Federal Register, Volume 80 Issue 183 (Tuesday, September 22, 2015)

[Federal Register Volume 80, Number 183 (Tuesday, September 22, 2015)]

[Proposed Rules]

[Pages 57129-57136]

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

[FR Doc No: 2015-24021]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE17

Proposal To Amend the Definition of “Material Terms” for

Purposes of Swap Portfolio Reconciliation

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (“Commission” or

“CFTC”) proposes to amend a provision of the Commission’s regulations

in connection with the material terms for which counterparties must

resolve discrepancies when engaging in portfolio reconciliation.

DATES: Comments must be received on or before November 23, 2015.

ADDRESSES: You may submit comments, identified by RIN 3038-AE17, and

Proposal to Amend the Definition of “Material Terms” for Purposes of

Swap Portfolio Reconciliation 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: Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

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

Hand Delivery/Courier: Same as Mail above.

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

Follow the instructions for submitting comments.

Please submit your comments using only one method.

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

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

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

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

information that 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 17 CFR 145.9. Commission regulations referred to herein are

found at 17 CFR Chapter I.

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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 http://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: Frank N. Fisanich, Chief Counsel, 202-

418-5949, [email protected]; Katherine S. Driscoll, Associate Chief

Counsel, 202-418-5544, [email protected]; Gregory Scopino, Special

Counsel, 202-418-5175, [email protected], Division of Swap Dealer and

Intermediary Oversight, Commodity Futures Trading Commission, Three

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

SUPPLEMENTARY INFORMATION:

I. Background

On September 11, 2012, the Commission published in the Federal

Register final rules Sec. 23.500 through Sec. 23.505 2 establishing

requirements for the timely and accurate confirmation of swaps, the

reconciliation and compression of swap portfolios, and documentation of

swap trading relationships between swap dealers (“SDs”),3 major

swap participants (“MSPs”),4 and their counterparties. These

regulations were promulgated by the Commission pursuant to the

authority granted under Sections 4s(h)(1)(D), 4s(h)(3)(D), and 4s(i) of

the Commodity Exchange Act (the “CEA”),5

[[Page 57130]]

as amended by Section 731 of the Dodd-Frank Wall Street Reform and

Consumer Protection Act (the “Dodd-Frank Act”),6 which, among other

things, directed the Commission to prescribe regulations for the timely

and accurate confirmation, processing, netting, documentation and

valuation of all swaps entered into by SDs and MSPs,7 and the

Commission’s general rulemaking authority under Section 8a(5) of the

CEA.8

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2 Confirmation, Portfolio Reconciliation, Portfolio

Compression, and Swap Trading Relationship Documentation

Requirements for Swap Dealers and Major Swap Participants, 77 FR

55904 (Sept. 11, 2012) (hereinafter, “Portfolio Reconciliation

Final Rule”).

3 Generally, an SD is any person who, in addition to

transacting in a notional amount of swaps in excess of specified de

minimis thresholds, holds itself out as a dealer in swaps, makes a

market in swaps, regularly enters into swaps with counterparties as

an ordinary course of business for its own account, or engages in

any activity causing it to be commonly known in the trade as a

dealer or market maker in swaps. See 7 U.S.C. 1a(49); 17 CFR

1.3(ggg).

4 Generally, an MSP is any non-dealer that maintains a

substantial position in swaps for any of the specified major swap

categories, whose outstanding swaps create substantial counterparty

exposure that could have serious adverse effects on the financial

stability of the United States banking system or financial markets,

or any financial entity that is highly leveraged relative to the

amount of capital such entity holds and that is not subject to

capital requirements established by an appropriate Federal banking

agency and maintains a substantial position in outstanding swaps in

any major swap category. See 7 U.S.C. 1a(33); 17 CFR 1.3(hhh).

5 7 U.S.C. 6s(h)(1)(D), 6s(h)(3)(D) and 6s(i).

6 Dodd-Frank Wall Street Reform and Consumer Protection Act,

Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).

7 Portfolio Reconciliation Final Rule, 77 FR at 55926

(“[P]ortfolio reconciliation involves both confirmation and

valuation and serves as a mechanism to ensure accurate

documentation.”).

8 7 U.S.C. 12a(5).

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Under Sec. 23.502,9 SDs and MSPs must reconcile their swap

portfolios with one another and provide non-SD and non-MSP

counterparties with regular opportunities for portfolio

reconciliation.10 Section 23.500(i) 11 defines the term,

“portfolio reconciliation,” as “any process by which the two parties

to one or more swaps: (1) Exchange the terms of all swaps in the swap

portfolio between the counterparties; (2) exchange each counterparty’s

valuation of each swap in the swap portfolio between the counterparties

as of the close of business on the immediately preceding business day;

and (3) resolve any discrepancy in material terms and valuations.”

Section 23.500(g) defines “material terms” to mean “all terms of a

swap required to be reported in accordance with part 45 of this

chapter.” 12 Thus, portfolio reconciliation seeks to enable “the

swap market to operate efficiently and to reduce systemic risk” 13

by requiring counterparties periodically to (1) exchange the terms of

their mutual swaps, and (2) locate and resolve discrepancies in

material terms of mutual swaps. In particular, the Commission

recognized that “portfolio reconciliation [would] facilitate the

identification and resolution of discrepancies between the

counterparties with regard to valuations of collateral held as

margin.” 14 The Commission also has described portfolio

reconciliation, generally, as follows:

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9 17 CFR 23.502.

