Federal Register, Volume 77 Issue 124 (Wednesday, June 27, 2012)[Federal Register Volume 77, Number 124 (Wednesday, June 27, 2012)]
[Proposed Rules]
[Pages 38229-38236]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15481]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 43
RIN 3038-AD84
Rules Prohibiting the Aggregation of Orders To Satisfy Minimum
Block Sizes or Cap Size Requirements, and Establishing Eligibility
Requirements for Parties to Block Trades
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
issuing a notice of proposed rulemaking to add certain provisions to
part 43 of the Commission's regulations pertaining to block trades in
swap contracts. The provisions would: (i) Prohibit the aggregation of
orders for different trading accounts in order to satisfy the minimum
block size or cap size requirements, except for orders aggregated by
certain commodity trading advisors (``CTAs''), investment advisers and
foreign persons (as described in this release), if such person has more
than $25,000,000 in total assets under management (``AUM''); (ii)
provide that parties to a block trade must individually qualify as
eligible contract participants (``ECPs''), except where a designated
contract market allows certain CTAs, investment advisers and foreign
persons (as described in this release), to transact block trades for
customers who are not ECPs, if such CTA, investment adviser or foreign
person has more than $25,000,000 in total AUM; and (iii) require that
persons transacting block trades on behalf of customers must receive
prior written instruction or consent from the customer to do so.
DATES: Comments must be received on or before July 27, 2012.
ADDRESSES: You may submit comments, identified by RIN number [TBD], by
any of the following methods:
The agency's Web site: at http://comments.cftc.gov. Follow
the instructions for submitting comments through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that you believe is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec. 145.9 of the Commission's regulations.\1\
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\1\ See 17 CFR 145.9.
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Commenters to this notice of proposed rulemaking are requested to
refrain from providing comments with respect to the provisions in part
43 of the Commission's regulations that are beyond the scope of this
notice of proposed rulemaking. The Commission only plans to address
those comments that are responsive to the policies, merits and
substance of the proposed provisions set forth in this notice of
proposed rulemaking.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director,
Division of Market Oversight, 202-418-5453, [email protected]; Nadia
Zakir, Special Counsel, Division of Market Oversight, 202-418-5720,
[email protected]; Laurie Gussow, Attorney-Advisor, 202-418-7623,
[email protected]; George Pullen, Economist, Division of Market
Oversight, 202-418-6709, [email protected]; Esen Onur, Economist, Office
of the Chief Economist, 202-418-6146, [email protected]; or Herminio
Castro,
[[Page 38230]]
Counsel, Office of General Counsel, 202-418-6705, [email protected],
Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA''
or ``Act'') \4\ to establish a comprehensive, new regulatory framework
for swaps and security-based swaps. This legislation was enacted to
reduce risk, increase transparency and promote market integrity within
the financial system by, inter alia: (1) Providing for the registration
and comprehensive regulation of swap dealers (``SDs'') and major swap
participants (``MSPs''); (2) imposing mandatory clearing and trade
execution requirements on standardized derivative products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the Commission's rulemaking and enforcement authorities with
respect to, among others, all registered entities and intermediaries
subject to the Commission's oversight.
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\2\ See Public Law 111-203, 124 Stat. 1376 (2010).
\3\ The short title of Title VII of the Dodd-Frank Act is the
``Wall Street Transparency and Accountability Act of 2010.''
\4\ See 7 U.S.C. 1 et seq.
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Section 727 of the Dodd-Frank Act enacted section 2(a)(13) of the
CEA, which authorizes and requires the Commission to promulgate
regulations for the real-time public reporting of swap transaction and
pricing data.\5\ Among other things, 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\
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\5\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).
\6\ See CEA sections 2(a)(13)(E)(ii) and (iii).
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B. The Initial Proposal
In order to implement the various statutory requirements imposed
under section 2(a)(13) of the CEA, the Commission published an initial
notice of proposed rulemaking on December 7, 2010 (the ``Initial
Proposal'').\7\ As relevant to this notice of proposed rulemaking, the
Initial Proposal proposed: (1) Definitions for the terms ``large
notional off-facility swap'' and ``block trade''; \8\ (2) a method for
determining the appropriate minimum block sizes for large notional off-
facility swaps and block trades; \9\ and (3) a framework for timely
reporting of such transactions and trades.\10\
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\7\ See Real-Time Public Reporting of Swap Transaction Data, 75
FR 76,139 (Dec. 7, 2010), as corrected in Real-Time Public Reporting
of Swap Transaction Data Correction, 75 FR 76,930 (Dec. 10, 2010)
(``Initial Proposal'').
