Federal Register, Volume 78 Issue 105 (Friday, May 31, 2013)[Federal Register Volume 78, Number 105 (Friday, May 31, 2013)]
[Rules and Regulations]
[Pages 32865-32944]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12133]
[[Page 32865]]
Vol. 78
Friday,
No. 105
May 31, 2013
Part III
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; Final Rule
Federal Register / Vol. 78, No. 105 / Friday, May 31, 2013 / Rules
and Regulations
[[Page 32866]]
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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: Final rule.
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SUMMARY: The Commodity Futures Trading Commission is adopting
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 adopting regulations that define the criteria for
grouping swaps into separate swap categories and establish
methodologies for setting appropriate minimum block sizes for each swap
category. In addition, the Commission is adopting further measures
under the Commission's regulations to prevent the public disclosure of
the identities, business transactions and market positions of swaps
market participants.
DATES: Effective date: July 30, 2013.
FOR FURTHER INFORMATION CONTACT: John W. Dunfee, Assistant General
Counsel, Office of the General Counsel, 202-418-5396, [email protected];
George Pullen, Economist, 202-418-6709, [email protected], or Nhan
Nguyen, Special Counsel, 202-418-5932, [email protected], Division of
Market Oversight; Esen Onur, Economist, Office of the Chief Economist,
202-418-6146, [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
1. Overview
2. Public Comments in Response to the Initial Proposal
C. Issuance of the Real-Time Reporting Final Rule
D. Further Block Proposal
1. Policy Goals
2. Summary of Proposed Approach
3. Overview of Comments Received
4. Additional Proposal Regarding Aggregation of Blocks
II. Procedures To Establish Appropriate Minimum Block Sizes for
Large Notional Off-Facility Swaps and Block Trades--Final Rules
A. 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. Summary of Proposed Rule
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
5. Comments Regarding Swap Categories Across Asset Classes
B. Appropriate Minimum Block Size Methodologies for the Initial
and Post-Initial Periods
1. Phase-in of Appropriate Minimum Block Sizes
2. Overview of Proposed Approach
3. The 67-Percent Notional Amount Calculation for Determination
of Appropriate Minimum Block Sizes
4. Data for Determination of Appropriate Minimum Block Sizes in
the Post-Initial Period
5. Methodology for Determining the Appropriate Minimum Block
Sizes by Asset Class
a. Interest Rate and Credit Default Swaps
b. Equity
c. FX
i. Initial Period Methodology
ii. Post-Initial Period Methodology
d. Other Commodity
i. Initial Period Methodology
ii. Post-Initial Period Methodology
6. 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
C. Procedural Provisions
1. Sec. 43.6(a) Commission Determination
2. Sec. 43.6(f)(4) and (5) Publication and Effective Date of
Post-Initial Appropriate Minimum Block Sizes
3. Sec. 43.6(g) Notification of Election
4. Sec. 43.7 Delegation of Authority
5. Sec. 43.6(h)(6)--Aggregation
6. Sec. 43.6(i) Eligible Block Trade Participants
III. 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
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. 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 or Pricing Points
i. Natural Gas and Related Products
ii. Petroleum and Related Products
iii. Electricity and Sources
iv. All Remaining Other Commodities
b. Non-U.S. Delivery or Pricing Points
c. Basis Swaps
d. Comments Received and Commission Determination
4. Further Revisions to Part 43
a. Additional Contracts Added to Appendix B to Part 43
b. Technical Revisions to Part 43
IV. Paperwork Reduction Act
A. Background
B. Description of the Collection
1. Sec. 43.6(g)--Notification of Election
2. Amendments to Sec. 43.4(d)(4) and 43.4(h)
V. Cost-Benefit Considerations
A. Background
B. The Statutory Mandate To Consider the Costs and Benefits of
the Commission's Action: Section 15(a) of the CEA
C. Rules Establishing Determination Criteria and Methodology
(Sec. 43.6(a)-(f) and (h))
1. Rule Summary
a. Rule 43.6(a) Commission Determination
b. Rule 43.6(b) Swap Category
c. Rules 43.6(c)-(f) and (h) Methods for Determining Appropriate
Minimum Block Sizes
2. Overview of Comments Received
3. Costs
a. Direct Costs
b. Indirect Costs
4. Benefits
5. Alternatives
a. Commission Determination of Minimum Block Sizes
b. Swap Category Alternatives
c. Block Methodology Alternatives
6. CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness and Financial Integrity of
Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
D. Cost-Benefit Considerations Relevant to the Block Trade/Large
Notional Off-Facility Swap Election Process (Sec. 43.6(g))
1. Costs Relevant to the Election Process (Sec. 43.6(g))
a. Incremental, Non-Recurring Expenditure to a Non-Financial
End-user, SEF or DCM To Update Existing Technology
b. 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
c. 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
[[Page 32867]]
d. 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
2. Comments Received
3. Benefits Relevant to the Election Process (Sec. 43.6(g))
4. Alternatives
5. Application of the Section 15(a) Factors to Sec. 43.6(g)
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
E. Costs and Benefits Relevant to Anonymity Protections
(Amendments to Sec. 43.4(d)(4) and (h))
1. Amendments to Sec. 43.4(d)(4)
2. Amendments to Sec. 43.4(h)
3. Costs Relevant to the Amendments to Sec. 43.4(d)(4) and (h)
4. Benefits Relevant to the Amendments to Sec. 43.4
5. Alternatives
6. Application of the Section 15(a) Factors to the 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
F. Costs and Benefits Relevant to Sec. 43.6(h)(6)--Aggregation
1. Overview of Comments Received
2. Costs
3. Benefits
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of the
Futures Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
G. Costs and Benefits Relevant to Sec. 43.6(i)--Eligible Block
Trade Parties
1. Overview of Comments Received
2. Costs
3. Benefits
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of the
Futures Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
VI. Regulatory Flexibility Act
VII. Example of a Post-Initial Appropriate Minimum Block Size
Determination Using the 67-Percent Notional Amount Calculation
VIII. List of Commenters Who Responded to the Further Block 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'').\1\ Title VII
of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')
\3\ 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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\1\ See Public Law 111-203, 124 Stat. 1376 (2010).
\2\ The short title of Title VII of the Dodd-Frank Act is the
``Wall Street Transparency and Accountability Act of 2010.''
\3\ 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.\4\ Section 2(a)(13)(A) provides that ``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.'' \5\
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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\4\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).
\5\ 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) places
two other statutory requirements on the Commission that are relevant to
this final rule. 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 large notional swap
transactions (block trades) to the public.'' \6\ 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.'' \7\
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\6\ 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), its Real-Time Reporting Final Rule (as defined below), and
its Further Block Proposal (as defined below), the Commission, in
exercising its authority under CEA section 2(a)(13)(B) 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,'' is authorized to prescribe rules similar
to those provisions in section 2(a)(13)(E) to uncleared swaps
described in section 2(a)(13)(C)(iii) and (iv) of the CEA.
\7\ CEA section 2(a)(13)(E)(iv). Section 5h(f)(2)(C) of the CEA
imposes a similar directive upon registered swap execution
facilities (``SEF'') by requiring that they set forth rules for
block trades for swap execution purposes.
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The second statutory requirement relevant to this final rule is
found in sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.
Through these sections, 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.'' \8\
Accordingly, Sec. 2(a)(13)(E)(i) of the CEA 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\
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\8\ 156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement of
Sen. Blanche Lincoln).
\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).
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In order to carry out the requirements of section 2(a)(13),
including among other things the two statutory requirements regarding
blocks and anonymity described above, the Commission issued a notice of
proposed rulemaking on December 7, 2010 (the ``Initial Proposal''). On
January 9, 2012, the Commission issued a final rule regarding Real-Time
Public Reporting of Swap Transaction Data adopting several provisions
contained in the Initial Proposal (the ``Real-Time Reporting Final
Rule''). The Real-Time Reporting
[[Page 32868]]
Final Rule, however, did not adopt most of the provisions in the
Initial Proposal pertaining to appropriate block sizes and anonymity.
Instead, the Commission issued a further notice of proposed rulemaking
regarding Procedures to Establish Appropriate Minimum Block Sizes for
Large Notional Off-Facility Swaps and Block Trades on March 15, 2012
(the ``Further Block Proposal'').\10\ Each of these issuances is
described more fully below.
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\10\ See Procedures to Establish Appropriate Minimum Block Sizes
for Large Notional Off-Facility Swaps and Block Trades, 77 FR
15,460, Mar. 15, 2012.
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B. The Initial Proposal
1. Overview
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, which included specific provisions pursuant to sections
2(a)(13)(E)(i)-(iv) and 2(a)(13)(C)(iii).\11\ In this Initial Proposal,
the Commission set out proposed provisions to satisfy, among other
things, the statutory requirements discussed above regarding minimum
block sizes and anonymity protections. 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'') would 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 swap
execution facility (``SEF'') or designated contract market (``DCM''),
the SEF or DCM must set the appropriate minimum block trade size at a
level at or above that established by an SDR for the relevant swap
instrument.\18\
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\11\ See Real-Time Public Reporting of Swap Transaction Data, 75
FR 76139, Dec. 7, 2010, as corrected in Real-Time Public Reporting
of Swap Transaction Data Correction, 75 FR 76930, 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 76171. The Real-Time
Reporting Final Rule 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 1182, 1244, Jan. 9,
2012. Specifically, the Real-Time Reporting Final Rule 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 final rulemaking, the Commission uses the term
``large notional off-facility swap'' as adopted in the Real-Time
Reporting Final Rule.
The Initial Proposal's definition of ``block trade'' was similar
to the final definition in the Real-Time Reporting Final Rule. See
proposed Sec. 43.2(f), 75 FR 76171. The Real-Time Reporting Final
Rule 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
1243.
\13\ See proposed Sec. 43.5, 75 FR 76174-76.
\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 76176. 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 Real-Time Reporting Final Rule established time delays for
the public dissemination of block trades and large notional off-
facility swaps in Sec. 43.5. See 77 FR 1247-49.
\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 76175.
\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 transaction size
for a particular swap instrument. The Commission proposed a block
trade multiple of five. Id.
\17\ See proposed Sec. 43.2(y), 75 FR 76172.
\18\ See 75 FR 76176.
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With respect to anonymity, 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 76174.
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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 customization.\20\ As a result, the Commission
provided that SEFs and DCMs should tailor the description required by
proposed Sec. 43.2(e) depending on the asset class and place of
execution of each swap.
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\20\ See 75 FR 76151 (``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.'').
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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
[[Page 32869]]
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 76150-51.
\22\ See 75 FR 76174.
\23\ See 75 FR 76150. 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 76174.
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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+'' rather than the actual notional size of the
swap.\24\
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\24\ See 75 FR 76152.
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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\ After issuing the Initial Proposal, the
Commission received 105 comment letters and held 40 meetings with
interested parties regarding the proposed provisions.\26\
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\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.
\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.
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2. Public Comments in Response to the Initial Proposal
The commenters to the Initial Proposal 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\ The comments submitted regarding
the Initial Proposal's provisions regarding appropriate minimum block
sizes and anonymity protections are summarized in detail in the Further
Block Proposal.\28\
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\27\ A list of the full names and abbreviations of commenters
who responded to the Initial Proposal and who the Commission refers
to in the Further Block 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.
\28\ See Further Block Proposal at 77 FR 15463-66.
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Following the close of the comment period for the Initial Proposal,
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.\29\ A discussion of the Commission's
actions and their impact on the Further Block Proposal is set out
immediately below.
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\29\ Commission staff also consulted with the staffs of several
other federal financial regulators in connection with the issuance
of the Further Block Proposal.
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C. Issuance of the Real-Time Reporting Final Rule
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.\30\ The Commission also reviewed additional information,
including a study pertaining to the mandatory trade execution
requirement and post-trade transparency concerns that arose out of two
of the Commission's proposed rulemakings,\31\ as well as a report
issued by two industry trade associations on block trade reporting in
the swaps market.\32\ In addition, the Commission and the Securities
and Exchange Commission (``SEC'') held a two-day public roundtable on
Dodd-Frank Act implementation on May 2-3, 2011 (``Public
Roundtable'').\33\ 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 establishing
block trade rules.
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\30\ A detailed discussion of Commission staff's review and
analysis process is set out below in sections II.A.1.b.i. and c.i.
\31\ 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 1214, 1220, Jan. 7, 2011) and the
Initial Proposal.
\32\ See 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.
\33\ 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 23211, Apr. 26, 2011. A copy of the transcript
is accessible at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf.
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On January 9, 2012, the Commission issued the Real-Time Reporting
Final Rule, finalizing several provisions that were proposed in the
Initial Proposal.\34\ Those provisions implement, among other things:
(1) Several definitions proposed in the Initial Proposal relevant to
this final rule, including ``asset class''; \35\ (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; \36\ (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.\37\ Based on commenters' recommendations, however, the
Commission did not adopt proposed Sec. 43.5 and stated its intent to
re-propose a calculation methodology for appropriate minimum block
sizes based on additional data and analysis in a separate
rulemaking.\38\
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\34\ See 77 FR 1182.
\35\ The Real-Time Reporting Final Rule 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 Real-Time Reporting Final Rule
did not define the term swap instrument. This final rule adopts 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.
\36\ See Sec. 43.2 of the Commission's regulations. 77 FR 1244.
The Real-Time Reporting Final Rule 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 1244.
\37\ See 77 FR 1244.
\38\ See 77 FR 1185.
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D. Further Block Proposal
On March 15, 2012, the Commission issued for comment the Further
Block Proposal.\39\ 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
[[Page 32870]]
established in the Real-Time Reporting Final Rule, the Commission
proposed provisions in the Further Block Proposal 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
Real-Time Reporting Final Rule.\40\
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\39\ See 77 FR 15460.
\40\ In several places in the Real-Time Reporting Final Rule,
the Commission stated that it planned to address these requirements
in a separate, forthcoming release. See, e.g., 77 FR 1185, 1191,
1193 and 1217. The Further Block Proposal was that release.
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1. 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.\41\
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 by mandating that the Commission shall ``take into account
whether the public disclosure [of swap transaction and pricing data]
will materially reduce market liquidity.''\42\ While 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,\43\ it also believes that the benefits of enhanced market
transparency are not boundless, particularly in swap markets with
limited liquidity.
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\41\ 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).
\42\ CEA section 2(a)(13)(E)(iv). See also CEA section
5h(f)(2)(C) (concerning the treatment of block trades on SEFs for
trade execution purposes).
\43\ 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.'').
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The Commission understands that the publication of detailed
information regarding ``outsize swap transactions'' \44\ could expose
swap counterparties to higher trading costs.\45\ 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.\46\ 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 liquidity in the swaps
market.
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\44\ As used in the Further Block Proposal and this final rule,
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.
\45\ Consistent with this final rule, the Commission clarified
in the SEF final rule that a swap transaction qualifies as a block
trade based on the size of the swap transaction, not based on
whether the swap is subject to the trade execution requirement under
section 2(h)(8) of the CEA. See Core Principles and Other
Requirements for Swap Execution Facilities, p. 72 (May 16, 2013)].
In Sec. 37.200 of the Commission's regulations, the Commission has
codified the statutory text of SEF Core Principle 2 under section
5h(f)(2)(C) of the CEA, which requires a SEF to establish rules
governing the operation of its trading facility, including trading
procedures for block trades. 17 CFR 37.200(c). Similarly, the
Commission's proposed rulemaking regarding core principles and other
requirements for DCMs under Sec. 38.504 of the Commission's
regulations, the Commission requires DCMs to adopt rules that comply
with all of the provisions of part 43, including the block trade
provisions finalized herein. Core Principles and Other Requirements
for Designated Contract Markets, 75 FR 80572, 80617 (Dec. 22, 2010).
\46\ 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.
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In consideration of these potential outcomes, the Further Block
Proposal sought to provide maximum public transparency, while taking
into account the concerns of liquidity providers regarding possible
reductions in market liquidity. To do so, the Further Block Proposal
established the following more detailed criteria: (1) Swap categories
(relative to the definition of swap instrument in the Initial
Proposal); (2) a phased-in approach to determining appropriate minimum
block sizes for block trades and large notional off-facility swaps; and
(3) anonymity provisions for the public reporting of transaction data.
A summary of the Commission's proposed approach is provided below.
2. Summary of Proposed Approach
The Commission proposed a two-period, phased-in approach to
implement regulations for determining appropriate minimum block
sizes.\47\ Specifically, the Commission proposed phasing-in minimum
block sizes during an initial period and setting them thereafter on an
ongoing basis (i.e., the post-initial period) so that market
participants could better adjust their swap trading strategies to
manage risk, secure new technologies and make necessary arrangements in
order to comply with part 43 reporting requirements. The Commission
proposed 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).
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\47\ The Commission proposed the same phased-in approach for
determining cap sizes, which help to protect the anonymity of
counterparties' market positions and business transactions as
required in the CEA. For a more detailed discussion of the
Commission's proposed approach with respect to cap sizes, see
section III.B.
The two-period, phased-in approach would become effective after
the implementation of the part 43 provisions in the Real-Time
Reporting Final Rule. Until the date on which the proposed
provisions in the Further Block Proposal become effective, all swaps
would be subject to a time delay pursuant to the provisions in part
43.
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In proposed Sec. 43.6(e), the Commission proposed establishing
initial appropriate minimum block sizes for each category of swaps
within the interest rate, credit, foreign exchange (``FX'') and other
commodity asset classes.\48\ The Commission listed the prescribed
initial appropriate minimum block sizes in proposed appendix F to part
43 based on these swap categories.\49\ For interest rate and credit
swaps, the Commission reviewed actual market data and prescribed
initial appropriate minimum block sizes for swap categories in these
asset classes
[[Page 32871]]
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 proposed using a methodology based on whether a
swap or swap category is ``economically related'' to a futures
contract.\50\ 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) during the initial period.
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\48\ The Commission proposed 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
proposed 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.
\49\ The Commission notes SEFs and DCMs would not be prohibited
under the Further Block Proposal from setting block sizes for swaps
at levels that are higher than the appropriate minimum block sizes
as determined by the Commission.
\50\ See infra notes 169-174 and accompanying text.
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In proposed Sec. 43.6(f)(1), the Commission provided that the
duration of this initial period would be no less than one year after an
SDR started collecting 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.\51\
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\51\ See Swap Data Recordkeeping and Reporting Requirements, 77
FR 2136, 2196, Jan. 13, 2012.
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The Commission stated in the Further Block Proposal and is
currently of the view 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 or by other Commission action. The Commission notes that
SDRs have been collecting data pursuant to the compliance dates for
certain market participants and asset classes since December 2012. DCMs
and Swap Dealers (``SDs'') began reporting swap transactions in the
interest rate and credit default swap asset classes on December 31,
2012.\52\ DCMs and SDs began reporting swap transactions in the FX,
equity, and other commodity asset classes on February 28, 2013.\53\
Major Swap Participants (``MSPs'') began reporting swap transactions in
all five asset classes on February 28, 2013.\54\ Financial Entities
began reporting swap transactions in the interest rate and credit
default swap asset classes on April 10, 2013.\55\ Financial Entities
begin reporting swap transactions for swaps executed starting April 10,
2013, in the FX, equity, and other commodity asset classes on May 29,
2013.\56\ Non-SDs, non-MSPs, and non-Financial Entities begin reporting
swap transactions for swaps executed starting April 10, 2013, in the
interest rate and credit default swap asset classes on July 1,
2013.\57\ Non-SDs, non-MSPs, and non-Financial Entities begin reporting
swap transactions for swaps executed starting April 10, 2013, in the
FX, equity, and other commodity asset classes on August 19, 2013.\58\
Accordingly, the Commission and SDRs will have one year of reliable
data as of April 10, 2014.
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\52\ See ``Commission Q & A--On the Start of Swap Data
Reporting'' (Oct. 9, 2012).
\53\ See ``No-Action Relief for Swap Dealers from Certain Swap
Data Reporting Requirements of Part 43, Part 45, and Part 46 of the
Commission's Regulations Due to Effects of Hurricane Sandy,''
Commission Letter No. 12-41 (Dec. 5, 2012).
\54\ See id.
\55\ See ``Time-Limited No-Action Relief for Swap Counterparties
that are not Swap Dealers or Major Swap Participants, from Certain
Swap Data Reporting Requirements of Parts 43, 45 and 46 of the
Commission's Regulations,'' Commission Letter No. 13-10 (Apr. 9,
2013).
\56\ See id.
\57\ See id.
\58\ See id.
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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. 43.6(f)(4) and (5). 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).\59\
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\59\ In particular, the Commission proposed a 67-percent
notional amount calculation, which is discussed in more detail in
section II.B.3.
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The Commission also proposed special rules for determining
appropriate minimum block sizes in certain instances. In particular, in
proposed Sec. 43.6(d), the Commission prescribed special rules for
swaps in the equity asset class. In proposed Sec. 43.6(h), the
Commission proposed 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.\60\
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\60\ See infra Section II.B.6. for a discussion of the special
rules.
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In the Further Block Proposal's proposed amendments to Sec.
43.4(h) and 43.4(d)(4), the Commission also prescribed measures to
fulfill the CEA's anonymity requirements in connection with the public
dissemination of publicly reportable swap transactions. The Commission
proposed adopting 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
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).\61\
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\61\ The Commission proposed to follow 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.
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3. Overview of Comments Received
The Commission received comments from 35 interested parties
representing a broad range of interests including: financial end-users,
swap dealers, asset managers, industry groups/associations, potential
SEFs, and a DCM.\62\ Some commenters expressed general support for the
Further Block Proposal's provisions regarding minimum block sizes and
anonymity; others objected to particular aspects of the Further Block
Proposal and/or offered recommendations for clarification or
modification of specific proposed regulations.
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\62\ A list of the full names and abbreviations of commenters
who responded to the Further Block Proposal is included in section
VIII 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.
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In addition to a general solicitation for comment on all aspects of
the Further Block Proposal, the Commission requested comment on a
number of specific, focused questions related to particular provisions.
For example, commenters were asked to address issues related to: (i)
The appropriate criteria for determining swap categories in the five
asset classes; (ii) the appropriate methodology for determining
appropriate minimum block sizes for swaps in the five asset classes;
(iii) whether and how a phase-in of block thresholds should be
implemented; (iv) special rules with respect to swaps with optionality,
swaps with composite reference prices, physical commodity swaps,
currency conversions, and successor currencies; (v) the role of SEFs
and DCMs in
[[Page 32872]]
determining appropriate minimum block sizes for swaps that they list;
(vi) the process by which the Commission would notify the public of
appropriate minimum block sizes; (vii) the process through which a
qualifying swap transaction would be treated as a block trade or large
notional off-facility swap; (viii) the appropriate methodology for
determining the maximum limit of the principal, notional amount of a
swap that is publicly disseminated; (ix) appropriate anonymity
protections for the public dissemination of publicly reportable swap
transactions in the other commodity asset class.
The Commission also requested comment with respect to the cost-
benefit considerations in the Further Block Proposal and specifically
requested commenters to provide a feasible alternative approach to
establishing minimum block sizes that would impose less regulatory
burden on swap market participants and the general public. Commenters
also were expressly invited to provide data regarding the direct and
indirect quantifiable costs with the proposed criteria for establishing
minimum block thresholds.
4. Additional Proposal Regarding Aggregation of Blocks
Among the requirements contained in the Initial Proposal, proposed
Sec. 43.5(b)(1) provided that eligible parties to a block trade (or
large notional swap) must be Eligible Contract Participants (``ECPs''),
except that a DCM may allow a Commodity Trading Advisor (``CTA''),
investment advisor, or foreign person meeting certain criteria to
transact block trades for customers who are not ECPs. Further, proposed
Sec. 43.5(m) prohibited aggregation of orders for different trading
accounts in order to satisfy the appropriate minimum block size
requirement, except if done so on a DCM by a CTA, investment adviser,
or foreign person meeting certain criteria.
After it issued its Further Block Proposal, the Commission
determined that the aggregation provision and the provision that
specified the eligible parties to a block trade, including the proposed
requirement that persons transacting block trades on behalf of
customers must receive prior written consent to do so, were
inadvertently omitted from the Further Block Proposal. These provisions
were then the subject of a separate notice of proposed rulemaking
issued on June 27, 2012 (``Proposed Aggregation Rule'').\63\
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\63\ Rules Prohibiting the Aggregation of Orders to Satisfy
Minimum Block Sizes or Cap Size Requirements, and Establishing
Eligibility Requirements for Parties to Block Trades, 77 FR 38229,
June 27, 2012.
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The Commission received a total of nine comment letters in response
to the proposed rules regarding eligible parties to a block trade and
aggregation of orders. Four of the letters responded to the Initial
Proposal and five letters responded to the Proposed Aggregation Rule.
Many of the comments received applied equally to the same provisions
contained in both proposed Sec. 43.6(h)(6) and 43.6(i), which address
the aggregation of orders and the eligible parties to a block trade.
II. Procedures To Establish Appropriate Minimum Block Sizes for Large
Notional Off-Facility Swaps and Block Trades--Final Rules
A. Criteria for Distinguishing Among Swap Categories in Each Asset
Class
In the Further Block Proposal, the Commission proposed 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.\64\ Specifically, the Commission proposed specific criteria for
defining swap categories in each asset class. As adopted in the Real-
Time Reporting Final Rule, Sec. 43.2 of the Commission's regulations
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.'' \65\ Section 43.2 also identifies the following five swap asset
classes: Interest rates; \66\ equity; credit; FX; \67\ and other
commodities.\68\
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\64\ 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.
\65\ See Sec. 43.2, 77 FR 1243.
\66\ In the Real-Time Reporting Final Rule, the Commission
determined that cross-currency swaps are a part of the interest rate
asset class. See 77 FR 1193. The Commission noted that this
determination is consistent with industry practice.
\67\ The U.S. Department of the Treasury (``Treasury'') has
issued a Final Determination, pursuant to sections 1a(47)(E)(i) and
1b of the CEA, that exempts FX swaps and FX forwards from the
definition of ``swap'' under the CEA. Therefore, 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. See Determination of Foreign Exchange
Swaps and Foreign Exchange Forwards under the Commodity Exchange
Act, 77 FR 69694, Nov. 20, 2012. Nevertheless, section
1a(47)(E)(iii) of the CEA provides that FX swaps and FX forwards
transactions still are not excluded from regulatory reporting
requirements to an SDR. Further, the Commission notes that
Treasury's final determination excludes FX swaps and FX forwards,
but does not apply to FX options or non-deliverable FX forwards. As
such, FX instruments that are not covered by Treasury's final
determination are subject to part 43 of the Commission's
regulations.
\68\ The Real-Time Reporting Final Rule 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 1244. 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 1243.
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The proposed swap category 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.\69\ 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 Real-Time Reporting Final Rule are discussed
briefly in the paragraph below, followed by a discussion of the
proposed swap category criteria for each asset class.
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\69\ 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 I.D.1.
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In the Further Block Proposal, the Commission proposed breaking
down each asset class into separate swap categories to determine
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).
[[Page 32873]]
Twenty-one commenters addressed the Further Block Proposal's use of
swap categories.\70\ The vast majority of the comments did not question
the use of swap categories generally, and focused on the specific
criteria proposed for determining swap categories within each asset
class instead. Better Markets and ICI expressly supported the
Commission's proposed use of swap categories.\71\ Better Markets stated
that ``the concept of a `swap category' is useful, in that it allows
greater granularity than the far broader notion of `asset class.' ''
\72\ ICI ``support[ed] the CFTC's proposal to establish categories of
swaps within different asset classes that would be subject to a common
appropriate minimum block size to better calibrate the block thresholds
to the relative liquidity of the swap categories in each asset class.''
\73\ ICAP, however, disagreed with the Commission's use of swap
categories and stated that ``the Commission's proposal is mistaken in
its use of `swap categories' . . . as opposed to using the standard
liquid tenors of swap contracts.'' \74\
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\70\ See generally CL-AFR; CL-AII; CL-Barclays; CL-Better
Markets; CL-CME; CL-FIA; CL-GFMA; CL-ICAP; CL-ICAP Energy; CL-ICI;
CL-ISDA/SIFMA; CL-Kinetix; CL-MFA; CL-Morgan Stanley; CL-
Parascandola; CL-Parity; CL-Pierpont; CL-SDMA; CL-SIFMA; CL-WMBAA;
CL-Vanguard.
\71\ CL-Better Markets at 5; CL-ICI at 4.
\72\ CL-Better Markets at 5.
\73\ CL-ICI at 4.
\74\ CL-ICAP at 8.
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After consideration of the comments related to the use of swap
categories, the Commission is adopting swap categories as proposed in
Sec. 43.6, with certain modifications based upon both general concerns
expressed by commenters in regard to the use of swap categories,
specific concerns raised in regard to the criteria for determining swap
categories within each asset class, and other relevant market
developments.\75\ The following sections address the comments regarding
specific asset classes and set out, where appropriate, the Commission's
responsive modifications of the swap categories approach.
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\75\ The Commission is using the term ``swap category'' instead
of ``swap instrument'' in this final rule. Although the Commission
is not adopting a definition of ``swap category,'' the Commission
believes that this term groups swap contracts that would be subject
to the same appropriate minimum block size based on asset class with
common quantitative or qualitative characteristics, i.e., risk and
liquidity profiles.
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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 markets for swaps in the interest rate and credit
asset classes. Based on that review, the Commission proposed criteria
for determining swap categories in these two asset classes.
Specifically, the Commission proposed defining swap categories for: (1)
Interest rate swaps based on unique combinations of tenor \76\ and
currency; and (2) credit default swaps (``CDS'') based on unique
combinations of tenor and conventional spread.\77\
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\76\ As used in the Further Block 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.
Two commenters addressed how the Commission should determine
tenor for backdated swaps. AFR stated that backdating a swap is the
equivalent of a swap with a date of its inception, but with a price
that includes an adjustment for the backdating feature of the
transaction; AFR wrote that tenor should be determined accordingly.
CL-AFR at 5-6. Similarly, ISDA/SIFMA requested that the Commission
determine the tenor of a back dated swap as the time from the date
of execution of the swap (as opposed to the start date) to the
maturity date of the swap. CL-ISDA/SIFMA at 10. After consideration
of these comments, the Commission maintains the same approach from
the Further Block Proposal.
\77\ 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.
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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'').\78\
Established in 2005, the ODSG is chaired by the Federal Reserve Bank of
New York and is comprised of domestic and international supervisors of
representatives from major OTC derivatives market participants.\79\ In
particular, the ODSG coordinated with the ``G-14 banks'' in order to
gain written permission to access the non-public swap data.\80\
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\78\ 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, the Further Block Proposal
included 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.
\79\ See OTC Derivatives Supervisors Group--Federal Reserve Bank
of New York, http://www.ny.frb.org/markets/otc_derivatives_supervisors_group.html (last visited May 6, 2013). 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.
\80\ 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 \81\ 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.\82\
---------------------------------------------------------------------------
\81\ MarkitSERV is a post-trade processing company wholly owned
by Markit. From its formation in 2009 until April 2013, MarkitSERV
was jointly owned by Markit and The Depository Trust & Clearing
Corporation (``DTCC'').
\82\ 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.\83\ The CDS data set covered CDS transactions for a
three-month period beginning on May 1, 2010 and ending on July 31,
2010.\84\
---------------------------------------------------------------------------
\83\ 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.
\84\ The Warehouse Trust data contained ``allocation-level
data,'' which 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.
---------------------------------------------------------------------------
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 Real-Time
[[Page 32874]]
Reporting Final Rule.\85\ As such, the Commission excluded from its
analysis duplicate and non-price forming transactions.\86\ The
Commission also converted the notional amount of each swap transaction
into a common currency denominator, the U.S. dollar.\87\
---------------------------------------------------------------------------
\85\ ``Publicly reportable swap transaction'' means, unless
otherwise provided in part 43: (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 do 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 transacted at arm's length,
but that do result in a corresponding change in the market risk
position between two parties. See 77 FR 1244.
\86\ 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.
\87\ The Commission calculated the average daily exchange rates
between relevant currencies and the U.S. dollar for the 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.
---------------------------------------------------------------------------
b. Interest Rate Swap Categories
i. Interest Rate Swap Data Summary
The filtered transaction records in the interest rate swap data set
contained 166,847 transactions with a combined notional value of
approximately $45.4 trillion dollars.\88\ 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.\89\
---------------------------------------------------------------------------
\88\ 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 supra note 86 for a list of excluded transaction
records.
\89\ 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.
[[Page 32875]]
Table 1--Summary Statistics for the Interest Rate Swap Data Set by Product Type, Currency, Floating Index and
Tenor
----------------------------------------------------------------------------------------------------------------
Percentage of Notional
Number of total amount Percentage of
transactions transactions (billions of total notional
\90\ 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: \91\
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
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\90\ The percentages were rounded to the nearest whole number.
Due to the rounding, the total percentages for the listed categories
do not add up to exactly 100%.
\91\ 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 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.
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 Swap.......................... 127 4 9 23 52 117 252 438
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
[[Page 32876]]
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: \92\
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\92\ In producing Table 2, 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.
---------------------------------------------------------------------------
The Commission also analyzed the interest rate swap data set to
classify the counterparties into broad groups.\93\ The Commission's
analysis of the interest rate swap data set revealed that approximately
50 percent of the 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.
---------------------------------------------------------------------------
\93\ 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 the following: (1) The total count of unique counterparties
was approximately 300; (2) the average notional size of transactions
involving two G-14 banks was 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
approximately $260 million.
---------------------------------------------------------------------------
ii. Summary of Proposed Rule
Based upon the data described above, the Commission proposed Sec.
43.6(b)(1) establishing swap categories in the interest rate asset
class based on tenor and underlying currency.
The Commission proposed interest rate swap tenor groupings based on
two observations regarding the data in the interest rate swap data set.
First, the Commission observed that points of concentrated transaction
activity along the yield curve correspond with specific tenors (e.g.,
three months, six months, one year, two years, etc.). Second, the
Commission observed a tendency for the transacted notional amounts to
decrease as tenor increased (e.g., longer-dated tenors in the data set
generally had lower average notional sizes). Based on these
observations, table 3 below details the eight proposed tenor groups for
the interest rate asset class.
Table 3--Proposed Tenor Groups for Interest Rates Asset Class \94\
----------------------------------------------------------------------------------------------------------------
Tenor group Tenor greater than And tenor less than or equal to
----------------------------------------------------------------------------------------------------------------
1.................................... ............................. Three months (107 days).
2.................................... Three months (107 days)...... Six months (198 days).
3.................................... Six months (198 days)........ One year (381 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 days)...... Ten years (3,668 days).
7.................................... Ten years (3,668 days)....... 30 years (10,973 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 \95\ The
[[Page 32877]]
Commission proposed currency groupings after considering: (1) The swap
transaction total notional amounts and transaction volumes of currency
groups based on the number of transactions; and (2) the average
transaction notional amounts and lack of evidence of large transacted
notional amounts or substantial volume of currency groups. After
considering these factors, the Commission proposed three currency
categories for the interest rate asset class: (1) Super-major
currencies, which are currencies with large volume and total notional
amounts; \96\ (2) major currencies, which generally exhibit moderate
volume and total notional amounts; \97\ and (3) non-major currencies,
which generally exhibit moderate to very low volume and total notional
amounts.\98\
---------------------------------------------------------------------------
\94\ 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.
\95\ 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 adopted 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.
\96\ 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, i.e., liquid futures markets for general interest rates
and FX rates.
\97\ Major currencies represent about 6 percent of the total
notional amount and about 10 percent of the total transactions in
the data set. Some of these currencies host liquid futures markets
for interest rates, and all exhibit liquid FX markets.
\98\ Non-major currencies represent less than two percent of the
total notional amount and about 10 percent of the transactions in
the data set. These currencies typically do not have corresponding
interest rate and FX futures markets.
---------------------------------------------------------------------------
Table 4 below summarizes the Commission's three proposed currency
swap categories.
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 \99\............. 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.
---------------------------------------------------------------------------
\99\ 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 5--Sample Characteristics of Proposed Interest Rate Swap Categories \100\
----------------------------------------------------------------------------------------------------------------
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
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 .............. .............. ..............
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\100\ Tables 5 and 6 do not include sample characteristics for
swap categories with less than 200 transactions in order to preserve
the anonymity of the parties to these transactions.
---------------------------------------------------------------------------
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.
[[Page 32878]]
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 ....... ....... ....... ....... ....... ....... .......
----------------------------------------------------------------------------------------------------------------
The Commission received twelve comments regarding the use of tenor
to establish swap categories in the interest rate swap asset class.
Five commenters expressed support for the Further Block Proposal's
suggested tenor buckets.\101\ Five other commenters recommended nine
tenor buckets straddling the most liquid tenor points as follows: 0-3
months, 3-6 months, 6-18 months, 18 months-3 years, 3-7 years, 7-12
years, 12-20 years, 20-30 years, and more than 30 years.\102\ These
commenters suggested that these nine tenor groupings would provide
greater granularity and avoid grouping together swaps with different
levels of liquidity. Similarly, ICI suggested that narrower tenor
groupings would provide greater granularity.\103\ Kinetix also
expressed concern with the proposed tenor buckets, stating that they
grouped together products with sharply different trading volumes.\104\
---------------------------------------------------------------------------
\101\ CL-AFR at 5; CL-Better Markets at 5; CL-MFA at 4; CL-
Pierpont at 3; CL-SDMA at 8 (``The CFTC categories are . . .
appropriate and accurate in terms of currency, index, and tenor.'')
\102\ CL-AII at 8; CL-Barclays at 7; CL-ISDA/SIFMA at 10; CL-
SIFMA at 7; CL-Vanguard at 5.
\103\ See CL-ICI at 5.
\104\ Kinetix stated that ``[t]he major flaw comes from
including in a bucket products with sharply different trading
volumes.'' Kinetix recommended bucketing products by average trade
volume, product type, and tenor, but did not suggest specific tenor
buckets. CL-Kinetix at 2.
---------------------------------------------------------------------------
In addition to the comments received regarding the Further Block
Proposal, the Commission also considered the research in the Federal
Reserve Bank of New York's March 2012 staff report entitled ``An
Analysis of OTC Interest Rate Derivatives Transactions: Implications
for Public Reporting'' (the ``Federal Reserve Staff Analysis''). In
that report, Federal Reserve staff tested for a relationship between
tenor and trade size. The Federal Reserve staff identified nine tenor
buckets, as opposed to the eight identified by the Commission. The
tenor buckets identified by the Federal Reserve staff were the same as
those proposed by the Commission in the Further Block Proposal, with a
further division of the Commission's 0-3 month bucket into a 0-1 month
bucket and a 1-3 month bucket.\105\
---------------------------------------------------------------------------
\105\ The Federal Reserve staff specifically found that ``when
[they] reduced the number of buckets at the short end of the trading
curve (by merging the 0-1 month and 1-3 month buckets into a 0-3
month bucket), the explanatory power of [their] regression declined
24%.'' Federal Reserve Staff Analysis at 16.
---------------------------------------------------------------------------
After consideration of the comments received and the Federal
Reserve Staff Analysis, the Commission is adopting Sec. 43.6(b)(1)
with one modification--the addition of another tenor grouping at the
shorter end of the interest rate yield curve. The Commission notes, as
an initial matter, that commenters generally supported the use of tenor
buckets to establish swap categories in the interest rate asset class.
Commenters, however, disagreed with the proposed tenor buckets.
In the Further Block Proposal, tenor buckets were proposed based on
observations of the distributions of notional sizes and volume with the
objectives of grouping swaps with similar characteristics while
maintaining a manageable number of swap categories. The tenor buckets
proposed by the Commission were associated with concentrations of
liquidity at commonly recognized points along the interest rate yield
curve. In general, the Commission observed that transactions in the
data set (and presumed market liquidity) tended to cluster at certain
tenors.
In establishing the categories, the Commission proposed groupings
that placed actively traded tenors at the upper boundary of the
category groupings because the calculation of the minimum block
threshold in a category will be most influenced by the notional amounts
of the most heavily traded swaps in a category, i.e., those at the
active tenor points. Hence, the minimum block thresholds for shorter
dated swaps in a category will tend to be set based on the typical
notional value of longer dated swaps. Since the longer dated swaps tend
to trade in smaller notional amounts, establishing
[[Page 32879]]
the categories in this manner will tend to result in a more
conservative (i.e., smaller) minimum block threshold for shorter
tenored swaps within the category. In addition, because the shorter-
dated swaps within an established swap category may experience less
liquidity, due to smaller trading volumes, these swaps may also benefit
from the setting of a lower minimum block threshold.
The narrower tenor buckets recommended by commenters, in contrast,
tend to straddle the liquid tenor points. If the Commission were to
establish tenor buckets straddling the liquid tenor points (rather than
having a liquid tenor point be the upper boundary of a tenor bucket),
then the minimum block threshold for swaps within a category would be
more heavily influenced by swaps centrally located in the category.
Thus, longer dated swaps in a category, which tend to trade in smaller
notional sizes, would be subject to higher minimum block thresholds,
meaning fewer would be eligible for the block trade exemption.
To illustrate the impact of placing the liquid tenor point at the
top of the category, consider the impact on a seven-year interest rate
swap that is proposed to be grouped in a tenor bucket with swaps having
a tenor greater than 5 years and less than or equal to 10 years. The
most liquid tenor point (i.e., the tenor point with the greatest number
of observations) within this bucket would be the 10-year interest rate
swap; thus, the 10-year interest rate swap would be the primary driver
in determining the minimum block threshold for swaps in the 5 to 10-
year tenor bucket. Table 7 is a subset of the information from Table 1
that illustrates this point. Specifically, there are 6,599 swaps with a
tenor of seven years, yielding an average notional amount of $100
million (USD) and 34,000 swaps with a tenor of ten years yielding an
average notional size of $81 million (USD). By combining these into the
same category, the Commission is adopting a conservative approach in
setting block sizes for the less liquid tenors.
Under the commenters' approach, however, the seven-year interest
rate swap is grouped in the same tenor bucket with the 5-year tenor
interest rate swaps. In this scenario, the liquid tenor point within
the bucket is the 5-year interest rate swap; thus, the 5-year interest
rate swap, with more than 26,000 transactions yielding an average
notional amount of $104 million (USD), is the primary driver in
determining the minimum block threshold for the tenor bucket and
results in a larger block size for the 7-year tenor interest rate swaps
than under the currently proposed swap category.
The Commission is of the view that the tenor with the most
transactions in the swap category, and thus having the most weight in
the block calculations, should be at the high end of the tenor grouping
for the swap category. Given the tendency for average notional size to
decrease as tenor increases as shown in Table 7 below, the Commission
views this as a more conservative approach to setting minimum block
thresholds, which results in lower block sizes for swap transactions at
tenors that may experience less liquidity.
Table 7--Summary Statistics for the Interest Rate Swap Data Set by Tenor \106\
----------------------------------------------------------------------------------------------------------------
Average notional
Tenor \107\ Number of Notional amount amount (billions
transactions (billions of USD) of USD)
----------------------------------------------------------------------------------------------------------------
1 Month............................................. 3,171 11,859 3.740
3 Month............................................. 10,229 11,660 1.140
6 Month............................................. 2,822 1,701 0.603
1 Year.............................................. 9,522 3,484 0.366
2 Year.............................................. 16,450 3,347 0.203
3 Year.............................................. 9,628 1,488 0.155
5 Year.............................................. 26,139 2,712 0.104
7 Year.............................................. 6,599 661 0.100
10 Year............................................. 34,000 2,746 0.081
30 Year............................................. 9,616 448 0.047
Other............................................... 38,671 5,284 0.137
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\106\ In producing Table 7, 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.