10 17 CFR 23.502; see Portfolio Reconciliation Final Rule, 77

FR at 55926.

11 17 CFR 23.500(i).

12 17 CFR 23.500(g). Part 45 of the Commission regulations

govern swap data recordkeeping and reporting requirements. The swap

terms that must be reported under part 45 are found in appendix 1 to

part 45. See 17 CFR part 45, App. 1; see also 17 CFR 45.1 (defining

“primary economic terms” as “all of the terms of a swap matched

or affirmed by the counterparties in verifying the swap,” including

“at a minimum each of the terms included in the most recent Federal

Register release by the Commission listing minimum primary economic

terms for swaps in the swap asset class in question” and stating

that the current list of minimum primary economic terms is in

appendix 1); Swap Data Recordkeeping and Reporting Requirements, 77

FR 2197 (Jan. 13, 2012) (promulgating the list of primary economic

terms). Examples of primary economic terms include the price of the

swap, payment frequency, type of contract (e.g., a “vanilla

option” or “complex exotic option”), execution timestamp, and, if

the swap is a multi-asset class swap, the primary and secondary

asset classes. 17 CFR part 45, App. 1.

13 Portfolio Reconciliation Final Rule, 77 FR at 55926.

14 Id. In response to comments that industry practice was only

to resolve swap terms that lead to material collateral disputes, the

Commission, in promulgating the final Sec. 23.502, emphasized the

importance of both (1) resolving disputes related to the material

terms of swaps and (2) resolving valuation disputes impacting margin

payments. Id. at 55926-27, 55929-31.

Portfolio reconciliation is a post-execution processing and risk

management technique that is designed to (i) identify and resolve

discrepancies between the counterparties with regard to the terms of

a swap either immediately after execution or during the life of the

swap; (ii) ensure effective confirmation of terms of the swap; and

(iii) identify and resolve discrepancies between the counterparties

regarding the valuation of the swap.15

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15 Portfolio Reconciliation Final Rule, 77 FR at 55926.

In adopting Sec. 23.502, the Commission intended to require that

SDs, MSPs, and their counterparties engage in portfolio reconciliation

at regular intervals. Explaining the rationale for Sec. 23.502, the

Commission noted that portfolio reconciliation can identify and reduce

overall risk “[b]y identifying and managing mismatches in key economic

terms and valuation for individual transactions across an entire

portfolio.” 16 Portfolio reconciliation is not required for cleared

swaps where a derivatives clearing organization (“DCO”) holds the

definitive record of the trades and determines binding daily valuations

for the swaps.17

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16 Id.

17 Id. at 55927.

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II. Proposed Regulation

In 2013, the International Swaps and Derivatives Association, Inc.

(“ISDA”) requested interpretive guidance from Commission staff that

would permit certain swap data elements to be excluded from portfolio

reconciliation as required under Sec. 23.502.18 Specifically, ISDA

requested that “the terms” of a swap that counterparties must

exchange during portfolio reconciliation exercises be limited to the

“material terms” of a swap, and that “material terms” have the same

meaning as “primary economic terms” in Sec. 45.1. ISDA further asked

that the following data fields (hereinafter referred to as the “No-

Action Excluded Data Fields”) be excluded from the definition of

“material terms” for purposes of compliance with Sec. 23.502:

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18 See CFTC Staff Letter No. 13-31 (June 26, 2013), available

at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-31.pdf.

1. An indication that the swap will be allocated;

2. If the swap will be allocated, or is a post-allocation swap, the

legal entity identifier 19 of the agent;

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19 A legal entity identifier is “a 20-digit, alpha-numeric

code, to uniquely identify legally distinct entities that engage in

financial transactions.” See Legal Entity Identifier Regulatory

Oversight Committee, http://www.leiroc.org/; 17 CFR 45.6.

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3. An indication that the swap is a post-allocation swap;

4. If the swap is a post-allocation swap, the unique swap identifier;

20

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20 A unique swap identifier is a unique identifier assigned to

all swap transactions which identifies the transaction (the swap and

its counterparties) uniquely throughout the duration of the swap’s

existence. See 17 CFR 45.5.

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5. Block trade indicator;

6. Execution timestamp;

7. Timestamp for submission to swap data repository (“SDR”); 21

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21 A swap data repository is any person that collects and

maintains information or records with respect to transactions or

positions in, or the terms and conditions of, swaps entered into by

third parties for the purpose of providing a centralized

recordkeeping facility for swaps. 7 U.S.C. 1a(48); 17 CFR 1.3(qqqq).

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8. Clearing indicator;

9. Clearing venue;

10. If the swap will not be cleared, an indication of whether the

clearing requirement exception in CEA Section 2(h)(7) 22 has been

elected; and

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22 Generally speaking, Section 2(h)(1)(A) of the CEA

establishes a clearing requirement for swaps, providing that “[i]t

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

person submits such swap for clearing to a derivatives clearing

organization that is registered under [the CEA] or a derivatives

clearing organization that is exempt from registration under [the

CEA] if the swap is required to be cleared.” 7 U.S.C. 2(h)(1)(A).

CEA Section 2(h)(7), however, provides for several limited

exceptions to the clearing requirement of Section 2(h)(1)(A). Id. at

2(h)(7); see also End-User Exception to the Clearing Requirement for

Swaps, 77 FR 42560, 42560-61 (July 19, 2012).

