Federal Register, Volume 76 Issue 147 (Monday, August 1, 2011)[Federal Register Volume 76, Number 147 (Monday, August 1, 2011)]
[Proposed Rules]
[Pages 45724-45730]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19362]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 23
RIN 3038-AD51
Clearing Member Risk Management
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing rules to implement new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act. These proposed rules address risk management for cleared trades by
futures commission merchants, swap dealers, and major swap participants
that are clearing members.
DATES: Submit comments on or before September 30, 2011.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD51,
by any of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Courier: Same as mail above.
Please submit your comments using only one method. RIN number,
3038-AD51, must be in the subject field of responses submitted via e-
mail, and clearly indicated on written submissions. All comments must
be submitted in English, or if not, accompanied by an English
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the CFTC 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 CFTC's regulations.\1\
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\1\ 17 CFR 145.9.
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The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of this action 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: John C. Lawton, Deputy Director and
Chief Counsel, 202-418-5480, [email protected], or Christopher A. Hower,
Attorney-Advisor, 202-418-6703, [email protected], Division of Clearing
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
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 amended the Commodity Exchange Act (CEA or Act) \3\
to establish a comprehensive new regulatory framework for swaps. The
legislation was enacted to reduce risk, increase transparency, and
promote market integrity within the financial system by, among other
things: (1) Providing for the registration and comprehensive regulation
of swap dealers and major swap participants; (2) imposing clearing and
trade execution requirements on standardized derivative products; (3)
creating rigorous 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. Title VII also
includes amendments to the federal securities laws to establish a
similar
[[Page 45725]]
regulatory framework for security-based swaps under the authority of
the Securities and Exchange Commission (SEC).
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
\3\ 7 U.S.C. 1 et seq.
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II. Proposed Regulations
A. Introduction
A fundamental premise of the Dodd-Frank Act is that the use of
properly regulated central clearing can reduce systemic risk. The
Commission has proposed extensive regulations addressing open access
and risk management at the derivatives clearing organization (DCO)
level.\4\ The Commission also has proposed regulations addressing risk
management for swap dealers (SDs) and major swap participants
(MSPs).\5\
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\4\ See, e.g., 76 FR 3698 (Jan. 20, 2011) (Risk Management
Requirements for Derivatives Clearing Organizations). These proposed
regulations include a requirement that a DCO adopt rules addressing
each clearing member's risk management policies and procedures. See
proposed Sec. 39.13(h)(5).
\5\ See, e.g., 75 FR 91397 (Nov. 23, 2010) (Regulations
Establishing Duties of Swap Dealers and Major Swap Participants).
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Clearing members provide the portals through which market
participants gain access to DCOs as well as the first line of risk
management. Accordingly, the Commission is proposing regulations to
facilitate customer access to clearing and to bolster risk management
at the clearing member level. The proposal addresses risk management
for cleared trades by FCMs and SDs and MSPs that are clearing members.
B. Clearing Member Risk Management
Section 3(b) provides that one of the purposes of the Act is to
ensure the financial integrity of all transactions subject to the Act
and to avoid systemic risk. Section 8a(5) authorizes the Commission to
promulgate such regulations that it believes are reasonably necessary
to effectuate any of the provisions or to accomplish any of the
purposes of the Act. Risk management systems are critical to the
avoidance of systemic risks.
Section 4s(j)(2) requires each SD and MSP to have risk management
systems adequate for managing its business. Section 4s(j)(4) requires
each SD and MSP to have internal systems and procedures to perform any
of the functions set forth in Section 4s.
Section 4d requires FCMs to register with the Commission. It
further requires FCMs to segregate customer funds. Section 4f requires
FCMs to maintain certain levels of capital. Section 4g establishes
reporting and recordkeeping requirements for FCMs.
These provisions of law and Commission regulations promulgated
pursuant to these provisions create a web of obligations designed to
secure the financial integrity of the markets and the clearing system,
to avoid systemic risk, and to protect customer funds. Effective risk
management by FCMs is essential to achieving these goals. For example,
a poorly managed position in the customer account can cause an FCM to
become undersegregated. A poorly managed position in the proprietary
account can cause an FCM to fall out of compliance with capital
requirements.
