2016-10565
Federal Register, Volume 81 Issue 88 (Friday, May 6, 2016)
[Federal Register Volume 81, Number 88 (Friday, May 6, 2016)]
[Rules and Regulations]
[Pages 27309-27314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10565]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE17
Definitions of ``Portfolio Reconciliation'' and ``Material
Terms'' for Purposes of Swap Portfolio Reconciliation
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending its regulations in connection with the terms for
which counterparties must exchange and resolve discrepancies when
engaging in portfolio reconciliation.
DATES: The final rule is effective May 6, 2016.
FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Chief Counsel, 202-
418-5949, [email protected]; KatherineS. Driscoll, Associate Chief
Counsel, 202-418-5544, [email protected]; Gregory Scopino, Special
Counsel, 202-418-5175, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
[[Page 27310]]
I. Proposed Rule
Under Sec. 23.502 of the Commission's regulations,\1\ swap dealers
(``SD'') and major swap participants (``MSP''), as defined in Sec. 1.3
of the Commission's regulations, must reconcile their swap portfolios
with one another and provide non-SD and non-MSP counterparties with
regular opportunities for portfolio reconciliation.\2\ Section
23.500(i) \3\ defines the term ``portfolio reconciliation'' as any
process by which the two parties to one or more swaps: (1) Exchange the
terms of all swaps in the swap portfolio between the counterparties;
(2) exchange each counterparty's valuation of each swap in the swap
portfolio between the counterparties as of the close of business on the
immediately preceding business day; and (3) resolve any discrepancy in
material terms and valuations. Section 23.500(g) defines ``material
terms'' to mean all terms of a swap required to be reported in
accordance with part 45 of this chapter.\4\
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\1\ 17 CFR 23.502.
\2\ 17 CFR 23.502; see Confirmation, Portfolio Reconciliation,
Portfolio Compression, and Swap Trading Relationship Documentation
Requirements for Swap Dealers and Major Swap Participants, 77 FR
55904 (Sept. 11, 2012) (``Portfolio Reconciliation Final Rule'') at
55926.
\3\ 17 CFR 23.500(i).
\4\ 17 CFR 23.500(g). Part 45 of the Commission regulations
governs swap data recordkeeping and reporting requirements. The swap
terms that must be reported under part 45 are found in appendix 1 to
part 45. See 17 CFR part 45, App. 1; see also 17 CFR 45.1 (defining
``primary economic terms'' as all of the terms of a swap matched or
affirmed by the counterparties in verifying the swap, including at a
minimum each of the terms included in the most recent Federal
Register release by the Commission listing minimum primary economic
terms for swaps in the swap asset class in question and stating that
the current list of minimum primary economic terms is in appendix
1); Swap Data Recordkeeping and Reporting Requirements, 77 FR 2197
(Jan. 13, 2012) (promulgating the list of primary economic terms).
Examples of primary economic terms include the price of the swap,
payment frequency, type of contract (e.g., a ``vanilla option'' or
``complex exotic option''), execution timestamp, and, if the swap is
a multi-asset class swap, the primary and secondary asset classes.
17 CFR part 45, App. 1.
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On September 22, 2015, the Commission proposed to amend the
definition of ``material terms'' in Sec. 23.500(g) to exclude nine
specific data fields (the ``Proposal'').\5\ It was then--and remains so
now--the intention of the Commission to alleviate the burden of
resolving discrepancies with respect to a swap that are not relevant to
the ongoing rights and obligations of the parties and the valuation of
the swap without impairing the Commission's regulatory mission.\6\ The
nine excluded data fields from the Proposal (hereinafter referred to as
the ``Proposed Excluded Data Fields'') are:
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\5\ Proposal to Amend the Definition of ``Material Terms'' for
Purposes of Swap Portfolio Reconciliation, 80 FR 57129, Sept. 22,
2015. The Commission's Division of Swap Dealer and Intermediary
Oversight had previously provided SDs and MSPs with no-action relief
stating it would not recommend an enforcement action against an SD
or MSP that omits eleven specific data fields from the portfolio
reconciliation process required under Sec. 23.502. See CFTC Letter
13-31 (June 26, 2013).5
\6\ See the Proposal, 80 FR at 57131.