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11. The identity of the counterparty electing the clearing requirement

exception in CEA Section 2(h)(7).23

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23 CFTC Staff Letter No. 13-31 at 2-3.

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ISDA contended generally that the definition of “material terms”

in Sec. 23.500(g) is too broad to guide market participants in the

construction of a reconciliation process, and with regard to the No-

Action Excluded Data Fields specifically, ISDA argued that these fields

are not relevant to the portfolio reconciliation process because they

pertain to the circumstances

[[Page 57131]]

surrounding entry into a transaction, and whether a transaction was

intended to be cleared, and are not relevant to ongoing rights and

obligations under swaps in a swap portfolio existing bilaterally

between an SD and a counterparty.

After considering ISDA’s request, the Commission’s Division of Swap

Dealer and Intermediary Oversight (the “Division”) provided SDs and

MSPs with no-action relief on June 26, 2013, pursuant to CFTC Staff

Letter 13-31.24 In such letter, the Division chose not to interpret

the reference to “the terms” of a swap in Sec. 23.500(i)(1) as

meaning the “material terms” or to define “material terms” to mean

the “primary economic terms” of a swap minus the No-Action Excluded

Data Fields. Rather, the Division merely stated that it would not

recommend an enforcement action against an SD or MSP that omits the No-

Action Excluded Data Fields from the portfolio reconciliation process

required under Sec. 23.502.25 Thus, it appears that following the

issuance of CFTC Staff Letter 13-31, an SD that chose to take advantage

of the relief could consider the No-Action Excluded Data Fields not to

be terms of a swap required to be exchanged with a counterparty in a

portfolio reconciliation exercise.

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24 See id.

25 Id. at 3.

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Against this background, the Commission is now proposing to amend

the definition of “material terms” in Sec. 23.500(g) to specifically

exclude a modified version of the No-Action Excluded Data Fields. As

amended, Sec. 23.500(g) would exclude the following data fields from

the definition of “material terms” (hereinafter referred to as the

“Proposed Excluded Data Fields”):

1. An indication that the swap will be allocated;

2. If the swap will be allocated, or is a post-allocation swap, the

legal entity identifier 26 of the agent;

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26 A legal entity identifier is “a 20-digit, alpha-numeric

code, to uniquely identify legally distinct entities that engage in

financial transactions.” See Legal Entity Identifier Regulatory

Oversight Committee, http://www.leiroc.org/; 17 CFR 45.6.

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3. An indication that the swap is a post-allocation swap;

4. If the swap is a post-allocation swap, the unique swap identifier;

27

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27 A unique swap identifier is a unique identifier assigned to

all swap transactions which identifies the transaction (the swap and

its counterparties) uniquely throughout the duration of the swap’s

existence. See 17 CFR 45.5.

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5. Block trade indicator;

6. With respect to a cleared swap, the execution timestamp;

7. With respect to a cleared swap, the timestamp for submission to SDR;

8. Clearing indicator; and

9. Clearing venue.

The Proposed Excluded Data Fields modify the No-Action Excluded

Data Fields by: (1) Amending the execution timestamp data field to be

specific to cleared swaps; (2) amending the timestamp for submission to

an SDR data field to be specific to cleared swaps; (3) removing the

data field containing an indication of whether the clearing requirement

exception in CEA Section 2(h)(7) has been elected with respect to an

uncleared swap; and (4) removing the data field containing the identity

of the counterparty electing the clearing requirement exception in CEA

Section 2(h)(7). The Commission is proposing to retain these data

fields for uncleared swaps as “material terms” because a discrepancy

in this information in the records of the counterparties could mean

that the related information is erroneous in the records of an SDR,

which could have an impact on the Commission’s regulatory mission.

The time of execution of an uncleared swap and the time of

submission to an SDR is of regulatory value to the Commission for

purposes of determining the compliance of SDs and MSPs with Commission

regulations.28 Similarly, the identity of a counterparty electing the

end-user exception to clearing is important to the Commission’s

enforcement of the clearing requirement and its monitoring of systemic

risk in the OTC markets under its jurisdiction. Thus, the Commission

believes it is reasonable to require SDs, MSPs, and their

counterparties to resolve any discrepancy in these data fields and, if

necessary, correct the information reported to an SDR.29

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28 For example, among other things, the time of execution of a

swap between an SD and a counterparty may be relevant to determining

the SD’s compliance with the deadlines for confirmation of the swap

set forth in Sec. 23.501. Likewise, the time of execution and the

time of reporting to an SDR may be relevant to determining the SD’s

compliance with the reporting deadlines set forth in part 45 of the

Commission’s regulations.

29 Reporting counterparties are required to correct errors and

omissions in data previously reported to an SDR pursuant to Sec.

45.14.

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The Commission intends that, if and when the proposed amendment to

the definition of “material terms” is adopted, it will direct the

Division to withdraw the no-action relief provided pursuant to CFTC

Letter 13-31. Accordingly, under this proposal, the Commission is

maintaining the status quo of Sec. 23.502 in that SDs and MSPs and

their counterparties would be required to exchange “the terms” of a

swap as required under Sec. 23.500(i)(1) and would have to resolve

discrepancies in “material terms” of swaps pursuant to Sec.