Even more significantly, a failure of risk management can cause an
FCM to become insolvent and default to a DCO. This can disrupt the
markets and the clearing system and harm customers. Such failures have
been predominately attributable to failures in risk management.\6\
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\6\ See, e.g., the failure of Volume Investors Corporation in
1986, the failure of Griffin Trading Company in 1998, and the
failure of Klein & Company Futures, Inc. in 2000.
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As noted previously, the Dodd-Frank Act requires the increased use
of central clearing. In particular, Section 2(h) establishes procedures
for the mandatory clearing of certain swaps. As stated in the Senate
Committee report: ``Increasing the use of central clearinghouses * * *
will provide safeguards for American taxpayers and the financial system
as a whole.\7\
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\7\ S. Rep. No. 111-176, at 32 (2010) (report of the Senate
Committee on Banking, Housing, and Urban Affairs).
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The Commission has proposed extensive risk management standards at
the DCO level. Given the increased importance of clearing and the
expected entrance of new products and new participants into the
clearing system, the Commission believes that enhancing the safeguards
at the clearing member level is necessary as well.
Bringing swaps into clearing will increase the magnitude of the
risks faced by clearing members. In many cases, it will change the
nature of those risks as well. Many types of swaps have their own
unique set of risk characteristics. The Commission believes that the
increased concentration of risk in the clearing system combined with
the changing configuration of the risk warrant additional vigilance not
only by DCOs but by clearing members as well.
FCMs generally have extensive experience managing the risk of
futures. They generally have less experience managing the risks of
swaps. The Commission believes that it is a reasonable precaution to
require that certain safeguards be in place. It would ensure that FCMs,
who clear on behalf of customers, are subject to standards at least as
stringent as those applicable to SDs and MSPs, who clear only for
themselves. Failure to require SDs, MSPs, and FCMs that are clearing
members to maintain such safeguards would frustrate the regulatory
regime established in the CEA, as amended by the Dodd-Frank Act.
Accordingly, the Commission believes that applying the risk-management
requirements in the proposed rules to SDs, MSPs, and FCMs that are
clearing members are reasonably necessary to effectuate the provisions
and to accomplish the purposes of the CEA.
Proposed Sec. 1.73 would apply to clearing members that are FCMs;
proposed Sec. 23.609 would apply to clearing members that are SDs or
MSPs. These provisions would require these clearing members to have
procedures to limit the financial risks they incur as a result of
clearing trades and liquid resources to meet the obligations that
arise. The proposal would require clearing members to:
(1) Establish credit and market risk-based limits based on position
size, order size, margin requirements, or similar factors;
(2) Use automated means to screen orders for compliance with the
risk-based limits;
(3) Monitor for adherence to the risk-based limits intra-day and
overnight;
(4) Conduct stress tests of all positions in the proprietary
account and all positions in any customer account that could pose
material risk to the futures commission merchant at least once per
week;
(5) Evaluate its ability to meet initial margin requirements at
least once per week;
(6) Evaluate its ability to meet variation margin requirements in
cash at least once per week;
(7) Evaluate its ability to liquidate the positions it clears in an
orderly manner, and estimate the cost of the liquidation at least once
per month; and
(8) Test all lines of credit at least once per quarter.
Each of these items has been observed by Commission staff as an
element of an existing sound risk management program at a DCO or an
FCM.
The Commission does not intend to prescribe the particular means of
fulfilling these obligations. As is the case with DCOs, clearing
members will have flexibility in developing procedures that meet their
needs. For example, items (1) and (2) could be addressed through simple
numerical limits on order or position size or through more complex
margin-based limits. Further examples could include
[[Page 45726]]
price limits to reject orders that are too far away from the market, or
limits on the number of orders that could be placed in a short time.
The following are examples of tools that could be used to monitor
for risk and to mitigate it:
--The ability to see all working and filled orders for intraday risk
management;
--A ``kill button'' that cancels all open orders for an account and
disconnects electronic access.
The Commission believes that these proposals are consistent with
international standards. In August 2010, the International Organization
of Securities Commissions issued a report entitled ``Direct Electronic
Access to Markets.'' \8\ The report set out a number of principles to
guide markets, regulators, and intermediaries. Principle 6 states that:
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\8\ The report can be found at http://www.iosco.org.
A market should not permit DEA [direct electronic access] unless
there are in place effective systems and controls reasonably
designed to enable the management of risk with regard to fair and
orderly trading including, in particular, automated pre-trade
controls that enable intermediaries to implement appropriate trading
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limits.