\107\ Tenor groups include swaps having tenors within 4 calendar
days of a complete month, plus or minus, of the stated tenor. All
other swaps are included in the ``Other'' category.
---------------------------------------------------------------------------
In response to comments generally calling for narrower tenor
buckets, the Commission is adopting an additional tenor bucket in order
to provide greater granularity as requested by commenters. The
Commission is splitting the first tenor group in the Further Block
Proposal (0-3 months) into two tenor groups (0-46 days, and greater
than 46 days to less than or equal to 3 months). While the Commission
did not receive any comments specifically discussing the less than 46
day tenor, the Commission received numerous comments recommending
greater granularity. Based upon the comments received requesting nine
tenor buckets and the Federal Reserve Staff Analysis identifying nine
tenor buckets, the Commission has determined to add a less than 46 day
tenor group. This would provide greater granularity and establish
notional swap groupings that account more precisely for the effects of
increased transparency on liquidity for swaps of a shorter tenor.
Accordingly, the Commission is adopting the following tenor
buckets:
[[Page 32880]]
Table 8--Tenor Groups for Interest Rates Asset Class \108\
----------------------------------------------------------------------------------------------------------------
Tenor group Tenor greater than And tenor less than or equal to
----------------------------------------------------------------------------------------------------------------
1.................................... ............................. 46 days.
2.................................... 46 days...................... Three months (107 days).
3.................................... Three months (107 days)...... Six months (198 days).
4.................................... Six months (198 days)........ One year (381 days).
5.................................... One year (381 days).......... Two years (746 days).
6.................................... Two years (746 days)......... Five years (1,842 days).
7.................................... Five years (1,842 days)...... Ten years (3,668 days).
8.................................... Ten years (3,668 days)....... 30 years (10,973 days).
9.................................... 30 years (10,973 days)....... ..........................................
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\108\ As in the Further Block Proposal, 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 months or years.
---------------------------------------------------------------------------
The Commission received eleven comments regarding whether interest
rate swaps should be categorized into the super-major, major, and non-
major currency groupings as proposed. Five commenters supported the
currency groupings proposed in the Further Block Proposal.\109\ Four
commenters urged the Commission to establish a separate swap category
for each individual currency in determining block thresholds.\110\ Two
more commenters specifically recommended that each of the four super-
major currencies should be categorized separately, rather than as a
group, in determining block thresholds.\111\
---------------------------------------------------------------------------
\109\ CL-AFR at 5; CL-Better Markets at 5; CL-MFA at 4; CL-
Pierpont at 3; CL-SDMA at 8 (``The CFTC categories are . . .
appropriate and accurate in terms of currency, index, and tenor.'')
\110\ CL-AII at 8; CL-ICI at 5; CL-SIFMA at 8-9; CL-Vanguard at
6.
\111\ CL-Barclays at 7; CL-ISDA/SIFMA at 7-8. While ISDA/SIFMA
supported separate categories for super-major currencies, their
comment also suggests separate categorization for each individual
currency. Similarly, SIFMA's comment, while requesting separate
categorization generally, states that dividing the four proposed
super-major currencies is most important. CL-SIFMA at 8-9.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(b)(1)(i) as proposed in regard to currency
categories. The currencies were grouped into the three categories in
the Further Block Proposal based upon the swap transaction total
notional amounts and transaction volumes of currency groups based on
the number of transactions, and the average transaction notional
amounts of currency groups. The commenters who requested that all
currencies be categorized by individual currency mainly focused on
differences in liquidity among the four super-major currencies,
particularly when comparing interest rate swaps in USD and EUR to those
in JPY and GBP. Similarly, the commenters who specifically requested
that the Commission establish separate swap categories for each of the
super-major currencies focused on perceived differences in liquidity.
While USD and EUR interest rate swaps feature the highest liquidity,
the Commission is of the view that, based upon all of the criteria
mentioned above, the super-major currencies are most similar to each
other (and different from major \112\ and non-major currencies) to
warrant treatment as a group, rather than separately.
---------------------------------------------------------------------------
\112\ The Commission notes that the difference between the total
notional and transactional volume of swaps referencing Japanese
yen--the lowest among those swaps in the super-major currency
category--and of swaps referencing the Australian Dollar--the
highest among those swaps in the major currency category--is
significantly larger than such differences between swaps within each
adopted currency category. This observation supports adopting the
Commission's approach in assigning certain swaps in the super-major
currency category against the major currency category.
---------------------------------------------------------------------------
The Commission considered alternative approaches of using the
individual currencies to determine swap categories in the interest rate
asset class. While these alternative approaches would have provided
greater correlation to an underlying curve than the adopted groupings,
the Commission believes that this would not substantially increase the
explanation of variations in notional amounts, but rather would result
in categories with too few observations. Hence, the Commission does not
believe that there would be a significant benefit to offset the
additional compliance burden that a more granular approach would impose
on market participants. The Commission notes that adoption of the
proposed currency categories establishes 27 separate swap categories
for interest rate swaps. Separate categorization of all currencies
would result in nearly 200 separate swap categories. Separate
categorization of the super-major currencies alone would result in 54
swap categories. The Commission believes that the 27 separate swap
categories contained in the rule achieves the objectives of grouping
swaps with similar characteristics while maintaining a manageable
number of swap categories.
The Commission also received a number of comments recommending that
interest rate swaps should be categorized based on criteria other than
tenor and currency. Four commenters suggested a range of additional
interest rate swap categories for the purposes of establishing block
thresholds.\113\ Two other commenters suggested grouping swaps by
product type in addition to tenor and currency groupings.\114\ Another
commenter, Kinetix, recommended grouping products by average trade
volume, as well as by product type and tenor.\115\ Of the four
commenters who expressed support for the proposed tenor and currency
groupings,\116\ two of them argued that further granularity would cause
some swaps to be subject to lower block thresholds than are
appropriate.\117\
---------------------------------------------------------------------------
\113\ Barclays suggested unique block levels for each of the
following swap categories: each super major currency, swaps against
standard floating rate indices, basis swaps, inflation swaps,
swaptions, caps and floors, cross-currency swaps, and structured
swaps. CL-Barclays at 7-8. ISDA/SIFMA suggested the following
additional swap categories: fixed versus non-benchmark floating rate
indexes and basis swaps, inflation swaps (a specified inflation rate
index), options (swaption and cap/floor markets); cross-currency
swaps (each leg denominated by different currency), and exotics. CL-
ISDA/SIFMA at 9. SIFMA and Vanguard suggested swap categorization
based on optionality or other characteristics such as distinctions
between ``plain vanilla,'' ``interest rate options,'' and ``other,''
as well as separate categories for major floating rate indices. CL-
SIFMA at 8-9; CL-Vanguard at 5-6.
\114\ CL-ICI at 5; CL-MFA at 5.
\115\ CL-Kinetix at 2.
\116\ CL-AFR at 5; CL-Better Markets at 5; CL-Pierpont at 3; CL-
SDMA at 8 (``The CFTC categories are . . . appropriate and accurate
in terms of currency, index, and tenor.'')
\117\ CL-AFR at 5; CL-Better Markets at 5.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(b)(1)(i) as proposed and Sec. 43. 6(b)(1)(ii) with
the modifications discussed above. Although some level of
[[Page 32881]]
categorization of swaps is useful to capture different levels of
trading activity and hedging potential, where a number of different
swaps could be used to hedge the same risk, the over-identification of
swap categories will eventually lead to a dilution of observations
within categories. Categories having small numbers of observations
could be subject to highly volatile minimum block sizes over time.
Over-identification also would be expected to lead to underestimations
of the ability to offset risks using related swap instruments. The
Commission believes that it has struck a balance between over- and
under-categorizing swaps that will result in more stable minimum block
sizes and allow for adequate risk offsets using instruments within a
category. The modification described above in regard to tenor will
provide some further granularity at the short end of the yield curve,
as suggested by commenters above, while still achieving the objectives
of grouping swaps with similar characteristics and reducing unnecessary
complexity for market participants in determining whether their swaps
are classified within a particular swap category.
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 transactions,\118\
with a combined notional value of approximately $4.6 trillion
dollars.\119\ The CDS data set contained transactions based on 26 broad
credit indexes.\120\ Of those indexes, both 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 9 sets out summary statistics of
the CDS data set for CDS indexes with greater than five transactions
per day on average.
---------------------------------------------------------------------------
\118\ See note 85 supra.
\119\ 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.
\120\ 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 9--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
----------------------------------------------------------------------------------------------------------------
ii. Credit Swap Data Analysis
As noted above, the Commission proposed using tenor and
conventional spread criteria to define swap categories for CDS indexes.
The Commission proposed 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
[[Page 32882]]
12.5 years (3,121-4,581 days) and (6) greater than 12.5 years (4,581
days).\121\
---------------------------------------------------------------------------
\121\ 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 had a tenor of five years (or
approximately 1,825 days). Based on the concentration of CDS index
transactions in five-year tenors, the Commission proposed six tenor
bands for CDS indexes.
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.
---------------------------------------------------------------------------
With respect to the conventional spread criterion, the Commission
determined ranges of spread values based on a review of the
distribution of spreads in the entire CDS data set.\122\ In particular,
the Commission observed that the relevant CDS data set partitioned at
the 175 basis points (``bps'') and 350 bps levels.\123\ 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
CDS categories (spread values between 175 to 350 bps; spread values
above 350 bps). Accordingly, the Commission proposed three separate
conventional spread levels: (1) CDS indexes with spread values under
175 bps; (2) CDS indexes with spread values between 175 and 350 bps;
and (3) CDS indexes with spread values above 350 bps. Table 9 shows the
summary statistics of the proposed criteria to determine swap
categories for swaps in the credit asset class.\124\
---------------------------------------------------------------------------
\122\ See supra note 77 for a definition of ``conventional
spread.''
\123\ The Commission proposed 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.
\124\ The Commission found that these categories were good
predictors of notional size. This finding was based on an analysis
which used the tenor and spread categories in Table 9 as explanatory
variables in a least squares regression, where the logged value of
the notional amount of the swap was the dependent variable.
Table 9--CDS Index Sample Statistics by Proposed Swap Category Criteria
------------------------------------------------------------------------
Sum of notional
Spread amounts (in Number of trades
billions of USD)
------------------------------------------------------------------------
<=175........................... 3,761 59,887
175-to-350...................... 233 11,045
350>............................ 577 27,998
------------------------------------------------------------------------
Sum of notional
Tenor (in calendar days) amounts Number of trades
------------------------------------------------------------------------
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
------------------------------------------------------------------------
The Commission sought comment on this proposed approach, a series
of alternative criteria to be used, and alternative categories. The
Commission received eight comments regarding the proposed swap
categories for CDS. Five of the comments focused on the proposed tenor
buckets in the Further Block Proposal. SIFMA and Vanguard suggested
that the 4-6 year tenor bucket be divided into four buckets: 4 to 4.5
years, 4.5 to 5 years, 5 to 5.5 years, and 5.5 to 6 years.\125\ AII and
ICI also recommended narrowing the tenor categories for CDS.\126\ MFA
generally supported the Commission's proposed grouping by tenor.\127\
---------------------------------------------------------------------------
\125\ CL-SIFMA at 7-8 (``We believe that such groupings would
better approximate sets of swaps with similar liquidity
characteristics''); CL-Vanguard at 5.
\126\ CL-AII at 8; CL-ICI at 5.
\127\ CL-MFA at 5.
---------------------------------------------------------------------------
Two of the comments focused on the proposed conventional spread
criteria. ISDA/SIFMA expressed support for the proposed use of spread
criteria, but also suggested that the Commission should clarify that
the spread for a CDS transaction will be based on the traded spread,
rather than on the fixed coupon.\128\ Barclays, however, commented that
traded spreads should not be used for categorizing CDS because swaps
may move daily between threshold buckets as spreads can move
substantially over short periods, which would create an unacceptable
level of operational risk for market participants in trying to achieve
compliance.\129\
---------------------------------------------------------------------------
\128\ CL-ISDA/SIFMA at 6 (``swap categories should be based on
the current spread of a transaction in order to reflect . . .
changes in liquidity'').
\129\ CL-Barclays at 8.
---------------------------------------------------------------------------
In addition to the comments regarding the tenor and conventional
spread criteria proposed, commenters also provided a number of
recommendations regarding other potential swap categories for CDS.
Three commenters suggested separate swap categories for individual CDX
index series.\130\ Better Markets, however, argued that using
individual CDX index series to create swap categories would be too
granular and recommended that CDS be divided into single-name and index
categories, with indexes further subdivided into five groups:
sovereign, corporate, municipal, mortgage-backed securities, and
other.\131\ Four commenters recommended that tranches of indices
receive their own unique swap category.\132\ Two commenters suggested
grouping CDS by different product type.\133\ MFA recommended separate
swap categories for indexes and options (as well as tranches).\134\
Finally, eight commenters suggested differentiating between on-the-run
and off-the-run CDS
[[Page 32883]]
indices.\135\ MFA specifically suggested separate minimum block sizes
for the current 5-year on-the-run CDS indices for CDX.NA.IG, CDX.NA.HY,
iTraxx Europe, and iTraxx Europe Crossover.\136\
---------------------------------------------------------------------------
\130\ CL-AII at 8; CL-Barclays at 8; CL-ISDA/SIFMA at 6.
\131\ CL-Better Markets at 6.
\132\ CL-AII at 8; CL-Barclays at 8; CL-ISDA/SIFMA at 6; MFA at
5.
\133\ CL-ICI at 5; CL-ISDA/SIFMA at 6.
\134\ CL-MFA at 5.
\135\ MFA specifically suggested separate minimum block sizes
for the current 5-year on-the-run CDS indices for CDX.NA.IG,
CDX.NA.HY, iTraxx Europe, and iTraxx Europe Crossover. CL-MFA at 5;
CL-AII at 8; CL-Barclays at 8; CL-ICAP at 7; CL-ISDA/SIFMA at 5-6;
CL-SIFMA at 8; CL-Vanguard at 5.
\136\ CL-MFA at 5.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(b)(2) as proposed. In general, the Commission
believes that the proposed criteria--tenor and conventional spread--
provide an appropriate way to group swaps with economic similarities
and to reduce unnecessary complexity for market participants in
determining whether a particular swap is classified within a particular
swap category. In regard to ISDA/SIFMA's suggested clarification, the
Commission clarifies that the spread for a CDS transaction will be
based on the traded spread, rather than on the fixed coupon.
Specifically, the Commission believes that the proposed tenor and
conventional spread categories sufficiently capture the variation in
notional size that is necessary for setting appropriate minimum block
sizes and that refining these categories as suggested by commenters
will not improve the clustering of swaps in order to better set
appropriate minimum block sizes. For example, the Commission notes that
the tenor buckets contained in the adopted rule generally result in
separate categorization for on-the-run and off-the-run indexes for
swaps in the CDS data set. On-the-run indexes, for example, comprised
the vast majority of swaps in the 4-6 year tenor bucket, while off-the-
run indexes were the vast majority of swaps in the 0-2, 2-4, and 6-8.5
year tenor buckets.
The Commission determined these swap categories based on the way
activity 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 on-the-run corporate credit default index swaps with a five-year
tenor, the Commission found that significant trading of corporate
credit default index swaps also occurred in other tenor ranges.\137\
The Commission believes that its approach is appropriate since CDS on
indexes other than corporate indexes (e.g., asset backed indexes,
municipal indexes, sovereign indexes) also trade at tenors other than
five years.\138\
---------------------------------------------------------------------------
\137\ For example, based on the observed CDS data set, corporate
CDS indexes traded in all but the longest of the tenor groups. The
vast majority of transactions outside of the 4-6 year tenor group
were off-the-run series.
\138\ For example, based on the observed CDS data set, the
majority of municipal credit default index swaps traded with tenors
of around 10 years.
---------------------------------------------------------------------------
The Commission, however, decided not to use ``on-the-run'' or
``off-the-run'' designations for grouping CDS indexes into categories
for the following reasons: (i) The underlying components of swaps with
differing versions or series based on the same named index are broadly
similar, if not the same, and are 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) using versions or series
as the criterion for defining CDS swap categories may result in an
unnecessary level of complexity.\139\ Hence, the Commission believes
that while on-the-run and off-the-run indexes may differ in terms of
available liquidity, they nonetheless are economically related to each
other within the categories proposed by the Commission; therefore, on-
the-run indexes could be used to offset much of the risk associated
with off-the-run indices. Moreover, while the off-the-run swaps
generally had less trading activity, and presumably less liquidity,
than the on-the-run swaps, off-the-run index swaps had larger notional
sizes, on average, than on-the run swaps in the same category. Hence,
the more liquid, on-the-run swaps will drive the block size in a
category and will result in lower block sizes for the less liquid swaps
in the category.\140\ The Commission feels that this is a more
conservative approach to setting block sizes for less liquid swaps.
---------------------------------------------------------------------------
\139\ 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 index provider determines the
composition of each index through 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.
\140\ This is similar to the example provided for the tenor
groupings in interest rate swaps in Section II.A.1.
---------------------------------------------------------------------------
In response to the commenters that specifically requested a
differentiation between on-the-run and off-the-run CDS indexes, the
Commission believes that while on-the-run and off-the-run indexes may
differ in terms of available liquidity, they nonetheless are
economically related to each other within the categories proposed by
the Commission such that on-the-run indexes could be used to offset
much of the risk associated with off-the-run indexes. The Commission
also notes that the tenor buckets contained in the adopted rule
generally result in separate categorization for on-the-run and off-the-
run indexes. For the CDS data set, the vast majority of swaps in the 4-
6 year tenor bucket were on-the-run indexes, while the vast majority of
swaps in the 0-2, 2-4, and 6-8.5 year tenor buckets were off-the-run.
In response to commenters that specifically recommended separate
swap categorization for tranches, the Commission believes that the
proposed swap categorization based upon conventional spread criteria
will result in separate categorizations related to tranches where
appropriate.\141\ For example, tranches having significantly different
levels of risk will potentially have spreads traded at levels that
differ enough from the underlying index so as to be placed in
categories that would receive a different block trade size. The
conventional spread reflects the risk of the underlying transaction and
the Commission believes that the risk associated with the transaction
will be the primary determinant of how difficult a transaction is to
hedge. Thus, the Commission believes that categorization of CDS by
conventional spread will capture differences related to tranches where
appropriate.
---------------------------------------------------------------------------
\141\ 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.
---------------------------------------------------------------------------
The Commission notes that the adopted Sec. 43.6(b)(2) establishes
18 separate swap categories for CDS swaps. While none of the commenters
provided suggestions as to precisely how to categorize CDS by tranche,
the Commission believes that creating additional swap categories for
tranches would result in swap categories totaling a multiple of the
proposed 18 swap categories, as each CDS index has multiple tranches.
Establishing swap categories based upon tenor and
[[Page 32884]]
conventional spread criterion as in adopted Sec. 43.6(b)(2) meets the
objectives of grouping swaps with economic similarity and reducing
confusion for market participants in determining whether their swaps
are classified within a particular swap category.
The Commission believes that this approach will mitigate the
administrative burden to both market participants and to the Commission
by limiting the number of swap categories for which appropriate minimum
block sizes need to be calculated. In regard to Barclay's concern that
swaps would move between categories, the Commission believes that
instances where a given swap will move daily between spread levels will
be limited given the small number of spread categories and the observed
distribution of trades. Additionally, the quantitative nature of the
block category calculation should limit the operational risk by
providing clarity and ease of notice to market participants as to what
the minimum block sizes are, even if they are subject to change.
If market participants reach the conclusion that the Commission has
determined specific swap categories in a way that will materially
reduce market liquidity, then those participants are encouraged to
submit data to support their conclusion. If, through its own
surveillance of swaps market activity, the Commission becomes aware
that a specific swap categorization for determination of appropriate
minimum block levels would reduce market liquidity, then the Commission
may exercise its 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.
2. Swap Category in the Equity Asset Class
The Commission proposed a single swap category for swaps in the
equity asset class. The Commission proposed this approach based on: (1)
The existence of a highly liquid underlying cash market for equities;
(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.
The Commission received six comments regarding swap categories in
the equity asset class. AFR supported the single swap category proposed
for the equity asset class.\142\ Five other commenters recommended that
the Commission treat equity swaps similarly to the other asset classes
and establish swap categories based upon a range of criteria.\143\ AII
recommended that equity swaps should be treated as blocks based on
liquidity, and urged the Commission to consider linking equity swap
categories to the liquidity of the underlying index.\144\ Barclays
recommended that swap categories should be established for equity swaps
taking into account transaction volume by index and equity asset class
type, and that broad-based indices should have separate block levels
based upon futures market levels.\145\ ICI recommended closer study of
data on equity swap transactions due to potential differences in
liquidity in the underlying equity cash market.\146\ ISDA/SIFMA
recommended categorizing equity swaps on the basis of underlying index
or basket, product type, notional size, and tenor.\147\ SIFMA stated
that the Commission should establish equity swap block categories based
upon liquidity of the underlying indices.\148\
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\142\ CL-AFR at 6.
\143\ CL-AII at 9; CL-Barclays at 9; CL-ICI at; ISDA/SIFMA at
10-11; SIFMA at 5.
\144\ CL-AII at 9.
\145\ CL-Barclays at 9.
\146\ CL-ICI at 5.
\147\ CL-ISDA/SIFMA at 10-11.
\148\ CL-SIFMA at 5.
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After consideration of the comments received, the Commission is
adopting Sec. 43.6(b)(3) as proposed. While a number of the commenters
point out differences in liquidity in the underlying equity indices to
support separate swap categories within the equity asset class and
establishment of block sizes in equities, these differences do not
undermine the premises underlying the Commission's proposal. Even
taking into account differences in liquidity, (1) there is still a
highly liquid underlying cash market for equities; and (2) the equity
index swaps market is small relative to the futures, options, and cash
equity index markets. These characteristics, combined with the fact
that there are no time delays for reporting block trades in the
underlying equity cash market, makes establishment of swap categories,
and therefore minimum block thresholds, for equity swaps
inappropriate.\149\ The Commission notes that establishing time delays
for reporting block trades in the swaps market when no time delays
exist could negatively impact the price discovery function of the
underlying equity cash market and futures market. Accordingly, the
Commission is adopting Sec. 43.6(b)(3) as proposed.\150\
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\149\ See infra Section II.B(5)(b). In the event that time
delays are established for reporting block trades in the underlying
equity cash market, the Commission may consider establishing swap
categories and minimum block thresholds for equity swaps.
\150\ The Securities and Exchange Commission (``SEC'') has
proposed general criteria that it would consider to set appropriate
minimum block trade sizes for security-based swaps. The SEC,
however, has not proposed specific numerical thresholds at this
time, but rather intends to propose such thresholds upon the
adoption of Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information. 75 FR 75208, 75228 (Dec. 2, 2010).
On May 1, 2013, the SEC reopened the comment period regarding this
proposed rule. See Reopening of Comment Periods for Certain
Rulemaking Releases and Policy Statement Applicable to Security-
Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934
and the Dodd-Frank Wall Street Reform and Consumer Protection Act
(May 1, 2013).
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3. Swap Categories in the FX Asset Class
The Commission proposed establishing swap categories for the FX
asset class based on unique currency combinations, with Sec.
43.6(b)(4)(i) distinguishing futures-related swaps \151\ from swaps
that are not futures-related (covered under proposed Sec.
43.6(b)(4)(ii)). Distinguishing futures-related swaps from other swaps
would allow the Commission to set initial appropriate minimum block
sizes for certain swaps based on DCM block sizes for FX futures
contracts.
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\151\ Under Sec. 43.2, a futures-related swap is defined as 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. See infra notes 169-174 and
accompanying text. Under Sec. 43.6(b)(4)(i), a futures-related swap
is a swap where one of the underlying currencies of the swap is the
subject of a futures contract listed on a DCM.
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The Commission based its approach on the assumption that FX swaps
and futures contracts based upon the same currency draw upon the same
liquidity pools. The Commission proposed in Sec. Sec. 43.6(b)(4)(i)
and (b)(4)(ii) to distinguish FX swaps and instruments based on the
existence of a related futures contract. Liquidity in the underlying
futures market for the currency combinations established in proposed
Sec. 43.6(b)(4)(i) suggested sufficient liquidity in the swaps market
for these currency combinations.
The Commission proposed establishing swap categories for futures-
related swaps under proposed Sec. 43.6(b)(4)(i) based on the unique
currency combinations between the currency of each of the following:
the United States, European Union, United Kingdom, Japan, Australia,
Switzerland, Canada, Republic of South Africa, Republic of Korea,
Kingdom of Sweden, New Zealand, Kingdom of Norway, Denmark, Brazil,
China, Czech Republic, Hungary, Israel, Mexico, New
[[Page 32885]]
Zealand, Poland, Russia, and Turkey.\152\ Hence, proposed Sec.
43.6(b)(4)(i) would establish a separate swap category for each of the
231 unique currency combinations between these currencies. In proposed
Sec. 43.6(b)(4)(ii), the Commission would establish an additional swap
category based on unique currency combinations not included in proposed
Sec. 43.6(b)(4)(i).\153\
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\152\ For example, the euro (EUR) and the Canadian dollar (CAD)
combination would be one swap category; whereas, the Swedish krona
(SEK) and the Korean won (KRW) combination would be a separate swap
category.
\153\ Under proposed Sec. 43.6(e)(2), swaps having currency
combinations described in Sec. 43.6(b)(4)(ii) would all be eligible
to be treated as a block trade or large notional off-facility swap.
Only in the post-initial period would the proposed rules set an
appropriate minimum block size for this category of FX swaps. See
infra Section II.B(5)(c)(ii).
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The Commission received six comments regarding the proposed swap
categories for the FX asset class based on unique currency
combinations. Two commenters recommended additional swap categories for
the FX asset class.\154\ Barclays suggested that EUR- and USD-
denominated transactions should be categorized separately from less
liquid transactions and that distinct block levels should apply to the
following product categories: Forwards, non-deliverable forwards, non-
deliverable options, vanilla options, and other more complex
options.\155\ GFMA recommended more granular swap categories that would
group specific instruments according to similarity of liquidity
profile.\156\ AFR, however, commented that the governing principle in
establishing swap categories should be the reasonable relationship of
swaps within a category to a liquid class of swaps or futures that are
potential hedges for that category and expressed concern that adding
any additional granularity might violate this principle.\157\ AII and
ICI urged the Commission to remove block trading thresholds so that all
transactions would be treated as blocks for the FX asset class during
the initial period, and allow for collection and analysis of SDR data
during this period to determine appropriate swap categories for the
post-initial period.\158\
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\154\ CL-Barclays at 10; CL-GFMA at 2-3.
\155\ CL-Barclays at 10.
\156\ CL-GFMA at 2-3. GFMA also suggested that (1) FX swaps
should be distinguished by tenor, and that (2) block size thresholds
should vary based on time of day, in order to take into account
liquidity across time zones.
\157\ CL-AFR at 6.
\158\ CL-AII at 3; CL-ICI at 5.
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The Commission notes that, since the Further Block Proposal,
Treasury has issued a Final Determination, pursuant to sections
1a(47)(E)(i) and 1b of the CEA, that exempts FX swaps and FX forwards
from the definition of ``swap'' under the CEA. Therefore, 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.\159\ Nevertheless, section 1a(47)(E)(iii)
of the CEA provides that FX swaps and FX forwards transactions still
are not excluded from regulatory reporting requirements to an SDR.
Further, the Commission notes that Treasury's final determination
excludes FX swaps and FX forwards, but does not apply to FX options or
non-deliverable FX forwards. As such, FX instruments that are not
covered by Treasury's final determination are subject to part 43 of the
Commission's regulations.
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\159\ See Determination of Foreign Exchange Swaps and Foreign
Exchange Forwards under the Commodity Exchange Act, 77 FR 69,694,
Nov. 20, 2012.
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After consideration of the comments received and the complexity of
the proposed approach, the Commission is adopting Sec. 43.6(b)(4) with
modifications. The Commission is modifying proposed Sec. 43.6(b)(4)(i)
to establish swap categories based on the unique currency combinations
between one super-major currency paired with one of the following: (1)
Another super major currency \160\; (2) a major currency \161\; or (3)
a currency of Brazil, China, Czech Republic, Hungary, Israel, Mexico,
New Zealand, Poland, Russia, or Turkey. This approach differs from the
proposal in that the adopted swap categories will not include the
unique currency combinations between major currencies and other major
currencies, between major currencies and each of the ten additional
enumerated non-major currencies, and between the ten additional
enumerated non-major currencies. Under Sec. 43.6(b)(4) as adopted, all
swap transactions subject to part 43 \162\ in these unique currency
combinations may be treated as blocks.\163\
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\160\ As set out in Section II.A.1., the super-major currencies
are the United States dollar (USD), European Union Euro Area euro
(EUR), United Kingdom pound sterling (GBP), and Japan yen (JPY).
\161\ As set out in Section II.A.1., the major currencies are
the 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).
\162\ As stated above, this section only applies to FX options
and non-deliverable FX forwards. Treasury has exempted FX swaps and
FX forwards from the definition of ``swap'' under the CEA. See
Determination of Foreign Exchange Swaps and Foreign Exchange
Forwards under the Commodity Exchange Act, 77 FR 69,694, Nov. 20,
2012.
\163\ See Table 10 for the enumerated swap categories
established by Sec. 43.6(b)(4)(i).
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The changes to Sec. 43.6(b)(4) will significantly reduce the
number of swap categories, hence reducing complexity, but will still
ensure coverage of the most liquid currency combinations.\164\
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\164\ According to the BIS Triennial Central Bank Survey:
Foreign Exchange and Derivatives Market Activity in April 2010
(preliminary results, dated September 2010), the currency
combinations enumerated under adopted Sec. 43.6(b)(4)(i) comprise
more than 80% of global FX market turnover.
According to the Survey of North American Foreign Exchange
Volume in October 2012, the proposed categories established by Sec.
43.6(b)(4)(i) cover more than 86% of the notional value of total
monthly volume of FX swaps that are priced or facilitated by traders
in North America. The Survey of North American Foreign Exchange
Volume is conducted by the Foreign Exchange Committee, which
includes representatives of major financial institutions engaged in
foreign currency trading in the United States and is sponsored by
the Federal Reserve Bank of New York. The survey is designed to
measure the level of turnover in the foreign exchange market.
Turnover is defined as the gross value in U.S. dollar equivalents of
purchases and sales entered into during the reporting period. The
data covers a one-month period in order to reduce the likelihood
that very short-term variations in activity might distort the data
and include all transactions that are priced or facilitated by
traders in North America (United States, Canada, and Mexico).
Transactions concluded by dealers outside of North America are
excluded even if they are booked to an office within North America.
The survey also excludes transactions between branches,
subsidiaries, affiliates, and trading desks of the same firm. The
October 2012 data can be located at http://www.newyorkfed.org/fxc/2012/octfxsurvey2012.pdf.
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While not affording block treatment to all swaps in the FX asset
class subject to part 43, these modifications will increase the number
of currency combinations which will be eligible to be blocks, many of
which have limited liquidity.\165\ Yet, this modified approach still
allows the Commission to set initial appropriate minimum block sizes
for the most liquid categories based on the block trade size thresholds
set by DCMs for economically-related futures contracts, as enumerated
under adopted Sec. 43.6(b)(4)(i). The Commission believes that the
categories established by proposed Sec. 43.6(b)(4)(i) and kept under
adopted Sec. 43.6(b)(4)(i) provide the separate classification for
EUR- and USD-denominated transactions recommended by Barclays.\166\
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\165\ For example, the unique currency combination of the
Australian Dollar (AUD) and the Canadian Dollar (CAD) had a minimum
block threshold of 10,000,000 CAD in the Further Block Proposal.
Under adopted Sec. 43.6(b)(4), all trades in this unique currency
combination will be eligible for block treatment.
\166\ The Commission emphasizes that the swap categories for the
FX asset class are unique currency combinations between each of the
super-major currencies, major currencies, and additional currencies
listed. The classification of EUR and USD as super-major currencies
simply means that both currencies are individually eligible for
inclusion among the unique currency combinations used for swap
categorization. In the FX asset class, there is no separate bucket
for super-major currencies (such as the buckets in the interest rate
swap asset class described above).
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[[Page 32886]]
The Commission will also modify Sec. 43.6(b)(4)(ii) to establish
one swap category for the currency combinations not included in Sec.
43.6(b)(4)(i). This category will encompass the other currency
combinations proposed, but not adopted, by the Commission, as well as
other non-futures related currency swaps. With the modifications to
Sec. 43.6(b)(4), the euro (EUR) and the Canadian dollar (CAD)
combination will still be one swap category as in the original proposal
pursuant to Sec. 43.6(b)(4)(i). However, the Swedish krona (SEK) and
the Korean won (KRW) combination will be grouped with all the other
swaps covered by Sec. 43.6(b)(4)(ii) into one swap category. As a
further example, a swap of the Czech koruna (CZK) and the Brazilian
real (BRL) will be in the same category as the SEK-KRW swap. While the
swaps grouped into one category by Sec. 43.6(b)(4)(ii) may have
different liquidity levels, these swaps will all be subject to the time
delays provided to block trades and large notional off-facility swaps
in both the initial and post-initial periods.
The Commission notes that the adopted Sec. 43.6(b)(4)(i)
establishes 78 unique currency combinations, covering a vast majority
of the notional value of FX swaps concluded by traders in North
America. Creating additional swap categories, as suggested by Barclays
and GFMA,\167\ would result in swap categories totaling a multiple of
this already large number without drastically increasing the number of
swaps that will be subject to real-time reporting without a delay.
Establishing swap categories based upon unique currency combinations as
in adopted Sec. 43.6(b)(4)(i) meets the objectives of grouping swaps
with economic similarity and reducing confusion for market participants
in determining whether their swaps are classified within a particular
swap category. The Commission believes that these changes will reduce
the administrative burden to both market participants and to the
Commission by reducing the number of swap categories for which
appropriate minimum block sizes need to be calculated.\168\
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\167\ CL-Barclays at 10; CL-GFMA at 2-3.
\168\ In the Further Block Proposal, every unique currency
combination would be considered a unique swap category, which means
there would be hundreds of different swap categories for the FX
asset class. Proposed Sec. 43.6(b)(4)(i) alone established 231 swap
categories. Many additional categories would have been established
under proposed Sec. 43.6(b)(4)(ii). The adopted Sec. 43.6(b)(4)
creates 78 categories requiring the calculation of appropriate
minimum block sizes in the post-initial period.
Table 10--Swap Categories Established Under Sec. 43.6(b)(4)(i)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Super-major currencies
-------------------------------------------------------------------------------------------------------------------
Euro (EUR) British pound (GBP) Japanese yen (JPY) U.S. dollar (USD)
--------------------------------------------------------------------------------------------------------------------------------------------------------
British Pound (GBP)................. EUR-GBP ........................... ........................... ...........................
Japanese Yen (JPY).................. EUR-JPY GBP-JPY ........................... ...........................
U.S. Dollar (USD)................... EUR-USD GBP-USD JPY-USD ...........................
Australian Dollar (AUD)............. AUD-EUR AUD-GBP AUD-JPY AUD-USD
Canadian Dollar (CAD)............... CAD-EUR CAD-GBP CAD-JPY CAD-USD
Swiss Francs (CHF).................. CHF-EUR CHF-GBP CHF-JPY CHF-USD
Denmark Krone (DKK)................. DKK-EUR DKK-GBP DKK-JPY DKK-USD
Korean Won (KRW).................... KRW-EUR KRW-GBP KRW-JPY KRW-USD
Swedish Krona (SEK)................. SEK-EUR SEK-GBP SEK-JPY SEK-USD
Norwegian Krone (NOK)............... NOK-EUR NOK-GBP NOK-JPY NOK-USD
New Zealand Dollar (NZD)............ NZD-EUR NZD-GBP NZD-JPY NZD-USD
South African Rand (ZAR)............ ZAR-EUR ZAR-GBP ZAR-JPY ZAR-USD
Brazilian Real (BRL)................ BRL-EUR BRL-GBP BRL-JPY BRL-USD
Czech Koruna (CZK).................. CZK-EUR CZK-GBP CZK-JPY CZK-USD
Hungarian Forint (HUF).............. HUF-EUR HUF-GBP HUF-JPY HUF-USD
Israeli Shekel (ILS)................ ILS-EUR ILS-GBP ILS-JPY ILS-USD
Mexican Peso (MXN).................. MXN-EUR MXN-GBP MXN-JPY MXN-USD
Polish Zloty (PLN).................. PLN-EUR PLN-GBP PLN-JPY PLN-USD
Chinese Renminbi (RMB).............. RMB-EUR RMB-GBP RMB-JPY RMB-USD
Russian Ruble (RUB)................. RUB-EUR RUB-GBP RUB-JPY RUB-USD
Turkish Lira (TRY).................. TRY-EUR TRY-GBP TRY-JPY TRY-USD
--------------------------------------------------------------------------------------------------------------------------------------------------------
4. Swap Categories in the Other Commodity Asset Class
The Commission proposed to determine swap categories in the other
commodity asset class based on three sets of groupings. The first two
sets of groupings create categories of swaps which are economically
related to specific futures contracts (i.e., futures-related swaps
\169\) or swap contracts under proposed Sec. Sec. 43.6(b)(5)(i) and
(ii). The third set of groupings creates categories based on swaps
sharing a common product type under proposed Sec. 43.6(b)(5)(iii).
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\169\ Proposed Sec. 43.2 defines a futures-related swap as 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. The Commission is adopting this
definition as proposed.
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The Commission proposed defining ``economically related'' \170\ in
Sec. 43.2 as a direct or indirect reference to the same commodity at
the same delivery location or locations,\171\ or with the
[[Page 32887]]
same or substantially similar cash market price series.\172\ The
Commission noted that this definition would (1) ensure that swap
contracts with shared reference price characteristics indicating
economic substitutability (i.e., swaps in the category can be used to
offset some or all of the risks associated with positions in the
underlying commodity) are grouped together within a common swap
category; \173\ and (2) provide further clarity as to which swaps are
described in Sec. 43.4(d)(4)(ii)(B), which was previously finalized
under the Real-Time Reporting Final Rule.\174\
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\170\ In the Real-Time Reporting Final Rule, 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 1211. 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.
\171\ 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
latter contract.
\172\ 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.
\173\ The Commission proposed 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 proposed 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. See infra Section II.B(6)(b). The Commission is
adopting this definition as proposed.
\174\ The Real-Time Reporting Final Rule previously finalized
Sec. 43.4(d)(4)(ii)(B), which requires a registered SDR to publicly
disseminate any publicly reportable swap transaction in the other
commodity asset class that is ``economically related'' to one of the
contracts described in appendix B to part 43, but did not define
``economically related.'' This definition, as proposed and to be
adopted here, would apply to the use of this term throughout all of
part 43 of the Commission's regulations.
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The first set of swap categories, covered under proposed Sec.
43.6(b)(5)(i), would establish separate swap categories for swaps that
are economically related to one of the contracts listed in appendix B
to part 43. Therefore, proposed Sec. 43.6(b)(5)(i) would establish one
swap category for each contract listed in appendix B to part 43. The
Real-Time Reporting Final Rule previously finalized appendix B to part
43, which lists 29 Enumerated Physical Commodity Contracts and Other
Contracts (i.e., Brent Crude Oil (ICE)).\175\ In the Further Block
Proposal, the Commission proposed to add 13 electricity and natural gas
swap contracts to appendix B to part 43.\176\ Therefore, proposed Sec.
43.6(b)(5)(i) would establish 42 swap categories such that each
contract would be the basis for its own other commodity swap category,
and all swaps that are economically related to that contract would be
included in that swap category.
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\175\ As noted by the Commission in the Real-Time Reporting
Final Rule, the 28 Enumerated Physical Commodity Contracts are
traded on U.S. DCMs, while Brent Crude Oil (ICE) futures contracts
are primarily traded in Europe. 77 FR 1211 n. 288.
\176\ See infra Section II.B5(d)(i). The Commission had
previously issued orders deeming these contracts as ``significant
price discovery contracts'' in connection with trading on exempt
commercial markets (``ECMs''), based on, among other factors, their
material liquidity and price discovery function. See infra Section
III.C(4)(a). These contracts included: AECO Financial Basis Contract
(``AEC'') traded on the IntercontinentalExchange, Inc. (``ICE'')
(See 75 FR 23697); NWP Rockies Financial Basis Contract (``NWR'')
traded on ICE (See 75 FR 23704); PG&E Citygate Financial Basis
Contract (``PGE'') traded on ICE (See 75 FR 23710); Waha Financial
Basis Contract (``WAH'') traded on ICE (See 75 FR 24655); Socal
Border Financial Basis Contract (``SCL'') traded on ICE (See 75 FR
24648); HSC Financial Basis Contract (``HXS'') traded on ICE (See 75
FR 24641); ICE Chicago Financial Basis Contract (``DGD'') traded on
ICE (See 75 FR 24633); SP-15 Financial Day-Ahead LMP Peak Contract
(``SPM'') traded on ICE (See 75 FR 42380); SP-15 Financial Day-Ahead
LMP Off-Peak Contract (``OFP'') traded on ICE (See 75 FR 42380); PJM
WH Real Time Peak Contract (``PJM'') traded on ICE (See 75 FR
42390); PJM WH Real Time Off-Peak Contract (``OPJ'') traded on ICE
(See 75 FR 42390); Mid-C Financial Peak Contract (``MDC'') traded on
ICE (See 75 FR 38469); Mid-C Financial Off-Peak Contract (``OMC'')
traded on ICE (See 75 FR 38469).
As discussed further below, as of October 12, 2012, ICE withdrew
its listing of these contracts as a result of converting its cleared
OTC swap contracts and related options to futures listed at ICE
Futures U.S. and ICE Futures Europe. Accordingly, ICE converted
these contracts into economically equivalent futures contracts and
has listed them for trading. See ICE--Swaps to Futures Transition,
https://www.theice.com/S2F.jhtml (last visited May 7, 2013).
Therefore, as discussed further below, the Commission has determined
in this final rule to add the converted contracts to appendix B to
part 43, such that each contract will serve as a basis for an other
commodity swap category. See infra Section II.A(4).
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The Commission has separately enumerated these contracts since it
previously has identified these 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.
Moreover, the Commission has also previously determined that any swap
that references or is economically related to these contracts (along
with the Brent Crude Oil (ICE) contract or any contract that is
economically related to it) has sufficient liquidity to ensure that the
public dissemination of swap transaction and pricing data for swaps
based on this reference asset poses little risk of disclosing
identities of parties, business transactions, or market positions.\177\
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\177\ 77 FR 1211.
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The second set of swap categories, covered under proposed Sec.
43.6(b)(5)(ii), 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;
and (2) economically related to a relevant futures contract that is
subject to the block trade rules of a DCM. Proposed Sec.
