2010-29009
-
FR Doc 2010-29009[Federal Register: November 23, 2010 (Volume 75, Number 225)]
[Proposed Rules]
[Page 71397-71408]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no10-19]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AC96
Regulations Establishing and Governing the Duties of Swap Dealers
and Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission is proposing
regulations to implement new statutory provisions enacted by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The
proposed regulations set forth certain duties imposed upon swap dealers
and major swap participants registered with the Commission with regard
to: Risk management procedures; monitoring of trading to prevent
violations of applicable position limits; diligent supervision;
business continuity and disaster recovery; disclosure and the ability
of regulators to obtain general information; and antitrust
considerations. The proposed regulations would implement the new
statutory framework of section 4s(j) of the Commodity Exchange Act,
added by section 731 of the Dodd-Frank Act, excepting regulations
related to conflicts of interest pursuant to section 4s(j)(5), which
will be addressed in a separate rulemaking. These regulations set forth
certain duties with which swap dealers and major swap participants must
comply to maintain registration as a swap dealer or major swap
participant.
DATES: Submit comments on or before January 24, 2011.
ADDRESSES: You may submit comments, identified by RIN number 3038-AC96
and Duties of Swap Dealers and Major Swap Participants, by any of the
following methods:
[[Page 71398]]
Agency Web site, via its Comments Online process at http:/
/comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be 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
CFTC Regulation 145.9, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from 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 the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate
Director, 202-418-5684, sjosephson@cftc.gov; Frank N. Fisanich, Special
Counsel, 202-418-5949, ffisanich@cftc.gov; or Jocelyn Partridge,
Special Counsel, 202-418-5926, jpartridge@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).\1\ Title VII of
the Dodd-Frank Act \2\ amended the Commodity Exchange Act (CEA) \3\ to
establish a comprehensive regulatory framework 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 rulemaking and enforcement
authorities of the Commodity Futures Trading Commission (Commission or
CFTC) with respect to all registered entities and intermediaries
subject to the Commission's oversight.
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/
OTCDERIVATIVES/index.htm.
\2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
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Section 731 of the Dodd-Frank Act amends the CEA by inserting after
section 4r a new section 4s that sets forth registration and regulatory
requirements, including a variety of business conduct standards and
duties, with which swap dealers and major swap participants must comply
to maintain registration as a swap dealer or major swap participant.
As part of an overall business conduct regime for swap dealers and
major swap participants, section 4s(j) of the CEA sets forth certain
duties for swap dealers and major swap participants, including the duty
to: (1) Monitor trading to prevent violations of applicable position
limits; (2) establish risk management procedures adequate for managing
the day-to-day business of the swap dealer or major swap participant;
(3) disclose to the Commission and to applicable prudential regulators
\4\ general information relating to swaps trading, practices, and
financial integrity; (4) establish and enforce internal systems and
procedures to obtain information needed to perform all of the duties
prescribed by Commission regulations; (5) implement conflict-of-
interest systems and procedures; \5\ and (6) refrain from taking any
action that would result in an unreasonable restraint of trade or
impose a material anticompetitive burden on trading or clearing. In
this release, the Commission is proposing six regulations specifically
addressing risk management, monitoring of positions limits, diligent
supervision, business continuity and disaster recovery, the
availability of general information, and antitrust considerations. The
Commission would adopt these implementing regulations pursuant to
authority granted under sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(j)(7),
and 8a(5) of the CEA.\6\ The Dodd-Frank Act requires the Commission to
promulgate these provisions by July 15, 2011.
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\4\ This term is defined for the purposes of this rulemaking and
generally has the same meaning as section 1(a)(39) of the Commodity
Exchange Act, which includes the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Farm Credit Association,
and the Federal Housing Finance Agency.
\5\ Conflicts of interest under section 4s(j)(5) of the CEA will
be addressed in a separate rulemaking and the rules pertaining to
conflicts of interest are not included in the following proposed
rules.
\6\ Section 8a(5) of the CEA authorizes the Commission, to
promulgate such regulations as, in the judgement of the Commission,
are reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.
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The proposed regulations reflect consultation with staff of the
following agencies: (i) The Securities and Exchange Commission; (ii)
the Board of Governors of the Federal Reserve System; (iii) the Office
of the Comptroller of the Currency; and (iv) the Federal Deposit
Insurance Corporation. Staff from each of these agencies has had the
opportunity to provide oral and/or written comments to the proposal,
and the proposed regulations incorporate elements of the comments
provided.
The Commission requests comment on all aspects of the proposed
regulations, as well as comment on the specific provisions and issues
highlighted in the discussion below. The Commission further requests
comment on an appropriate effective date for final regulations,
including comment on whether it would be appropriate to have staggered
or delayed effective dates for some regulations based on the nature or
characteristics of the activities or entities to which they apply.
Moreover, the Commission recognizes that there will be differences in
the size and scope of the business of particular swap dealers and major
swap participants. Therefore, comments are solicited on whether certain
provisions of the proposed regulations should be modified or adjusted
to reflect the differences among swap dealers or major swap
participants.
II. Proposed Regulations
A. Structure and Approach
The proposed regulations set forth business conduct standards with
which swap dealers and major swap participants must comply. Such duties
[[Page 71399]]
are outlined in section 4s(j) of the CEA and include: (1) Monitoring of
trading; (2) risk management procedures; (3) disclosure of general
information; (4) ability to obtain information; (5) conflicts of
interest; and (6) antitrust considerations. Section 4s(j)(7) requires
the Commission to prescribe rules implementing the enumerated duties.
The proposed regulations will be grouped under a new subpart to
part 23, chapter I, title 17 of the Code of Federal Regulations. The
proposed regulations generally address monitoring of trading and risk
management together in a single rule requiring each swap dealer and
major swap participant to establish a comprehensive risk management
program (rule 23.600). Although part of a comprehensive risk management
program, monitoring of trading for compliance with applicable position
limits (rule 23.601); diligent supervision of a swap dealer's or major
swap participant's business (rule 23.602); and business continuity and
disaster recovery requirements (rule 23.603) are addressed in separate
rules for ease of reference. The availability for disclosure and
inspection of general information (rule 23.606) and antitrust
considerations (rule 23.607) also are addressed in separate rules.
Conflicts of interest under section 4s(j)(5) of the CEA (rule 23.605)
will be addressed in a separate notice of proposed rulemaking to be
released at the same time as this proposal.
B. Risk Management
1. Overview
Sections 4s(h)(1)(D), 4s(h)(3)(D), and 4s(j) of the CEA authorize
the Commission to adopt those regulations regarding business conduct
and risk management that the Commission deems necessary for the public
interest and in furtherance of the CEA. Pursuant to this authority, the
Commission is proposing regulation 23.600 to require swap dealers and
major swap participants to establish a risk management program for
monitoring and managing the risks associated with their business
activities.