Principle 7 states that:
Intermediaries (including, as appropriate, clearing firms)
should use controls, including automated pre-trade controls, which
can limit or prevent a DEA Customer from placing an order that
exceeds a relevant intermediary's existing position or credit
limits.
Stress tests are an essential risk management tool. The purpose in
conducting stress tests is to determine the potential for significant
losses in the event of extreme market events and the ability of traders
and clearing members to absorb the losses. As was the case with the DCO
risk management proposal, the Commission does not intend to prescribe
the manner in which clearing members conduct stress tests. Rather, the
Commission would monitor to determine whether clearing members were
routinely conducting stress tests reasonably designed for the types of
risk the clearing members and their customers face.
The proposal also would require clearing members to evaluate their
ability to meet calls for initial and variation margin. This includes
testing for liquidity of financial resources available to cover
exposures due to market events. Routine testing of this sort diminishes
the chance of a default based on liquidity problems.
Each clearing member also would be required to evaluate
periodically its ability to liquidate, in an orderly manner, the
positions in the proprietary and customer accounts and estimate the
cost of the liquidation. In recent years, Commission staff has observed
instances where a trader was unable to meet its financial obligations
and the FCM had to assume responsibility for the trader's portfolio.
Under these conditions, an FCM would normally liquidate the portfolio
promptly. In some instances, however, where the portfolio contained
large and complex options positions, the FCM found that it was not easy
to liquidate. The Commission believes that clearing members should
periodically review portfolios to ensure that they have the ability to
liquidate them and to estimate the cost of such liquidation. The
exercise should also address the ability of the FCM to put on
appropriate hedges to mitigate risk pending liquidation. Such an
exercise would take into account the size of the positions, the
concentration of the positions in particular markets, and the liquidity
of the markets.
Finally, the proposal would require each clearing member to
establish written procedures to comply with this regulation and to keep
records documenting its compliance. The Commission believes that these
are important elements of a good risk management program.
The Commission requests comments on all aspects of the risk
management proposal. In particular the Commission requests comment on:
The extent to which each DCO already (i) Requires clearing
member FCMs, SDs, and MSPs to have each component, and (ii) audits
compliance with such requirement;
The extent to which each component has otherwise been
incorporated into exsisting risk management systems of clearing member
FCMs, SDs, and MSPs; and
The potential costs and benefits of each component.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\9\ The
Commission previously has established certain definitions of ``small
entities'' to be used in evaluating the impact of its regulations on
small entities in accordance with the RFA.\10\ The proposed regulations
would affect FCMs, DCOs, SDs, and MSPs.
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\9\ 5 U.S.C. 601 et seq.
\10\ 47 FR 18618, Apr. 30, 1982.
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The Commission previously has determined, however, that FCMs should
not be considered to be small entities for purposes of the RFA.\11\ The
Commission's determination was based, in part, upon the obligation of
FCMs to meet the minimum financial requirements established by the
Commission to enhance the protection of customers' segregated funds and
protect the financial condition of FCMs generally.\12\ The Commission
also has previously determined that DCOs are not small entities for the
purpose of the RFA.\13\
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\11\ Id. at 18619.
\12\ Id.
\13\ See 66 FR 45605, 45609, Aug. 29, 2001.
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SDs and MSPs are new categories of registrants. Accordingly, the
Commission has not previously addressed the question of whether such
persons are, in fact, small entities for purposes of the RFA. Like
FCMs, SDs will be subject to minimum capital and margin requirements
and are expected to comprise the largest global financial firms. The
Commission is required to exempt from SD registration any entities that
engage in a de minimis level of swap dealing in connection with
transactions with or on behalf of customers. The Commission anticipates
that this exemption would tend to exclude small entities from
registration. Accordingly, for purposes of the RFA for this rulemaking,
the Commission is hereby proposing that SDs not be considered ``small
entities'' for essentially the same reasons that FCMs have previously
been determined not to be small entities and in light of the exemption
from the definition of SD for those engaging in a de minimis level of
swap dealing.