43.6(b)(5)(ii) listed the 18 futures contracts to which these swaps are
economically related, and hence, establishes 18 swap categories.\178\
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) differ from the swap categories established by
proposed Sec. 43.6(b)(5)(ii) in that the former may be economically
related to futures or swap 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.\179\
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\178\ As proposed, 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.
\179\ 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.''
---------------------------------------------------------------------------
The third set of swap categories, covered under proposed Sec.
43.6(b)(5)(iii), would establish swap categories for all other
commodity swaps that are not categorized under proposed Sec.
43.6(b)(5)(i) or (ii). These swaps are not economically related to any
of the contracts listed in appendix B to part 43 or any of the
contracts listed in proposed Sec. 43.6(b)(5)(ii). For these other
commodity swaps, 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. 14'' or ``Sugar
No. 5,'' the underlying asset would be grouped as ``Sugar.'' The
Commission thereafter
[[Page 32888]]
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 ``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.''
Comments on the proposed swap categories in the other commodity
asset class varied. CME Group agreed with the proposed approach to
establishing swap categories in the other commodity asset class in the
initial period because it would allow appropriate minimum block level
sizes to be set based on the minimum block sizes set by DCMs.\180\ ICI,
however, recommended that the Commission obtain and analyze trading
data from SDRs first before determining whether the proposed swap
categories are appropriate.\181\
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\180\ CL-CME 3-4. Proposed Sec. 43.6(e)(1) established
appropriate minimum block sizes in the initial period for swap
categories in proposed Sec. 43.6(b)(5)(i)-(ii) based on the block
sizes for related futures contracts set by DCMs, except for natural
gas and electricity swaps proposed to be added to appendix B of part
43.
\181\ CL-ICI at 5.
---------------------------------------------------------------------------
Several commenters commented on the granularity of the proposed
swap categories. Some commenters recommended more granular categories
to account for the differences in liquidity and execution risk between
shorter- and longer-dated contracts.\182\ Similarly, Barclays also
commented that swap categories in the other commodity asset class
should consider that products typically experience a reduction in
liquidity beyond the first or second year.\183\ Other commenters,
however, opposed the proposed categories as too narrow and recommended
broadening the definition of ``economically related'' and reducing the
number of swap categories to reflect increasing price correlation
between different categories of commodities as well as existing hedging
practices by market participants.\184\
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\182\ CL-ICAP Energy at 4; CL-fia at 3.
\183\ CL-Barclays at 9.
\184\ CL-Better Markets at 6-7; CL-AFR at 6-7.
---------------------------------------------------------------------------
Parity Energy requested that the Commission establish a separate
category for swaps that are economically related to crude oil options
because transactions in crude oil options are typically fewer and
larger in size than transactions in crude oil futures contracts.\185\
Parity Energy also agreed with the proposed distinction in swap
categories between swaps that are economically related to natural gas
swaps and swaps that are economically related to natural gas swap
options.\186\
---------------------------------------------------------------------------
\185\ CL-Parity at 4-5.
\186\ Id. As proposed, the initial minimum block size for swaps
that are economically related to Henry Hub Natural Gas futures was
set at 1,000,000 mmBtu; the initial minimum block size for Henry Hub
Natural Gas options was set at 5,500,000 mmBtu.
---------------------------------------------------------------------------
The Commission is adopting the definition of ``economically
related'' as proposed. The Commission believes that broadening the
definition, as suggested by some commenters, would reduce the precision
with which swaps in the other commodity asset class can be properly
categorized. As proposed, the definition of ``economically related'' is
sufficient in that it (1) ensures that swap contracts with shared
reference price characteristics (indicating economic substitutability)
are grouped together within a common swap category and (2) provides
further clarity as to which swaps are described in Sec.
43.4(d)(4)(ii)(B).
Furthermore, the Commission believes that its general approach to
establishing swap categories under Sec. 43.6(b)(5)(i)-(iii) is
appropriate and is adopting the text of Sec. 43.6(b)(5)(i)-(iii)
largely as proposed, with the exception of some proposed swap
categories in Sec. 43.6(b)(5)(ii).\187\ With the conversion of the 13
electricity and natural gas swap contracts proposed to be added to
appendix B to part 43 into DCM-listed, economically equivalent futures
contracts,\188\ the Commission is making one modification by
establishing swap categories and adopting initial appropriate minimum
block sizes corresponding to those set by a DCM for those futures
contracts. With respect to the swap categories established under Sec.
43.6(b)(5)(i), the Commission believes that establishing categories for
swaps that are economically related to one of the referenced futures
contracts is appropriate because these contracts have previously been
identified 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.
---------------------------------------------------------------------------
\187\ The Commission is not adopting separate swap categories
that it proposed in the Further Block Proposal for swaps that are
economically related to the following NYMEX futures contracts: Gulf
Coast Gasoline; Gulf Coast Ultra Low Sulfur Diesel; and New York
Harbor Ultra Low Sulfur Diesel. As of October 15, 2012, NYMEX
eliminated block trading in these contracts because they have no
open interest. The Commission is also removing the swap category for
swaps that reference or are economically related to Non-Farm Payroll
futures contract, the International Skimmed Milk Powder, and Wood
Pulp as these contracts are no longer listed for trading.
\188\ See supra note 176.
---------------------------------------------------------------------------
With respect to the swap categories established under Sec.
43.6(b)(5)(i)-(ii), the Commission is establishing swap categories and
adopting initial appropriate minimum block sizes which correspond with
those set by a DCM for economically related futures contracts in the
initial period.\189\ Hence, to the extent possible, the Commission is
relying upon the DCMs' knowledge of and experience with liquidity in
related futures markets until additional data becomes available. With
respect to the swap categories established under Sec. 43.6(b)(5)(iii),
the Commission believes that setting swap categories by product type
would allow the Commission to set appropriate minimum block sizes for
groups of transactions that have similar underlying physical commodity
market characteristics. Accordingly, the Commission does not believe
that establishing swap categories that are broader than proposed is
necessary to enhance market transparency.
---------------------------------------------------------------------------
\189\ See infra Section II.B(5)(d).
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[[Page 32889]]
Furthermore, the Commission is not using additional criteria to
create more granular swap categories in the other commodity asset
class. While commodity swaps within a particular swap category may
feature different liquidity and risk profiles based on their tenor, the
Commission is not aware of any data that would warrant additional swap
categories. As swaps trading data becomes available, the Commission
will examine such data to determine whether establishing additional
swap categories would be appropriate.
The other main modification to the swap categories established
under Sec. 43.6(b)(5) is that the Commission is not adopting separate
swap categories for swaps that are economically related to the options
contracts listed in appendix F of the Further Block Proposal.\190\
Consistent with the Commission's definitions of ``economically-
related'' and ``futures-related swap,'' the Commission considers such
swaps, which feature an optionality component, to be economically
related to the corresponding futures contracts adopted in appendix F of
this final rule for purposes of determining swap categories. This
approach to categorizing such swaps is consistent with the Commission's
methodology to establish initial appropriate minimum block size for
swaps with optionality for all asset classes.\191\ Under this
methodology, the notional size of swaps with optionality in the initial
period will be equal to the notional size of the swap component without
the optional component. As discussed further below, the Commission is
adopting this methodology as proposed, and therefore will not consider
optionality in the determination of a swap contract's notional size--
allowing block sizes to be established based on the block sizes set by
DCMs for options contracts would contradict this approach.
---------------------------------------------------------------------------
\190\ These options contracts listed in proposed Appendix F,
which are subject to a minimum DCM block size rule, included Cocoa
(ICE); Coffee (ICE); Cotton No. 2 (ICE); Frozen Concentrated Orange
Juice (ICE); Gold (COMEX and NYSE Liffe); New York Harbor No. 2
Heating Oil (NYMEX); Silver (COMEX and NYSE Liffe); Sugar
11 (ICE); and Sugar 16 (ICE).
\191\ See infra Section II.C.
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5. Comments Regarding Swap Categories Across Asset Classes
The Commission received a number of comments suggesting that, for
all asset classes, the Commission establish separate swap categories,
with separate appropriate minimum block sizes, for infrequently traded
or illiquid swaps. Javelin and SDMA did not think infrequently-traded
swaps posed an obstacle and recommended swap categorization that would
account for hedging for illiquid swaps through synthetic/portfolio
hedging through liquidity of economically equivalent swaps.\192\
Barclays suggested that all swaps made available to trade that trade
less than three times a day should be treated as blocks, as market
makers otherwise will be reluctant to quote prices.\193\ Alternatively,
Barclays suggested removing such swaps from the ``available to trade''
category and thereby exempting them from post-trade reporting.\194\
ISDA/SIFMA requested block treatment for all infrequently traded swaps
and suggested a benchmark tied to precise daily trading frequency
including a time delay for illiquid products generally.\195\ To support
this approach, ISDA/SIFMA cited a Commission study showing that market
participants prefer off-exchange bilateral execution for illiquid
instruments because of liquidity concerns.\196\ ISDA/SIFMA suggested
that a single transaction, regardless of size, in such infrequently-
traded or illiquid swaps may move the market.\197\ GFMA suggested
treating all infrequently-traded swaps as blocks and defines such
transactions as exhibiting all or some of the following features: (1)
The constituent swap or swaps to which they are economically related
are not 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.\198\
Parascandola recommended block treatment for small notional and odd-lot
trades, particularly in index products where the notional amount is
below $10 million.\199\ Kinetix suggested that transactions in any
product with fewer than 250 transactions annually should receive
treatment as block trades.\200\ Vanguard urged a more granular approach
to swap categories and thresholds to ``recognize distinct liquidity
pools.'' \201\ Vanguard and SIFMA suggested that swaps that trade fewer
than 14 trades per day should be blocks.\202\ AII suggested block
treatment for swaps that trade less than 5 times per day.\203\
---------------------------------------------------------------------------
\192\ CL-Javelin at 5-6; CL-SDMA at 6.
\193\ CL-Barclays at 4.
\194\ Id.
\195\ ISDA/SIFMA recommended that every transaction (regardless
of size) in a swap category for which there are no more than 14
swaps traded per business day receive block treatment for a period
of 1 year. CL-ISDA/SIFMA at 12.
\196\ According to ISDA/SIFMA, ``[f]orcing the same transparency
standards on market participants for both liquid and illiquid
products will be detrimental. Instantaneous trade disclosure for
highly illiquid products, combined with the potential for SEF or DCM
execution, is likely to erode their liquidity further and to do
severe damage to the safety and soundness of the system as a
whole.'' Id.
\197\ Id.
\198\ CL-GFMA at 3.
\199\ CL-Parascondola at 1.
\200\ CL-Kinetix at 1.
\201\ CL-Vanguard at 5.
\202\ CL-SIFMA at 10; CL-Vanguard at 7.
\203\ CL-AII at 6.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting the swap categories described in the sections above. The
Commission believes that the trade frequency of a single instrument is
but one measure of liquidity for such a swap and does not factor in the
pool of instruments that are capable of providing an economically
equivalent position, either individually or on a portfolio basis.
B. Appropriate Minimum Block Size Methodologies for the Initial and
Post-Initial Periods
The Commission proposed 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
size methodologies for swaps within: (1) Swap categories in 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.
[[Page 32890]]
1. Phase-In of Appropriate Minimum Block Sizes
As discussed in Section I.C.2. above, the Commission proposed a
phase-in of its regulations regarding appropriate minimum block size
methodologies so that market participants could better adjust their
swap trading strategies to manage risk, secure new technologies, and
make necessary arrangements to comply with part 43. Thus, the
Commission proposed 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).
The Commission received ten comments regarding the proposed phase-
in of its appropriate minimum block size methodologies. Four
commenters, AII, EEI, SIFMA, and Vanguard, requested that the
Commission apply block status to all swaps during the initial
period.\204\ AII stated that removing (or lowering) block thresholds
would appropriately transition the market and avoid harming
liquidity.\205\ SIFMA recommended collecting SDR data during the
initial period and gradually and iteratively phasing in block
thresholds.\206\ Vanguard also expressed concern regarding the
liquidity impacts of setting block thresholds without more data.\207\
---------------------------------------------------------------------------
\204\ CL-AII at 3; CL-EEI at 5; CL-SIFMA at 3; CL-Vanguard at 7.
\205\ CL-AII at 3.
\206\ CL-SIFMA at 3.
\207\ CL-Vanguard at 7.
---------------------------------------------------------------------------
Eight commenters suggested that the Commission establish a more
conservative threshold during the initial period. AII recommended that
the Commission either remove block trading thresholds during the
initial period or lower the thresholds below the proposed levels to
appropriately transition the market and avoid unnecessarily harming
liquidity.\208\ Barclays recommended introducing block levels that
allow for empirical analysis of the transaction data and sequentially
increasing block sizes until such point as the desired equilibrium
between transparency and liquidity is reached.\209\ GFMA stated that,
if the Commission used a percentage notional test, then it should
introduce it in a phased manner to assess the impact on the market over
time and ensure it has sufficient flexibility to amend the notional
percentage.\210\ ICAP Energy proposed specific initial block thresholds
for PJM at 50 MW/Hr and for SP-15 and Mid-C at 30 MW/Hr, and for
natural gas basis swaps at 2500 MMBTUs/day.\211\ ICI, while supporting
a 50 percent notional amount calculation, urged the Commission to
phase-in the calculation for very illiquid instruments (less than 3 or
4 trades per week) by first implementing a 25 percent notional amount
calculation, in order to alleviate potential harmful effects of
disclosure of large block sizes on liquidity, particularly in illiquid
swaps markets.\212\ ISDA/SIFMA stated that the Commission should phase
in the block threshold in order to allow trading on SEFs and DCMs to
develop and suggested setting the threshold based on a 25-percent
notional amount calculation.\213\ SIFMA proposed a multi-phase process
for establishing block levels, starting with a one-year data collection
phase, followed by an initial period with low block levels.\214\ The
block levels would then be decreased if the Commission found that
liquidity significantly decreased or bid-ask spreads significantly
increased over the quarter for swaps close to, but below, the block
threshold.\215\ WMBAA encouraged the Commission to implement lower
block trade thresholds while the post-trade reporting requirements are
implemented and market participants begin providing data to SDRs for
cleared and uncleared swaps.\216\
---------------------------------------------------------------------------
\208\ CL-AII at 3.
\209\ CL-Barclays at 11.
\210\ CL-GFMA at 3.
\211\ CL-ICAP Energy at 3.
\212\ CL-ICI at 7.
\213\ CL-ISDA/SIFMA at 13.
\214\ CL-SIFMA at 3.
\215\ Id.
\216\ CL-WMBAA at 4.
---------------------------------------------------------------------------
After consideration of the comments above, the Commission is
adopting a phased-in approach as proposed, but with modifications in
response to the comments above regarding phasing, as more fully
described below.
2. Overview of Proposed Approach
The chart below summarizes swap categories and calculation
methodologies that the Commission proposed for each asset class in both
the initial period and the post-initial period.
[[Page 32891]]
Proposed Approach
----------------------------------------------------------------------------------------------------------------
Post-initial
Asset class Swap category criteria Initial implementation implementation period
period \217\
----------------------------------------------------------------------------------------------------------------
Interest Rates................... By unique currency and 67-percent notional 67-percent notional
Credit........................... tenor grouping \218\ amount calculation by amount calculation by
By tenor and conventional swap category \219\ swap category \220\
spread grouping \221\.
FX............................... By numerated FX currency Based on DCM futures
combinations (i.e., block size by swap
futures related) \222\ category \223\
By non-enumerated FX All trades may be
currency combinations treated as block trades
(i.e., non-futures \225\
related) \224\
Other Commodity.................. By economically-related Based on DCM futures
Appendix B to part 43 block size by swap
contract if the swap is category \227\
(1) futures related and
(2) the relevant futures
contract is subject to
DCM block trade rules
\226\
By economically-related No trades may be treated
Appendix B to part 43 as blocks \229\
contract if the swap is:
(1) futures related and
(2) the relevant futures
contract is not subject
to DCM block trade rules
\228\
By economically-related Appropriate minimum
Appendix B to part 43 block size equal to $25
contract if the swap is million \231\
(1) a listed natural gas
or electricity swap
contract and (2) the
relevant Appendix B
contract is not futures
related \230\
By swaps that are Based on DCM futures
economically related to block size by swap
the list of 18 contracts category \233\
listed in Sec.
43.6(b)(5)(ii) \232\
By Appendix D to part 43 All trades may be
commodity group, for treated as block trades
swaps not economically \235\
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)
\234\
---------------------------------------------------
Equity........................... All equity swaps \236\... No trades may be treated as blocks \237\
----------------------------------------------------------------------------------------------------------------
3. The 67-Percent Notional Amount Calculation for Determination of
Appropriate Minimum Block Sizes
The Commission proposed using 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), 43.6(e)(1), and
43.6(f)(1).\238\ The Commission also proposed using a 67-percent
notional amount calculation to determine post-initial appropriate
minimum block sizes for swaps in the FX and other commodity asset
classes pursuant to Sec. 43.6(f)(1).
---------------------------------------------------------------------------
\217\ This post-initial implementation period would commence
after an initial period, lasting at least one year. Thereafter, the
Commission would determine appropriate minimum block sizes a minimum
of once annually. See proposed Sec. 43.6(f)(1).
\218\ See proposed Sec. 43.6(b)(1).
\219\ See proposed Sec. 43.6(c)(1).
\220\ See proposed Sec. 43.6(f)(2).
\221\ See proposed Sec. 43.6(b)(2).
\222\ See proposed Sec. 43.6(b)(4)(i).
\223\ See proposed Sec. 43.6(e)(1).
\224\ See proposed Sec. 43.6(b)(4)(ii).
\225\ See proposed Sec. 43.6(e)(2).
\226\ See proposed Sec. 43.6(b)(5)(i).
\227\ See proposed Sec. 43.6(e)(1).
\228\ See proposed Sec. 43.6(b)(5)(i).
\229\ See proposed Sec. 43.6(e)(3).
\230\ See proposed Sec. 43.6(b)(5)(i).
\231\ See proposed Sec. 43.6(e)(3).
\232\ See proposed Sec. 43.6(b)(5)(ii).
\233\ See proposed Sec. 43.6(e)(1).
\234\ See proposed Sec. 43.6(b)(5)(iii) and the product types
groupings listed in proposed appendix D to part 43.
\235\ See proposed Sec. 43.6(e)(2).
\236\ See proposed Sec. 43.6(b)(3).
\237\ See proposed Sec. 43.6(d).
\238\ 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.
---------------------------------------------------------------------------
The 67-percent notional amount calculation as proposed 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;
\239\ (step 2) convert to the same currency or units and use a
``trimmed data set''; \240\ (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 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
[[Page 32892]]
point of two significant digits; \241\ 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 final rule.
---------------------------------------------------------------------------
\239\ See note 85 supra for the definition of publicly
reportable swap transaction. Since the Commission proposed 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.
\240\ See proposed amendment to Sec. 43.2 and the discussion
infra in this section.
\241\ 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.
---------------------------------------------------------------------------
Twenty-eight commenters provided general comments on the resulting
proposed block sizes or on the general approach of using a notional
amount calculation. Out of the 28 commenters, 14 opposed the 67 percent
notional amount calculation and/or supported lower appropriate minimum
block sizes,\242\ 12 supported the 67 percent notional amount
calculation and/or supported higher appropriate minimum block
sizes,\243\ 1 commenter felt unable to comment on the 67 percent
notional amount calculation without actual swap data,\244\ and 1
commenter opposed the 67 percent notional calculation for the other
commodity asset class, but also felt that the 50 percent notional
calculation was too low for interest rates.\245\
---------------------------------------------------------------------------
\242\ Commenters in this category include AII, Barclays, CME,
Freddie Mac, ICAP Energy, ICAP North America, ICI, ISDA/SIFMA, MFA,
Morgan Stanley, Pierpont, SIFMA, Vanguard, WMBAA.
\243\ Commenters in this category include Arbor, AFR, Barnard,
Better Markets, CRT, Currenex, Javelin, Jefferies, ODEX, RJ O'Brien,
SDMA, Spring Trading.
\244\ CL-GFMA at 3.
\245\ CL-FIA at 2-3.
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Of the 14 commenters who opposed the 67 percent notional amount
calculation and/or supported lower appropriate minimum block sizes, two
commenters, CME and Barclays, opposed the notional amount calculation
generally, but not necessarily the resulting block sizes.\246\ CME
stated that the rule is arbitrary and unrelated to the explicit goals
of Dodd-Frank with respect to setting appropriate minimum block
sizes.\247\ Barclays stated that the calculation is not based on any
analysis of the impact that these thresholds will have on liquidity or
on the corresponding costs to market participants.\248\ The other
commenters in this group generally expressed concern that the
appropriate minimum block sizes were too large and would reduce
liquidity and/or disrupt markets. For example, AII stated that ``we
believe that if the CFTC utilizes the 67 percent notional calculation
required under the Proposed Rules, the CFTC will sacrifice liquidity
for certain swap products and alter the proper functioning of the
marketplace in the name of transparency.'' \249\
---------------------------------------------------------------------------
\246\ CL-CME at 2; CL-Barclays at 10.
\247\ CL-CME at 2.
\248\ CL-Barclays at 10.
\249\ CL-AII at 2.
---------------------------------------------------------------------------
Several of the commenters who opposed the 67 percent notional
amount calculation and/or supported lower appropriate minimum block
sizes specifically discussed the 50 percent notional amount
calculation. These commenters generally expressed concern that the 67
percent notional amount calculation resulted in appropriate minimum
block sizes that are too high and would result in reduced liquidity in
these markets. Freddie Mac and ICI expressly supported a 50 percent
notional amount calculation.\250\ Pierpont and WMBAA recommended a
notional amount calculation of no greater than 50 percent.\251\ ICAP
Energy and SIFMA recommended a notional amount calculation below 50
percent, but preferred a 50 percent notional amount calculation to a 67
percent notional amount calculation.\252\ AII and ICAP recommended not
using a notional amount calculation at all, but preferred a 50 percent
notional amount calculation to a 67 percent notional amount
calculation.\253\
---------------------------------------------------------------------------
\250\ CL-Freddie at 2; CL-ICI at 6-7.
\251\ CL-Pierpont at 3; CL-WMBAA at 3.
\252\ CL-ICAP Energy at 3; CL-SIFMA at 10.
\253\ CL-AII at 6; CL-ICAP Energy at 4.
---------------------------------------------------------------------------
Some of the commenters who opposed the 67 percent notional amount
calculation and/or supported lower appropriate minimum block sizes did
so conditionally. MFA preferred the 50 percent notional amount
calculation over the 67 percent primarily in the initial period--``if
swap categories are not properly distinguished, and the Commission
cannot ensure a calibration of the initial minimum block sizes to
current market conditions, we hesitate to endorse the 67 percent
notional amount calculation in the final rulemaking and prefer instead
that the Commission use a 50 percent notional amount calculation,
particularly in the initial period, with a phase-in to a 67 percent
notional amount calculation over time.'' \254\ Two other commenters
supported the 50 percent notional amount calculation, but in the
context of specific asset classes--Freddie Mac for the interest rate
asset class and ICAP Energy for the other commodity asset class ``for
year two and beyond.'' \255\
---------------------------------------------------------------------------
\254\ CL-MFA at 3-4.
\255\ CL-Freddie at 2; CL-ICAP Energy at 3.
---------------------------------------------------------------------------
Of the 12 commenters who supported the 67 percent notional amount
calculation and/or higher appropriate minimum block sizes, several
argued that lower appropriate minimum block sizes were inconsistent
with congressional intent. Barnard and SDMA specifically stated that a
50 percent notional amount calculation would not constitute a ``vast
majority'' of swap transactions as intended by Congress.\256\ Moreover,
commenters also suggested that the 67 percent notional amount
calculation supported the statutory requirements of section 2(a)(13) of
the CEA as well as congressional intent. For example, Arbor stated that
``the 67% rule and the Market Depth test are consistent with
[c]ongressional [i]ntent, promotes transparency and trading of SEFs,
provides better market data, and is a conservative approach given the
market's size.'' \257\ CRT and Currenex stated that the 67 percent
notional amount calculation would achieve a proper balance between
market transparency and market liquidity.\258\ Jefferies stated that
the 67 percent notional amount calculation was consistent with
congressional intent.\259\
---------------------------------------------------------------------------
\256\ 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); CL-
Barnard at 3; CL-SDMA at 2.
\257\ CL-Arbor at 1.
\258\ CL-CRT at 1-2; CL-Currenex at 2.
\259\ CL-Jefferies at 1-2.
---------------------------------------------------------------------------
Seven commenters expressed a preference for the 67 percent notional
amount calculation, but also supported another alternative.\260\ ODEX,
RJ O'Brien, and Spring Trading expressed support for the 67 percent
notional amount calculation, but also suggested that a higher notional
amount calculation would be preferable, particularly in the post-
initial period.\261\ AFR, Better Markets, Javelin, and SDMA all
recommended a 75 percent or higher notional amount calculation and a
market depth and market breadth test.\262\
---------------------------------------------------------------------------
\260\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Spring Trading
at 2; CL-ODEX at 1; CL-RJ O'Brien at 1; CL-AFR at 8-9; CL-Better
Markets at 7-8; CL-Javelin at 2; CL-SDMA at 2.
\261\ CL-ODEX at 1; CL-RJ O'Brien at 1; CL-Spring Trading at 2.
\262\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Javelin at 2;
CL-SDMA at 2. For a discussion of market depth and market breadth,
see infra note 271 and accompanying text.
---------------------------------------------------------------------------
A number of commenters also expressed concern regarding imposing
the proposed 67 percent notional amount calculation prior to analysis
of swap data collected by SDRs. AII recommended lowering or eliminating
block thresholds until complete data has been reported to SDRs so as
not to
[[Page 32893]]
impair market liquidity.\263\ Barclays recommended introducing block
levels that allow for empirical analysis of the transaction data and
sequentially increasing block sizes until such point as the desired
equilibrium between transparency and liquidity is reached.\264\ Better
Markets suggested transitioning to a market depth and market breadth
test after the Commission has collected a year of SDR data.\265\ GFMA
could not comment on the 67 percent notional amount calculation in the
absence of swap data.\266\ ICAP Energy stated that once post-
implementation swap data is obtained, then the Commission and industry
will be in better position to assess liquidity and propose block
levels.\267\ ICI stated that, for those asset classes where no data is
available, it is impossible to determine whether the Commission has
identified the most relevant criteria for swap categories.\268\ ISDA/
SIFMA suggested that for new interest rate swap products the Commission
should allow for block treatment until sufficient data is
available.\269\ Vanguard stated that block thresholds cannot be
established absent an adequate data source and time for
assessment.\270\
---------------------------------------------------------------------------
\263\ CL-AII at 6.
\264\ CL-Barclays at 11.
\265\ CL-Better Markets at 9-10.
\266\ CL-GFMA at 3.
\267\ CL-ICAP Energy at 2.
\268\ CL-ICI at 4.
\269\ CL-ISDA/SIFMA at 14.
\270\ CL-Vanguard at 7.
---------------------------------------------------------------------------
In the Further Block Proposal, the Commission specifically
requested comment regarding other potential methods for determining
appropriate minimum block thresholds. While the Commission received
numerous comments regarding the efficacy of a notional amount
calculation and the appropriate percentage to use in making such a
calculation, the Commission only received significant comments
regarding one other method. The Commission received a number of
comments regarding whether the Commission should use a market depth and
market breadth test, instead of the 67 percent notional amount
calculation methodology, to calculate the relevant initial minimum
block sizes and the post-initial minimum block sizes.\271\
---------------------------------------------------------------------------
\271\ Market depth and market breadth was proposed to be
calculated as follows: (step 1) Identify swap contracts with pre-
trade price transparency within a swap category; (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
of all of the bids and offers once each minute for the pre-trade
price transparency set of contracts identified in step 1; (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; (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 120 observations
retained in step 4, calculate the sum of the notional amount of all
orders collected from step 3 that fall within a range, 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. 77 FR 15,482.
---------------------------------------------------------------------------
Many commenters expressed support for adopting the market depth
test \272\ and other commenters additionally supported utilizing the
market breadth test.\273\ Several commenters stated that such tests
would provide a more accurate depiction of overall liquidity in
specific markets, and thus would produce more appropriate minimum block
sizes.\274\ Other commenters stated that employing the tests would be
consistent with congressional intent expressed in the Dodd-Frank
Act.\275\ MFA, however, cautioned that current market depth may be an
unreliable indicator because it may vary over time and be subject to
manipulation.\276\
---------------------------------------------------------------------------
\272\ CL-CME at 2; CL-ODEX at 2; CL-Spring Trading at 2; CL-MFA
at 7; CL-FIA at 2.
\273\ CL-Arbor at 1; CL-AFR at 8-9; CL-Jeffries at 2; CL-SDMA at
3-6; CL-Javelin at 4-6; CL-RJ O'Brien at 1; CL-Better Markets at 9-
10; CL-CRT at 2; CL-FIA at 2.
\274\ CL-AFR at 9; CL-Spring Trading at 2; CL-FIA at 2; CL-SDMA
at 8.
\275\ CL-Arbor at 1; CL-CME at 2; CL-AFR at 3.
\276\ CL-MFA at 7.
---------------------------------------------------------------------------
Several commenters supported using the market depth and market
breadth test in conjunction with the proposed notional amount
calculation methodology and proposed different approaches. Some
commenters recommended using the market depth test during the initial
period as a cross-check against the Commission's notional amount
calculations.\277\ SDMA and Javelin argued that a market depth and
market breadth analysis would justify adoption of a 75-percent notional
amount threshold in the initial period; \278\ AFR suggested, however,
that such a threshold could be set as a floor, with higher thresholds
available based on liquidity levels.\279\ Spring Trading suggested
using the market depth test on a quarterly basis to refine the 67-
percent threshold during the initial period.\280\ Jefferies recommended
using the test in the post-initial period to complement the 67-percent
notional amount calculation in the initial period for interest rate and
credit swaps.\281\
---------------------------------------------------------------------------
\277\ CL-MFA at 7; CL-SDMA at 7; CL-Spring Trading at 2.
\278\ CL-SDMA at 5; CL-Javelin at 2.
\279\ CL-AFR at 9.
\280\ CL-Spring Trading at 2.
\281\ CL-Jefferies at 3.
---------------------------------------------------------------------------
Some commenters noted the need for available and sufficient data to
adopt the market depth and market breadth tests. AFR commented that
sufficient data was already available based on information provided on
trading screens of trading venues.\282\ Other commenters, however,
stated that additional market data would allow the tests to produce a
more adequate snapshot of liquidity.\283\ For example, SDMA recommended
adopting the tests after obtaining six months of data; Vanguard and
Better Markets recommended a year.\284\
---------------------------------------------------------------------------
\282\ CL-AFR at 9.
\283\ CL-Jefferies at 2; CL-Javelin at 6; CL-Arbor at 1; CL-RJ
O'Brien at 1; CL-CRT at 2.
\284\ CL-Better Markets at 10; CL-SDMA at 7; CL-Vanguard at 7.
---------------------------------------------------------------------------
After consideration of the comments received in regard to phasing-
in the appropriate minimum block size and the 67-percent notional
amount calculation, the Commission is adopting Sec. 43.6(e)(1) with
the following modifications. For the initial period, the Commission is
adopting the 50 percent notional amount calculation to determine
appropriate minimum block sizes in the interest rate swaps and credit
asset classes. The Commission is of the view that this approach
provides for a more gradual phase-in of minimum block sizes as
recommended by numerous commenters. Moreover, this will allow SDRs to
collect at least one year of reliable data for each swap category prior
to the application of the higher 67-percent notional amount calculation
to determine appropriate minimum block sizes in the post initial
period, which the Commission is adopting as discussed below.
For the post-initial period, the Commission is adopting Sec.
43.6(f)(1) as proposed. The 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. 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
[[Page 32894]]
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 move away from the
competitive price. The Commission also anticipates that enhanced price
transparency would improve market integrity and price discovery, while
reducing information asymmetries enjoyed by market makers in
predominately opaque swap markets.\285\
---------------------------------------------------------------------------
\285\ The proposed calculation stands in contrast to the
proposed 95th percentile-based distribution test set out in the
Initial Proposal. See the discussion in section I.B. of the Further
Block Proposal.
---------------------------------------------------------------------------
In the Commission's view, using the 67-percent notional amount
calculation in the post-initial period 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 swaps markets. The
Commission believes that its methodology, in conjunction with the 50-
percent notional amount calculation during the initial period,
represents a tailored approach towards achieving the goal of subjecting
``a vast majority'' of swap transactions to real-time public
reporting.\286\
---------------------------------------------------------------------------
\286\ See note 41 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.'' \287\ If
market participants conclude 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 to support their conclusion. In addition,
through its own surveillance of swaps market activity, the Commission
may become aware that an appropriate minimum block size would reduce
market liquidity for a specific swap category.\288\ In response to
either a submission or its own surveillance of swaps market activity
the Commission may exercise its legal authority to take action by rule
or order to mitigate the potential effects on market liquidity with
respect to swaps in a particular swap category.
---------------------------------------------------------------------------
\287\ 7 U.S.C. 2(a)(13)(E)(iv).
\288\ The Commission received two comments supporting the
Commission's authority to set appropriate minimum block sizes
outside of the proposed annual look-back period. MFA argued that the
Commission's goal to balance transparency and liquidity would be
better achieved with the flexibility to adjust minimum block sizes
quickly to respond to material market changes. CL-MFA at 8. MFA
recommended that the Commission should have the authority to update
post-initial minimum block sizes in extraordinary circumstances and
on a case-by-case basis, based on SDR data that it receives for
individual or across multiple swap categories. Id. GFMA stated that
if the Commission establishes a notional calculation test, then it
should ensure that it has sufficient flexibility to amend minimum
block sizes. CL-GFMA at 4. GFMA recommended that the Commission
should be able to ``swiftly alter'' block trade levels to enable
some trading to be conducted in a newly illiquid market, without the
benefit of reference to a data set. Id. The Commission notes that
Sec. 43.6(f)(1) provides that the Commission shall update post-
initial appropriate minimum block levels ``[n]o less than once each
calendar year.'' Accordingly, the Commission notes that it has the
ability to adjust post-initial minimum block sizes under the types
of extraordinary circumstances raised by commenters.
---------------------------------------------------------------------------
With respect to the market depth and market breadth test, the
Commission is declining to adopt this approach to determine appropriate
minimum block sizes at this time. The Commission considers the test a
viable alternative to the notional amount calculation methodology, but
also recognizes several prerequisites to implementing such a test. For
example, the Commission would need to determine which contracts within
a swap category offer pre-trade price transparency--electronically
displayed and executable bids and offers as well as displayed available
volumes for execution. As noted by commenters, adequate market trading
data also must be available to collect a market depth snapshot of all
of the bids and offers for the pre-trade price transparency set of
applicable contracts. The Commission is also cognizant of MFA's
concerns regarding the potential for manipulation of market depth.
Given the time needed for trading infrastructure to develop and the
significant time and cost considerations involved in collecting such
data from SEFs and DCMs, the Commission will continue to examine the
merits of adopting the market depth and market breadth test.
The Commission is currently of the view 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 or by other Commission action. The
Commission notes that SDRs have been collecting data pursuant to the
compliance dates for certain market participants and asset classes
since December 2012. DCMs and Swap Dealers (``SDs'') began reporting
swap transactions in the interest rate and credit default swap asset
classes on December 31, 2012.\289\ DCMs and SDs began reporting swap
transactions in the FX, equity, and other commodity asset classes on
February 28, 2013.\290\ Major Swap Participants (``MSPs'') began
reporting swap transactions in all five asset classes on February 28,
2013.\291\ Financial Entities began reporting swap transactions in the
interest rate and credit default swap asset classes on April 10,
2013.\292\ Financial Entities begin reporting swap transactions for
swaps executed starting April 10, 2013, in the FX, equity, and other
commodity asset classes on May 29, 2013.\293\ Non-SDs, non-MSPs, and
non-Financial Entities begin reporting swap transactions for swaps
executed starting April 10, 2013, in the interest rate and credit
default swap asset classes on July 1, 2013.\294\ Non-SDs, non-MSPs, and
non-Financial Entities begin reporting swap transactions for swaps
executed starting April 10, 2013, in the FX, equity, and other
commodity asset classes on August 19, 2013.\295\ Accordingly, the
Commission and SDRs will have one year of reliable data as of April 10,
2014.
---------------------------------------------------------------------------
\289\ See ``Commission Q & A--On the Start of Swap Data
Reporting'' (Oct. 9, 2012).
\290\ See ``No-Action Relief for Swap Dealers from Certain Swap
Data Reporting Requirements of Part 43, Part 45, and Part 46 of the
Commission's Regulations Due to Effects of Hurricane Sandy,''
Commission Letter No. 12-41 (Dec. 5, 2012).
\291\ See id.
\292\ See ``Time-Limited No-Action Relief for Swap
Counterparties that are not Swap Dealers or Major Swap Participants,
from Certain Swap Data Reporting Requirements of Parts 43, 45 and 46
of the Commission's Regulations,'' Commission Letter No. 13-10 (Apr.
9, 2013).
\293\ See id.
\294\ See id.
\295\ See id.
---------------------------------------------------------------------------
The Commission notes that in response to either a submission or its
own surveillance of swaps market activity, the Commission may exercise
its legal authority to take action by rule or order to delay the
imposition of post-initial appropriate minimum block sizes,
particularly with respect to swap categories in the other commodity
asset class.
4. Data for Determination of Appropriate Minimum Block Sizes in the
Post-Initial Period
As referenced above in Sec. 43.6(f)(2), the Commission proposed
determining post-initial appropriate minimum block sizes 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.
The Commission received eight comments regarding the use of a
three-
[[Page 32895]]
year rolling window of data. AII believed it would be more prudent for
the Commission to base block trading thresholds on a shorter time
frame, using newer data. AII recommended that the Commission should
only use the highest of the three-year, one-year, or one-quarter data
collected in the determinations.\296\ GFMA stated that the three-year
rolling data set is unlikely to be sensitive enough to shorter term
changes in market liquidity and therefore risks setting block sizes
that do not reflect current market conditions.\297\ ICI believed that a
three-year window may not provide an appropriate data set to calculate
the block threshold, and encouraged the Commission to look at a one-
year set of data and a one-quarter set of data to determine whether the
calculation would produce more accurate results.\298\ ISDA/SIFMA
recommended a 6-month window for determining appropriate minimum block
sizes, as a three-year rolling window is over-inclusive, particularly
in CDS.\299\ Kinetix expressed concern that historical data may not be
indicative of current market conditions.\300\ MFA was concerned that
the three-year window would constrain the ability to shorten the look-
back period if material changes in market conditions warranted a
smaller data set, and recommended retaining the option to shorten the
look-back window for the observed data set.\301\ SIFMA believed that
block reassessments should look to data on swaps executed since the
previous reassessment, rather than from a three-year data window as
proposed by the Commission.\302\ Vanguard believed the assessment
should be made on the basis of data recorded over a rolling three-month
period for each swaps category.\303\
---------------------------------------------------------------------------
\296\ CL-AII at 11.
\297\ CL-GFMA at 4.
\298\ CL-ICI at 7-8.
\299\ CL-ISDA/SIFMA at 14.
\300\ CL-Kinetix at 1.
\301\ CL-MFA at 8.
\302\ CL-SIFMA at 6-7.
\303\ CL-Vanguard at 7.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(f)(2) with modifications. Based upon the numerous
comments recommending a data set covering a shorter time frame, the
Commission will determine post-initial appropriate minimum block sizes
under Sec. 43.6(f)(2) utilizing a one-year window of swap transaction
and pricing data. This approach will allow the Commission to better
calibrate block thresholds to changes in market liquidity, while at the
same time providing enough data to smooth out fluctuations in data such
as those that may result from, for example, seasonality.
As referenced above, the Commission proposed 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 received five comments regarding the proposed use of
a trimmed data set. Three commenters supported the use of a trimmed
data set, but suggested alternative approaches. ISDA/SIFMA opposed the
proposed methodology and believed that it would establish a threshold
that is too high to exclude large transactions.\304\ Therefore, ISDA/
SIFMA recommended that the Commission look instead at the raw block
size (calculated based on all transactions in the relevant swap
category) and eliminate any trades more than five times larger than the
block threshold.\305\ ISDA/SIFMA alternatively recommended that the
Commission only exclude transactions that are three standard deviations
beyond the mean because the proposed methodology (excluding
transactions that are four standard deviations beyond the mean) would
capture large transactions that would otherwise skew the data.\306\ For
purposes of applying a market depth and market breadth test, Javelin
and SDMA recommended trimming each data set to focus only on bids or
offers at the ``current price''--the Commission would (1) determine the
mid-point of the bid-offer spread; (2) capture orders between the bid
and this value; and (3) capture orders between the offer and this
value.\307\
---------------------------------------------------------------------------
\304\ CL-ISDA/SIFMA at 14.
\305\ Id.
\306\ Id.
\307\ CL-Javelin at 5; CL-SDMA at 8.
---------------------------------------------------------------------------
Two commenters opposed data trimming on the grounds that it is
irrelevant to the purpose of determining minimum block trade sizes. AFR
and Better Markets believed that trimming the data set would ultimately
skew minimum block size calculations, such that certain-sized trades
would be classified as block trades.\308\ Better Markets stated that
the Commission should disclose the discrepancies between using a
trimmed data set versus an unfiltered data set to calculate the block
size threshold because the public lacks the data to make this
determination on its own.\309\
---------------------------------------------------------------------------
\308\ CL-AFR at 7; CL-Better Markets at 9.
\309\ CL-Better Markets at 9.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.2 as proposed and applying the concept of a trimmed
data set in Sec. 43.6(c) as proposed. The Commission 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.\310\ Therefore, trimming the data
set increases the power of these statistical measures. In response to
the commenters who oppose data trimming, the Commission emphasizes that
trimming the data set is necessary to avoid the skewing of these
measures, which could lead to the establishment of inappropriately high
minimum block sizes.
---------------------------------------------------------------------------
\310\ 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).
---------------------------------------------------------------------------
5. Methodology for Determining the Appropriate Minimum Block Sizes by
Asset Class
a. Interest Rate and Credit Default Swaps
As described above, the Commission proposed using a 67-percent
notional amount calculation to determine appropriate minimum block
sizes for swaps in the interest rate and credit asset classes in both
the initial and post-initial periods pursuant to Sec. Sec. 43.6(c)(1),
43.6(e)(1), and 43.6(f)(1). There was an exception to the use of the
67-percent notional amount calculation for the initial period in three
swap categories in the interest rate and credit asset classes which
contained less than 30 transactions that would meet the definition of
publicly reportable swap transaction: (1) Interest rate swap
[[Page 32896]]
category--major currency/30 years +; (2) interest rate swap category--
non-major currency/30 years +; and (3) CDScategory--350 bps +/6 to 8.5
years. 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. Accordingly, for these
three swap categories in the initial period, the Commission proposed
using the lowest appropriate minimum block size for their respective
asset classes based on the respective data set.\311\ In the interest
rate asset class, the swap category with the lowest block size was the
non-major currency/5 to 10 years, with an appropriate minimum block
size of $22 million (USD). In the credit asset class, the swap category
with the lowest block size was the category 350 bps +/8.5 to 12.5
years, with an appropriate minimum block size of $21 million (USD).