23.502(a)(4) and (b)(4). However, “material terms” would not include

the Proposed Excluded Data Fields. This requirement differs from what

may be the current practice of SDs and MSPs that have chosen to take

advantage of the relief provided in CFTC Staff Letter 13-31. Such SDs

and MSPs may be omitting the No-Action Excluded Data Fields from the

portfolio reconciliation process altogether and not exchanging such

terms at all, or if exchanging them, choosing not to resolve

discrepancies that may be discovered. If the Commission’s proposal is

adopted, such SDs and MSPs would be required to resume exchanging the

terms included in the Proposed Excluded Data Fields, although they

could continue the practice of choosing not to resolve discrepancies in

such terms. In addition, SDs and MSPs would have to resolve

discrepancies in execution and SDR submission timestamps for cleared

swaps, and discrepancies in the identities of counterparties electing

the end-user exception from clearing, which may not be the practice for

SDs and MSPs that have been relying on CFTC Staff Letter 13-31.

It is the intention of the Commission’s proposal to alleviate the

burden of resolving discrepancies in terms of a swap that are not

relevant to the ongoing rights and obligations of the parties and the

valuation of the swap, or to the Commission’s regulatory mission.

However, with respect to at least some of the No-Action Excluded Data

Fields and the corresponding information that is included in the

Proposed Excluded Data Fields, the Commission questions whether such

data is actually required to be included in any ongoing portfolio

reconciliation exercise. For example, the “clearing indicator” and

“clearing venue” items included in the Proposed Excluded Data Fields

pertain to a swap only until it is extinguished when accepted for

clearing by a DCO.30 When extinguished, the original swap would no

longer be subject to portfolio reconciliation,31 and, as explained

[[Page 57132]]

above, portfolio reconciliation is not required for cleared swaps.32

As noted below, the Commission seeks comment on whether such terms

should be included in the Proposed Excluded Data Fields.

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30 See 17 CFR 23.504(b)(6) (” . . . upon acceptance of a swap

by a derivatives clearing organization: (i) The original swap is

extinguished; (ii) The original swap is replaced by equal and

opposite swaps with the derivatives clearing organization; and (iii)

All terms of the swap shall conform to the product specifications of

the cleared swap established under the derivative clearing

organization’s rules.”).

31 The Commission notes that portfolio reconciliation only

applies to swaps currently in effect between an SD or MSP and a

particular counterparty, not to expired or terminated swaps. See

Definition of “swap portfolio,” 17 CFR 23.500(k).

32 Portfolio Reconciliation Final Rule, 77 FR at 55927.

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Finally, the Commission notes that it is not proposing an amendment

to Sec. 23.500(i)(1) that would exclude the Proposed Excluded Data

Fields from portfolio reconciliation altogether. Thus the Commission is

not proposing to change the existing requirement under Sec. 23.502

that parties must exchange terms of all swaps in a mutual portfolio,

but need only resolve discrepancies over material terms and valuations.

As stated above, the Commission recognizes that the proposed amendment

would not have the same effect as the no-action relief provided by the

Division in CFTC Staff Letter 13-31. Nevertheless, the Commission has

determined that it would be premature to propose to codify the staff

relief without considering comments from the public on the nature of

the post-Dodd-Frank-Act portfolio reconciliation process and how the

Proposed Excluded Data Fields relate to that process.

III. Request for Comment

To ensure that the proposed rule would, if adopted, achieve its

stated purpose, the Commission requests comment generally on all

aspects of the proposed rule. Specifically, the Commission requests

comment on the following:

Should the Commission amend its regulations to provide

relief identical to that granted in CFTC Letter No. 13-31?

Alternatively, should the Commission amend Sec. 23.500(i)(1) so that

counterparties only have to exchange the “material terms” (which

would not include the Proposed Excluded Data Fields) of swaps? Or,

lastly, should the Commission adopt its current proposal which is to

only remove the Proposed Excluded Data Fields from the definition of

“material terms” that counterparties must resolve for discrepancies

pursuant to Sec. 23.500(i)(3)?

Should the Commission’s Proposed Excluded Data Fields not

include the execution and SDR submission timestamps for uncleared

swaps? Please explain why or why not.

Should the Commission’s Proposed Excluded Data Fields

include an indication of the election of the clearing exception in CEA

Section 2(h)(7) and/or the identity of the counterparty electing such

clearing requirement exception? Please explain why or why not.

Are there other items in the Proposed Excluded Data Fields

that may have material regulatory value to the Commission or that may

be relevant to the ongoing rights and obligations of the parties and

the valuation of the swap and, thus, should not be included in the

Proposed Excluded Data Fields? Please explain why or why not.

Is each of the Proposed Excluded Data Fields actually

required to be included in any ongoing portfolio reconciliation

exercise, and, if not, should any such term be removed from the list of

Proposed Excluded Data Fields? Please explain why or why not.

Should any other “material term” as defined in Sec.

23.500(g) be included in the list of Proposed Excluded Data Fields?

Please explain why or why not.

Should the Commission amend Sec. 23.500(g) so that the

term, “material terms,” is defined as all terms of a swap required to

be reported in accordance with part 45 of the Commission regulations

other than the Proposed Excluded Data Fields, as proposed? Please

explain why or why not.

To what extent does the proposed amendment facilitate (or

fail to facilitate) the policy objectives of portfolio reconciliation?

