real-time public dissemination, so
long as such fees are equitable and non-discriminatory. The
Commission currently does not have sufficient data on which to
estimate the fees that an SDR would charge to person reporting swap
transaction and pricing data. 77 FR 1,246.
—————————————————————————
D. Background; Objectives of This Further Proposal
In the Adopting Release, the Commission stated that it planned to
“issue a separate notice of proposed rulemaking that would
specifically address the appropriate criteria for determining
appropriate minimum block trade sizes in light of the data and comments
received.” 336 Accordingly, in this Further Proposal, the Commission
is specifically proposing to: (1) Establish criteria by creating the
concept of a “swap category” (i.e., groupings of swaps within the
same asset class based on underlying characteristics) 337; (2)
prescribe initial appropriate minimum block sizes based on the
Commission’s review and analysis of swap market data across certain
asset classes 338; (3) establish a methodology for calculating post-
initial appropriate minimum block sizes 339; (4) establish an
obligation for the Commission to calculate appropriate minimum block
sizes; (5) provide the method through which parties to a swap may elect
block trade or large notional off-facility swap treatment for their
swap transaction 340; (6) establish a system to ensure the anonymity
of certain swaps in the other commodity asset class 341; and (7)
establish a methodology for the calculation of post-interim or post-
initial cap sizes.342
—————————————————————————
336 See 77 FR 1,185.
337 See proposed Sec. 43.6(b), which defines swap category by
asset class.
338 See proposed Sec. 43.6(e) and proposed appendix F to part
43.
339 See proposed Sec. Sec. 43.6(c) and (f).
340 See proposed Sec. 43.6(g).
341 See proposed amendments to Sec. 43.4(d)(4).
342 See proposed Sec. Sec. 43.4(h) and 43.6(c).
—————————————————————————
Items (1) through (5) referenced above are addressed in Part One of
this Further Proposal since they relate to the proposed criteria,
methodology and election for block sizes and large notional off-
facility swaps. Items (6) and (7) are discussed in Part Two since they
relate to protecting the identity of parties to a swap in accordance
with sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.
E. Costs and Benefits Relevant to the Block Trade Rules Section of the
Further Proposal (Sec. Sec. 43.6(a)-(f) and (h))
The Commission has organized its cost-benefit discussion of the
provisions within Part One of this Further Proposal as follows: (1) The
proposed criteria for establishing swap categories and a proposed
methodology for determining appropriate minimum block sizes; and (2)
the proposed method through which the parties to a swap may elect to
treat their qualifying swap transaction as a block trade or large
notional off-facility swap, as applicable. The Commission has performed
a separate section 15(a) analysis with respect to each group of
provisions.
1. Costs and Benefits Relevant to the Proposed Criteria and Methodology
In proposed Sec. Sec. 43.6(a)-(f) and (h), the Commission
specifies criteria for establishing swap categories and a proposed
methodology that the Commission would use in determining appropriate
minimum block sizes. In the subsections that follow, the Commission
sets forth brief summaries of the relevant proposed provisions,
followed by a discussion of associated costs and benefits.
a. Proposed Sec. 43.6(a) Commission Determination
Pursuant to proposed Sec. 43.6(a), the Commission would determine
the appropriate minimum block size for any swap listed on a SEF or DCM,
and for large notional off-facility swaps. Following an initial period
(as described below), the Commission would calculate and publish all
appropriate minimum block sizes across all asset classes no less than
once each calendar year.
b. Proposed Sec. 43.6(b) Swap Category
The Commission is proposing a tailored approach to group swaps
within each asset class. Section 43.6(b) proposes unique swap
categories based on the underlying asset class, relevant economic
indicators and the Commission’s analysis of relevant swap market data.
c. Proposed Sec. Sec. 43.6(c)-(f) and (h) Methods for Determining
Appropriate Minimum Block Sizes
The Commission is proposing in Sec. Sec. 43.6(c)-(f) and (h) a
phased-in approach, with an initial period and a post-initial period,
to determine appropriate minimum block sizes for each swap category.
During the initial period, the Commission is proposing a schedule of
initial appropriate minimum block sizes in appendix F to part 43. The
Commission is proposing to determine the appropriate minimum block
sizes for the interest rate and credit asset classes differently from
the sizes for the equity, FX and other commodity asset classes. With
respect to the interest rate and credit asset class, the Commission
established the initial appropriate minimum block sizes based on data
it had received from the Over-the-Counter Derivatives Supervisors
Group.343 In calculating these sizes, the Commission has applied the
67-percent notional amount calculation, which is set forth in proposed
Sec. 43.6(c)(1).
—————————————————————————
343 A discussion of the ODSG is set forth in section II.C.1 of
this Further Proposal.
—————————————————————————
In proposed Sec. 43.6(d), the Commission would disallow swaps in
the equity asset class from being eligible for treatment as block
trades or large notional off-facility swaps (i.e., equity swaps would
not be subject to a time delay as provided in part 43). As noted above,
the Commission is of the view that applying this treatment to the
equity asset class is inappropriate given, inter alia, the depth of
liquidity in the underlying equity cash market.
With respect to the FX and other commodity asset classes, the
appropriate minimum block sizes for
[[Page 15505]]
swaps during the initial period would be divided primarily between
swaps that are futures-related swaps and those that are not futures
related.344 Proposed appendix F to part 43 lists the proposed initial
appropriate minimum block sizes for swap categories in the FX and other
commodity asset classes. For those swaps in the FX and other commodity
asset classes that are not listed in proposed appendix F to part 43,
the Commission generally provides in proposed Sec. 43.6(e)(2) that
these swaps would qualify as block trades or large notional off-
facility swaps.
—————————————————————————
344 As noted above, the Commission is of the view that the
difference in methodology for determining initial appropriate
minimum block sizes for swaps in the FX and other commodity asset
classes is warranted because: (1) Swaps in these asset classes are
closely linked to futures markets; (2) tying block sizes to their
economically related futures contracts reduces opportunities for
regulatory arbitrage; and (3) DCMs have experience in setting block
sizes in such a way that maintains market liquidity.
—————————————————————————
After an SDR has collected reliable data for a particular asset
class, proposed Sec. 43.6(f)(1) provides that the Commission shall
determine post-initial appropriate minimum block sizes for all swaps in
the interest rate, credit, FX and other commodity asset classes based
on the 67-percent notional amount calculation. The Commission is also
proposing special rules for the determination of appropriate minimum
block sizes that would apply to all asset classes.
In the following paragraphs, the Commission estimates the costs of
the proposed criteria and methodology and discusses their benefits,
before considering these costs and benefits in light of the five public
interest areas of section 15(a) of the CEA.
d. Proposed Sec. Sec. 43.6(a)-(f) and (h) Costs Relevant to the
Proposed Criteria and Methodology
The Adopting Release identifies the baseline of direct,
quantifiable costs to reporting parties, SDRs, SEFs and DCMs from
current part 43.345 The Commission foresees that proposed Sec. Sec.
43.6(a)-(f) and (h) would impose incremental direct costs on swap
market participants and registered entities (i.e., SEFs, DCMs, or SDRs)
through the need to reprogram and update their technology to
accommodate the Commission’s publication of post-initial appropriate
minimum block sizes at least once each calendar year following the
initial period. The Commission does not anticipate that proposed
Sec. Sec. 43.6(a)-(f) and (h) would impose any direct costs on the
general public. As noted above, proposed Sec. 43.6(a) provides that
the Commission shall set appropriate minimum block sizes for block
trades and large notional off-facility swaps following the procedures
set forth in proposed Sec. Sec. 43.6(b)-(f) and (h). The Commission
would determine these sizes both in the initial and post-initial
periods. The Commission anticipates that the requirements proposed in
Sec. 43.6(a) likely would mitigate new costs since the proposed
approach seeks to build on the existing connectivity, infrastructure
and arrangements that market participants and registered entities have
established in complying with the requirements in part 43 of the
Commission’s regulations.346 The Commission anticipates that market
participants and registered entities may have to reprogram or update
their technology to accommodate the Commission’s publication of post-
initial appropriate minimum block sizes at least once each calendar
year following the initial period. The Commission anticipates that
compliance would be slightly different for market participants and
registered entities.
—————————————————————————
345 In the Adopting Release, the Commission noted that “the
direct, quantifiable costs imposed on reporting parties, SEFs and
DCMs will take the forms of (i) non-recurring expenditures in
technology and personnel; and (ii) recurring expenses associated
with systems maintenance, support, and compliance.” See 77 FR
1,231.
346 In its report, ISDA states that end-users “will face
significant technology and operational challenges as well as
increased regulatory reporting requirements. Dealers will have to
upgrade infrastructure to deal with automated trading and comply
with increased regulatory reporting and recordkeeping.” See Costs
and Benefits of Mandatory Electronic Execution Requirements for
Interest Rate Products note 75 supra, at 24.
—————————————————————————
Market participants, and specifically non-financial end users,
likely would need to provide training to their existing personnel and
update their written policies and procedures in order to comply with
proposed Sec. 43.6(a)-(f) and (h). The Commission estimates that
providing training to existing personnel and updating written policies
and procedures would impose an initial non-recurring burden of
approximately 15 personnel hours at an approximate cost of $1,431.26
for each non-financial end-user.347 This cost estimate includes the
number of potential burden hours required to produce and design
training materials, conduct training with existing personnel, and
revise and circulate written policies and procedures in compliance with
the proposed requirements.
—————————————————————————
347 This estimate is calculated as follows: (Compliance
Manager at 10 hours) + (Director of Compliance at 3 hours) +
(Compliance Attorney at 2 hours) = 15 hours per non-financial end-
user who is a reporting party. A compliance manager’s adjusted
hourly wage is $77.77. A director of compliance’s hourly wage is
$158.21. A compliance attorney’s hourly wage is $89.43. See note 316
supra.
—————————————————————————
Registered entities would likely need to update their existing
technology in order to comply with proposed Sec. 43.6(a)-(f) and (h).
The Commission estimates that registered entities updating existing
technology would impose an initial non-recurring burden of
approximately 40 personnel hours at an approximate cost of $2,728 for
each registered entity.348 This cost estimate includes the number of
potential burden hours required to amend internal procedures, reprogram
systems and implement processes to account for each swap category and
to update appropriate minimum block sizes at least once each calendar
year.
—————————————————————————
348 The estimate is calculated as follows: (Senior Programmer
at 20 hours) + (Systems Analyst at 20 hours). A senior programmer’s
adjusted hourly wage is $81.52. A systems analyst’s adjusted hourly
wage is $54.89. See note 316 supra.
—————————————————————————
The Commission anticipates that the publication of swap transaction
and pricing data may enhance market liquidity. The Commission also
anticipates, however, that the immediate reporting of block trades and
large notional off-facility swaps may have the potential to increase
the costs associated with the trading of those swaps. If these costs
increase, then market liquidity may decrease. In these circumstances,
swap market participants may experience difficulty managing the risks
attendant to their trading activity.
The Commission anticipates that some market participants may face
increased, indirect costs if block trades and large notional off-
facility swaps are reported without a time delay (i.e., as soon as
technologically practicable). Some market makers could experience
higher trading costs as a result of increased liquidity risks attendant
to the need to offset large swap positions. Market makers ultimately
would pass those costs onto their end-user clients. The Commission
anticipates that the proposed criteria and methodology may mitigate the
potential increase in costs by addressing both liquidity concerns and
enhanced price discovery. The Commission also anticipates that its
proposed approach of establishing specific criteria for grouping swaps
into a finite set of defined swap categories might provide a clear
organizational framework that avoids administrative burdens for market
participants that otherwise could arise from more numerous and/or non-
uniform swap categories.