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1. An indication that the swap will be allocated;
2. If the swap will be allocated, or is a post-allocation swap, the
legal entity identifier \7\ of the agent;
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\7\ A legal entity identifier is a 20-digit, alpha-numeric code,
to uniquely identify legally distinct entities that engage in
financial transactions. See Legal Entity Identifier Regulatory
Oversight Committee, http://www.leiroc.org/; 17 CFR 45.6.
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3. An indication that the swap is a post-allocation swap;
4. If the swap is a post-allocation swap, the unique swap
identifier; \8\
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\8\ A unique swap identifier is a unique identifier assigned to
all swap transactions which identifies the transaction (the swap and
its counterparties) uniquely throughout the duration of the swap's
existence. See 17 CFR 45.5.
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5. Block trade indicator;
6. With respect to a cleared swap, the execution timestamp;
7. With respect to a cleared swap, the timestamp for submission to
swap data repository (``SDR'');
8. Clearing indicator; and
9. Clearing venue.\9\
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\9\ The Proposed Excluded Data Fields modified the No-Action
Excluded Data Fields by: (1) Amending the execution timestamp data
field to be specific to cleared swaps; (2) amending the timestamp
for submission to an SDR data field to be specific to cleared swaps;
(3) removing the data field containing an indication of whether the
clearing requirement exception in CEA section 2(h)(7) has been
elected with respect to an uncleared swap; and (4) removing the data
field containing the identity of the counterparty electing the
clearing requirement exception in CEA section 2(h)(7). The
Commission proposed to retain those data fields for uncleared swaps
as ``material terms'' because a discrepancy in this information in
the records of the counterparties could mean that the related
information is erroneous in the records of an SDR, which could have
an impact on the Commission's regulatory mission.
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In the Proposal, the Commission asked for comments on a number of
issues related to the appropriate scope of portfolio reconciliation.
For example, the Commission asked for comment on whether counterparties
should only have to exchange the ``material terms'' of swaps or whether
counterparties should be required to exchange all terms of swaps
(material or not).\10\ The Commission also sought comment concerning,
among other things, whether additional data fields should be excluded
from portfolio reconciliation exercises.\11\
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\10\ Proposal, 80 FR at 57132.
\11\ Id.
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II. Summary of Comments
In response to the Proposal, the Commission received four
comments.\12\ All of the commenters supported going further than the
Proposal by, for example, allowing counterparties to avoid having to
reconcile non-material terms. None of the commenters wanted the
Commission to keep Sec. 23.500 as it was. Additionally, none of the
commenters suggested that the Commission do less than was proposed to
reduce the burdens associated with portfolio reconciliation exercises.
All four commenters urged the Commission to further reduce the scope of
terms that must be reconciled for discrepancies than what had been
suggested in the Proposal.
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\12\ These comment letters are on the Commission's Web site at
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1619.
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In particular, Chris Barnard of Germany stated that he supported
``amending the definition of `material terms' to not include terms that
are not relevant to the valuation of swaps portfolios'' and amending
``Sec. 23.500(i)(1) so that counterparties only have to exchange the
`material terms' (which would not include the Proposed Excluded Data
Fields) of swaps.'' \13\
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\13\ See Letter from Chris Barnard (Nov. 17, 2015), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60560&SearchText=.
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Likewise, the Japanese Bankers Association recommended that the
Commission amend Sec. 23.500(i)(1) so that swap counterparties only
have to exchange the ``material terms'' of swaps, consistent with the
Proposed Excluded Data Fields.\14\ The Japanese Bankers Association
further stated that ``[t]he removal of the data reconciliation
requirement of the Proposed Excluded Data Fields will generate
significant cost savings.'' \15\
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\14\ Letter from the Japanese Bankers Association (Nov. 16,
2015), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60556&SearchText=.