The Commission also has previously determined that large traders
are not ``small entities'' for RFA purposes.\14\ In that determination,
the Commission considered that a large trading position was indicative
of the size of the business. MSPs, by statutory definition, maintain
substantial positions in swaps or maintain outstanding swap positions
that create substantial counterparty exposure that could have serious
adverse effects on the financial stability of the United States banking
system or financial markets. Accordingly, for purposes of the RFA for
this rulemaking, the Commission is hereby proposing that MSPs not be
considered ``small entities'' for essentially the same reasons that
large traders have
[[Page 45727]]
previously been determined not to be small entities.
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\14\ Id. at 18620.
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations
will not have a significant economic impact on a substantial number of
small entities. The Commission invites the public to comment on whether
SDs and MSPs should be considered small entities for purposes of the
RFA.
B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \15\ imposes certain requirements
on Federal agencies (including the Commission) in connection with their
conducting or sponsoring any collection of information as defined by
the PRA. This proposed rulemaking would result in new collection of
information requirements within the meaning of the PRA. The Commission
therefore is submitting this proposal to the Office of Management and
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The title for this collection of information is ``Clearing
Member Position Risk Management.'' An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number. The
OMB has not yet assigned this collection a control number.
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\15\ 44 U.S.C. 3501 et seq.
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The collection of information under these proposed regulations is
necessary to implement certain provisions of the CEA, as amended by the
Dodd-Frank Act. Specifically, it is essential both for effective risk
management and for the efficient operation of trading venues among swap
dealers, major swap participants, and futures commission merchants. The
position risk management requirement established by the proposed rules
diminishes the chance for a default, thus ensuring the financial
integrity of markets as well as customer protection.
If the proposed regulations are adopted, responses to this
collection of information would be mandatory. The Commission will
protect proprietary information according to the Freedom of Information
Act and 17 CFR part 145, ``Commission Records and Information.'' In
addition, section 8(a)(1) of the CEA strictly prohibits the Commission,
unless specifically authorized by the CEA, from making public ``data
and information that would separately disclose the business
transactions or market positions of any person and trade secrets or
names of customers.'' The Commission is also required to protect
certain information contained in a government system of records
according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
Swap dealers, major swap participants, and futures commission
merchants would be required to develop and monitor procedures for
position risk management in accordance with proposed rules 1.73 and
23.609.
The annual burden associated with these proposed regulations is
estimated to be 524 hours, at an annual cost of $52,400 for each
futures commission merchant, swap dealer, and major swap participant.
Burden means the total time, effort, or financial resources expended by
persons to generate, maintain, retain, disclose, or provide information
to or for a federal agency. The Commission has characterized the annual
costs as initial costs because the Commission anticipates that the cost
burdens will be reduced dramatically over time as the documentation and
procedures required by the proposed regulations become increasingly
standardized within the industry.
This hourly burden primarily results from the position risk
management obligations that would be imposed by proposed regulations
1.73 and 23.609. Proposed 1.73 and 23.609 would require each futures
commission merchant, swap dealer, and major swap participant to
establish and enforce procedures to establish risk-based limits,
conduct stress testing, evaluate the ability to meet initial and
variation margin, test lines of credit, and evaluate the ability to
liquidate, in an orderly manner, the positions in the proprietary and
customer accounts and estimate the cost of the liquidation. The
Commission believes that each of these items is currently an element of
existing risk management programs at a DCO or an FCM. Accordingly, any
additional expenditure related to Sec. Sec. 1.73 and 23.609 likely
would be limited to the time initially required to review and, as
needed, amend, existing risk management procedures to ensure that they
encompass all of the required elements and to develop a system for
performing these functions as often as required.
In addition, proposed Sec. Sec. 1.73 and 23.609 would require each
futures commission merchant, swap dealer, and major swap participant to
establish written procedures to comply, and maintain records
documenting compliance. Maintenance of compliance procedures and
records of compliance is prudent business practice and the Commission
anticipates that swap dealers and major swap participants already
maintain some form of this documentation.
With respect to the required position risk management, the
Commission estimates that futures commission merchants, swap dealers,
and major swap participants will spend an average of 2 hours per
trading day, or 504 hours per year, performing the required tests. The
Commission notes that the specific information required for these tests
is of the type that would be performed in a prudent market
participant's ordinary course of business.
In addition to the above, the Commission anticipates that futures
commission merchants, swap dealers, and major swap participants will
spend an average of 16 hours per year drafting and, as needed, updating
the written policies and procedures to ensure compliance required by
proposed Sec. Sec. 1.73 and 23.609, and 4 hours per year maintaining
records of the compliance.