Feel free to reference specific terms listed in the Proposed Excluded

Data Fields in your answer.

Where are the cost savings realized by not having to

resolve discrepancies in the Proposed Excluded Data Fields? If any

other alternative approach should be considered, what cost savings

would be realized by such alternative approach? Commenters are

encouraged to quantify these cost savings.

IV. Related Matters

A. Regulatory Flexibility Act.

The Regulatory Flexibility Act 33 requires that agencies consider

whether the rules they propose will have a significant economic impact

on a substantial number of small entities and, if so, provide a

regulatory flexibility analysis reflecting the impact. For purposes of

resolving any discrepancy in material terms and valuations, the

proposed regulation would amend the definition in Sec. 23.500(g) of

the Commission regulations so that the term “material terms” (which

is used in Sec. 23.500(i)(3)) is defined as all terms of a swap

required to be reported in accordance with part 45 of the Commission’s

regulations other than the Proposed Excluded Data Fields. As noted

above, clause (3) of the definition of “portfolio reconciliation” in

Sec. 23.500(i) requires the parties to resolve any discrepancy in

“material terms” and valuations. As a result of the proposed change

to the definition of “material terms” in Sec. 23.500(g) of the

Commission regulations, SDs and MSPs would not need to include the

Proposed Excluded Data Fields 34 in any resolution of discrepancies

of material terms or valuations when engaging in portfolio

reconciliation. The Commission has previously determined that SDs and

MSPs are not small entities for purposes of the Regulatory Flexibility

Act.35 Furthermore, any financial end users that may be indirectly

36 impacted by the proposed rule are likely to be eligible contract

participants, and, as such, they would not be small entities.37

—————————————————————————

33 5 U.S.C. 601 et seq.

34 See section II above for a list of “Proposed Excluded Data

Fields” and proposed Sec. 23.500(g) of the Commission regulations.

35 Policy Statement and Establishment of Definitions of

“Small Entities” for Purposes of the Regulatory Flexibility Act,

47 FR 18618, 18619 (Apr. 30, 1982).

36 The Regulatory Flexibility Act focuses on direct impact to

small entities and not on indirect impacts on these businesses,

which may be tenuous and difficult to discern. See Mid-Tex Elec.

Coop., Inc. v. FERC, 773 F.2d 327, 340 (D.C. Cir. 1985); Am.

Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985).

37 See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25,

2001).

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Thus, for the reasons stated above, the Commission preliminarily

believes that the proposal will not have a significant economic impact

on a substantial number of small entities. Accordingly, the Chairman,

on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

605(b), that the proposed regulations in this Federal Register release

would not have a significant economic impact on a substantial number of

small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) 38 imposes certain

requirements on Federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

information, as defined by the PRA. An agency may not conduct or

sponsor, and a person is not required to respond to, a collection of

information unless it displays a currently valid control number. This

proposed rulemaking would result in an amendment to existing collection

of information OMB Control Number 3038-0068 with respect to the

collection of information entitled “Confirmation, Portfolio

Reconciliation, and Portfolio Compression Requirements for Swap Dealers

and

[[Page 57133]]

Major Swap Participants.” 39 The Commission is therefore submitting

this proposal to the Office of Management and Budget (OMB) for review.

The Commission previously discussed, for purposes of the PRA, the

burden 40 that the regulation mandating, inter alia, portfolio

reconciliation would impose on market participants.41 In particular,

the Commission estimated the burden to be 1,282.5 hours for each SD and

MSP, and the aggregate burden for registrants–based on a then-

projected 125 registrants–was 160,312.5 burden hours.42 Since the

Commission finalized the rules for SDs and MSPs, 104 entities have

provisionally registered as SDs and two entities have provisionally

registered as MSPs, for a total of 106 registrants.43 Accordingly,

based on the original estimate of 1,282.5 burden hours for each SD and

MSP, the aggregate burden for all registrants is estimated at 135,945

burden hours.

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38 44 U.S.C. 3501 et seq.

39 See OMB Control No. 3038-0068, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0068.

40 “For purposes of the PRA, the term `burden’ means the

`time, effort, or financial resources expended by persons to

generate, maintain, or provide information to or for a Federal

Agency.’ ” Portfolio Reconciliation Final Rule, 77 FR at 55959.

41 Portfolio Reconciliation Final Rule, 77 FR at 55958-60.

42 Portfolio Reconciliation Final Rule, 77 FR at 55959.

43 Provisionally Registered Swap Dealers as of June 17, 2015,

http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer;

Provisionally Registered Major Swap Participants as of March 1,

2013, http://www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart.

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The proposed regulation would amend the definition in Sec.

23.500(g) of the Commission regulations so that the term “material

terms” (which is used in Sec. 23.500(i)(3)) is defined as all terms

of a swap required to be reported in accordance with part 45 of the

Commission’s regulations other than the Proposed Excluded Data

Fields.44 As noted above, clause (3) of the definition of “portfolio

reconciliation” in Sec. 23.500(i) requires the parties to resolve any

discrepancy in “material terms” and valuations. The proposed change

would clarify that SDs and MSPs would not need to include the Proposed

Excluded Data Fields in any resolution of discrepancies of material

terms or valuations.

—————————————————————————

44 As noted earlier, the proposed rule is amending the

definition of the term “material terms” at Sec. 23.500(g) to

exclude nine data fields that would not be considered “material

terms” in the definition of the term “portfolio reconciliation”

of Sec. 23.500(i)(3).