\15\ Id.
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Additionally, consistent with the Proposal, Freddie Mac stated that
it ``believes that the Commission should continue to exclude the
execution timestamp and [SDR] submission timestamp data fields with
respect to non-cleared swap transactions from the definition of
`material terms' under 23.500(g) for purposes of compliance with the
portfolio reconciliation requirements of 23.502.'' \16\
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\16\ Letter from FreddieMac (Nov. 23, 2015), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60563&SearchText=.
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In addition, ISDA commented that it believes that ``[t]he data
fields that need to be exchanged and those which need to be reconciled
should be the same'' in
[[Page 27311]]
that ``[t]hese should only include data fields which were agreed upon
between the parties as a term of the swap and [are] relevant to the
mutual obligations of a swap.'' \17\ ISDA agreed with the exclusion of
the Proposed Excluded Data Fields for purposes of portfolio
reconciliation but believes that the Commission should further expand
the list of excluded items. ISDA suggests that the Commission define,
``material terms,'' such that it would be limited to the primary
economic terms of a swap, minus 25 specific data elements referenced in
Appendix A to ISDA's comment letter.\18\ The data elements in question
are otherwise required to be reported under Part 45, but are not,
according to ISDA, relevant to the mutual obligations and valuation of
swaps.\19\
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\17\ Letter from ISDA, at 4 (Nov. 20, 2015), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60561&SearchText=.
\18\ Id. at 2.
\19\ Id.
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ISDA's 25 recommended excluded terms are the following:
1. An indication of whether the reporting counterparty is a SD with
respect to the swap;
2. An indication of whether the reporting party is an MSP with
respect to the swap;
3. If the reporting counterparty is not an SD or a MSP with respect
to the swap, an indication of whether the reporting counterparty is a
financial entity as defined in section 2(h)(7)(c) of the Commodity
Exchange Act (``Act'');
4. An indication of whether the reporting counterparty is a U.S.
person;
5. An indication that the swap will be allocated;
6. If the swap will be allocated, or is a post-allocation swap, the
legal entity identifier of the agent;
7. An indication of whether the swap is a post-allocation swap;
8. If the swap is a post-allocation swap, the unique swap
identifier of the original transaction between the reporting
counterparty and the agent;
9. An indication of whether the non-reporting counterparty is an SD
with respect to the swap;
10. An indication of whether the non-reporting counterparty is an
MSP with respect to the swap;
11. If the non-reporting counterparty is not an SD or an MSP with
respect to the swap, an indication of whether the reporting
counterparty is a financial entity as defined in section 2(h)(7)(c) of
the Act;
12. An indication of whether the non-reporting counterparty is a
U.S. person;
13. An indication that the swap is a multi-asset swap;
14. For a multi-asset swap, an indication of the primary asset
class;
15. For a multi-asset swap, an indication of the secondary asset
class(es);
16. An indication that the swap is a mixed swap;
17. For a mixed swap reported to two non-dually-registered swap
data repositories, the identity of the other SDR (if any) to which the
swap is or will be reported;
18. Block trade indicator;
19. Execution timestamp;
20. Timestamp for submission to SDR;
21. Clearing indicator;
22. Clearing venue;
23. If the swap will not be cleared, an indication of whether the
clearing requirement exception in section 2(h)(7) of the Act was
elected;
24. The identity of the counterparty electing the clearing
requirement exception in section 2(h)(7) of the Act; and
25. Any other term(s) of the swap matched or affirmed by the
counterparties in verifying the swap.\20\
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\20\ Id.
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With respect to the twenty-fifth term, ISDA stated that such term
was ``[n]ot suitable for material terms reconciliation'' because
``[u]ndefined data fields cannot be reconciled between parties or
supported by portfolio reconciliation.'' \21\
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\21\ Id.