The hour burden calculations below are based upon a number of
variables such as the number of futures commission merchants, swap
dealers, and major swap participants in the marketplace and the average
hourly wage of the employees of these registrants that would be
responsible for satisfying the obligations established by the proposed
regulation.
There are currently 134 futures commission merchants based on
industry data. Swap dealers and major swap participants are new
categories of registrants. Accordingly, it is not currently known how
many swap dealers and major swap participants will become subject to
these rules, and this will not be known to the Commission until the
registration requirements for these entities become effective after
July 16, 2011, the date on which the Dodd-Frank Act becomes effective.
While the Commission believes there will be approximately 200 swap
dealers and 50 major swap participants, it has taken a conservative
approach, for PRA purposes, in estimating that there will be a combined
number of 300 swap dealers and major swap participants who will be
required to comply with the recordkeeping requirements of the proposed
rules. The Commission estimated the number of affected entities based
on industry data.
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, ``Financial
Managers,'' (which includes operations managers) that is employed by
the ``Securities and Commodity Contracts Intermediation
[[Page 45728]]
and Brokerage'' industry is $74.41.\16\ Because swap dealers, major
swap participants, and futures commission merchants include large
financial institutions whose operations management employees' salaries
may exceed the mean wage, the Commission has estimated the cost burden
of these proposed regulations based upon an average salary of $100 per
hour.
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\16\ http://www.bls.gov/oes/current/oes113031.htm.
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Accordingly, the estimated hour burden was calculated as follows:
Developing and Conducting Position Risk Management Procedures for Swap
Dealers and Major Swap Participants. This hourly burden arises from the
proposed requirement that swap dealers and major swap participants
establish and perform testing of clearing member risk management
procedures.
Number of registrants: 300.
Frequency of collection: Daily.
Estimated number of responses per registrant: 252 [252 trading
days].
Estimated aggregate number of responses: 75,600 [300 registrants x
252 trading days].
Estimated annual burden per registrant: 504 hours [252 trading days
x 2 hours per record].
Estimated aggregate annual hour burden: 151,200 hours [300
registrants x 252 trading days x 2 hours per record].
Developing Written Procedures for Compliance, and Maintaining
Records Documenting Compliance for Swap Dealers and Major Swap
Participants. This hourly burden arises from the proposed requirement
that swap dealers and major swap participants make and maintain records
documenting compliance related to clearing member risk management.
Number of registrants: 300.
Frequency of collection: As needed.
Estimated number of annual responses per registrant: 1.
Estimated aggregate number of annual responses: 300.
Estimated annual hour burden per registrant: 20 hours.
Estimated aggregate annual hour burden: 6,000 burden hours [300
registrants x 20 hours per registrant].
Developing and Conducting Position Risk Management Procedures for
Futures Commission Merchants: This hourly burden arises from the
proposed requirement that futures commission merchants establish and
perform testing of clearing member risk management procedures.
Number of registrants: 134.
Frequency of collection: Daily.
Estimated number of responses per registrant: 252 [252 trading
days].
Estimated aggregate number of responses: 33,768 [134 registrants x
252 trading days].
Estimated annual burden per registrant: 504 hours [252 trading days
x 2 hours per record].
Estimated aggregate annual hour burden: 67,536 hours [134
registrants x 252 trading days x 2 hours per record].
Developing Written Procedures for Compliance, and Maintaining
Records Documenting Compliance for Futures Commission Merchants. This
hourly burden arises from the proposed requirement that futures
commission merchants make and maintain records documenting compliance
related to clearing member risk management.
Number of registrants: 134.
Frequency of collection: As needed.
Estimated number of annual responses per registrant: 1.
Estimated aggregate number of annual responses: 134.
Estimated annual hour burden per registrant: 20 hours.
Estimated aggregate annual hour burden: 2,680 burden hours [134
registrants x 20 hours per registrant].
Based upon the above, the aggregate hour burden cost for all
registrants is 227,416 burden hours and $22,741,600 [227,416 x $100 per
hour].