\8\ The Initial Proposal defined the term ``large notional
swap''. See proposed Sec. 43.2(l), 75 FR 76,171. The Adopting
Release finalized the term as ``large notional off-facility swap'',
to denote, in relevant part, that the swap is not executed pursuant
to SEF or DCM rules and procedures. See Sec. 43.2, 77 FR 1182, 1244
(Jan. 9, 2012) (``Adopting Release''). Specifically, the Adopting
Release defined the term as an ``off-facility swap that has a
notional or principal amount at or above the appropriate minimum
block size applicable to such publicly reportable swap transaction
and is not a block trade as defined in Sec. 43.2 of the
Commission's regulations.'' Id.
The final definition of ``block trade'' in the Adopting Release
is similar to how that term was defined in the Initial Proposal. See
proposed Sec. 43.2(f), 75 FR 76,171. The Adopting Release defines
the term ``block trade'' as a publicly reportable swap transaction
that: ``(1) [i]nvolves a swap that is listed on a [SEF or DCM]; (2)
[o]ccurs away from the [SEF's or DCM's] trading system or platform
and is executed pursuant to the [SEF's or DCM's] rules and
procedures; (3) has a notional or principal amount at or above the
appropriate minimum block size applicable to such swap; and (4) [i]s
reported subject to the rules and procedures of the [SEF or DCM] and
the rules described in [part 43], including the appropriate time
delay requirements set forth in Sec. 43.5.'' See Sec. 43.2, 77 FR
1,243.
\9\ See proposed Sec. 43.5, 75 FR 76174-76.
\10\ Proposed Sec. 43.5(k)(1) in the Initial Proposal provided
that the time delay for the public dissemination of data for a block
trade or large notional off-facility swap shall commence at the time
of execution of such trade or swap. See 75 FR 76,176. Proposed Sec.
43.5(k)(2) provided that the time delay for standardized block
trades and large notional off-facility swaps (i.e., swaps that fall
under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from
the time of execution. Id. The Initial Proposal did not provide
specific time delays for large notional off-facility swaps (i.e.,
swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,
proposed Sec. 43.5(k)(3) provided that such swaps shall be reported
subject to a time delay that may be prescribed by the Commission.
Id.
The Adopting Release established time delays for the public
dissemination of block trades and large notional off-facility swaps
in Sec. 43.5. See 77 FR 1247-49.
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Among other 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 ECPs,\11\ except that a
designated contract market (``DCM'') may allow a CTA acting in an asset
managerial capacity and registered pursuant to Section 4n of the Act,
or a principal thereof, including any investment adviser who satisfies
the criteria of Sec. 4.7(a)(2)(v), or a foreign person performing a
similar role or function and subject as such to foreign regulation, to
transact block trades for customers who are not eligible contract
participants (``non-ECPS''), if such CTA, investment adviser or foreign
person has more than $25,000,000 in total AUM. The proposed rule
further required that a person transacting a block trade on behalf of a
customer must receive written instruction or prior consent from the
customer to do so.
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\11\ See CEA Section 1a(18).
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Furthermore, proposed Sec. 43.5(m) of the Initial Proposal
prohibited the aggregation of orders for different trading accounts in
order to satisfy the minimum block size requirement, except if done on
a DCM by a CTA acting in an asset managerial capacity and registered
pursuant to Section 4n of the Act, or a principal thereof, including
any investment adviser who satisfies the criteria of Sec.
4.7(a)(2)(v), or a foreign person performing a similar role or function
and subject as such to foreign regulation, if such CTA, investment
adviser or foreign person has more than $25,000,000 in total AUM.
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.\12\
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\12\ 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.