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III. Final Rule
After careful consideration, the Commission has decided to finalize
the rule by: (1) Modifying Sec. 23.500(i)(1) to define ``portfolio
reconciliation'' as, inter alia, any process by which the two parties
to one or more swaps exchange the material terms of all swaps in the
swap portfolio between the counterparties, and (2) modifying Sec.
23.500(g) to define ``material terms'' to mean the minimum primary
economic terms of a swap, as defined in appendix 1 of part 45 of the
Commission's regulations, other than the first 24 terms listed above.
After analyzing and considering the materiality of such terms, the
Commission believes that the terms are not material for purposes of
portfolio reconciliation exercises. Specifically, the Commission has
determined that these 24 data fields: (i) Pertain to static items about
entering into the swap; (ii) pertain to static data fields about a
party's status; (iii) are only relevant to cleared transactions; (iv)
are data which is not agreed, exchanged, or confirmed between the
parties; or (v) are not relevant to the swap's daily valuation. The
Commission also believes that the removal of these terms from
reconciliations would alleviate the burden of resolving discrepancies
in terms of a swap that are not relevant to the ongoing rights and
obligations of the parties and the valuation of the swap without
impairing the Commission's regulatory mission. The Commission's view of
these ``Excluded Data Fields'' only applies to the ``portfolio
reconciliation'' process and has no bearing on other obligations that
counterparties must adhere to, such as, but not limited to,
recordkeeping and reporting obligations. Thus the final rule would make
the portfolio reconciliation process more efficient without harming the
Commission's ability to regulate the market. Accordingly, the
Commission has decided to adopt the 24 terms as the ``Excluded Data
Fields'' to be listed in Sec. 23.500(g)'s definition of material
terms.
The twenty-fifth data field listed above--``[a]ny other term(s) of
the swap matched or affirmed by the counterparties in verifying the
swap''--is a provision that could include terms, unlike the 24 excluded
terms above, that would be relevant to or affect the valuation of the
swap or the ongoing rights and obligations of the counterparties.\22\
Additionally, reconciling terms captured by this data field only covers
terms that are matched or affirmed by the counterparties in verifying
the swap, and terms that are matched or affirmed by the counterparties
must, in any event, be memorialized and recorded, thereby providing a
basis for counterparties to know which data fields must be included in
portfolio reconciliation exercises. Accordingly, the Commission is not
persuaded that the twenty-fifth data field is ambiguous and has
determined not to exclude it from the definition of material terms.
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\22\ For example, the Commission has stated that this field
could include terms such as an ``early termination option clause''
in an interest-rate swap. See Exhibit C in appendix 1 to part 45;
see also Exhibit C to appendix 1 to part 45 (listing the minimum
primary economic terms data for foreign exchange transactions other
than cross-currency swaps, and stating that the field for any other
term(s) of the swap matched or affirmed by the counterparties in
verifying the trade would include, for options, premium, premium
currency, premium payment date; for non-deliverable trades,
settlement currency, valuation (fixing) date; indication of the
economic obligations of the counterparties).
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The Commission will, however, provide an additional measure of
certainty to swap counterparties in the final rule by modifying the
definition of ``material terms'' in Sec. 23.500(g) to mean the minimum
primary economic terms as defined in appendix 1 of part 45 of
[[Page 27312]]
the Commission's regulations (as opposed to meaning the primary
economic terms more generally, without reference to the minimum terms
enumerated in appendix (1), minus the Excluded Data Fields. Under this
approach, market participants looking for the list of terms or data
fields that must be exchanged during portfolio reconciliation exercises
can look to the tables in appendix 1 to part 45 (minus the 24 Excluded
Data Fields), which primarily feature concrete terms.
With these modifications to the existing regulations, the final
rule will make it such that the terms that must be exchanged during
portfolio reconciliation exercises will be identical to the terms that
have to be resolved for discrepancies, both of which will be reduced
from what was required under the regulations as originally promulgated.
The Commission is finalizing the rule as such because the Commission
believes that modifying the rule in this manner will provide for a
streamlined and efficient portfolio reconciliation process that will
continue to provide counterparties (and the Commission) with sufficient
information about swap transactions. Accordingly, the Commission
believes that the Final Rule will result in fewer ``false positives''
and provide for an overall more effective portfolio reconciliation
process.
IV. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act \23\ requires that agencies consider
whether the rules they propose will have a significant economic impact
on a substantial number of small entities and, if so, provide a
regulatory flexibility analysis reflecting the impact. For purposes of
resolving any discrepancy in material terms and valuations, the final
rule amends the definition in Sec. 23.500(g) of the Commission
regulations so that the term ``material terms'' is defined as the
minimum primary economic terms of a swap other than the 24 Excluded
Data Fields. In connection with portfolio reconciliation, Sec.
23.500(i)(1) requires counterparties to exchange the material terms of
all swaps, which is now consistent with Sec. 23.500(i)(3), which
requires counterparties to resolve any discrepancy in ``material
terms'' and valuations. As a result of the change to the definition of
``material terms'' in Sec. 23.500(g) of the Commission regulations,
SDs and MSPs will not be required to include the 24 Excluded Data
Fields in portfolio reconciliations. Accordingly, counterparties also
will not have to resolve discrepancies of material terms or valuations
in connection with the 24 Excluded Data Fields. The Commission has
previously determined that SDs and MSPs are not small entities for
purposes of the Regulatory Flexibility Act.\24\
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\23\ 5 U.S.C. 601 et seq.
\24\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619 (Apr. 30, 1982). The Regulatory Flexibility Act
is limited to direct impact to small entities and not on indirect
impacts on these businesses, which may be tenuous and difficult to
discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340
(D.C. Cir. 1985); Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043
(D.C. Cir. 1985). Nonetheless, the Commission notes that any
financial end-users that may be indirectly impacted by the proposed
rule are likely to be eligible contract participants, and, as such,
they would not be small entities. See Opting Out of Segregation, 66
FR 20740, 20743 (Apr. 25, 2001).
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Thus, for the reasons stated above, the Commission believes that
the amendments to the definitions of ``material terms'' and ``portfolio
reconciliation'' will not have a significant economic impact on a
substantial number of small entities. Accordingly, the Chairman, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the regulations in this Federal Register release will not
have a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \25\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
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\25\ 44 U.S.C. 3501 et seq.
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In connection with the proposal, the Commission anticipated that,
if adopted the Final Rule would require an amendment to existing
collection of information OMB Control Number 3038-0068 with respect to
the collection of information entitled ``Confirmation, Portfolio
Reconciliation, and Portfolio Compression Requirements for Swap Dealers
and Major Swap Participants.'' \26\ The Commission therefore submitted
this proposal to the Office of Management and Budget (OMB) for review.
The Commission previously had discussed, for purposes of the PRA, the
burden \27\ that the regulation mandating, inter alia, portfolio
reconciliation would impose on market participants.\28\ In particular,
the Commission estimated the burden to be 1,282.5 hours for each SD and
MSP, and the aggregate burden for SDs and MSPs--based on a then-
projected 125 SDs and MSPs--was 160,312.5 burden hours.\29\
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\26\ See OMB Control No. 3038-0068, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0068.
\27\ ``For purposes of the PRA, the term `burden' means the
`time, effort, or financial resources expended by persons to
generate, maintain, or provide information to or for a Federal
Agency.' '' Portfolio Reconciliation Final Rule, 77 FR at 55959.
\28\ Portfolio Reconciliation Final Rule, 77 FR at 55958-60.
\29\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
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The final rule amends the definition in Sec. 23.500(g) of the
Commission regulations so that the term ``material terms'' means the
minimum primary economic terms of a swap other than the 24 Excluded
Data Fields.\30\ As noted above, under the final rule, clause (1) of
the definition of ``portfolio reconciliation'' in Sec. 23.500(i)
requires the parties to exchange the material terms of all swaps
between them and clause (3) of Sec. 23.500(i) requires parties to
resolve any discrepancy in ``material terms'' and valuations. The
change will clarify that SDs and MSPs are not required to include the
24 Excluded Data Fields in portfolio reconciliations or in any
resolution of discrepancies of material terms or valuations.
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\30\ As noted earlier, the final rule is amending the definition
of the term, ``material terms,'' at Sec. 23.500(g) to exclude 24
data fields that will not be considered ``material terms'' for the
purposes of ``portfolio reconciliation'' as that term is defined in
Sec. 23.500(i)(3).
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As discussed above, the final rule reduces the number of ``material
terms'' that counterparties are required to exchange and resolve for
discrepancies during portfolio reconciliations, but will not eliminate
the overall portfolio reconciliation requirement itself. The Commission
stated that it believed that the Proposal would reduce the time burden
for portfolio reconciliation by one burden hour for each SD and MSP,
which would reduce the annual burden to 1,281.5 hours per SD and MSP.
The Commission stated that it believed that the Proposal would result
in one hour of less work for computer programmers for SDs and MSPs
because the programmers who have to match the needed data fields from
two different databases would have fewer data fields to obtain and
resolve for discrepancies. In the Proposal, the Commission estimated
that, given that there are 106 provisionally registered SDs and MSPs,
the proposed amendment would result in an aggregate burden of 135,839
[[Page 27313]]
burden hours if adopted. The final rule, however, will reduce the time
burden on SDs and MSPs even more than what was included in the
proposal, and there is one less provisionally registered MSP. In light
of the fact that the final rule will remove 24 data fields entirely
from portfolio reconciliations, and based on a total of 105 (as opposed
to 106) provisionally registered SDs and MSPs, the Commission believes
that the final rule will reduce the time burden for portfolio
reconciliation by approximately eight burden hours for each SD and MSP,
which would reduce the annual burden to 1,274.5 hours per SD and MSP,
with an aggregate burden of 133,822.5. In the Proposal, the Commission
invited the public and other Federal agencies to comment on any aspect
of the reporting burdens discussed above, but did not receive any such
comments.
C. Considerations of Costs and Benefits
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the Act or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
1. Background
The Commission believes that, while portfolio reconciliation
generally helps counterparties to manage risk, commentators were
persuasive in their arguments that portfolio reconciliation should only
involve exchanging and resolving discrepancies in material terms, and
that material terms should not include the 24 Excluded Data Fields
mentioned above. The Commission has been convinced that exchanging the
24 Excluded Data Fields does not improve the management of risks in
swaps portfolios. By eliminating the requirement to exchange data
fields that do not impact the valuation of the swap or the payment
obligations of the counterparties and thereby reducing the number of
data fields that parties must resolve for differences in portfolio
reconciliation exercises, the Commission believes the final rule will
decrease the costs that its current regulations impose on SDs and MSPs
(and their counterparties) without a concomitant reduction in the
benefits obtained from portfolio reconciliation exercises under the
existing regulatory framework, as described below.
For purposes of considering the costs and benefits of the final
rule, the Commission has used its current rules as the baseline.
Currently, counterparties to swap transactions must exchange certain
data elements for each swap, and then compare these and validate each
element, even where the element is not relevant to the valuation of the
swap or the payment obligations of the counterparties. The final rule
circumscribes this process to include only those data elements that are
relevant on an ongoing basis to the valuation of the swap or the
payment obligations of the counterparties. Accordingly, the Commission
does not believe the final rule will impose any new costs on SDs, MSPs,
or their counterparties.
2. Costs
Rather, as described below, the Commission believes that, in the
aggregate, the final rule will decrease the costs that its regulations
impose on SDs and MSPs (and their counterparties) because it would
eliminate the requirement to exchange and resolve discrepancies in swap
terms that remain constant (or that do not impact the valuation of
swaps or the payment obligations of the counterparties) and thereby
reduce the number of data fields requiring particular attention in
portfolio reconciliation exercises.
The Commission does not believe the final rule will impair the
Commission's ability to oversee and regulate the swaps markets.
Portfolio reconciliation is designed to enable counterparties to
understand the current status or value of swap terms. Because the
Commission's proposal only is removing terms from the general portfolio
reconciliation process that are not critical to the valuation of the
swap or to the ongoing obligations of the counterparties, it will not
negatively impact the amount of information available to the Commission
about swaps. The Commission believes that this final rule will reduce
SDs,' MSPs,' or their counterparties' costs of complying with
Commission regulations because it will reduce the number of terms that
counterparties must exchange during portfolio reconciliations.
3. Benefits
The Commission believes that the final rule will reduce the annual
burden hours for each SD and MSP by four hours, resulting in a total of
1,278.5 hours, which leads to an aggregate number, based on 105
registrants, of 134,242.5 burden hours. The Commission previously
estimated that, assuming 1,282.5 annual burden hours per SD and MSP,
the financial cost of its regulations on each SD and MSP would be
$128,250.\31\ Therefore, based on those prior estimates, an eight-hour
reduction in the annual burden hours for each SD and MSP would result
in a financial cost of $127,450 per registrant. Accordingly, the
Commission estimates that the aggregate financial burden of its
regulations on the 105 provisionally registered SDs and MSPs would be
$13,382,250.\32\
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\31\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
\32\ Previously, the Commission had estimated that, if 125
entities had registered as SDs and MSPs, the aggregate burden would
be $16,031,250. Id.
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In addition, the Commission believes that the final rule benefits
SDs, MSPs, and their counterparties because it will enable them to
focus on reconciling data fields that actually impact the valuations of
swaps and the obligations of the counterparties. Potentially, this
change will enable the portfolio reconciliation process to be more
efficient without reducing its usefulness as a risk management tool.
4. Section 15(a)
Section 15(a) of the Act requires the Commission to consider the
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
For the reasons discussed above, the Commission believes that,
notwithstanding its decision to remove the 24 Excluded Data Fields from
the list of material terms that counterparties must exchange during
portfolio reconciliations, its regulations will continue to protect
market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
For the reasons discussed above, the Commission believes that the
final rule will increase resource allocation efficiency of market
participants engaging in reconciliation exercises without increasing
the risk of harm to the financial integrity of markets.
c. Price Discovery
For the reasons discussed above, the Commission did not identify
any impact on price discovery as a result of the proposed regulation,
and did not believe there would be one, but sought
[[Page 27314]]
comment as to any potential impact. The Commission did not receive any
comments on this issue. Accordingly, the Commission continues to
believe the final rule will not impact price discovery.
d. Sound Risk Management
For the reasons discussed above, the Commission believes that the
final rule is consistent with sound risk management practices because
the regulatory change will not impair an entity's ability to conduct
portfolio reconciliations.
e. Other Public Interest Considerations
The Commission did not identify any other public interest
considerations, but welcomed comment on whether the proposal would
promote public confidence in the integrity of derivatives markets by
ensuring meaningful regulation and oversight of all SDs and MSPs. The
Commission did not receive any comments about this issue.
List of Subjects in 17 CFR Part 23
Authority delegations (Government agencies), Commodity futures,
Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as set forth below:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
0
2. In Sec. 23.500, revise paragraphs (g) and (i)(1) to read as
follows:
Sec. 23.500 Definitions.