The proposed risk management regulation contemplates that each
legal entity that falls within the definition of swap dealer or major
swap participant under the CEA and Commission regulations would be
required to establish a risk management program and risk management
unit. However, the Commission recognizes that the business activities
engaged in and risks faced by one affiliate may increase the risk
exposure or alter overall risk profile of another affiliate or the
entity as a whole, and that, to be effective, a risk management program
must protect against the risks resulting from the activities of
interconnected or otherwise related entities. Accordingly, the proposed
regulations would require each swap dealer and major swap participant
to be able to demonstrate that, to the extent possible, it is taking an
integrated approach to risk management at the consolidated entity
level.
Participants in the swap markets are exposed to various risks,
including, but not limited to: (1) Market risk; \7\ (2) credit risk;
\8\ (3) liquidity risk; \9\ (4) foreign currency risk; \10\ (5) legal
risk; \11\ (6) operational risk; \12\ and (7) settlement risk.\13\
Managing all relevant risks should be integrated into the swap dealer
and major swap participant's overall risk management structure. The
Commission believes this approach is particularly warranted given that
swap dealers and major swap participants may hold positions in a
variety of financial instruments.
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\7\ Market risk includes the risk that prices or rates will
adversely change due to economic forces. This risk includes, among
other things, changes in correlations between or among products
(including all types of basis risk), volatility of market prices,
and the sensitivity of option positions to other market factors.
\8\ Credit risk includes the risk that a counterparty will be
unable to meet fully its financial obligations when due or at any
time in the future.
\9\ Liquidity risk includes the risk that a firm will not be
able to settle its obligations when due and/or without adverse price
changes.
\10\ Foreign currency risk is the risk arising from movements of
foreign exchange rates.
\11\ Legal risk includes risk of loss due to an unenforceable
contract, an ultra vires act of a counterparty, or failure to comply
with applicable law.
\12\ Operational risk includes the risk of loss due to
deficiencies in information systems, internal processes and
staffing, or disruptions from external events that result in the
reduction, deterioration, or breakdown in services or controls
within the firm.
\13\ Settlement risk includes the risk of loss arising when a
party meets its payment obligation under a contract before its
counterparty meets its payment obligation. Settlement risk lasts
from the time an outgoing payment instruction can no longer be
canceled unilaterally until the time the incoming payment is
received with finality and reconciled.
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Some of these risks are due, in part, to the characteristics of
swap products and the way swap markets have evolved over time. For
example, some swaps are customized or designed with unique
characteristics that may present previously unforeseen or unpredictable
risks. Also, for swaps not accepted for clearing, market participants
face risks associated with the financial and legal ability of
counterparties to perform under the terms of specific transactions. As
part of a risk management program, risk managers must carefully review
any unique product characteristics that may pose unusual risks and take
steps to manage potential risks before trading commences.
In the past, the importance of risk management has been highlighted
by significant losses experienced by several large financial firms.
Some of these losses were caused by unauthorized and undisclosed
employee trading. In each case, these losses went virtually undetected
by management because of the lack of proper internal procedures,
including the separation of responsibility for recording the trades on
the firms' books from the personnel responsible for trading. Internal
risk management policies and procedures promote the stability, safety,
and soundness of firms by reducing the risk of significant losses,
which, in turn, may reduce the risk that spreading losses would cause
defaults by multiple firms, thereby undermining markets as a whole.
The Commission recognizes that an individual firm must have the
flexibility to implement specific policies and procedures unique to its
circumstances. The Commission's rule has been designed such that the
specific elements of a risk management program will vary depending on
the size and complexity of a swap dealer's or major swap participant's
business operations. Risk management policies are expected to provide
for appropriate risk measurement methodologies, compliance monitoring
and reporting, and on-going testing and assessment of the overall
effectiveness of the program. Consequently, proposed regulations
23.600, 23.601, 23.602, and 23.603 would establish the general
parameters for the design, implementation, review, and testing of a
swap dealer's or major swap participant's risk management program, as
well as a limited number of additional elements that the Commission
believes are essential to an appropriate risk management program.
The proposed rules would require a swap dealer or major swap
participant to adopt policies and procedures to monitor and manage its
risks, assess the effectiveness of those policies and procedures, and
modify or update them, as necessary, from time to time. In addition,
the proposed rule would require certain elements to be included in each
swap dealer and major swap participant's risk management program to
ensure that internal systems protect against universal risks. For
example, to ensure the independence of the risk management process, the
unit at the firm responsible for monitoring risk must be independent
from the business trading unit whose activities create the risks. In
addition, to ensure that trading
[[Page 71400]]
losses cannot be hidden, personnel responsible for recording
transactions in the books of the swap dealer or major swap participant
cannot be the same as those responsible for executing transactions.
Similarly, all accounts, including suspense accounts, must be
monitored.
Finally, the swap dealer's or major swap participant's management
must periodically review the firm's business activities for consistency
with established risk management policies. This will ensure that
personnel are operating within the scope of activity that management
has determined to be permissible.
2. Risk Management Program
Proposed regulation 23.600(b) provides a general requirement that a
swap dealer or major swap participant establish and maintain a risk
management program reasonably designed to monitor and manage the risks
associated with its business as a swap dealer or major swap
participant. It further provides (1) That such risk management program
consist of written policies and procedures; (2) that such policies and
procedures be approved by the governing body of the swap dealer or
major swap participant and be furnished to the Commission; and (3) that
a risk management unit that is independent from the business trading
unit be established to administer the risk management program.
The proposed regulations would require swap dealers and major swap
participants to provide copies of the risk management policies and
procedures to the Commission in order to allow the Commission to
monitor the status of risk management practices among swap dealers and
major swap participants. Submission of such policies and procedures to
the Commission without further comment or action by the Commission or
Commission staff should not be construed as an endorsement of the
completeness or effectiveness of the risk management policies and
procedures and no swap dealer or major swap participant should make a
representation to the contrary. The Commission invites comments on the
submission of risk management policies and procedures and, more
generally, on whether the provisions of 23.600 have achieved a
sufficient level of detail for the purposes of designing a
comprehensive risk management program.
Proposed regulation 23.600(c) would provide a non-exclusive list of
the elements that must be a part of the risk management program of a
swap dealer or major swap participant. Such policies and procedures
should include: (1) Identifying risks and setting of risk tolerance
limits; (2) providing periodic risk exposure reports to senior
management and the governing body; (3) establishing a new product
policy; and (4) establishing a risk management program that takes into
account market risk, credit risk, liquidity risk, foreign currency
risk, legal risk, operational risk, and settlement risk, including a
process for evaluating and addressing risks associated with the use of
models to derive market valuations or otherwise calculate or evaluate
risk exposures. The regulation also would establish requirements for
supervision of the business unit of a swap dealer or major swap
participant, including monitoring of limits on individual traders and
establishing procedures governing the use, supervision, and testing of
any algorithmic trading program. The objective is to ensure that those
capable of committing the capital of the swap dealer or major swap
participant are properly supervised and subject to approved limits.