In addition to the per hour burden discussed above, the Commission
anticipates that swap dealers, major swap participants, and futures
commission merchants may incur certain start-up costs in connection
with the proposed recordkeeping obligations. Such costs would include
the expenditures related to re-programming or updating existing
recordkeeping technology and systems to enable the swap dealer, major
swap participant, or futures commission merchant to collect, capture,
process, maintain, and re-produce any newly required records. The
Commission believes that swap dealers, major swap participants, and
futures commission merchants generally could adapt their current
infrastructure to accommodate the new or amended technology and thus no
significant infrastructure expenditures would be needed. The Commission
estimates the programming burden hours associated with technology
improvements to be 60 hours.
According to recent Bureau of Labor Statistics, the mean hourly
wages of computer programmers under occupation code 15-1021 and
computer software engineers under program codes 15-1031 and 1032 are
between $34.10 and $44.94.\17\ Because swap dealers, major swap
participants, and futures commission merchants generally will be large
entities that may engage employees with wages above the mean, the
Commission has conservatively chosen to use a mean hourly programming
wage of $60 per hour. Accordingly, the start-up burden associated with
the required technological improvements would be $3,600 [$60 x 60
hours] per affected registrant or $1,562,400 [$3,600 x 434 registrants]
in the aggregate.
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\17\ http://www.bls.gov/oes/current/oes113031.htm.
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2. Information Collection Comments
The Commission invites the public and other federal agencies to
comment on any aspect of the recordkeeping burdens discussed above.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (i) Evaluate whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information will have practical
utility; (ii) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (iii) determine
whether there are ways to enhance the quality, utility, and clarity of
the information to be collected; and (iv) minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at
[email protected]. Please provide the Commission with a copy
of submitted comments so that all comments can be summarized and
addressed in the final rule preamble. Refer to the Addresses section of
this notice of proposed rulemaking for comment submission instructions
to the Commission. A copy of the supporting statements for the
collection of information discussed above may be obtained by visiting
http://www.RegInfo.gov. OMB is required to make a decision concerning
the collection of information between 30 and 60 days after publication
of this document in the Federal Register. Therefore, a comment is best
assured of having its full effect if OMB receives it within 30 days of
publication.
C. Consideration of Costs and Benefits Under Section 15(a) of the CEA
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its action before promulgating a regulation under
the CEA. Section 15(a) of the CEA specifies
[[Page 45729]]
that costs and benefits shall be evaluated in light of 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
may in its discretion give greater weight to any one of the five
enumerated areas and could in its discretion determine that,
notwithstanding its costs, a particular order is necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the CEA.
The proposed rules involve risk management for cleared trades by
futures commission merchants, swap dealers, and major swap participants
that Are clearing members. The discussion below will consider the
proposed rule in light of each section 15(a) concerns.
Position Risk Management for Cleared Trades by Futures Commission
Merchants, Swap Dealers, and Major Swap Participants That Are Clearing
Members
The Commission is proposing regulations that would require FCMs,
SDs, and MSPs to put into place certain risk management procedures.
1. Protection of Market Participants
Good risk management practices among FCMs, SDs, and MSPs help
insulate DCOs from financial distress. Moreover, while the rule calls
for standard risk mitigation measures, it allows FCMs, SDs, and MSPs to
use diverse techniques to implement those measures. This makes it less
likely that multiple FCMs, SDs, and MSPs would be exposed to identical
blind spots during unexpected market developments.
As far as costs are concerned, regular testing of various systems
and financial positions requires significant personnel hours and
potentially the services of external vendors. The requirement that
records be created and maintained may impose costs on FCMs, SDs, and
MSPs. The Commission believes that some costs might only be incremental
because it believes that well-managed firms would generally already
create and maintain records of this type.
2. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The integrity of the markets is enhanced with the certainty that
the customer's counterparties (i.e., FCMs, SDs, and MSPs, as well as
DCOs) are more likely to remain solvent during strenuous financial
conditions.
As for the costs related to this rule, rigorous stress tests may
encourage conservative margin requirements that reduce customers'
ability to leverage their positions. Also, higher costs associated with
maintaining more stringent risk management practices will ultimately be
passed along to customers, likely in the form of larger spreads, which
may reduce the liquidity and efficiency of the market. However, more
conservative margin requirements and stringent risk management
practices will also help reduce systemic risk thereby protecting the
integrity of the financial system as a whole.