The Commission anticipates that the potential costs of disruptions
to market liquidity and trading activity are
[[Page 15506]]
minimized through the proposed regime. That is, the Commission
anticipates that the phase-in approach should provide swap market
participants with an adequate amount of time to incrementally adjust
their trading practices, technology infrastructure and business
arrangements to comply with the new block trade regime. This approach
also may ensure efficient compliance with the proposal while minimizing
the impact of implementation costs to swap market participants,
registered entities and the general public.
The Commission anticipates that market participants, registered
entities and the general public may bear some indirect costs due to the
increased degree of transparency that would result from the criteria
and methodology in proposed Sec. Sec. 43.6(a)-(f) and (h). However,
the Commission proposed that the appropriate minimum block trade sizes
specified in this Further Proposal are sufficiently moderate to
mitigate these indirect costs. The Commission also anticipates that the
benefits of transparency would be significant relative to the costs
occasioned by the tailored institution of appropriate minimum block
size levels proposed in the initial period.
e. Benefits Relevant to Proposed Sec. Sec. 43.6(a)-(f) and (h)
The Commission anticipates that proposed Sec. Sec. 43.6(a)-(f) and
(h) would generate several overarching, although presently
unquantifiable, benefits to swap market participants, registered
entities and the general public. Most notably, the Commission expects
that the proposed criteria and methodologies for setting appropriate
minimum block sizes would provide greater price transparency for a
substantial portion of swap transactions in a manner modulated to
mitigate any negative impact to swaps market liquidity. More
specifically, the proposed regulations would provide price transparency
by lifting the current part 43 real-time reporting time delay 349 for
swap transactions with notional values under specified threshold
levels. At the same time, the Commission’s proposed criteria and
methodology–including carefully crafted block trades and large-
notional off-facility swap categories–are designed to retain time-
delay status for those high-notional-value transactions exceeding
thresholds intended to avoid a negative market liquidity impact. The
phased-in implementation proposed by the Commission is intended to
introduce greater transparency in an incremental, measured and flexible
manner so that appropriate minimum block sizes are responsive to
changing markets.350 The Commission also intends the proposed
approach to enhance price transparency in a manner that respects market
participants’ and registered entities’ efficiency needs. Under proposed
Sec. 43.6(a), the Commission would be required to set all appropriate
minimum block sizes. The Commission anticipates that its proposed
approach would impose significantly fewer direct burdens on market
participants and registered entities than an alternative that would
require them to engage in a more quantitative analysis to ascertain
appropriate minimum block sizes for themselves. Such an alternative
approach could lead to market fragmentation, adversely affect market
liquidity, or reduce price transparency.
—————————————————————————
349 See 77 FR 1,240.
350 Proposed Sec. 43.6(f)(2) permits the Commission to set
appropriate minimum block sizes no less than once annually during
the post-initial period. If swap market conditions were to change
significantly after the implementation of the provisions of this
Further Proposal, the Commission could react to further improve
price transparency or to mitigate adverse effects on market
liquidity.
—————————————————————————
f. Application of the Section 15(a) Factors to Proposed Sec. Sec.
43.6(a)-(f) and (h)
As noted above, section 15(a) directs the Commission to consider
the following five areas in evaluating the costs and benefits of a
particular Commission action.
i. Protection of Market Participants and the Public
The Commission anticipates that the criteria and methodology in
proposed Sec. Sec. 43.6(a)-(f) and (h) would protect swap market
participants by extending the delay for reporting for publicly
reportable swap transactions, as appropriate, while also accommodating
the market participant and public interest with enhanced transparency.
By setting appropriate minimum block sizes in a thoughtful and measured
manner as contemplated in the Further Proposal, the Commission strives
to attain at least a near-optimal balance between transparency and
liquidity interests. As a result, swap market participants would retain
a means to offset risk exposures related to their swap transactions
(including outsize swap transactions) at competitive prices. While the
Commission notes that all publicly reportable swap transactions would
remain subject to a time delay, the Commission foresees a resulting
swap-market transparency counterbalance that could benefit swap market
participants by promoting greater competition for their businesses.
Specifically, the Commission expects that the availability of real-time
pricing information for carefully enumerated categories of swap
transactions could draw increased swap market liquidity through the
competitive appeal of improved pricing efficiency that greater
transparency affords. More liquid, competitive swap markets, in turn,
allow businesses to offset costs more efficiently than in completely
opaque markets, thus serving well the interests of both market
participants and the public who should benefit through lower costs of
goods and services.351
—————————————————————————
351 There may be a de minimis cost in the form of increased
offsetting costs, but the Commission foresees that its proposed
criteria and methodology would likely mitigate that cost. A
discussion of this de minimis cost is set forth above.
—————————————————————————
ii. Efficiency, Competitiveness and Financial Integrity of Markets
352
—————————————————————————
352 The Commission is presently unable to identify any
potential impact to the financial integrity of futures markets from
the proposed criteria and methodology in its consideration of
section 15(a)(2)(B) of the CEA. Although by its terms, section
15(a)(2)(B) applies to futures (not swaps), the Commission finds
this factor useful in analyzing the costs and benefits of swaps
regulation, as well.
—————————————————————————
The Commission anticipates that the proposed criteria and
methodology would promote market efficiency, competitiveness and
financial integrity of markets in a number of respects, including the
following:
They impose minimal administrative burdens on swap market
participants as a result of Commission-specified swap categories and
the Commission’s responsibility to determine of appropriate minimum
block sizes (as opposed to requiring registered entities to establish
such categories and determine such sizes).
With respect to futures-related swaps in the FX and other
commodity asset classes, by synchronizing the appropriate minimum block
sizes for swaps with DCM block trade sizes for futures during the
initial period, they can be expected to reduce opportunities for
regulatory arbitrage between the underlying cash or futures markets and
the swap markets.
They retain needed flexibility in light of the changes
that the Commission anticipates will occur in swap markets following
the implementation of part 43 and other implementing regulations. More
specifically, the proposed methodology in Sec. Sec. 43.6(c)-(f) and
(h) would recalibrate appropriate minimum block sizes regularly to
ensure that those sizes remain appropriate for, and responsive to,
these changing markets.
[[Page 15507]]
As discussed above with respect to the protection of
market participants and the public, they would introduce increased
market transparency for swaps in a careful, measured manner that seeks
to optimize the balance between liquidity and transparency
concerns.353 The Commission anticipates that this enhanced
transparency would be introduced in a manner capable of fostering
greater competition among swap market participants drawn to the
improved pricing efficiency that transparency fosters.
—————————————————————————
353 As noted above, under part 43 of the Commission’s
regulations (as now promulgated in the Adopting Release), all
publicly reportable swap transactions are subject to a time delay
pending further amending regulation to establish the criteria and
methodology to distinguish block trades and large notional off-
facility swaps from those swaps that do not meet those definitions.
See 77 FR 1,217. As a result, SDRs as of now are not required to
publicly disseminate publicly reportable swap transactions as soon
as technologically practicable.
—————————————————————————
iii. Price Discovery
The Commission anticipates that the proposed criteria and
methodology will enhance swap market price discovery by eliminating, to
the extent appropriate, the time delays for the real-time public
reporting of those swaps as now provided in the Adopting Release. The
proposed criteria and methodology of this Further Proposal would ensure
that an SDR could be able to publicly disseminate data for certain
swaps as soon as technologically practicable. As more trades are
published in real-time, reported prices are likely to be better
indicators of competitive pricing.
iv. Sound Risk Management Practices
As discussed above, the Commission anticipates that the proposed
criteria and methodology, if adopted, would likely result in enhanced
price discovery since SDRs would be able to publicly disseminate some
swaps as soon as technologically practicable. With better and more
accurate data, valuation, and risk assessment information, swap market
participants would likely be better able to measure risk. An ability to
better manage risk at an entity level is likely to translate to
improved market participant risk management generally. Improved risk
measurement and management potential, in turn, may reduce the risk of
another financial crisis since, presumably, it should better equip
market participants to value their swap contracts and other assets
during times of market instability. In addition, the proposed criteria
and methodology may avoid higher costs that could cause some market
participants to abandon swaps transactions in favor of more imperfect
financial risk management tools.
The Commission also anticipates that as the market price reflects
more accurate economic information, volatility is likely to be reduced,
therefore smoothing market risk for participants.
v. Other Public Interest Considerations
The Commission does not anticipate that the proposed criteria and
methodology discussed above would have a material effect on public
interest considerations other than those identified above.
g. Specific Questions Regarding the Proposed Criteria and Methodology
The Commission requests comments on its cost and benefit
considerations with respect to the proposed criteria and methodology.
While comments are welcome on all aspects of the proposal, the
Commission notes the following specifically:
Q93. Please provide comments regarding views on the accuracy and/or
inaccuracy of: (1) The facts cited in support of the Commission’s
analysis of the identified considerations relating to the proposed
criteria and methodology in proposed Sec. Sec. 43.6(a)-(f) and (h);
and (2) the Commission’s general analysis.
Q93.a. Please provide estimates or data regarding the direct,
quantifiable costs associated with the criteria and methodology in
proposed Sec. Sec. 43.6(a)-(f) and (h).
Q93.b. Please provide estimates or data regarding the indirect,
quantifiable costs associated with the criteria and methodology in
proposed Sec. Sec. 43.6(a)-(f) and (h).
Q93.c. Please comment and provide data on whether the proposed
criteria and methodology would decrease or increase liquidity in swaps
markets.
Q93.d. How can these costs be avoided by the use of alternative
trading strategies (e.g., splitting larger trades into smaller trades)?
What are the costs related to those alternative trading strategies?
Q93.e. Please provide estimates of the fees that SDRs and other
registered entities would charge reporting parties and other market
participants in order to pass along the incremental costs associated
with proposed Sec. Sec. 43.6(a)-(f) and (h).
Q93.f. Would market participants abandon swap transactions in favor
of more imperfect financial risk management tools?
Q93.g. Does the 67-percent notional amount calculation meet the
optimization goal of balancing liquidity and transparency concerns?
Q94. Other than those public interest considerations identified
herein, are there any other public interest considerations that the
Commission should examine in finalizing proposed Sec. Sec. 43.6(a)-(f)
and (h)?
Q94.a. One of the Commission’s rationales for its proposed criteria
and methodology is the objective of deterring regulatory arbitrage as
between swaps and futures markets. Should the Commission also be
concerned regarding the costs and benefits related to regulatory
arbitrage as between swaps and forwards markets?
Q95. In a discussion paper titled “Costs and Benefits of Mandatory
Electronic Execution Requirements for Interest Rate Products,” ISDA
examined the likely costs and benefits of mandating the execution of
interest rate swaps on DCMs and SEFs.354 ISDA’s paper provided an
analysis of, inter alia, liquidity and transaction costs in the
interest futures and options markets, in addition to a review of
liquidity and transaction costs in the OTC derivatives market. ISDA
surveyed financial and non-financial end users to estimate the
incremental costs resulting from the introduction of the electronic
execution requirement in the Commission’s proposal for SEFs.355 The
paper identifies some potential costs that are relevant to this Further
Proposal, such as technology costs and costs associated with
development of algorithms for block trades. This paper also identifies
potential costs that are either beyond the scope of this Further
Proposal (e.g., costs necessary to establish a SEF) or are irrelevant
to an analysis under section 15(a) of the CEA (e.g., costs to
regulators). The Commission requests comments on the analysis and
conclusions reached in ISDA’s paper.
—————————————————————————
354 See Costs and Benefits of Mandatory Electronic Execution
Requirements for Interest Rate Products note 75316 supra.
355 See Core Principles and Other Requirements for Swap
Execution Facilities, 76 FR 1,214, Jan. 7, 2011.
—————————————————————————
Q96. Will end users that desire to transact large trades under the
appropriate minimum block size find it necessary to develop some form
of algorithmic trading procedure? If so, what are the direct and
indirect costs and benefits related to the development?