Additionally, the risk management program should set forth requirements
for compliance with Commission regulations related to capital and
margin and for monitoring overall compliance with the risk management
program. The rule also would require that swap dealers and major swap
participants establish policies and procedures (1) to require the use
of central counterparties for clearing where clearing is required
pursuant to Commission regulation or order, and (2) to use central
clearing as a means of mitigating counterparty credit risk.
To ensure the continued effectiveness of a risk management program,
proposed regulation 23.600(e) would require quarterly review and
testing of the adequacy of each swap dealer and major swap
participant's risk management program by internal audit staff or a
qualified external, third party service. The Commission requests
comment on these proposed audit and review requirements.
C. Monitoring of Position Limits
Proposed regulation 23.601 would require swap dealers and major
swap participants to establish policies and procedures to monitor,
detect, and prevent violations of applicable position limits
established by the Commission, a designated contract market, or a swap
execution facility. This rule implements section 4s(j)(1) of the CEA,
which requires each swap dealer and major swap participant to monitor
its trading in swaps to prevent violations of applicable position
limits. In order to prevent violations, each swap dealer and major swap
participant would be required to provide training to all relevant
employees on applicable position limits, actively monitor trading,
implement an early warning system, test the effectiveness of its
policies and procedures, and report quarterly to its senior management
and governing body on compliance with applicable position limits. The
Commission requests comment on how much time would be needed for swap
dealers and major swap participants to come into compliance with new
position limits that may be imposed.
D. Diligent Supervision
Proposed regulation 23.602 implements section 4s(h)(1)(B) of the
CEA, which requires each swap dealer and major swap participant to
conform with Commission regulations related to diligent supervision of
the business of the swap dealer and major swap participant. The
proposed regulation provides (1) a requirement for diligent supervision
reasonably designed to achieve compliance with the CEA and Commission
regulations, and (2) requirements for qualification of supervisors and
grants of appropriate supervisory authority.
E. Business Continuity and Disaster Recovery
Given the observed interconnectedness of the current swap market,
and as part of a comprehensive risk management program, the Commission
believes that each swap dealer and major swap participant should be
required to establish and maintain a business continuity and disaster
recovery plan that is reasonably designed to minimize any disruption to
the financial markets in the event of an emergency or a disruption of a
swap dealer's or major swap participant's business operations. Proposed
regulation 23.603 would require swap dealers and major swap
participants to establish and maintain a business continuity and
disaster recovery plan designed to enable the swap dealer or major swap
participant to resume normal operations within one business day of an
emergency or other disruption.
To accomplish this task, swap dealers and major swap participants
would be required to provide the Commission with emergency contacts;
identify essential documents, data, facilities, infrastructure, and
personnel, and maintain sufficient back-up facilities in a reasonably
separate geographic location; design a plan for communicating with
persons essential
[[Page 71401]]
for recovery; and annually test the business continuity and disaster
recovery plan's effectiveness.
The Commission invites comments regarding whether a comprehensive
business continuity and disaster recovery plan is necessary for all
entities that may register with the Commission as swap dealers or major
swap participants and whether one business day is sufficient time for
recovery of essential business operations. The Commission also invites
comments regarding an appropriate effective date for this regulation
given the amount of time and cost that may be necessary for
implementation of a comprehensive business continuity and disaster
recovery plan.
F. Disclosure and Ability To Obtain Information
In order to carry out its oversight and examination
responsibilities, the Commission would require access to certain
information of swap dealers and major swap participants.\14\ Sections
4s(j)(3) and 4s(j)(4) of the CEA require a swap dealer or major swap
participant to (1) disclose to the Commission and to the swap dealer's
or major swap participant's prudential regulator information regarding
the terms and conditions of its swaps, its swap trading operations,
mechanisms, and practices; its financial integrity protections relating
to swaps, and other information relevant to its trading in swaps; and
(2) establish internal systems to obtain necessary information to
perform any of the functions described in section 4s and for disclosure
of information to the Commission or prudential regulator upon request.
Proposed regulation 23.606 would implement these requirements.
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\14\ The oversight, supervision, and examination regimes for
swap dealers and major swap participants remain under consideration
by the Commission. The Commission is considering whether it will
directly handle oversight, whether it may delegate authority to
perform oversight to one or more self-regulatory organizations
(SROs), or whether a combination of Commission and SRO oversight
would be the optimal approach.
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Proposed regulation 23.606(a) requires that swap dealers and major
swap participants make available for disclosure and inspection all
information required by the Commission, including those items listed in
section 4s(j)(3). This information would be required to be disclosed
promptly to the Commission or applicable prudential regulator in the
manner and frequency as set forth in the relevant regulation. Proposed
regulation 23.606(b) would require a swap dealer or major swap
participant to establish and maintain adequate internal systems that
will permit it to obtain any information required to satisfy its duties
under section 4s(j) of the CEA.
G. Antitrust Considerations
Section 4s(j)(6) of the CEA prohibits a swap dealer or major swap
participant from adopting any process or taking any action that results
in any unreasonable restraint of trade or imposes any material
anticompetitive burden on trading or clearing, unless necessary or
appropriate to achieve the purposes of the CEA. Proposed regulation
23.607 would implement these prohibitions by requiring that the swap
dealer or major swap participant adopt policies and procedures that
would prevent unreasonable restraint of trade or the imposition of a
material anticompetitive burden on trading or clearing.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities.\15\ The
Commission previously has established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\16\ The
proposed rules would affect swap dealers and major swap participants.
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\15\ 5 U.S.C. 601 et seq.
\16\ 47 FR 18618, Apr. 30, 1982.
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Swap dealers and major swap participants 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. However, the Commission previously has determined
that futures commission merchants should not be considered to be small
entities for purposes of the RFA.\17\ The Commission's determination
was based, in part, upon the obligation of futures commission merchants
to meet the minimum financial requirements established by the
Commission to enhance the protection of customers' segregated funds and
protect the financial condition of futures commission merchants
generally.\18\ Like futures commission merchants, swap dealers 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 swap dealer designation any entities that engage in a de
minimis level of swaps 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 swap dealers not be considered ``small entities'' for
essentially the same reasons that futures commission merchants have
previously been determined not to be small entities and in light of the
exemption from the definition of swap dealer for those engaging in a de
minimis level of swap dealing.
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\17\ Id. at 18619.
\18\ Id.
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The Commission has also previously determined that large traders
are not ``small entities'' for RFA purposes.\19\ In that determination,
the Commission considered that a large trading position was indicative
of the size of the business. Major swap participants, 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 major swap participants not be
considered ``small entities'' for essentially the same reasons that
large traders have previously been determined not to be small entities.
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\19\ Id. at 18620.