3. Sound Risk Management Practices
The rule extends the range of parties responsible for rigorous risk
management practices which promotes further stability of the entire
financial system. However, as mentioned previously, risk management
systems can be costly to implement. The Commission does not know at
this time, and requests comment on, how many parties will need to
upgrade their systems, if any. Additionally, the Commission requests
comment from the public as to what the costs might be to upgrade
existing systems or install new systems to comply with the proposed
regulation.
4. Other Public Interest Considerations
Requiring a significant investment in risk mitigation structures
and procedures by all FCMs, SDs, and MSPs increases the number of
entities committing time and resources to development of new techniques
that have the potential to advance the practice across the entire
industry. Such measures contribute to the overall stability of our
global financial system.
List of Subjects
17 CFR Part 1
Conflicts of interest, Futures commission merchants, Major swap
participants, Swap dealers.
17 CFR Part 23
Conflicts of interests, Futures commission merchants, Major swap
participants, Swap dealers.
In light of the foregoing, the Commission hereby proposes to amend
Part 1, and Part 23, as proposed to be added at 75 FR 71390, November
23, 2010, and further amended at 75 FR 81530, December 28, 2010, of
Title 17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3,
8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
2. Add Sec. 1.73 to part 1 to read as follows:
Sec. 1.73 Clearing futures commission merchant risk management.
(a) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall:
(1) Establish risk-based limits in the proprietary account and in
each customer account based on position size, order size, margin
requirements, or similar factors;
(2) Use automated means to screen orders for compliance with the
risk-based limits;
(3) Monitor for adherence to the risk-based limits intra-day and
overnight;
(4) Conduct stress tests of all positions in the proprietary
account and in each customer account that could pose material risk to
the futures commission merchant at least once per week;
(5) Evaluate its ability to meet initial margin requirements at
least once per week;
(6) Evaluate its ability to meet variation margin requirements in
cash at least once per week;
(7) Evaluate its ability to liquidate, in an orderly manner, the
positions in the proprietary and customer accounts and estimate the
cost of the liquidation at least once per month; and
(8) Test all lines of credit at least once per quarter.
(b) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall:
(1) Establish written procedures to comply with this regulation;
and
(2) Keep full, complete, and systematic records documenting its
compliance with this regulation.
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
3. The authority citation for part 23 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
4. Add Sec. 23.609 to part 23, subpart J, to read as follows:
[[Page 45730]]
Sec. 23.609 Clearing member risk management.
(a) With respect to clearing activities in futures, security
futures products, swaps, agreements, contracts, or transactions
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act,
commodity options authorized under section 4c of the Act, or leveraged
transactions authorized under section 19 of the Act, each swap dealer
or major swap participant that is a clearing member of a derivatives
clearing organization shall:
(1) Establish risk-based limits based on position size, order size,
margin requirements, or similar factors;
(2) Use automated means to screen orders for compliance with the
risk-based limits;
(3) Monitor for adherence to the risk-based limits intra-day and
overnight;
(4) Conduct stress tests of all positions at least once per week;
(5) Evaluate its ability to meet initial margin requirements at
least once per week;
(6) Evaluate its ability to meet variation margin requirements in
cash at least once per week;
(7) Test all lines of credit at least once per quarter; and
(8) Evaluate its ability to liquidate the positions it clears in an
orderly manner, and estimate the cost of the liquidation.
(b) Each swap dealer or major swap participant that is a clearing
member of a derivatives clearing organization shall:
(1) Establish written procedures to comply with this regulation;
and
(2) Keep full, complete, and systematic records documenting its
compliance with this regulation.
Issued in Washington, DC, on July 19, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Clearing Member Risk Management--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 Dunn and
Chilton voted in the affirmative; Commissioners O'Malia and Sommers
voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the proposed rulemaking for enhanced risk management
for clearing members. One of the primary goals of the Dodd-Frank
Wall Street Reform and Consumer Protection Act was to reduce the
risk that swaps pose to the economy. The proposed rule would require
clearing members, including swap dealers, major swap participants
and futures commission merchants to establish risk-based limits on
their house and customer accounts. The proposed rule also would
require clearing members to establish procedures to, amongst other
provisions, evaluate their ability to meet margin requirements, as
well as liquidate positions as needed. These risk filters and
procedures would help secure the financial integrity of the markets
and the clearing system and protect customer funds.
[FR Doc. 2011-19362 Filed 7-29-11; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: August 1, 2011