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1. Comments in Response to the Initial Proposal
The Commission received four comment letters in response to the
proposed aggregation rule. The American Benefits Council and the
Committee on the Investment of Employee Benefit Assets stated that
qualified investment advisers who are not CTAs should be able to
aggregate block trade orders for different trading accounts.\13\
Tradeweb commented that the CTAs that trade on SEFs should also be
permitted to aggregate trades of behalf of their customers for purposes
of block trades.\14\ J.P. Morgan commented that the proposed rule
appears to reflect a concern that private negotiation offers less
protection to unsophisticated
[[Page 38231]]
investors than trading through the central market, 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.\15\ In related comments, the Wholesale Market
Brokers Association (Americas) (``WMBA'') commented that ``work-up'' or
``join-the-trade'' periods be permitted and recognized to satisfy the
block trade requirement.\16\
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\13\ The American Benefits Council and the Committee on the
Investment of Employee Benefit Assets comment letter at 3 (Feb. 7,
2011). The comment letter specifically requested that the rule be
revised such that the words ``including any'' from the second
sentence are deleted and replaced with the word ``an.''
\14\ Tradeweb comment letter at 5 (Feb. 7, 2011).
\15\ J.P. Morgan comment letter at 9, n. 13 (Jan. 12, 2011).
\16\ WMBA comment letter at 4-5 (Feb. 7, 2011) (commenting that
``the public dissemination of incremental activity that would
otherwise constitute a block trade could jeopardize identification
of counterparties and materially reduce market liquidity.'')
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C. The Adopting Release and Further Proposal
On January 9, 2012, the Commission issued a notice of final
rulemaking \17\ (``Adopting Release'') that finalized several
provisions that were proposed in the Initial Proposal pertaining to,
among other things, the reporting, public dissemination and
recordkeeping requirements applicable to certain swap transactions.\18\
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\17\ Real-Time Public Reporting of Swap Transaction Data, 77 FR
1,182 (Jan. 9, 2012).
\18\ Commenters are directed to the Adopting Release for a
discussion of the issues addressed therein. See id.
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Based on the public comments received in response to the Initial
Proposal, in the Adopting Release the Commission agreed that additional
analysis was necessary prior to issuance of final rules for appropriate
minimum block sizes, and accordingly determined not to make final its
proposed Sec. 43.5 rules specifying the criteria for determining block
trade sizes. Instead, the Commission intended to issue a separate
notice of proposed rulemaking that would specifically address the
appropriate criteria for determining appropriate minimum block trade
sizes in light of data and comments received.\19\ On March 15, 2012,
the Commission decided to further propose (``Further Proposal'')
certain other block trade provisions that were included with the
Initial Proposal.\20\
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\19\ See id. at 1,185.
\20\ Commenters are directed to the Further Proposal for a
discussion of the issues addressed therein. See ``Procedures to
Establish Appropriate Minimum Block Sizes for Large Notional Off-
Facility Swaps and Block Trades,'' 77 FR 15,460 (Mar. 15, 2012). The
comment period for the Further Proposal ended on May 14, 2012.
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After it issued the Further 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 instruction or consent from the customer to do
so, were inadvertently omitted from the Further Proposal. These
provisions are the subject of this notice of proposed rulemaking.
II. Notice of Proposed Rulemaking
A. Proposed Sec. 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 is permissible
if done on a DCM or SEF by a person who: (i)(A) is a CTA registered
pursuant to Section 4n of the Act 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 $25,000,000 in total AUM.
The prohibition of aggregation of orders for different trading
accounts in order to meet the minimum block size or cap size
requirements is an integral element in ensuring the integrity of block
trading principles, and in preserving the basis for the anonymity
associated with cap sizes. As defined in the Adopting Release, a block
trade is a publicly reportable transaction that: (1) Involves a swap
that is listed on a registered SEF or DCM; (2) occurs away from the
registered SEF's or DCM's trading system or platform (and is executed
pursuant to the rules of such SEF or DCM); (3) has a notional or
principal amount at or above the appropriate minimum block size
applicable to such swap; and (4) is reported subject to the rules and
procedures of the SEF or DCM and Commission regulations, including the
appropriate time delay requirements.\21\ While block transactions are
conducted pursuant to the rules of a SEF or DCM, by definition these
transactions occur away from the SEF's or DCM's trading system or
platform, where there is no pre-trade transparency. If too many trades
were permitted to be aggregated and thus executable as blocks, the CEA
objectives of increased transparency and price discovery for swaps
trading could be undermined.\22\ By prohibiting aggregation of orders
for different accounts to meet the minimum block size requirement, the
proposed rule would protect the principles of block trading, and would
help to prevent potential circumvention of exchange-trading and of the
real-time reporting obligations associated with non-block transactions.