* * * * *
(g) Material terms means the minimum primary economic terms (as
defined in Appendix 1 of part 45 of this chapter) of a swap other than
the following:
(1) An indication of whether the reporting counterparty is a swap
dealer with respect to the swap;
(2) An indication of whether the reporting party is a major swap
participant with respect to the swap;
(3) If the reporting counterparty is not a swap dealer or a major
swap participant with respect to the swap, an indication of whether the
reporting counterparty is a financial entity as defined in section
2(h)(7)(c) of the Act;
(4) An indication of whether the reporting counterparty is a U.S.
person;
(5) An indication that the swap will be allocated;
(6) If the swap will be allocated, or is a post-allocation swap,
the legal entity identifier of the agent;
(7) An indication of whether the swap is a post-allocation swap;
(8) If the swap is a post-allocation swap, the unique swap
identifier of the original transaction between the reporting
counterparty and the agent;
(9) An indication of whether the non-reporting counterparty is a
swap dealer with respect to the swap;
(10) An indication of whether the non-reporting counterparty is a
major swap participant with respect to the swap;
(11) If the non-reporting counterparty is not a swap dealer or a
major swap participant with respect to the swap, an indication of
whether the reporting counterparty is a financial entity as defined in
section 2(h)(7)(c) of the Act;
(12) An indication of whether the non-reporting counterparty is a
U.S. person;
(13) An indication that the swap is a multi-asset swap;
(14) For a multi-asset swap, an indication of the primary asset
class;
(15) For a multi-asset swap, an indication of the secondary asset
class(es);
(16) An indication that the swap is a mixed swap;
(17) For a mixed swap reported to two non-dually-registered swap
data repositories, the identity of the other swap data repository (if
any to which the swap is or will be reported;
(18) Block trade indicator;
(19) Execution timestamp;
(20) Timestamp for submission to swap data repository;
(21) Clearing indicator;
(22) Clearing venue;
(23) If the swap will not be cleared, an indication of whether the
clearing requirement exception in section 2(h)(7) of the Act was
elected; and
(24) The identity of the counterparty electing the clearing
requirement exception in section 2(h)(7) of the Act.
* * * * *
(i) * * *
(1) Exchange the material terms of all swaps in the swap portfolio
between the counterparties;
* * * * *
Issued in Washington, DC, on May 2, 2016, by the Commission.
Robert N. Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Amendments to the Definitions of ``Portfolio Reconciliation'' and
``Material Terms'' for Purposes of Swap Portfolio Reconciliation--
Commission Voting Summary and Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Commissioner J. Christopher Giancarlo
I support the final rule amending the definitions of portfolio
reconciliation and material terms for purposes of swap portfolio
reconciliation. I commend the Commission and Division of Swap Dealer
& Intermediary Oversight staff for replacing no-action relief with a
rulemaking subject to a cost-benefit analysis and the notice and
comment requirements of the Administrative Procedure Act.
In the proposal I raised two concerns. First, I questioned the
logic of the proposed rule to require the exchange of all terms
throughout the life of a swap as part of a portfolio reconciliation
exercise, but then require reconciliation of only the material
terms. I am pleased that the Commission has amended the definition
of portfolio reconciliation to require the exchange of material
terms so that the terms that must be exchanged are the same as those
that must be reconciled.
Second, I questioned the logic of the proposed rule to treat as
material terms, and thus require the reconciliation of, data fields
that will not change over time, such as execution timestamp and
timestamp for submission to a swap data repository. I am also
pleased that the Commission has revised the definition of material
terms to mean the minimum primary economic terms as defined in
appendix 1 of part 45 of the Commission's regulations and to exclude
several additional data fields that are not relevant to the ongoing
rights and obligations of the parties and the valuation of the swap.
The final rule streamlines the portfolio reconciliation process
and reduces costs for market participants without undermining the
Commission's objectives for portfolio reconciliation. The final rule
is much improved from the proposal so I am pleased to support it.
[FR Doc. 2016-10565 Filed 5-5-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: May 6, 2016