Q97. The Commission seeks comment with respect to whether there is
a feasible alternative approach to the one now contemplated in proposed
Sec. 43.6(a) (i.e., the Commission would assume all responsibilities
for determining and publishing appropriate minimum block sizes) that
would impose less regulatory
[[Page 15508]]
burden on swap market participants and the general public.
Q98. The Commission anticipates that increased bid/ask spreads
could make it difficult for end users to obtain more competitive
pricing for outsize swap transactions. Under this Further Proposal,
would the price of executing outsize swap transactions be generally
higher? Would bid/ask spreads widen in yield as a result of this
Further Proposal?
Q98.a. Whether, and to what extent, do market participants
anticipate that their knowledge of bid/ask spreads or of liquidity in a
swap market generally will improve as a result of this Further
Proposal?
Q98.b. Whether, and to what extent, do market participants
anticipate that their knowledge of the competitive price for swaps will
improve as a result of this Further Proposal?
Q98.c. Would increased knowledge of the competitive price in a
market encourage market participants that may not be current liquidity
providers to provide liquidity to the market?
Q99. On average, what are current transaction costs for standard
size swaps in comparison to transaction costs in the futures markets?
Would transaction costs for swap markets increase as a result of this
Further Proposal? If so, by how much? Would the difference between
swaps and futures transaction costs induce more market participants to
trade futures instead of transacting swaps?
Q100. What effects, if any, would this Further Proposal have on
access to swaps markets? Would the Further Proposal positively or
negatively impact access opportunities for small end users?
2. Cost-Benefit Considerations Relevant to the Proposed Block Trade/
Large Notional Off-Facility Swap Election Process (Proposed Sec.
43.6(g))
Proposed Sec. 43.6(g) contains the provisions regarding the
election to have a swap transaction treated as a block trade or large
notional off-facility swap, as applicable. Proposed Sec. 43.6(g)(1)
establishes a two-step notification process relating to block trades.
Proposed Sec. 43.6(g)(2) establishes the notification process relating
to large notional off-facility swaps.
Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-
step notification process relating to block trades. In particular, this
section provides that the parties to a swap executed at or above the
appropriate minimum block size for the applicable swap category are
required to notify the SEF or DCM, as applicable, of their election to
have their qualifying swap transaction treated as a block trade. The
Commission anticipates that SEFs and DCMs will use automated,
electronic–and in some cases voice–processes to execute swap
transactions; and that the transmission of the notification of a block
trade election also will be either automated, electronic or
communicated through voice processes. A discussion of the costs and
benefits relevant to proposed Sec. 43.6(g) is set forth in the
subsections that follow.
a. Costs Relevant to the Proposed Election Process (Proposed Sec.
43.6(g))
Non-financial end-users who are reporting parties, as well as SEFs,
DCMs, and SDRs would likely bear the costs of complying with the
election process in proposed Sec. 43.6(g). The Commission anticipates,
however, that these entities already will have made non-recurring
expenditures in technology and personnel in connection with the
requirements set forth in part 43. In addition, these entities already
will be required to incur recurring expenses associated with systems
maintenance, support and compliance as described in the cost-benefit
discussion in the Adopting Release.356 As such, the Commission
assumes that these non-financial end-users, SEFs, DCMs, and SDRs would
likely be able to leverage their existing technology, systems and
personnel in complying with the election process in proposed Sec.
43.6(g). Based on this assumption, the Commission anticipates that non-
financial end-users, SEFs, DCMs and SDRs would likely have the
following direct, quantifiable costs: (i) An incremental, non-recurring
expenditure to update existing technology; (ii) an incremental non-
recurring expenditure for training existing personnel and updating
written policies and procedures for compliance with amendments to part
43; and (iii) incremental recurring expenses associated with
compliance, maintenance and operational support in connection with the
proposed election process. SDRs also would have incremental, non-
recurring expenditures to update existing technology.357 In the
paragraphs that follow, the Commission discusses each of these costs.
—————————————————————————
356 See 77 FR 1,237. As noted in the Adopting Release, non-
financial end-users (that do not contract with a third party) will
have initial costs consisting of: (i) Developing an internal order
management system capable of capturing all relevant data ($26,689
per non-financial end-user) and a recurring annual burden of
($27,943 per non-financial end-user); (ii) establishing connectivity
with an SDR that accepts data ($12,824 per non-financial end-user);
(iii) developing written policies and procedures to ensure
compliance with part 43 ($14,793 per non-financial end-user); and
(iv) compliance with error correction procedures ($2,063 per non-
financial end-user). See id. With respect to recurring costs, a non-
financial end-user will have: (i) Recurring costs for compliance,
maintenance and operational support ($13,747 per non-financial end-
user); (ii) recurring costs to maintain connectivity to an SDR
($100,000 per non-financial end-user); and (iii) recurring costs to
maintain systems for purposes of reporting errors or omissions
($1,366 per non-financial end user). See id.
SDRs (that do not enter into contracts with a third party) would
have incremental costs related to compliance with part 43 beyond
those costs identified in the release adopting part 49 of the
Commission’s regulations. See Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR 54,538 (Sept. 1, 2011).
In the Adopting Release, the Commission stated that each SDR would
have: (i) A recurring burden of approximately $856,666 and an annual
burden of $666,666 for system maintenance per SDR; (ii) non-
recurring costs to publicly disseminate ($601,003 per SDR); and
(iii) recurring costs to publicly disseminate ($360,602 per SDR).
See id.
In the Adopting Release, the Commission assumed that SEFs and
DCMs will experience the same or lower costs as a non-financial end-
user. See id.
357 SDRs that do not enter into contracts with a third party
would have incremental costs related to compliance with part 43 of
the Commission’s regulations beyond those costs identified in the
release adopting part 49 of the Commission’s regulations. See Swap
Data Repositories: Registration Standards, Duties and Core
Principles, 76 FR 54,538, Sept. 1, 2011. In the Adopting Release,
the Commission stated that each SDR would have: (1) A recurring
burden of approximately $856,666 and an annual burden of $666,666
for system maintenance per SDR; (2) non-recurring costs to publicly
disseminate ($601,003 per SDR); and (3) recurring costs to publicly
disseminate ($360,602 per SDR). See id.
—————————————————————————
i. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,
SEF or DCM to Update Existing Technology358
—————————————————————————
358 For the same reasons stated in the Adopting Release, the
Commission assumes that SEFs and DCMs would experience the same or
less costs as a non-financial end-user. See 77 FR 1,236. Under
proposed Sec. 43.6(g)(1), SEFs or DCMs would be required to
transmit a block trade election to an SDR only when the SEF or DCM
receives notice of a block trade election from a reporting party.
—————————————————————————
To comply with the election process in proposed Sec. 43.6(g), a
non-financial end-user, SEF, or DCM likely would need to: (1) Update
its OMS system to capture the election to treat a qualifying publicly
reportable swap transaction as a block trade or large notional off-
facility swap. The Commission estimates that updating an OMS system to
permit notification to an SDR of a block trade or large notional off-
facility swap election would impose an initial non-recurring burden of
approximately 80 personnel hours at an approximate cost of $6,761.20
for each non-financial end-user, SEF or DCM.359 This cost
[[Page 15509]]
estimate includes an estimate of the number of potential burden hours
required to amend internal procedures, reprogram systems and implement
processes to permit a non-financial end-user to elect to treat their
qualifying swap transaction as a block trade or large notional off-
facility swap in compliance with the requirements set forth in proposed
Sec. 43.6(g).
—————————————————————————
359 This estimate is calculated as follows: (Compliance
Manager at 15 hours) + (Director of Compliance at 10 hours) +
(Compliance Attorney at 5 hours) + (Senior Systems Analyst at 30) +
(Senior Programmer at 20) = 80 hours per non-financial end-user who
is a reporting party. See note 316 supra.
—————————————————————————
ii. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,
SEF or DCM To Provide Training to Existing Personnel and Update Written
Policies and Procedures
To comply with the election process in proposed Sec. 43.6(g), a
non-financial end-user likely would need to provide training to its
existing personnel and update its written policies and procedures to
account for this new process. The Commission estimates that providing
training to existing personnel and updating written policies and
procedures would impose an initial non-recurring burden of
approximately 39 personnel hours at an approximate cost of $3,195.00
for each non-financial end-user.360 This cost estimate includes the
number of potential burden hours required to produce design training
materials, conduct training with existing personnel, and revise and
circulate written policies and procedures in compliance with the
requirements set forth in proposed Sec. 43.6(g).
—————————————————————————
360 This estimate is calculated as follows: (Compliance
Manager at 5 hours) + (Director of Compliance at 2 hours) +
(Compliance Attorney at 2 hours) + (Senior Systems Analyst at 10) +
(Senior Programmer at 20) = 39 hours per non-financial end-user who
is a reporting party. A compliance manager has adjusted hourly wages
of $77.77. See note 316 supra.
—————————————————————————
iii. Incremental, Recurring Expenses to a Non-Financial End-User, DCM
or SEF Associated With Incremental Compliance, Maintenance and
Operational Support in Connection With the Proposed Election Process
A non-financial end-user, DCM or SEF likely would incur costs on an
annual basis in order to comply with the election process in proposed
Sec. 43.6(g). The Commission estimates that annual compliance,
maintenance and operation support would impose an incremental,
recurring burden of approximately five personnel hours at an
approximate cost of $341.60 for each non-financial end-user, DCM or
SEF.361 This cost estimate includes the number of potential burden
hours required to design training materials, conduct training with
existing personnel, and revise and circulate written policies and
procedures in compliance with the requirements set forth in proposed
Sec. 43.6(g).
—————————————————————————
361 This estimate is calculated as follows: (Director of
Compliance at 1 hour) + (Compliance Clerk at 3 hours) + (Compliance
Attorney at 1 hour) = 5 hours per year per non-financial end-user
who is a reporting party. A director of compliance has adjusted
hourly wages of $158.21. A compliance clerk (junior compliance
advisor) has adjusted hourly wages of $31.22. A compliance attorney
has adjusted hourly wages of 89.43. See note 316 supra.
—————————————————————————
iv. Incremental, Non-Recurring Expenditure to an SDR To Update Existing
Technology To Capture and Publicly Disseminate Swap Data for Block
Trades and Large Notional Off-Facility Swaps
To comply with the election process in proposed Sec. 43.6(g), an
SDR likely would need to update its existing technology to capture
elections and disseminate qualifying publicly reportable swap
transactions as block trades or large notional off-facility swaps. The
Commission estimates that updating existing technology to capture
elections would impose an initial non-recurring burden of approximately
15 personnel hours at an approximate cost of $1,317.58 for each
SDR.362 This cost estimate includes the number of potential burden
hours required to amend internal procedures, reprogram systems, and
implement processes to capture and publicly disseminate swap
transaction and pricing data for block trades and large notional off-
facility swaps in compliance with the requirements set forth in
proposed Sec. 43.6(g).
—————————————————————————
362 This estimate is calculated as follows: (Sr. Programmer at
8 hours) + (Sr. Systems Analyst at 3 hours) + (Compliance Manager at
2 hours) + (Director of Compliance at 2 hours) = 15 hours per SDR. A
senior programmer has adjusted hourly wages of $81.52. A senior
systems analyst has adjusted hourly wages of $64.50. A compliance
manager has adjusted hourly wages of $77.77. A director of
compliance has adjusted hourly wages of $158.21. See note 316 supra.
—————————————————————————
b. Benefits Relevant to the Proposed Election Process (Proposed Sec.
43.6(g))
The Commission has identified two overarching, although presently
unquantifiable, benefits that the proposed election process in Sec.