By presumption, the aggregation of orders for different accounts to
meet the minimum block size threshold would be prohibited.
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\21\ See 77 FR 1,243.
\22\ J.P. Morgan Comment letter at 5 (Jan. 12, 2011).
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Indeed, in the futures market, all block trade rules approved by
the Commission have included an aggregation prohibition (with the
discrete exception of block trades done through certain CTAs).
Accordingly, in the futures market, where market participants have
engaged in block transactions for years, DCMs that permit block trading
have rules that prohibit the aggregation of orders for different
trading accounts to meet the minimum block size requirement.\23\
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\23\ The following DCMs have rules permitting block trading:
Cantor Futures Exchange, L.P. (rule IV-16); CBOE Futures Exchange
LLC (rule 415); Chicago Board of Trade (rule 526); CME (rule 526);
ELX Futures, L.P. (rule IV-16); Eris Exchange, LLC (rule 601); Green
Exchange, LLC (rule 602); ICE Futures (rule 4.31); Nasdaq OMX
Futures Exchange, Inc. (rule E23); New York Mercantile Exchange,
Inc. (rule 526); NYSE Liffe US, LLC (rule 423); and OneChicago LLC
Futures Exchange (rule 417). Each of the aforementioned DCMs also
have rules prohibiting aggregation of orders to meet minimum block
transaction size: Cantor Futures Exchange, L.P. (rule IV-16(K));
CBOE Futures Exchange LLC (rule 415(a)(i)); Chicago Board of Trade
(rule 526A); CME (rule 526A); ELX Futures, L.P. (rule IV-16(a));
Eris Exchange, LLC (rule 601(b)(1)); Green Exchange, LLC (rule
602(a)); ICE Futures (rule 4.31(a)(ii)(B)); Nasdaq OMX Futures
Exchange, Inc. (rule E23(d)); New York Mercantile Exchange, Inc.
(rule 526A); NYSE Liffe US, LLC (rule 423(a)(1)); and OneChicago LLC
Futures Exchange (rule 418(a)(i)).
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As proposed in this release, the rule also would prohibit
aggregation in order to meet the cap size requirements. A cap size is
defined in the Further Proposal as the maximum notional or principal
amount of a publicly reportable swap transaction that is publicly
disseminated.\24\ A transaction that meets the cap size requirement
would be eligible to mask the total size of the transaction if it
equals or exceeds the cap size for a given swap category.\25\ The
Commission adopted cap sizes in order to help to protect the anonymity
of counterparties' market positions and business transactions, and to
mitigate the potential impact that real-time public reporting of
extraordinarily large positions could have in reducing market
[[Page 38232]]
liquidity.\26\ By preventing aggregation of orders to meet the cap size
requirement, the proposed rule will help to ensure that cap sizes are
used for the specific purpose for which they are intended
(extraordinarily large positions), and will help to prevent potential
circumvention of the real-time reporting obligations.
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\24\ 77 FR 15,516.
\25\ 77 FR 15,489-90.
\26\ Id.
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The proposed rule further provides that aggregation of orders for
different trading accounts for purposes of the block size or cap size
requirements 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 similar role or function 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. As noted above, DCMs that
permit block trading in connection with futures contracts currently
prohibit aggregation of orders to meet the block size requirement, and
a majority of these DCMs have substantially similar rules that allow
aggregation in such context if done by certain CTAs, investment
advisers and foreign persons.\27\
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\27\ A majority of DCMs currently maintain similar rules
permitting certain CTAs, investment advisors and foreign persons to
aggregate. See, e.g., CME Rulebook, rule 526 (providing an exception
for block transactions by permitting aggregation if done by a CTA
registered or exempt from registration under the Act, including
without limitation, any investment adviser registered or exempt from
registration under the Investment Adviser's Act of 1940 * * *
provided that such advisers have total AUM exceeding $25 million and
the block trade is suitable for the customers of such advisors. See
also, CBOE Futures Exchange LLC (rule 415(a(i)); Chicago Board of
Trade (rule 526I); CME (rule 526I); ELX Futures, L.P. (rule IV-
16(a)); Eris Exchange, LLC (rule 601(b)(10)); Green Exchange, LLC
(rule 602(j)); ICE Futures ((rule 4.31(a)(ii)(B)); Nasdaq OMX
Futures Exchange, Inc., (rule E23); New York Mercantile Exchange,
Inc. (rule 526I); NYSE Liffe US, LLC (rule 423(a)(i)); and
OneChicago LLC Futures Exchange (rule 417(a)(i)).