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Moreover, the Commission is carrying out Congressional mandates by
proposing this regulation. Specifically, the Commission is proposing
these regulations to comply with the Dodd-Frank Act, the aim of which
is to reduce systemic risks presented by swap dealers and swap market
participants through comprehensive regulation. The Commission does not
believe that there are regulatory alternatives to those being proposed
that would be consistent with the statutory mandate. Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the proposed rules will not have a significant
economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \20\ imposes certain requirements
on Federal agencies 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
[[Page 71402]]
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 ``Regulations
Establishing and Governing the Duties of Swap Dealers and Major Swap
Participants.'' The OMB has not yet assigned this collection a control
number. 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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\20\ 44 U.S.C. 3501 et seq.
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The collection of information under these proposed rules is
necessary to implement certain provisions of the CEA, as amended by the
Dodd-Frank Act. Specifically, it is essential to ensuring that swap
dealers and major swap participants maintain risk management programs,
business continuity and disaster recovery plans, procedures to ensure
compliance with position limits, and antitrust procedures. Commission
staff would use the information when conducting the Commission's
examination and oversight program to evaluate the completeness and
effectiveness of the procedures adopted by the registrants.
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
The proposed regulation would require each swap dealer and major
swap participant to establish a risk management program (including
specific policies for compliance with position limits and to ensure
business continuity and disaster recovery); establish policies to
prevent unreasonable restraints of trade and anticompetitive burdens;
establish systems to diligently supervise the activities relating to
its business; and make certain information available for disclosure and
inspection by the Commission. These requirements may impose PRA
burdens. The burden associated with the proposed regulation per
registrant is estimated to be 204.5 hours per year, at an annual cost
of $20,450. 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.'' \21\
This burden will result from the development of the required policies
and procedures, satisfaction of various reporting obligations and the
documentation of required testing.
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\21\ 44 U.S.C. 3502(2).
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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 that
there may likely 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 establish and
implement risk management policies and procedures under 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 financial risk managers) that is employed
by the ``Securities and Commodity Contracts Intermediation and
Brokerage'' industry is $74.41.\22\ Because swap dealers and major swap
participants include large financial institutions whose risk 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. Accordingly, the estimated burden was
calculated as follows:
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\22\ http://www.bls.gov/oes/current/oes113031.htm.
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Drafting, Filing, Updating and Distributing Risk Management Program
(Including Position Limit Procedures and Business Continuity and
Disaster Recovery Plan)
Number of registrants: 300.
Estimated number of responses: 300.
Estimated total annual burden per registrant: 160 hours.
Frequency of collection: One-time filing with the Commission,
annual distribution, updating as needed.
Total annual burden: 48,000 burden hours [300 registrants x 160
hours].
Quarterly Risk Exposure Reports
Number of registrants: 300.
Estimated number of responses: 1,200 [300 registrants x 4 reports].
Estimated total annual burden per registrant: 32 hours.
Frequency of collection: Quarterly.
Total annual burden: 9,600 burden hours [300 registrants x 32
hours].
Quarterly Documentation of Risk Management Testing
Number of registrants: 300.
Estimated number of responses: 1,200 [300 registrants x 4 tests].
Estimated total annual burden per registrant: 4 hours.
Frequency of collection: Quarterly.
Total annual burden: 1,200 hours [300 registrants x 4 hours].
Documentation of Annual Position Limit Compliance Training and Audit
Number of registrants: 300.
Estimated number of responses: 300.
Estimated total annual burden per registrant: 2 hours.
Frequency of collection: Annually.
Total annual burden: 600 hours [300 registrants x 2 hours].
Quarterly Documentation of Position Limit Compliance
Number of registrants: 300.
Estimated number of responses: 1,200 [300 registrants x 4 reports].
Estimated total annual burden per registrant: 2 hours.
Frequency of collection: Quarterly.
Total annual burden: 600 hours [300 registrants x 2 hours].
Documentation of Position Limit Violations
Number of registrants: 300.
Estimated number of responses: 600 [300 registrants x 2 documents].
Estimated total annual burden per registrant: .5.
Frequency of collection: As needed.
Total annual burden: 150 hours [300 registrants x .5 hours].
Filing Emergency Contact Information and Annual Documentation of
Business Continuity Testing
Number of registrants: 300.
Estimated number of responses: 300.
Estimated total annual burden per registrant: 1 hour.
Frequency of collection: Annual.
Total annual burden: 300 hours.
[[Page 71403]]
Documentation of Risk Assessment of New Products
Number of registrants: 300.
Estimated number of responses: 1,500 [300 registrants x 5
documents].
Estimated total annual burden per registrant: 3 hours.
Frequency of collection: As needed.
Total annual burden: 900 hours [300 registrants x 3 hours].
Based upon the above, the aggregate cost for all registrants is
61,350 burden hours and $6,135,000 [61,350 x $100 per hour].
2. Information Collection Comments
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and 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
collections 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 (and the Commission) receives
it within 30 days of publication.
C. Cost-Benefit Analysis
Section 15(a) of the CEA \23\ requires the Commission to consider
the costs and benefits of its actions before issuing a rulemaking under
the CEA. By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of a new regulation or to determine
whether the benefits of the rule outweigh its costs; rather, it
requires that the Commission ``consider'' the costs and benefits of its
actions.
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\23\ 7 U.S.C. 19(a).
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Section 15(a) further specifies that costs and benefits of a
proposed rulemaking 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 considerations and could, in its discretion, determine that,
notwithstanding its costs, a particular regulation was 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.
Summary of proposed requirements. The proposed regulations would
implement certain provisions of section 731 of the Dodd-Frank Act,
which adds a new section 4s(j) to the Commodity Exchange Act. The
proposed regulations would set forth certain duties imposed upon swap
dealers and major swap participants registered with the Commission with
regard to: (1) Risk management procedures; (2) monitoring of trading to
prevent violations of applicable position limits; (3) diligent
supervision; (4) business continuity and disaster recovery; (5)
disclosure and the ability of regulators to obtain general information;
and (6) antitrust considerations.
Costs. With respect to costs, the Commission has determined that
for swap dealers and major swap participants, costs to institute risk
management systems and personnel in order to satisfy the new regulatory
requirements are far outweighed by the benefits to the financial system
as a whole. The proposed rules would require a swap dealer or major
swap participant to consider a number of issues affecting its business
environment when creating its risk management system. For example, a
swap dealer or major swap participant would need to consider, among
other things, the experience and qualifications of relevant risk
management personnel, as well as the separation of duties among
personnel in the business unit, when designing and implementing its
risk management policies and procedures. These considerations would
help facilitate the development of a risk management program that
appropriately addresses the risks posed by the swap dealer's or major
swap participant's business and the environment in which such business
is being conducted. In addition, these considerations would guide a
swap dealer or major swap participant in the implementation of specific
policies and procedures unique to its circumstances.