—————————————————————————

As discussed above, the rule change proposed herein would reduce

the number of “material terms” that counterparties would need to

resolve for discrepancies in portfolio reconciliation exercises, but

would not eliminate the portfolio reconciliation requirement itself.

However, the Commission believes that the changes proposed to the

regulatory definition of “material terms” described herein would

reduce the time burden for portfolio reconciliation by one burden hour

for each SD and MSP, which would reduce the annual burden to 1,281.5

hours per SD and MSP. The Commission believes that the proposed rule

would result in one hour of less work for computer programmers for SDs

and MSPs because the programmers who have to match the needed data

fields from two different databases would have fewer data fields to

obtain and resolve for discrepancies. Given that there are 106

provisionally registered SDs and MSPs, the proposed rule, if adopted,

would result in an aggregate burden of 135,839 burden hours. The

Commission welcomes comments about the potential impact that this

proposal would have on the time and cost burden associated with

portfolio reconciliation.

1. Information Collection Comments

The Commission invites the public and other Federal agencies to

comment on any aspect of the reporting burdens discussed above.

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

in order to: (1) Evaluate whether the proposed collection of

information is necessary for the proper performance of the functions of

the Commission, including whether the information will have practical

utility; (2) evaluate the accuracy of the Commission’s estimate of the

burden of the proposed collection of information; (3) determine whether

there are ways to enhance the quality, utility, and clarity of the

information to be collected; and (4) mitigate the burden of the

collection 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, by fax at (202) 395-6566 or by email at

[email protected]. Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

addressed in the final rule preamble. Refer to the ADDRESSES section of

this notice of proposed rulemaking for comment submission instructions

to the Commission. A copy of the supporting statement for the

collection of information discussed above may be obtained by visiting

http://reginfo.gov/. OMB is required to make a decision concerning the

collection of information between 30 and 60 days after publication of

this document in the Federal Register. Therefore, a comment is best

assured of having its full effect if OMB receives it within 30 days of

publication.

C. Considerations of Costs and Benefits

Section 15(a) of the CEA 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. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

section 15(a) factors.

1. Background

The Commission believes that, while portfolio reconciliation

generally helps counterparties to manage risk by facilitating the

resolution of discrepancies in material terms of swaps, forcing

entities to resolve discrepancies in the Proposed Excluded Data Fields

does not improve the management of risks in swaps portfolios. By

eliminating the need to resolve discrepancies over material swap terms

that remain constant (and that do not impact the valuation of the swap

or the payment obligations of the counterparties) and thereby reducing

the number of data fields that parties must resolve for differences in

portfolio reconciliation exercises, the Commission believes this

proposal will slightly decrease the costs that its regulations impose

on SDs and MSPs (and their counterparties) without a concomitant

reduction in the benefits obtained from portfolio reconciliation

exercises under the existing regulatory framework, as described below.

2. Costs

The Commission believes this proposal will slightly decrease the

costs that its regulations impose on SDs and MSPs (and their

counterparties) because it would eliminate the need to verify and

resolve discrepancies in swap terms that remain constant (or that do

not impact the valuation of swaps or the payment obligations of the

counterparties) and thereby reduce the number of data fields requiring

particular attention in portfolio

[[Page 57134]]

reconciliation exercises.45 As mentioned previously, the Commission

believes that this change will reduce the annual burden hours for each

SD and MSP by one hour, resulting in a total of 1,281.5 hours, which

leads to an aggregate number, based on 106 registrants, of 135,839

burden hours. The Commission previously estimated that, assuming

1,282.5 annual burden hours per SD and MSP, the financial cost of its

regulations on each SD and MSP would be $128,250.46 Therefore, based

on those prior estimates, a one-hour reduction in the annual burden

hours for each SD and MSP would result in a financial cost of $128,150

per registrant. Accordingly, the Commission estimates that, if the

proposed rule is adopted, the aggregate financial burden of its

regulations on SDs and MSPs would be $13,583,900.47

—————————————————————————

45 The Commission notes the existence of CFTC Staff Letter No.

13-31 and that the Proposal, if finalized, could increase the burden

for SDs, MSPs, and their counterparties relying on the relief in

that letter.

46 Portfolio Reconciliation Final Rule, 77 FR at 55959.

47 The Commission had estimated that, if 125 entities had

registered as SDs and MSPs, the aggregate burden would be

$16,031,250. Id.

—————————————————————————

The Commission does not believe the proposed regulation would

increase the Commission’s costs or impair the Commission’s ability to

oversee and regulate the swaps markets. Portfolio reconciliation is

designed to enable counterparties to understand the current status or

value of swap terms. As mentioned above, the Commission is proposing to

amend the definition of “material terms” in Sec. 23.500(g) so as to

exclude the Proposed Excluded Data Fields because it preliminarily

agrees with market participants that the Proposed Excluded Data Fields

are not material to the ongoing rights and obligations of the

counterparties to a swap. Because the Commission’s proposal would only

remove terms from the discrepancy resolution process for material

terms, as opposed to the general portfolio reconciliation process or

swaps reporting requirements, it will not negatively impact the amount

of information available to the Commission about swaps. While the

Commission believes that this proposal would reduce SDs’, MSPs’, or

their counterparties’ costs of complying with Commission regulations

(because it would reduce the number of terms that counterparties must

periodically resolve for discrepancies during portfolio

reconciliations), the Commission seeks specific comment on the

following, and encourages commenters to provide quantitative

information in their comments where practical):

How will the proposed regulation affect the costs of

portfolio reconciliation for swap counterparties? Is the Commission’s

estimate of cost reductions that would result from the proposed rule a

reasonable estimate of cost savings that would be realized from

adopting the proposal?