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The Commission is seeking comments on whether this exception to the
prohibition of aggregation of orders is appropriate in the context of
the swaps market. The Commission seeks comments on whether such an
exception should be available to other categories of Commission
registrants, and if so, why? Additionally, the Commission seeks
comments on whether the $25 million AUM requirement for the specified
account controllers is appropriate in the context of block transactions
for swaps? Further, the Commission seeks comments on whether the $25
million AUM requirement should include only swaps assets, or be based
per asset class, or be different for the five asset classes of swaps?
In addition to these specific questions, the Commission requests
comments on all aspects of this notice of proposed rulemaking.
B. Proposed Sec. 43.6(i)--Eligible Block Trade Parties
The Commission is also proposing under new Sec. 43.6(i)(1) a
provision that describes the eligible parties to a block trade. The
proposed provision provides that parties to a block trade must be
``eligible contract participants,'' as that term is 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 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 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 $25,000,000 in total
AUM.\28\
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\28\ Parties that are non-ECPs may not enter into any swap
transactions, including blocks, except on or subject to the rules of
a DCM. Specifically, section 2(e) of the CEA provides 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, a board of trade designated as a
contract market under section 5.'' 7 U.S.C. 2(e).
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In the current futures market, all DCMs require that parties to
block trades must be ECPs. A majority of these DCMs permit certain
CTAs, investment advisers and foreign persons to transact a block trade
on behalf of their non-ECP customers. The proposed rule, including the
limited exception, is currently reflected in the rulebooks of numerous
DCMs that permit block trading in the futures market.\29\
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\29\ Most DCMs that permit block trading require that parties to
the block trade must be ECPs with a limited exception for CTAs. The
following DCMs have rules excepting CTAs from the requirement that
parties to a block trade must be ECPs: CBOE Futures Exchange LLC
(rule 415(a)(ii)); Chicago Board of Trade (rule 526I); CME (rule
526I); ELX Futures, L.P. (rule IV-16(c)); Eris Exchange, LLC (rule
601(b)(10)); Green Exchange, LLC (rule 602(a) and (j)); ICE Futures
(rule 4.31(a)(i)); Nasdaq OMX Futures Exchange, Inc., (rule E23(d));
New York Mercantile Exchange, Inc. (rule 526I); NYSE Liffe US, LLC
(rule 423(a)(ii)); and OneChicago LLC Futures Exchange (rule
417(a)(ii)).
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Proposed Sec. 43.6(i)(2) further provides 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 its account. This rule also is substantially similar to the block
trading rules maintained by existing DCMs.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\30\
The RFA focuses on direct impact to small businesses and not on
indirect impacts on these businesses, which may be tenuous and
difficult to discern.\31\ The CFTC believes that this proposal would
not have a significant economic impact on a substantial number of small
entities.
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\30\ See 5 U.S.C. 601 et seq.
\31\ See Whitman v. Am. Trucking Ass'ns, 531 U.S. 457 (2001);
Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985);
Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).
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1. Effect of the Proposed Rulemaking
This release proposes a rule that would prohibit the aggregation of
orders for different trading accounts in order to satisfy the minimum
block size, or cap size requirement. The proposed rule further provides
that aggregation is permissible if done on a DCM or SEF 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 similar role or function 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.
[[Page 38233]]
This release also proposes under new Sec. 43.6(i)(1) a provision
that describes the eligible parties to a block trade. The proposed rule
provides that parties to a block trade must be ``eligible contract
participants,'' as that term is defined under Section 1a(18) of the CEA
and the Commission's regulations. The proposed rule further provides
that a DCM may allow: (i) A CTA who is 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 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 on behalf of their customers who are not
eligible contract participants, if such CTA, investment adviser or
foreign person has more than $25,000,000 in total AUM.
