2011-19362

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, jlawton@cftc.gov, or Christopher A. Hower,

Attorney-Advisor, 202-418-6703, chower@cftc.gov, 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

OIRAsubmissions@omb.eop.gov. 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