It is estimated that the average amount of time a swap dealer or
major swap participant would spend annually implementing its
comprehensive risk management program would be 204.5 hours. Based on an
hourly wage rate of $100, Commission staff estimates that each
registrant could expend up to $20,450 annually to comply with the
proposed rules. This would result in an aggregated cost of $6,135,000
annually (300 registrants x $20,450).
Most swap dealers and major swap participants have adequate
resources and existing risk management structures that are capable of
adjusting to the new regulatory framework without material diversion of
resources away from commercial operations.
Benefits. With respect to benefits, the proposed regulations would
require swap dealers and major swap participants to assess and monitor
the adequacy of their risk management under standards established by
the Commission. This would further the goal of avoiding market
disruptions and financial losses to market participants and the general
public. The proposed regulations also would promote prudent risk
management, oversight and stability, thereby fostering efficiency and a
greater ability to compete in the broader financial markets. The
proposed regulations would reward efficiency insofar as swap dealers
and major swap participants that operate efficiently would have lower
operating costs and thus would require fewer resources to comply with
the regulations. Finally, the proposed regulations are designed to
ensure that swap dealers and major swap participants can sustain their
market operations and meet their financial obligations to market
participants, thus contributing to the integrity of the financial
markets. Therefore, the Commission believes it is prudent to require
risk management
[[Page 71404]]
requirements for swap dealers and major swap participants.
Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data
or other information that they may have quantifying or qualifying the
costs and benefits of the proposed rules with their comment letters.
List of Subjects in 17 CFR Part 23
Antitrust, Commodity futures, Conduct standards, Conflict of
interests, Major swap participants, Reporting and recordkeeping, Swap
dealers, Swaps.
For the reasons stated in this release, the Commission proposes to
amend 17 CFR part 23 (as proposed in a separate proposed rule published
elsewhere in this issue of the Federal Register) as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
Authority and Issuance
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.
2. Subpart J is added to read as follows:
Subpart J--Duties of Swap Dealers and Major Swap Participants
Sec.
23.600 Risk Management Program for swap dealers and major swap
participants.
23.601 Monitoring of position limits.
23.602 Diligent supervision.
23.603 Business continuity and disaster recovery.
23.604 [Reserved]
23.605 [Reserved]
23.606 General information: Availability for disclosure and
inspection.
23.607 Antitrust considerations.
Subpart J--Duties of Swap Dealers and Major Swap Participants
Sec. 23.600 Risk Management Program for swap dealers and major swap
participants.
(a) Definitions. For purposes of this subpart J, the following
terms shall be defined as provided.
(1) Affiliate. This term means, with respect to any person, a
person controlling, controlled by, or under common control with, such
person.
(2) Business trading unit. This term means any department,
division, group, or personnel of a swap dealer or major swap
participant or any of its affiliates, whether or not identified as
such, that performs or is involved in any pricing, trading, sales,
marketing, advertising, solicitation, structuring, or brokerage
activities on behalf of a registrant.
(3) Clearing unit. This term means any department, division, group,
or personnel of a registrant or any of its affiliates, whether or not
identified as such, that performs any proprietary or customer clearing
activities on behalf of a registrant.
(4) Governing body. This term typically means, with respect to:
(i) A sole proprietorship, the proprietor;
(ii) A corporation, its board of directors;
(iii) A partnership, any general partner;
(iv) A limited liability company or limited liability partnership,
the manager, managing member or those members vested with management
authority; or
(v) Any other person, the body or person with ultimate decision-
making authority over the activities of such person.
(5) Prudential regulator. This term has the same meaning as section
1a(39) of the Commodity Exchange Act and includes the Board of
Governors of the Federal Reserve System, the Office of the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Farm
Credit Association, and the Federal Housing Finance Agency, as
applicable to the swap dealer or major swap participant. The term also
includes the Federal Deposit Insurance Corporation, with respect to any
financial company as defined in section 201 of under the Dodd-Frank
Wall Street Reform and Consumer Protection Act or any insured
depository institution under the Federal Deposit Insurance Act, and
with respect to each affiliate of any such company or institution.
(6) Senior management. This term means, with respect to a
registrant, such registrant's chief executive officer and any officer
with supervisory duties who reports directly to the chief executive
officer.
(b) Risk management program. (1) Purpose. Each swap dealer and
major swap participant shall establish, document, maintain, and enforce
a system of risk management policies and procedures designed to monitor
and manage the risks associated with the business of the swap dealer or
major swap participant. For purposes of this regulation, such policies
and procedures shall be referred to collectively as a ``Risk Management
Program.''
(2) Written policies and procedures. Each swap dealer and major
swap participant shall maintain written policies and procedures that
describe the Risk Management Program of the swap dealer or major swap
participant.
(3) Approval by governing body. The Risk Management Program and the
written risk management policies and procedures shall be approved, in
writing, by the governing body of the swap dealer or major swap
participant.
(4) Furnishing to the Commission. Each swap dealer and major swap
participant shall furnish a copy of its written risk management
policies and procedures to the Commission upon application for
registration. Where there is a material change in the risk management
policies and procedures, updated risk management policies and
procedures reflecting that change shall be furnished to the Commission
within sixty (60) calendar days after the end of the fiscal quarter in
which the change occurred.
(5) Risk management unit. As part of its Risk Management Program,
each swap dealer and major swap participant shall establish and
maintain a risk management unit with sufficient authority; qualified
personnel; and financial, operational, and other resources to carry out
the risk management program established pursuant to this regulation.
The risk management unit shall report directly to senior management and
shall be independent from the business trading unit.
(c) Elements of the Risk Management Program. The Risk Management
Program of each swap dealer and major swap participant shall include,
at a minimum, the following elements:
(1) Identification of risks and risk tolerance limits. (i) The Risk
Management Program should take into account market, credit, liquidity,
foreign currency, legal, operational, settlement, and any other
applicable risks together with a description of the risk tolerance
limits set by the swap dealer or major swap participant and the
underlying methodology. The risk tolerance limits shall be reviewed and
approved quarterly by senior management and annually by the governing
body. Exceptions to risk tolerance limits shall require prior approval
of, at a minimum, a supervisor in the risk management unit.
(ii) The Risk Management Program shall take into account risks
posed by affiliates and take an integrated approach to risk management
at the consolidated entity level.
(iii) The Risk Management Program shall include policies and
procedures for detecting breaches of risk tolerance limits set by the
swap dealer or major swap participant, and alerting supervisors within
the risk management unit and senior management, as appropriate.
[[Page 71405]]
(2) Periodic Risk Exposure Reports. (i) The risk management unit of
each swap dealer and major swap participant shall provide to senior
management and to its governing body quarterly written reports setting
forth the market, credit, liquidity, foreign currency, legal,
operational, settlement, and any other applicable risk exposures of the
swap dealer or major swap participant; any recommended changes to the
Risk Management Program; the recommended time frame for implementing
those changes; and the status of any incomplete implementation of
previously recommended changes to the Risk Management Program. For
purposes of this regulation, such reports shall be referred to as
``Risk Exposure Reports.'' The Risk Exposure Reports also shall be
provided to the senior management and the governing body immediately
upon detection of any material change in the risk exposure of the swap
dealer or major swap participant.