The CFTC is of the view that this proposal may affect primarily the
following entities: DCMs, futures commission merchants (``FCMs''),
ECPs, swap dealers, major swap participants, certain CTAs, SEFs and
certain investment advisers. The majority of entities impacted by this
proposed rulemaking have been determined by the Commission not to be
small entities. To the extent that a small number of small entities may
be affected by the proposed rules, the Commission believes, as
described below, that the proposed rules would not have a significant
economic impact on a substantial number of such entities.
2. Specific Entities That May Be Small Entities
As noted above, the Commission has previously determined that DCMs,
FCMs, and ECPs are not small entities for purposes of the Regulatory
Flexibility Act.\32\ Certain other entities that may be affected by
this rulemaking, including SDs, MSPs and SEFs, have been certified by
the Commission not to be small entities in other recent rulemakings
implementing the requirements of the Dodd-Frank Act.\33\
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\32\ See, respectively and as indicated, 47 FR 18618, 18619,
Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); and, 66 FR
20740, 20743, Apr. 25, 2001 (ECPs).
\33\ See respectively, Registration of Swap Dealers and Major
Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers
and major swap participants); Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR
63732, 63746 (Oct. 18, 2010) (SEFs); Further Definition of ``Swap,''
``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 76 FR
29818, 29868 (May 23, 2011) (Products).
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a. Entities affected under Sec. 43.6(h)(6): FCMs, CTAs, and
investment advisers.
As noted above, the CFTC previously has determined that registered
FCMs are not small entities for purposes of the RFA based upon, among
other things, the registration requirements that FCMs must meet,
including certain minimum financial requirements that enhance the
protection of customers' segregated funds and protect the financial
condition of FCMs generally.\34\ With respect to certain CTAs \35\ and
investment advisers who would not be permitted to aggregate under the
proposed rule, the Commission notes that the same provisions embodied
in the proposed rule are currently required by DCM rules (under rules
accepted by the Commission) and thus, such entities currently must
comply with the same aggregation prohibition. Thus, all DCMs that
permit aggregation for purposes of the block size requirement, only
permit aggregation by CTAs, investment advisers and foreign persons
that have more than $25,000,000 in total AUM. Accordingly, the
Commission believes that this rule does not impact entities that
heretofore have not been able to aggregate. To the extent that certain
CTAs and investment advisers with less than $25,000,000 AUM are not
currently permitted to aggregate, the Commission's codification of
these rules would not have any significant economic impact on a
substantial number of small entities.
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\34\ See supra note 32.
\35\ The Commission may determine on a case-by-case basis
whether CTAs are not small entities for the purpose of the RFA based
upon a case by case determination. See 47 FR 18618, 18620 (Apr. 30,
1982).
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b. Entities affected under Sec. 43.6(i)(1): Certain non-ECP
participants on DCMs, certain investment advisors, and FCMs.
New Sec. 43.6(i)(1) provides that parties to a block trade must be
``eligible contract participants,'' \36\ as that term is defined under
Section 1a(18) of the CEA and Sec. 1.3 of the Commission's
regulations, except for certain CTAs, investment advisers or foreign
persons performing a similar role or function having more than
$25,000,000 in total AUM, which may transact block trades for customers
who are not ECPs. As indicated above, certain CTAs and investment
advisers that have less than $25,000,000 in AUM would not be covered
under the proposed rule because the provision embodied in the proposed
rule is substantially the same as is currently required by DCM rules
(under rules accepted by the Commission). Similarly, any non-ECP
participants who trade on DCMs also would be prohibited under current
DCM rules from directly entering into a block transaction unless their
qualifying CTA, investment adviser, or foreign person acts on their
behalf. To the extent that these entities are not currently permitted
to aggregate, the Commission's codification of these rules would not
have any significant economic impact on a substantial number of small
entities. Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed rules
will not have a significant economic impact on a substantial number of
small businesses. Nonetheless, the Commission specifically requests
comment on the economic impact that this notice of proposed rulemaking
may have on small entities.
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\36\ ECPs have been determined not to be small entities. See 66
FR 20740, 20743 (Apr. 25, 2001).
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B. Paperwork Reduction Act
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.\37\
The PRA applies to all information, ``regardless of form or format,''
that a government is ``obtaining, causing to be obtained, [or]
soliciting'' and requires ``disclosure to third parties or the public,
of facts or opinions,'' when the information collection calls for
``answers to identical reporting or recordkeeping requirements imposed,
on ten or more persons[.]'' \38\ The PRA requirements have been
determined to include not only mandatory but also voluntary information
collections, and include both written and oral communications.\39\
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\37\ See 44 U.S.C. 3501.