Will the proposed regulation make the portfolio

reconciliation process more or less expensive? How so?

How would the proposed rule affect the ongoing costs of

compliance with Commission regulations?

Are there other costs that the Commission should consider?

Commenters are strongly encouraged to include quantitative

information in their comment on this rulemaking where practical.

3. Benefits

The Commission believes that this proposal would benefit SDs, MSPs,

and their counterparties because it will not require them to expend the

resources necessary to resolve discrepancies over swap terms that are

included in the Proposed Excluded Data Fields in accordance with tight

regulatory timeframes.48 The Commission requests comment on all

aspects of its preliminary consideration of benefits and encourages

commenters to provide quantitative information where practical. Has the

Commission accurately identified the benefits of this proposed

regulation? Are there other benefits to the Commission, market

participants, and/or the public that may result from the adoption of

the proposed regulation that the Commission should consider?

—————————————————————————

48 See Sec. 23.502(a)(4) requiring SDs and MSPs to resolve

discrepancies in material terms immediately with counterparties that

are also SDs or MSPs. See also Sec. 23.502(b)(4) (requiring SDs and

MSPs to resolve discrepancies in material terms and valuations in a

timely fashion with counterparties that are not SDs or MSPs).

—————————————————————————

4. Section 15(a)

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

effects of its actions in light of the following five factors:

a. Protection of Market Participants and the Public

The Commission believes that, notwithstanding its proposal to

remove the Proposed Excluded Data Fields from the list of material

terms that counterparties must periodically scrutinize to resolve any

discrepancies, its regulations will continue to protect market

participants and the public. The Commission, however, welcomes comment

as to how market participants and the public may be protected or harmed

by the proposed regulation.

b. Efficiency, Competitiveness, and Financial Integrity of Markets

The Commission believes that its proposal, which will ensure that

the parties resolving discrepancies in material terms and valuations in

portfolio reconciliation exercises need not concern themselves with

terms in the Proposed Excluded Data Fields may increase resource

allocation efficiency of market participants engaging in reconciliation

exercises without increasing the risk of harm to the financial

integrity of markets.

The Commission seeks comment as to how the proposed regulation may

promote or hinder the efficiency, competitiveness, and financial

integrity of markets.

c. Price Discovery

The Commission has not identified an impact on price discovery as a

result of the proposed regulation, but seeks comment as to any

potential impact. Will the proposed regulation impact, positively or

negatively, the price discovery process?

d. Sound Risk Management

The Commission believes that its proposal is consistent with sound

risk management practices because the proposed regulatory change would

not impair an entity’s ability to conduct portfolio reconciliations.

The Commission solicits comments on whether market participants believe

the proposal will impact, positively or negatively, the risk management

procedures or actions of SDs, MSPs, or their counterparties.

e. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations, but welcomes comment on whether this proposal would

promote public confidence in the integrity of derivatives markets by

ensuring meaningful regulation and oversight of all SDs and MSPs. Will

this proposal impact, positively or negatively, any heretofore

unidentified matter of interest to the public?

List of Subjects in 17 CFR Part 23

Authority delegations (Government agencies), Commodity futures,

Reporting and recordkeeping requirements.

For the reasons stated in the preamble, the Commodity Futures

[[Page 57135]]

Trading Commission proposes to amend 17 CFR part 23 as set forth below:

PART 23–SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0

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

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

0

2. Revise Sec. 23.500(g) to read as follows:

Sec. 23.500 Definitions.

* * * * *

(g) Material terms means all terms of a swap required to be

reported in accordance with part 45 of this chapter other than the

following:

(1) An indication that the swap will be allocated;

(2) If the swap will be allocated, or is a post-allocation swap,

the legal entity identifier of the agent;

(3) An indication that the swap is a post-allocation swap;

(4) If the swap is a post-allocation swap, the unique swap

identifier;

(5) Block trade indicator;

(6) With respect to a cleared swap, execution timestamp;

(7) With respect to a cleared swap, timestamp for submission to a

swap data repository;

(8) Clearing indicator; and

(9) Clearing venue.

* * * * *

Issued in Washington, DC, on September 17, 2015, by the

Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

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

Federal Regulations.

Appendices to Proposal To Amend the Definition of “Material Terms”

for Purposes of Swap Portfolio Reconciliation–Commission Voting

Summary, Chairman’s Statement, and Commissioner’s Statement

Appendix 1–Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

Appendix 2–Statement of Chairman Timothy G. Massad

I support issuing this proposal to amend the definition of

“material terms” for purposes of portfolio reconciliation

performed by swap dealers and major swap participants.

The proposed amendment would replace an existing “no-action”

letter issued during the implementation of the Dodd-Frank Act. This

gives greater certainty to affected registrants and furthers the

Commission’s ongoing process of simplifying, fine-tuning, and

harmonizing our rules.