Hence, the appropriate minimum block size was proposed to be set at $22
million (USD) for the two interest rate swap categories with
insufficient data and at $21 million (USD) for the corresponding CDS
category.
---------------------------------------------------------------------------
\311\ 77 FR at 15480.
---------------------------------------------------------------------------
For interest rate swaps specifically, the Commission received eight
comments regarding the application of the 67 percent notional amount
calculation to determine initial and post-initial minimum block sizes.
Jefferies supported the Commission's proposal, stating that the 67
percent notional amount calculation was consistent with congressional
intent and observed liquidity.\312\ FIA did not explicitly support the
67 percent notional amount calculation, but stated that a 50 percent
notional amount calculation for interest rate swaps would be
significantly too low.\313\ Javelin, ODEX, SDMA, and Spring Trading all
recommended that the Commission maintain the proposed 67 percent
notional amount calculation or raise the threshold higher.\314\ Javelin
and SDMA both suggested a 75 percent notional amount calculation in
conjunction with a market breadth and market depth approach.\315\ Other
commenters, however, suggested lower values for the notional amount
calculation--Freddie recommended a 50 percent notional calculation in
the absence of more comprehensive data about liquidity and depth of
swaps markets.\316\ Pierpont commented that, for instances where one
counterparty to a swap is not a registered swap dealer, the Commission
should determine block levels based on a 25 percent notional amount
calculation.\317\
---------------------------------------------------------------------------
\312\ CL-Javelin at 1-2.
\313\ CL-FIA at 2.
\314\ CL-Javelin at 2; CL-ODEX at 1; CL-SDMA at 2; CL-Spring
Trading at 2.
\315\ CL-Javelin at 2; CL-SDMA at 2.
\316\ CL-Freddie at 2.
\317\ CL-Pierpont at 3.
---------------------------------------------------------------------------
For credit default swaps, the Commission received four comments
regarding the application of the 67 percent notional amount calculation
to determine initial and post-initial minimum block sizes. Jefferies
supported the Commission's proposal, stating that the 67 percent
notional amount calculation was consistent with congressional intent
and observed liquidity.\318\ Javelin recommended that the Commission
maintain the proposed 67 percent notional amount calculation or raise
the threshold higher, to a 75 percent notional amount calculation.\319\
Four commenters supported a market depth and market breadth test for
CDS.\320\
---------------------------------------------------------------------------
\318\ CL-Javelin at 1-2.
\319\ CL-Javelin at 2.
\320\ CL-CRT at 1-2; CL-Javelin at 5-6; CL-Jefferies at 2; CL-
SDMA at 2-7.
---------------------------------------------------------------------------
The Commission also received seven comments specifically regarding
the interest rate swaps and CDS data sets used for determining swap
categories and establishing appropriate minimum block thresholds in the
initial period. AII commented that the data for interest rate swaps and
CDS is no longer reflective of the market, nor is it reflective of the
market that will result once the Commission's regulations are
implemented in full, and urged the Commission not to rely on minimal
and outdated data.\321\ ICI stated that the historical data on which
the Commission relies may not be reflective of the swaps market once
the Dodd-Frank Act requirements are fully implemented.\322\ Freddie
stated that the interest rate data set may not be comprehensive enough
to form the basis of the proposed minimum block sizes, particularly
where the proposed post-initial appropriate minimum block sizes are
determined after transaction and pricing data has been collected for a
year.\323\ ICAP recommended that, if the Commission relies on
historical market data, then it should use data that is more current
and demonstrated to be representative of the market.\324\ MFA stated
that, given limitations related to the size, composition, and
timeliness of the data set that the Commission used for the initial
period, the Commission should calibrate initial minimum block sizes
against current market conditions.\325\ Vanguard stated that block
thresholds cannot be established absent an adequate data source and
time for assessment.\326\ WMBAA believed that, in basing rules on three
months of data from over two years ago, the Commission has failed to
``examine the relevant data and articulate a satisfactory explanation
for its action including a rational connection between the facts found
and the choices made'' as well as ``determine as best it can the
economic implications of the rule.'' \327\
---------------------------------------------------------------------------
\321\ CL-AII at 7.
\322\ CL-ICI at 5.
\323\ CL-Freddie at 2.
\324\ CL-ICAP at 8.
\325\ CL-MFA at 6-7.
\326\ CL-Vanguard at 7.
\327\ CL-WMBAA at 4-5.
---------------------------------------------------------------------------
As described more fully above, in response to comments regarding
the data sets used for interest rate and credit default swaps, the use
of an incremental approach, and the comments regarding phasing and the
67-percent notional amount calculation regardless of asset class, the
Commission is adopting a phased-in approach to notional amount
calculation. The Commission is adopting Sec. 43.6(e)(1) and (f)(1) as
proposed, with modifications. In the initial period, the Commission is
adopting the 50-percent notional amount calculation to determine
appropriate minimum block sizes in the interest rate and credit asset
classes. The Commission believes that this approach provides for a more
gradual phase-in of minimum block sizes, as explained more fully
above.\328\
---------------------------------------------------------------------------
\328\ See supra Section II.B(3).
---------------------------------------------------------------------------
The Commission did not receive any comments regarding the exception
to the 67 percent notional amount calculation for swap categories
containing fewer than 30 transactions. Accordingly, the Commission will
continue to apply this exception in instances where the a Interest Rate
or Credit swap category contains fewer than 30 transactions in
calculating appropriate minimum block thresholds for the initial
period.
b. Equity
The Commission proposed 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 reporting time delay under part 43). As noted above, the
Commission proposed 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
[[Page 32897]]
small relative size of the equity 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.
The Commission received six comments regarding swap categories in
the equity asset class. One commenter, AFR, felt that no block trade
treatment is appropriate as proposed for the equity asset class.\329\
Five other commenters recommended that the Commission treat equity
swaps similarly to the other asset classes and establish swap
categories based upon a range of criteria.\330\
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\329\ CL-AFR at 6.
\330\ CL-AII at 9; CL-Barclays at 9; CL-ICI at; ISDA/SIFMA at
10-11; SIFMA at 5.
---------------------------------------------------------------------------
AII disagreed with the Commission's proposal that no equity swaps
should be treated as blocks and suggested harmonization with the SEC's
approach for large equity trades.\331\ Barclays also disagreed with
disallowing block levels for all equity swaps and recommended that the
equity asset class should be treated similarly to the other asset
classes, such that broad based indices should have separate block
levels based upon futures market levels.\332\ Barclays also suggested
that the Commission coordinate with the SEC in setting minimum block
levels.\333\ ICI recommended interim time delays for all equity swaps
until a closer study of data on equity swap transactions is completed,
due to potential differences in liquidity in the underlying equity cash
market.\334\ ISDA/SIFMA requested that the Commission reconsider its
proposal and suggested that the Commission establish block sizes based
on the consideration of total trading volume of swaps linked to the
relevant underlying index or basket of equity securities.\335\ SIFMA
stated that the Commission should establish appropriate minimum block
sizes for equity swaps based upon liquidity of the underlying
indices.\336\
---------------------------------------------------------------------------
\331\ CL-AII at 9.
\332\ CL-Barclays at 9.
\333\ Id.
\334\ CL-ICI at 5.
\335\ CL-ISDA/SIFMA at 10-11.
\336\ CL-SIFMA at 5.
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After consideration of the comments received, the Commission is
adopting Sec. 43.6(d) as proposed. While a number of the commenters
pointed out differences in liquidity in the underlying equity indices
as a justification for swap categorization, these differences do not
alter the premises underlying the Commission's proposal. Even taking
these differences into account, there is still (1) a highly liquid
underlying cash market; and (2) a small equity swaps market relative to
the futures, options, and cash equity index markets. These
characteristics, combined with the fact that there are no time delays
for reporting block trades in the underlying equity cash market, makes
establishment of swap categories and block thresholds for equity swaps
inappropriate.\337\ Accordingly, the Commission is adopting Sec.
43.6(d) as proposed.
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\337\ In the event that time delays are established for
reporting block trades in the underlying equity cash market, the
Commission may consider establishing swap categories and block
thresholds for equity swaps.
---------------------------------------------------------------------------
c. FX
The Commission proposed 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 ii. below includes a discussion of the post-
initial period methodology.
i. Initial Period Methodology
The Commission proposed under Sec. 43.6(e)(1) to set the
appropriate minimum block sizes for swaps in the FX asset class during
the initial period based on whether such swap is economically related
to a futures contract, i.e., a futures-related swap.\338\ 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
based on the block trade size thresholds set by DCMs for economically-
related futures contracts.\339\ The Commission set forth the initial
appropriate minimum block sizes in proposed appendix F to part 43 of
the Commission's regulations.\340\ For non-futures related swaps in the
FX asset class in the initial period, the Commission proposed under
Sec. 43.6(e)(2) that all such swaps 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 expected that this provision, as provided,
only would apply to the most illiquid swaps.
---------------------------------------------------------------------------
\338\ See supra note 169.
\339\ 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.
\340\ 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.
---------------------------------------------------------------------------
The Commission received three comments specifically related to the
proposed methodology for determining appropriate minimum block sizes
for swap categories in the FX asset class during the initial period.
SDMA supported the Commission's proposed block trade thresholds for the
FX asset class.\341\ AII, however, urged the Commission to consider
removing the block trading threshold during the initial period for the
FX asset class, so as to allow the Commission to use SDR data to
properly evaluate the market.\342\ ICAP recommended an initial block
level of $10 million in the 1-month contract on a variety of FX non-
deliverable forward contracts.\343\
---------------------------------------------------------------------------
\341\ CL-SDMA at 2.
\342\ CL-AII at 3 n.10.
\343\ CL-ICAP at 10.
---------------------------------------------------------------------------
The Commission notes that, since the Further Block Proposal,
Treasury has issued a Final Determination, pursuant to sections
1a(47)(E)(i) and 1b of the CEA, that exempts FX swaps and FX forwards
from the definition of ``swap'' under the CEA. Therefore, 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.\344\ Nevertheless, section 1a(47)(E)(iii)
of the CEA provides that FX swaps and FX forwards transactions still
are not excluded from regulatory reporting requirements to an SDR.
Further, the Commission notes that Treasury's final determination
excludes FX swaps and FX forwards, but does not apply to FX options or
non-deliverable FX forwards. As such, FX instruments that are not
covered by Treasury's final determination are subject to part 43 of the
Commission's regulations.
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\344\ See Determination of Foreign Exchange Swaps and Foreign
Exchange Forwards under the Commodity Exchange Act, 77 FR 69694,
Nov. 20, 2012.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(e)(1) and (2) as proposed. However, given the
changes to proposed Sec. 43.6(b)(4)(i), which significantly reduce the
number of swap categories, the Commission believes that this approach
encompasses the most liquid FX swaps and instruments, including all
[[Page 32898]]
super-major currency combinations, as well as all super-major and major
currency combinations. This approach further encompasses many important
super-major and non-major currency combinations, many of which already
have block trade size thresholds set by DCMs for economically-related
futures contracts.\345\ The Commission believes that this approach is
appropriate during the initial period in the absence of actual swap
data. The 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.\346\ The Commission understands that DCMs have set
block sizes primarily in consideration of the objectives of enhancing
pre-trade transparency and reducing liquidity risk.\347\ The Commission
notes that DCMs are required to set block sizes for futures in
compliance with relevant core principles (including Core Principle 9)
\348\ and Commission regulations.\349\
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\345\ See Q18 of the Further Block Proposal, which sets forth an
alternative approach to proposed swap categories based on unique
currency combinations. 77 FR 15476.
\346\ 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).
\347\ The Commission is of the view that the pre-trade and post-
trade contexts are sufficiently similar such 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.
\348\ 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.
\349\ For example, 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.
---------------------------------------------------------------------------
ii. Post-Initial Period Methodology
In the post-initial period, the Commission proposed 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. 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.
The Commission received three comments specific to the proposed
methodology for determining appropriate minimum block sizes for swap
categories in the FX asset class during the post-initial period. SDMA
supported the Commission's proposed block trade thresholds for the FX
asset class.\350\ Barclays and GFMA, however, expressed concern that
the 67 percent notional amount calculation was proposed without actual
swap data regarding the FX asset class.\351\
---------------------------------------------------------------------------
\350\ CL-SDMA at 2.
\351\ CL-Barclays at 10; CL-GFMA at 3.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(f)(2) with the modification that only those swap
categories established in Sec. 43.6(b)(4)(i) will have minimum block
sizes set using this methodology in the post-initial period, while the
remainder of the swaps covered by Sec. 43.6(b)(4)(ii) will continue to
be treated as blocks. The Commission believes that applying the 67
percent notional amount calculation will ensure that the vast majority
of swap transactions are subject to real-time reporting.\352\ In
addition, applying the 67 percent notional amount calculation to all
five asset classes in the post-initial period provides a consistent,
bright-line rule regarding how appropriate minimum block thresholds
will be calculated, thus providing clarity to market participants
engaging in swap transactions. By allowing all swaps covered by Sec.
43.6(b)(4)(ii) to be treated as blocks, the Commission is being
conservative in its approach in potentially less liquid markets where
the impacts to market participants of inappropriate block trades could
be substantial. The Commission believes that this approach provides
additional time to analyze data in order to establish improved swap
categories as suggested by commenters.
---------------------------------------------------------------------------
\352\ See supra note 256.
---------------------------------------------------------------------------
d. Other Commodity
The Commission proposed using 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; \353\ (2) swaps
that are economically related to certain futures contracts; \354\ and
(3) other swaps.\355\ With regards to (1), the Commission proposed
setting 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 listed in appendix B to part 43 of the Commission's
regulations.\356\ The proposed methodology for determining the
appropriate minimum block sizes for other commodity swaps in the post-
initial period follows the same methodology--the 67 percent notional
amount 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.
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\353\ See proposed Sec. 43.6(b)(5)(i). The Commission is
adopting most of the proposed categories in this final rule, subject
to some modifications. See supra note 190 and accompanying text.
\354\ As proposed under Sec. 43.6(b)(5)(ii), these futures
contracts were: 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. The Commission is adopting most
of the proposed categories in this final rule, subject to some
modifications. See supra note 187.
\355\ See proposed Sec. 43.6(b)(5)(iii).
\356\ 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. As discussed further above, the
Commission is adopting these categories in this final rule. See
supra Section II.A(4).
---------------------------------------------------------------------------
i. Initial Period Methodology
With respect to swaps that reference or are economically related to
one of the futures contracts listed in appendix B to part 43 \357\ or
in Sec. 43.6(b)(5)(ii), the Commission proposed to set the appropriate
minimum block size based on the block sizes for related futures
[[Page 32899]]
contracts set by DCMs.\358\ Similar to its rationale with respect to
setting initial appropriate minimum block sizes for swaps in the FX
asset class, the Commission believed that this approach would utilize
the experience of DCMs in considering liquidity effects of enhancing
pre-trade transparency in setting block sizes for these contracts. 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 proposed in Sec. 43.6(e)(3) to disallow
treatment as a block trade or large notional off-facility swap. The
Commission based 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.
---------------------------------------------------------------------------
\357\ 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 electricity and natural gas swap
contracts that the Commission had proposed to add to appendix B to
part 43 of the Commission's regulations were not futures contracts.
As noted above, however, these contracts have been converted into
economically equivalent futures contracts that are listed on a DCM.
See supra note 176.
\358\ 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 proposed in Sec. 43.6(e)(2)
to treat all non-futures-related swaps \359\ in the other commodity
asset class as block trades or large notional off-facility swaps (i.e.,
these swaps would be subject to a reporting time delay under part 43,
irrespective of notional amount). The Commission believed 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 appendix B to part 43).
---------------------------------------------------------------------------
\359\ 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).
---------------------------------------------------------------------------
The Commission also proposed 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,\360\ with each contract
serving as the basis for a swap category in the other commodity asset
class. The Commission further proposed to set the initial appropriate
minimum block size for each of these categories to $25 million (USD),
which would apply to natural gas and electricity swaps that reference
or are economically related to these natural gas and electricity swap
contracts.\361\
---------------------------------------------------------------------------
\360\ See supra Section II.A(4).
\361\ For swaps in which the underlying asset references or is
economically related to one of the natural gas or electricity swaps,
the Commission proposed 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 recognized 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. The proposed
$25 million initial minimum block level corresponded to the level of
the interim and initial cap sizes. For a discussion of interim and
initial cap sizes, see supra section III.A of the Further Block
Proposal.
---------------------------------------------------------------------------
SDMA expressed support for the proposed methodology for swaps in
the other commodity asset class.\362\ With respect to the 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, EEI also expressed support for denominating the minimum block size
in U.S. dollars, rather than by a quantity such as Mwh.\363\ EEI argued
that denominating minimum block sizes in U.S. dollars would promote
standardization across the various trading hubs in the electricity and
natural gas markets.\364\
---------------------------------------------------------------------------
\362\ CL-SDMA at 2 n.1.
\363\ CL-EEI at 11 n. 29.
\364\ Id.
---------------------------------------------------------------------------
Several commenters, however, objected to certain aspects of the
proposed $25 million (USD) initial appropriate minimum block size. Two
commenters recommended setting the block sizes based on mmBtu/day and
MW/hr for natural gas and electricity swaps, respectively, rather than
setting the block sizes based on notional amount.\365\ ICAP Energy
commented in particular that adopting the latter approach would be
inappropriate, given that prices for such commodities fluctuate due to
peak season usage or delivery location.\366\ ICAP Energy also commented
that it was not clear as to how the notional value of swaps with
optionality would be calculated; calculating notional value based on
the premium of the option, for example, would adversely affect low-
premium options such as out-of-the-money calls and puts.\367\
---------------------------------------------------------------------------
\365\ CL-ICAP Energy at 4; CL-Barclays at 9.
\366\ CL-ICAP Energy at 4.
\367\ Id.
---------------------------------------------------------------------------
Two commenters opposed the proposed $25 million (USD) initial
minimum block size with respect to the swap categories for the
electricity swaps added to appendix B to part 43. ICAP Energy and EEI
argued that the proposed limits were too high given the relative
illiquidity of these markets.\368\ ICAP Energy recommended the
following minimum block sizes: PJM WH (on-peak and off-peak)--50 MW/hr;
SP-15 Financial Day-Ahead LMP (on-peak and off-peak)--30/MW/hr; Mid-C
Financial (on-peak and off-peak--30 MW/hr).\369\ EEI requested that the
Commission treat all electricity swaps transactions as block trades
during the initial period or, in the alternative, set the initial
minimum block size at no higher than $3 million.\370\
---------------------------------------------------------------------------
\368\ CL-ICAP Energy at 5; CL-EEI at 5.
\369\ CL-ICAP Energy at 5.
\370\ CL-EEI at 8.
---------------------------------------------------------------------------
ICAP Energy and EEI also opposed the proposed $25 million initial
minimum block size with respect to the swap categories for the natural
gas swaps proposed to be added to appendix B to part 43. EEI requested
that the Commission treat all natural gas swaps transactions as block
trades during the initial period because of their relatively illiquid
markets.\371\ In the alternative, EEI recommended setting the initial
minimum block size at no higher than $3 million, which would
approximately equate the proposed initial block size for the Henry Hub
Natural Gas futures contract.\372\ ICAP Energy recommended setting the
initial minimum block size at 2500 mmBtu.\373\
---------------------------------------------------------------------------
\371\ CL-EEI at 8.
\372\ According to EEI, the proposed initial minimum block size
of 1,000,000 mmBtu for the Henry Hub Natural Gas futures contract is
approximately equal to a minimum block size of $3 million. EEI
Comment Letter at 8-9.
\373\ CL-ICAP Energy at 5.
---------------------------------------------------------------------------
Parity Energy commented on the ambiguity of the term ``economically
related'' and requested clarification that natural gas swaps with
optionality that reference or are economically related to the Henry Hub
Natural Gas options would be subject to the initial minimum block size
proposed for that particular swap category (5,500,000 mmBtu), rather
than the block size for Henry Hub Natural Gas futures (1,000,000
mmBtu).\374\
---------------------------------------------------------------------------
\374\ CL-Parity at 3.
---------------------------------------------------------------------------
Parity Energy opposed the proposed initial minimum block size of
100,000 bbl. to crude oil swaps with optionality as too low and
recommended that the Commission establish a separate initial minimum
block size for such swaps at 1,000,000 bbl., which would be consistent
with CME's minimum block size for Light Sweet Crude Oil options.\375\
---------------------------------------------------------------------------
\375\ Id. at 4-5.
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ICAP Energy commented that swaps that reference or are economically
[[Page 32900]]
related to the NYMEX New York Harbor RBOB Gasoline futures contract,
for which the Commission has not set an initial minimum block size
under proposed appendix F, should be subject to a block size that is
consistent with the one set by DCMs for the related futures
contract.\376\
---------------------------------------------------------------------------
\376\ CL-ICAP Energy at 1-2.
---------------------------------------------------------------------------
The Commission has considered the comments above regarding the
appropriate unit of measurement and initial appropriate minimum block
size for the natural gas and electricity swap categories in the other
commodity asset class. Based on those comments and the other commodity
swap categories adopted by the Commission in this final rule that are
based on the converted natural gas and electricity futures
contracts,\377\ the Commission is setting the appropriate minimum block
sizes for these categories in the initial period based on the block
sizes set by DCMs for these futures contracts. The Commission is
adopting this approach for several reasons. This approach is consistent
with the Commission's approach for swaps that reference or are
economically related to one of the futures contracts previously listed
in appendix B to part 43 or adopted Sec. 43.6(b)(5)(ii), which
utilizes the experience of DCMs in setting block sizes for these
contracts. The Commission also believes this approach is more
conservative than the proposed $25 million initial minimum block size,
which might adversely affect market liquidity for the electricity and
natural gas swaps markets. Further, this approach responds to comments
by setting the initial minimum block sizes based on underlying units,
rather than notional amount, and would be more appropriate to avoid
price fluctuations and to establish consistency with post-initial
calculation methodology.
---------------------------------------------------------------------------
\377\ See supra note 176.
---------------------------------------------------------------------------
In response to Parity Energy and consistent with the Commission's
adopted approach to swaps categories in the other commodity asset class
under Sec. 43.6(b)(5)(i)-(ii), the Commission is not establishing
initial appropriate minimum block sizes based on DCM block sizes for
swaps that reference or are economically related to the options
contracts listed in proposed appendix F.\378\ The Commission is
establishing initial appropriate minimum block size for such swaps
based on the adopted methodology for swaps with optionality, as
discussed further below.\379\ The notional size of swaps with
optionality in the initial period will be equal to the notional size of
the swap component without the optional component; accordingly, the
appropriate minimum block size will be based on the block sizes for
economically related futures contracts set by DCMs.\380\
---------------------------------------------------------------------------
\378\ See supra note 187 and accompanying text.
\379\ See infra Section II.C.
\380\ See infra Section II.B.
---------------------------------------------------------------------------
The Commission is otherwise adopting the rule generally as proposed
under Sec. 43.6(e) with respect to swaps in the other commodity asset
class, but also is updating initial appropriate minimum block sizes
proposed in appendix F, consistent with block sizes set by DCMs for the
relevant related futures contract.\381\ In response to ICAP Energy's
request, the Commission is also setting an initial minimum block size
for swaps that reference or are economically related to the NYMEX New
York Harbor RBOB Gasoline futures contract that is based on the DCM
block size set for that contract.
---------------------------------------------------------------------------
\381\ The Commission is also amending the initial minimum block
size for swaps that reference or are economically related to the
GSCI Excess Return Index, Dow Jones-UBS Commodity Index, Gulf Coast
Sour Crude Oil, and Palladium futures contract. The Commission is
also removing the initial minimum block size for swaps that
reference or are economically related to the Non-Farm Payroll,
International Skimmed Milk Powder, and Wood Pulp futures contracts,
as these contracts are no longer listed for trading. See supra note
187.
---------------------------------------------------------------------------
ii. Post-Initial Period Methodology
In the post-initial period, the Commission provided 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.
Several commenters opposed the 67-percent notional amount
calculation methodology for swaps in the other commodity asset class in
the post-initial period.\382\ CME and WMBAA characterized the proposed
methodology as overbroad and recommended a more tailored approach based
on the trading profiles of each particular market.\383\ Barclays
commented that the Commission has no data or evidence demonstrating
that such a notional amount would properly balance liquidity and
transparency considerations.\384\ ICAP Energy recommended a lower post-
initial notional amount--either 33 or 50 percent--that would account
for the illiquid nature of the electricity and natural gas basis swaps
market.\385\ Based on the non-standardized and bespoke nature of many
electricity and natural gas swap transactions, EEI recommended that the
Commission eliminate post-initial minimum block sizes for the
electricity and natural gas swap categories for the swaps added to
appendix B to part 43.\386\ EEI also recommended that the Commission
eliminate minimum post-initial block sizes for the electricity swap
category under appendix D.\387\ In the alternative, EEI recommended
that the Commission set the minimum block sizes for each of these
categories at no greater than $3 million.\388\
---------------------------------------------------------------------------
\382\ CL-Barclays at 10; CL-CME at 2, 4; CL-WMBAA at 2-3.
\383\ CL-CME at 4; CL-WMBAA at 2-3.
\384\ CL-Barclays at 10.
\385\ CL-ICAP Energy at 3.
\386\ CL-EEI at 8-9.
\387\ Id. at 9.
\388\ EEI requested that the Commission delay the adoption of
minimum block sizes for the swaps in these categories for at least
one year until it has obtained at least one year of data from an
SDR; in the interim, all relevant transactions would be eligible for
block trade treatment. CL-EEI at 11.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(f)(1) as proposed for swap categories in the other
commodity asset class for the post-initial period. The reasons stated
by the Commission above in support of this methodology in the post-
initial period also apply to swaps in this asset class. The Commission
believes that this methodology will ensure that the vast majority of
swap transactions are subject to real-time reporting.\389\ In addition,
applying the same post-initial notional amount calculation to the other
commodity asset class provides a consistent, bright-line rule regarding
how appropriate minimum block thresholds will be calculated, thus
providing clarity to market participants engaging in swap transactions.
---------------------------------------------------------------------------
\389\ See note 41 supra.
---------------------------------------------------------------------------
6. Special Provisions for the Determination of Appropriate Minimum
Block Sizes for Certain Types of Swaps
The Commission recognizes the complexity of the swaps 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 proposed 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 proposed special rules with respect to: (a) Swaps with
optionality; (b) swaps with composite reference prices \390\; (c)
[[Page 32901]]
``physical commodity swaps'' \391\; (d) currency conversions; and (e)
successor currencies. Each of these special rules is discussed in the
subsections below.
---------------------------------------------------------------------------
\390\ In the Further Block Proposal, the Commission proposed
amending 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 proposed 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. The Commission is adopting this definition as
proposed.
\391\ In the Further Block Proposal, the Commission proposed 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. The Commission is
adopting this definition as proposed.
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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) addressed these concerns by providing that the notional size
of swaps with optionality would 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.\392\
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\392\ In essence, this approach would assume a delta factor of
one with respect to the underlying swap for swaptions.
---------------------------------------------------------------------------
The Commission received two comments regarding proposed Sec.
43.6(h)(1). FIA stated that the approach failed to recognize potential
differences in liquidity between the swap and an underlying
swaption.\393\ FIA also pointed out that the Further Block Proposal did
not explicitly address how to handle combinations of options.\394\ With
respect to options transactions involving swaps in the electricity,
natural gas, and crude oil swap categories that are used to carry out
complex strategies, ICAP Energy recommended treating all such
transactions, as well as related swap hedges, as block trades.\395\
ICAP Energy cited the complex nature of these transactions and the
common involvement of an intermediary in carrying them out as reasons
for across-the-board treatment as block trades.\396\ ICAP Energy,
however, supported the proposed approach of adopting the block sizes
set by DCMs for natural gas and electricity outright options.\397\
---------------------------------------------------------------------------
\393\ CL-FIA at 3.
\394\ Id.
\395\ CL-ICAP Energy at 6.
\396\ Id.
\397\ CL-ICAP Energy at 7.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(h)(1) as proposed. In response to ICAP Energy, the
Commission believes that the proposed approach 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.\398\ 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.\399\
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\398\ 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).
\399\ 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 size 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), 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.
The Commission received one comment regarding proposed Sec.
43.6(h)(2). AFR recommended that transactions that are composites of
swaps that are economically equivalents of futures contracts should be
disaggregated and separately priced for the purpose of determining
applicability of the block rules. AFR also recommended that the
Commission be vigilant of the use of composite swaps by counterparties
in order to ``evade the purpose of Section 727 and the Proposed
Rules.'' \400\
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\400\ CL-AFR at 5.
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With respect to spread transactions, ICAP Energy recommended that
the minimum block size limit be based upon the lowest limit leg of the
transaction, in a manner consistent with the proposed approach to
setting minimum block size limits for the mixed asset swap class.\401\
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\401\ CL-ICAP Energy at 6.
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Based upon the comments received, the Commission is adopting Sec.
43.6(h)(2) with certain clarifications based upon general concerns
expressed by commenters regarding the use of composite swaps to evade
minimum block sizes. The Commission is of the view that this rule
provides market participants with a straightforward and uncomplicated
way in which to determine whether such swap would qualify as a block
trade or large notional off-facility swap, but that a clarification is
needed to avoid the risk of evasion raised by commenters. In response
to ICAP Energy's comments, the Commission highlights to provide clarity
that ``any component swap category'' as used above in the methodology
applies to swaps with a single Unique Swap Identifier (``USI'') for the
combination of swaps identified with a single Unique Product Identifier
(``UPI'') and not to groups of different swaps each with separate USIs
transacted on or near the same time.\402\ Further, the reference to
``any component swap category'' does not
[[Page 32902]]
limit the application of this standard to those composite reference
swaps comprised of only multiple asset classes and instead should be
understood to apply more broadly to composite swaps of multiple asset
classes (i.e., a mixed asset swap), intra asset classes, and intra swap
category composite reference prices.
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\402\ The real-time public reporting rules would apply to each
of the separate USIs as previously finalized in part 43. 17 CFR
45.5.
---------------------------------------------------------------------------
To provide further clarity and clarification in response to AFR's
comment, the Commission provides the following additional example of
determining whether a composite reference price swap transaction would
qualify as a block trade or large notional off-facility swap. For
example, assume that the appropriate minimum block size for swap
category E is $50 million and for swap category F is $200 million. If a
single swap transaction with a corresponding singular reporting
obligation is based on a composite reference price that itself is based
on the weighted average of (1) one component in swap category E; (2) a
second component in swap category E; and (3) a component in swap
category F (33% equal weightings for each), and the notional size of
the swap is $75 million (i.e., $25 million for each component swap),
then the swap would not qualify as a block trade or large notional off-
facility swap based on either the swap category E or the swap category
F 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 proposed 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.
The Commission received no comments regarding proposed Sec.
43.6(h)(3). The Commission is adopting Sec. 43.6(h)(3) as proposed.
d. Currency Conversion
Under proposed Sec. 43.6(h)(4), the Commission provided 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.
The Commission received no comments regarding proposed Sec.
43.6(h)(4). The Commission is adopting Sec. 43.6(h)(4) as proposed.
e. Successor Currencies
As noted above, the Commission proposed using currency as a
criterion to determine swap categories in the interest rate asset
class.\403\ The Commission also proposed to classify the euro (EUR) as
a super-major currency, among other currencies.\404\ 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 EU member states that use the
euro.\405\
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\403\ See proposed Sec. 43.6(b)(1)(i) and the related
discussion in section II.B.1. of the Further Block Proposal.
\404\ See the proposed amendment to Sec. 43.2, defining
``super-major currencies.''
\405\ The 17 European Union member states 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
country 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.\406\ For countries with a GDP greater than $500 billion
but less than $2 trillion, the Commission would classify the successor
currency as a major currency.\407\ For nations with a GDP less than
$500 billion, the Commission would classify the successor currency as a
non-major currency.\408\
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\406\ See proposed Sec. 43.6(h)(6)(i).
\407\ See proposed Sec. 43.6(h)(6)(ii).
\408\ See proposed Sec. 43.6(h)(6)(iii).
---------------------------------------------------------------------------
The Commission received no comments regarding proposed Sec.
43.6(h)(5). The Commission is adopting Sec. 43.6(h)(5) as proposed.
C. Procedural Provisions
1. Sec. 43.6(a) Commission Determination
The Commission proposed 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.
The Commission received eight comments regarding determination of
appropriate minimum block sizes for swaps listed on a SEF or DCM. Four
commenters favored allowing SEFs and DCMs to set appropriate minimum
block sizes for the swaps they list. CME stated that the Commission
would be better served by retaining the ability to set block levels in
the private, bilateral swaps market and deferring to the expertise of
SEFs and DCMs to set the levels in their markets.\409\ ICAP suggested
that the Commission utilize the same approach as for the futures
markets, where futures exchanges set their own block sizes, and allow
SEFs to set block sizes since they have an incentive to provide as much
information about trading interest as possible without hurting
liquidity.\410\ Morgan Stanley suggested that the Commission could
allow DCMs and SEFs to set appropriate block sizes, subject to
Commission approval, as DCMs and SEFs would benefit from setting block
sizes in a way that maximizes liquidity.\411\ WMBAA stated that the
Commission should authorize SEFs to analyze ongoing swaps market
[[Page 32903]]
trading activity and trade data to determine uniform thresholds that
distinguish transactions that move markets from those that do not, and
work to ensure that block trade regimes for swaps executed on SEFs and
DCMs are as consistent as possible to avoid arbitrage.\412\
---------------------------------------------------------------------------
\409\ CL-CME at 3.
\410\ CL-ICAP at 5-6.
\411\ CL-Morgan Stanley at 3.
\412\ CL-WMBAA at 5.
---------------------------------------------------------------------------
Four commenters supported the Commission's proposal that the
Commission set minimum block levels. Three of those commenters
recommended that SEFs and DCMs should not be able to set minimum block
thresholds above the level mandated by the Commission. Javelin asserted
that the CFTC should set block trade rules and not SEFs, so as to avoid
a race to the bottom that would harm transparency and threaten
competition.\413\ SIFMA stated that the Commission should set minimum
block trade size thresholds and argued that allowing SEFs and DCMs to
set a block size threshold above the minimum level mandated by the
Commission without guidance is inconsistent with the Commission's
statutory duty ``to specify the criteria for determining what
constitutes a large notional swap transaction (block trade) for
particular markets and contracts.'' \414\ AII also stated that SEFs or
DCMs should not have the ability to set block sizes for swaps at higher
levels than the appropriate minimum block sizes determined by the
Commission, as SEFs in particular have interests that may not be
aligned with buy-side firms and may not be incentivized to ensure that
market disruption is minimal.\415\
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\413\ CL-Javelin at 6.
\414\ CL-SIFMA at 11-12.
\415\ CL-AII at 10.
---------------------------------------------------------------------------
In addition, ICAP Energy stated that SEF block limits for futures
equivalent swap contracts should adjust automatically to meet DCM
contract limits adjustments between annual revisions of SEF block
limits, so that the Commission does not set SEF block levels at levels
higher than the block levels set by DCMs.
Based upon the comments received, the Commission is adopting Sec.
43.6(a) as proposed. The Commission agrees with the commenters who
recommended that appropriate minimum block thresholds for swaps be set
by the Commission, rather than SEFs or DCMs. The Commission concurs
with SIFMA that it has a statutory duty ``to specify the criteria for
determining what constitutes a large notional swap transaction (block
trade) for particular markets and contracts.'' \416\ The Commission
also agrees with Javelin that allowing SEFs and DCMs to set appropriate
minimum block thresholds could lead to a race to the bottom that would
harm transparency and reduce competition. In the Commission's view, the
Commission's approach is also the least burdensome from a cost-benefit
perspective because it significantly reduces the direct costs imposed
on registered entities. Moreover, while Sec. 43.6(a) states that the
Commission will determine minimum block sizes, as recommended by some
of the commenters, the Commission notes that SEFs and DCMs nonetheless
will have the discretion to set block sizes for swaps at levels that
are higher than the appropriate minimum block sizes determined by the
Commission.
---------------------------------------------------------------------------
\416\ CL-SIFMA at 11-12; 7 U.S.C. 2(a)(13)(E)(ii).
---------------------------------------------------------------------------
2. 43.6(f)(4) and (5) Publication and Effective Date of Post-Initial
Appropriate Minimum Block Sizes
Proposed Sec. 43.6(f)(3) provided that the Commission would
publish the post-initial appropriate minimum block sizes on its Web
site. Proposed Sec. 43.6(f)(4) provided 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.
Several commenters recommended that post-initial appropriate
minimum block sizes should be updated more frequently than on an annual
basis.\417\ ICI, AII and SIFMA recommended a quarterly or at least a
semi-annual calculation in order to account for changes in liquidity in
the market.\418\ Spring Trading and Vanguard recommended a quarterly
calculation that would allow block levels to be more responsive to the
market.\419\ Kinetix, however, recommended that calculations should be
carried out on a monthly basis.\420\ MFA suggested that the Commission
maintain the optional ability to update the minimum block size on a
more frequent basis as well as shorten the look-back window for the
relevant data set.\421\
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\417\ CL-GFMA at 3.
\418\ CL-ICI at 7; CL-AII at 11; CL-SIFMA at 6-7.
\419\ CL-TeraExchange at 2; CL-Vanguard at 7.
\420\ CL-Kinetix at 2.
\421\ CL-MFA at 8.
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Some commenters asserted that the Commission should have the
authority to update appropriate minimum block sizes outside of the
proposed 1-year set look-back period. GFMA believed that the Commission
should have this authority, without reference to a data set, to respond
to a market that quickly becomes illiquid.\422\ MFA also supported
providing this authority, but believed that the Commission should
exercise this authority based on SDR data received for individual or
multiple swap categories.\423\
---------------------------------------------------------------------------
\422\ CL-GFMA at 4.
\423\ CL-MFA at 8.
---------------------------------------------------------------------------
Based on its argument that block levels set by SEFs should not be
higher than those set by DCMs, ICAP Energy recommended allowing for
automatic adjustment to occur during the course of the year.\424\
---------------------------------------------------------------------------
\424\ CL-ICAP Energy at 4.
---------------------------------------------------------------------------
The Commission is adopting the rule as proposed, with the one
modification that proposed Sec. 43.6(f)(3) and (4) will be adopted as
Sec. 43.6(f)(4) and (5). The rule as adopted only requires that the
Commission to update post-initial minimum block sizes at least once a
year and therefore does not preclude the Commission from doing so on a
more frequent basis. The Commission anticipates that it will examine
and re-calculate such block sizes at regular intervals, but also
acknowledges that the liquidity of a swap market may change
significantly outside of such intervals. Therefore, the Commission
reserves the authority to update minimum block sizes when warranted and
as necessary to respond to such circumstances. In response to GFMA and
MFA, the Commission agrees with MFA and emphasizes that in all
circumstances, minimum block sizes will be updated based on the
relevant market data received.
In response to ICAP Energy's recommendation, the Commission notes
that adopting such a requirement would potentially create minimum block
size re-alignment issues for SEFs, particularly during the initial
period for swaps in the other commodity class. Under this requirement,
SEFs would be de facto subject to a DCM's own business decisions, i.e.,
block trade size calculations that are based on trading that does not
occur on their own facility or platform. Further, the Commission has
noted that SEFs and DCMs may set minimum block sizes that are higher
than those prescribed by the Commission; this recommended requirement
would otherwise preclude such an ability in certain cases. Accordingly,
the Commission declines to adopt this requirement.
3. Sec. 43.6(g) Notification of Election
Proposed Sec. 43.6(g) set forth the election process through which
a qualifying swap transaction would be treated as a block trade or
large notional
[[Page 32904]]
off-facility swap, as applicable. Proposed Sec. 43.6(g)(1) would
establish a two-step notification process relating to block trades.
Proposed Sec. 43.6(g)(2) would establish the notification process
relating to large notional off-facility swaps.
Proposed Sec. 43.6(g)(1)(i) contained the first step in the two-
step notification process relating to block trades. In particular, the
parties to a publicly reportable swap transaction that has a notional
amount at or above the appropriate minimum block size would be 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.\425\ With respect to the second
step, proposed Sec. 43.6(g)(1)(ii) provided that the SEF or DCM that
receives an election notification would be required to notify the
relevant SDR of such block trade election when transmitting swap
transaction and pricing data to the SDR for public dissemination.
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\425\ In order to qualify as a block trade, a swap must (1) be
listed on a registered SEF or DCM; (2) occur away from the
registered SEF's or DCM's trading system or platform and is executed
pursuant to its rules and procedures; and (3) have a notional or
principal amount at or above the appropriate minimum block size
applicable to such swap. See Sec. 43.2. By definition, a block
trade must occur away from the SEF or DCM's trading system or
platform and thus cannot be transacted on the SEF or DCM's trading
system or platform. Moreover, the swap must be at or above the
appropriate minimum block size at the time that it becomes a
publicly reportable swap transaction. Any swap that is executed on a
SEF or DCM's trading system or platform, regardless of whether it is
for a size at or above the appropriate minimum block size for such
swap, is not a block trade under this definition, and, thus, is
required to be publicly disseminated in real-time pursuant to Sec.
43.4.
---------------------------------------------------------------------------
Similar to the first step set forth in proposed Sec. 43.6(g)(1),
proposed Sec. 43.6(g)(2) would provide, in part, that a reporting
party who executes an off-facility swap with a notional amount at or
above the applicable appropriate minimum block size would be required
to notify the relevant SDR of its election to treat such swap as a
large notional off-facility swap. This section provided further that
the reporting party would be 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.
The Commission received no comments regarding proposed Sec.
43.6(g). The Commission is adopting Sec. 43.6(g) as proposed.
4. 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) New swap categories as described in proposed Sec.
43.6(b); (2) post-initial appropriate minimum block sizes as described
in proposed Sec. 43.6(f); and (3) post-initial cap sizes as described
in the proposed amendments to Sec. 43.4(h)(2) of the Commission's
regulations.\426\ The purpose of the proposed delegation provision
would be 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) provided
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) provided that the delegation to the Director would not
prevent the Commission, at its election, from exercising the delegated
authority.
---------------------------------------------------------------------------
\426\ See the discussion of post-initial cap sizes in section
III.B. infra. As noted above, the Commission proposed 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.
---------------------------------------------------------------------------
The Commission received no comments regarding proposed Sec.
43.7(a) and therefore is adopting Sec. 43.7(a) as proposed.
5. Section 43.6(h)(6) Aggregation
Proposed Sec. 43.6(h)(6) would prohibit the aggregation of orders
for different trading accounts in order to satisfy the minimum block
size or cap size requirements, except that aggregation would be
permissible if done on a DCM or SEF by a person who: (i)(A) Is a CTA
registered pursuant to Section 4n of the CEA or exempt from such
registration under the Act, or a principal thereof, and who has
discretionary trading authority or directs client accounts, (B) is an
investment adviser who has discretionary trading authority or directs
client accounts and satisfies the criteria of Sec. 4.7(a)(2)(v) of
this chapter, or (C) is a foreign person who performs a similar role or
function as the persons described in (A) or (B) and is subject as such
to foreign regulation, and (ii) has more than $25 million in total
assets under management. In the Commission's view, such a prohibition
would be integral to ensuring the integrity of block trade principles
and preserving the basis for the anonymity associated with establishing
cap sizes.
The Commission received a number of comments on the proposed
aggregation rule, particularly as to the enumerated persons who would
otherwise be allowed to aggregate orders from different trading
accounts. Barnard supported the rule, noting that it would help ensure
that non-block transactions comply with the exchange trading
requirements and real-time reporting obligations, thereby increasing
transparency and price discovery, promoting market integrity, improving
efficiency and competitiveness in the swap markets, and ultimately
providing timely information to enable market participants to improve
their risk management practices.\427\ Barnard suggested that the
Commission add an additional requirement--that the ``block trade is
suitable for customers of such persons''--on the basis that such a
requirement would improve consistency in the rules applicable to swap
and futures markets.\428\
---------------------------------------------------------------------------
\427\ CL-Barnard at 2.
\428\ CL-Barnard at 2.
---------------------------------------------------------------------------
ABC and CIEBA stated that qualified investment advisers who are not
CTAs should be able to aggregate block trade orders for different
trading accounts.\429\ Tradeweb commented that CTAs who trade on a SEF
should also be permitted to aggregate trades on behalf of their
customers for purposes of block trades.\430\ JP Morgan commented that
this rule appears to reflect a concern that private negotiation affords
less protection to unsophisticated investors than trading through the
central markets, and that since all entities that transact in the OTC
market already must be ECPs, the analogous concern about customer
protection in the swaps market is already addressed.\431\
---------------------------------------------------------------------------
\429\ CL-ABC/CIEBA at 3.
\430\ CL-Tradeweb at 5. Tradeweb's comment was received in
response to the Initial Proposal and not the Aggregation Proposed
Rule, the latter which allowed for CTAs to aggregate on SEFs. 75 FR
at 76174.
\431\ CL-JPM at 9, n.13.
---------------------------------------------------------------------------
ICI opposed the minimum assets under management requirement in
proposed Sec. 43.6(h)(6)(ii) and argued that the Commission did not
articulate a rationale or policy reason for this requirement.\432\ ICI
stated that while advisers to registered funds would typically meet the
asset requirement, advisers with less than the proposed
[[Page 32905]]
minimum would also have a valid need to engage in block trades on
behalf of the funds they manage.\433\ ICI further stated that no
relationship exists between the amount of assets managed and the
legitimacy of aggregating client orders. ICI also disagreed that an
investment adviser seeking to aggregate orders must satisfy the
criteria of Sec. 4.7(a)(2)(v) of the Commission's regulations.\434\
ICI suggested that the Commission only require an investment adviser to
be registered under Sec. 203 of the Investment Advisers Act of 1940 or
pursuant to the laws of any state without specifying a minimum
registration length or location for deposit of client assets.\435\
---------------------------------------------------------------------------
\432\ CL-ICI at 3.
\433\ Id.
\434\ Id. at 4. An investment adviser satisfies the criteria of
Sec. 4.7(a)(2)(v) if the investment adviser registers pursuant to
Sec. 203 of the Investment Advisers Act of 1940, or pursuant to the
laws of any state, and the investment adviser has been registered
and active for two years or provides security investment advice to
securities accounts which, in the aggregate, have total assets in
excess of $5,000,000 deposited at one or more registered securities
brokers. 17 CFR 4.7(a)(2)(v).
\435\ CL-ICI at 3.
---------------------------------------------------------------------------
Two comments requested clarifications to the proposed rule. WMBAA
sought clarification that the Commission did not intend for the
Proposed Rule to prevent the use of ``work up'' in over-the-counter
swaps.\436\ WMBAA stated that a block size calculation should not be
performed until the work up period ends, but expressed concern that the
work up trades could be considered aggregation.\437\ SIFMA noted that
proposed Sec. 43.6(h)(6) does not restrict the aggregation prohibition
to ``block trades'' and, as a result, ``large notional off-exchange
swaps'' could be subject to the aggregation prohibition.\438\ SIFMA
requested that the Commission add language to clarify that the
aggregation prohibition does not apply to large notional off-exchange
swaps.\439\
---------------------------------------------------------------------------
\436\ CL-WMBAA at 2. During a work up transaction, a swap price
is agreed upon for trading and the trade is then reported to market
participants, who then have the opportunity to ``join the trade'' by
placing a firm bid or offer to buy or sell a particular quantity.
Id.
\437\ Id. at 2-3.
\438\ Id. at 3.
\439\ Id.
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After consideration of the comments received, the Commission is
adopting proposed Sec. 43.6(h)(6) as proposed. In response to the
comment by ABC and CIEBA, the Commission notes that qualified
investment advisers, who are not CTAs, are able to aggregate block
trade orders from different trading accounts. Under Sec.
43.6(h)(6)(i)(B) and (ii), investment advisers that satisfy the
criteria under Sec. 4.7(a)(2)(v) and have more than $25 million in
total assets under management are able to aggregate orders from
different accounts. The Commission also agrees that CTAs who trade on a
SEF should be permitted to aggregate customer trades, which would be
allowed under the rule as adopted, subject to the enumerated
conditions.
With respect to JP Morgan's comment, the Commission notes that
customers trading swaps on DCMs do not have to be ECPs. As discussed
further below, adopted Sec. 43.6(i)(1) allows non-ECP customers to be
parties to block trades through a qualifying CTA, investment adviser,
or similar foreign person.\440\ It is possible, therefore, that those
non-ECP DCM customers may not be aware if they received the best terms
for their individual swap transactions that are aggregated with other
transactions. Protection for such customers is therefore necessary, as
it is for unsophisticated customers in other markets.
---------------------------------------------------------------------------
\440\ See infra Section II.C(6).
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In response to Barnard's suggested additional requirement,\441\ the
Commission acknowledges that the same or similar phrase appears in the
rules of many exchanges.\442\ The Commission, however, does not believe
that it is necessary to incorporate such specific language to the rule
because persons such as CTAs and investment advisers are already
subject to broad anti-fraud prohibitions under their governing
statutes.\443\ Moreover, adopted Sec. 43.6(i)(2), discussed further
below, also requires that any person transacting a block trade on
behalf of a customer receive prior written instruction or consent from
the customer.
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\441\ CL-Barnard at 2.
\442\ See, e.g., Chicago Mercantile Exchange Rule 526(I). See
also Chicago Board of Trade Rule 526(I); Eris Exchange, LLC Rule
601(b)(10); and New York Mercantile Exchange, Inc. Rule 526(I).
\443\ See CEA section 4o (CTAs); Investment Advisors Act of 1940
section 206.
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In response to ICI's opposition to the minimum asset threshold
under Sec. 43.6(h)(6)(ii), the Commission notes that this threshold
reflects common industry practice.\444\ CME, for example, has enforced
the $25 million threshold in its rules since September 2000.\445\ CME
has stated that the threshold ``is an effort to establish the
professionalism and sophistication of the registrant'' \446\ while also
expanding the number of CTAs and investment advisers eligible to
aggregate trades.\447\ The Commission believes that the $25 million
threshold is an appropriate requirement to ensure that persons allowed
to aggregate trades are appropriately sophisticated with these
transactions, while at the same time not excluding an unreasonable
number of CTAs, investment advisers, and similar foreign persons.
---------------------------------------------------------------------------
\444\ See, e.g., CME Rule 526. See also CBOE Futures Exchange
LLC Rule 415(a)(i); Chicago Board of Trade Rule 526; Eris Exchange,
LLC Rule 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ OMX Futures
Exchange, Inc. Rule E23; New York Mercantile Exchange, Inc. Rule
526(I); NYSE Liffe US, LLC Rule 423; and OneChicago LLC Rule 417.
\445\ See CME Submission 00-99 (Sept. 21, 2000) (modifying CME
Rule 526 to reduce the threshold from $50,000,000 to $25,000,000).
CME originally planned to lower the threshold from $50,000,000 to
$5,000,000, but withdrew the submission and instead proposed to
lower the threshold to $25,000,000, based on customer suggestions.
See CME Submission 00-93 (Sept. 1, 2000); CME Submission 00-99 at 5-
6.
\446\ Id. at 6 (quoting letter addressed to Jean A. Webb,
Secretary of the Commission from John G. Gaine, President, Managed
Funds Association dated April 24, 2000 regarding ``Chicago
Mercantile Exchange new Proposed Rule 526'').
\447\ Id. at 4, 6-7. CME also stated in the filing that it
planned to readdress the threshold amount as it gained experience
with block trades, but has declined to modify the amount.
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The Commission also disagrees with ICI's contention that investment
advisers should not be required to satisfy the criteria under Sec.
4.7(a)(2)(v), which requires an investment adviser to (1) be registered
and active as an investment adviser for two years or (2) provide
securities investment advice to securities accounts which, in the
aggregate, have total assets in excess of $5 million deposited at one
or more registered securities brokers.\448\ The Commission first
adopted provisions similar to current Sec. 4.7(a)(2)(v) in 1992 \449\
as objective indications that a person had the investment
sophistication and experience needed to evaluate the risks and benefits
of investing in commodity pools or a portfolio large enough to indicate
the same, along with the financial resources to withstand the
investment risks.\450\ In 2000,\451\ the Commission extended the same
criteria in current Sec. 4.7(a)(2)(v) to registered investment
advisers for the same reasons.\452\ The Commission believes that these
objective criteria, which demonstrate that an investment adviser
possesses the necessary investment expertise, should also apply with
respect to allowing such persons to aggregate client orders.
---------------------------------------------------------------------------
\448\ 17 CFR 4.7(a)(2)(v).
\449\ 57 FR 34853, 34854-55 (Aug. 7, 1992). The final rule
reduced the amount on deposit threshold to $5 million from the $10
million required by the proposed rule. See 57 FR 3148, 3152 (Jan.
28, 1992).
\450\ See 57 FR at 34854 (quoting 57 FR at 3152).
\451\ 65 FR 11253, 11257-58 (Mar. 2, 2000).
\452\ Id. at 11257 (quoting 57 FR at 3152).
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In response to WMBAA, the Commission clarifies that the aggregation
prohibition will not affect the work up process. By definition, a block
trade occurs away from a DCM or
[[Page 32906]]
SEF.\453\ The trades that are part of the work up process will occur on
a DCM or SEF, and therefore are not block trades and are not subject to
the aggregation prohibition.
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\453\ Section 43.2 defines a ``block trade'' as a publicly
reportable swap transaction that ``occurs away from the registered
swap execution facility's or designated contract market's trading
system or platform and is executed pursuant to the registered swap
execution facility's or designated contract market's rules and
procedures.''
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Finally, as to SIFMA's requested clarification, the Commission
notes that that it does intend to include large notional off-facility
swaps in the aggregation prohibition under Sec. 43.6(h)(6). The
appropriate minimum block size applies to both block trades and large
notional off-facility swaps,\454\ and thus the aggregation prohibition
should be applied to both types of transactions.
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\454\ Section 43.2 defines a ``large notional off facility
swap'' as having ``notional or principal amount at or above the
appropriate minimum block size.''
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6. Section 43.6(i) Eligible Block Trade Participants
Proposed Sec. 43.6(i)(1) provided that parties to a block trade
must be ECPs, as defined under Section 1a(18) of the CEA and the
Commission's regulations. The proposed rule includes an exception to
the ECP requirement by providing that a DCM may allow (i) A CTA
registered pursuant to Section 4n of the CEA, or exempt from
registration under the CEA, or a principal thereof, who has
discretionary trading authority or directs client accounts, (ii) an
investment adviser who has discretionary trading authority or directs
client accounts and satisfies the criteria the criteria of 4.7(a)(2)(v0
of the Commission's regulations, or (iii) a foreign person who performs
a similar role or function to the persons described in (i) or (ii) and
is subject as such to foreign regulation, to transact block trades for
customers who are not ECPs, if such CTA, investment adviser or foreign
person has more than $25 million in total assets under management.
Proposed Sec. 43.6(i)(2) further provided that a person transacting a
block trade on behalf of a customer must receive prior written
instruction or consent from the customer to do so. Such instruction or
consent may be provided in a power of attorney or similar document, by
which the customer provides the person with discretionary trading
authority or the authority to direct the trading in the customer's
account.
As discussed above, similar comments regarding the exceptions to
the prohibitions against aggregation for certain persons were submitted
with respect to the exception to certain persons transacting blocks on
a DCM on behalf of non-ECPs. For example, ICI opposed the minimum
assets under management requirement in proposed Sec. Sec. 43.6(i)(1)
and similarly argued that the Commission did not articulate a rationale
or policy reason for this requirement.\455\
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\455\ CL-ICI at 3.
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Specific comments were also received on proposed Sec.
43.6(i)(2).\456\ ICI requested a clarification that only a person
transacting a block trade on behalf of a customer who is not an ECP
must receive prior written instruction or consent.\457\ ICI argued that
written instruction or consent from an ECP is not necessary because
these customers can engage in block trades and that investment advisers
with discretionary trading authority registered with the SEC already
have the ability to aggregate orders on behalf of clients without
obtaining separate consent.\458\
---------------------------------------------------------------------------
\456\ CL-ICI at 5; CL-SIFMA at 1-2.
\457\ CL-ICI at 5.
\458\ Id.
---------------------------------------------------------------------------
SIFMA commented that proposed Sec. 43.6(i)(2) may require asset
managers to obtain consent from each client for whom they will engage
in block trades.\459\ SIFMA contended that this requirement would be
costly and unnecessary, and that notice to the customers \460\ or a
general grant of investment discretion in the investment management
agreement, power of attorney, or similar document should be
sufficient.\461\ SIFMA further commented that proposed Sec. 43.6(i)(2)
is unlike rules governing DCMs in the futures context.\462\ SIFMA also
argued that DCM rules requiring consent for block trades only require
the direct members of the DCM to obtain consent from the members'
direct customers, not from the customers' customers. Additionally,
SIFMA contended that a client consent requirement does not apply to
advisers with respect to futures trades and should not apply to
advisers with respect to swaps trades.\463\
---------------------------------------------------------------------------
\459\ CL-SIFMA at 1.
\460\ Id. at 2.
\461\ Id.
\462\ Id. at 1 n.4.
\463\ Id.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.6(i) as proposed. The Commission declines to adopt
ICI's clarification and notes that Sec. 43.6(i)(2) is intended to
ensure that all customers of CTAs, investment advisers, and similar
foreign persons, whether the customers are ECPs or not, are fully
informed of the use of block trades on their behalf.
The Commission also disagrees with SIFMA's contention regarding the
burdens of obtaining consent. This burden consent will be minimal
because Sec. 43.6(i)(2) states that the instruction or consent may be
provided through a power of attorney or similar document that provides
discretionary trading authority or the authority to direct trading in
the account. The consent may therefore be included in existing and
future customer agreements. The Commission further disagrees that a
general grant of investment discretion or notice to the customer should
satisfy Sec. 43.6(i)(2). A customer's written instruction or consent
is necessary because a customer potentially may not receive the best
terms for an individual swap transaction that is part of an
aggregation. The written instruction or consent makes the customer
aware that block trades may be used on its behalf, allowing the
customer to decide whether to allow these transactions.
The Commission notes that a similar consent requirement was
included in the Commission's proposed DCM rule.\464\ The Commission
believes that the customer protection functions of the consent
requirement apply, regardless of the degree of separation between the
customer and the DCM or SEF. As discussed above, the consent
requirement ensures that customers are informed of the use of block
trades for their accounts. If a CTA, an investment adviser, or a
similar foreign person plans to aggregate customer orders for block
trades, then the customers must have the opportunity to evaluate
whether the customer agrees to the use of aggregation, as evidenced by
the written instruction or consent, regardless of whether the CTA,
investment adviser, or similar foreign person is a direct member of a
DCM or SEF.
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\464\ Core Principles and Other Requirements for Designated
Contract Markets. 75 FR 80572, Dec. 22, 2010. The final DCM rule,
however, did not include this proposed regulation which was
promulgated, along with various other regulations, to implement Core
Principle 9. As noted in the final rule, given the number of
comments received under Core Principle 9, the Commission believed
that additional time was appropriate before finalizing the proposed
rules for Core Principle 9; it expects to consider the proposed
rules at a future date. 77 FR 36643, June 19, 2012.
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III. 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
[[Page 32907]]
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.\465\ In proposed amendments to Sec. 43.4(h) and 43.4(d)(4), as
described further below, the Commission proposed 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 proposed 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 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).\466\
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\465\ 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).
\466\ 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.
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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 also proposed 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 protect the anonymity of
counterparties' market positions and business transactions as required
in section 2(a)(13)(C)(iii) of the CEA.\467\ Second, the masking of
extraordinarily large positions also takes into consideration the
requirement under section 2(a)(13)(E)(iv) that the Commission take into
account the impact that real-time public reporting could have in
reducing market liquidity.\468\
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\467\ See 7 U.S.C. 2(a)(13)(C)(iii).
\468\ See 7 U.S.C. 2(a)(13)(E)(iv).
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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 proposed 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.
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 Real-Time
Reporting Final Rule, 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.\469\ 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.\470\ In Sec. 43.4(h) and as described in
the Real-Time Reporting Final Rule, the Commission notes that SDRs will
apply interim cap sizes until such time as appropriate minimum block
sizes are established.\471\ 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.\472\
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\469\ See 77 FR 1247.
\470\ 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.
\471\ See 77 FR 1215.
\472\ 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 proposed 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.\473\ The Commission also proposed changing the term
``interim'' as it is used in Sec. 43.4(h) in the Real-Time Reporting
Rule to ``initial'' in order to correspond with the description of the
initial period in proposed Sec. 43.6(e).
---------------------------------------------------------------------------
\473\ The Commission does not intend the provisions in this
final rule to prevent a SEF or DCM from sharing the exact notional
amounts of a swaps transaction 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 1245.
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a. Initial Cap Sizes
In the initial period,\474\ proposed Sec. 43.4(h)(1) would set the
cap size for each swap category as the greater of the interim cap sizes
in all five asset classes set forth in the Real-Time Reporting Final
Rule (Sec. 43.4(h)(1)-(5)) or the appropriate minimum block size for
the respective swap category.\475\ 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 Real-Time Reporting Final Rule (Sec.
43.4(h)(1)-(5)).
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\474\ The initial period is the period prior to the effective
date of a Commission determination to establish applicable post-
initial cap sizes. See proposed Sec. 43.4(h)(1).
\475\ See 77 FR 1249.
---------------------------------------------------------------------------
For the initial period, AII and ISDA/SIFMA argued that the cap size
should be the lower of block size and the interim cap size in Sec.
43.4(h)(1).\476\ EEI stated that the cap size of $25 million for both
the electricity swap contracts proposed to be added to appendix B and
the electricity swaps in the other commodity swap categories in
appendix D, which would be based on the interim cap sizes established
by the Commission in the Real-Time Reporting Final Rule, is too high.
EEI instead recommended both a fixed cap size and a minimum block size
of $3 million.\477\
---------------------------------------------------------------------------
\476\ CL-AII at 12; CL-ISDA/SIFMA at 15.
\477\ CL-EEI at 11-12.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting
[[Page 32908]]
Sec. 43.4(h)(1) as proposed. EEI recommends a lower cap size for
specific swap categories--particularly electricity swaps--but it does
not recommend any change to the proposed interplay between cap size and
appropriate minimum block size during the interim period. The cap size
for the interim period was established by the Real-Time Reporting Final
Rule, and the Commission considered the appropriate level for these cap
sizes at that time. The Commission did not propose altering the interim
cap size in the Further Block Proposal, and thus did not receive
comments regarding altering the interim cap size beyond that of EEI.
The Commission does not believe that altering the interim cap size
would be appropriate under such circumstances.
AII and ISDA/SIFMA recommended that the cap size be set as the
lower of the appropriate minimum block size and the interim cap sizes
set forth in the Real-Time Reporting Rule. The Commission, however,
disagrees with this view of the relationship between block thresholds
and cap sizes. All of the information regarding a block trade is
reported to the market at the end of the block time delay. Cap sizes,
on the other hand, are never expressed to the market. Because this
information is not reported to the market in real-time, nor reported to
the market at all, the Commission believes that cap sizes should be set
at a higher level than block sizes, in order to minimize the amount of
information that is never publicly disseminated. Accordingly, the
Commission is adopting Sec. 43.4(h)(1) as proposed.
b. Post-Initial Cap Sizes and the 75-Percent Notional Amount
Calculation
Pursuant to proposed Sec. 43.4(h)(2)(ii), the Commission would use
a 75 percent notional amount calculation, as proposed in Sec.
43.6(c)(2), to determine the appropriate post-initial cap sizes for all
swap categories for the purpose of reporting block trades or large
notional off-facility swaps of significant size.\478\ This calculation
methodology would be different from the 67 percent notional amount
calculation methodology that the Commission proposed in Sec.
43.6(c)(1), which would be used to determine appropriate minimum block
sizes.\479\
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\478\ See proposed Sec. 43.6(c)(2).
\479\ See proposed Sec. 43.6(c)(2).
---------------------------------------------------------------------------
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
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.
Consistent with the Commission's proposed process to determine the
appropriate post-initial minimum block sizes, proposed Sec. 43.4(h)(3)
provided that the Commission would publish post-initial cap sizes on
its Web site. Proposed Sec. 43.4(h)(4) provided 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.
The Commission received 10 comments regarding the 75 percent
notional amount calculation for determining post-initial cap sizes. One
commenter, Javelin, supported the 75 percent notional amount
calculation and stated that it was consistent with the minimum block
size threshold established by the Commission.\480\
---------------------------------------------------------------------------
\480\ CL-Javelin at 2.
---------------------------------------------------------------------------
Seven commenters, however, recommended that the Commission set
post-initial cap sizes matching the post-initial minimum block size
thresholds established by the Commission. AII recommended setting the
post-initial cap size for each swap category at the same level as the
post-initial block size threshold and states that the 75 percent
notional amount calculation is far too high.\481\ GFMA similarly stated
that the same rationale should apply to cap and block sizes, as both
have potential negative impacts on liquidity.\482\ ICI stated that the
75 percent notional amount would be too high for determining cap size
because the lack of depth and liquidity in the swaps market could cause
public reporting of block sizes to reveal identities, business
transactions, and market positions of participants, and recommended a
67 percent notional amount calculation for determining cap size in the
post-initial period.\483\ ISDA/SIFMA also stated that the added
transparency from reporting transaction sizes between 67 percent and 75
percent would not outweigh the harm to liquidity from additional
disclosure, and urges the Commission to ensure that the post-initial
cap size is always equal to the relevant block size.\484\ MFA commented
that it is unnecessary for the Commission to establish cap sizes that
differ from minimum block sizes as there is not a meaningful
transparency benefit that would outweigh the resource burdens on the
Commission, SDRs, SEFs, and other market participants.\485\ SIFMA
recommended that the Commission should set the notional cap size at the
block threshold, as the added public dissemination could harm liquidity
in the same manner that a higher block trade size threshold might.\486\
Vanguard believes that it is essential that the cap match the block
trade threshold, as to do otherwise would compromise the liquidity
protections afforded by the nuanced assessment of block trade
thresholds.\487\
---------------------------------------------------------------------------
\481\ CL-AII at 12.
\482\ CL-GFMA at 5.
\483\ CL-ICI at 8.
\484\ CL-ISDA/SIFMA at 15.
\485\ CL-MFA at 8-9.
\486\ CL-SIFMA at 12.
\487\ CL-Vanguard at 7.
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Two other commenters suggested alterations of the Commission's
proposed cap sizes. Barclays recommended that the post-initial period
cap sizes be introduced at more nuanced levels that reflect the
differences between product's traded volumes.\488\ EEI recommended a
much lower fixed cap size for Electricity Swap Contracts and the Other
Commodity Electricity Swap Category.\489\
---------------------------------------------------------------------------
\488\ CL-Barclays at 6.
\489\ CL-EEI at 11-12.
---------------------------------------------------------------------------
After consideration of the comments above, the Commission is
adopting Sec. 43.4(h)(2)(ii) as proposed. The Commission is of the
view that setting post-initial 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-
[[Page 32909]]
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 to lay off risk when executing extraordinarily large swap
transactions.
The Commission notes that Section 2(a)(13) tasks the Commission
with bringing real-time public reporting to the swaps market. Section
2(a)(13)(E) expressly provides that the Commission determine
appropriate time delays for block trades and large notional off-
facility swaps. However, these provisions only call for a time delay--
they do not provide for information to be kept from the market in
perpetuity. All of the information regarding a block trade is reported
to the market at the end of the block time delay. Cap sizes, on the
other hand, are never expressed to the market. Because this information
is not reported to the market in real-time, nor reported to the market
at all, the Commission believes that cap sizes should be set at a
higher level than block sizes. The 75 percent notional test balances
the competing interests of providing meaningful real-time public
reporting to the swaps market and protecting the anonymity of swap
market participants, while taking into account potential impacts on
market liquidity.
If market participants conclude that the Commission has set cap
sizes for a specific swap category in a way that will materially reduce
market liquidity, then those participants are encouraged to submit data
to support their conclusion. In addition, through its own surveillance
of swaps market activity, the Commission may become aware that a cap
size would reduce market liquidity for a specific swap category. In
response to either a submission or its own surveillance of swaps market
activity, the Commission has the legal authority to take action by rule
or order to mitigate the potential effects on market liquidity of cap
sizes with respect to swaps in a particular swap category.
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 Real-Time Reporting Final Rule, 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.\490\ 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.
---------------------------------------------------------------------------
\490\ 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.\491\ 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.
---------------------------------------------------------------------------
\491\ Appendix B to part 43 provides a list of 28 ``Enumerated
Physical Commodity Contracts'' as well as 1 contract under the
``Other Contracts'' heading. See 77 FR 1182 app. B.
---------------------------------------------------------------------------
In its Real-Time Reporting Final Rule, 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 the
Further Block Proposal, the Commission proposed adding 13 contracts to
appendix B to part 43 under the ``Other Contracts'' heading.\492\ 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 that are economically related thereto) would
not disclose the identities, market positions and business transactions
of swap counterparties.
---------------------------------------------------------------------------
\492\ Appendix B to part 43 currently lists only Brent Crude Oil
(ICE) under the ``Other Contracts'' heading.
---------------------------------------------------------------------------
Pursuant to the Real-Time Reporting Final Rule, 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 Real-Time Reporting Final Rule. The Commission
noted in the Real-Time Reporting Final Rule 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.\493\ Accordingly, the Commission
proposed in the Further Block 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).
---------------------------------------------------------------------------
\493\ See 77 FR 1211.
---------------------------------------------------------------------------
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,\494\ the public dissemination of less
specific information for swaps with specific geographic or pricing
detail may be appropriate. The Commission believes 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 proposed 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.\495\
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\494\ 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).
\495\ 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
supra note 61.
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2. Proposed Amendments to Sec. 43.4
In order to accommodate the policy goals described above, the
Commission proposed adding Sec. 43.4(d)(4)(iii) to part 43 to
establish rules regarding the
[[Page 32910]]
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.
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 believes, however, that the
public dissemination of such data will still provide the market with
useful information relating to market depth, trading activity and
pricing information for similar types of swaps.
The Commission also proposed making conforming amendments to Sec.
43.4(d). Specifically, the Commission proposed amending the
introductory language to Sec. 43.4(d)(4)(i) by deleting ``Sec.
43.4(d)(4)(ii)'' and adding in its place ``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.\496\
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\496\ 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 also
proposed amending Sec. 43.4(g) and (h) to make conforming changes.
---------------------------------------------------------------------------
The Commission received no comments regarding Sec. 43.4(d)(4)(i)
and (ii). The Commission is adopting Sec. 43.4(d)(4)(i) and (ii) as
proposed.
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 would
be required to 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, the provisions of proposed Sec. 43.4(d)(4)(iii) and proposed
appendix E to part 43 would not apply. 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 outlines the proposed
system for SDRs to publicly disseminate ``basis swaps.''\497\
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\497\ For the purposes of the Further Block Proposal and this
final rule, 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.
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a. U.S. Delivery or Pricing Points
Table E1 in proposed 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 proposed 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 proposed using
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 set 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, the proposal required 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'').\498\
The FERC Natural Gas Markets reflect natural deviations found in the
spot prices in different markets.\499\ The Commission 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.
---------------------------------------------------------------------------
\498\ See FERC, National Gas Markets--Overview, http://www.ferc.gov/market-oversight/mkt-gas/overview.asp (last viewed May
6, 2013).
\499\ 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.10, 2013). 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) 748-65.
---------------------------------------------------------------------------
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, Vermont, Connecticut, New York,
Pennsylvania, Kentucky, Ohio, West Virginia, New Jersey, Delaware,
Maryland and Virginia); \500\ (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.
---------------------------------------------------------------------------
\500\ The District of Columbia would be included in this region,
if any specific delivery or pricing points existed at the time of
the Further Block Proposal.
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ii. Petroleum and Related Products
In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part
43, the Commission set forth a method to describe the publicly
reportable swap transactions that have petroleum or related products as
an underlying asset and have a specific delivery or pricing point in
the United States. In particular, the proposal 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.\501\ The PADD regions indicate
economically and geographically distinct regions for the purposes of
administering oil allocation.
[[Page 32911]]
The Department of Energy's Energy Information Administration (``EIA'')
collects and publishes oil supply and demand data with respect to the
PADD regions.\502\ Accordingly, to provide consistency with EIA
publications and information regarding regional patterns, the
Commission proposed that specific delivery or pricing points with
respect to such petroleum product swaps are publicly disseminated based
on PADD regions.
---------------------------------------------------------------------------
\501\ See PADD Map, Appendix A, Petroleum Administration for
Defense Districts, http://www.eia.gov/todayinenergy/detail.cfm?id=4890, (last viewed May 6, 2013).
\502\ See U.S. Energy Information Administration (EIA)--
Petroleum & Other Liquids, http://www.eia.gov/petroleum/data.cfm
(last viewed May 6, 2013).
---------------------------------------------------------------------------
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).\503\ 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.
---------------------------------------------------------------------------
\503\ 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).
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iii. Electricity and Sources
In proposed Sec. 43.4(d)(4)(iii), the Commission also set 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, the
proposal would require SDRs to publicly disseminate the specific
delivery or pricing point based on a description of one of the FERC
Electric Power Markets.\504\
---------------------------------------------------------------------------
\504\ See FERC, Electric Power Markets--Overview, http://www.ferc.gov/market-oversight/mkt-electric/overview.asp (last viewed
May 6, 2013).
---------------------------------------------------------------------------
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) Pennsylvania-New Jersey-Maryland (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.
iv. All Remaining Other Commodities
In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part
43, the Commission set forth a method to describe any swaps in the
other commodity asset class that do not have oil, natural gas,
electricity, or petroleum as an underlying asset, but have specific
delivery or pricing points in the United States. In particular, the
Commission proposed 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
believed 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 10 federal regions that SDRs would use for public dissemination
under the proposal 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).\505\
---------------------------------------------------------------------------
\505\ See U.S. Energy Information Administration, U.S. Federal
Region Map, http://www.eia.gov/electricity/regionsmap/fedregstates.html (last visited May 6, 2013).
---------------------------------------------------------------------------
b. Non-U.S. Delivery or Pricing Points
Table E2 in proposed appendix E to part 43 provided 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 proposed 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 proposed 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''); \506\ (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 considered 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 amount of energy
production in those regions.
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\506\ Note that Russia is not included in ``Eastern Europe'' or
in ``Northern Asia'' and instead should be publicly disseminated as
``Russia.''
---------------------------------------------------------------------------
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 proposed requiring SDRs to ensure that specific
underlying assets are publicly disseminated for basis swaps that
qualify as publicly
[[Page 32912]]
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. Currently, Sec.
43.4(d)(4)(ii)(A)-(B) requires an SDR to publicly disseminate the
actual underlying asset of the leg of the basis swap that references or
is economically related to 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 also publicly disseminate the specific
underlying asset. With respect to the leg of a basis swap that does not
reference a contract in appendix B to part 43, however, the Commission
proposed to require SDRs to publicly disseminate the underlying asset
of that leg pursuant to proposed Sec. 43.4(d)(4)(iii) and proposed
appendix E to part 43, i.e., with top-coding provisions.
d. Comments Received and Commission Determination
The Commission received three comments regarding the masking of
specific delivery or pricing detail of energy and power swaps. EEI
recommended that the Commission mask data regarding Other Commodity
Electricity Swaps according to the North American Electric Reliability
Corporation eight regions rather than the FERC regions proposed.\507\
Barclays recommended that the Commission use wider geographic regions
when publicly disseminating data for commodity swaps with very specific
underlying assets and/or delivery points and develop an appropriate
process to avoid identifying issuers of debt.\508\ Spring Trading
supported further measures to prevent public disclosure of identities,
business transactions, and market positions of swap market
participants, and recommended disclosing a subset of data on a
collective basis at a later date.
---------------------------------------------------------------------------
\507\ CL-EEI at 12-13.
\508\ CL-Barclays at 6.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission is
adopting Sec. 43.4(d)(4)(iii) with the following modification. For
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, the Commission is requiring SDRs to publicly
disseminate the specific delivery or pricing point based on a
description of one of 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) 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).\509\ The Commission is of the view that
using these regions as suggested by EEI will provide further masking of
specific delivery details and thus further protection against public
disclosure of identities, business transactions, and market positions
of swap market participants, as recommended by Barclays and Spring
Trading.
---------------------------------------------------------------------------
\509\ See NERC, Key Players: Regional Entities, http://www.nerc.com/page.php?cid=1%7C9%7C119 (last visited May 6, 2013).
---------------------------------------------------------------------------
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 Real-Time Reporting Final
Rule, 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 proposed adding 13 natural gas and
electricity contracts under the ``Other Commodity'' heading in appendix
B to part 43 that have been de-listed and converted into futures
contracts listed on a DCM.\510\ Nevertheless, the addition of these 13
contracts to appendix B 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.
---------------------------------------------------------------------------
\510\ See supra note 176.
---------------------------------------------------------------------------
The Commission had previously determined that these 13 contracts--
as swaps--were significant price discovery contracts (``SPDCs'') in
connection with trading on exempt commercial markets (``ECMs'').\511\
Each of the 13 contracts had 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.\512\
---------------------------------------------------------------------------
\511\ Id.
\512\ 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.
---------------------------------------------------------------------------
To the extent that the SPDC contracts have been de-listed and
replaced by listed futures contracts, the Commission believes that the
latter contracts have similar material liquidity and material price
reference, among other things. Therefore, the Commission anticipates
that, the public dissemination of the full underlying asset for
publicly reportable swap transactions that reference such futures
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.\513\ The Commission did not receive
any other comments, and accordingly, is adopting these additions to
appendix B.
---------------------------------------------------------------------------
\513\ The Commission notes that it is not adding ``Henry
Financial LD1 Fixed Price,'' a listed futures contract that was
converted from ``Henry Financial LD1 Fixed Price Swap'' (which was
previously deemed by the Commission to be a SPDC), to 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.
---------------------------------------------------------------------------
b. Technical Revisions to Part 43
In the Real-Time Reporting Final Rule, the Commission states that
the
[[Page 32913]]
transactions described Sec. 43.4(d)(4)(ii)(A)-(C), i.e., the instances
in which the actual underlying asset for a publicly reportable swap
transaction in the other commodity asset class is to be publicly
disseminated, are meant to be exclusive of one another. Under these
sections, an SDR is required to publicly disseminate the actual
underlying asset(s) of a swap in the other commodity asset class, where
the swap (1) is executed on or pursuant to the rules of a SEF or DCM;
(2) references a contract listed on appendix B to part 43; or (3) is
economically related to a contract on appendix B. Accordingly, the
Commission proposed 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 Real-
Time Reporting Final Rule.
The Commission did not receive any comments regarding the technical
clarification to Sec. 43.4(d)(4)(ii)(B). Accordingly, the Commission
is adopting Sec. 43.4(d)(4)(ii)(B) as proposed.
IV. 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.\514\ 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 required ``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.'' \515\ The
PRA requirements have been determined to include not only mandatory but
also voluntary information collections, and include both written and
oral communications.\516\
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\514\ See 44 U.S.C. 3501.
\515\ See 44 U.S.C. 3502.
\516\ 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.\517\ 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 included completing a supporting statement with the
agency's burden estimate and justification for the collection. The
information collection established within this rulemaking, which
included the agency's burden estimate and justification, was subjected
to the rulemaking's public comment process. No public comments were
received affecting the information burden and justification.
---------------------------------------------------------------------------
\517\ See 44 U.S.C. 3506.
---------------------------------------------------------------------------
Section 43.6 and amendments to Sec. 43.4 amend an existing
collection of information within the meaning of the PRA in two
respects. Accordingly, the Commission submitted the Further Block
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.'' The Commission invited the public to comment on any aspect
of the proposed amendments to existing collections of information. The
responses to this amended collection of information are mandatory. The
Commission did not receive any comments regarding the proposed
amendments. Accordingly, the Commission is not revising the estimates
contained in the Further Block Proposal, which are described in the
following sections.
B. Description of the Collection
On January 9, 2012, the Commission issued the Real-Time Reporting
Final Rule, 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).
Sections 43.4 and 43.6 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 Sec.
43.6 is set out in section 1 below. The analysis with respect to the
amended collections as a result of amendments to Sec. 43.4 is set out
in section 2 below.
1. Sec. 43.6(g)--Notification of Election
Section 43.6(g) amends the first and second collections of
information within the meaning of the PRA. In particular, 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. Section 43.6(g)(1) establishes a two-step
notification process relating to block trades. Section 43.6(g)(2)
establishes the notification process relating to large notional off-
facility swaps. Section 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.
Section 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.\518\ 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.\519\ Thus, the
Commission estimates that there would be 130,000 notifications of a
block trade election by reporting parties under Sec. 43.6(g) each
year.\520\
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\518\ 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 1229-30.
\519\ 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.
\520\ 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.
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[[Page 32914]]
The Commission estimates that the burden hours associated with
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 2011 Securities Industry Salary Survey, the Commission
estimates that these block traders would earn approximately $184.90 per
hour in total compensation.\521\ Accordingly, the 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 \522\ or $400,678
in total annual burden hours costs \523\ and $11.8 million in total
start-up capital costs.\524\
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\521\ 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) [(2010 salary + bonus) * (salary growth per professional
type, 2010-2011)] = Estimated 2010 total annual compensation. The
most recent data provided by the SIFMA report describe the 2010
total compensation (salary + bonus) by professional type, the growth
in base salary from 2010 to 2011 for each professional type, and the
2011 base salary for each professional type; therefore, the
Commission estimated the 2011 total compensation for each
professional type, but, in the absence of similarly granular data on
salary growth or compensation from 2011 to 2012 and beyond, did not
estimate dollar costs beyond 2011. [(Estimated 2011 total annual
compensation)/(1,800 annual work hours)] = Hourly wage per
professional type.]
(2) [(Hourly wage) * (Adjustment factor for overhead and other
benefits, which the Commission has estimated to be 1.3)] = Adjusted
hourly wage per professional type.]
(3) [(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 the Further Block
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.
\522\ 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.
\523\ The underlying adjusted labor cost estimate of $184.90 per
hour used in this estimate is calculated based on the adjusted wages
of swap traders. See note 521 supra.
\524\ 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 ($7,170); and (2) provide training to existing personnel and
update written policies and procedures ($3,360). See section V.D.1.
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.
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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 Sec. 43.6(g)(1)(ii) would be approximately $610,740 in
non-recurring annualized capital and start-up costs.\525\ The Real-Time
Reporting Final Rule already has addressed the recurring annualized
costs for the hour burden.
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\525\ 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 V.D.1. infra.
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Section 43.6(g)(2) is similar to the first step set forth in Sec.
43.6(g)(1). That is, 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
2,250 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).\526\ SIFMA's report states that traders and market analysts
make $184.90 per hour in total compensation.\527\
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\526\ 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.
\527\ See note 521 supra.
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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 Sec. 43.6 each
year. Accordingly, the Commission estimates that the total annual
burden associated with Sec. 43.6(g)(2) would be approximately 2,250
annual labor hours or $416,025 in annual labor costs.\528\
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\528\ 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 = 2,250 hours. The labor cost
estimate is calculated as follows: 2,250 labor hours x $140.93 per
hour total compensation = $317,092. The Commission notes that the
calculation in the Further Block Proposal incorrectly listed the
labor hour estimate as 2,255 hours (rather than 2,250). The labor
cost estimate was then incorrectly listed as $317,797 (rather than
$317,092) due to the incorrect labor hour estimate.
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[[Page 32915]]
In addition, the Commission estimates that Sec. 43.6(g)(2) results
in $11.8 million in non-recurring annualized capital and start-up
costs.\529\ The Real-Time Reporting Final Rule addressed all ongoing
operational and maintenance costs.\530\
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\529\ 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
V.D.1. 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 1229-30.
\530\ See 77 FR at 1232.
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2. Amendments to 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) 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 Real-Time Reporting
Final Rule, 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 Real-Time Reporting Final Rule.
In this final rule, the Commission is promulgating a new provision
(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
adopting 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 $154,021 in annualized hour burden costs.\531\
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\531\ 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 523 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.
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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.\532\
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\532\ The Real-Time Reporting Final Rule calculated and
addressed the total ongoing burden hours and burden hour costs. See
77 FR 11232.
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This final rule amends Sec. 43.4(h) to establish new cap sizes in
the post-initial period using a 75-percent notional amount calculation.
Under this amendment, the Commission will perform the calculation;
however, SDRs will 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 the 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 masking system and post-initial cap sizes methodology;
(2) updating its written policies and procedures to ensure compliance
with Sec. 43.4(d)(4)(iii) and the amendment to Sec. 43.4(h); and (3)
training staff on the new policies and procedures.\533\
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\533\ 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.
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V. Cost-Benefit Considerations
A. Background
Section 15(a) of the Commodity Exchange Act \534\ (``CEA'')
mandates that the Commission consider the costs and benefits of this
rulemaking, which amends portions of part 43 (the Real-Time Reporting
Final Rule).\535\ Part 43 implements section 727 of the Dodd-Frank
Act.\536\
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\534\ 7 U.S.C. 19(a).
\535\ Real-Time Public Reporting of Swap Transaction Data, 77 FR
1182, Jan. 9, 2012.
\536\ Dodd-Frank Wall Street Reform and Consumer Protection Act
section 727, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank
Act'').
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Enacted in the wake of the 2008 financial crisis with the aim of
preventing a repeat of the severe harm that crisis caused, Title VII of
the Dodd-Frank Act establishes a comprehensive new regulatory framework
for swaps and security-based swaps.\537\ Among other things, the
legislation seeks to promote market integrity, reduce risk, and
increase transparency within the financial system as a whole and swaps
markets in particular. Consistent with the view that the financial
crisis was not attributable to a single weakness, but a combination of
several,\538\ Title VII does not provide for a single-dimensional fix.
Rather, it weaves together a multidimensional regulatory construct
designed to ``mitigate costs and risks to taxpayers and the financial
system.'' \539\
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\537\ Dodd-Frank Act section 701, et seq.
\538\ See, e.g., Financial Crisis Inquiry Commission, ``The
Financial Crisis Inquiry Report: Final Report of the National
Commission on the Causes of the Financial and Economic Crisis in the
United States,'' Jan. 2011, at xxiv, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (listing
uncontrolled leverage; lack of transparency, capital and collateral
requirements; speculation; interconnection among firms; and
concentrations of risk in the market as contributing factors).