\38\ 44 U.S.C. 3502.3(A)(i).
\39\ See 5 CFR 1320.3(c)(1).
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The proposed rules would not impose any new recordkeeping or
information collection requirements, or other collections of
information that require approval of the Office of Management and
Budget (``OMB'') under the PRA. The proposed rules are covered by
existing collection requirements and would not change existing
collection
[[Page 38234]]
requirements.\40\ The Commission invites public comment on the accuracy
of its estimate that no additional recordkeeping or information
collection requirements or changes to existing collection requirements
would result from the rules proposed herein.
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\40\ See 77 FR 1182 (Jan. 9, 2012), as amended by the Further
Proposal. OMB has assigned control number 3038-0070 to the existing
collection of information, which is titled ``Part 43--Real-Time
Public Reporting.''
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C. Cost-Benefit Considerations
Section 15(a) of the CEA \41\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
or issuing an order under the CEA. 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.
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\41\ 7 U.S.C. 19(a).
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The baseline for the Commission's assessment of costs and benefits
attributable to its discretionary actions in this rulemaking is the
costs and benefits that would otherwise exist today (i.e., post-Dodd-
Frank Act enactment) absent this Commission action. The Commission
recognizes that before the Dodd-Frank Act, swap transactions were
executed over-the-counter and were not publicly reported. One of the
implications of the Dodd-Frank Act is that most swap transactions are
required to be publicly disseminated by SDRs as soon as technologically
practicable, unless the notional value of the swap transaction meets
the minimum block trade threshold.\42\ That is the baseline for the
Commission's proposed assessment of costs and benefits in this release.
The Commission proposes that costs and benefits with respect to block
trade thresholds are already accounted for in the Further Proposal and
that this rule only considers the additional costs and benefits
relevant to proposed Sec. 43.6(h)(6) and proposed Sec. 43.6(i).
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\42\ The Commission notes that for an initial interim period, as
outlined in Sec. 43.5 of the Adopting Release, all transactions
will be treated as block trades and will enjoy delayed reporting
temporarily.
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1. Costs and Benefits Relevant to Proposed Sec. 43.6(h)(6)--
Aggregation
The Commission is proposing Sec. 43.6(h)(6) to specify 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 proposed 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.
Costs
The Commission expects that there will be some incremental cost
attendant to compliance with proposed Sec. 43.6(h)(6), and seeks data
from the public in order to quantify the same. 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 proposes that
as a result of some advisors not being allowed to aggregate, there
might be some minimal unquantifiable cost associated with a decrease in
competition among such traders in the market. The Commission seeks
comment on these and any other costs that may result from this
proposal. In particular, and as noted above, the WMBA claimed in its
comment letter that ``work-up'' or ``join-the-trade'' periods be
permitted to satisfy the block trade requirements, and that ``the
public dissemination of incremental activity that would otherwise
constitute a block trade could jeopardize identification of
counterparties and materially reduce market liquidity.'' \43\ The
Commission seeks comment on the costs and benefits of the rules
proposed in this release with respect to the specific implications
claimed by WMBA.
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\43\ WMBA comment letter at 4-5 (Feb. 7, 2011).
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Benefits
The proposed 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. The Commission seeks comment on these and any other
benefits that may result from this proposal.
Section 15(a) Factors
(1) Protection of market participants and the public.
The Commission believes that the proposed rule would protect market
participants from unfair practices by preventing trades that do not
meet the minimum block trade threshold from enjoying extended reporting
times. This requirement would mean that trades that are not
extraordinarily large, and hence, that do not need extra reporting time
would not qualify as block trades and would be made public as soon as
technologically practicable. Hence, the proposed rule would increase
transparency of non-block transactions, and thus, would protect market
participants by informing their trading determinations through
increased transparency and price discovery.
(2) 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 requirement would mean that a higher
number of trades would be eligible for real time reporting, and that
[[Page 38235]]
would increase market transparency as well as promote competition in
the swap markets. The rule also would 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 proposed rule on competition outweigh its negative effects.
(3) Price discovery.