(ii) Furnishing to the Commission. Each swap dealer and major swap
participant shall furnish copies of its Risk Exposure Reports to the
Commission within five (5) business days of providing such reports to
its senior management.
(3) New product policy. The Risk Management Program of each swap
dealer and major swap participant shall include a new product policy
that is designed to identify and take into account the risks of any new
product prior to engaging in transactions involving the new product.
The new product policy should include the following elements:
(i) Consideration of the type of counterparty with which the new
product will be transacted; the product's characteristics and economic
function; and whether the product requires a novel pricing methodology
or presents novel legal and regulatory issues.
(ii) Identification and analysis of the relevant risks of the new
product and how they will be managed. The risk analysis should include
an assessment of any product, market, credit, liquidity, foreign
currency, legal, operational, settlement, and any other risks
associated with the new product. Product risk characteristics may
include, but are not limited to, volatility, non-linear price
characteristics, jump-to-default risk, and any correlation between the
value of the product and the counterparty's creditworthiness.
(iii) An assessment, signed by a supervisor in the risk management
unit, as to whether the new product would materially alter the overall
entity-wide risk profile of the swap dealer or major swap participant.
If the new product would materially alter the overall risk profile of
the swap dealer or major swap participant, the new product must be pre-
approved by the governing body before any transactions are effectuated.
(iv) A requirement that the risk management unit review the risk
analysis to identify any necessary modifications to the Risk Management
Program and implement such modifications prior to engaging in
transactions involving the new product.
(4) Specific risk management considerations. The Risk Management
Program of each swap dealer and major swap participant shall include,
but not be limited to, policies and procedures necessary to monitor and
manage the following risks:
(i) Market risk. Market risk policies and procedures shall take
into account, among other things:
(A) Daily measurement of market exposure, including exposure due to
unique product characteristics, volatility of prices, basis and
correlation risks, leverage, sensitivity of option positions, and
position concentration, to comply with market risk tolerance limits;
(B) Timely and reliable valuation data derived from, or verified
by, sources that are independent of the business trading unit, and if
derived from pricing models, that the models have been independently
validated by qualified, independent persons; and
(C) Reconciliation of profits and losses resulting from valuations
with the general ledger at least once each business day.
(ii) Credit risk. Credit risk policies and procedures shall take
into account, among other things:
(A) Daily measurement of overall credit exposure to comply with
counterparty credit limits;
(B) Monitoring and reporting of violations of counterparty credit
limits performed by personnel that are independent of the business
trading unit; and
(C) Regular valuation of collateral used to cover credit exposures
and safeguarding of collateral to prevent loss, disposal,
rehypothecation, or use unless appropriately authorized.
(iii) Liquidity risk. Liquidity risk policies and procedures shall
take into account, among other things:
(A) Daily measurement of liquidity needs;
(B) Testing of procedures to liquidate all non-cash collateral in a
timely manner and without significant effect on price; and
(C) Application of appropriate collateral haircuts that accurately
reflect market and credit risk.
(iv) Foreign currency risk. Foreign currency risk policies and
procedures shall take into account, among other things:
(A) Daily measurement of the amount of capital exposed to
fluctuations in the value of foreign currency to comply with applicable
limits; and
(B) Establishment of safeguards against adverse currency
fluctuations.
(v) Legal risk. Legal risk policies and procedures shall take into
account, among other things:
(A) Determinations that transactions and netting arrangements
entered into have a sound legal basis; and
(B) Establishment of documentation tracking procedures designed to
ensure the completeness of relevant documentation and to resolve any
documentation exceptions on a timely basis.
(vi) Operational risk. Operational risk policies and procedures
shall take into account, among other things:
(A) Secure and reliable operating and information systems with
adequate, scalable capacity, and independence from the business trading
unit;
(B) Safeguards to detect, identify, and promptly correct
deficiencies in operating and information systems; and
(C) Reconciliation of all operating and information systems.
(vii) Settlement risk. Settlement risk policies and procedures
shall take into account, among other things:
(A) Establishment of standard settlement instructions with each
counterparty;
(B) Procedures to track outstanding settlement items and aging
information in all accounts, including nostro and suspense accounts;
and
(C) Procedures to ensure timely payments to counterparties and to
resolve any late payments.
(5) Use of central counterparties. Each swap dealer and major swap
participant shall establish policies and procedures relating to its use
of central counterparties. Such policies and procedures shall:
(i) Require the use of central counterparties where clearing is
required pursuant to Commission regulation or order, unless the
counterparty has properly invoked a clearing exemption under Commission
regulations;
(ii) Set forth the conditions for use of central counterparties for
clearing when available as a means of mitigating counterparty credit
risk; and
(iii) Require diligent investigation into the adequacy of the
financial resources
[[Page 71406]]
and risk management procedures of any central counterparty through
which the swap dealer or major swap participant clears.
(6) Compliance with margin and capital requirements. Each swap
dealer and major swap participant shall satisfy all capital and margin
requirements established by the Commission or prudential regulator, as
applicable.
(7) Monitoring of compliance with Risk Management Program. Each
swap dealer and major swap participant shall establish policies and
procedures to detect violations of the Risk Management Program; to
encourage employees to report such violations to senior management,
without fear of retaliation; and to take specified disciplinary action
against employees who violate the Risk Management Program.
(d) Business trading unit. Each swap dealer and major swap
participant shall establish policies and procedures that, at a minimum:
(1) Require all trading policies be approved by the governing body
of the swap dealer or major swap participant;
(2) Require that traders execute transactions only with
counterparties for whom credit limits have been established;
(3) Provide specific quantitative or qualitative limits for traders
and personnel able to commit the capital of the swap dealer or major
swap participant;
(4) Monitor each trader throughout the trading day to prevent the
trader from exceeding any limit to which the trader is subject, or from
otherwise incurring undue risk;
(5) Require each trader to follow established policies and
procedures for executing and confirming all transactions;
(6) Establish means to detect unauthorized trading activities or
any other violation of policies and procedures;
(7) Ensure that trade discrepancies are brought to the immediate
attention of management of the business trading unit and are
documented;
(8) Ensure that the risk management unit reviews brokers'
statements, reconciles brokers' charges to estimates, reviews and
monitors broker's commissions, and initiates payment to brokers;
(9) Ensure that use of algorithmic trading programs is subject to
policies and procedures governing the use, supervision, maintenance,
testing, and inspection of the program; and
(10) Require the separation of personnel in the business trading
unit from personnel in the risk management unit.