\539\ S. Rep. No. 111-176, at 92 (2010).
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Section 727 concerns a fundamental component in the Dodd-Frank Act
construct: public swap transaction reporting. This provision adds
section 2(a)(13) to the CEA ``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.'' \540\ In addition, the section directs the Commission to
promulgate certain rules, including rules that:
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\540\ CEA section 2(a)(13)(B).
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Require ``real-time public reporting''--i.e., ``reporting
data related to a swap transaction, including price and volume, as soon
as technologically practicable after the time at which the swap
transaction has been executed'' \541\--of swap transactions \542\;
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\541\ CEA section 2(a)(13)(A).
\542\ CEA section 2(a)(13)(C).
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specify ``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 32916]]
large notional swap transactions (block trades) to the public;'' \543\
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\543\ 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). The
Commission, in exercising its authority under CEA section
2(a)(13)(B) 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,'' is authorized
to prescribe rules similar to those provisions in section
2(a)(13)(E) to uncleared swaps described in section 2(a)(13)(C)(iii)
and (iv) of the CEA. Thus, the Commission is establishing block
thresholds for the swaps described in Sections 2(a)(13)(C)(i) and
2(a)(13)(C)(ii) of the CEA as required by Section 2(a)(13)(E). The
Commission is establishing large notional off-facility swap
thresholds for swaps described in Sections 2(a)(13)(C)(iii) and
2(a)(13)(C)(iv) pursuant to its authority under Section 2(a)(13)(B).
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take into account whether public disclosure of swap
transaction and pricing data ``will materially reduce market
liquidity'' \544\;
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\544\ CEA section 2(a)(13)(E)(iv).
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protect the identities of counterparties to swaps and
maintain the anonymity of business transactions and market positions of
swap counterparties.\545\
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\545\ See CEA sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii).
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In January 2012, the Commission adopted the part 43 Real-Time
Reporting Final Rule implementing section 2(a)(13)of the CEA.\546\
Generally summarized, the Real-Time Reporting Final Rule defined the
terms ``block trade'' and ``large notional off-facility swap,'' \547\
and established the: (1) Responsibilities of the parties to each swap
to report swap transaction and pricing data to a swap data repository
(``SDR'') and the types of data they must report \548\; (2)
requirements for SDRs to publicly disseminate such data in real-time
or, in the case of block trades and large-notional off-facility swaps,
subject to a time delay \549\; (3) applicable time delays for public
dissemination of block trades and large-notional off-facility swaps
data according to asset class \550\; and (4) a system to protect the
anonymity of parties to a swap, including interim notional cap sizes
for all swaps that are publicly disseminated and the creation of an
exception from the real-time public reporting requirement for certain
swaps in the ``other commodity'' asset class.\551\
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\546\ Real-Time Public Reporting of Swap Transaction Data, 77 FR
1182, Jan. 9, 2012.
\547\ The Real-Time Reporting Final Rule 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 1243.
The Real-Time Reporting Final Rule defined the term ``Large
notional off-facility swap 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.
\548\ See Sec. 43.3, 77 FR 1244.
\549\ See Sec. 43.4, 77 FR 1246.
\550\ See Sec. 43.5, 77 FR 1247.
\551\ See Sec. 43.4 (d) and (h), 77 FR 1,246. Section 43.4(h)
states that ``[t]he rounded notional or principal amount that is
publicly disseminated for a publicly reportable swap transaction
shall be capped. . . . '' If the notional or principal amount of a
publicly reportable swap transaction is greater than the cap size,
the publicly reported size for the trade will be ``[cap size]+.''
For example, if the relevant cap size is 250 million, the publicly
reported size will be ``250+.''
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The Real-Time Public Reporting Final Rule as adopted in January
2012, however, deferred its responsibility to promulgate rules that
``specify the criteria for determining what constitutes a large
notional [off-facility] swap transaction [or block trade] for
particular markets and contracts'' as CEA section 2(a)(13)(E)(ii)
requires. Pending the adoption of such supplemental part 43 rules, the
Commission adopted ``interim time delays for all swaps.'' \552\
Accordingly, at present no swap transaction data is publicly
disseminated in real-time; interim time delays are in place for all
swaps.\553\
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\552\ 77 FR 1217; see also Sec. 43.5(c).
\553\ See Sec. 43.5(c)(1).
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The final rules adopted in this release amend part 43 to establish
appropriate minimum block sizes, lift the blanket interim time-delay
for all swaps from real-time public reporting, and provide further
anonymity provisions to protect the identities of swap counterparties
and transactions. More specifically, and as discussed in more detail
above, these rules do so by:
creating ``swap categories'' (i.e., groupings of swaps
within the same asset class based on underlying characteristics) to
which a common appropriate minimum block size applies \554\;
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\554\ See Sec. 43.6(b), which defines swap category by asset
class.
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prescribing a two-period, phased in approach to implement
regulations, comprised of an initial period and an on-going (post-
initial) period to allow market participants sufficient time for
compliance \555\;
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\555\ See Sec. 43.6(e) and (f).
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establishing initial appropriate minimum block sizes based
on the Commission's review and analysis of swap market data across
certain asset classes \556\;
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\556\ See Sec. 43.6(e) and appendix F to part 43.
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obligating set forth a methodology for calculating post-
initial appropriate minimum block sizes \557\;
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\557\ See Sec. 43.6(c) and (f).
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providing a procedure that allows parties to a swap to
elect block trade or large notional off-facility swap treatment for a
swap transaction; \558\ and
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\558\ See Sec. 43.6(g).
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establishing a system to ensure the anonymity of certain
swaps in the other commodity asset class,\559\ including a methodology
for the calculation of initial or post-initial cap sizes.\560\
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\559\ See amendments to Sec. 43.4(d)(4).
\560\ See Sec. Sec. 43.4(h) and 43.6(c).
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The rules do not, however, amend part 43 in a manner that alters the
appropriate time delays for block trades and large notional off-
facility swaps, nor do they require investment in a completely new
information infrastructure beyond what is necessary to comply with the
existing provisions of part 43.\561\ With this release, in conjunction
with the separate SEF core principles rulemaking \562\ and the made
available to trade rulemaking,\563\ the Commission is implementing the
trade execution mandate of CEA Section 2(h)(8). Due to the clearing
mandate, the Final Rule at this time mainly will affect pre-trade
transparency only in the interest rate and credit default asset
classes. In regard to the foreign exchange and other commodity asset
classes, the Commission notes that there is no clearing mandate for
foreign exchange swaps and other commodity swaps at this time. Thus,
the swaps block rule does not currently affect pre-trade transparency
for these asset classes. As these markets evolve, the Commission will
continue to monitor developments within each asset class and may
exercise its legal authority to take action by rule or order if
necessary to address changes in the markets.
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\561\ The costs and benefits attendant to the time delay and
development of an infrastructure for block trades and large notional
off-facility swaps are discussed in Real-Time Public Reporting of
Swap Transaction Data, 77 FR 1182, 1232, Jan. 9, 2012.
\562\ See, the Core Principles and Other Requirements for Swap
Execution Facilities notice of proposed rulemaking, 76 FR 1214 (Jan.
7, 2011).
\563\ The Commission separately proposed rules to determine
whether a swap is ``made available to trade'' for purposes of the
trade execution requirement in CEA section 2(h)(8). Process for a
Designated Contract Market or Swap Execution Facility To Make a Swap
Available to Trade, 76 FR 77728 (proposed Dec. 14, 2011).
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This rulemaking requires the Commission to carefully navigate a
tension that CEA section 2(a)(13) recognizes: while section 2(a)(13)(C)
requires the Commission to promulgate rules to bring real-time public
reporting to the swaps market, section 2(a)(13)(E)(iv) requires that in
doing so
[[Page 32917]]
the Commission ``take into account whether the public disclosure will
materially reduce market liquidity.'' The Commission has followed both
directives. Accordingly, a central focus of the Commission's
consideration of costs and benefits of this rulemaking is the interplay
between the important benefits of enhanced swap transaction
transparency that real-time public dissemination affords \564\ and the
potential that, in certain circumstances, transparency could reduce
swap market liquidity. As evident by commenters' divergent opinions,
the optimal point in this interplay, and how to set it, defies
precision.\565\ Given this fact, these rules reflect the Commission's
reasoned judgment of how best to meaningfully effectuate real-time
public reporting of swap transactions--and the transparency Congress
intended--in a manner that takes into account the impact on market
liquidity. Briefly, the Commission will use a 67% percent notional
calculation to determine the threshold over which block trades and
large notional off-facility swaps will be eligible for block trade
treatment, meaning that most swaps will be reported in real-time.\566\
At the same time, a phased implementation schedule assures that
transparency is introduced incrementally, taking into account whether
public disclosure will ``materially reduce market liquidity.'' For
example, to cushion potential liquidity impact, the thresholds for
swaps in the interest rate and credit assets classes will initially
rest conservatively at 50 percent, thus allowing transactions above 50
percent of the notional amount to remain shielded from real-time public
reporting, before transitioning to 67 percent in the post-initial
period. While this departure from the proposal means that fewer swaps
will be subject to real-time transparency during the initial period, it
affords the Commission the opportunity to collect and analyze data on
the use of block thresholds and to apply that data to its evaluation of
the risks attendant to a less transparent market. Simultaneously
introducing a conservative, 50 percent threshold also allows the
Commission to assess whether there are material reductions in the
liquidity for some swaps and take any measures to stave off those
reductions, as the rules allow the Commission to review and refine the
thresholds as liquidity and transparency needs may warrant in the
future.\567\
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\564\ The benefits of public dissemination of swap transaction
and pricing data are detailed in Real-Time Public Reporting of Swap
Transaction Data, 77 FR at 1234. As the Commission explained in that
release and reaffirms here, swap transaction reporting and public
dissemination benefits market participants and the public in a
number of respects. Among others discussed in that earlier release,
and considered by reference herein, these include enhanced: price
discovery, ability to manage risk as a result of improved visibility
into swap market risk pricing, and improved swap market price
competition. Additionally, the transparency afforded through public
dissemination of swap transaction and pricing data ``will enhance
the Commission's ability to detect anomalies in the market . . . and
provide a check against a reoccurrence of the type of systemic risk
build-up that occurred in 2008 when `the market permitted enormous
exposure to risk to grow out of the sight of regulators and other
traders [and d]erivatives exposures that could not be readily
quantified exacerbated panic and uncertainty about the true
financial condition of other market participants, contributing to
the freezing of credit markets.' '' Id. (quoting Congressional
Research Service Report for Congress, The Dodd-Frank Wall Street
Reform and Consumer Protection Act: Title VII, Derivatives, by Mark
Jickling and Kathleen Ann Ruane (August 30, 2010).
\565\ Indeed, CEA section 2(a)(13)(E)(iv), in simply requiring
that the Commission ``take into account whether public disclosure
will materially reduce market liquidity,'' does not require that the
Commission attempt to determine the precise optimal relationship
between transparency and liquidity or assure no liquidity loss.
\566\ Using the Over-the-Counter Derivatives Supervisors Group
(``ODSG'') data for interest rate swaps, the Commission notes that
the 67 percent notional amount calculation would result in 94
percent of trades being reported in real-time. A discussion of the
ODSG and the data set is set forth in section II.C.1 of this final
rule.
\567\ See Sec. 43.6(f).
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B. The Statutory Mandate To Consider the Costs and Benefits of the
Commission's Action: Section 15(a) of the CEA
Section 15(a) of the CEA \568\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. 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.
---------------------------------------------------------------------------
\568\ 7 U.S.C. 19(a).
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These amending rules become effective in--and their costs and
benefits are considered relative to--the context of the conditions now
in place under part 43. That is: all publicly reportable swap
transactions are currently subject to a time delay and are not publicly
reported in real-time.569 570 Unless otherwise indicated,
the Commission has looked to a non-financial end-user that already has
developed the technical capability and infrastructure necessary to
comply with the requirements set forth in part 43 as a reference entity
for estimating this rulemaking's direct costs under the assumption that
the costs for this particular market participant would represent the
maximum degree of compliance costs.\571\ The Commission anticipates,
however, that in many cases the actual costs to established market
participants (including swap counterparties, SDRs and other registered
entities) would be lower than for the reference entity--perhaps
significantly so, depending on the type, flexibility, and scalability
of systems already in place.
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\569\ See Sec. 43.5(c).
\570\ Currently, the part 43 requirements are not applicable to
swaps in the other commodities asset class that reference underlying
assets not included in Appendix B to Part 43. The Real-Time
Reporting Rule provides notice that, until such time as the
anonymity provisions of this final rule are finalized, those off-
facility swaps not listed in appendix B to part 43 are not be
required to comply with the real-time reporting and public
dissemination requirements under part 43. However, such swaps are
subject to the regulatory reporting requirements, described in
proposed part 45. According to the BIS report http://bis.org/publ/qtrpdf/r_qs1209.pdf, commodities (as a whole and not just the
subset identified above) only represent slightly more than one third
of one percent (0.36%) of the notional amounts outstanding as a
percentage of the global OTC derivatives market for the end of
December 2011. For this small subset of other commodity swaps, the
starting point for the purposes of the Commission's consideration of
the costs and benefits is the same as the starting point for the
Commission's consideration of costs and benefits of the Real-Time
Reporting Rule. A detailed discussion of the Commission's
consideration of those costs and benefits is contained in the Real-
Time Reporting Rule. See 77 FR at 1232-1240.
\571\ 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.
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Wherever reasonably feasible, the Commission has endeavored to
quantify the costs and benefits of this rulemaking. In a number of
instances, the Commission lacks the data and information required to
precisely estimate costs, owing to the fact that these markets do not
yet exist or are not yet fully developed. The Commission requested that
commenters provide any data or other information that would be useful
in the estimation of the
[[Page 32918]]
quantifiable costs and benefits of this rulemaking \572\; no commenters
supplied such data or other information. Where it was not feasible to
quantify (e.g., because of the lack of accurate data or appropriate
metrics), the Commission has considered the costs and benefits of these
rules in qualitative terms.
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\572\ Further Block Proposal Q93(a)-(e), 77 FR at 15507.
---------------------------------------------------------------------------
For purposes of considering their costs and benefits, the
Commission has organized these rules in three groups: (1) Block trade
rules concerning the criteria for determining swap categories and the
methodologies to be used to determine the initial and post-initial
appropriate minimum block sizes for large notional off-facility swaps
and block trades; (2) block trade rules concerning the method by which
swap counterparties may elect to treat a qualifying swap transaction as
a block trade or a large notional off-facility swap, as applicable, and
SEFs and DCMs notify an SDR of a block trade election; and (3) rules
concerning anonymity protections. Each group is discussed below.
C. Rules Establishing Determination Criteria and Methodology (Sec.
43.6(a)-(f) and (h))
Rules 43.6(a)-(f) and (h) specify the Commission's criteria for
establishing swap categories and methodology for determining
appropriate minimum block sizes. The subsections that follow provide a
brief contextual summary description of the rules; identify and discuss
the costs and benefits attributable to the rules in light of comments;
consider alternatives; and consider costs and benefits relative to
factors specified in CEA section 15(a).
1. Rule Summary
Rules 43.6(a)-(f) and (h) are described previously in this
release.\573\ A summary of each follows:
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\573\ See section II, supra.
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a. Rule 43.6(a) Commission Determination
Rule 43.6(a) provides that the Commission will determine the
appropriate minimum block size for any swap on a SEF or DCM, and for
large notional off-facility swaps. The rule also sets forth a schedule
whereby the Commission will calculate and publish all appropriate
minimum block sizes across all asset classes no less than once each
calendar year, following an initial period (as described below).
b. Rule 43.6(b) Swap Category
Rule 43.6(b) specifies the Commission's approach for grouping swaps
by asset class based on existing liquidity in underlying cash markets,
relevant economic indicators, the underlying asset class, and the
Commission's analysis of relevant swap market data supplied to the
Commission.\574\
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\574\ Data was supplied to the Commission by MarkitSERV and The
Warehouse Trust Company LLC. The data is more fully described in
Section II.A.1.a. of this release.
---------------------------------------------------------------------------
c. Rules 43.6(c)-(f) and (h) Methods for Determining Appropriate
Minimum Block Sizes
Rules 43.6(c)-(f) and (h) prescribe a phased-in approach, with an
initial period and a post-initial period for determining appropriate
minimum block sizes for each swap category. Appendix F to part 43
contains a schedule of appropriate minimum block sizes effective during
the initial period. The schedule reflects a different appropriate
minimum block size methodology for the interest rate and credit asset
classes than for the equity, FX and other commodity asset classes. The
initial appropriate minimum block sizes for the interest rate and
credit asset class are derived from data supplied by the ODSG.\575\ As
set forth in Appendix F to this Final Rule, the Commission is
calculating the appropriate minimum block sizes in interest rate and
credit asset classes based upon the 50-percent notional amount
calculation set forth in Sec. 43.6(c)(1) in the initial period.
---------------------------------------------------------------------------
\575\ A discussion of the ODSG and the data set is set forth in
section II.C.1 of this final rule.
---------------------------------------------------------------------------
Rule 43.6(d) states that swaps in the equity asset class shall not
be treated 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).
With respect to the FX and other commodity asset classes, the
appropriate minimum block sizes for swaps during the initial period is
divided primarily between swaps that are futures-related swaps and
those that are not futures-related.\576\ 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 swaps in
the FX and other commodity asset classes that are not listed in
appendix F to part 43, Sec. 43.6(e)(2) generally provides that these
swaps will be considered block trades or large notional off-facility
swaps.
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\576\ As explained above in section II.C., the Commission
believes 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; and (2) DCMs
have experience in setting block sizes for futures.
---------------------------------------------------------------------------
After an SDR has collected reliable data for a particular asset
class, 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
adopting special rules for the determination of appropriate minimum
block sizes that would apply to all asset classes, including rules
applicable to swaps with optionality, swaps with composite reference
prices, physical commodity swaps, currency conversion, and successor
currencies.\577\
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\577\ See proposed rule Sec. 43.6(h).
---------------------------------------------------------------------------
2. Overview of Comments Received
The Commission received numerous comments regarding the potential
costs and benefits to market participants and the public in response to
the rules establishing the criteria and methodology for determining
block thresholds. Commenters were divided on whether the Commission
properly considered costs or misstated or ignored the benefits of the
rules. Some commenters touched on the cost benefit considerations
directly by promoting various alternatives to the proposed rules.\578\
Comments relating to the Commission's consideration of costs and
benefits are discussed specifically in the sections below.
---------------------------------------------------------------------------
\578\ E.g., CL-AII at 6; CL-SIFMA at 10; CL-WMBAA at 8; CL-CME
at 2; CL-Vanguard at 3; CL-Morgan Stanley at 3; CL-ICAP Energy at 3;
CL-Barnard at 1; CL-Freddie at 2; CL-Barclays at 10.
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3. Costs
a. Direct Costs
Rules 43.6(a)-(f) and (h) will impose recurring costs on swap
market participants and registered entities (i.e., SEFs, DCMs, or SDRs)
to accommodate the Commission's publication of post-initial appropriate
minimum block sizes at least once each calendar year following the
initial period. In the Further Block Proposal, the Commission
anticipated that in order for registered entities to comply with the
rule, they would need to update their existing data systems and that
process would entail approximately 40 initial, non-recurring personnel
hours at an approximate cost of $2,728 for each registered entity.\579\
This estimate included the potential number of burden hours required to
[[Page 32919]]
make a one-time adjustment to internal procedures, reprogram systems
and implement processes to segregate the data by swap categories and
incorporate data on appropriate minimum block sizes as published by the
Commission at least once each calendar year.
---------------------------------------------------------------------------
\579\ 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 521 supra.
---------------------------------------------------------------------------
Market participants other than registered entities, and
specifically non-financial end users, expectedly will need to train
their existing personnel and update their written policies and
procedures to comply with Sec. 43.6(a)-(f) and (h). The Commission
estimated that the training and updating of policies and procedures
will impose an initial non-recurring burden of approximately 15
personnel hours at an approximate cost of $1,430 for each non-financial
end-user.\580\ This cost estimate included 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.
---------------------------------------------------------------------------
\580\ 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 521
supra.
---------------------------------------------------------------------------
The Commission received one comment specifically addressing direct
costs. WMBAA disagreed with the Further Block Proposal's projected cost
estimates and contended that the Commission's approach ``is overly
simplistic and does not contemplate the actual efforts a SEF will have
to undertake to implement the block trade regime, including the two-
step notification process, the technology upgrades, providing training
to existing personnel and updating written policies and procedures,
among other necessary actions to comply with the CFTC's proposed
rule.'' \581\
---------------------------------------------------------------------------
\581\ CL-WMBAA at 8.
---------------------------------------------------------------------------
Because WMBAA did not provide data to support or monetize its cost
concern, the Commission has considered them qualitatively. Further,
WMBAA's disagreement with the Further Block Proposal's cost estimates
does not concern the incremental cost to augment and maintain systems
and processes that the Commission believes entities need have in place
to comply with the real time reporting requirement of Section 2(a)(13)
of the CEA; rather it concerns the cost to comply with that statutory
requirement as prescribed by the existing part 43 implementation
regulations. SEFs and DCMs would incur these costs regardless of how
the Commission determines block thresholds. Accordingly, the Commission
considers WMBAA's criticism of the cost estimates in this rulemaking
misplaced. Moreover, the Commission has intentionally structured the
requirements of Sec. 43.6(a) to mitigate these costs; this rule's
approach seeks to leverage the existing connectivity, infrastructure
and arrangements that market participants and registered entities will
have already established to comply with the part 43 regulations.
The Commission did not find, nor was it provided, additional
information that was sufficient to change the cost basis. Therefore,
the Commission is maintaining the Further Block Proposal's approach to
calculating the direct costs resulting from the methodology for
determining block thresholds. However, the Commission is revising its
estimates to reflect wage rate data updated since the Further Block
Proposal was published. The Commission estimates that for registered
entities to update existing technology as necessary will entail
approximately 40 initial, non-recurring personnel hours at an
approximate cost of $2,874 for each registered entity.\582\ The
Commission estimates that training for existing personnel and updating
written policies and procedures will impose an initial non-recurring
burden of approximately 15 personnel hours at an approximate cost of
$1,456 for each non-financial end-user.\583\
---------------------------------------------------------------------------
\582\ The estimate is calculated as follows: (Senior Programmer
at 20 hours) + (Systems Analyst at 20 hours). A senior programmer's
adjusted hourly wage is $86.89. A systems analyst's adjusted hourly
wage is $56.79. See note 521 supra.
\583\ 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 $74.17. A director of compliance's hourly wage is
$169.16. A compliance attorney's hourly wage is $103.18. See note
521 supra.
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b. Indirect Costs
The Commission received numerous comments regarding indirect costs
that could result from the establishment of criteria and methodology
for setting appropriate minimum block thresholds. The majority of these
comments focused on the issue of market liquidity; and many of the
comments provided alternatives for either lower notional amount
calculation thresholds, and extended phase-in or restricting the asset
classes to which thresholds would apply. Eleven commenters suggested
that the 67 percent notional amount calculation set forth in proposed
Sec. 43.6(c)(1) would have a negative impact on market liquidity.\584\
---------------------------------------------------------------------------
\584\ CL-AII at 6; CL-SIFMA at 10; CL-WMBAA at 8; CL-CME at 2;
CL-Vanguard at 3; CL-Morgan Stanley at 3; CL-ICAP Energy at 3; CL-
Barnard at 1; CL-Freddie at 2; CL-Barclays at 10.
---------------------------------------------------------------------------
SIFMA and AII asserted that the 67 percent notional amount
calculation is under inclusive for most swap categories and that the
Commission should start with low block sizes (or classify all swaps as
block trades) until data can be accumulated.\585\ Consequences of a
high threshold, they maintain, would be reduced liquidity,
fragmentation of trading, higher transaction costs and higher swap
pricing costs to end users.\586\ AII stated that high block sizes would
permit front running of swap dealers' hedging activities.\587\ SIFMA
suggested that the Commission identify minimum liquidity thresholds for
certain swaps in each swap category below which all swaps should be
treated as blocks.\588\ SIFMA stated that 67 percent is too high to
prevent liquidity impact; that 20-33 percent of trades should be
blocks; and that 50 percent is better than 67 percent.\589\
---------------------------------------------------------------------------
\585\ CL-AII at 6; CL-SIFMA at 10.
\586\ CL-AII at 6; CL-SIFMA at 10.
\587\ CL-AII at 6.
\588\ CL-SIFMA at 10.
\589\ CL-SIFMA at 10.
---------------------------------------------------------------------------
WMBAA advocated using a 50 percent or lower block level and that
the Commission rely on more timely and complete data to avoid impairing
liquidity.\590\ CME asserted that 67 percent is arbitrary, has no
relationship to the explicit goals of Dodd-Frank with respect to block
trading of swaps, and would materially reduce market liquidity.\591\
---------------------------------------------------------------------------
\590\ CL-WMBAA at 8.
\591\ CL-CME at 2.
---------------------------------------------------------------------------
Vanguard commented that block rules bringing transparency may
ultimately increase liquidity, but an abrupt change could decrease
liquidity.\592\ Vanguard instead favored a lower, 25 percent initial
notional calculation methodology or perhaps providing block treatment
to all swaps for one-year before phasing in notional amount calculation
thresholds, maintaining that a lack of data compromises the setting of
blocks and risks a negative liquidity impact.\593\ Vanguard further
urged more swap category granularity by identifying discrete
``liquidity pools'', and asserted that the lack of a sufficient time
delay would hamper liquidity providers' ability to enter into off-
setting trades.\594\
---------------------------------------------------------------------------
\592\ CL-Vanguard at 3.
\593\ CL-Vanguard at 3.
\594\ CL-Vanguard at 3.
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[[Page 32920]]
Morgan Stanley, AII, and CME all stated that the approach in the
Further Block Proposal would sacrifice liquidity in the name of
transparency in contravention of the statute.\595\ Specifically, Morgan
Stanley commented that the proposed rules would diminish liquidity
because the market would know details of transactions that are about to
take place; Morgan Stanley also provided examples of IRS swaps under
the proposed threshold that might move the market and, without
providing further support, stated that application of the 67 percent
notional amount calculation in CDS would result in too few trades
receiving treatment as blocks and reduce liquidity.\596\ Morgan Stanley
urged the Commission to lower block thresholds and apply them only to
vanilla structures with standard maturities; Morgan Stanley further
advocated for DCM/SEFs to set block sizes because they would maximize
liquidity.\597\
---------------------------------------------------------------------------
\595\ CL-Morgan Stanley at 3; CL-AII at 6; CL-CME at 2.
\596\ CL-Morgan Stanley at 3.
\597\ CL-Morgan Stanley at 3.
---------------------------------------------------------------------------
ICAP and Barnard asserted that the Further Block Proposal fails to
evaluate the effect of the block thresholds on liquidity.\598\ ICAP
stated that the Commission misconstrued the legislative intent of Dodd-
Frank Act because the Further Block Proposal 1) proposes a ``results-
oriented'' approach; 2) does not determine if the 67 percent
methodology would minimize impact on market liquidity; and 3)
establishes block size thresholds based on notional size rather than
number of transactions.\599\ In addition, ICAP stated that the Further
Block Proposal failed to identify a ``market moving'' transaction for
certain swaps, as intended by Congress and does not propose a
methodology.\600\ Freddie stated that, in the absence of data, minimum
block sizes for Interest Rate swaps are too high and will materially
reduce market liquidity.\601\
---------------------------------------------------------------------------
\598\ CL-ICAP Energy at 3; CL-Barnard at 1.
\599\ CL-ICAP Energy at 3.
\600\ CL-ICAP at Energy at 3.
\601\ CL-Freddie at 2.
---------------------------------------------------------------------------
The Commission also received comments raising potential indirect
costs besides market liquidity impact. Barclays stated that mandatory
clearing and uncleared margin requirements may compound the costs of
increased transparency created by high block trade thresholds.\602\
SIFMA stated that the Commission's cost-benefit consideration is
insufficient and incorrect in the context of mandatory execution under
the proposed SEF rules.\603\ SIFMA expressed the concern that
``liquidity seekers' [sic] could provide other market participants with
the information needed to front run the successful dealer in the hedge
market.'' \604\ SIFMA concluded that ``the Commission should implement
lower block trade size thresholds to avoid significant decreases in
liquidity or increases in bid-ask spreads.'' \605\
---------------------------------------------------------------------------
\602\ CL-Barclays at 10.
\603\ CL-SIFMA at 4.
\604\ CL-SIFMA at 4.
\605\ CL-SIFMA at 4.
---------------------------------------------------------------------------
Several commenters objected to the Commission's use of data in the
Further Block Proposal. Five commenters \606\ asserted that the Further
Block Proposal fails to adequately consider costs and benefits and
relies upon obsolete data. AII \607\ stated that the Commission relies
upon inadequate and outdated data, that the rules will impede
competition and increase costs, and that the Commission should look to
TRACE as a model for more deliberate disclosure implementation.
---------------------------------------------------------------------------
\606\ CL-Vanguard at 3; CL-ISDA/SIFMA at 11-13; CL-SIFMA at 10;
CL-WMBAA at 8; and CL-AII at 6.
\607\ CL-AII at 6.
---------------------------------------------------------------------------
Vanguard \608\ suggested phasing in the requirements because the
new rules are a ``paradigm shift,'' and issuing final rules on block
trades requires more data collection before implementation.
---------------------------------------------------------------------------
\608\ CL-Vanguard at 3.
---------------------------------------------------------------------------
Several commenters suggest the Commission collect more and better
data before setting block levels. They criticize not only the dearth of
relevant data but how the Commission has interpolated the data through
trimming mechanism. SIFMA suggests that all swaps should be treated as
blocks for first year of compliance during which data is collected,
then the Commission should take a conservative approach to establish
and iteratively modify thresholds based on liquidity and bid-ask spread
of swaps that near the established block size threshold.\609\
---------------------------------------------------------------------------
\609\ CL-SIFMA at 4.
---------------------------------------------------------------------------
The Commission also received comments suggesting costs in terms of
market liquidity or other factors in setting the appropriate minimum
block thresholds too low (or benefits in setting the appropriate
minimum block thresholds at 67 percent of notional or higher).
Conversely, four commenters expressed support for the Further Block
Proposal's 67 percent notional amount calculation methodology or
suggested that a lower threshold would result in a decrease in
liquidity.\610\
---------------------------------------------------------------------------
\610\ CL-ODEX at 2; CL-SDMA at 3-6; CL-Javelin at 4-6; CL-Arbor
at 1.
---------------------------------------------------------------------------
Specifically, Javelin stated that the Commission should set a
higher block threshold than the 67 percent notional amount calculation
``where the market is protected from disruption and where greater
transparency, competition and liquidity are ensured.'' \611\ SDMA
commented that ``[t]oo low a block threshold and fewer trades will be
executed on SEFs as little structural change in swaps execution occurs,
increased competition fails to manifest itself and more diverse
liquidity is impaired.'' \612\ AFR asserted that some drop in liquidity
was assumed by Congress when it enacted the provision and that ``there
is no authoritative study supporting the concept that immediate
disclosure would distort prices because of market liquidity.'' \613\
Similarly, Better Markets argued that any information embargo should be
eliminated, stating that ``there is no authoritative study validating
the notion that market liquidity would be adversely affected if Block
Trade data were fully disclosed.'' \614\ Better Markets also stated
that the public benefits of swap data transparency under the Further
Block Proposal greatly outweigh the private costs to the disclosing
entities and to the swaps market participants; Better Markets argued
that Congress' ultimate objective in the Dodd-Frank Act was to prevent
another crisis and avert the massive costs it would inflict upon the
public (including all market participants), and that the consideration
of costs and benefits should focus on this overriding public
interest.\615\
---------------------------------------------------------------------------
\611\ CL-Javelin at 2.
\612\ CL-SDMA at 1.
\613\ CL-AFR at 4.
\614\ CL-Better Markets at 4.
\615\ CL-Better Markets at 4.
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In response to comments advocating for a more gradual phase in of
appropriate minimum block thresholds, the Commission is adopting rules
establishing a more conservative 50 percent notional amount calculation
for determining block thresholds in the Interest Rate Swap and Credit
Default Swap categories during the initial period. This will allow for
a more gradual phase-in of the 67 percent notional amount calculation
for determining block thresholds in the post-initial period than what
was proposed. The block trade methodology that will be implemented by
the Commission also allows minimum appropriate block trade amounts to
change periodically in response to the new data collected in the
market.
The Commission believes that this implements the congressional
directive
[[Page 32921]]
for transparency while accounting for possible material reductions in
liquidity through the phasing-in of real-time reporting of a portion of
the swaps market. In contrast, SIFMA's suggestion of treating all swaps
as blocks while the Commission collects data inverts the public policy
rationale underlying congressional requirements for transparency
through real-time public reporting. The most useful data for
determining at what levels blocks would be appropriate is data
collected for swaps reported in real-time when market participants have
the ability to execute block trades above minimum block thresholds.
Data collected prior to the point where real-time reporting and block
levels are functioning together is useful (and has been used by the
Commission in fashioning block thresholds in the initial period for
swaps in the interest rate and credit asset classes), but provides an
incomplete picture absent implementation of the real-time reporting
regime. The Commission's 67 percent notional amount calculation in the
post-initial period is designed to adjust appropriate minimum block
levels once this data becomes available.
Notwithstanding the fact that the commenters did not provide data
to support or monetize their cost concerns, the Commission has
considered their qualitative comments regarding the potential costs
that the Commission's appropriate minimum block threshold methodology
may have on market liquidity.
The Commission agrees with Vanguard that transparency ultimately
promotes increased market liquidity. Transparency afforded through the
publication of swap transaction and pricing data is likely to attract
more market participants to the market place, thereby increasing market
liquidity depth. However, the Commission also understands the tension
between achieving greater swap transaction transparency and liquidity:
required reporting of large transactions without a time delay (i.e., as
soon as technologically practicable) presents potential for downside
cost to certain market participants, most particularly market makers
providing liquidity. The immediate reporting of swaps that approach,
but fall shy of the appropriate minimum block size threshold, may in
certain circumstances increase the difficulty, and thus cost, for
liquidity providers to lay off attendant price risks in the market. As
the commenters suggest, market makers ultimately could pass these costs
on to their end-user clients.
Recognizing the potential for such indirect costs, the Commission
believes it has designed the criteria and methodology outlined in the
rule in a manner that strikes an appropriate balance between the
importance of price discovery and transparency, and concerns about
potential costs to market participants. By establishing a 67 percent
notional amount calculation for appropriate minimum block thresholds in
the post initial period, the Commission will bring transparency through
real-time reporting to the vast majority of transactions in the swap
market.
The Commission believes that the phase-in approach provides swap
market participants with adequate time to incrementally adjust their
trading practices, technology infrastructure and business arrangements
to comply with the new block trade regime. As a result, the rule's
approach promotes liquidity since the Commission believes that a
transparent market with improved pre-trade price transparency is likely
to attract customers. The Commission expects that indirect costs
described above will be mitigated through improved price discovery and
a decrease in the cost of hedging practices for end users due to
improved transparency and competition in the marketplace.
The Commission also considered the potential that different swaps
and futures block criteria and methodology might competitively
disadvantage SEFs to the extent certain market participants consider
swaps and futures products competitive substitutes; thus, in turn,
frustrating public interests that Congress, in authorizing SEFs in the
Dodd-Frank Act, intended to further. For several reasons, the
Commission does not believe this will occur. First, as discussed in the
SEF Rulemaking, the Commission has provided SEFs with various
functionalities designed to provide flexibility that will promote the
trading of swaps on SEFs.\616\ Second, by using futures block
thresholds as a reference for initially setting the criteria for
economically related swaps, the rule, at a minimum, substantially
mitigates any such theoretical costs. Further, the Commission has, and
will use, corrective tools if experience in these newly-regulated
markets indicates potential for differences in swaps and futures block
criteria and methodology to harm market users through hindered product
competition. These tools include periodical recalibration of swap
criteria as anticipated under this rule as well as the Commission's
ability to exercise its legal authority to take action by rule or order
to mitigate any potential harm due to hindered competition.\617\
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\616\ See, the Core Principles and Other Requirements for Swap
Execution Facilities notice of proposed rulemaking, 76 FR 1214 (Jan.
7, 2011), for details of functionalities that provide flexibility to
promote trading of swaps on SEFs.
\617\ Historically (and under a rule proposed in a pending
rulemaking concerning Core Principle 9 for Designated Contract
Markets (``DCMs'')), DCMs have discretion to set minimum block
thresholds for futures trading, the Dodd-Frank Act amended the CEA
to require that the Commission specify criteria to determine swap
block trades without imposing an equivalent requirement for
Commission specification of futures block criteria. See Core
Principles and Other Requirements for Designated Contract Markets,
75 FR 80572, 80616-17 (Dec. 22, 2010) (Notice of Proposed
Rulemaking; proposed Sec. 38.503(a) would require that a board of
trade that permits block trade transactions on futures contracts
have rules governing such transactions, including rules limiting
block trades to large transactions and imposing minimum size
requirements, and that block trade size be certified or approved by
the Commission); Core Principles and Other Requirements for
Designated Contract Markets, 77 FR 36612, 36643 (Final Rule;
announces Commission intent to take additional time to consider the
proposed rules for block transactions and other aspects of proposed
rules under Core Principle 9).
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4. Benefits
The Commission believes that Sec. 43.6(a)-(f) and (h) will
generate several overarching benefits to swap market participants,
registered entities and the general public. Most notably, the
Commission expects that the criteria and methodologies for setting
appropriate minimum block sizes will provide greater price transparency
for a substantial portion of swap transactions in a manner carefully
calibrated to preserve and promote swaps market liquidity. More
specifically, the regulations will provide price transparency by
lifting the current part 43 real-time reporting time delay \618\ in a
measured manner for swap transactions with notional values under
specified threshold levels.
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\618\ See 77 FR 1240.
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At the same time, the Commission's criteria and methodology--
including carefully crafted block trade and large-notional off-facility
swap categories--are designed to retain time-delay status for those
high-notional-value transactions, where doing otherwise could
negatively impact market liquidity. In addition to avoiding potential
negative market liquidity impact associated with transactions that
remain eligible for a reporting time-delay, the Commission also expects
the liquidity in the market to increase since a more transparent market
is likely to attract more customers. The Commission expects improved
transparency and liquidity to have a positive effect on the prices
market participants will pay for their swaps as
[[Page 32922]]
well as to cause a decrease in the cost of hedging due to improved
transparency and competition in the market. The Commission also expects
that lower hedging costs and improved transparency will reduce systemic
risk potential. A swaps market that is transparent to regulators and
the public in real-time, without the interim delays for all
transactions imposed in Part 43, provides for a system that will assist
the Commission's oversight ability. Finally, the Commission believes
that this added transparency will ultimately strengthen the swaps
market by affording academics, the media, public and market
participants the opportunity to monitor, study, and analyze these
previously opaque segments of the economy.
The rules' phased-in implementation will introduce greater
transparency in an incremental, measured and flexible manner so that
appropriate minimum block sizes can respond to changing markets.
Section 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 final rule, there is nothing
that prevents the Commission from reacting to take action further
improving price transparency or mitigating adverse effects on market
liquidity. In an effort to add more flexibility to respond to
continuing swaps market evolution, the methodology in Sec. 43.6(c)-(f)
and (h) will recalibrate appropriate minimum block sizes regularly to
ensure that those sizes remain appropriate for, and responsive to,
these changing markets.
5. Alternatives
The Commission considered alternatives to the determination
criteria and methodology adopted in this rulemaking. The chief
alternatives raised by commenters or otherwise considered by the
Commission concerned three topics--Commission's determination of
minimum block sizes, swap categories, and block methodology--as
discussed below.
a. Commission Determination of Minimum Block Sizes
Under Sec. 43.6(a) the Commission will determine minimum block
sizes; this approach limits the direct burden on market participants
and registered entities relative to an alternative that would require
them to engage a quantitative analysis to ascertain appropriate minimum
block sizes for themselves. Such an alternative approach is
inconsistent with the statutory requirement of CEA section
2(a)(13)(E)(ii) that the Commission ``specify the criteria for
determining what constitutes a large notional swap transaction (block
trade) for particular markets and contracts.'' \619\
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\619\ See also 111 Cong. Rec. S. 5921 (daily ed., July 15, 2010)
(Statement of Sen Lincoln) (the regulators are given authority to
establish what constitutes a `block trade' or `large notional' swap
transaction for particular contracts as well as appropriate time
delay in reporting transactions to the public'').
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b. Swap Category Alternatives
Commenters \620\ noted what they described as a lack of granularity
in the Commission's choice of swaps categories, which they cautioned
would result in the grouping of liquid swaps together with illiquid
swaps in the same swap category. Vanguard \621\ suggested a more
granular approach to setting swap categories and block sizes according
to ``distinct liquidity pools.'' ISDA/SIFMA \622\ suggested subjecting
a swap to block thresholds as long as the swap has sufficient trading
frequency and trades in such volume that allows full hedging in a short
period of time and also prevents widening of the spread as a result of
public reporting. In support of such a test, the comment cited research
and data to suggest that disclosure does not necessarily lead to
increased transparency and swaps with varying levels of liquidity will
be subject to the same block size. Many commenters expressed that the
Commission's determination of swap categories would result in block
levels that are insufficiently granular to account for differences
between swap asset classes and within swap categories, including the
differences in transaction frequency and volume.\623\ Some commenters
suggested that all infrequently traded swaps, under a specified level,
should be treated as block trades.\624\ The various swap category
alternatives suggested by commenters are more fully discussed and
considered in Sections II.A.1-5 of this final rule.
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\620\ CL-Vanguard at 7; CL-ISDA/SIFMA at 14; CL-SIFMA at 10; and
CL-Better Markets at 4.
\621\ CL-Vanguard at 7.
\622\ CL-ISDA/SIFMA at 14; and CL-SIFMA at 10.
\623\ CL-ISDA/SIFMA at 14; CL-Vanguard at 7.
\624\ CL-ISDA/SIFMA at 14.
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The Commission believes that its approach of establishing specific
criteria for grouping swaps into a finite set of defined swap
categories is preferable to the alternatives noted; it provides (1)
appropriate granularity that mitigates the potential for like risks to
trade differently; and (2) 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 made use of swaps market data, as well as market convention,
in making its determination of how best to form swap categories and
asset classes as well as buckets within each asset class. Ultimately,
the Commission determined that that the best approach was to allow for
products with similar characteristics and risk structures to be grouped
together, given that in certain circumstances market participants view
similar financial products as close substitutes and use them as such
for risk mitigating purposes. The Commission has fashioned its swaps
categories to, where possible, group together swaps that could be used
to hedge the same risk or otherwise establish an equivalent position.
Grouping economically-substitutable swaps together makes the
setting of appropriate minimum block sizes on an individual product
basis unnecessary and potentially dangerous in that it would allow for
like risks to trade differently.
c. Block Methodology Alternatives
The Commission also considered various alternatives to its proposed
methodologies for determining appropriate minimum block thresholds in
both the initial and the post initial periods. As discussed more fully
in Section II.B., the Commission received various comments suggesting
alternatives to the phased-in approach contained in the Further Block
Proposal. Many commenters compared the 67 percent notional amount
calculation to a 50 percent notional amount calculation, as
specifically requested by the Commission in Question 33 of the Further
Block Proposal. Twelve commenters preferred the 67 percent notional
amount calculation to a 50 percent notional amount calculation;
whereas, nine commenters preferred the 50 percent notional amount
calculation to the 67 percent notional amount calculation. ODEX, RJ
O'Brien, and Spring Trading expressed support for the 67 percent
notional amount calculation, but also suggested that a higher notional
amount calculation would be preferable, particularly in the post-
initial period.\625\ AFR, Better Markets, Javelin, and SDMA all
recommended a 75 percent or higher notional amount calculation and a
market depth and market breadth test.\626\
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\625\ CL-ODEX at 1; CL-RJ O'Brien at 1.
\626\ CL-AFR at 8-9; CL-Better Markets at 7-8; CL-Javelin at 2;
CL-SDMA at 2.
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[[Page 32923]]
Nine commenters preferred the 50 percent notional amount
calculation to the 67 percent notional amount calculation.
Freddie Mac and ICI expressly supported a 50 percent notional
amount calculation.\627\ Pierpont and WMBAA recommended a notional
amount calculation of no greater than 50 percent.\628\ ICAP Energy and
SIFMA recommended a notional amount calculation below 50 percent, but
preferred a 50 percent notional amount calculation to a 67 percent
notional amount calculation.\629\ AII and ICAP recommended not using a
notional amount calculation at all, but preferred a 50 percent notional
amount calculation to a 67 percent notional amount calculation.\630\
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\627\ CL-Freddie at 2; CL-ICI at 6-7.
\628\ CL-Pierpont at 3; CL-WMBAA at 3.
\629\ CL-ICAP Energy at 3; CL-SIFMA at 10.
\630\ CL-AII at 6; CL-ICAP Energy at 4.
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AII recommended lowering or eliminating block thresholds until
complete data has been reported to SDRs so as not to impair market
liquidity.\631\ Barclays recommended introducing block levels that
allow for empirical analysis of the transaction data and sequentially
increasing block sizes until such point as the desired equilibrium
between transparency and liquidity is reached.\632\ Better Markets
suggested transitioning to a market depth/market breadth test after the
Commission has collected a year of SDR data.\633\
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\631\ CL-AII at 6.
\632\ CL-Barclays at 11.
\633\ CL-Better Markets at 9-10.
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The Commission also specifically requested comments regarding other
potential methods for determining appropriate minimum block
thresholds.\634\ While numerous comments addressed the efficacy of a
notional amount calculation and the appropriate percentage to use in
making such a calculation, the comments reveal only one significant
alternative methodology to calculating relevant initial and post-
initial minimum block thresholds in place of a notional amount
calculation: block thresholds based on market depth and market
breadth.\635\ The Commission received a number of comments regarding
whether the Commission should use either market depth or market breadth
criteria, instead of the 67-percent notional amount calculation
methodology, to calculate the relevant initial minimum block sizes and
the post-initial minimum block sizes.\636\ Many commenters expressed
support for adopting the market depth test \637\ and other commenters
additionally supported utilizing the market breadth test.\638\
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\634\ See Further Block Proposal, Q32-54.
\635\ See Note 262 for an in depth description of the market
depth and market breadth test.
\636\ Market depth and market breadth was proposed to be
calculated as follows: (step 1) Identify swap contracts with pre-
trade price transparency within a swap category; (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 of one year; (step 3) collect a market
depth snapshot of all of the bids and offers once each minute for
the pre-trade price transparency set of contracts identified in step
1; (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; (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
120 observations retained in step 4, calculate the sum of the
notional amount of all orders collected from step 3 that fall within
a range, 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. 77 FR 15482.
\637\ CME-CL at 2; ODEX-CLetter at 2; Spring Trading-CL at 2;
MFA-CL at 7; FIA-CL at 2.
\638\ Arbor-CL at 1; AFR-CL at 8-9; Jeffries-CL at 2; SDMA-CL at
3-6; Javelin-CL at 4-6; RJ O'Brien-CL at 1; Better Markets-CL at 9-
10; CRT-CL at 2; FIA-CL at 2.
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As discussed more fully in Section II.B., for the initial period
the Commission is adopting the 50 percent notional amount calculation
to determine appropriate minimum block sizes in the interest rate and
credit asset classes. This approach provides for a more gradual phase-
in of minimum block sizes, as recommended by numerous commenters. The
Commission believes 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.
For the post-initial period, the Commission is adopting Sec.
43.6(f)(1) as proposed. The 67-percent notional amount calculation
means that, within a swap category, approximately two-thirds of the sum
total of all notional amounts will be reported on a real-time basis.
This approach will afford market participants a timely view of a
substantial portion of swap transaction and pricing data to assist them
in determining the competitive price for swaps within a relevant swap
category. The Commission anticipates that this enhanced price
transparency will encourage market participants to provide liquidity
(e.g., through the posting of bids and offers), particularly when
transaction prices move away from the competitive price. The Commission
also anticipates that enhanced price transparency thereby will improve
market integrity and price discovery, while also reducing information
asymmetries enjoyed by market makers in predominately opaque swap
markets.\639\
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\639\ The proposed calculation stands in contrast to another
alternative--the proposed 95th percentile-based distribution test
set out in the Initial Proposal. See the discussion in section I.B.
of the Further Block Proposal. No commenters suggested or supported
the distribution test in response to the Further Block Proposal.
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In the Commission's view, using the 67-percent notional amount
calculation also would minimize the potential impact of real-time
public reporting on liquidity risk compared to other alternatives. The
67 percent notional amount calculation represents a middle ground
between the many commenters who supported higher block thresholds and
the many commenters who preferred much more conservative thresholds.
The Commission believes that its methodology, in conjunction with the
50-percent notional amount calculation during the initial period,
represents a tailored and incremental approach for achieving the goal
of ``a vast majority'' of swap transactions becoming subject to real-
time public reporting.\640\
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\640\ 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). As
discussed above, this phased-in approach seeks to improve
transparency while not having a negative impact on market liquidity.
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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.'' \641\ 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 to support their conclusion. In addition,
the Commission will conduct its own surveillance of swaps market
[[Page 32924]]
activity and how block sizes affect market liquidity in each of the
specified swap categories.\642\ In response to either a submission or
its own surveillance of swaps market activity the Commission may
exercise its legal authority to take action by rule or order to
mitigate the potential effects on market liquidity with respect to
swaps in a particular swap category.
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\641\ 7 U.S.C. 2(a)(13)(E)(iv).
\642\ The Commission received two comments supporting the
Commission's authority to set appropriate minimum block sizes
outside of the proposed annual look-back period. MFA argued that the
Commission's goal to balance transparency and liquidity would be
better achieved with the flexibility to adjust minimum block sizes
quickly to respond to material market changes. MFA recommended that
the Commission should have the authority to update post-initial
minimum block sizes in extraordinary circumstances and on a case-by-
case basis, based on SDR data that it receives for individual or
across multiple swap categories. GFMA stated that if the Commission
establishes a notional calculation test, then it should ensure that
it has sufficient flexibility to amend minimum block sizes. GFMA
recommended that the Commission should be able to ``swiftly alter''
block trade levels to enable some trading to be conducted in a newly
illiquid market, without the benefit of reference to a data set. The
Commission notes that Sec. 43.6(f)(1) provides that the Commission
shall update post-initial appropriate minimum block levels ``[n]o
less than once each calendar year.'' Accordingly, the Commission
notes that it has the ability to adjust post-initial minimum block
sizes under the types of extraordinary circumstances raised by
commenters.
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The Commission acknowledges that the market depth and market
breadth test is a viable alternative to the notional amount calculation
methodology. However, it has several prerequisite conditions that
complicate the ability to implement it. For example, the Commission
would need to determine which contracts within a swap category offer
pre-trade price transparency--electronically displayed and executable
bids and offers as well as displayed available volumes for execution.
As noted by commenters, adequate market trading data also must be
available to collect a market depth snapshot of all of the bids and
offers for the pre-trade price transparency set of applicable
contracts. The Commission is also cognizant of MFA's concerns regarding
the potential for manipulation of market depth. Given the time needed
for trading infrastructure to develop and the significant time and cost
considerations involved in collecting such data from SEFs and DCMs, the
Commission deems it unfeasible to implement at this time; the
Commission will continue to examine the merits of doing so in the
future.
6. CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
The Commission believes that the criteria and methodology in Sec.
43.6(a)-(f) and (h) will 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
final rule, the Commission believes that it has properly balanced the
tradeoff between transparency and liquidity interests. As a result,
swap market participants will retain a means to offset risk exposures
related to their swap transactions at competitive prices. In addition,
the phased-in implementation scheme outlined in this rulemaking will
introduce greater transparency in an incremental, measured and flexible
manner so that appropriate minimum block sizes are responsive to
changing markets. Specifically, the Commission expects that the
availability of real-time pricing information for carefully enumerated
categories of swap transactions will 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 the interests of both
market participants and the public who should benefit through lower
costs of goods and services.
Another benefit of increasing swaps market transparency to
regulators and the public in real-time, without the interim delays for
all transactions imposed in Part 43, is better protection of market
participants and the public by improving the Commission's oversight
ability and by giving academics, the media, public and market
participants the opportunity to monitor, study, and analyze these
previously opaque segments of the economy.
b. Efficiency, Competitiveness and Financial Integrity of Markets \643\
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\643\ The Commission sees no potential impact to the financial
integrity of futures markets from the 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, the Commission finds
this factor useful in analyzing the costs and benefits of swaps
regulation, as well.
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The criteria and methodology set out in the rules will promote
market efficiency, competitiveness and financial integrity of markets
in several ways. The Commission acknowledges that because
responsibility for specifying swap categories and determining
appropriate minimum block sizes is with the Commission rather than
registered entities, the administrative burden on swap market
participants is minimized. Further, the rules afford flexibility to
respond to continuing swaps market evolution, including but not limited
to changing industry practices and activities that the Commission
foresees occurring as market participants comply with regulations,
including part 43, implementing the Dodd-Frank Act regulatory regime.
More specifically, the methodology in Sec. 43.6(c)-(f) and (h) will
recalibrate appropriate minimum block sizes regularly to ensure that
those sizes remain appropriate for, and responsive to, these changing
markets. This ability, coupled with the potential for the Commission to
adjust futures block requirements in pending and future rulemakings
(among other tools) also helps assure that competitive implications
that could arise between substitutable swaps and futures as markets
evolve are appropriately addressed. The Commission believes that the
rules will introduce increased market transparency for swaps in a
careful, measured manner that the Commission believes will optimize the
balance between liquidity and transparency concerns.\644\
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\644\ As noted above, under part 43 of the Commission's
regulations (as now promulgated in the Real-Time Reporting Final
Rule), 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 1217. As a result, SDRs as of now are not
required to publicly disseminate publicly reportable swap
transactions as soon as technologically practicable.
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c. Price Discovery
The criteria and methodology set out in the rules will enhance swap
market price discovery by eliminating, to the extent appropriate, the
time delays for the real-time public reporting. The methodology of this
final rule will ensure that an SDR will be able to publicly disseminate
data for certain swaps as soon as technologically practicable and the
majority of the transactions in the market will be visible to traders
as well as the public. Since the majority of trades will be published
and visible in real-time, reported prices are likely to be better
indicators of competitive pricing. As such, the rules promote improved
price discovery.
[[Page 32925]]
d. Sound Risk Management Practices
As discussed above, the Commission believes that the criteria and
methodology set forth in the rules will enhance price discovery since
SDRs will publicly disseminate price and other data relevant to
valuation as soon as technologically practicable for the swaps for
which the time-delay is lifted. This better and more accurate data will
enable swap market participants, generally, to better measure risk. An
ability to better manage risk at an entity level should translate to
improved market participant risk management generally. Improved risk
measurement and management potential, in turn, mitigates the risk of
another financial crisis by better equipping market participants to
value their swap contracts and other assets during times of market
instability.
e. Other Public Interest Considerations
The Commission believes that the criteria and methodology in Sec.
43.6(a)-(f) and (h) will allow the majority of swap transactions and
prices to be publicly disseminated, giving academics, the media, public
and market participants the opportunity to monitor, study, and analyze
these previously opaque segments of the economy. This would allow the
public to be better informed about swaps markets and analyze publicly
available market data disseminated in real-time.
D. Cost-Benefit Considerations Relevant to the Block Trade/Large
Notional Off-Facility Swap Election Process (Sec. 43.6(g))
Section 43.6(g) specifies the process for a market participant to
elect that a swap transaction be treated as a block trade or large
notional off-facility swap (``the election process''). Section
43.6(g)(1) establishes a two-step notification process relating to
block trades. Section 43.6(g)(2) establishes the notification process
relating to large notional off-facility swaps.
Section 43.6(g)(1)(i) sets out the first step in the block trade
notification process: 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.
Section 43.6(g)(1)(ii) sets out the second step: 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. The
Commission expects SEFs and DCMs to use automated, electronic--and in
some cases voice--processes to execute swap transactions; the
transmission of the notification of a block trade election, which may
occur separately from the execution process, also will be either
automated, electronic or communicated through voice processes.
Section 43.6(g)(1)(ii) sets out the second step: 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.
1. Costs Relevant to the Election Process (Sec. 43.6(g))
Non-financial end-users who are reporting parties, as well as SEFs,
DCMs, and SDRs will likely bear the costs of complying with the
election process in Sec. 43.6(g). To comply with the real-time
reporting requirements of part 43 already in place, these entities will
have already invested in technology and personnel as well as
established programs for continued systems maintenance, support and
compliance; the Commission has previously described and considered
these costs in the Real-Time Reporting Final Rule.\645\ The Commission
specifically designed the election process so that non-financial end-
users, SEFs, DCMs, and SDRs would be able to leverage any investments
made for compliance with part 43 to also comply with Sec. 43.6(g).
Accordingly, the Commission expects non-financial end-users, SEFs, DCMs
and SDRs to have the following direct, quantifiable costs: (a) An
incremental, non-recurring expenditure to update existing technology to
comply with Sec. 43.6(g); (b) an incremental non-recurring expenditure
for training existing personnel and updating written policies and
procedures for compliance with amendments to part 43; (c) incremental
recurring expenses associated with compliance, maintenance and
operational support in connection with the election process; and (d)
additional incremental, non-recurring expenditures to update existing
technology exclusive to SDRs. SDRs also would have incremental, non-
recurring expenditures to update existing technology.\646\ The
Commission also recognizes that the election process in Sec. 43.6(g)
is voluntary and that eligible entities would not elect block trade
treatment for a swap transaction in circumstances in which they did not
perceive a net benefit in doing so. In the paragraphs that follow, the
Commission discusses each of these costs.
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\645\ See 77 FR 1237. As noted in the Real-Time Reporting Final
Rule, 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 54538 (Sept. 1, 2011).
In the Real-Time Reporting Final Rule, 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 cots to publicly disseminate ($360,602 per
SDR). See id.
In the Real-Time Reporting Final Rule, the Commission assumed
that SEFs and DCMs will experience the same or lower costs as a non-
financial end-user. See id.
\646\ 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 cost identified in the
release adopting part 49 of the Commission's regulations. See Swap
Data Repositories: Registration Standards, Duties and Core
Principles, 76 FR 54538 (Sept. 1, 2011). In the Real-Time Reporting
Final Rule, 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.
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a. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,
SEF or DCM to Update Existing Technology \647\
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\647\ For the same reasons stated in the Real-Time Reporting
Final Rule, the Commission assumes that SEFs and DCMs would
experience the same or less costs as a non-financial end-user. See
77 FR 1236. Under 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.
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To comply with the election process in Sec. 43.6(g), a non-
financial end-user, SEF, or DCM likely would need to: (1) Update its
Order Management System (``OMS'') to capture the election to treat a
qualifying publicly reportable swap transaction as a block trade or
large notional off-facility swap. In the Further Block Proposal, the
Commission
[[Page 32926]]
estimated 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 for each non-financial end-user,
SEF or DCM.\648\ This cost estimate included 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 Sec. 43.6(g). The Commission is revising its
estimates based on updated wage rate data. 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 $7,171 for each non-financial end-user, SEF or
DCM.\649\
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\648\ This estimate was 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. A compliance manager has adjusted hourly wages
of $77.77. A director of compliance has adjusted hourly wages of
$158.21. A compliance attorney has adjusted hourly wages of $89.43.
A senior systems analyst has adjusted hourly wages of $64.50. A
senior programmer has adjusted hourly wages of $81.52.
\649\ This estimate was 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. A compliance manager has adjusted hourly wages
of $74.16. A director of compliance adjusted hourly wages of
$169.16. A compliance attorney has adjusted hourly wages of $103.17.
A senior systems analyst has adjusted hourly wages of $70.45. A
senior programmer has adjusted hourly wages of $86.89.
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b. Incremental, Non-Recurring Expenditure to a Non-Financial End-User
to Provide Training To Existing Personnel and Update Written Policies
and Procedures
To comply with the election process in 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. In the Further Block Proposal, the
Commission estimated 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 $3,200 for each non-financial end-user.\650\ This cost estimate
included 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 Sec. 43.6(g). The Commission is
revising its estimates based on updated wage rate data. 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
$3,360 for each non-financial end-user.\651\
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\650\ 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.
\651\ This estimate was 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 $74.16. A director of compliance adjusted hourly wages of
$169.16. A compliance attorney has adjusted hourly wages of $103.17.
A senior systems analyst has adjusted hourly wages of $70.45. A
senior programmer has adjusted hourly wages of $86.89.
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c. Incremental, Recurring Expenses to a Non-Financial End-User, DCM or
SEF Associated With Incremental Compliance, Maintenance and Operational
Support in Connection With the 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 Sec.
43.6(g). In the Further Block Proposal, the Commission estimated that
annual compliance; maintenance and operation support would impose an
incremental, recurring burden of approximately five personnel hours at
an approximate cost of $340 for each non-financial end-user, DCM or
SEF.\652\ This cost estimate included 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 Sec.
43.6(g). The Commission is revising its estimates based on updated wage
rate data. The Commission estimates the updated approximate cost of
designing training materials, conducting training with existing
personnel, and revising and circulating written policies and procedures
in compliance with the requirements set forth in Sec. 43.6(g) to be
$370 for each non-financial end-user, DCM, or SEF.\653\
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\652\ 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.
\653\ 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's adjusted hourly
wage is $169.16. A compliance clerk (junior compliance advisor) has
adjusted hourly wages of $33.52. A compliance attorney's adjusted
hourly wage is $103.17.
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d. 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 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. In the Further Block
Proposal, the Commission estimated that updating existing technology to
capture elections would impose an initial non-recurring burden of
approximately 15 personnel hours at an approximate cost of $1,310 for
each SDR.\654\ This cost estimate included 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 Sec.
43.6(g). The Commission is revising its estimates based on updated wage
rate data. The Commission estimates the updated approximate cost
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 Sec. 43.6(g) to be
$1,390 for each SDR.\655\
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\654\ 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.
\655\ This estimate is calculated as follows: (Senior Programmer
at 8 hours) + (Senior 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 $86.89. A
senior systems analyst has adjusted hourly wages of $70.45. A
compliance manager has adjusted hourly wages of $74.16. A director
of compliance has adjusted hourly wages of $169.16.
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[[Page 32927]]
2. Comments Received
The Commission received one comment directly related to the costs
of the election process. As discussed more fully above, WMBAA disagreed
with the Further Block Proposal projected cost estimates generally and
contended that the Commission failed to contemplate the actual efforts
a SEF will have to undertake to implement the block trade regime,
including the two-step notification process.\656\ In addition to the
fact that WMBAA did not provide data to support or monetize its
position, WMBAA's disagreement with the Further Block Proposal's
election process cost estimates does not concern the incremental cost
to augment and maintain systems and processes that the Commission
believes entities need have in place to comply with the real time
reporting requirement of Section 2(a)(13) of the CEA; rather it
concerns the cost to comply with that statutory requirement as
prescribed by the existing part 43 implementation regulations. SEFs and
DCMs would incur these costs regardless of how the Commission
determines block thresholds. Accordingly, the Commission considers
WMBAA's criticism of the cost estimates in this rulemaking misplaced.
Therefore, the Commission is maintaining the Further Block Proposal's
approach to calculating the direct costs resulting from the methodology
for determining block thresholds, but is revising its estimates based
on updated wage rate data.
---------------------------------------------------------------------------
\656\ CL-WMBAA at 8.
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3. Benefits Relevant to the Election Process (Sec. 43.6(g))
The Commission has identified two overarching benefits that the
election process in Sec. 43.6(g) would confer on swap market
participants, registered entities and the general public. First,
although Sec. 43.6(g) sets out a purely administrative process with
which market participants and registered entities must comply, the
Commission views this process as an integral component of the block
trade framework in this rulemaking and in part 43. Consequently, this
election process will benefit market participants, registered entities
and the general public by providing greater price transparency in swaps
markets than currently exists under part 43.\657\ Since this election
process is optional, entities need avail themselves of the process only
in circumstances where the attendant benefits warrant.
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\657\ See the discussion of benefits in section VI.E.1.e above
with respect to Sec. 43.6(a)-(f) and (h).
---------------------------------------------------------------------------
Second, the Commission believes that the election process will
promote market efficiency by creating a standardized process in Sec.
43.6(g) for market participants to designate publicly reportable swap
transactions that are eligible for block trade or large notional off-
facility swap treatment. In addition, this standardized process will
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
believes the final rule avoids imposing duplicative or conflicting
obligations on market participants and registered entities.
4. Alternatives
The Commission specifically asked commenters whether there were
alternative methods through which a reporting party could elect to
treat its qualifying swap transaction as a block trade or large
notional off-facility swap. In addition, the Commission asked whether
it should require a variation on the proposed election process where
SEFs, DCMs, and reporting parties would be required to indicate under
which swap category they were claiming block or large notional off-
facility swap treatment. Finally, the Commission asked whether it
should establish an alternative approach for small end-users when such
an end-user is the reporting party to a qualified swap transaction.
No comments were received either proposing or otherwise supporting
an alternative approach and as such, the Commission is adopting in
Sec. 43.6(g) relative to possible alternatives.
5. Application of the Section 15(a) Factors to Sec. 43.6(g)
a. Protection of Market Participants and the Public
Section 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. Consequently, this 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.
b. Efficiency, Competitiveness and Financial Integrity.\658\
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\658\ 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).
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As noted above, the election process will promote efficiency by
providing market participants and registered entities with a
standardized process to delineate which publicly reportable swap
transactions are block trades or large notional off-facility swaps. The
voluntary nature of this election process will also add to the
efficiency of the swaps market since eligible entities will only choose
to elect if it is financially beneficial for them to do so. In
addition, the proposed election process will 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 will create efficiencies for these entities and
mitigate the cost to comply 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.
c. Price Discovery
The Commission has identified no potential material impact to price
discovery that would result from the implementation of the election
process outside of those discussed in section b. above.
d. Sound Risk Management Practices
The Commission has identified no potential impact on sound risk
management practices that would result from the implementation of the
election process outside of those discussed in section b. above.
e. 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 election process.
[[Page 32928]]
E. Costs and Benefits Relevant to Anonymity Protections (Amendments to
Sec. 43.4(d)(4) and (h))
This section discusses the two amendments to Sec. 43.4. Section
43.4 as now promulgated prescribes the manner in which SDRs must
publicly disseminate swap transaction and pricing data. One amendment
adds a system for masking the geographical data for certain swaps in
the other commodity asset class not currently subject to public
dissemination, which provides limited, but not detailed information on
the geographic location of the underlying assets of those swaps. The
other amendment establishes a methodology to establish cap sizes that
masks the size of swap transactions above a certain threshold, which is
different from the methodology for determining appropriate minimum
block sizes. Both amendments seek to protect the anonymity of the
parties and certain identifying information for swaps while also
providing increased transparency in swaps markets.
1. Amendments to Sec. 43.4(d)(4)
The Commission addresses the public dissemination of information
regarding certain swaps in the other commodity asset class in Sec.
43.4(d)(4). Section 43.4(d)(4)(ii) currently provides that for publicly
reportable swaps in this commodity asset class, information identifying
the underlying assets of the swap 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 Real-Time Reporting Final Rule, any swap that
is in the other commodity asset class that falls under Sec.
43.4(d)(4)(ii) will be subject to reporting and public dissemination
requirements.
In this final rule, the Commission is adopting a new provision,
Sec. 43.4(d)(4)(iii), that prescribes a system for the public
dissemination of exact underlying assets in the other commodity asset
class with a ``mask'' for sensitive and potentially revealing
geographic detail. The Commission also is adopting guidance in the form
of a new appendix to part 43 that contains the geographical details
that SDRs will be able to use in masking eligible other commodity swaps
while maintaining compliance with public dissemination of swap
transaction and pricing data.
2. Amendments to Sec. 43.4(h)
Section 43.4(h) establishes cap sizes for ``rounded notional or
principal swap amounts'' above which information on swaps transactions
is publicly reportable, for the purpose of providing anonymity for
transactions where information on the notional or principal amounts
alone would likely reveal the identity of the parties to the swap or
sensitive business information. In doing so, the Commission notes that
the objective of establishing cap sizes differs from that of
establishing appropriate minimum block sizes.\659\ With respect to the
latter, the objective is to ensure that a block trade or large notional
off-facility swap can be sufficiently offset during a relatively short
reporting delay. The former is strictly for the protection of the
counterparties' identity and sensitive business information.
---------------------------------------------------------------------------
\659\ The Commission received numerous comments suggesting that
the block thresholds and cap sizes established by the Commission
should be the same. However, block thresholds and cap sizes have
different statutory mandates and serve different purposes.
---------------------------------------------------------------------------
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
the 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.\660\
---------------------------------------------------------------------------
\660\ See note 470 supra, which lists the interim cap sizes set
forth in Sec. 43.4(h)(1)-(5).
---------------------------------------------------------------------------
The amendment to Sec. 43.4(h) will require SDRs to continue to
publicly disseminate cap sizes that correspond to their respective
appropriate minimum block sizes during the initial period. However,
when the Commission publishes the post-initial appropriate minimum
block sizes in accordance with Sec. 43.6(f), it will also publish
post-initial cap sizes for each swap category by applying a 75-percent
notional amount calculation on data collected by SDRs. The Commission
will apply the 75-percent notional amount calculation to a one-year
rolling window of such data corresponding to each relevant swap
category for each calendar year.
3. Costs Relevant to the Amendments to Sec. 43.4(d)(4) and (h)
SDRs will bear some costs of complying with the amendments to Sec.
43.4(d)(4) and (h).\661\ The Commission set forth the potential costs
of these provisions in the Further Block Proposal and requested
comments regarding its estimates. The Commission did not receive any
comments regarding its estimates.
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\661\ The Commission anticipates that reporting parties, SEFs
and DCMs would not incur any new costs related to the 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.
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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 Real-Time Reporting
Final Rule.\662\ Notwithstanding these recurring expenses, an SDR will
have additional non-recurring expenditures associated with the
amendments to Sec. 43.4. Specifically, the Commission estimated that
updating existing technology will impose an initial non-recurring
burden of approximately 34 personnel hours at an approximate cost of
$3,190 for each SDR.\663\ This cost estimate included 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
[[Page 32929]]
compliance with the requirements set forth in Sec. 43.4(d).
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\662\ See 76 FR 54572-75. 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 54573. In the Real-Time Reporting Final Rule,
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 cots to publicly
disseminate ($360,602 per SDR). See 77 FR 1238.
\663\ 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. The total number
was calculated incorrectly in the Further Block Proposal. The
initial cost to an SDR should have been $2,747, rather than $3,190.
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The Commission is revising its estimates based on updated wage rate
data. The Commission estimates the updated approximate cost 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 Sec. 43.4(d) to be $2,930 for each
SDR.\664\
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\664\ 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 $86.89. A
senior systems analyst has adjusted hourly wages of $70.45. A
compliance manager has adjusted hourly wages of $74.16. A director
of compliance has adjusted hourly wages of $169.16.
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In addition, the Commission believes that Sec. 43.4(d)(4)(iii)
will 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. The Commission estimates 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 will be
$154,021 in annualized costs.\665\
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\665\ 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 523 supra, the total labor costs for a swap
trader is $184.90. Thus, the total number of burden hour costs equal
the total number of burden hours (833 burden hours) x $184.90.
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The Commission also anticipates that Sec. 43.4(d)(4)(iii) will
result in some indirect costs to the market through reduced
information, since notional values of transactions beyond the cap size
limits will not be revealed to the public. The Commission lacks data to
quantify the costs associated with the reduction of information.
However, given the statutory mandate to protect market participant
identities, the Commission believes such costs are warranted and
contemplated by Congress.
The Commission also received a number of comments regarding
potential costs arising from the established level for cap size. GFMA
stated that the same rationale should apply to cap and block sizes, as
both have potential negative impacts on liquidity.\666\ ICI stated that
the 75 percent notional amount would be too high for determining cap
size because the lack of depth and liquidity in the swaps market could
cause public reporting of block sizes to reveal identities, business
transactions, and market positions of participants, and recommends a 67
percent notional amount calculation for determining cap size in the
post-initial period.\667\ ISDA/SIFMA stated that the added transparency
from reporting transaction sizes between 67 percent and 75 percent
would be outweighed by the harm to liquidity from additional
disclosure, and urges the Commission to ensure that the post-initial
cap size is always equal to the relevant block size.\668\ MFA stated
that it is unnecessary for the Commission to establish cap sizes that
differ from minimum block sizes as there is not a meaningful
transparency benefit that would outweigh the resource burdens on the
Commission, SDRs, SEFs, and other market participants.\669\ SIFMA
stated that the Commission should set the notional cap size at the
block threshold, as the added public dissemination could harm liquidity
in the same manner that a higher block trade size threshold might.\670\
Vanguard stated that it is essential that the cap match the block trade
threshold, as to do otherwise would compromise the liquidity
protections afforded by the nuanced assessment of block trade
thresholds.\671\
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\666\ CL-GFMA at 5.
\667\ CL-ICI at 8.
\668\ CL-ISDA/SIFMA at 15.
\669\ CL-MFA at 8-9.
\670\ CL-SIFMA at 12.
\671\ CL-Vanguard at 7.
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The additional information provided to the market regarding the
size of block trades that are below the cap size may enhance price
discovery by publicly disseminating more information relating to market
depth and the notional sizes of publicly reportable swap transactions.
This, in turn, promotes increased market liquidity.
In addition, the rule incorporates flexibility to adjust post-
initial cap sizes in response to changing markets. Section 43.4(h) will
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
rulemaking, then the Commission can react in a timely manner to further
improve price transparency or to mitigate adverse effects on market
liquidity.\672\
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\672\ 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 32 supra.
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4. Benefits Relevant to the Amendments to Sec. 43.4
The Commission anticipates that the anonymity provisions of Sec.
43.4 will generate several overarching benefits to swap market
participants, registered entities and the general public. In the first
instance, the Commission anticipates that the cap size amendments to
Sec. 43.4(h) will 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 will set appropriate minimum block sizes based on the 67
percent notional amount calculation \673\ and cap sizes based on the
75-percent notional amount calculation.\674\ Although swaps with
notional amounts that fall between these two sizes will be subject to a
time delay, the exact notional amounts of these swaps eventually will
be publicly disclosed. The delayed public disclosure of the notional
amount of these swaps will provide market participants, registered
entities and the general public with meaningful price transparency.
---------------------------------------------------------------------------
\673\ See proposed Sec. 43.6(c)(1).
\674\ See proposed Sec. 43.6(c)(2).
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The masking provisions in the amendment to Sec. 43.4(d)(4) and
appendix D to part 43 will 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. However, the
Commission believes there are a significant number of swaps in the
other commodity asset class that are not economically related to the 29
contracts identified on this appendix to part 43. The amendment
creating new Sec. 43.4(d)(4)(iii) will require the public
dissemination of data on these swaps. The real-time public reporting of
these swaps will enhance price discovery in the other commodity asset
class.
[[Page 32930]]
In addition, the rule incorporates flexibility to adjust post-
initial cap sizes in response to changing markets. Section 43.4(h) will
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
rulemaking, then the Commission can react in a timely manner to further
improve price transparency or to mitigate adverse effects on market
liquidity.\675\
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\675\ 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 32 supra.
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5. Alternatives
The Commission received numerous comments supporting alternatives
to the proposed anonymity provisions in Sec. 43.4(d)(4) and (h). These
alternatives fall into two basic categories: (1) Post-initial cap size
level; and (2) preventing public disclosure of swap market participant
identity. In regard to cap size, seven commenters recommended that the
Commission set post-initial cap sizes matching the minimum block size
thresholds established by the Commission. AII supported setting the
post-initial cap size for each swap category at the same level as the
block size threshold and states that the 75 percent notional amount
calculation is far too high.\676\
---------------------------------------------------------------------------
\676\ CL-AII at 12.
---------------------------------------------------------------------------
For the initial period, AII and ISDA/SIFMA argued that the cap size
should be the lower of block size and the interim cap size in Sec.
43.4(h)(1).\677\ Barclays recommended that the post initial period cap
sizes be introduced at more nuanced levels that reflect the differences
between product's traded volumes.\678\ EEI stated that the initial cap
size of $25 million for both the Electricity Swap Contracts and the
Other Commodity Electricity Swap Category is too high, as is the 75
percent notional amount for the post-initial period. EEI recommended
that the Commission adopt a fixed cap size of $3 million for both
periods.\679\
---------------------------------------------------------------------------
\677\ CL-AII at 12; CL-ISDA/SIFMA at 15.
\678\ CL-Barclays at 6.
\679\ CL-EEI at 5.
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The Commission has evaluated these various alternatives concerning
post-initial cap size levels against the statutory requirements imposed
upon it by Section 2(a)(13): bring real-time public reporting to the
swaps market subject to time delays for block trades and large notional
off-facility swaps that it determines appropriate.\680\ However, the
statute only calls for a time delay--it does not provide for
information to be kept from the market in perpetuity. All of the
information regarding a block trade is reported to the market at the
end of the block time delay. Notional or principal amount information
above cap sizes, on the other hand, is never expressed to the market.
Because the notional amount of the trade is neither reported to the
market in real-time, nor reported to the market at all, the Commission
believes that cap sizes should be set at a higher level than block
sizes. The 75 percent notional test balances the competing interests of
providing meaningful real-time public reporting to the swaps market and
protecting the anonymity of swap market participants, while taking into
account potential impacts on market liquidity.
---------------------------------------------------------------------------
\680\ Section 2(a)(13)(E) of the CEA.
---------------------------------------------------------------------------
The additional information provided to the market regarding the
size of block trades that are below the cap size may enhance price
discovery by publicly disseminating more information relating to market
depth and the notional sizes of publicly reportable swap transactions.
This, in turn, promotes increased market liquidity.
In regard to alternatives for preventing the public disclosure of
the identities of swap market participants, the Commission received
three comments regarding the masking of specific delivery or pricing
detail of energy and power swaps. EEI recommended that the Commission
mask data regarding Other Commodity Electricity Swaps according to the
North American Electric Reliability Corporation eight regions rather
than the FERC regions proposed.\681\ Barclays recommended that the
Commission use wider geographic regions when publicly disseminating
data for commodity swaps with very specific underlying assets and/or
delivery points and develop an appropriate process to avoid identifying
issuers of debt.\682\ Spring Trading supported further measures to
prevent public disclosure of identities, business transactions, and
market positions of swap market participants, and recommended
disclosing a subset of data on a collective basis at a later date.
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\681\ CL-EEI at 12-13.
\682\ CL-Barclays at 6.
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After consideration of the alternatives suggested by commenters,
the Commission is adopting Sec. 43.4(d)(iii) with the following
modification that it believes affords greater anonymity protection
relative to the Further Block Proposal, without adversely impacting
transparency. The modification is: For 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, the
Commission is requiring SDRs to public disseminate the specific
delivery or pricing point based on a description of one of 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). Using the regions
suggested by EEI further masks specific delivery details and thus
provides additional protection against public disclosure of identities,
business transactions, and market positions of swap market
participants, as recommended by Barclays and Spring Trading.
The Commission also considered the alternative of having DCMs and
SEFs set cap sizes. The Commission ultimately chose to determine cap
sizes itself for the reason that doing so limits the direct burden on
registered entities to determine and implement appropriate cap sizes
themselves. As such, the chosen approach will promote market efficiency
for market participants and registered entities.
6. Application of the Section 15(a) Factors to the Amendments to Sec.
43.4
a. Protection of Market Participants and the Public
The amendments to Sec. 43.4 protect swap counterparty anonymity on
an ongoing basis. While cap sizes for some transactions can exceed
appropriate minimum block sizes in certain circumstances (resulting in
the public dissemination of notional/principal-amount information after
a time delay), the Commission believes that for the vast majority of
impacted swap transactions, the 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.\683\ The Commission believes that setting
post-initial cap sizes above appropriate minimum block sizes will
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-
[[Page 32931]]
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 to lay off risk when executing extraordinarily large swap
transactions.
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\683\ 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.
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b. Efficiency, Competitiveness and Financial Integrity \684\
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\684\ 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 believes that amendments to Sec. 43.4(h) promote
market efficiencies and competitiveness since the approach will provide
market participants with the ability to continue transacting swaps with
the protection of anonymity, while promoting greater price
transparency.
The Commission does not believe that the implementation of the
anonymity protections established in Sec. 43.4(h) will adversely
impact the financial integrity of swap markets. The Commission has
considered the comments provided regarding impacts on liquidity arising
out of the 75 percent notional cap size. The Commission does not agree
that the cap size will have a substantial negative impact on market
liquidity. As stated above, the additional pricing information
available to the market as a result of the 75 percent notional cap size
promotes enhanced 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 to lay off risk when executing
extraordinarily large swap transactions. This, in turn, promotes market
liquidity.
c. Price Discovery
The cap size amendments to Sec. 43.4(h) should 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 will set appropriate minimum block sizes
based on the 67 percent notional amount calculation \685\ and cap sizes
based on the 75-percent notional amount calculation.\686\ Although
swaps with notional amounts that fall between these two sizes will be
subject to a time delay, the exact notional amounts of these swaps will
be publicly disclosed after the established time delay for blocks and
large notional off-facility swaps.
---------------------------------------------------------------------------
\685\ See proposed Sec. 43.6(c)(1).
\686\ See proposed Sec. 43.6(c)(2).
---------------------------------------------------------------------------
The masking provisions in the amendment to Sec. 43.4(d)(4) and
appendix D to part 43 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. The amendment creating new Sec.
43.4(d)(4)(iii) will require the public dissemination of data on these
swaps. The Commission expects that the real-time public reporting of
these swaps will enhance price discovery in the other commodity asset
class.
d. Sound Risk Management Practices
To the extent that the amendments to Sec. 43.4 mask the identity,
business transactions and market positions of swap counterparties, the
Commission expects that the amendments to Sec. 43.4 provide those
traders with the anonymity and time delay they require to manage their
market risk efficiently.
e. Other Public Interest Considerations
The Commission does not anticipate that the amendment to Sec.
43.4(h) will have a material effect on public interest considerations
other than those identified above.
F. Costs and Benefits Relevant to Sec. 43.6(h)(6)--Aggregation
Section 43.6(h)(6) specifies that, except as otherwise provided, it
is impermissible to aggregate orders for different accounts in order to
satisfy minimum block trade or cap size requirements. The rule further
provides that aggregation may be permitted on a DCM or SEF if done by a
person who: (i)(A) is a CTA who is registered pursuant to Section 4n of
the Act or is exempt from registration under the Act, or a principal
thereof, and has discretionary trading authority or directs client
accounts, (B) is an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(2)(v) of the Commission's regulations, or (C) is a foreign
person who performs a role or function similar to the persons described
in (A) or (B) and is subject as such to foreign regulation, and (ii)
has more than $25,000,000 in total AUM.
1. Overview of Comments Received
The Commission received a number of comments with the proposed
aggregation rule but none directly addressing the costs and benefits
considerations of the rule.
JP Morgan commented that the rule appears to reflect a concern that
private negotiation affords less protection to unsophisticated
investors than trading through the central markets, and that since all
entities that transact in the OTC market already must be ECPs, the
analogous concern about customer protection in the swaps market is
already addressed.\687\
---------------------------------------------------------------------------
\687\ CL-JPM at 9, n.13.
---------------------------------------------------------------------------
ICI opposed the minimum assets under management requirement in
proposed Sec. 43.6(h)(6)(ii) and argued that the Commission did not
articulate a rationale or policy reason for this requirement.\688\ ICI
also disagreed that an investment adviser seeking to aggregate orders
must satisfy the criteria of Sec. 4.7(a)(2)(v) of the Commission's
regulations.\689\
---------------------------------------------------------------------------
\688\ CL-ICI at 3.
\689\ Id. at 4. An investment adviser satisfies the criteria of
Sec. 4.7(a)(2)(v) if the investment adviser registers pursuant to
Sec. 203 of the Investment Advisers Act of 1940, or pursuant to the
laws of any state, and the investment adviser has been registered
and active for two years or provides security investment advice to
securities accounts which, in the aggregate, have total assets in
excess of $5,000,000 deposited at one or more registered securities
brokers. 17 CFR 4.7(a)(2)(v).
---------------------------------------------------------------------------
With respect to JP Morgan's comment, the Commission notes that
customers trading swaps on DCMs do not have to be ECPs. As discussed
further below, adopted Sec. 43.6(i)(1) allows non-ECP customers to be
parties to block trades through a qualifying CTA, investment adviser,
or similar foreign person.\690\ It is possible, therefore, that those
non-ECP DCM customers may not be aware if they received the best terms
for their individual swap transactions that are aggregated with other
transactions. Protection for such customers is therefore necessary, as
it is for unsophisticated customers in other markets.
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\690\ See infra Section II.C.6.
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In response to ICI's opposition to the minimum asset threshold
under Sec. 43.6(h)(6)(ii), the Commission notes that this threshold
reflects common industry practice.\691\ CME, for example, has enforced
the $25 million threshold
[[Page 32932]]
in its rules since September 2000.\692\ CME has stated that the
threshold ``is an effort to establish the professionalism and
sophistication of the registrant'' \693\ while also expanding the
number of CTAs and investment advisers eligible to aggregate
trades.\694\ The Commission believes that the $25 million threshold is
an appropriate requirement to ensure that persons allowed to aggregate
trades are appropriately sophisticated with these transactions, while
at the same time not excluding an unreasonable number of CTAs,
investment advisers, and similar foreign persons.
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\691\ See, e.g., CME Rule 526. See also CBOE Futures Exchange
LLC Rule 415(a)(i); Chicago Board of Trade Rule 526; Eris Exchange,
LLC Rule 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ OMX Futures
Exchange, Inc. Rule E23; New York Mercantile Exchange, Inc. Rule
526(I); NYSE Liffe US, LLC Rule 423; and OneChicago LLC Rule 417.
\692\ See CME Submission 00-99 (Sept. 21, 2000) (modifying CME
Rule 526 to reduce the threshold from $50,000,000 to $25,000,000).
CME originally planned to lower the threshold from $50,000,000 to
$5,000,000, but withdrew the submission and instead proposed to
lower the threshold to $25,000,000, based on customer suggestions.
See CME Submission 00-93 (Sept. 1, 2000); CME Submission 00-99 at 5-
6.