The Commission expects the proposed 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 would result in enhanced swap market
price discovery, since market participants and the public would be able
to observe real-time pricing information for a higher percentage of
transactions in the market. In addition, the Commission expects that
the rule would 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.
(4) Sound risk management practices.
The Commission anticipates that the proposed criteria, if adopted,
would likely result in enhanced price discovery as discussed above.
With better and more accurate data, swap market participants would
likely be better able to measure and manage risk. The Commission
proposes 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 proposes 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.
(5) Other public interest considerations.
The Commission has not identified any other public interest
considerations regarding the proposed rule.
2. Costs and Benefits Relevant to Proposed Sec. 43.6(i)--Eligible
Block Trade Parties
Costs
Proposed Sec. 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 proposed 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 * * * 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.
Proposed Sec. 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 proposed
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.\44\
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\44\ Using wage rate estimates based on salary information for
the securities industry compiled by the Securities Industry and
Financial Markets Association (``SIFMA''), the estimate is
calculated as follows: Compliance manager at 2 hours. A senior
programmer's adjusted hourly wage is $77.77, estimated using the
following calculations:
(1) [(2009 salary + bonus) * (salary growth per professional
type, 2009-2010)] = Estimated 2010 total annual compensation. The
most recent data provided by the SIFMA report describe the 2009
total compensation (salary + bonus) by professional type, the growth
in base salary from 2009 to 2010 for each professional type, and the
2010 base salary for each professional type; thus, the Commission
estimated the 2010 total compensation for each professional type,
but, in the absence of similarly granular data on salary growth or
compensation from 2010 to 2011 and beyond, did not estimate dollar
costs beyond 2010.
(2) [(Estimated 2010 total annual compensation)/(1,800 annual
work hours)] = Hourly wage per professional type.
(3) [(Hourly wage) * (Adjustment factor for overhead and other
benefits, which the Commission has estimated to be 1.3)] = Adjusted
hourly wage per professional type.
(4) [(Adjusted hourly wage) * (Estimated hour burden for
compliance)] = Dollar cost of compliance for each hour burden
estimate per professional type.
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Benefits
The Commission has determined that the benefits of proposed Sec.
43.6(i) are significant. The proposed rule, if adopted, would allow
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 would 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.
Section 15(a) Factors
(1) Protection of market participants and the public.
The Commission does not anticipate the proposed rule to have any
significant effect on the protection of market participants and the
public.
(2) Efficiency, competitiveness, and financial integrity of the
futures markets.
The Commission expects the proposed 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
[[Page 38236]]
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 would also serve to increase liquidity, as well as competition,
in that market.
(3) Price discovery.
The Commission does not anticipate the proposed rule to have any
significant effect on price discovery in the market.
(4) Sound risk management practices.
The Commission does not anticipate the proposed rule to have any
significant effect on risk management practices.
(5) Other public interest considerations.
The Commission has not identified any other public interest
considerations regarding the proposed rule.
The Commission requests comments on its cost and benefit
considerations with respect to the proposed rule, and any alternatives.
The Commission specifically requests that commenters provide data from
which the Commission may quantify the costs or benefits of the proposed
rule.
IV. Rule Text
List of Subjects in 17 CFR Part 43
Large notional off-facility trades, Block trades, Appropriate
minimum block sizes, Real-time public reporting, Public dissemination,
Cap size, Anonymity, Swap category.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 43 as set forth below:
PART 43--[AMENDED]
1. The authority citation for part 43 shall continue to read as
follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
2. Add section 43.6(h)(6) to part 43 to read as follows:
Sec. 43.6(h)(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 subparagraphs (A) or (B) and is subject as
such to foreign regulation; and,
(ii) Has more than $25,000,000 in total assets under management.
3. Add Section 43.6(i) to part 43 to read as follows:
Sec. 43.6(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 (i) or
(ii) of this paragraph 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.
Issued in Washington, DC, on June 20, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendix to Rules Prohibiting the Aggregation of Orders To Satisfy
Minimum Block Sizes or Cap Size Requirements, and Establishing
Eligibility Requirements for Parties to Block Trades
Commission Voting Summary
Note: The following appendix will not appear in the Code of
Federal Regulations.
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
[FR Doc. 2012-15481 Filed 6-26-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 27, 2012