(e) Review and testing. (1) Risk Management Programs shall be
reviewed and tested on at least a quarterly basis, or upon any material
change in the business of the swap dealer or major swap participant
that is reasonably likely to alter the risk profile of the swap dealer
or major swap participant.
(2) The quarterly reviews of the Risk Management Program shall
include an analysis of adherence to, and the effectiveness of, the risk
management policies and procedures, and any recommendations for
modifications to the Risk Management Program. The quarterly testing
shall be performed by qualified internal audit staff that are
independent of the business trading unit being audited or by a
qualified third party audit service reporting to staff that are
independent of the business trading unit. The results of the quarterly
reviews of the Risk Management Program shall be promptly reported to
and reviewed by, the chief compliance officer, senior management, and
governing body of the swap dealer or major swap participant.
(3) Each swap dealer and major swap participant shall document all
internal and external reviews and testing of its Risk Management
Program and written risk management policies and procedures including
the date of the review or test; the results; any deficiencies
identified; the corrective action taken; and the date that corrective
action was taken. Such documentation shall be provided to Commission
staff, upon request.
(f) Distribution of risk management policies and procedures. The
Risk Management Program shall include procedures for the timely
distribution of its written risk management policies and procedures to
relevant supervisory personnel. Each swap dealer and major swap
participant shall maintain records of the persons to whom the risk
management policies and procedures were distributed and when they were
distributed.
(g) Recordkeeping. (1) Each swap dealer and major swap participant
shall maintain copies of all written approvals required by this
section.
(2) All records or reports that a swap dealer or major swap
participant is required to maintain pursuant to this regulation shall
be maintained in accordance with 17 CFR 1.31 and shall be made
available promptly upon request to representatives of the Commission
and to representatives of applicable prudential regulators.
Sec. 23.601 Monitoring of position limits.
(a) Each swap dealer and major swap participant shall establish and
enforce written policies and procedures that are designed to monitor
for and prevent violations of applicable position limits established by
the Commission, a designated contract market, or a swap execution
facility, and to monitor for and prevent improper reliance upon any
exemptions or exclusions from such position limits. For purposes of
this regulation, such policies and procedures shall be referred to as
``Position Limit Procedures.'' The Position Limit Procedures shall be
incorporated into the Risk Management Program of the swap dealer or
major swap participant.
(b) For purposes of the Position Limit Procedures, each swap dealer
and major swap participant shall convert all swap positions into
equivalent futures positions using the methodology set forth in
Commission regulations.
(c) Each swap dealer and major swap participant shall provide
training to all relevant personnel on applicable position limits on an
annual basis and promptly upon any change to applicable position
limits. Each swap dealer and major swap participant shall maintain
records of such training including the substance of the training and
the identity of those receiving training.
(d) Each swap dealer and major swap participant shall diligently
monitor its trading activities and diligently supervise the actions of
its partners, officers, employees, and agents to ensure compliance with
the Position Limit Procedures of the swap dealer or major swap
participant.
(e) The Position Limit Procedures of each swap dealer and major
swap participant shall implement an early warning system designed to
detect and alert its senior management when position limits are in
danger of being breached (such as when trading has reached a percentage
threshold of the applicable position limit, and when position limits
have been exceeded). Any detected violation of applicable position
limits shall be reported promptly to the firm's governing body and to
the Commission. Each swap dealer and major swap participant shall
maintain a record of any early warning received, any position limit
violation detected, any action taken as a result of either, and the
date action was taken.
(f) Each swap dealer and major swap participant shall test its
Position Limit Procedures for adequacy and effectiveness each month and
maintain records of such monthly tests; the results thereof; any action
that is taken as a result thereof including, without limitation, any
recommendations for
[[Page 71407]]
modifications to the firm's Position Limit Procedures; and the date
action was taken.
(g) Each swap dealer and major swap participant shall document its
compliance with applicable position limits established by the
Commission, a designated contract market, or a swap execution facility
in a written report on a quarterly basis. Such report shall be promptly
reported to and reviewed by the chief compliance officer, senior
management, and governing body of the swap dealer or major swap
participant, and shall include, without limitation, a list of all early
warnings received, all position limit violations, the action taken in
response, the results of the monthly position limit testing required by
this regulation, any deficiencies in the Position Limit Procedures, the
status of any pending amendments to the Position Limit Procedures, and
any action taken to amend the Position Limit Procedures to ensure
compliance with all applicable position limits. Each swap dealer and
major swap participant shall retain a copy of this report.
(h) On an annual basis, each swap dealer and major swap participant
shall audit its Position Limit Procedures as part of the audit of its
Risk Management Program required by Commission regulations.
(i) All records required to be maintained pursuant to these
regulations shall be maintained in accordance with 17 CFR 1.31 and
shall be made available promptly upon request to representatives of the
Commission and to representatives of applicable prudential regulators.
Sec. 23.602 Diligent supervision.
(a) Supervision. Each swap dealer and major swap participant shall
establish and maintain a system to supervise, and shall diligently
supervise, all activities relating to its business performed by its
partners, members, officers, employees, and agents (or persons
occupying a similar status or performing a similar function). Such
system shall be reasonably designed to achieve compliance with the
requirements of the Commodity Exchange Act and Commission regulations.
(b) Supervisory System. Such supervisory system shall provide, at a
minimum, for the following:
(1) The designation, where applicable, of a person with authority
to carry out the supervisory responsibilities of the swap dealer or
major swap participant for all activities relating to its business as a
swap dealer or major swap participant.
(2) The use of reasonable efforts to determine that all supervisors
are qualified and meet such standards of training, experience,
competence, and such other qualification standards as the Commission
finds necessary or appropriate.
Sec. 23.603 Business continuity and disaster recovery.
(a) Business continuity and disaster recovery plan required. Each
swap dealer and major swap participant shall establish and maintain a
written business continuity and disaster recovery plan that outlines
the procedures to be followed in the event of an emergency or other
disruption of its normal business activities. The business continuity
and disaster recovery plan shall be designed to enable the swap dealer
or major swap participant to continue or to resume any operations by
the next business day with minimal disturbance to its counterparties
and the market, and to recover all documentation and data required to
be maintained by applicable law and regulation.
(b) Essential components. The business continuity and disaster
recovery plan of a swap dealer or major swap participant shall include
the following components:
(1) Identification of the documents, data, facilities,
infrastructure, personnel and competencies essential to the continued
operations of the swap dealer or major swap participant and to fulfill
the obligations of the swap dealer or major swap participant.
(2) Identification of the supervisory personnel responsible for
implementing each aspect of the business continuity and disaster
recovery plan and the emergency contacts required to be provided
pursuant to this regulation.