\693\ Id. at 6 (quoting letter addressed to Jean A. Webb,
Secretary of the Commission from John G. Gaine, President, Managed
Funds Association dated April 24, 2000 regarding ``Chicago
Mercantile Exchange new Proposed Rule 526'').
\694\ Id. at 4, 6-7. CME also stated in the filing that it
planned to readdress the threshold amount as it gained experience
with block trades, but has declined to modify the amount.
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The Commission also disagrees with ICI's contention that investment
advisers should not be required to satisfy the criteria under Sec.
4.7(a)(2)(v), which requires an investment adviser to (1) be registered
and active as an investment adviser for two years or (2) provide
securities investment advice to securities accounts which, in the
aggregate, have total assets in excess of $5 million deposited at one
or more registered securities brokers.\695\ The Commission first
adopted provisions similar to current Sec. 4.7(a)(2)(v) in 1992 \696\
as objective indications that a person had the investment
sophistication and experience needed to evaluate the risks and benefits
of investing in commodity pools or a portfolio large enough to indicate
the same, along with the financial resources to withstand the
investment risks.\697\ In 2000,\698\ the Commission extended the same
criteria in current Sec. 4.7(a)(2)(v) to registered investment
advisers for the same reasons.\699\ The Commission believes that these
objective criteria, which demonstrate that an investment adviser
possesses the necessary investment expertise, should also apply with
respect to allowing such persons to aggregate client orders.
---------------------------------------------------------------------------
\695\ 17 CFR 4.7(a)(2)(v).
\696\ 57 FR 34853, 34854-55 (Aug. 7, 1992). The final rule
reduced the amount on deposit threshold to $5 million from the $10
million required by the proposed rule. See 57 FR 3148, 3152 (Jan.
28, 1992).
\697\ See 57 FR at 34854 (quoting 57 FR at 3152).
\698\ 65 FR 11253, 11257-58 (Mar. 2, 2000).
\699\ Id. at 11257 (quoting 57 FR at 3152).
---------------------------------------------------------------------------
The Commission believes that the $25 million threshold, as well as
requiring investment advisers to satisfy the criteria under Sec.
4.7(a)(2)(v), are both important for certifying that persons allowed to
aggregate trades are appropriately sophisticated and important for
protection of market participants and public.
2. Costs
The Commission expects that there will be some incremental cost
attendant to compliance with Sec. 43.6(h)(6). The Commission believes
that the overall benefits to the market of allowing for the aggregation
of orders under certain circumstances (i.e., if done on a designated
contract market or a swap execution facility by certain CTAs,
investment advisers or foreign persons) will mitigate costs of reduced
market liquidity that could result from execution of such transactions
away from the centralized marketplace. The Commission also expects
there to be some advisors who will be prohibited from aggregating
orders for different trading accounts in order to satisfy the minimum
block size, or cap size requirements. The Commission also believes that
as a result of some advisers not being allowed to aggregate, there
might be some minimal unquantifiable cost associated with a decrease in
competition among such traders in the market.
3. Benefits
The rule is designed, in large part, to prevent circumvention of
the exchange trading requirements and of the real-time reporting
obligations associated with non-block transactions. Absent this
prohibition, the goals of the Commission's regulations regarding block
trading, namely increased transaction transparency, better price
discovery and improved competitiveness in the markets as well as better
risk management, could be frustrated by those whose trades individually
fail to meet the minimum block trade threshold (and cap size threshold
as a result), but nevertheless achieve the benefits intended for
extraordinarily large positions by aggregating those individual trades.
In other words, such entities would be able to evade the exchange-
trading and reporting obligations that are integral to price
transparency.
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
The Commission believes that the rule will protect market
participants from unfair practices by preventing trades that do not
meet the minimum block trade threshold from enjoying extended reporting
times. This means that trades that are not extraordinarily large, and
hence, that do not need extra reporting time will not qualify as block
trades and will be made public as soon as technologically practicable.
Hence, the rule will increase transparency of non-block transactions,
and thus, would protect market participants by informing their trading
determinations through increased transparency and price discovery.
b. Efficiency, Competitiveness, and Financial Integrity of the Futures
Markets
The Commission expects the prohibition of aggregation of trades to
improve efficiency and competitiveness in the markets by allowing more
trades to be reported without the time delay that is applied to
qualifying block trades. This means that a higher number of trades will
be eligible for real time reporting, and that will increase market
transparency as well as promote competition in the swap markets. The
rule also will protect the integrity of the derivatives market by
ensuring that smaller trades, which do not qualify as block
transactions, are executed on the trading system where there is pre-
trade and post-trade transparency.
The Commission also recognizes that advisors who are prohibited
from aggregating orders in order to satisfy the minimum block size or
cap size requirements might not trade at the most favorable prices in
the market, which might have a negative effect on the number of such
traders in the market. While the Commission expects that competition in
the market may be negatively affected as a result of prohibiting
aggregation, the Commission anticipates that the positive effects of
the rule on competition outweigh its negative effects.
c. Price Discovery
The Commission expects the rule to improve price discovery in the
swap markets by preventing aggregation of trades and as a result
promoting more trades to be publicly reported as soon as
technologically practicable. This will result in enhanced swap market
price discovery, since market participants and the public will be able
to observe real-time pricing information for a higher
[[Page 32933]]
percentage of transactions in the market. In addition, the Commission
expects that the rule will enhance price discovery by ensuring that
smaller trades, which do not qualify as block transactions, are
executed on the trading system where there is pre-trade and post-trade
transparency and where buyers and sellers may make informed trading
decisions based on the market's transparency.
d. Sound Risk Management Practices
The Commission anticipates that the criteria will likely result in
enhanced price discovery as discussed above. With better and more
accurate data, swap market participants will likely be better able to
measure and manage risk. The Commission believes that if the
prohibition of aggregation of trades was not adopted, swap transactions
may not be reported to an SDR ``as soon as technologically
practicable.'' The Commission also believes that by preventing this
delay in the reporting period of a swap transaction to an SDR, the
Commission will possess the information it needs to monitor the
transfer and positions of risk among counterparties in the swaps
market.
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations regarding the rule.
G. Costs and Benefits Relevant to Sec. 43.6(i)--Eligible Block Trade
Parties
1. Overview of Comments Received
The Commission received few comments with respect to the eligible
block trade parties rule. As discussed above, similar comments
regarding the exceptions to the prohibitions against aggregation for
certain persons were submitted with respect to the exception to certain
persons transacting blocks on a DCM on behalf of non-ECPs. For example,
ICI opposed the minimum assets under management requirement in proposed
Sec. 43.6(i)(1) and similarly argued that the Commission did not
articulate a rationale or policy reason for this requirement.\700\
---------------------------------------------------------------------------
\700\ CL-ICI at 3.
---------------------------------------------------------------------------
The Commission received one specific comment related to costs on
proposed Sec. 43.6(i)(2). SIFMA commented that proposed Sec.
43.6(i)(2) may require asset managers to obtain consent from each
client for whom they will engage in block trades.\701\ SIFMA contended
that this requirement would be costly and unnecessary, and that notice
to the customers \702\ or a general grant of investment discretion in
the investment management agreement, power of attorney, or similar
document should be sufficient.\703\
---------------------------------------------------------------------------
\701\ CL-SIFMA at 1.
\702\ Id. at 2.
\703\ Id.
---------------------------------------------------------------------------
The Commission disagrees with SIFMA's contention regarding the
burdens of obtaining consent. This burden consent will be minimal
because Sec. 43.6(i)(2) states that the instruction or consent may be
provided through a power of attorney or similar document that provides
discretionary trading authority or the authority to direct trading in
the account. The consent may therefore be included in existing and
future customer agreements. The Commission further disagrees that a
general grant of investment discretion or notice to the customer should
satisfy Sec. 43.6(i)(2). A customer's written instruction or consent
is necessary because a customer potentially may not receive the best
terms for an individual swap transaction that is part of an
aggregation. The written instruction or consent makes the customer
aware that block trades may be used on its behalf, allowing the
customer to decide whether to allow these transactions, through which
the rule has the added benefit of protection of market participants and
public. The Commission also would like to point out that a cost
estimate for that burden has already been presented in the proposed
rule and received no direct comments on that cost estimate.
2. Costs
Section 43.6(i)(1) requires that parties to a block trade must be
eligible contract participants, as defined under the CEA and Commission
regulations, except that a DCM may allow: (i) A CTA registered pursuant
to Section 4n of the Act or exempt from registration under the Act, or
a principal thereof, and who has discretionary trading authority or
directs client accounts, (ii) an investment adviser who has
discretionary trading authority or directs client accounts and
satisfies the criteria of Sec. 4.7(a)(2)(v) of the Commission's
regulations, or (iii) a foreign person who performs a similar role or
function to the persons described in (i) or (ii) and is subject as such
to foreign regulation, to transact block trades for customers who are
not eligible contract participants, if such CTA, investment adviser or
foreign person has more than $25,000,000 in total AUM. This rule
codifies, in part, the requirement under Section 2(e) of the CEA, which
requires that ``[i]t shall be unlawful for any person, other than an
eligible contract participant, to enter into a swap unless the swap is
entered into on, or subject to the rules of[hellip].a designated
contract market.'' In addition, the provisions allowing certain
entities (as described in this release) to enter into block trades on
behalf of their non-ECP customers on DCMs is substantially similar to
the existing DCM rules that allow block trading in the futures market.
Section 43.6(i)(2) further provides that no person may conduct a
block trade on behalf of a customer unless the person receives prior
written instruction or consent to do so. The rule further provides that
such instruction or consent may be provided in the power of attorney or
similar document by which the customer provides the person with
discretionary trading authority or the authority to direct the trading
in its account. The Commission is of the view that the cost associated
with the written instruction or consent is minimal. The Commission
estimates that a prior written instruction or consent requirement would
impose an initial non-recurring burden of approximately 2 personnel
hours at an approximate cost of $155.54 for each CTA, investment
adviser or foreign person.\704\
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\704\ The estimate is calculated as follows: Compliance manager
at 2 hours. A compliance manager's adjusted hourly wage is $77.77.
See note 521 supra.
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3. Benefits
The Commission has determined that the benefits of Sec. 43.6(i)
are significant. The rule allows customers who are not ECPs to engage
in block trade transactions through certain entities as outlined in the
rule. By permitting certain CTAs, investment advisers and foreign
persons to transact swaps on behalf of non-ECP customers, the rule
provides important safeguards for non-ECPs when entering into block
transactions in swaps. The Commission believes that access to block
trades will allow customers who are not ECPs to diversify their risk or
improve their investment strategies. In addition, the Commission also
anticipates the access to block trades for non-ECPs to increase their
participation in swap markets, increasing liquidity in the markets for
everyone.
The Commission acknowledges that Sec. 43.6(i)(2) has the added
benefit of protection of market participants and public since the
written instruction or consent required in Sec. 43.6(i)(2) of the rule
makes the customer aware that block trades may be used on its behalf,
allowing the customer to decide whether to allow these transactions.
[[Page 32934]]
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
As discussed above, Sec. 43.6(i)(2), by requiring that no person
may conduct a block trade on behalf of a customer unless the person
receives prior written instruction or consent to do so, protects the
customer by making sure the customer is aware that block trades may be
used on its behalf. This means better protection for market
participants and the public since no one will be able to conduct a
block trade on their behalf without their consent.
b. Efficiency, Competitiveness, and Financial Integrity of the Futures
Markets
The Commission expects the rule to improve competitiveness in the
markets by allowing customers who are not ECPs to have access to block
trades through certain CTAs, investment advisers and foreign persons.
The Commission anticipates an increase in competitiveness due to the
fact that more customers would use the swap markets as a result of this
rule. An increased participation in a market will also serve to
increase liquidity, as well as competition, in that market.
c. Price Discovery
The Commission does not anticipate the rule to have any significant
effect on price discovery in the market.
d. Sound Risk Management Practices
The Commission does not anticipate the rule to have any significant
effect on risk management practices.
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations regarding the rule.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies
to consider the impact of its rules on ``small entities.'' \705\ A
regulatory flexibility analysis or certification typically is required
for ``any rule for which the agency publishes a general notice of
proposed rulemaking pursuant to'' the notice-and-comment provisions of
the Administrative Procedure Act, 5 U.S.C. 553(b).\706\ With respect to
the Further Block Proposal, the Commission provided in its RFA
statement that the proposed rule would have a direct effect on a number
of entities, specifically DCMs, SEFs, SDs, MSPs, and certain single
end-users.\707\ In the Further Block Proposal, the Chairman, on behalf
of the Commission, certified that the rulemaking would not have a
significant economic effect on a substantial number of small entities.
Comments on that certification were sought.
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\705\ See 5 U.S.C. 601 et seq.
\706\ See 5 U.S.C. 601(2), 603, 604, and 605.
\707\ As discussed more fully in the Further Block Proposal, the
Commission is of the view that registered entities such as SDs and
MSPs are not small businesses.
---------------------------------------------------------------------------
In the Further Block Proposal, the Commission provided that it
previously had established that certain entities subject to its
jurisdiction are not small entities for purposes of the RFA.
Specifically, the Commission stated that it had previously determined
that SEFs and DCMs are not small businesses.\708\ The Commission also
stated that it is of the view that SDs and MSPs are not small
businesses.\709\
---------------------------------------------------------------------------
\708\ 77 FR at 15499. See 17 CFR part 40 Provisions Common to
Registered Entities, 75 FR 67282 (Nov. 2, 2010); see also 47 FR
18618, 18619, Apr. 30, 1982 and 66 FR 45604, 45609, Aug. 29, 2001.
\709\ 77 FR at 15499.
---------------------------------------------------------------------------
The Commission recognized that the proposed rule could 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.\710\
---------------------------------------------------------------------------
\710\ See 77 FR 1240 (``[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 76170.
---------------------------------------------------------------------------
Notwithstanding the imposition of this burden, however, the
determination to certify pursuant to Sec. 605(b) of the RFA that the
proposed rule would not have a significant economic effect on a
substantial number of small entities was based upon two major
considerations. First, Section 43.3 of the Commission's regulations
already requires these entities to report their swap transaction and
pricing data to an SDR.\711\ 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. Second, the proposed rule was structured
so that most swaps that are expected to be executed by an end user
would not require notification of the election by the end user, but
rather by a party that is subject to Commission registration and
regulation.
---------------------------------------------------------------------------
\711\ See 77 FR 1240.
---------------------------------------------------------------------------
The Commission did not receive any comments respecting its RFA
certification. Accordingly, for the reasons stated in the Further
Proposal and set forth above, the Commission continues to believe that
the rulemaking will not have a significant impact on a substantial
number of small entities. Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
procedure to establish appropriate minimum block sizes adopted herein
will not have a significant economic impact on a substantial number of
small entities.
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).
Table A--Swap Category Z Transactions
----------------------------------------------------------------------------------------------------------------
Transaction 1 i>2 i>3 i>4 i>5
----------------------------------------------------------------------------------------------------------------
5,000,000 25,000,000 50,000,000 1.05 3,243,571
----------------------------------------------------------------------------------------------------------------
[[Page 32935]]
Transaction 6 i>7 i>8 i>9 i>10
----------------------------------------------------------------------------------------------------------------
100,000,000 525,000,000 10,000,000 15,000,000 25,000,000
----------------------------------------------------------------------------------------------------------------
Transaction 11 i>12 i>13 i>14 i>15
----------------------------------------------------------------------------------------------------------------
100,000,000 265,000,000 25,000,000 100,000,000 100,000,000
----------------------------------------------------------------------------------------------------------------
Transaction 16 i>17 i>18 i>19 i>20
----------------------------------------------------------------------------------------------------------------
100,000,000 150,000,000 50,000,000 100,000,000 50,000,000
----------------------------------------------------------------------------------------------------------------
Transaction 21 i>22 i>23 i>24 i>25
----------------------------------------------------------------------------------------------------------------
75,000,000 82,352,124 100,000,000 1,235,726 60,000,000
----------------------------------------------------------------------------------------------------------------
Transaction 26 i>27 i>28 i>29 i>30
----------------------------------------------------------------------------------------------------------------
100,000,000 50,000,000 50,000,000 100,000,000 100,000,000
----------------------------------------------------------------------------------------------------------------
Transaction 31 i>32 i>33 i>34 i>35
----------------------------------------------------------------------------------------------------------------
100,000,000 100,000,000 32,875,000 50,000,000 440,000,000
----------------------------------------------------------------------------------------------------------------
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.
Table C--Testing for Outliers in the Publicly Reportable Swap Transaction Data Set
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Log10 Average............................... 7.75 4*STDEV+Average............... 10.2
Log10 STDEV................................. 0.611359 Omitted Values................ None
-------------------------------------------------
4* STDEV.................................... 2.45
----------------------------------------------------------------------------------------------------------------
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 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
[[Page 32936]]
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] TR31MY13.000
30 = Notional amount of swap transaction
i = Index variable of summation for the set
Ti = Indicator for publicly reportable swap transactions
PRSTNV = Sum total of the notional amounts of all remaining publicly
reportable swap transactions in the set
PRSTNV = 2,989,706,421
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 PRSTi[squ]. Table D below
reflects the ranking of the remaining publicly reportable swap
transactions based on their notional amount sizes for this example.
PRSTi = 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 PRSTi.
A running sum would be calculated by adding together the ranked and
ordered publicly reportable swap transactions from step 5 (PRSTi) in
least to greatest order. The calculations of running sum values with
respect to this example are reflected in Table D below.
RS Values = Running sum values
Table D--PRSTi Values and RS Values
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rank Order 1 i>2 i>3 i>4 i>5
PRSTi Values........................................ 1,235,726 3,243,571 5,000,000 10,000,000 15,000,000
RS Values........................................... 1,235,726 4,479,297 9,479,297 19,479,297 34,479,297
Rank Order 6 i>7 i>8 i>9 i>10
PRSTi Values........................................ 25,000,000 25,000,000 32,875,000 50,000,000 50,000,000
RS Values........................................... 59,479,297 84,479,297 117,354,297 167,354,297 217,354,297
Rank Order 11 i>12 i>13 i>14 i>15
PRSTi Values........................................ 50,000,000 50,000,000 50,000,000 60,000,000 82,352,124
RS Values........................................... 267,354,297 317,354,297 367,354,297 427,354,297 509,706,421
Rank Order 16 i>17 i>18 i>19 i>20
PRSTi Values........................................ 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
RS Values........................................... 609,706,421 709,706,421 809,706,421 909,706,421 1,009,706,421
Rank Order 21 i>22 i>23 i>24 i>25
PRSTi Values........................................ 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
RS Values........................................... 1,109,706,421 1,209,706,421 1,309,706,421 1,409,706,421 1,509,706,421
Rank Order 26 i>27 i>28 i>29 i>30
PRSTi Values........................................ 100,000,000 150,000,000 265,000,000 440,000,000 525,000,000
RS Values........................................... 1,609,706,421 1,759,706,421 2,024,706,421 2,464,706,421 2,989,706,421
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 Further Block Proposal
------------------------------------------------------------------------
Acronym/Abbreviation Commenter
------------------------------------------------------------------------
Abbott.................................... Abbott, Robert.
AFR....................................... Americans for Financial
Reform.
ABC....................................... American Benefits Counsel.
Arbor..................................... Arbor Research & Trading,
Inc.
AII....................................... Association of Institutional
Investors.
Barclays.................................. Barclays Bank PLC.
Barnard................................... Barnard, Chris.
Better Markets............................ Better Markets, Inc.
CIEBA..................................... Committee on the Investment
of Employee Benefit Assets.
CME Group................................. CME Group Inc.
[[Page 32937]]
CRT....................................... CRT Capital Group LLC.
Currenex.................................. Currenex, Inc.
EEI....................................... Edison Electric Institute.
FIA....................................... Futures Industry Association
Principle Traders Group.
Freddie................................... Freddie Mac.
GFMA...................................... Global Foreign Exchange
Division of the Global
Financial Markets
Association.
ICAP Energy............................... ICAP Energy LLC.
ICAP...................................... ICAP North America Inc.
ISDA/SIFMA................................ International Swaps and
Derivatives Association and
the Securities Industry and
Financial Markets
Association.
ICI....................................... Investment Company
Institute.
Javelin................................... Javelin Capital Markets,
LLC.
Jefferies................................. Jefferies & Co., Inc.
JPM....................................... J.P. Morgan.
Kearney................................... Kearney, Timothy.
Kinetix................................... Kinetix Trading Solutions.
MFA....................................... Managed Funds Association.
Morgan Stanley............................ Morgan Stanley.
ODEX...................................... ODEX Group.
Parascandola.............................. Parascandola, James.
Parity.................................... Parity Energy, Inc.
Pierpont.................................. Pierpont Securities Holdings
LLC.
R.J. O'Brien.............................. R.J. O'Brien & Associates,
Inc.
SIFMA..................................... Asset Management Group of
the Securities Industry and
Financial Markets
Association.
SDMA...................................... Swaps & Derivatives Market
Association.
Spring Trading............................ Spring Trading, Inc.
Vanguard.................................. Vanguard.
WMBAA..................................... Wholesale Market Brokers'
Association, Americas.
Wolkoff................................... Wolkoff Consulting Services
LLC.
------------------------------------------------------------------------
List of Subjects in 17 CFR Part 43
Real-time public reporting, Block trades, Large notional off-
facility swaps, Reporting and recordkeeping requirements.
Accordingly, for the reasons discussed in the preamble, the
Commodity Futures Trading Commission amends 17 CFR part 43 as follows:
PART 43--REAL-TIME PUBLIC REPORTING
0
1. The authority citation for part 43 is revised to read as follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
0
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, the 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.
* * * * *
0
3. Amend Sec. 43.4 as follows:
0
A. Revise paragraph (d)(4)(i);
0
B. Revise paragraph (d)(4)(ii)(B);
0
C. Add paragraph (d)(4)(iii);
0
D. Revise paragraph (h).
The revisions and addition read as follows:
Sec. 43.4 Swap transaction and pricing data to be publicly
disseminated in real-time.
* * * * *
(d) * * *
(4) * * *
(i) A registered swap data repository shall publicly disseminate
swap transaction and pricing data for publicly reportable swap
transactions in the other commodity asset class in the manner described
in paragraphs (d)(4)(ii) and (d)(4)(iii) of this section.
(ii) * * *
(B) Any publicly reportable swap transaction that is economically
related to one of the contracts described in Appendix B of this part;
or
* * * * *
[[Page 32938]]
(iii) The underlying assets of swaps in the other commodity asset
class that are not described in paragraph (d)(4)(ii) of this section
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 of
this part.
* * * * *
(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) of this
section, 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 of this part or the respective
cap sizes in paragraphs (h)(1)(i) through (h)(1)(v) of this section. If
Appendix F of 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 (h)(1)(v) of this section.
(i) For swaps in the interest rate asset class, the publicly
disseminated notional or principal amount for a swap subject to the
rules in this part shall be:
(A) USD 250 million for 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 swap subject to the rules in this
part shall be USD 100 million.
(iii) For swaps in the equity asset class, the publicly
disseminated notional or principal amount for a swap subject to the
rules in this part shall be USD 250 million.
(iv) For swaps in the foreign exchange asset class, the publicly
disseminated notional or principal amount for a swap subject to the
rules in this part shall be USD 250 million.
(v) For swaps in the other commodity asset class, the publicly
disseminated notional or principal amount for a swap subject to the
rules in this part 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 one-year window 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 Sec.
43.6(c)(3) 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.
0
4. Add Sec. 43.6 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 paragraph (b) of
this section in accordance with the provisions set forth in paragraphs
(c), (d), (e), (f) or (h) of this section, 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 46 days;
(B) Greater than 46 days to three months (47 to 107 days);
(C) Greater than three months to six months (108 to 198 days);
(D) Greater than six months to one year (199 to 381 days);
(E) Greater than one to two years (382 to 746 days);
(F) Greater than two to five years (747 to 1,842 days);
(G) Greater than five to ten years (1,843 to 3,668 days);
(H) Greater than ten to 30 years (3,669 to 10,973 days); or
(I) 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;
(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 (4,582 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 one super-major currency
paired with one of the following:
(A) Another super major currency;
(B) A major currency; or
(C) A currency of Brazil, China, Czech Republic, Hungary, Israel,
Mexico, Poland, Russia, and Turkey; or
(ii) By unique currency combinations not included in paragraph
(b)(4)(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 of this part, by the relevant contract as referenced in
Appendix B of this part; or
(ii) For swaps that are not economically related to contracts in
Appendix B of this part, by the following futures-related swaps--
(A) CME Cheese;
(B) CBOT Distillers' Dried Grain;
(C) CBOT Dow Jones-UBS Commodity Index;
(D) CBOT Ethanol;
(E) CME Frost Index;
(F) CME Goldman Sachs Commodity Index (GSCI), (GSCI Excess Return
Index);
(G) NYMEX Gulf Coast Sour Crude Oil;
(H) CME Hurricane Index;
(I) CME Rainfall Index;
(J) CME Snowfall Index;
(K) CME Temperature Index;
(L) CME U.S. Dollar Cash Settled Crude Palm Oil; or
(iii) For swaps that are not covered in paragraphs (b)(5)(i) and
(b)(5)(ii) of this section, the relevant product type as referenced in
Appendix D of this part.
[[Page 32939]]
(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) 50-percent notional amount calculation. The Commission shall
use the following procedure in determining the 50-percent notional
amount calculation:
(i) Select all of the publicly reportable swap transactions within
a specific swap category using a one-year window of data beginning with
a minimum of one year's worth of data;
(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 50 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 50-percent notional
amount calculated in paragraph (c)(1)(iv) of this section;
(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 paragraph (c)(1)(viii) of this section.
(2) 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 one-year window of data beginning with
a minimum of one year's worth of data;
(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 paragraph (c)(2)(iv) of this section;
(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 paragraph (c)(2)(viii) of this section.
(3) 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 one-year window of data beginning with
a minimum of one year's worth of data;
(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 paragraph (c)(3)(iv) of this section;
(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 paragraph (c)(3)(viii) of this section.
(d) No appropriate minimum block sizes for swaps in the equity
asset class. 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 paragraphs (b)(1), (b)(2), (b)(4)(i), (b)(5)(i) or
(b)(5)(ii) of this section, the initial appropriate minimum block size
for such publicly reportable swap transaction shall be the appropriate
minimum block size that is in Appendix F of this part.
(2) Certain swaps in the foreign exchange and other commodity asset
classes. All swaps or instruments in the swap categories described in
paragraphs (b)(4)(ii) and (b)(5)(iii) of this section 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
paragraph (b)(5)(i) of this section that are economically related to a
futures contract in Appendix B of 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, the Commission shall establish, by swap categories, the post-
initial appropriate minimum block sizes as described in paragraphs
(f)(2) through (f)(5) of this section. 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 for certain swaps.
The Commission shall determine post-initial appropriate minimum block
sizes for the swap categories described in paragraphs (b)(1), (b)(2),
(b)(4)(i) and (b)(5) of this section by utilizing a one-year window 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) Certain swaps in the foreign exchange asset class. All swaps or
instruments in the swap category described in paragraph (b)(4)(ii) of
this section shall be eligible to be treated as a block trade or large
notional off-facility swap, as applicable.
(4) Commission publication of post-initial appropriate minimum
block sizes. The Commission shall publish the appropriate minimum block
sizes determined pursuant to paragraph (f)(1) of this section on its
Web site at http://www.cftc.gov.
(5) 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 paragraph (f)(1)
of this
[[Page 32940]]
section 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 this part.
(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 a swap 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 reference price's 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,
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.
(6) Aggregation. Except as otherwise stated in this paragraph, the
aggregation of orders for different accounts in order to satisfy the
minimum block trade size or the cap size requirement is prohibited.
Aggregation is permissible on a designated contract market or swap
execution facility if done by a person who:
(i) (A) Is a commodity trading advisor registered pursuant to
Section 4n of the Act, or exempt from registration under the Act, or a
principal thereof, who has discretionary trading authority or directs
client accounts,
(B) Is an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(2)(v) of this chapter, or
(C) Is a foreign person who performs a similar role or function as
the persons described in paragraphs (h)(6)(i)(A) or (h)(6)(i)(B) of
this section and is subject as such to foreign regulation; and,
(ii) Has more than $25,000,000 in total assets under management.
(i) Eligible Block Trade Parties.
(1) Parties to a block trade must be ``eligible contract
participants,'' as defined in Section 1a(18) of the Act and the
Commission's regulations. However, a designated contract market may
allow:
(i) A commodity trading advisor registered pursuant to Section 4n
of the Act, or exempt from registration under the Act, or a principal
thereof, who has discretionary trading authority or directs client
accounts,
(ii) An investment adviser who has discretionary trading authority
or directs client accounts and satisfies the criteria of Sec.
4.7(a)(2)(v) of this chapter, or
(iii) a foreign person who performs a similar role or function as
the persons described in paragraphs (i)(1)(i) or (ii) of this section
and is subject as such to foreign regulation, to transact block trades
for customers who are not eligible contract participants if such
commodity trading advisor, investment adviser or foreign person has
more than $25,000,000 in total assets under management.
(2) A person transacting a block trade on behalf of a customer must
receive prior written instruction or consent from the customer to do
so. Such instruction or consent may be provided in the power of
attorney or similar document by which the customer provides the person
with discretionary trading authority or the authority to direct the
trading in its account.
0
5. Add Sec. 43.7 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 and publish 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
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.
0
6. Amend Appendix B to Part 43 to add the following contracts under the
heading ``Energy'' after the existing listing for ``New York Mercantile
Exchange New York Harbor Heating Oil'':
Appendix B to Part 43--Enumerated Physical Commodity Contracts and
Other Contracts
* * * * *
[[Page 32941]]
Energy
* * * * *
ICE Futures SP-15 Day-Ahead Peak Fixed Price
ICE Futures SP-15 Day-Ahead Off-Peak Fixed Price
ICE Futures PJM Western Hub Real Time Peak Fixed Price
ICE Futures PJM Western Hub Real Time Off-Peak Fixed Price
ICE Futures Mid-Columbia Day-Ahead Peak Fixed Price
ICE Futures Mid-Columbia Day-Ahead Off-Peak Fixed Price
Chicago Basis
HSC Basis
Socal Border Basis
Waha Basis
ICE Futures AB NIT Basis
NWP Rockies Basis
PG&E Citygate Basis
* * * * *
0
7. Add Appendix D to Part 43 to read as follows:
Appendix D to Part 43--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
0
8. Add Appendix E to Part 43 to read as follows:
Appendix E to Part 43--Other Commodity Geographic Identification for
Public Dissemination Pursuant to Sec. 43.4(d)(4)(iii)
Registered swap data repositories are required by Sec.
43.4(d)(4)(iii) to publicly disseminate any specific delivery point
or pricing point associated with publicly reportable swap
transactions in the ``other commodity'' asset class pursuant to
Tables E1 and E2 in this appendix. 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 in this appendix. 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 in this appendix.
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
Florida Reliability Coordinating Council (FRCC)
Midwest Reliability Organization (MRO)
Northeast Power Coordinating Council (NPCC)
Reliability First Corporation (RFC)
SERC Reliability Corporation (SERC)
Southwest Power Pool, RE (SPP)
Texas Regional Entity (TRE)
Western Electricity Coordinating Council (WECC)
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
Country or Sub-Region
North America (Other than U.S.)
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)
[[Page 32942]]
Central Asia
Eastern Asia
Western Asia
Southeast Asia
Australia/New Zealand/Pacific Islands
0
9. Add Appendix F to Part 43 to read as follows:
Appendix F to Part 43--Initial Appropriate Minimum Block Sizes by Asset
Class for Block Trades and Large Notional Off-Facility Swaps
------------------------------------------------------------------------
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 50% Notional (in
Currency group Tenor greater than to millions)
----------------------------------------------------------------------------------------------------------------
Super-Major............................ .......................... 46 days.................. 6,400
Super-Major............................ 46 days................... Three months (107 days).. 2,100
Super-Major............................ Three months (107 days)... Six months (198 days).... 1,200
Super-Major............................ Six months (198 days)..... One year (381 days)...... 1,100
Super-Major............................ One year (381 days)....... Two years (746 days)..... 460
Super-Major............................ Two years (746 days)...... Five years (1,842 days).. 240
Super-Major............................ Five years (1,842 days)... Ten years (3,668 days)... 170
Super-Major............................ Ten years (3,668 days).... 30 years (10,973 days)... 120
Super-Major............................ 30 years (10,973 days).... ......................... 67
Major.................................. .......................... 46 days.................. 2,200
Major.................................. 46 days................... Three months (107 days).. 580
Major.................................. Three months (107 days)... Six months (198 days).... 440
Major.................................. Six months (198 days)..... One year (381 days)...... 220
Major.................................. One year (381 days)....... Two years (746 days)..... 130
Major.................................. Two years (746 days)...... Five years (1,842 days).. 88
Major.................................. Five years (1,842 days)... Ten years (3,668 days)... 49
Major.................................. Ten years (3,668 days).... 30 years (10,973 days)... 37
Major.................................. 30 years (10,973 days).... ......................... 15
Non-Major.............................. .......................... 46 days.................. 230
Non-Major.............................. 46 days................... Three months (107 days).. 230
Non-Major.............................. Three months (107 days)... Six months (198 days).... 150
Non-Major.............................. Six months (198 days)..... One year (381 days)...... 110
Non-Major.............................. One year (381 days)....... Two years (746 days)..... 54
Non-Major.............................. Two years (746 days)...... Five years (1,842 days).. 27
Non-Major.............................. Five years (1,842 days)... Ten years (3,668 days)... 15
Non-Major.............................. Ten years (3,668 days).... 30 years (10,973 days)... 16
Non-Major.............................. 30 years (10,973 days).... ......................... 15
----------------------------------------------------------------------------------------------------------------
Credit Swaps
----------------------------------------------------------------------------------------------------------------
Traded tenor less than or 50% Notional (in
Spread group (Basis Points) Traded tenor greater than equal to Millions)
----------------------------------------------------------------------------------------------------------------
Less than or equal to 175.............. .......................... Two years (746 days)..... 320
Less than or equal to 175.............. Two years (746 days)...... Four years (1,477 days).. 200
Less than or equal to 175.............. Four years (1,477 days)... Six years (2,207 days)... 110
Less than or equal to 175.............. Six years (2,207 days).... Eight years and six 110
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 ......................... 46
months (4,581 days).
Greater than 175 and less than or equal .......................... Two years (746 days)..... 140
to 350.
Greater than 175 and less than or equal Two years (746 days)...... Four years (1,477 days).. 82
to 350.
Greater than 175 and less than or equal Four years (1,477 days)... Six years (2,207 days)... 32
to 350.
Greater than 175 and less than or equal Six years (2,207 days).... Eight years and six 20
to 350. months (3,120 days).
Greater than 175 and less than or equal Eight years and six months Twelve years and six 26
to 350. (3,120 days). months (4,581 days).
Greater than 175 and less than or equal Twelve years and six ......................... 63
to 350. months (4,581 days).
Greater than 350....................... .......................... Two years (746 days)..... 66
[[Page 32943]]
Greater than 350....................... Two years (746 days)...... Four years (1,477 days).. 41
Greater than 350....................... Four years (1,477 days)... Six years (2,207 days)... 26
Greater than 350....................... Six years (2,207 days).... Eight years and six 13
months (3,120 days).
Greater than 350....................... Eight years and six months Twelve years and six 13
(3,120 days). months (4,581 days).
Greater than 350....................... Twelve years and six ......................... 41
months (4,581 days).
----------------------------------------------------------------------------------------------------------------
Foreign Exchange Swaps
--------------------------------------------------------------------------------------------------------------------------------------------------------
Super-major currencies
-----------------------------------------------------------------------
GBP (British JPY (Japanese USD (U.S.
EUR (Euro) pound) yen) dollar)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Super-major currencies......................... EUR............................ 6,250,000 6,250,000 18,750,000
GBP............................ 6,250,000* 6,250,000 6,250,000
JPY............................ 6,250,000* 6,250,000* 1,875,000,000
USD............................ 18,750,000* 6,250,000* 1,875,000,000*
Major currencies............................... AUD............................ 6,250,000* 0 10,000,000 10,000,000
CAD............................ 6,250,000* 0 10,000,000 10,000,000
CHF............................ 6,250,000* 6,250,000* 12,500,000 12,500,000
DKK............................ 0 0 0 0
KRW............................ 0 0 0 6,250,000,000
SEK............................ 6,250,000* 0 0 10,000,000
NOK............................ 6,250,000* 0 0 10,000,000
NZD............................ 0 0 0 5,000,000
ZAR............................ 0 0 0 25,000,000
Non-major currencies........................... BRL............................ 0 0 0 5,000,000
CZK............................ 200,000,000 0 0 200,000,000
HUF............................ 1,500,000,000 0 0 1,500,000,000
ILS............................ 0 0 0 50,000,000
MXN............................ 0 0 0 50,000,000
PLN............................ 25,000,000 0 0 25,000,000
RMB............................ 50,000,000 0 50,000,000 50,000,000
RUB............................ 0 0 0 125,000,000
TRY............................ 6,250,000* 0 0 10,000,000*
--------------------------------------------------------------------------------------------------------------------------------------------------------
All values that do not have an asterisk are denominated in the currency of the left hand side.
All values that have an asterisk (*) are denominated in the currency indicated on the top of the table.
Other Commodity Swaps
----------------------------------------------------------------------------------------------------------------
Initial appropriate minimum
Related futures contract block size Units
----------------------------------------------------------------------------------------------------------------
............................ .......................................
AB NIT Basis (ICE)....................... 62,500...................... MMBtu
Brent Crude (ICE and NYMEX).............. 25,000...................... bbl.
Cheese (CME)............................. 400,000..................... lbs.
Class III Milk (CME)..................... NO BLOCKS................... .......................................
Cocoa (ICE and NYSE LIFFE and NYMEX)..... 1,000....................... metric tons
Coffee (ICE and NYMEX)................... 3,750,000................... lbs.
Copper (COMEX)........................... 625,000..................... lbs.
Corn (CBOT).............................. NO BLOCKS................... bushels
Cotton No. 2 (ICE and NYMEX)............. 5,000,000................... lbs.
Distillers' Dried Grain (CBOT)........... 1,000....................... short tons
Dow Jones-UBS Commodity Index (CBOT)..... 30,000 times index.......... dollars
Ethanol (CBOT)........................... 290,000..................... gallons
Feeder Cattle (CME)...................... NO BLOCKS................... .......................................
Frost Index (CME)........................ 200,000 times index......... euros
Frozen Concentrated Orange Juice (ICE)... NO BLOCKS................... .......................................
Gold (COMEX and NYSE Liffe).............. 2,500....................... troy oz.
Goldman Sachs Commodity Index (GSCI), 5,000 times index........... dollars
GSCI Excess Return Index (CME).
Gulf Coast Sour Crude Oil (NYMEX)........ 5,000....................... bbl.
Hard Red Spring Wheat (MGEX)............. NO BLOCKS................... .......................................
Hard Winter Wheat (KCBT)................. NO BLOCKS................... .......................................
Henry Hub Natural Gas (NYMEX)............ 500,000..................... MMBtu
HSC Basis (ICE and NYMEX)................ 62,500...................... MMBtu
Hurricane Index (CME).................... 20,000 times index.......... dollars
Chicago Basis (ICE and NYMEX)............ 62,500...................... MMBtu
[[Page 32944]]
............................ .......................................
Lean Hogs (CME).......................... NO BLOCKS................... .......................................
Light Sweet Crude Oil (NYMEX)............ 50,000...................... bbl.
Live Cattle (CME)........................ NO BLOCKS................... .......................................
Mid-Columbia Day-Ahead Off-Peak Fixed 250......................... MW/Hr.
Price (ICE).
Mid-Columbia Day-Ahead Peak Fixed Price 4,000....................... MW/Hr.
(ICE).
New York Harbor RBOB (Blendstock) 1,050,000................... gallons
Gasoline (NYMEX).
New York Harbor No. 2 Heating Oil (NYMEX) 1,050,000................... bbl.
NWP Rockies Basis (ICE and NYMEX)........ 62,500...................... MMBtu
Oats (CBOT).............................. NO BLOCKS................... .......................................
Palladium (NYMEX)........................ 1,000....................... troy oz.
PG&E Citygate Basis (ICE and NYMEX)...... 62,500...................... MMBtu
PJM Western Hub Real Time Off-Peak Fixed 3,900....................... MW/Hr.
Price (ICE).
PJM Western Hub Real Time Peak Fixed 8,000....................... MW/Hr.
Price (ICE).
Platinum (NYMEX)......................... 500......................... troy oz.
Rainfall Index (CME)..................... 10,000 times index.......... dollars
Rough Rice (CBOT)........................ NO BLOCKS................... .......................................
Silver (COMEX and NYSE Liffe)............ 125,000..................... troy oz.
Snowfall Index (CME)..................... 10,000 times index.......... dollars
Socal Border Basis (ICE and NYMEX)....... 62,500...................... MMBtu
Soybean (CBOT)........................... NO BLOCKS................... .......................................
Soybean Meal (CBOT)...................... NO BLOCKS................... .......................................
Soybean Oil (CBOT)....................... NO BLOCKS................... .......................................
SP-15 Day-Ahead Peak Fixed Price (ICE)... 4,000....................... MW/Hr.
SP-15 Day-Ahead Off-Peak Fixed Price 250......................... MW/Hr.
(ICE).
Sugar 11 (ICE and NYMEX) 5,000....................... metric tons
(futures).
Sugar 16 (ICE) (futures)........ NO BLOCKS................... .......................................
Temperature Index (CME).................. 400 times index............. currency units
U.S. Dollar Cash Settled Crude Palm Oil 250......................... metrics tons
(CME).
Waha Basis (ICE and NYMEX)............... 62,500...................... MMBtu
Wheat (CBOT)............................. NO BLOCKS................... .......................................
----------------------------------------------------------------------------------------------------------------
Issued in Washington, DC, on May 16, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy 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 final block rule for swaps, which is critical to
promoting transparency in this once opaque market. With this rule,
the public will benefit from seeing the price and volume of the
majority of swaps transactions in real time--as soon as
technologically practicable--after a trade is executed. Further,
with this rule the public will benefit from the competition that
will arise as buyers and sellers must transact on transparent
trading platforms.
The methodology for determining block sizes is appropriately
tailored to vary by asset class and by underlying referenced product
or rate.
The Commission also has established a phased-in approach for
setting and implementing appropriate minimum block sizes. During an
initial one-year period, block sizes in the interest rate and credit
asset classes will be set such that 50 percent of the notional
amount of a particular swap category will benefit from pre-trade and
post-trade transparency. Also during this initial period, the block
sizes for foreign exchange and other commodity asset classes will be
based upon the block sizes that designated contract markets have set
for economically related futures contracts.
After the initial period, the Commission will determine block
sizes using a methodology that relies on the data collected by swap
data repositories. Block sizes will be set such that 67 percent of
the notional amount of a particular swap category will benefit from
pre-trade transparency and enhanced post-trade transparency.
The rule also includes measures to protect the identities,
market positions and business transactions of swap counterparties
when their swap transactions and pricing are reported to the public.
[FR Doc. 2013-12133 Filed 5-30-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: May 31, 2013