43.6(g) would confer on swap market participants, registered entities
and the general public. First, although proposed Sec. 43.6(g) sets out
a purely administrative process with which market participants and
registered entities must comply, the Commission submits that this
proposed process is an integral component of the block trade framework
in this Further Proposal and in part 43. Consequently, this proposed
election process would benefit market participants, registered entities
and the general public by providing greater price transparency in swaps
markets than currently exists under part 43.363
—————————————————————————
363 See the discussion of benefits in section VI.E.1.e above
with respect to proposed Sec. Sec. 43.6(a)-(f) and (h).
—————————————————————————
Second, the Commission foresees that the election process would
promote market efficiency by creating a standardized process in
proposed Sec. 43.6(g) for market participants to delineate which
publicly reportable swap transactions qualify for block trade or large
notional off-facility swap treatment. In addition, this standardized
process would further promote efficiency by allowing market
participants and registered entities to leverage their existing
technology infrastructure, connectivity, personnel and other resources
required under parts 43 and 49 of the Commission’s regulations. The
Commission has endeavored to craft the Further Proposal in such a
manner that its elements work together and avoid duplicative or
conflicting obligations on market participants and registered entities.
c. Application of the Section 15(a) Factors to Proposed Sec. 43.6(g)
As noted above, section 15(a) directs the Commission to consider
five particular factors in evaluating the costs and benefits of a
particular Commission action. These factors are considered below with
respect to proposed Sec. 43.6(g).
i. Protection of Market Participants and the Public
Although proposed Sec. 43.6(g) sets out a purely administrative
process with which market participants and registered entities must
comply, the Commission foresees this proposed process as integral to
the effective functioning of the block trade framework in this Further
Proposal and in part 43. Consequently, this proposed election process
contributes to providing greater swap market transparency than what
currently exists under part 43 of the Commission’s regulations. Market
participants, registered entities and the general public benefit from
this enhanced swap market price transparency.
ii. Efficiency, Competitiveness and Financial Integrity 364
—————————————————————————
364 Although by its terms, section 15(a)(2)(B) of the CEA
applies to futures and not swaps, the Commission finds this factor
useful in analyzing the costs and benefits of regulating swaps, as
well. See 7 U.S.C. 19(a)(2)(B).
—————————————————————————
As noted above, the proposed election process would promote
efficiency by providing market participants and
[[Page 15510]]
registered entities with a standardized process to delineate which
publicly reportable swap transactions are block trades or large
notional off-facility swaps. In addition, the proposed election process
would promote efficiency by allowing non-financial end-users, SEFs,
DCMs and SDRs to leverage their existing technology infrastructure,
connectivity, personnel and other resources required under part 43 and
part 49 of the Commission’s regulations. The use of existing
technologies, connectivity, personnel and other resources would create
efficiencies for these entities and significantly minimize costs in
connection with implementation of, and compliance with, proposed Sec.
43.6(g).
The Commission has identified no potential impact on
competitiveness and financial integrity that would result from the
implementation of the proposed election process.
iii. Price Discovery
The Commission has identified no potential material impact to price
discovery that would result from the implementation of the proposed
election process.
iv. Sound Risk Management Practices
The Commission has identified no potential impact on sound risk
management practices that would result from the implementation of the
proposed election process.
v. Other Public Interest Considerations
The Commission has identified no potential impact on other public
interest considerations (other than those identified above) that would
result from the implementation of the proposed election process.
d. Specific Questions Regarding the Proposed Election Process
The Commission requests comments on its cost and benefit
consideration with respect to the proposed election process. While
comments are welcome on all aspects of the proposal, the Commission is
particularly interested in the following:
Q101. Please provide comments regarding the Commission’s estimates
of direct and indirect costs to non-financial end-users and SDRs.
Q102. Please provide comments regarding views on the accuracy and/
or inaccuracy of: (1) The facts cited in support of the Commission’s
analysis of the identified considerations relating to the proposed
election process; and (2) the Commission’s analysis.
Q103. Are there any other public interest considerations that the
Commission should examine in finalizing proposed Sec. 43.6(g)?
Q104. Are there other alternative processes that would further
reduce burdens on market participants and registered entities?
F. Costs and Benefits Relevant to Proposed Anonymity Protections
(Amendments to Sec. Sec. 43.4(d)(4) and (h))
The Commission has organized its cost-benefit discussion of the two
proposed amendments to Sec. 43.4 of the Commission’s regulations into
one section. Section 43.4 as now promulgated prescribes the manner in
which SDRs must publicly disseminate swap transaction and pricing data.
One amendment proposes to add a system for masking the geographical
data for certain other commodity swaps, which are not currently subject
to public dissemination. The other amendment proposes to establish a
methodology to establish cap sizes for large swap transactions that is
different than the methodology for determining appropriate minimum
block sizes. Both amendments seek to protect the anonymity of the
parties to swaps while providing increased transparency in swaps
markets.
A discussion of each amendment is set out immediately below,
followed by a discussion of the costs and benefits of the amendments,
as well as an analysis of the costs and benefits in light of the five
factors identified in section 15(a) of the CEA.
1. Proposed Amendments to Sec. 43.4(d)(4)
The Commission addresses the public dissemination of certain swaps
in the other commodity asset class in Sec. 43.4(d)(4). Section
43.4(d)(4)(ii) provides that for publicly reportable swaps in the other
commodity asset class, information identifying the actual underlying
assets must be publicly disseminated for: (a) Those swaps executed on
or pursuant to the rules of a SEF or DCM; (b) those swaps referencing
one of the contracts described in appendix B to part 43; and (c) any
publicly reportable swap transaction that is economically related to
one of the contracts described in appendix B to part 43. Pursuant to
the Adopting Release, any swap that is in the other commodity asset
class that falls under Sec. 43.4(d)(4)(ii) would be subject to
reporting and public dissemination requirements.
In this Further Proposal, the Commission is proposing a new
provision, Sec. 43.4(d)(4)(iii), which would establish develop a
system for the public dissemination of exact underlying assets in the
other commodity asset class with a “mask” that is based on commodity
detail and geographic detail. The Commission also is proposing a new
appendix to part 43, which contains the geographical details that SDRs
would use in masking certain other commodity swaps in connection with
public dissemination of swap transaction and pricing data.
2. Proposed Amendments to Sec. 43.4(h)
Section 43.4(h) of the Commission’s regulations establishes cap
sizes for rounded notional or principal amounts that are publicly
disseminated for publicly reportable swap transactions. The purpose of
establishing cap sizes is to provide anonymity to large swap
transactions that, if the notional or principal amounts were revealed,
would likely identify the parties to the swap or their business
transactions. The Commission notes that the objective of cap sizes
differs from the primary objective underlying the establishment of
appropriate minimum block sizes. With respect to the latter, the
objective is tied to ensuring that a block trade or large notional off-
facility swap can be sufficiently offset during a relative short
reporting delay.
Section 43.4(h) currently requires SDRs to publicly disseminate the
notional or principal amounts of a publicly reportable swap transaction
represented by a cap size (i.e., $XX+) that adjusts in accordance with
their respective appropriate minimum block size for the relevant swap
category. Section 43.4(h) further provides that if no appropriate
minimum block size exists with respect to a swap category, then the cap
size on the notional or principal amount will correspond with interim
cap sizes that the Commission has established for the five asset
classes.365
—————————————————————————
365 See note 259 supra, which lists the interim cap sizes set
forth in Sec. Sec. 43.4(h)(1)-(5).
—————————————————————————
The proposed amendment to Sec. 43.4(h) would continue to require
SDRs to publicly disseminate cap sizes that correspond with their
respective appropriate minimum block sizes during an initial period.
However, upon publishing post-initial appropriate minimum block sizes
in accordance with proposed Sec. 43.6(f), the Commission also would
publish post-initial cap sizes for each swap category by applying the
75-percent notional amount calculation on data collected by SDRs. The
Commission would apply the 75-percent notional amount calculation on a
three-year rolling window (i.e., beginning with a minimum of one year
and adding one year of data for each calculation until a total of three
years of
[[Page 15511]]
data is accumulated) of such data corresponding to each relevant swap
category for each calendar year.
3. Costs Relevant to the Proposed Amendments to Sec. Sec. 43.4(d)(4)
and (h)
SDRs potentially would bear the costs of complying with the
proposed amendments to Sec. Sec. 43.4(d)(4) and (h).366 The
Commission anticipates that these entities already will have made non-
recurring expenditures in technology and personnel in connection with
the requirements set forth in part 43 and part 49 (which contain rules
regarding the registration and regulation of SDRs). As such, SDRs
already will be required to pay recurring expenses associated with
systems maintenance, support and compliance as described in the cost-
benefit discussion in the Adopting Release.367 Notwithstanding these
recurring expenses, an SDR would have additional non-recurring
expenditures associated with the amendments to Sec. 43.4.
Specifically, the Commission estimates that updating existing
technology to capture elections would impose an initial non-recurring
burden of approximately 34 personnel hours at an approximate cost of
$3,195.00 for each SDR.368 This cost estimate includes an estimate of
the number of potential burden hours required to amend internal
procedures, reprogram systems and implement processes to capture and
publicly disseminate swap transaction and pricing data for block trades
and large notional off-facility swaps in compliance with the
requirements set forth in proposed Sec. 43.6(g).
—————————————————————————
366 The Commission anticipates that reporting parties, SEFs
and DCMs would not incur any new costs related to the proposed
amendments to Sec. 43.4 because this section relates to the data
that an SDR must publicly disseminate. Section 43.3 of the
Commission’s regulations sets out the requirements for reporting
parties, SEFs and DCMs in terms of what is transmitted to an SDR.
367 See 76 FR 54,572-75. As noted in SDR final rule, SDRs
(that do not enter into contracts with a third party) would have
incremental costs related to compliance with part 43 beyond those
costs identified in the release adopting part 49 of the Commission’s
regulations. See 76 FR 54,573. In the Adopting Release, the
Commission stated that each SDR would have: (i) A recurring burden
of approximately $856,666 and an annual burden of $666,666 for
system maintenance per SDR; (ii) non-recurring costs to publicly
disseminate ($601,003 per SDR); and (iii) recurring costs to
publicly disseminate ($360,602 per SDR). See 77 FR 1,238.
368 This estimate is calculated as follows: (Sr. Programmer at
20 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager
at 2 hours) + (Director of Compliance at 2 hours) = 34 hours per
SDR. A senior programmer has adjusted hourly wages of $81.52. A
senior systems analyst has adjusted hourly wages of $64.50. A
compliance manager has adjusted hourly wages of $77.77. A director
of compliance has adjusted hourly wages of $158.21. See note 316
supra.
—————————————————————————
In the Commission’s view, these additional non-recurring and
recurring costs are not likely to be significant to an SDR given the
likelihood that it will leverage its existing technology, systems and
personnel in complying with the proposed amendments to Sec. 43.4.
In addition, the Commission anticipates that proposed Sec.
43.4(d)(4)(iii) may result in some incremental, recurring costs for
SDRs because they will be required to publicly disseminate other
commodity swaps data that were not previously within the scope of the
public dissemination requirement in Sec. 43.4. At this time, however,
the Commission does not have sufficient data to quantify these costs.
The Commission also anticipates that proposed Sec. 43.4(d)(4)(iii)
may result in some indirect costs to the market through reduced
information bearing on the contours of total trading in the market. The
Commission currently lacks data to quantify the costs associated with
the reduction of information.
4. Benefits Relevant to the Proposed Amendments to Sec. 43.4
The Commission anticipates that the proposed anonymity provisions
of Sec. 43.4 would generate several overarching, although presently
unquantifiable, benefits to swap market participants, registered
entities and the general public. In the first instance, the Commission
anticipates that the proposed cap size amendments to Sec. 43.4(h)
would benefit market participants, registered entities and the general
public by providing greater price transparency with respect to swaps
with notional amounts that fall between the post-initial appropriate
minimum block size and post-initial cap size for a particular swap
category. During the post-initial period, the Commission would set
appropriate minimum block sizes based on the 67-percent notional amount
calculation 369 and cap sizes based on the 75-percent notional amount
calculation.370 Although swaps with notional amounts that fall
between these two sizes would be subject to a time delay, the exact
notional amounts of these swaps eventually would be publicly disclosed.
The Commission is of the preliminary view that the delayed public
disclosure of the notional amount of these swaps would provide market
participants, registered entities and the general public with
meaningful price transparency.
—————————————————————————
369 See proposed Sec. 43.6(c)(1).
370 See proposed Sec. 43.6(c)(2).
—————————————————————————
The proposed masking provisions in the amendment to Sec.
43.4(d)(4) and proposed appendix D to part 43 would further benefit
market participants, registered entities and the general public by
enhancing price discovery with respect to swaps that currently are not
required to be publicly disclosed under part 43. Section 43.4(d)(4)
currently requires SDRs to publicly disseminate swap transaction and
pricing data for publicly reportable swap transactions that reference
or are economically related to the 29 contracts identified in appendix
B to part 43. The Commission is of the preliminary view that there are
a significant number of swaps in the other commodity asset class that
are not economically related to the 29 contracts identified in appendix
to part 43. The proposed amendment creating new Sec. 43.4(d)(4)(iii)
would require the public dissemination of data on these swaps. The
Commission proposes that the real-time public reporting of these swaps
would enhance price discovery in the other commodity asset class.
Moreover, the Commission’s proposed amendments to the anonymity
provisions are intended to reduce impacts on market liquidity. As noted
above, CEA section 2(a)(13) requires the Commission to prescribe rules
for the real-time public reporting of all swap transactions in order to
enhance price transparency, while taking into account the effects of
such transparency on market liquidity. The Commission’s proposed
approach would introduce greater transparency in a flexible manner so
that post-initial cap sizes are responsive to changing markets.
Proposed Sec. 43.4(h) would permit the Commission to set cap sizes no
less than once annually during the post-initial period. If swap market
conditions change significantly after the implementation of the
provisions of this Further Proposal, then the Commission could react in
a timely manner to further improve price transparency or to mitigate
adverse effects on market liquidity.371
—————————————————————————
371 This benefit is consistent with one of the considerations
for implementation identified by ISDA and SIFMA in their January 18,
2011 report. See Block trade reporting for over-the-counter
derivatives markets, note 54 supra.
—————————————————————————
Finally, the proposed approach would promote market efficiency for
market participants and registered entities. Under proposed Sec.
43.4(h), Commission would be required to set all cap sizes. The
Commission anticipates that its proposed approach would impose
significantly fewer direct burdens on market participants and
registered entities that they otherwise would have
[[Page 15512]]
in the alternative (e.g., requiring market participants and/or
registered entities to set cap sizes for the entire swaps market). An
alternative approach could lead to market fragmentation, adverse
effects on market liquidity, or reduced price transparency.
5. Application of the Section 15(a) Factors to the Proposed Amendments
to Sec. 43.4
As noted above, section 15(a) directs the Commission to consider
five particular areas in evaluating the costs and benefits of a
particular Commission action. These five areas with respect to proposed
amendments to Sec. 43.4 are considered below.
a. Protection of Market Participants and the Public
The Commission anticipates that the proposed amendments to Sec.
43.4 would ensure the protection of swap counterparty anonymity on an
ongoing basis. While cap sizes for some transactions could exceed
appropriate minimum block sizes in certain circumstances (resulting in
the public dissemination of notional/principal-amount information after
a time delay), the Commission intends and expects that for the vast
majority of (if not all) impacted swap transactions, the proposed cap-
size process and methodology is sufficient to distinguish correctly
between those for which masking of notional or principal amount is
required to maintain anonymity and those for which it is not.372
—————————————————————————
372 The Commission recognizes that adoption of rules that
delineate cap sizes insufficient to provide anonymity could cause
prospective counterparties to forego swap transactions, thus
adversely impacting market liquidity.
—————————————————————————
b. Efficiency, Competitiveness and Financial Integrity 373
—————————————————————————
373 Although by its terms, section 15(a)(2)(B) applies to
futures and not swaps, the Commission finds this factor useful in
analyzing the costs and benefits of swaps regulation, as well. 7
U.S.C. 19(a)(2)(B).
—————————————————————————
The Commission anticipates that proposed amendments to Sec.
43.4(h) would promote market efficiencies and competitiveness since the
proposed approach would provide market participants with the ability to
continue transacting swaps with the protection of anonymity, while
promoting greater price transparency.
The Commission has identified no potential impact on financial
integrity that would result from the implementation of the proposed
election process.
c. Price Discovery
As noted above, the Commission anticipates that the proposed cap
size amendments to Sec. 43.4(h) would benefit market participants,
registered entities and the general public by providing greater price
transparency with respect to swaps with notional amounts that fall in
between the post-initial appropriate minimum block size and post-
initial cap size for a particular swap category. During the post-
initial period, the Commission would set appropriate minimum block
sizes based on the 67-percent notional amount calculation 374 and cap
sizes based on the 75-percent notional amount calculation.375
Although swaps with notional amounts that fall in between these two
sizes would be subject to a time delay, the exact notional amounts of
these swaps eventually would be publicly disclosed.
—————————————————————————
374 See proposed Sec. 43.6(c)(1).
375 See proposed Sec. 43.6(c)(2).
—————————————————————————
The proposed masking provisions in the amendment to Sec.
43.4(d)(4) and proposed appendix D to part 43 could furt-er benefit
market participants, registered entities and the general public by
enhancing price discovery with respect to swaps that currently are not
required to be publicly disclosed under part 43. The proposed amendment
creating new Sec. 43.4(d)(4)(iii) would require the public
dissemination of data on these swaps. The Commission anticipates that
the real-time public reporting of these swaps would enhance price
discovery in the other commodity asset class.
d. Sound Risk Management Practices
To the extent that the proposed amendments to Sec. 43.4 mask the
identity, business transactions and market positions of swap
counterparties, the Commission anticipates that the proposed amendments
to Sec. 43.4 would preserve the viability of swaps as a risk
management tool for those traders that otherwise might feel compelled
to switch to a less well-suited risk management tool.
e. Other Public Interest Considerations
The Commission does not anticipate that the proposed amendment to
Sec. 43.4(h) would have a material effect on public interest
considerations other than those identified above.
6. Specific Questions Regarding the Proposed Amendments to Sec. 43.4
The Commission requests comments on its cost and benefit
considerations with respect to the proposed amendments to Sec. 43.4.
While commenters are welcome to comment on all aspects of this Further
Proposal, the Commission is particularly interested in the following:
Q105. Please provide comments regarding the Commission’s estimates
of direct and indirect costs to SDRs of the proposed amendments to
Sec. 43.4.
Q105a. Please provide comments regarding any potential direct or
indirect costs to non-financial end-users.
Q106. Please provide comments regarding views on the accuracy and/
or inaccuracy of the facts cited in support of the Commission’s
analysis of the identified considerations relating to the proposed
anonymity protections.
Q107. Are there any other public interest considerations not
discussed above that the Commission should examine in finalizing the
proposed amendments to Sec. 43.4?
Q108. Please provide comments regarding the sufficiency of the
Commission’s proposed rules to protect market participant anonymity and
whether the rules could be expected to cause certain swap
counterparties to forego swap transactions and, if so, the magnitude of
any likely liquidity impact.
VII. Example of a Post-Initial Appropriate Minimum Block Size
Determination Using the 67-Percent Notional Amount Calculation
The example below describes the steps necessary for the Commission
to determine the post-initial appropriate minimum block size based on
Sec. 43.6(c)(1) for a sample set of data in “Swap Category Z.” For
the purposes of this example, Swap Category Z had 35 transactions over
the given observation period. The observations are described in table A
below and are ordered by time of execution (i.e., Transaction
1 was executed prior to Transaction 2).
[[Page 15513]]
[GRAPHIC] [TIFF OMITTED] TP15MR12.000
Step 1: Remove the transactions that do not fall within the
definition of “publicly reportable swap transactions” as described in
Sec. 43.2.
In this example, assume that five of the 35 transactions in Swap
Category Z do not fall within the definition of “publicly reportable
swap transaction.” These five transactions, listed in table B below
would be removed for the data set that will be used to determine the
post-initial appropriate minimum block size.
Table B–Transactions That Do Not Fall Within the Definition of “Publicly Reportable Swap Transaction”
—————————————————————————————————————-
Transaction 4 i>13 i>16 i>20 i>21
—————————————————————————————————————-
1.05 25,000,000 100,000,000 50,000,000 75,000,000
—————————————————————————————————————-
Step 2A: Convert the publicly reportable swap transactions in the
swap category to the same currency or units.
In order to accurately compare the transactions in a swap category
and apply the appropriate minimum block size calculation, the
transactions must be converted to the same currency or unit.
In this example, the publicly reportable swap transactions were all
denominated in U.S. dollars, so no conversion was necessary. If the
notional amounts of any of the publicly reportable swap transactions in
Swap Category Z had been denominated in a currency other than U.S.
dollars, then the notional amounts of such publicly reportable swap
transactions would have been adjusted by the daily exchange rates for
the period to arrive at the U.S. dollars equivalent notional amount.
Step 2B: Examine the remaining data set for any outliers and remove
any such outliers, resulting in a trimmed data set.
The publicly reportable swap transactions are examined to identify
any outliers. If an outlier is discovered, then it would be removed
from the data set. To conduct this analysis, the notional amounts of
all of the publicly reportable swap transactions remaining after step 1
and step 2A are transformed by Log10. The average and
standard deviation (“STDEV”) of these transformed notional amounts
would then be calculated. Any transformed notional amount of a publicly
reportable swap transaction that is larger than the average of all
transformed notional amounts plus four times the standard deviation
would be omitted from the data set as an outlier.
In the data set used in this example, none of the observations were
large enough to qualify as an outlier, as shown in the calculations
described in Table C.
[GRAPHIC] [TIFF OMITTED] TP15MR12.001
Step 3: Sum the notional amounts of the remaining publicly
reportable swap transactions in the data set resulting after step 2B.
Note: The notional amounts being summed in this step are the original
amounts following step 2A
[[Page 15514]]
and not the Log10 transformed amounts used for the process
in step 2B used to identify and omit any outliers.
Using the equation described immediately below, the notional
amounts are added to determine the sum total of all notional amounts
remaining in the data set for a particular swap category. In this
example, the notional amounts of the 30 remaining publicly reportable
swap transactions in Swap Category Z are added together to come up with
a net value of 2,989,706,421.
[GRAPHIC] [TIFF OMITTED] TP15MR12.002
Step 4: Calculate the 67 Percent Notional Amount.
Using the resulting amount from step 2B, a 67-percent notional
amount value would be calculated by using the equation:
PRSTNV * 0.67 = G
G = 67 percent of the sum total of the notional amounts of all
remaining publicly reportable swap transactions in the set
G = 2,003,103,302
Step 5: Order and rank the observations based on notional amount of
the publicly reportable swap transaction from least to greatest.
The remaining publicly reportable swap transactions having
previously been converted to U.S. dollar equivalents must be ranked,
based on the notional sizes of such transactions, from least to
greatest. The resulting ranking yields the PRSTt. Table D below
reflects the ranking of the remaining publicly reportable swap
transactions based on their notional amount sizes for this example.
PRSTt = a publicly reportable swap transaction in the data set
ranked from least to greatest based on the notional amounts of such
transactions.
Step 6A: Calculate the running sum of all PRSTt.
A running sum would be calculated by adding together the ranked and
ordered publicly reportable swap transactions from step 5 (PRSTt) in
least to greatest order. The calculations of running sum values with
respect to this example are reflected in Table D below.
[[Page 15515]]
[GRAPHIC] [TIFF OMITTED] TP15MR12.003
Step 6B: Select first RS Value that is greater than or equal to G.
In this example, G is equal to 2,003,103,302, meaning that the RS
Value that must be selected would have to be greater than that number.
The first RS Value that is greater than or equal to G can be found in
the observation that corresponds to Rank Order 28 (see Table
D). The RS Value of the Rank Order 28 observation is
2,024,706,421.
Step 7: Select the PRSTt that corresponds to the observation
determined in step 6B.
In this example, the PRSTt that corresponds to the RS Value
determined in step 6B (Rank Order 28) is 265,000,000.
Step 8: Determine the rounded notional amount.
Calculate the rounded notional amount under the process described
in the proposed amendment to Sec. 43.2. The 265,000,000 amount would
be rounded to the nearest 10 million for public dissemination, or
270,000,000.
Step 9: Set the appropriate minimum block size at the amount
calculated in step 8.
In this example, the appropriate minimum block size for swap
category Z would be 270,000,000 for the observation period.
Post-Initial Appropriate Minimum Block Size = $270,000,000
VIII. List of Commenters Who Responded to the Initial Proposal
1. Markit.
2. Asset Management Group of the Securities Industry and Financial
Markets Association (“SIFMA AMG”).
3. Managed Funds Association (“MFA”).
4. Argus Media, Inc. (“Argus”).
5. J.P. Morgan (“JP Morgan”).
6. Gibson Dunn on behalf of the Coalition for Derivatives End-Users
(“Coalition for Derivatives End-Users”).
7. Committee on Capital Markets Regulation (“CCMR”).
8. Goldman Sachs & Co. (“Goldman”).
9. Barclays Capital, Inc. (“Barclays”).
10. Air Transport Association (“ATA”).
11. Pacific Investment Management Company, LLC (“PIMCO”).
12. Committee on the Investment of Employee Benefit Assets & American
Benefits Council (“ABC/CIEBA”).
13. Better Markets, Inc. (“Better Markets”).
14. Investment Company Institute (“ICI”).
15. MarkitSERV.
16. Coalition of Physical Energy Companies (“COPE”).
17. International Options Markets Association/World Federation of
Exchanges (“World Federation of Exchanges”).
18. UBS Securities LLC (“UBS”).
19. Global Foreign Exchange Division of Association for Financial
Markets in Europe (“AFME”), the Securities Industry and Financial
Markets Association (“SIFMA”) and the Asia Securities Industry and
Financial Markets Association (“ASIFMA”) (collectively, “SIFMA/AFME/
ASIFMA”).
20. CME Group, Inc. (“CME”).
21. Coalition of Energy End-Users.
22. International Swaps and Derivatives Association & Securities
Industry and Financial Markets Association (“ISDA/SIFMA”).
23. Morgan Stanley.
24. Hunton & Williams LLP on behalf of the Working Group of Commercial
Energy Firms (“Hunton & Williams”).
25. Freddie Mac.
26. Vanguard.
27. TriOptima.
28. BlackRock, Inc. (“BlackRock”).
29. Dominion Resources, Inc. (“Dominion”).
30. Sadis & Goldberg LLP (“Sadis & Goldberg”).
31. Metlife, Inc. (“Metlife”).
32. Wholesale Markets Brokers’ Association, Americas (“WMBAA”).
[[Page 15516]]
33. Depository Trust & Clearing Corporation (“DTCC”).
34. Cleary Gottlieb on behalf of Bank of America Merrill Lynch, BNP
Paribas, Citi; Credit Agricole Corporate and Investment Bank; Credit
Suisse Securities (USA), Deutsche Bank AG, Morgan Stanley, Nomura
Securities International, In., PNC Bank, National Association,
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS Securities LLC, Wells
Fargo & Company (“Cleary Gottlieb”).
35. Financial Industry Regulatory Authority (“FINRA”).
36. International Swaps and Derivatives Association (“ISDA”).
37. Association of Institutional Investors (“AII”).
38. Swaps & Derivatives Market Association (“SDMA”).
List of Subjects in 17 CFR Part 43
Real-time public reporting; Block trades; Large notional off-
facility swaps; Reporting and recordkeeping requirements.
Accordingly, 17 CFR Part 43, as proposed to be added at 77 FR
1,243, January 9, 2012, is proposed to be further amended as follows.
PART 43–REAL-TIME PUBLIC REPORTING
1. The authority citation for part 43 shall continue to read as
follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
2. Amend Sec. 43.2 by adding the following definitions in
alphabetical order to read as follows:
Sec. 43.2 Definitions.
* * * * *
Cap size means, for each swap category, the maximum notional or
principal amount of a publicly reportable swap transaction that is
publicly disseminated.
* * * * *
Economically related means a direct or indirect reference to the
same commodity at the same delivery location or locations, or with the
same or a substantially similar cash market price series.
* * * * *
Futures-related swap means a swap (as defined in section 1a(47) of
the Act and as further defined by the Commission in implementing
regulations) that is economically related to a futures contract.
Major currencies means the currencies, and the cross-rates between
the currencies, of Australia, Canada, Denmark, New Zealand, Norway,
South Africa, South Korea, Sweden, and Switzerland.
Non-major currencies means all other currencies that are not super-
major currencies or major currencies.
* * * * *
Physical commodity swap means a swap in the other commodity asset
class that is based on a tangible commodity.
* * * * *
Reference price means a floating price series (including
derivatives contract prices and cash market prices or price indices)
used by the parties to a swap or swaption to determine payments made,
exchanged or accrued under the terms of a swap contract.
* * * * *
Super-major currencies means the currencies of the European
Monetary Union, Japan, United Kingdom, and United States.
* * * * *
Swaps with composite reference prices means swaps based on
reference prices that are composed of more than one reference price
from more than one swap category.
Trimmed data set means a data set that has had extraordinarily
large notional transactions removed by transforming the data into a
logarithm with a base of 10, computing the mean, and excluding
transactions that are beyond four standard deviations above the mean.
* * * * *
3. Revise section 43.4(h) to read as follows:
Sec. 43.4 Swap transaction and pricing data to be publicly
disseminated in real-time.
* * * * *
(h) Cap sizes. (1) Initial cap sizes. Prior to the effective
date of a Commission determination to establish an applicable post-
initial cap size for a swap category as determined pursuant to
paragraph (h)(2), the initial cap sizes for each swap category shall
be equal to the greater of the initial appropriate minimum block
size for the respective swap category in appendix F to this part or
the respective cap sizes in paragraphs (h)(1)(i) through (v) of this
section. If appendix F to this part does not provide an initial
appropriate minimum block size for a particular swap category, the
initial cap size for such swap category shall be equal to the
appropriate cap size as set forth in paragraphs (h)(1)(i) through
(v) of this section.
(i) For swaps in the interest rate asset class, the publicly
disseminated notional or principal amount for an interest rate swap
subject to the rules in this part 43 the cap size shall be:
(A) USD 250 million swaps with a tenor greater than zero up to and
including two years;
(B) USD 100 million for swaps with a tenor greater than two years
up to and including ten years; and
(C) USD 75 million for swaps with a tenor greater than ten years;
(ii) For swaps in the credit asset class, the publicly disseminated
notional or principal amount for a credit swap subject to the rules in
this part 43 shall be USD 100 million;
(iii) For swaps in the equity asset class, the publicly
disseminated notional or principal amount for an equity swap subject to
the rules in this part 43 shall be USD 250 million;
(iv) For swaps in the foreign exchange asset class, the publicly
disseminated notional or principal amount for a foreign exchange swap
subject to the rules in this part 43 shall be USD 250 million; and
(v) For swaps in the other commodity asset class, the publicly
disseminated notional or principal amount for any other commodity swap
subject to the rules in this part 43 shall be USD 25 million.
(2) Post-initial cap sizes. Pursuant to the process described in
Sec. 43.6(f)(1), the Commission shall establish post-initial cap sizes
using reliable data collected by registered swap data repositories, as
determined by the Commission, based on the following:
(i) A three-year rolling window (beginning with a minimum of one
year and adding one year of data for each calculation until a total of
three years of data is accumulated) of swap transaction and pricing
data corresponding to each relevant swap category recalculated no less
than once each calendar year; and
(ii) The 75-percent notional amount calculation described in
paragraph (c)(2) of this section applied to the swap transaction and
pricing data described in paragraph (h)(2)(i) of this section.
(3) Commission publication of post-initial cap sizes. The
Commission shall publish post-initial cap sizes on its Web site at
http://www.cftc.gov.
(4) Effective date of post-initial cap sizes. Unless otherwise
indicated on the Commission’s Web site, the post-initial cap sizes
shall be effective on the first day of the second month following the
date of publication. * * *
4. Amend Sec. 43.4(d)(4)(i) by deleting “Sec. 43.4(d)(4)(ii).”
and replacing it with “Sec. Sec. 43.4(d)(4)(ii) and (iii).”
5. Amend Sec. 43.4(d)(4)(ii)(B) by deleting “; and” and
replacing it with “; or”; and
6. Add Sec. 43.4(d)(4)(iii) to read as follows:
[[Page 15517]]
(iii) The underlying assets of swaps in the other commodity asset
class that are not described in 43.4(d)(4)(ii) shall be publicly
disseminated by limiting the geographic detail of the underlying
assets. The identification of any specific delivery point or pricing
point associated with the underlying asset of such other commodity swap
shall be publicly disseminated pursuant to appendix E to this part.
7. Add section 43.6 to part 43 to read as follows:
Sec. 43.6 Block trades and large notional off-facility swaps.
(a) Commission determination. The Commission shall establish the
appropriate minimum block size for publicly reportable swap
transactions based on the swap categories set forth in Sec. 43.6(b) in
accordance with the provisions set forth in Sec. Sec. 43.6(c), (d),
(e), (f) or (h), as applicable.
(b) Swap categories. Swap categories shall be established for all
swaps, by asset class, in the following manner:
(1) Interest rates asset class. Interest rate asset class swap
categories shall be based on unique combinations of the following:
(i) Currency by:
(A) Super-major currency;
(B) Major currency; or
(C) Non-major currency; and
(ii) Tenor of swap as follows:
(A) Zero to three months (0 to 107 days);
(B) Three months to six months (108 to 198 days);
(C) Greater than six months to one year (199 to 381 days);
(D) Greater one to two years (382 to 746 days);
(E) Greater than two to five years (747 to 1,842 days);
(F) Greater than five to ten years (1,843 to 3,668 days);
(G) Greater than ten to 30 years (3,669 to 10,973 days); or
(H) Greater than 30 years (10,974 days and above).
(2) Credit asset class. Credit asset class swap categories shall be
based on unique combinations of the following:
(i) Traded Spread rounded to the nearest basis point (0.01) as
follows:
(A) 0 to 175 points;
(B) 176 to 350 points; or
(C) 351 points and above; and
(ii) Tenor of swap as follows:
(A) Zero to two years (0-746 days);
(B) Greater than two to four years (747-1,476 days);
(C) Greater than four to six years (1,477-2,207 days)
(D) Greater than six to eight-and-a-half years (2,208-3,120 days);
(E) Greater than eight-and-a-half to 12.5 years (3,121-4,581 days);
and
(F) Greater than 12.5 years (4,581 days and above).
(3) Equity asset class. There shall be one swap category consisting
of all swaps in the equity asset class.
(4) Foreign exchange asset class. Swap categories in the foreign
exchange asset class shall be grouped as follows:
(i) By the unique currency combinations of super-major currencies,
major currencies and the currencies of Brazil, China, Czech Republic,
Hungary, Israel, Mexico, Poland, Russia, and Turkey; or
(ii) By unique currency combinations not included in subparagraph
(i) of this section.
(5) Other commodity asset class. Swap contracts in the other
commodity asset class shall be grouped into swap categories as follows:
(i) For swaps that are economically related to contracts in
appendix B to this part, by the relevant contract as referenced in
appendix B to this part; or
(ii) For swaps that are not economically related to contracts in
appendix B to this part, by the following futures-related swaps–
(A) CME Cheese;
(B) CBOT Distillers’ Dried Grain;
(C) CBOT Dow Jones-UBS Commodity Index Excess Return;
(D) CBOT Ethanol;
(E) CME Frost Index;
(F) CME Goldman Sachs Commodity Index (GSCI), (GSCI Excess Return
Index);
(G) NYMEX Gulf Coast Gasoline;
(H) NYMEX Gulf Coast Sour Crude Oil;
(I) NYMEX Gulf Coast Ultra Low Sulfur Diesel;
(J) CME Hurricane Index;
(K) CME International Skimmed Milk Powder;
(L) NYMEX New York Harbor Ultra Low Sulfur Diesel;
(M) CME Nonfarm Payroll;
(N) CME Rainfall Index;
(O) CME Snowfall Index;
(P) CME Temperature Index;
(Q) CME U.S. Dollar Cash Settled Crude Palm Oil; or
(R) CME Wood Pulp; or
(iii) For swaps that are not covered in subparagraphs (i) and (ii)
of this section, the relevant product type as referenced in appendix D
to this part.
(c) Methodologies to determine appropriate minimum block sizes and
cap sizes. In determining appropriate minimum block sizes and cap sizes
for publicly reportable swap transactions, the Commission shall utilize
the following statistical calculations–
(1) 67-percent notional amount calculation. The Commission shall
use the following procedure in determining the 67-percent notional
amount calculation: (i) Select all of the publicly reportable swap
transactions within a specific swap category using a rolling three-year
window of data beginning with a minimum of one year’s worth of data and
adding one year of data for each calculation until a total of three
years of data is accumulated; (ii) convert to the same currency or
units and use a trimmed data set; (iii) determine the sum of the
notional amounts of swaps in the trimmed data set; (iv) multiply the
sum of the notional amount by 67 percent; (v) rank order the
observations by notional amount from least to greatest; (vi) calculate
the cumulative sum of the observations until the cumulative sum is
equal to or greater than the 67-percent notional amount calculated in
(iv); (vii) select the notional amount associated with that
observation; (viii) round the notional amount of that observation to
two significant digits, or if the notional amount associated with that
observation is already significant to two digits, increase that
notional amount to the next highest rounding point of two significant
digits; and (ix) set the appropriate minimum block size at the amount
calculated in (viii).
(2) 75-percent notional amount calculation. The Commission shall
use the following procedure in determining the 75-percent notional
amount calculation: (i) Select all of the publicly reportable swap
transactions within a specific swap category using a rolling three-year
window of data beginning with a minimum of one year’s worth of data and
adding one year of data for each calculation until a total of three
years of data is accumulated; (ii) convert to the same currency or
units and use a trimmed data set; (iii) determine the sum of the
notional amounts of swaps in the trimmed data set; (iv) multiply the
sum of the notional amount by 75 percent; (v) rank order the
observations by notional amount from least to greatest; (vi) calculate
the cumulative sum of the observations until the cumulative sum is
equal to or greater than the 75-percent notional amount calculated in
(iv); (vii) select the notional amount associated with that
observation; (viii) round the notional amount of that observation to
two significant digits, or if the notional amount associated with that
observation is already significant to two digits, increase that
notional amount to the next highest rounding point of two significant
digits; and (ix) set the appropriate minimum block size at the amount
calculated in (viii).
(d) No appropriate minimum block sizes for swaps in the equity
asset class.
[[Page 15518]]
Publicly reportable swap transactions in the equity asset class shall
not be treated as block trades or large notional off-facility swaps.
(e) Initial appropriate minimum block sizes. Prior to the
Commission making a determination as described in paragraph (f)(1) of
this section, the following initial appropriate minimum block sizes
shall apply:
(1) Prescribed appropriate minimum block sizes. Except as otherwise
provided in paragraph (e)(1) of this section, for any publicly
reportable swap transaction that falls within the swap categories
described in Sec. Sec. 43.6(b)(1), (b)(2), (b)(4)(i), (b)(5)(i) and
(b)(5)(ii), the initial appropriate minimum block size for such
publicly reportable swap transaction shall be the appropriate minimum
block size that is in appendix F to this part.
(2) Certain swaps in the foreign exchange and other commodity asset
classes. All swaps or instruments in the swap categories described in
Sec. Sec. 43.6(b)(4)(ii) and (b)(5)(iii) shall be eligible to be
treated as a block trade or large notional off-facility swap, as
applicable.
(3) Exception. Publicly reportable swap transactions described in
Sec. 43.6(b)(5)(i) that are economically related to a futures contract
in appendix B to this part shall not qualify to be treated as block
trades or large notional off-facility swaps (as applicable), if such
futures contract is not subject to a designated contract market’s block
trading rules.
(f) Post-initial process to determine appropriate minimum block
sizes.
(1) Post-initial period. After a registered swap data repository
has collected at least one year of reliable data for a particular asset
class, as determined by Commission, the Commission shall establish by
swap categories, the post-initial appropriate minimum block sizes as
described in this subsection. No less than once each calendar year
thereafter, the Commission shall update the post-initial appropriate
minimum block sizes.
(2) Post-initial appropriate minimum block sizes certain swaps. The
Commission shall determine post-initial appropriate minimum block sizes
for the swap categories described in Sec. Sec. 43.6(b)(1), (b)(2),
(b)(4) and (b)(5) by utilizing a three-year rolling window (beginning
with a minimum of one year and adding one year of data for each
calculation until a total of three years of data is accumulated) of
swap transaction and pricing data corresponding to each relevant swap
category reviewed no less than once each calendar year, and by applying
the 67-percent notional amount calculation to such data.
(3) Commission publication of post-initial appropriate minimum
block sizes. The Commission shall publish the appropriate minimum block
sizes determined pursuant to Sec. 43.6(f)(1) on its Web site at http://www.cftc.gov.
(4) Effective date of post-initial appropriate minimum block sizes.
Unless otherwise indicated on the Commission’s Web site, the post-
initial appropriate minimum block sizes described in Sec. 43.6(f)(1)
shall be effective on the first day of the second month following the
date of publication.
(g) Required notification.
(1) Block trade election. (i) The parties to a publicly reportable
swap transaction that has a notional amount at or above the appropriate
minimum block size shall notify the registered swap execution facility
or designated contract market, as applicable, pursuant to the rules of
such registered swap execution facility or designated contract market,
of its election to have the publicly reportable swap transaction
treated as a block trade.
(ii) The registered swap execution facility or designated contract
market, as applicable, pursuant to the rules of which a block trade is
executed shall notify the registered swap data repository of such a
block trade election when transmitting swap transaction and pricing
data to such swap data repository in accordance with Sec. 43.3(b)(1).
(2) Large notional off-facility swap election. A reporting party
who executes an off-facility swap that has a notional amount at or
above the appropriate minimum block size shall notify the applicable
registered swap data repository that such swap transaction qualifies as
a large notional off-facility swap concurrent with the transmission of
swap transaction and pricing data in accordance with part 43.
(h) Special provisions relating to appropriate minimum block sizes
and cap sizes. The following special rules shall apply to the
determination of appropriate minimum block sizes and cap sizes–
(1) Swaps with optionality. The notional amount of swaps with
optionality shall equal the notional amount of the component of the
swap that does not include the option component.
(2) Swaps with composite reference prices. The parties to a swap
transaction with composite reference prices may elect to apply the
lowest appropriate minimum block size or cap size applicable to one
component swap category of such publicly reportable swap transaction.
(3) Notional amounts for physical commodity swaps. Unless otherwise
specified in this part, the notional amount for a physical commodity
swap shall be based on the notional unit measure utilized in the
related futures contract market or the predominant notional unit
measure used to determine notional quantities in the cash market for
the relevant, underlying physical commodity.
(4) Currency conversion. Unless otherwise specified in this part
43, when the appropriate minimum block size or cap size for a publicly
reportable swap transaction is denominated in a currency other than
U.S. dollars, parties to a swap and registered entities may use a
currency exchange rate that is widely published within the preceding
two business days from the date of execution of the swap transaction in
order to determine such qualification.
(5) Successor currencies. For currencies that succeed a super-major
currency, the appropriate currency classification for such currency
shall be based on the corresponding nominal gross domestic product
classification (in U.S. dollars) as determined in the most recent World
Bank, World Development Indicator at the time of succession. If the
gross domestic product of the country or nation utilizing the successor
currency is:
(i) Greater than $2 trillion, then the successor currency shall be
included among the super-major currencies;
(ii) Greater than $500 billion but less than $2 trillion, then the
successor currency shall be included among the major currencies; or
(iii) Less than $500 billion, then the successor currency shall be
included among the non-major currencies.
8. Add section 43.7 to part 43 to read as follows:
Sec. 43.7 Delegation of authority.
(a) Authority. The Commission hereby delegates, until it orders
otherwise, to the Director of the Division of Market Oversight or such
other employee or employees as the Director may designate from time to
time, the authority:
(1) To determine whether swaps fall within specific swap categories
as described in Sec. 43.6(b);
(2) To determine post-initial, appropriate minimum block sizes as
described in Sec. 43.6(f); and
(3) To determine post-initial cap sizes as described in Sec.
43.4(h).
(b) Submission for Commission consideration. The Director of the
Division of Market Oversight may submit to the Commission for its
[[Page 15519]]
consideration any matter that has been delegated pursuant to this
section.
(c) Commission reserves authority. Nothing in this section
prohibits the Commission, at its election, from exercising the
authority delegated in this section. * * *
9. Amend appendix B to part 43 to add the following after “Brent
Crude Oil (ICE)”:
SP-15 Financial Day-Ahead LMP Peak Contract
SP-15 Financial Day-Ahead LMP Off-Peak Contract
PJM WH Real Time Peak Contract
PJM WH Real Time Off-Peak Contract
Mid-C Financial Peak Contract
Mid-C Financial Off-Peak Contract
ICE Chicago Financial Basis Contract
HSC Financial Basis Contract
Socal Border Financial Basis Contract
Waha Financial Basis Contract
AECO Financial Basis Contract
NWP Rockies Financial Basis Contract
PG&E Citygate Financial Basis Contract
10. Add “Appendix D to Part 43–Other Commodity Swap Categories”
after “Appendix C to Part 43–Time Delays for Public Dissemination”
to read as follows:
Appendix D–Other Commodity Swap Categories
Other Commodity Group
Individual Other Commodity
GRAINS
OATS
WHEAT
CORN
RICE
GRAINS–OTHER
LIVESTOCK/MEAT PRODUCTS
LIVE CATTLE
PORK BELLIES
FEEDER CATTLE
LEAN HOGS
LIVESTOCK/MEAT PRODUCTS-OTHER
DAIRY PRODUCTS
MILK
BUTTER
CHEESE
DAIRY PRODUCTS–OTHER
OILSEED AND PRODUCTS
SOYBEAN OIL
SOYBEAN MEAL
SOYBEANS
OILSEED AND PRODUCTS–OTHER
FIBER
COTTON
FIBER–OTHER
FOODSTUFFS/SOFTS
COFFEE
FROZEN CONCENTRATED ORANGE JUICE
SUGAR
COCOA
FOODSTUFFS/SOFTS–OTHER
PETROLEUM AND PRODUCTS
JET FUEL
ETHANOL
BIODIESEL
FUEL OIL
HEATING OIL
GASOLINE
NAPHTHA
CRUDE OIL
DIESEL
PETROLEUM AND PRODUCTS–OTHER
NATURAL GAS AND RELATED PRODUCTS
NATURAL GAS LIQUIDS
NATURAL GAS
NATURAL GAS AND RELATED PRODUCTS–OTHER
ELECTRICITY AND SOURCES
COAL
ELECTRICITY
URANIUM
ELECTRICITY AND SOURCES–OTHER
PRECIOUS METALS
PALLADIUM
PLATINUM
SILVER
GOLD
PRECIOUS METALS–OTHER
BASE METALS
STEEL
COPPER
BASE METALS–OTHER
WOOD PRODUCTS
LUMBER
PULP
WOOD PRODUCTS–OTHER
REAL ESTATE
REAL ESTATE
CHEMICALS
CHEMICALS
PLASTICS
PLASTICS
EMISSIONS
EMISSIONS
WEATHER
WEATHER
MULTIPLE COMMODITY INDEX
MULTIPLE COMMODITY INDEX
OTHER AGRICULTURAL
OTHER AGRICULTURAL
OTHER NON-AGRICULTURAL
OTHER NON-AGRICULTURAL
11. Add “Appendix E to Part 43–Other Commodity Geographic
Identification for Public Dissemination Pursuant to Sec.
43.4(d)(4)(iii)” after “Appendix D to Part 43–Other Commodity
Product Swap Categories” to read as follows:
Appendix E–Other Commodity Geographic Identification for Public
Dissemination Pursuant to Sec. 43.4(d)(4)(iii)
Registered swap data repositories shall publicly disseminate any
specific delivery point or pricing point associated with publicly
reportable swap transactions in the “other commodity” asset class
(as described in Sec. 43.4(d)(4)(iii)) pursuant to Tables E1 and
E2. If the underlying asset of a publicly reportable swap
transaction described in Sec. 43.4(d)(4)(iii) has a delivery or
pricing point that is located in the United States, such information
shall be publicly disseminated pursuant to the regions described in
Table E1. If the underlying asset of a publicly reportable swap
transaction described in Sec. 43.4(d)(4)(iii) has a delivery or
pricing point that is not located in the United States, such
information shall be publicly disseminated pursuant to the countries
or sub-regions, or if no country or sub-region, by the other
commodity region, described in Table E2.
Table E1–U.S. Delivery or Pricing Points
Other Commodity Group
Region
NATURAL GAS AND RELATED PRODUCTS
MIDWEST
NORTHEAST
GULF
SOUTHEAST
WESTERN
OTHER–U.S.
PETROLEUM AND PRODUCTS
NEW ENGLAND (PADD 1A)
CENTRAL ATLANTIC (PADD 1B)
LOWER ATLANTIC (PADD 1C)
MIDWEST (PADD 2)
GULF COAST (PADD 3)
ROCKY MOUNTAINS (PADD 4)
WEST COAST (PADD 5)
OTHER–U.S.
ELECTRICITY AND SOURCES
CALIFORNIA (CAISO)
MIDWEST (MISO)
NEW ENGLAND (ISO-NE)
NEW YORK (NYISO)
NORTHWEST
PJM
SOUTHEAST
SOUTHWEST
SOUTHWEST POWER TOOL (SPP)
TEXAS (ERCOT)
OTHER–U.S.
ALL REMAINING OTHER COMMODITIES (PUBLICLY DISSEMINATE THE REGION. IF
PRICING OR DELIVERY POINT IS NOT REGION SPECIFIC, INDICATE “U.S.”)
REGION 1–(INCLUDES CONNECTICUT, MAINE, MASSACHUSETTS, NEW
HAMPSHIRE, RHODE ISLAND, VERMONT)
REGION 2–(INCLUDES NEW JERSEY, NEW YORK)
REGION 3–(INCLUDES DELAWARE, DISTRICT OF COLUMBIA, MARYLAND,
PENNSYLVANIA, VIRGINIA, WEST VIRGINIA)
REGION 4–(INCLUDES ALABAMA, FLORIDA, GEORGIA, KENTUCKY,
MISSISSIPPI, NORTH CAROLINA, SOUTH CAROLINA, TENNESSEE)
REGION 5–(INCLUDES ILLINOIS, INDIANA, MICHIGAN, MINNESOTA,
OHIO, WISCONSIN)
REGION 6–(INCLUDES ARKANSAS, LOUISIANA, NEW MEXICO, OKLAHOMA,
TEXAS)
REGION 7–(INCLUDES IOWA, KANSAS, MISSOURI, NEBRASKA)
REGION 8–(INCLUDES COLORADO, MONTANA, NORTH DAKOTA, SOUTH
DAKOTA, UTAH, WYOMING)
REGION 9–(INCLUDES ARIZONA, CALIFORNIA, HAWAII, NEVADA)
REGION 10–(INCLUDES ALASKA, IDAHO, OREGON, WASHINGTON)
Table E2–Non-U.S. Delivery or Pricing Points
Other Commodity Regions With Countries or Sub-Regions
NORTH AMERICA (OTHER THAN U.S.)
[[Page 15520]]
CANADA
MEXICO
CENTRAL AMERICA
SOUTH AMERICA
BRAZIL
OTHER SOUTH AMERICA
EUROPE
WESTERN EUROPE
NORTHERN EUROPE
SOUTHERN EUROPE
EASTERN EUROPE (EXCLUDING RUSSIA)
RUSSIA
AFRICA
NORTHERN AFRICA
WESTERN AFRICA
EASTERN AFRICA
CENTRAL AFRICA
SOUTHERN AFRICA
ASIA-PACIFIC
NORTHERN ASIA (EXCLUDING RUSSIA)
CENTRAL ASIA
EASTERN ASIA
WESTERN ASIA
SOUTHEAST ASIA
AUSTRALIA/NEW ZEALAND/PACIFIC ISLANDS
12. Add “Appendix F to Part 43–Initial Appropriate Minimum Sizes
for Block Trades and Large Notional Off-facility Swaps” after
“Appendix E to Part 43–Other Commodity Geographic Identification for
Public Dissemination Pursuant to Sec. 43.4(d)(4)(iii)(B)” to read as
follows:
Appendix F–Initial Appropriate Minimum Block Sizes by Asset Class
————————————————————————
Currency group Currencies
————————————————————————
Super-Major Currencies……. United States dollar (USD), European
Union Euro Area euro (EUR), United
Kingdom pound sterling (GBP), and Japan
yen (JPY).
Major Currencies…………. Australia dollar (AUD), Switzerland franc
(CHF), Canada dollar (CAD), Republic of
South Africa rand (ZAR), Republic of
Korea won (KRW), Kingdom of Sweden krona
(SEK), New Zealand dollar (NZD), Kingdom
of Norway krone (NOK), and Denmark krone
( DKK).
Non-Major Currencies……… All other currencies.
————————————————————————
Interest Rate Swaps
—————————————————————————————————————-
Tenor less than or equal 67% Notional (in
Currency group Tenor greater than to millions)
—————————————————————————————————————-
Super-Major………………………. …………………….. Three months (107 days).. 6,400
Super-Major………………………. Three months (107 days)… Six months (198 days)…. 1,900
Super-Major………………………. Six months (198 days)….. One year (381 days)…… 1,600
Super-Major………………………. One year (381 days)……. Two years (746 days)….. 750
Super-Major………………………. Two years (746 days)…… Five years (1,842 days).. 380
Super-Major………………………. Five years (1,842 days)… Ten years (3,668 days)… 290
Super-Major………………………. Ten years (3,668 days)…. 30 years (10,973 days)… 210
Super-Major………………………. 30 years (10,973 days)…. ……………………. 130
Major……………………………. …………………….. Three months (107 days).. 970
Major……………………………. Three months (107 days)… Six months (198 days)…. 470
Major……………………………. Six months (198 days)….. One year (381 days)…… 320
Major……………………………. One year (381 days)……. Two years (746 days)….. 190
Major……………………………. Two years (746 days)…… Five years (1,842 days).. 110
Major……………………………. Five years (1,842 days)… Ten years (3,668 days)… 73
Major……………………………. Ten years (3,668 days)…. 30 years (10,973 days)… 50
Major……………………………. 30 years (10,973 days)…. ……………………. 22
Non-Major………………………… …………………….. Three months (107 days).. 320
Non-Major………………………… Three months (107 days)… Six months (198 days)…. 240
Non-Major………………………… Six months (198 days)….. One year (381 days)…… 160
Non-Major………………………… One year (381 days)……. Two years (746 days)….. 79
Non-Major………………………… Two years (746 days)…… Five years (1,842 days).. 40
Non-Major………………………… Five years (1,842 days)… Ten years (3,668 days)… 22
Non-Major………………………… Ten years (3,668 days)…. 30 years (10,973 days)… 24
Non-Major………………………… 30 years (10,973 days)…. ……………………. 22
—————————————————————————————————————-
Credit Swaps
—————————————————————————————————————-
Traded tenor less than or 67% Notional (in
Spread group (basis points) Traded tenor greater than equal to millions)
—————————————————————————————————————-
Less than or equal to 175………….. …………………….. Two years (746 days)….. 510
Less than or equal to 175………….. Two years (746 days)…… Four years (1,477 days).. 300
Less than or equal to 175………….. Four years (1,477 days)… Six years (2,207 days)… 190
Less than or equal to 175………….. Six years (2,207 days)…. Eight years and six 250
months (3,120 days).
Less than or equal to 175………….. Eight years and six months Twelve years and six 130
(3,120 days). months (4,581 days).
Less than or equal to 175………….. Twelve years and six ……………………. 110
months (4,581 days).
Greater than 175 and less than or equal …………………….. Two years (746 days)….. 210
to 350.
Greater than 175 and less than or equal Two years (746 days)…… Four years (1,477 days).. 130
to 350.
Greater than 175 and less than or equal Four years (1,477 days)… Six years (2,207 days)… 36
to 350.
[[Page 15521]]
Greater than 175 and less than or equal Six years (2,207 days)…. Eight years and six 26
to 350. months (3,120 days).
Greater than 175 and less than or equal Eight years and six months Twelve years and six 64
to 350. (3,120 days). months (4,581 days).
Greater than 175 and less than or equal Twelve years and six ……………………. 120
to 350. months (4,581 days).
Greater than 350………………….. …………………….. Two years (746 days)….. 110
Greater than 350………………….. Two years (746 days)…… Four years (1,477 days).. 73
Greater than 350………………….. Four years (1,477 days)… Six years (2,207 days)… 51
Greater than 350………………….. Six years (2,207 days)…. Eight years and six 21
months (3,120 days).
Greater than 350………………….. Eight years and six months Twelve years and six 21
(3,120 days). months (4,581 days).
Greater than 350………………….. Twelve years and six ……………………. 51
months (4,581 days).
—————————————————————————————————————-
BILLING CODE 6351-01-P
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BILLING CODE 6351-01-C
Issued in Washington, DC, on February 23, 2012, by the
Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Procedures To Establish Appropriate Minimum Block Sizes
for Large Notional Off-Facility Swaps and Block Trades–Commission
Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1–Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative; Commissioners Sommers and O’Malia
voted in the negative.
Appendix 2–Statement of Chairman Gary Gensler
I support the block rule proposal, which promotes both pre-trade
and post-trade transparency. The derivatives reforms in the Dodd-
Frank Wall Street Reform and Consumer Protection Act, including
bringing transparency to the swaps market, will lead to significant
benefits for the real economy–that which makes up over 94 percent
of private sector jobs in America. Transparency also helps all
Americans who depend on pension funds, mutual funds, community banks
and insurance companies.
[FR Doc. 2012-5950 Filed 3-14-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: March 15, 2012
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