The proposal not only seeks comment on the technical aspects of

reconciling specific data fields excluded under the staff no-action

letter, but also seeks answers to important questions regarding the

experience of swap dealers and major swap participants in complying

with the portfolio reconciliation requirement more generally.

Further, it seeks comment on the relationship of portfolio

reconciliation to the integrity of data reported to swap data

repositories.

The feedback of knowledgeable market participants on this

proposal will allow the Commission to further its goal of

continuously improving our recordkeeping, reporting, and data

quality rules and practices. I encourage all market participants to

join in this effort by examining the proposal and providing detailed

comments. I look forward to reviewing them.

Appendix 3–Statement of Commissioner J. Christopher Giancarlo

In its rush to implement the Dodd-Frank Act over the past few

years, the Commission issued multiple rules that proved to be

confusing, impracticable or unworkable, which in turn necessitated

the unprecedented issuance of no-action relief, either due to

unrealistic compliance deadlines, problematic elements of the rules

or both. I trust that today’s proposal from the Commission signals

that the epoch of heedless rule production is drawing to a close.

The Commission is seeking comment on a proposed rule that would

codify a modified version of no-action relief issued in 2013 (the

“No-Action Relief”) by the Division of Swap Dealer and

Intermediary Oversight (“DSIO”) pursuant to a request for an

interpretive letter from the International Swaps and Derivatives

Association (“ISDA”). The No-Action Relief allows Swap Dealers

(“SDs”) and Major Swap Participants (“MSPs”) to treat certain

Part 45 data fields as non-material for purposes of portfolio

reconciliation under Commission Regulation 23.502.1

—————————————————————————

1 See CFTC Letter No. 13-31 (June 26, 2013).

—————————————————————————

I commend the Chairman and DSIO staff for taking steps to

replace the No-Action Relief with a rulemaking subject to a cost-

benefit analysis and the notice and comment requirements of the

Administrative Procedure Act. Reasonable people understood at the

height of the Dodd-Frank rulemaking frenzy that the Commission would

and could not get everything right. That is why actions like today’s

rule proposal are necessary and appropriate.

I urge the CFTC staff to continue down the path of bringing to

the Commission for consideration amendments to flawed Dodd-Frank

rulesets. It is appropriate as a matter of good government that we

replace the hundreds of no-action, exemptive and interpretive

letters, guidance, advisories and other communications, both written

and unwritten, issued without a Commission vote in the wake of the

Dodd-Frank Act with proper administrative rulemakings.

I support issuing for public comment the proposed amendments to

the definition of “material terms” for purposes of portfolio

reconciliation. As the public reviews this rule change and

formulates comments, I would like to draw its attention to several

aspects of the proposal. Commission Regulation 23.502 requires SDs

and MSPs to engage in portfolio reconciliation once each day, week

or calendar quarter, depending on the size of the swap portfolio,

and to resolve immediately any discrepancy in a material term. It is

unclear why the Commission needs a daily, weekly, or quarterly

reconciliation of data fields that will not change over time once

established. In particular, I note that the proposed rule would

continue to treat as material terms the execution timestamp and

timestamp for submission to a swap data repository for uncleared

swaps, an indication of whether the clearing requirement exception

in section 2(h)(7) of the Commodity Exchange Act has been elected

and the identity of the counterparty electing the clearing

requirement exception. I am aware of the staff’s concern that a

discrepancy in these terms could negatively impact the Commission’s

regulatory mission, but question whether these terms will ever need

to be reconciled after an initial verification.

On the other hand, I also question what additional burden will

be placed on market participants by including these terms in the

portfolio reconciliation process. I note that in its request for an

interpretive letter ISDA stated that requiring reconciliation of

data fields that are not relevant to the ongoing rights and

obligations of the parties to a swap unnecessarily adds to the costs

and complexity associated with implementing and managing the

portfolio reconciliation process.2 It would be most helpful if

parties affected by the rule would submit detailed comments

regarding these costs.

—————————————————————————

2 See ISDA Request for Interpretive Letter–Part 23 dated May

31, 2013.

—————————————————————————

It is also unclear why the Commission is proposing to retain the

requirement that SDs and MSPs exchange non-material terms throughout

the life of a swap as part of a portfolio reconciliation exercise.

Commission Regulation 23.500(i) defines portfolio reconciliation as

the process by which two parties to one or more swaps: (1) Exchange

“terms” (meaning all terms) of all swaps between the

counterparties; (2) exchange each counterparty’s valuation of each

swap as of the close of business on the immediately preceding

business day; and (3) resolve any discrepancy in “material” terms

and valuations. I note that ISDA requested that the Commission

narrow the definition of “terms” in Rule 23.500(i)(1) to mean

“material terms,” but the Commission is not proposing to do so.

Thus, counterparties will be required to exchange all terms of each

swap on a daily, weekly, or quarterly basis throughout the life of a

swap, but will be required to reconcile only “material terms.” As

with treating the terms relating to timestamps and the clearing

exception as “material terms” discussed above, I question the

utility of including non-material terms that are not required to be

reconciled as part of the portfolio reconciliation process. It would

be most helpful if parties affected by

[[Page 57136]]

the rule would submit detailed comments weighing the burdens against

benefits of continuing to include such non-material terms.

I look forward to thoughtful comments on all aspects of the

proposal.

[FR Doc. 2015-24021 Filed 9-21-15; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: September 22, 2015