(3) A plan to communicate with the following persons in the event
of an emergency or other disruption, to the extent applicable to the
operations of the swap dealer or major swap participant: Employees;
counterparties; swap data repositories; execution facilities; trading
facilities; clearing facilities; regulatory authorities; data,
communications and infrastructure providers and other vendors; disaster
recovery specialists and other persons essential to the recovery of
documentation and data, the resumption of operations, and compliance
with the Commodity Exchange Act and Commission regulations.
(4) Procedures for, and the maintenance of, back-up facilities,
systems, infrastructure, personnel and other resources to achieve the
timely recovery of data and documentation and to resume operations as
soon as reasonably possible and generally within the next business day.
(5) Maintenance of back-up facilities, systems, infrastructure and
personnel in one or more areas that are geographically separate from
the swap dealer's or major swap participant's primary facilities,
systems, infrastructure and personnel (which may include contractual
arrangements for the use of facilities, systems and infrastructure
provided by third parties).
(6) Back-up or copying, with sufficient frequency, of documents and
data essential to the operations of the swap dealer or major swap
participant or to fulfill the regulatory obligations of the swap dealer
or major swap participant and storing the information off-site in
either hard-copy or electronic format.
(7) Identification of potential business interruptions encountered
by third parties that are necessary to the continued operations of the
swap dealer or major swap participant and a plan to minimize the impact
of such disruptions.
(c) Distribution to employees. Each swap dealer and major swap
participant shall distribute a copy of its business continuity and
disaster recovery plan to relevant employees and promptly provide any
significant revision thereto. Each swap dealer and major swap
participant shall maintain copies of the business continuity and
disaster recovery plan at one or more accessible off-site locations.
Each swap dealer and major swap participant shall train relevant
employees on applicable components of the business continuity and
disaster recovery plan.
(d) Commission notification. Each swap dealer and major swap
participant shall promptly notify the Commission of any emergency or
other disruption that may affect the ability of the swap dealer or
major swap participant to fulfill its regulatory obligations or would
have a significant adverse effect on the swap dealer or major swap
participant, its counterparties, or the market.
(e) Emergency contacts. Each swap dealer and major swap participant
shall provide to the Commission the name and contact information of two
employees who the Commission can contact in the event of an emergency
or other disruption. The individuals identified shall be authorized to
make key decisions on behalf of the swap dealer or major swap
participant and have knowledge of the firm's business continuity and
disaster recovery plan. The swap dealer or major swap participant shall
provide the Commission with any updates to this information promptly.
[[Page 71408]]
(f) Review and modification. A member of the senior management of
each swap dealer and major swap participant shall review the business
continuity and disaster recovery plan annually or upon any material
change to the business. Any deficiencies found or corrective action
taken shall be documented.
(g) Testing. Each business continuity and disaster recovery plan
shall be tested annually by qualified, independent internal audit
personnel or a qualified third party audit service. The date the
testing was performed shall be documented, together with the nature and
scope of the testing, any deficiencies found, any corrective action
taken, and the date that corrective action was taken.
(h) Business continuity and disaster recovery plans required by
other regulatory authorities. A swap dealer or major swap participant
shall comply with the requirements of this regulation in addition to
any business continuity and disaster recovery requirements that are
imposed upon the swap dealer or major swap participant by its
prudential regulator or any other regulatory or self-regulatory
authority.
(i) Recordkeeping. The business continuity and disaster recovery
plan of the swap dealer and major swap participant and all other
records required to be maintained pursuant to this section shall be
maintained in accordance with Commission Regulation Sec. 1.31 and
shall be made available promptly upon request to representatives of the
Commission and to representatives of applicable prudential regulators.
Sec. 23.604 [Reserved]
Sec. 23.605 [Reserved]
Sec. 23.606 General information: Availability for disclosure and
inspection.
(a) Disclosure of information. (1) Each swap dealer and major swap
participant shall make available for disclosure to and inspection by
the Commission and its prudential regulator, as applicable, all
information required by, or related to, the Commodity Exchange Act and
Commission regulations, including:
(i) The terms and condition of its swaps;
(ii) Its swaps trading operations, mechanisms, and practices;
(iii) Financial integrity and risk management protections relating
to swaps; and
(iv) Any other information relevant to its trading in swaps.
(2) Such information shall be made available promptly, upon
request, to Commission staff and the staff of the applicable prudential
regulator, at such frequency and in such manner as is set forth in the
Commodity Exchange Act, Commission regulations, or the regulations of
the applicable prudential regulator.
(b) Ability to provide information. (1) Each swap dealer and major
swap participant shall establish and maintain reliable internal data
capture, processing, storage, and other operational systems sufficient
to capture, process, record, store, and produce all information
necessary to satisfy its duties under the Commodity Exchange Act and
Commission regulations. Such systems shall be designed to produce the
information within the time frames set forth in the Commodity Exchange
Act and Commission regulations or upon request, as applicable.
(2) Each swap dealer and major swap participant shall establish,
implement, maintain, and enforce written procedures for the capture,
processing, recording, storage, and production of all information
necessary to satisfy its duties under the Commodity Exchange Act and
Commission regulations.
(c) Record retention. All records or reports that a swap dealer or
major swap participant is required to maintain pursuant to this
regulation shall be maintained in accordance with 17 CFR 1.31 and shall
be made available promptly upon request to representatives of the
Commission and to representatives of applicable prudential regulators.
Sec. 23.607 Antitrust considerations.
(a) No swap dealer or major swap participant shall adopt any
process or take any action that results in any unreasonable restraint
of trade, or impose any material anticompetitive burden on trading or
clearing, unless necessary or appropriate to achieve the purposes of
the Commodity Exchange Act.
(b) Consistent with its obligations under paragraph (a) of this
section, each swap dealer and major swap participant shall adopt
policies and procedures to prevent actions that result in unreasonable
restraint of trade, or impose any material anticompetitive burden on
trading or clearing.
Issued in Washington, DC, on November 10, 2010, by the
Commission.
David A. Stawick,
Secretary of the Commission.
Statement of Chairman Gary Gensler
Regulations Establishing and Governing the Duties of Swap Dealers and
Major Swap Participants
I support the proposed business conduct standards rulemaking
that establishes risk management policies for swap dealers and major
swap participants. One of the primary goals of the Dodd-Frank Act
was to bring swap dealers and major swap participants under
comprehensive regulation to reduce risk to the financial system and
to the economy as a whole. The proposed rules are consistent with
the Congressional requirement that swap dealers and major swap
participants: (1) Monitor trading to prevent violations of position
limits; (2) establish risk management procedures for managing their
day-to-day business; (3) disclose to the Commission and to
applicable prudential regulators general information relating to
trading practices and financial integrity of swaps; (4) establish
and enforce internal systems and procedures to obtain information
needed to perform all of the duties prescribed; (5) implement
conflicts of interest systems and procedures; and (6) refrain from
unreasonably restraining trade or imposing an anticompetitive burden
on trading or clearing.
[FR Doc. 2010-29009 Filed 11-22-10; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 23, 2010
See Also:
