# Swap Data Repositories > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-31133 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** December 23, 2010 - **Citation:** 75 FR 80898 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 49 RIN 3038-AD20 Swap Data Repositories AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. SUMMARY: The Commodity Futures Trading Commission (“CFTC” or “Commission”) is proposing rules to implement new statutory provisions introduced by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 728 of the Dodd-Frank Act amends the Commodity Exchange Act (“CEA” or the “Act”) by adding new Section 21, which establishes registration requirements, statutory duties, core principles and certain compliance obligations for registered swap data repositories (“SDRs”) and directs the Commission to adopt rules governing persons that are registered, as such, under this Section. DATES: Comments must be received by February 22, 2011. ADDRESSES: You may submit comments, identified by RIN 3038-AC20, 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. • Mail: David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. • Hand Delivery/Courier: Same as mail above. • Federal eRulemaking Portal: http://www.Regulations.gov. Follow the instructions for submitting comments. Please submit your comments using only one method. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to 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 (“FOIA”), 1 a petition for confidential treatment of the exempt information may be submitted according to the established procedures in § 145.9 of the Commission's regulations. 2 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 FOIA. 1 5 U.S.C. 552. 2 17 CFR 145.9. FOR FURTHER INFORMATION CONTACT: Jeffrey P. Burns, Assistant General Counsel, Office of the General Counsel, at (202) 418-5101, jburns@cftc.gov; Susan Nathan, Senior Special Counsel, Division of Market Oversight, at (202) 418-5133, snathan@cftc.gov and Adedayo Banwo, Counsel, Office of the General Counsel, at (202) 418-6249, abanwo@cftc.gov, Commodity Futures Trading Commission, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. The Proposed Regulations: Part 49 A. Requirements of Registration B. Duties of Registered SDRs 1. Acceptance of Data 2. Confirmation of Data Accuracy 3. Recordkeeping Requirements 4. Direct Electronic Access by the Commission 5. Monitoring, Screening and Analyzing Swap Data 6. Maintenance of Data Privacy 7. Access to SDR Data 8. Emergency Procedures C. Designation of Chief Compliance Officer D. Core Principles Applicable to SDRs 1. Antitrust Considerations (Core Principle 1) 2. Introduction—Governance Arrangements (Core Principle 2) and Conflicts of Interest (Core Principle 3) 3. Governance Arrangements (Core Principle 2) 4. Conflicts of Interest (Core Principle 3) E. Additional Duties 1. System Safeguards 2. Financial Resources 3. Disclosure Requirements of Swap Data Repositories 4. Non-Discriminatory Access and Fees F. Real Time Reporting G. Procedures for Implementing Swap Data Repository Rules III. Effectiveness and Transition Period IV. General Request for Comments V. Related Matters A. Paperwork Reduction Act B. Cost-Benefit Analysis C. Antitrust Considerations D. Regulatory Flexibility Act VI. List of Subjects I. Background On July 21, 2010, President Obama signed into law the Dodd-Frank Act. 3 Title VII of the Dodd-Frank Act 4 amended the CEA 5 to establish a comprehensive new regulatory framework for swaps and security-based 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 (“SDs”) and major swap participants (“MSPs”); (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight. 3 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm. 4 Pursuant to Section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.” 5 7 U.S.C. 1, et seq. To enhance transparency, promote standardization and reduce systemic risk, Section 728 of the Dodd-Frank Act establishes a newly-created registered entity—the SDR 6 —to collect and maintain data and information related to swap transactions as prescribed by the Commission 7 and to make such data and information directly and electronically available to regulators. Section 2(a)(13)(G) of the CEA, adopted by Section 727 of the Dodd-Frank Act, requires all swaps—cleared or uncleared—to be reported to an SDR. Section 728 of the Dodd-Frank Act added to the CEA new Section 21 governing registration and regulation of SDRs, and directed the Commission to adopt regulations governing SDR duties and responsibilities specified in the legislation. Section 21 requires that SDRs be registered with the Commission, 8 allows a derivatives clearing organization (“DCO”) to register as an SDR, and specifies that persons required to be registered as SDRs must register with the Commission whether or not they are also licensed as a bank or registered as a security-based swap data repository with the Securities and Exchange Commission (“SEC”). 9 To register with the Commission and maintain registration, SDRs are required to comply with the duties and core principles set forth in Section 21 of the CEA as well as other requirements that the Commission may prescribed by rule. 10 6 Section 721 of the Dodd-Frank Act amends Section 1a of the CEA to add the definition of SDR. Section 1a provides that the term “swap data repository means any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for swaps.” 7 U.S.C. 1a(48). Currently there are global trade repositories for credit, interest rate, and equity swaps. Since 2009, all G-14 dealers have submitted credit swap data to the Depository Trust & Clearing Corporation's (“DTCC”) Trade Information Warehouse. In January 2010, TriOptima launched the Global OTC Derivatives Interest Rate Trade Reporting Repository after selection by the Rates Steering Committee of the International Swaps and Derivatives Association to provide a trade repository to collect information on trades in interest rate swaps. In August 2010, DTCC also launched the Equity Derivatives Reporting Repository for equity swaps and other equity derivatives. Other entities may also perform trade repository functions on a regional or more localized basis. In addition, a variety of firms also provide ancillary services and functions essential to the efficient operation of trade reporting of swaps. Trade repositories for other asset classes such as commodities and foreign currency have yet to be formally established but are expected to be developed in the near future in connection with the effective date of the Dodd-Frank Act. 7 Regulations governing the SDRs' data collection and recordkeeping responsibilities are the subject of a separate proposed rulemaking under part 45 of the Commission's regulations. See 17 CFR part 45. 8 The Dodd-Frank Act mandates that the Commission promulgate rules to implement these provisions by July 15, 2011. See Section 712 of the Dodd-Frank Act. 9 If a DCO so registers, then to the extent that final rules on governance and conflicts of interest, discussed infra Section II.D.2, differ between a DCO and an SDR, the DCO must meet the more stringent set of rules. 10 Section 21(f)(4)(A) of the CEA, added by the Dodd-Frank Act, authorizes the Commission to develop one or more additional duties applicable to SDRs. 7 U.S.C. 24a(f)(4). Pursuant to the specific duties outlined in Section 21(c) of the CEA, SDRs must (1) accept data; (2) confirm with both counterparties to the swap the accuracy of the data that was submitted; (3) maintain data according to standards prescribed by the Commission; (4) provide direct electronic access to the Commission or any designee of the Commission; (5) provide public reporting of swap data in the form and frequency as the Commission may require; (6) establish automated systems for monitoring and analyzing data (including the use of end-user clearing exemptions) at the direction of the Commission; (7) maintain user privacy; (8) on a confidential basis, pursuant to Section 8 of the CEA, 11 upon request and after notifying the Commission, make data available to other specified regulators; and (9) establish and maintain emergency procedures. As a separate matter, prior to sharing information with specified entities, the SDR must, pursuant to Section 21(d) of the CEA, receive a written agreement from each such entity stating that it will abide by the confidentiality provisions of Section 8 of the CEA and agree to indemnify the SDR and the Commission for any litigation expenses relating to information provided under Section 8. 11 Section 8 of the CEA, 7 U.S.C. 12(e), establishes among other things the conditions under which the Commission may furnish information obtained in connection with the administration of the CEA to any department or agency of the United States; such information shall not be disclosed by such department or agency except in any action or proceeding under the laws of the United States to which it, the Commission or the United States is a party. Similarly, the Commission may furnish such information to a foreign futures authority if the Commission is satisfied that the information will not be disclosed by such foreign futures authority except in connection with an adjudicatory action or proceeding brought under the laws of such foreign government or political subdivision, or foreign futures authority, is a party. Section 21(e) of the CEA requires that each SDR have a chief compliance officer (“CCO”) and specifies the duties of the CCO. Section 21(f) of the CEA establishes four core principles for SDRs. First, an SDR is prohibited from adopting any rule or taking any action that results in any unreasonable restraint of trade or imposing any material anticompetitive burden on the trading, clearing or reporting of transactions. Second, each SDR must establish governance arrangements that are transparent to fulfill the public interest requirements and to support the objectives of the federal government, owners and participants. Third, each SDR must establish and enforce rules to minimize conflicts of interest in the SDR's decision-making processes and establish a process for resolving conflicts of interest. Lastly, a fourth core principle provides that the Commission must establish additional duties for registered SDRs to minimize conflicts of interest, protect data, ensure compliance and guarantee the safety and security of the SDR and may develop additional duties taking into account evolving standards of the United States and the international community. 12 12 See Section 21(f)(4) of the CEA, 7 U.S.C. 24a(f)(4). The Commission notes that in May 2010, a working group jointly established by the Committee on Payment and Settlement Systems (“CPPS”) of the Bank of International Settlements (“BIS”) and the Technical Committee of the International Organization of Securities Commissions (“IOSCO”) published a consultative report entitled “Considerations for Trade Repositories in the OTC Derivatives Markets”(“Working Group Report”). 13 The Working Group Report presents a set of factors to consider in connection with the design, operation and regulation of SDRs. A significant consideration of the Working Group Report is access to SDR data by appropriate regulators. As noted in this Working Group Report, a trade repository “should support market transparency by making data available to relevant authorities and the public in line with their respective information needs.” 14 The Commission believes that the Dodd-Frank Act and proposed part 49 of the Commission's Regulations are consistent with the goals of the Working Group Report. Unless inconsistent with the statutory framework set forth in Section 21 of the CEA and related provisions, the Commission proposes that SDRs will largely follow the recommendations in the Working Group Report to enhance transparency, promote standardization and reduce systemic risk in the swaps market. 13 See CPSS-IOSCO Consultative Report, Considerations for Trade Repositories in the OTC Derivatives (May 2010), available at http://www.bis.org/publ/cpss90.pdf . 14 Id. Additionally, Section 752(a) of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities regarding the establishment of consistent international standards for the regulation of swaps and various “swap entities.” 15 Consistent with this directive, the Commission believes that the data maintained by SDRs must be available to all appropriate foreign regulators consistent with their regulatory responsibilities and the Dodd-Frank Act. Accordingly, in support of its cooperative international approach to the regulation of SDRs, the Commission has consulted with various foreign regulatory authorities in promulgating the proposed rules. 15 The Dodd-Frank Act provides: In order to promote effective and consistent global regulation of swaps and security-based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators (as that term is defined in Section 1a(39) of the Commodity Exchange Act), as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps, security-based swaps, swap entities, and security-based swap entities and may agree to such information-sharing arrangements as may be deemed to be necessary or appropriate in the public interest or for the protection of investors, swap counterparties, and security-based swap counterparties. Section 752(a) of the Dodd-Frank Act. The Commission also notes the recent issuance by the European Commission of its regulatory proposal related to OTC derivatives, central counterparties and trade depositories. 16 It is the Commission's intention to harmonize its approach with that of the European Commission to the extent possible consistent with the statutory provisions of Dodd-Frank Act relating to SDRs. 16 See Proposal for a Regulation of the European Parliament and of the Council on OTC Derivatives, Central Counterparties, and Trade Depositories (the “European Commission Proposal”), COM (2010) 484/5. The Commission submits further that Section 21 of the CEA does not provide the Commission with the authority to exempt any entity performing the functions of an SDR from the registration requirements or any other regulatory duties established by the Dodd-Frank Act. However, swap activity that is strictly of a “non-U.S.” nature would be excluded from Commission registration and regulation. Specifically, Section 2(i) of the CEA, as amended by Section 722 of the Dodd-Frank Act, excludes from U.S. jurisdiction all swap activity that does not have a “direct and significant connection with activities in, or effect on, commerce of the United States”, or which contravene regulations necessary to prevent evasion. 17 17 Section 2(i) of the CEA, as amended by Section 722(d) of the Dodd-Frank Act, provides: (i) APPLICABILITY.—The provisions of this Act relating to swaps that were enacted by the Wall Street Transparency and Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities— (1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this Act that was enacted by the Wall Street Transparency and Accountability Act of 2010. 7 U.S.C. 2(i)(1)-(2). II. The Proposed Regulations: Part 49 As discussed above, part 49 will contain the provisions that apply to registration and regulation of SDRs. Proposed § 49.3 will establish the procedures and substantive requirements for registration as an SDR. Compliance with the statutory duties described in Section 21(c) of the CEA is described in proposed § 49.9 and detailed in proposed §§ 49.10 through 49.18. Core principles applicable to SDRs as outlined in Section 21(f) are set forth in proposed §§ 49.19 through 49.22. The additional duties promulgated pursuant to Section 21(f)(4) of the CEA (Core Principle 4) are set forth in proposed §§ 49.23 through 49.27. A. Requirements of Registration Proposed §§ 49.3-49.4 and 49.6-49.7 provide the substantive requirements and framework for SDR registration. The Proposed Regulations include provisions relating to: (1) Procedures for registration; (2) provisional registration; (3) an annual filing requirement; (4) withdrawal of application for registration; (5) reinstatement of dormant registration; (6) withdrawal of registration; (7) registration of successor entities; and (8) SDRs located in foreign jurisdictions. Each of the proposed Regulations is discussed below in turn. 1. Procedures for Registration—Proposed § 49.3 To implement the requirements of Section 21(a) of the CEA, as amended by Section 728 of the Dodd-Frank Act, and to ensure the Commission's ability to administer part 49 of the Commission's Regulations generally, the Commission proposes in § 49.3 to establish application and approval procedures for any entity seeking registration as a SDR. The Commission, in connection with proposed § 49.3, is proposing to require each SDR applicant to file for registration on proposed Form SDR. (a) Proposed Form SDR. Proposed § 49.3(a) provides that applications for registration as an SDR must be filed electronically with the Commission on new Form SDR. Proposed Form SDR will be used for an initial or provisional registration as an SDR as well as any updates or amendments to registration. Each applicant will be required to provide the Commission with documents and descriptions pertaining to the (i) business organization, (ii) financial resources, (iii) technological capabilities and (iv) accessibility of services of the SDR. SDR applicants will be required to provide documents describing the applicant's legal status, including a copy of the constitution, articles of incorporation or association with all amendments, existing by-laws, rules or instruments corresponding with, and a description of the organizational and governance structure. SDRs must also submit copies of any applicable rules and regulations (as defined in revised § 40.1), 18 disclose any affiliates along with a brief description of the nature of the affiliation, and submit copies of any agreements between the SDR and third parties that will assist the SDR in complying with the duties set forth in Section 21(c) and the core principles specified in Section 21(f). If the applicant is a foreign entity, the entity is required to certify and provide an opinion of counsel that the SDR, as a matter of law, is able to provide the Commission with prompt access to the books and records of the SDR and that the SDR can submit to onsite inspection and examination by the Commission. 18 See Commission, Notice of Proposed Rulemaking: Revisions to part 40 (Provisions Common to Registered Entities), 75 FR 67282 (Nov. 2, 2010). Financial information filed as part of Form SDR would include (i) a balance sheet, (ii) statement of income and expenses, (iii) statement of sources and application of revenues and (iv) all notes or schedules, as of the most recent fiscal year. A balance sheet and an income and expense statement for each affiliate, as of the end of the most recent fiscal year, will also be required for those affiliates of the SDR that provide SDR regulatory services. If the applicant is a newly-created entity without sufficient time in operation, the applicant should provide pro forma financial statements for the most recent six months, or since inception of the entity, whichever occurs first. Except for pro forma financial statements prepared for newly-created entities, financial statements shall be prepared in conformity with generally accepted accounting principles (“GAAP”) applied on a basis consistent with that of the preceding financial statement. Applicants will be required to demonstrate operational capability through documentation such as technical manuals and/or third party service provider agreements that will be employed to provide services to the SDR. Applicants will also be required to set forth practices and procedures for accepting swap data and providing services to market participants. As required by proposed § 49.27, access must be fair, open and non-discriminatory. (b) 180-Day Review Procedures. An entity that seeks to register as a SDR is required to electronically file Form SDR with the Commission in accordance with the instructions contained in Form SDR. The Commission will review Form SDR and, at or prior to the conclusion of a 180-day period, by order either (i) grant registration; (ii) extend the 180-day review period for good cause; or (ii) deny the application for registration. If deemed appropriate, the Commission may grant registration as a SDR subject to conditions. The 180-day review period will commence once a completed submission on Form SDR is submitted to the Commission, as determined solely in the discretion of the Commission. If the Commission denies an application for registration, it will specify the grounds for such denial. In the event the Commission denies an applicant registration, such person may request an opportunity for a hearing before the Commission. (c) Standard for Approval. The Commission, in reviewing applications for SDR registration, will review whether SDR applicants are properly organized and have the capacity to assure the prompt, accurate and reliable performance of the SDR duties in Section 21(c), core principles in Section 21(f) and additional duties of Section 21(f)(4). Subject to the ability of the Commission to extend the 180-day period as noted above, the Commission would deny registration if it appears at the end of the 180-day period that the application (i) is materially incomplete; 19 (ii) fails in form or substance to meet the requirements of Section 21 of the CEA and proposed part 49 of the Commission's Regulations; 20 and/or (iii) is amended or supplemented in a manner that is inconsistent with proposed § 49.3. The Commission, in each instance of the denial of an application for registration, will provide notification setting forth the deficiencies in the application, or the manner in which the application fails to meet the requirements of proposed part 49 of the Commission's Regulations. 21 19 An SDR applicant that is denied registration based on an incomplete application would be permitted to re-file an application with the Commission. 20 The Commission would deny the registration of a SDR applicant that is unable to demonstrate compliance with the statutory duties set forth in Section 21(c) of the CEA, 7 U.S.C. 24a(c) and proposed § 49.9 as well as the core principles set forth in Section 21(f) of the CEA, 7 U.S.C. 24a(f), and proposed § 49.19. 21 This provision is comparable to the designated contract market (“DCM”) and DCO applications set forth in Section 6 of the CEA, 7 U.S.C. 8. (d) Amendments and Annual Filing. Proposed § 49.3(a)(3) provides that if any information reported on Form SDR or any subsequent amendment becomes inaccurate, the SDR is required to promptly file an amendment on Form SDR updating such information. This requirement is applicable regardless of whether the information becomes inaccurate before or after an application for registration has been granted. Proposed § 49.3(a)(3) also requires that each registered SDR annually file an amendment on Form SDR within 60 days after the end of each calendar year. (e) Service of Process. The Commission is proposing in proposed § 49.3(a)(5) to require each SDR to designate and authorize on Form SDR an agent in the United States, other than a Commission official, to accept any notice or service of process, pleadings, or other documents in any action or proceedings against the SDR to enforce the CEA and related Regulations. If an SDR appoints another agent to accept such notice or service of process, then the SDR would be required to file promptly an amendment on Form SDR updating this information. 22 Proposed § 49.3(a)(5) is intended to conserve the Commission's resources and to minimize any logistical obstacles ( e.g., locating defendants or respondents abroad) that the Commission may encounter when attempting to effect service. 22 See proposed § 49.3(a)(5). (f) Provisional Registration. Proposed § 49.3(b) permits the Commission, upon the request of an applicant, to grant a provisional registration of an SDR, if such applicant is in substantial compliance with the standards set forth in proposed § 49.3(a)(4). This application for provisional registration would be filed on proposed Form SDR. Such provisional registration will expire on the earlier of: (i) The date that the Commission grants or denies registration of the SDR; or (ii) the date that the Commission rescinds the provisional registration of the SDR. The Commission may rescind such provisional registration on the same grounds as those set forth in proposed § 49.3(a)(3). The proposed provisional registration would enable an SDR to comply with the Dodd-Frank Act upon its effective date ( i.e., the later of 360 days after the date of its enactment or 60 days after publication of the final rule implementing Section 21 of the CEA). The provisional registration would also allow the Commission to implement the registration requirements of the Dodd-Frank Act for SDRs while providing the Commission sufficient time to fully review the application of an SDR. An SDR that is provisionally registered with the Commission would be subject to Section 21 of the CEA and related regulations during the period in which the Commission is reviewing the SDR's application of registration. The Commission believes that the provisional registration should not be a permanent provision of part 49. Accordingly, proposed § 49.3(b) includes a “sunset” provision so that provisional registration would terminate 365 days from the effective date of proposed § 49.3(b). Notwithstanding the availability of a provisional registration, the Commission encourages each SDR to apply for registration as soon as possible following the Commission's adoption of final part 49, to permit sufficient time for an SDR to answer any questions that the Commission staff may have and to provide additional information or documentation, if necessary. The Commission will review applications in the order in which they are received. Applications seeking provisional registration that are received close to the effective date of the SDR registration requirement may not be reviewed and approved by the effective date. (g) Withdrawal of Application for Registration. Proposed § 49.3(c) permits an applicant for registration as an SDR to withdraw its application by filing a request with the Commission. Such a voluntary withdrawal by the applicant SDR will not affect any action taken or to be taken by the Commission based upon conduct occurring during the time that the application for registration was pending with the Commission. (h) Reinstatement of Dormant Registration. Proposed § 49.3(d) provides that the Commission must affirmatively re-instate the registration of a dormant SDR (as defined in revised § 40.1 of the Commission's Regulations) 23 prior to such dormant SDR accepting or re-accepting swap data. 23 See Provisions Common to Registered Entities, supra note 18. (i) Delegation of Authority. Proposed § 49.3(e) delegates authority to the Director of the Division of Market Oversight (or designee) with the consultation of the General Counsel of the Commission (or designee) for certain matters relating to the sufficiency of the application on Form SDR filed with the Commission. In particular, the Commission in this proposed Regulation delegates to the Director of the Division of Market Oversight or designee, with the consultation of the General Counsel or designee, the authority to notify an applicant for registration as an SDR under Section 21 of the CEA that such application for registration is materially incomplete and that the running of the 180-day period is stayed. This delegation of authority does not prohibit the Commission from otherwise exercising its authority that would be delegated under this proposed Regulation. The Director of the Division of Market Oversight may also submit to the Commission for its consideration any matter which has been delegated under this proposed Regulation. 2. Withdrawal From Registration—Proposed § 49.4 Consistent with Section 7 of the CEA, proposed § 49.4 permits a registered SDR to withdraw from registration by filing a notice of withdrawal with the Commission at least 90 days prior to the named withdrawal date. As part of its notice of withdrawal, the SDR is required to: (1) Designate another SDR to serve as the custodian of the withdrawing SDR's books and records; (2) specify the location of the data and records; and (3) provide an opinion of counsel that the SDR is authorized to make such data and records available. Prior to the filing of a notice of withdrawal, a SDR must file an amended Form SDR to update any inaccurate information. The withdrawal of a SDR's registration will be effective on the 60th day after receipt by the Commission of the notice of withdrawal, unless the Commission determines to extend or curtail the effectiveness of an SDR's registration by order, deemed necessary or appropriate and in the public interest. Proposed § 49.4(c) provides that after an opportunity for hearing, the Commission may revoke the registration of a registered SDR if the Commission finds that any registered SDR has obtained its registration by making any false and misleading material statements or has violated or failed to comply with any provision of the CEA and Commission Regulations. Pending final determination of whether the registration of an SDR should be revoked, the Commission may suspend the registration of the SDR if it appears to the Commission, after notice and opportunity for hearing, to be necessary or appropriate in the public interest. 3. Equity Interest Transfer Notification—Proposed § 49.5 Proposed § 49.5 would require SDRs to file with the Commission a notice of the equity interest transfer of ten percent or more, no later than the business day, as defined in revised § 40.1, 24 following the date on which the SDR enters into a firm obligation to transfer the equity interest. 25 The notification must include and be accompanied by: (i) Any relevant agreement(s), including preliminary agreements; (ii) any associated changes to relevant corporate documents; (iii) a chart outlining any new ownership or corporate or organizational structure; (iv) a brief description of the purpose and any impact of the equity interest transfer; and (v) a representation from the registered SDR that it meets all of the requirements of Section 21 of the CEA and Commission regulations adopted thereunder. The SDR would also be required to amend any information that is no longer accurate on Form SDR consistent with the procedures set forth in proposed § 49.3. 24 See Provisions Common to Registered Entities, supra note 18. 25 The Commission is proposing a 10 percent threshold because it believes that a change in ownership of such magnitude may have an impact on the operations of the SDR. The Commission believes that such impact may be present even if the change in ownership does not constitute a change in control. Given the potential impact that a change in ownership might have on the operations of a SDR, the Commission believes that it is appropriate to require such SDR to certify after such change that it continues to comply with all obligations under the CEA and Commission regulations. The proposed Regulation requires that the registered SDR keep the Commission informed of the projected date that the transaction resulting in the equity interest transfer will be consummated, and provide to the Commission any new agreements or modifications to the original agreement(s) filed pursuant to this proposed Regulation. The registered SDR is required to notify the Commission of the consummation of the transaction on the business day in which it occurs. The proposed Regulation will enable Commission staff to consider whether any conditions contained in an equity transfer agreement(s) are inconsistent with the duties, responsibilities and core principles of a SDR. Proposed § 49.5(c) would require the SDR upon a 10% or greater change in ownership to certify, within two business days following the date on which the change in ownership occurs, that such SDR meets all of the requirements of Section 21 of the CEA and proposed Regulations under Part 49 of the Commission's regulations. The proposed Regulation also requires that the SDR include as part of its certification whether any aspects of the SDR's operations will change as a result of the change in ownership, and if so, the SDR must provide a description of the changes. Proposed § 49.5(c) also provides that the certification may rely on, and be supported by, prior materials and information submitted as part of an application for registration or new filings if necessary to update its previous filings. The Commission notes that there may be differences in notification procedures for transfers or changes in equity ownership of registered entities proposed by the Commission. Request for Comment. The Commission requests comment regarding the proposed notification procedures as follows: • Should there be uniformity or differentiation in procedures applied to different registered entities? 4. Registration of Successor Entities—Proposed § 49.6 Proposed § 49.6(a) sets forth the process of registering successor entities of an SDR as the result of corporate change of control or other similar events. Specifically, the proposed Regulation provides that in the event of a corporate reorganization, merger, acquisition, bankruptcy or other similar corporate event that creates a new entity, the SDR is required to request a transfer of its registration, rules, and other matters, within 30 days of the succession. The registration of the predecessor SDR entity will be deemed to remain effective as the registration of the successor if the successor, within 30 days after such succession, files an application for registration on Form SDR, and the predecessor files a request for withdrawal of registration. The proposed Regulation would further provide that the registration of the predecessor SDR shall cease to be effective 90 days after the application for registration on Form SDR is filed by the successor SDR. 26 In other words, the 90-day period would not begin to run until a complete Form SDR has been filed by the successor with the Commission. 26 See proposed § 49.6(a). The following are examples of the types of successions that would be required to be completed by filing an application: (1) An acquisition, through which an unregistered entity purchases or assumes substantially all of the assets and liabilities of the SDR and then operates the business of the SDR, (2) a consolidation of two or more registered entities, resulting in their conducting business through a new unregistered entity, which assumes substantially all of the assets and liabilities of the predecessor entities, and (3) dual successions, through which one registered entity subdivides its business into two or more new unregistered entities. Proposed § 49.6(b) sets forth the process of registering successor entities of an SDR as the result of a change in the predecessor SDR's date or state of incorporation, form of organization, or composition of a partnership. In these cases, the successor SDR, within 30 days after the succession, must amend the registration of the predecessor SDR on Form SDR to reflect the changes. Such amendment would be deemed an application for registration filed by the predecessor and adopted by the successor. In all three types of successions, the predecessor must cease operating as an SDR. The Commission preliminarily believes that it is appropriate to allow a successor to file an amendment to the predecessor's Form SDR in these types of successions because such successions do not typically result in a change of control of the SDR. The purpose of proposed § 49.6 is to enable a successor SDR to operate without an interruption of business by relying for a limited period of time on the registration of the predecessor SDR until the successor's own registration becomes effective. The proposed Regulation is intended to facilitate the legitimate transfer of business between two or more SDRs and to be used only where there is a direct and substantial business nexus between the predecessor and the successor SDR. The proposed Regulation would not allow a registered SDR to sell its registration, eliminate substantial liabilities, spin off personnel, or facilitate the transfer of the registration of a “shell” organization that does not conduct any business. No entity would be permitted to rely on proposed § 49.6 unless it is acquiring or assuming substantially all of the assets and liabilities of the predecessor's SDR business. Proposed § 49.6 would not apply to reorganizations that involve only registered SDRs. In those situations, the registered SDRs can continue to rely on their existing registrations. The proposed rule would also not apply to situations in which the predecessor intends to continue to engage in SDR activities. Otherwise, confusion may result as to the identities and registration statuses of the parties. 5. Swap Data Repositories Located in Foreign Jurisdictions—Proposed § 49.7 Proposed § 49.7 relates to those SDR applicants that are located outside of the United States. This proposed Regulation is intended to enable the Commission to obtain necessary swap data and related books and records maintained by a SDR located outside of the United States. Proposed § 49.7 would require each SDR located outside of the United States to provide an opinion of counsel that the SDR can, as a matter of law, provide the Commission with prompt access to its books and records and submit to onsite inspection and examination by the Commission. The Commission notes that each jurisdiction may have a different legal framework that may limit or restrict the Commission's ability to receive information from an SDR. An opinion of counsel regarding prompt access to books and records and onsite inspection and examination will allow the Commission to better evaluate an SDR's capability to meet the requirements of registration and ongoing supervision. Failure to provide an opinion of counsel may be a basis for the Commission to deny an application for registration. Request for Comment. The Commission requests comment on the questions set forth below regarding registration. (1) Are the instructions in proposed Form SDR clear? If not, identify any instructions that should be clarified and, if possible, offer alternatives. (2) Would any of the requested information on proposed Form SDR be burdensome for an SDR to supply? If so, explain. (3) Should the Commission require any additional information on proposed Form SDR? If so, what information and why? (4) Are there any items on proposed Form SDR that the Commission should not request? If so, which items and why? (5) Is the Commission's proposed registration process appropriate and sufficiently clear? If not, why not and what would be a better alternative? (6) If a SDR located outside of the United States is registered, should the registration process for the foreign SDR be any different than the Commission's proposed registration process? (7) Are there any factors that the Commission should take into consideration to ensure that a SDR located outside the United States seeking to register as an SDR can, in compliance with applicable foreign laws, provide the Commission with access to the SDR's books and records that are required pursuant to proposed § 49.7 and can submit to onsite inspection and examination by the Commission? (8) Should the Commission consider any other factors relating to a SDR located outside of the United States with respect to the Commission's registration rules or in general? (9) Is the Commission's proposed rule regarding provisional registration appropriate? If not, why not? (10) What conditions should apply to the granting of a provisional registration? What criteria should the Commission consider for approving provisional registration applications? (11) Are the timeframes in the proposed registration process appropriate? If not, why not and what would be more appropriate timeframes? (12) Are the proposed factors in determining whether the Commission should grant or deny an application for registration appropriate and sufficiently clear? If not, why not? Should the Commission take into consideration any other factors in determining whether to grant or deny an SDR's application for registration? B. Duties of Registered SDRs Section 21(c) of the CEA sets forth the minimum duties that a SDR is required to perform to become registered and to maintain registration. These statutory duties require that SDRs (i) accept swap data as prescribed by the Commission; (ii) confirm with both counterparties to a swap the accuracy of the data; (iii) maintain the data submitted; (iv) provide the Commission or its designee with direct electronic access to the swap data; (v) provide the necessary information as prescribed by the Commission to comply with the public reporting requirements set forth in Section 2(a)(13) of the CEA; (vi) establish automated systems for monitoring, screening, and analyzing swap data; (vii) maintain the privacy or confidentiality of any and all swap data that the SDR receives; (viii) provide access to the swap data to certain “appropriate” domestic and foreign regulators; and (ix) adopt and implement emergency procedures. In addition, the Commission pursuant to its authority under Sections 21(f)(4) and 8a(5) 27 of the CEA also proposes to add by regulation four additional duties which would require that registered SDRs (i) adopt and implement system safeguards, including business continuity and disaster recovery (“BC-DR”) plans; (ii) maintain sufficient financial resources; (iii) furnish market participant with a disclosure document setting forth the risks and costs associated with using the services of the SDR; and (iv) provide fair and open access and fees and charges that are equitable and non-discriminatory. 27 Section 8a(5) of the CEA, 7 U.S.C. 12a(5), authorizes the Commission to promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or accomplish any of the purposes of the CEA. In connection with SDRs, Section 21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii) specifically requires that a SDR to be registered and maintain its registration must comply with any requirement that the Commission may impose by rule or regulation pursuant to Section 8a(5) of the CEA. The following subsections describe in detail the Regulations proposed by the Commission to implement SDR statutory duties set forth in Section 21(c) of the CEA. 1. Acceptance of Data—Section 21(c)(1) of the CEA The Commission in a companion release 28 is proposing in new part 45 to the Commission's Regulations the data elements that must be reported and applicable to DCMs, DCOs, swap execution facilities (“SEFs”), foreign boards of trade (“FBOTs”), 29 SDs, MSPs and/or end-users in connection with the reporting of such swap data to SDRs. 30 These data elements and standards would include the reporting of continuation data throughout the life of the swap. 31 In addition, the Data NPRM provides specific requirements for SDRs relating to (i) determining which counterparty must report to the SDR; 32 (ii) third party facilitation of swap data reporting; 33 (iii) reporting to a single SDR in connection with the reporting of swap data; 34 (iv) required data standards; and (v) the reporting of errors and omissions. 28 See Commission, Notice of Proposed Rulemaking: Swap Data Recordkeeping and Reporting Requirements, 75 FR 76574 (Dec. 8, 2010) (the “Data NPRM”). 29 Proposed § 48.1 defines a FBOT as “any board of trade, exchange or market located outside of the United States, its territories or possessions, whether incorporated or unincorporated, where foreign agreements, contracts or transactions are entered into.” See Commission, Notice of Proposed Rulemaking: Registration of Foreign Boards of Trade, 75 FR 70974 (Nov. 19, 2010) (expected to be codified at 17 CFR part 48). Since 1996, FBOT requests to provide direct access to their electronic trading and order matching systems (trading systems) from within the U.S. have been addressed by Commission staff via the no-action process set forth in Commission Regulation 140.99. See, e.g., Deutsche Terminborse, CFTC No-Action Letter, 1994-1996 Transfer Binder], Comm. Fut. L. Rep. (CCH) ¶ 26,669 (Feb. 29, 1996), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/96-28.pdf. 30 As detailed in the Data NPRM, SDRs will also be required by proposed § 45.4(a) to issue unique swap identifiers (“USIs”), used to identify each particular swap transaction, when both counterparties to a swap are not SDs or MSPs. The SDR would be required to transmit the USI to each counterparty and DCO (if applicable) involved in the swap as soon as technologically practicable. 31 See proposed § 45.3(b) detailed in the Data NPRM, supra note 28. 32 Proposed § 45.5 establishes a mechanism for counterparties to follow in choosing the counterparty to report in situations where both counterparties have the same hierarchical status, in order to prevent confusion or delay concerning this choice. Where both counterparties are SDs, or both are MSPs, or both are non-SD/MSP counterparties, the proposed regulations require the counterparties to agree as one term of their swap transaction which counterparty will fulfill reporting obligations with respect to that swap. In addition, and notwithstanding the other provisions in proposed § 45.5, where only one counterparty to a swap is a U.S. person, the proposed Regulation would require the U.S. person to be the reporting counterparty. 33 The Commission in proposed § 45.6 permits registered entities and counterparties to contract with third-party service providers to facilitate their reporting obligations. However, registered entities and counterparties remain fully responsible for their reporting obligations. 34 Proposed § 45.7 would require that all swap data for a given swap must be reported to the SDR to which required primary economic terms data for that swap is first reported. The SDR receiving the initial report must transmit its own identity, together with the USI for the swap to each counterparty to the swap, to the SEF or DCM, if any, on which the swap was executed, and to the DCO, if any, to which the swap is submitted for clearing. Thereafter, the proposed Regulation requires that all data reported for the swap by any registered entity or any counterparty to the swap, and all corrections of errors and omissions in previously reported data, must be reported to that same SDR (or to its successor in the event that it ceases to operate). As part of proposed § 49.10, market participants will be required to fulfill their reporting obligations to SDRs in a reliable, secure, and efficient manner. Proposed § 49.10 specifically requires that SDRs adopt policies and procedures that will enable the SDR to electronically accept data and other regulatory information. 35 These policies and procedures must provide specific technological protocols for market participants in submitting swaps data to the SDR. 35 See Section 21(c)(1) of the CEA, 7 U.S.C. 24a(c)(1). Proposed § 49.10 will also require SDRs to accept all swaps in an asset classes for which they have registered. The requirement is intended to minimize the number of swaps that are not accepted by any SDR by enabling market participants to easily identify a SDR that accepts particular asset classes. As described in proposed § 49.3 relating to registration, each SDR applying for registration on Form SDR will be required to specify the specific asset classes for which it will accept swap data. Proposed § 49.2(a)(2) defines the term “asset class” as those swaps in a particular broad category of goods, services or commodities underlying a swap. The asset classes include credit, equity, interest rates, currency, 36 other commodities and such other asset classes as may be determined by the Commission. 37 In proposing these five major asset categories, the Commission considered market statistics that distinguish between those general types of underlying instruments, as well as market infrastructures that have been established for these five types of instruments. The first category would encompass the underlying of any swap which is based, in whole or in part, on one or more reference rates, such as swaps of payments determined by fixed and floating rates. The second category would encompass the underlying of any swap that is based, in whole or in part, on rates of exchange between different currencies, changes in such rates or other aspects of such rates, including a foreign exchange option. The currency asset class includes foreign exchange swaps, as defined in Section 1a(25) of the CEA. The third category would encompass the underlying of any swap that is based, in whole or in part, on one or more broad-based indices related to instruments of indebtedness, including but not limited to any swap that is an index credit default swap or a total return swap on one or more indices of debt instruments. 38 The fourth category would encompass the underlying of any swap that is based, in whole or in part, on one or more broad-based indices of equity securities, such as a total return swap on one or more equity indices. The fifth category would encompass the underlying of any swap not included in the interest rate, currency, credit or equity asset class categories, including, without limitation, any swap for which the primary underlying notional item is a physical commodity or the price or any other aspect of a physical commodity. 36 Section 1a(47)(iii) of the CEA states: Notwithstanding a written determination by the Secretary under clause (i), all foreign exchange swaps and foreign exchange forwards shall be reported to either a swap data repository, or, if there is no swap data repository that would accept such swaps or forwards, to the Commission pursuant to section 4r within such time period as the Commission may by rule or regulation prescribe. 7 U.S.C. 1a(47)(E)(iii). Clause (i) of Section 1a(47)(E) provides: Foreign exchange swaps and foreign exchange forwards shall be considered swaps under this paragraph unless the Secretary makes a written determination under section 1b that either foreign exchange swaps or foreign exchange forwards or both— (I) should be not be regulated as swaps under this Act; and (II) are not structured to evade the Dodd-Frank Wall Street Reform and Consumer Protection Act in violation of any rule promulgated by the Commission pursuant to section 721(c) of that Act. 7 U.S.C. 1a(47)(E)(iii). See also, Department of the Treasury, Notice and Request for Comments: Determination of Foreign Exchange Swaps and Forwards, 75 FR 66829 (Oct. 29, 2010) and 75 FR 66426 (Oct. 28, 2010). 37 As detailed in proposed § 49.27, SDRs would be required to provide fair and open access to their services. The Commission submits that SDRs would not be permitted to discriminate in connection with the access to their services. As a result, market participants with sufficient technology resources for connectivity and the payment of fees would be granted access to the services of the SDR. 38 This category does not encompass the underlying of a derivatives contract that is based on an instrument of indebtedness solely in connection with the swap's financing leg. In addition, part 43 of the Commission's proposed regulations states that SDRs acting as “real-time disseminators” for the purposes of real-time reporting may require additional information to (1) match the real-time swap transaction and pricing data to data reported to the SDR; and/or (2) confirm that parties to a swap have reported in a timely manner pursuant to Section 2(a)(13)(F) of the CEA. Such additional information requested by an SDR acting as a real-time disseminator may include a transaction identification code, the names of the parties to the swap, or such other additional information as may be necessary. 39 Additionally, part 43 of the Commission's proposed regulations will also require registered SDRs to calculate the appropriate minimum block size for swaps for purposes of real-time reporting. 39 See proposed § 43.4(c) set forth in Notice of Proposed Rulemaking: Real Time Public Reporting of Swap Transaction Data, 75 FR 76140 (Dec. 7, 2010) (the “Real Time NPRM”). Proposed § 49.10(c) would also require an SDR to establish sufficient policies and procedures to prevent a valid swap from being invalidated, altered or modified through the confirmation or recording process of the SDR. The Commission is concerned that a validly executed swap may, through contractual provisions or other practices of an SDR, be improperly invalidated. To this end, the Commission submits that SDRs should not be in a position to alter, amend or invalidate otherwise valid swaps of counterparties through the reporting process. In addition, proposed § 49.10(d) would also require SDRs to establish procedures and provide facilities for effectively resolving disputes over the accuracy of the swap data and positions that are recorded in the SDR. In this manner, disputes can be resolved quickly and efficiently so that the integrity and reliability of SDR data reporting and recordkeeping is facilitated. Request for Comment. The Commission requests comment on the question set forth below on acceptance of data: (1) Should the Commission require an SDR to accept all swaps of a given asset class? If not, what other mechanism should the Commission use to prevent “orphaned” swaps ( i.e., those swaps not accepted by an SDR)? (2) How should the Commission address swaps that do not clearly belong to a particular asset class or that could arguably belong to more than one asset class? Should the Commission allow an SDR that accepts swaps in one asset class to accept any swap that arguably belongs to that asset class, but which could also belong to a second asset class, without requiring the SDR to then accept all swaps in the second asset class? (3) Are there any circumstances under which a validly, executed swap should be modified or altered other than by the express agreement of the counterparties? What should be the role of the SDR in these circumstances? Should the SDR be able to alter or modify an existing swap based on a contractual arrangement with a reporting party? 2. Confirmation of Data Accuracy—Section 21(c)(2) of the CEA Section 21(c)(2) of the CEA, as adopted by Section 728 of the Dodd-Frank Act, requires SDRs to “confirm with both counterparties to the swap the accuracy of the data that was submitted.” 40 Proposed § 49.11 provides that an SDR must establish and adopt policies and procedures to ensure the accuracy of swap data that is reported to an SDR by DCMs, DCOs, SEFs, FBOTs, SDs, MSPs and/or end-users or certain third party service providers such as confirmation or matching service providers acting on their behalf. The specific form and content of the swaps data will be established by the Commission in proposed part 45 of the Commission's regulations relating to data elements and standards. In particular, proposed § 49.11 requires that the SDR confirm with both counterparties to the swap the accuracy of the data and information submitted. 41 40 Section 21(c)(2) of the CEA, 7 U.S.C. 24a(c)(2). 41 The Data NPRM details and defines “confirmation” and “confirmation data.” The term confirmation is proposed in § 45.1(b) to mean “the full, signed legal confirmation by the counterparties of all of the terms of a swap.” The term “confirmation data” is proposed in § 45.1(c) to mean “all of the terms of a swap matched and agreed upon by the counterparties in confirming the swap.” See Data NPRM, supra note 28. Proposed § 49.11 provides that in connection with the required confirmation, the SDR must confirm with each counterparty to the swap and receive acknowledgement of all data submitted as well as corrections of any errors. 42 The acknowledgement and correction of errors must pertain to all information submitted by either counterparty or entity that has been delegated the reporting obligation. The SDR must keep a record of corrected errors and make that record available upon request to the Commission. Confirmation is unnecessary when the reporting obligation is borne by a SEF, DCM, DCO or a confirmation or matching service provider to whom the swap counterparty has delegated its reporting obligation. In these situations, the SDR must still ensure that the data and information it receives from such entity is accurate. 42 This requirement does not apply to real-time public reporting. See proposed § 43.3(f), supra note 39. In addition, proposed part 43 of the Commission's regulations relating to real-time reporting requires that registered SDRs which accept and publicly disseminate swap transaction and pricing data to also disseminate any cancellations and corrections to such data. 43 43 See proposed Regulations 43.3(f)(3)-(4), supra note 39. 3. Recordkeeping Requirements—Section 21(c)(3) of the CEA Proposed § 49.12, which implements Section 21(c)(3) of the CEA, requires SDRs to, in accordance with the requirements of proposed § 45.2(f), maintain the books and records of all activity and data relating to swaps reported to the SDR. 44 Proposed § 45.2(f), relating to swap data recordkeeping requirements, requires that SDRs maintain reported swap data, consistent with the data elements described in proposed § 45.9, throughout the life of such swap transaction plus an additional five year period, during which time the swap data must be readily accessible by the SDR and available to the Commission via real-time electronic access. In addition, proposed § 45.2(f) would also require the SDR to provide subsequent archival storage. 45 This archival storage would require the SDR to be able to retrieve such swap data within three business days. 44 See Data NPRM, supra note 28. 45 The Commission in the Data NPRM is requesting comment relating to the time period in which an SDR should be required to maintain archival storage of swap data records. Consistent with proposed § 45.2(g), proposed § 49.12(c) would also require the books and records maintained by a SDR to be open to inspection upon request by any representative of the Commission, the United States Department of Justice, the SEC or by any representative of a prudential regulator as authorized by the Commission. The SDR would be required to provide copies to the Commission, either by electronic means, in hard copy, or both, as requested by the Commission. Proposed § 49.12(d) would require each SDR that publicly disseminates swap data in real time to comply with the real time public reporting and recordkeeping requirements prescribed in part 43. In connection with real-time reporting, proposed § 49.2(a)(9) defines “position” to mean the gross and net notional amounts of open swap transactions aggregated by one or more attributes, including, but not limited to, the (i) underlying instrument, index, or reference entity; (ii) counterparty; (iii) asset class; (iv) long risk of the underlying instrument, index, or reference entity; and (v) short risk of the underlying instrument, index, or reference entity. Position data is required to be provided by SDRs to certain entities pursuant to Section 2(a)(13) of the CEA. 46 The proposed term is designed to be sufficiently specific so that SDRs are aware of the types of positions that regulators may require an SDR to provide, while at the same time, provide enough flexibility to encompass the types of positions that regulators and the industry will find important as new types of swaps are developed. 46 See Section 727 of the Dodd-Frank Act. The Dodd-Frank Act specifically directs the Commission to issue regulations to limit the amount of positions, other than bona fide hedge positions, that may be held by any person with respect to commodity futures and option contracts in exempt and agricultural commodities. 47 The Data NPRM accordingly has proposed data reporting requirements that would require all persons reporting to SDRs to include futures contract equivalents for each swap transaction. 48 As set forth below, the Commission requests comment on position data and how it should be maintained and monitored. 47 See Commission, Notice of Proposed Rulemaking: Position Reports for Physical Commodity Swaps, 75 FR 67258 (November 2, 2010). The Commission in this proposal would require position data for not only futures and option contracts but also for economically equivalent swaps. 48 See Data NPRM, supra note 28. Request for Comment. The Commission requests comment on the questions set forth below on data maintenance: (1) Is the appropriate time period for readily accessible access to the transaction data the life of the particular swap plus at least five years after expiration of the swap? Should the Commission provide different recordkeeping requirements for transaction data and position data? For transaction data, would ten years after expiration of the applicable swap be more appropriate and why? What would be the benefits and burdens associated with each of these time periods? Are there other retention periods that would be more appropriate? (2) What is the appropriate time period for archival storage of SDR data and records? (3) What are the costs/benefits of requiring longer data retention requirements? (4) Should position data be maintained and monitored by SDRs? If not, in what manner should the Commission monitor speculative position limits that may include swaps? What would be the proper role of an SDR? What entity or entities should have the responsibility to aggregate and maintain the position data for regulatory purposes? (5) Should the Commission specify particular standards or procedures for calculating positions? 4. Direct Electronic Access to SDR by the Commission—Section 21(c)(4) of the CEA A critical function and responsibility of an SDR as set forth in Section 21(c)(4)(A) of the CEA is to provide “direct electronic access” to the Commission or its designee, which could include another registered entity. 49 For purposes of proposed § 49.17, “direct electronic access” is defined as “an electronic system, platform or framework that provides internet or web-based access to real-time swap transaction data.” 50 49 The term “registered entity” is defined in Section 1a(40) of the CEA to include (i) a board of trade designated as a contract market under Section 5 of the CEA; (ii) a DCO registered under Section 5b of the CEA; (iii) a SEF registered under Section 5h of the CEA; (iv) a SDR registered under Section 21 of the CEA; and (v) with respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded. 7 U.S.C. 1a(40). 50 See proposed § 49.17(b)(3). Proposed § 49.17 provides for two requirements in connection with “direct electronic access” that each SDR must develop. First, proposed § 49.17 would require a SDR to provide the Commission or its designee with connectivity and access to the SDR's database of swap data and web-based services. Connectivity access and web-based services will allow the Commission or its designee to receive any and all information regarding a swap transaction that may be required for regulatory, examination and/or enforcement purposes on a real-time basis. Second, proposed § 49.17 would also require the SDR to electronically deliver to the Commission or its designee, certain data in the form and manner prescribed by the Commission. Section 21(c)(5) of the CEA requires a registered SDR, at the direction of the Commission, to establish automated systems for monitoring, screening, and analyzing swap data. Pursuant to proposed § 49.17, 51 registered SDRs in connection with providing “direct electronic access” will also be required to provide the Commission with monitoring tools, capable of screening and analyzing swap data, identical to those provided to compliance staff and the CCO of the registered SDR, including, but not limited to, access to the staff of the registered SDR and/or third party service providers or agents familiar with the operations of the registered SDR, who can provide assistance to the Commission regarding data structure and content, web-based services and various software. 51 Section 21(c)(5) of the CEA reads: “A swap data repository shall— * * * at the direction of the Commission, establish automated systems for monitoring, screening, and analyzing swap data, including compliance and frequency of end user clearing exemption claims by individual and affiliated entities.” 7 U.S.C. 24a(c)(5). Proposed § 49.17 further provides that the swap data provided to the Commission by a registered SDR will be accessible only by authorized persons. The Commission will provide registered SDRs with a list of authorized users on a quarterly basis so that proper security protocols may be efficiently implemented. Request for Comment. The Commission requests comment on the following issues related to swap data access. (1) What are the advantages and disadvantages of requiring SDRs to provide a direct streaming of the data to the Commission or its designee? Should the Commission require periodic electronic transfer of data as an alternative? If so, how often should such transfer occur ( e.g., hourly, a few times a day, every few days, once a week)? (2) What are the advantages and disadvantages of requiring SDRs to provide a user interface that permits the Commission or its designee access to the data maintained by the SDR and that provides the Commission or its designee with the ability to query or analyze the data in the same manner that is available to the SDR? (3) What would be the most feasible and cost-effective method for an SDR to provide direct electronic access to the Commission or its designee? (4) Are there other methods of providing direct electronic access to the Commission or its designee that the Commission should consider? (5) Are there specific reports or sets of data that the Commission should consider obtaining from SDRs to monitor risk exposures of individual counterparties to swap transactions, to monitor concentrations of risk exposures, or for other purposes? (6) In addition to the data already subject to the Commission's request, are there additional reports or sets of data that the Commission should consider obtaining from SDRs to evaluate systemic risk or that could be used for prudential supervision? (7) Are there any other reports or sets of data that the Commission should consider obtaining from SDRs? 5. Monitoring, Screening and Analyzing Swap Data—Section 21(c)(5) of the CEA Section 21(c)(5) of the CEA, as amended by Section 728 of the Dodd Frank Act, requires SDRs to implement such automated systems for “monitoring, screening, and analyzing swap data” as the Commission may direct. In addition, Section 21(c)(5) also requires SDRs to establish automated systems to monitor, screen, and analyze data for end-user clearing exemption claims by individuals and affiliated entities.” The Commission proposes to implement the requirements of Section 21(c)(5) through proposed §§ 49.13 and 49.14, which closely resembles the statutory text, by requiring SDRs to monitor, screen, and analyze swap data in their possession, as directed by the Commission, including data related to end-user clearing exemptions claims. 52 Proposed § 49.13 also requires SDRs to establish and maintain sufficient information technology, staff, and other resources to fulfill these tasks. Section 21 of the CEA reflects SDRs' significant responsibilities in the new swaps market regulatory structure established by the Dodd-Frank Act. SDRs will function not only as warehouses for all swap transaction data, but also as potential sources of regulatory information for the Commission and other appropriate regulators. 52 Section 2(h)(7) of the CEA, 7 U.S.C. 2(h)(7) provides that the clearing requirement of Section 2(h)(1)(A) shall not apply to a swap if one of the counterparties (i) is not a financial entity; (ii) is using swaps to hedge or mitigate commercial risk; and (iii) notifies the Commission, in a manner set forth by the Commission, how it generally meets the financial obligations associated with entering into non-cleared swaps. By its terms, Section 21(c)(5), requires that such automated systems be established “at the direction of the Commission,” but does not provide for specific functions which SDRs should undertake with respect to the swap transaction data in their possession. 53 Similarly, while suggesting a role for SDRs in monitoring end-user clearing exemption claims, the only specific requirement of Section 21(c)(5) is that SDRs have systems in place capable of fulfilling such requirements as the Commission may assign. The Commission proposes to implement the requirements of Section 21(c)(5) via proposed § 49.13 which, as summarized below, requires that SDRs: (1) Monitor, screen, and analyze all swap data in their possession as the Commission may require; (2) develop systems and resources as necessary to execute any monitoring, screening, or analyzing functions assigned by the Commission; and (3) monitor, screen, and analyze swap transactions which are reported to the SDR as exempt from clearing pursuant to Section 2(h)(7) of the CEA ( i.e., end-user clearing exemption). 53 Id. (a) Proposed § 49.13(a) Proposed § 49.13(a) requires SDRs to monitor, screen, and analyze all swap data in their possession in such a manner as the Commission may require. An SDR's duties in this respect include routine monitoring, screening, and analysis to accomplish any swap surveillance objectives established by the Commission, and specific monitoring, screening, and analysis tasks based on ad hoc requests by the Commission. The Commission expects that SDRs will be required to compile, extract, filter, and report information necessary to assist the Commission in the fulfillment of its regulatory obligations with respect to swap markets. However proposed § 49.13(b) only requires that SDRs undertake these functions at the Commission's request. The Commission will consider specific tasks to be performed by SDRs at a later date, as its knowledge of the regulatory oversight needs with respect to the swap markets increases. (b) Proposed § 49.13(b) Proposed § 49.13(b) obligates SDRs to maintain sufficient information technology, staff, and other resources as necessary to fulfill any requirements that may arise through proposed § 49.13(a). It also requires SDRs to monitor their resources at least annually, and to make adjustments as needed to remain in regulatory compliance. Proposed § 49.13(b) is modeled on existing and proposed Commission requirements applicable to other registered entities. For example, part 38 of the Commission's Regulations requires DCMs to have “arrangements and resources for effective trade practice surveillance” and “arrangements, resources and authority for effective rule enforcement.” 54 With respect to SDRs, the Commission also recognizes the necessity for adequate resource requirements given its expectation that SDRs may play a significant role in assisting the Commission to fulfill its regulatory mandate. 54 See 17 CFR 38, Appendix B, Core Principle 2(a)(1)-(2). See also Notice of Proposed Rulemaking Relating to Core Principle and Other Requirements for Designated Contract Markets approved for publication by the Commission at an open meeting on Dec. 1, 2010 and expected to be published shortly in the Federal Register (to be codified at 17 CFR part 38). (c) Proposed § 49.14 Pursuant to Section 2(h)(7) of the CEA, the Dodd-Frank Act creates a framework by which certain swap transactions may be exempt from the mandatory clearing requirement. 55 Swap transactions may be exempt from clearing if one of the counterparties to a swap is (i) not a financial entity; 56 (ii) is using swaps to hedge or mitigate commercial risk; 57 and (iii) notifies the Commission as to how it generally meets its financial obligations associated with entering into non-cleared swaps (the so-called “end-user” clearing exemption). 58 The Commission is expected in a subsequent proposed rulemaking to require that swap counterparties claiming the clearing exemption submit supplemental information along with transaction data and notification for any swap transaction claimed under the clearing exception. Counterparties may be required to answer entity-related identification questions, identify how they generally expect to meet their financial obligations associated with the non-cleared swaps, identify whether the swap claimed under the exemption is being used to hedge or mitigate commercial risk, and identify whether the transaction was approved by a governing body of the entity. 55 See Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A). 56 See Section 2(h)(7)(A)(i) of the CEA, 7 U.S.C. 2(h)(7)(A)(i). 57 See Section 2(h)(7)(A)(ii) of the CEA, 7 U.S.C. 2(h)(7)(A)(ii). 58 See Section 2(h)(7)(A)(iii) of the CEA., 7 U.S.C. 2(h)(7)(A)(iii). Section 2(h)(7) of the CEA—and more specifically Section 2(h)(7)(F) of the CEA—also enables the Commission to monitor the use of clearing exemption claims and to prevent abuses by prescribing rules, issuing interpretations, or requesting information from persons claiming the clearing exemption. 59 Although exempt from clearing, counterparties claiming the clearing exemption must nonetheless report the swap transaction to an SDR, and must provide the notification required pursuant to Section 2(h)(7)(A)(iii) of the CEA, including information regarding how the counterparty generally meets its financial obligations associated with non-cleared swaps, and any additional information which the Commission deems necessary to prevent abuse pursuant to Section 2(h)(7)(F) of the CEA. 59 See Section 2(h)(7)(F) of the CEA, 7 U.S.C. 2(h)(7)(F). Proposed § 49.14 is designed to implement the Commission's program to monitor and prevent abuse of end-user clearing exemption claims. It requires SDRs to have automated systems capable of identifying, aggregating, sorting and filtering all swap transactions reported to an SDR that are exempt from clearing pursuant to Section 2(h)(7) of the CEA. Such systems are also required for information provided by end-users to the SDR regarding how an end-user meets the requirements of Sections 2(h)(7)(A)(i)-(iii) of the CEA and any regulations promulgated by the Commission thereunder. The Commission believes it is important to monitor the use and claims of end user exemptions to prevent abuse and assure compliance with the required disclosures. At this time the Commission is only requiring that SDRs establish the infrastructure to fulfill the requirements of this rule, and any requirements for specific data processing will be set forth at a later time. Request for Comment. The Commission requests comment on the following issue relating to the monitoring of margin. • Should the Commission require SDRs to establish automated systems for monitoring, screening, and analyzing the reporting of margin required, and of margin on deposit, as proposed in new part 23 of the Commissions Regulations? 60 60 See Commission, Notice of Proposed Rulemaking: Regulations Establishing and Governing Duties of Swap Dealers and Major Swap Participants, 75 FR 71397 (Nov. 23, 2010). 6. Maintenance of Data Privacy—Section 21(c)(6) of the CEA Proposed § 49.16 would implement the statutory requirements of Section 21(c)(6) of the CEA as adopted by Section 728 of the Dodd-Frank Act to maintain the privacy and confidentiality of swap data provided to the SDR. In particular, Section 21(c)(6) of the CEA provides that an SDR shall “maintain the privacy of any and all swap transaction information that the swap data repository receives from a SD, counterparty, or any other registered entity”. 61 Proposed § 49.16 would also partially implement Section 21(f)(3) of the CEA, as adopted by Section 728 of the Dodd-Frank Act. 62 Such section sets forth a conflicts of interest “core principle” applicable to an SDR. 63 As detailed further below, the Commission has identified certain conflicts that may implicate access, disclosure, or use of SDR Information. 64 SDR Information includes any information that an SDR receives from a reporting entity ( i.e., the submitter(s) of the data, including, without limitation, market participants 65 such as DCMs, DCOs, SEFs, SDs, MSPs, end-users and/or any other counterparties). The Commission emphasizes that SDRs will receive two separate “streams” of data: (i) data related to real-time public reporting which by its nature is publicly available and (ii) core data that is intended for use by the Commission and other regulators which is subject to statutory confidential treatment. Accordingly, pursuant to Sections 21(c)(6) and 21(f)(3) (Core Principle 3—Conflicts of Interest) of the CEA, SDR information that is not subject to real-time public reporting should be treated as non-public and strictly confidential, so that it may not be accessed, disclosed, or used for purposes not related to SDR responsibilities under the CEA or the regulations thereunder, unless such use is explicitly agreed to by the reporting entities ( i.e., the submitter(s) of the data). However, aggregated data that cannot be attributed to individual transactions or market participants may be made publicly available by SDRs. 61 See Section 21(c)(6) of the CEA, 7 U.S.C. 24a(c)(6). 62 See Section 21(f)(3) of the CEA, 7 U.S.C. 24a(f)(3). 63 According to such “core principle,” each SDR shall “establish and enforce rules to minimize conflicts of interest in [its] decision-making process * * *” and “establish a process for resolving conflicts of interest * * *” Id. 64 The term “SDR Information” is defined in proposed § 49.2(a)(15) to mean “any information that the swap data repository maintains.” Proposed § 49.17(f) and (g) contain more specific prohibitions on access or use of SDR Information. 65 The term “market participant” is defined in proposed § 49.2(a)(6) to mean any person participating in the swap market, including, but not limited to, DCMs, DCOs, SEFs, SDs, MSPs, and any other counterparties to a swap transaction. Request for Comment. The Commission requests comment on the questions set forth below regarding the limitations on the use of SDR Information. (1) Has the Proposal correctly defined “SDR Information”? (2) Are there any other concerns regarding the use of SDR Information that the Commission should consider? (3) Would public availability of aggregated swap data be consistent with an SDR's obligation to keep swap data confidential? Proposed § 49.16 would require the SDR to establish, maintain, and enforce specific policies and procedures to protect the privacy or confidentiality of any and all SDR Information. This would also include privacy or confidentiality policies and procedures for the sharing of SDR Information with SDR affiliates 66 as well as certain non-affiliated third parties. 67 As noted above, swap data that is publicly disseminated in real-time by SDRs pursuant to proposed part 43 of the Commission's Regulation would not be subject to the privacy and confidentiality requirements set forth in proposed § 49.16. 66 The term “affiliate” is defined in proposed § 49.2(a)(1) to mean a person that “directly, or indirectly, controls, is controlled by, or is under common control with, the swap data repository.” 67 The term “non-affiliated third party” is defined in proposed § 49.2(a)(7) to mean “any person except (i) swap data repository, (ii) the swap data repository's affiliate, or (iii) a person employed by a swap data repository and any entity that is not the swap data repository's affiliate (and “non-affiliated third party” includes such entity that jointly employs the person).” Proposed § 49.16 would also require the SDR to establish and maintain safeguards, policies, and procedures that would, at a minimum, address the misappropriation or misuse of swap data that the Commission is prohibited (save for limited exceptions) from disclosing pursuant to Section 8 of the CEA (“Section 8 Material”). 68 Section 8 Material is that information or material described in Section 8(a) of the CEA that the Commission is prohibited from publishing if it “would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.” 69 Such information would typically include trade data, position data, business transactions, trade secrets and any other non-public personal information about a market participant or any of its customers. Moreover, proposed § 49.16 would require an SDR to also protect SDR information that is not Section 8 Material as well as intellectual property that may include trading strategies. 68 The term “Section 8 Material” is defined in proposed § 49.2(a)(13) as “the business transactions, trade data, or market positions of any person and trade secrets or names of customers.” The legislative history of Section 8 of the CEA reflects substantial Congressional concern with protecting the legitimate interests of certain market participants. In particular, Congressional members were concerned that “bona fide hedging transactions” and “legitimate” or “necessary” speculative transactions would be impracticable if disclosure of positions or transactions was permitted. Congress was also concerned that publication of the names and market positions of large traders would facilitate manipulation and place traders at a competitive disadvantage. Section 8(e) generally provides that “upon request,” the CFTC may furnish “any information” in its possession. 7 U.S.C. 12(e). See generally 61 Cong. Rec. 1321 (1921); Regulation of Grain Exchanges, Hearing on H.R. 8829 Before the H. Comm. on Agriculture, 73rd Cong. (1934). 69 Section 8(a) of the CEA outlines the scope and authority of the Commission to publish or otherwise publicly disclose information that is gathered in the course of its investigative and market surveillance activities. While the Section authorizes the Commission to publish or disclose the information obtained through the use of its powers, it expressly provides that, except in specifically prescribed circumstances, the Commission may not lawfully: publish data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers * * *. 7 U.S.C. 12(a). The statutory bar to disclosure of “business transactions, market positions and trade secrets” is qualified by several narrowly-defined exceptions set forth in Section 8(e) of the CEA. 7 U.S.C. 12(e). Section 8(e) generally provides that “upon request,” the CFTC may furnish “any information” in its possession “obtained in connection with its administration of the [CEA]” to another U.S. government department or agency, individual states, foreign futures authorities and foreign governments and any committee of the U.S. Congress that is “acting within the scope of its jurisdiction.” Id. In addition, Section 8(e) also provides an exception for information that was previously disclosed publicly and Section 8(b) permits disclosure of Section 8 Material in connection with congressional, administrative or judicial proceedings. Id. The Commission submits that the abovementioned SDR safeguards, policies, and procedures addressing privacy and confidentiality—as well as misuse and misappropriation—of data should provide (i) limitations on access related to Section 8 Material and other SDR Information; (ii) standards related to controlling persons associated with the SDR trading for their personal benefit or the benefit of others; and (iii) adequate oversight to ensure SDR compliance with proposed § 49.17. As set forth in proposed § 49.17 discussed below in the section entitled “Access to SDR Data,” the SDR may share swap data and information with certain appropriate domestic and foreign regulators. Commercial use of the data maintained by an SDR—exclusive of real-time reporting data—would be strictly circumscribed as provided in proposed § 49.17. 7. Access to SDR Data—Section 21(c)(7) of the CEA Section 21(c)(7) 70 of the CEA requires a registered SDR, on a confidential basis pursuant to Section 8 of the CEA, upon request and after notifying the Commission, to make available all data 71 obtained by the registered SDR, to “Appropriate Domestic Regulators” and “Appropriate Foreign Regulators.” 70 Section 21(c)(7) of the CEA reads: A swap data repository shall— * * * on a confidential basis pursuant to Section 8, upon request, and after notifying the Commission of the request, make available all data obtained by the swap data repository, including individual counterparty trade and position data, to—(A) each appropriate prudential regulator; (B) the Financial Stability Oversight Council; (C) the Securities and Exchange Commission; (D) the Department of Justice; and (E) any other person that the Commission determines to be appropriate * * *. 7 U.S.C. 24a(c)(7). Included in the definition of Appropriate Domestic Regulators are all domestic entities listed in Section 21(c)(7) and other persons that the Commission has determined to be appropriate. 71 The sharing of data with an Appropriate Domestic Regulator by a registered SDR is subject to the confidentiality and indemnification restrictions in Section 21(d) of the CEA, 7 U.S.C. 24a(d). (a) Appropriate Domestic Regulator. An “Appropriate Domestic Regulator” is defined in proposed § 49.17 as (i) the SEC; (ii) each prudential regulator identified in Section 1a(39) of the CEA with respect to requests related to any of such regulator's statutory authorities, without limitation to the activities listed for each regulator in Section 1a(39); (iii) the Financial Stability Oversight Council (“FSOC”); 72 (iv) the Department of Justice; (v) the Federal Reserve Bank of New York (“FRBNY”); (vi) the Office of Financial Research (“OFR”) 73 and (vii) any other person the Commission deems appropriate. 74 72 FSOC consists of the Department of the Treasury (“Treasury”), the Board of Governors of the Federal Reserve System (the ”Fed”), the Office of the Comptroller of the Currency (“OCC”), the Bureau of Consumer Financial Protection, the SEC, the Commission, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Housing Financial Agency, National Credit Union Administration Board and an independent member appointed by the President, by and with the advice and consent of the Senate, having insurance expertise. 73 Under Section 152 of the Dodd-Frank Act, OFR will be established within the Department of the Treasury. OFR is intended to help facilitate improved financial market data gathering and analyses for financial regulators, including the new FSOC, which is responsible for monitoring the financial system as a whole in order to promote financial stability. OFR will support the FSOC and its member agencies by providing them with better financial data, information, and analysis so that policymakers and market participants have a more complete understanding of risk in the financial system. The data and analysis provided by the OFR will enhance the ability to identify emerging threats in financial markets, and will help ensure that the government has the information and analytical tools it needs to respond appropriately to future crises. 74 The definition of “Appropriate Domestic Regulator” set forth above specifically includes those federal agencies or departments that are identified as prudential regulators in Section 1a(39) of the CEA. Each prudential regulator will have access to all data related to any of its statutory authorities, without limitation to the activities listed for each regulator in Section 1a(39). Although Section 21(c)(7) of the CEA does not specifically provide for the sharing of information between an SDR and the FRBNY or OFR, the Commission in proposed § 49.17 is proposing to deem the FRBNY and OFR as “appropriate” persons under Section 21(c)(7) of the CEA. The FRBNY is one of 12 regional Federal Reserve Banks, which together with the Board of Governors of the Federal Reserve System comprise the Federal Reserve System. Each of the Federal Reserve Banks has features and/or characteristics of private corporations and quasi-public federal agencies. 75 OFR will be an office within the Department of the Treasury with the primary function to support the FSOC in the monitoring and containment of systemic risk. OFR will also be a resource for the FSOC and all of its member agencies. In particular, OFR will support the agencies in their efforts to supervise financial institutions and the financial system as well as in their work to implement the Act. In addition, regulatory agencies will have access to new data collected by the OFR, which will improve regulators' ability to monitor risks within their respective focus areas. 75 The FRBNY oversees the Second Federal Reserve District, which includes the state of New York, the 12 northern counties of the state of New Jersey, Fairfield County in the state of Connecticut, Puerto Rico and the U.S. Virgin Islands. Though it serves a geographically small area compared with those of other Federal Reserve Banks, the FRBNY is the largest Reserve Bank as measured by assets and volume of activity. (b) Appropriate Foreign Regulator. An “Appropriate Foreign Regulator” is defined in proposed § 49.17 and contains a two-part analysis. First, proposed § 49.17 defines as an Appropriate Foreign Regulator as those “foreign regulators” 76 with an existing memorandum of understanding (“MOU”) or other similar type of information sharing arrangement executed with the Commission. Second, proposed § 49.17 provides that foreign regulators without an MOU with the Commission may be deemed “Appropriate Foreign Regulators” as determined on a case-by-case basis by the Commission. 76 The term “foreign regulator” is defined in proposed § 49.2(a)(4) to mean “a foreign futures authority as defined in Section 1a(26) of the Commodity Exchange Act, foreign financial supervisors, foreign central banks and foreign ministries.” Proposed § 49.17 details the filing procedures for foreign regulators who do not currently have an MOU with the Commission to obtain the status of an “Appropriate Foreign Regulator.” The foreign regulator in its application 77 filed with the Commission is required to provide sufficient facts and details to permit the Commission to analyze whether the foreign regulator has appropriate confidentiality procedures and whether the foreign regulator is otherwise subject to local laws, regulations and/or customs that would require disclosure of information in contravention of the CEA. 77 The form and manner of this filing will be prescribed by the Commission. In its review of applications filed by foreign regulators seeking the status of an “Appropriate Regulator” under proposed § 49.17, the Commission must be satisfied that any information potentially provided by a registered SDR will not be disclosed except in limited circumstances such as an adjudicatory action or proceeding involving the foreign regulator. 78 In addition, the Commission on an ongoing basis, reserves the right in connection with any determination of an “Appropriate Foreign Regulator” to revisit or reassess a prior determination consistent with the CEA. 78 See supra text accompanying note 69. (c) Procedure for Gaining Access to an SDR. Pursuant to proposed § 49.17, an Appropriate Domestic Regulator or Appropriate Foreign Regulator will be required to request access with the registered SDR. The request will set forth in sufficient detail the basis for such request. The Appropriate Domestic Regulator or Appropriate Foreign Regulator must also certify (i) its statutory authority and (ii) that it is acting within the scope of its jurisdiction. A registered SDR must notify the Commission promptly by electronic means of any request received from an Appropriate Domestic Regulator or Appropriate Foreign Regulator. The registered SDR will then provide access to the requested swap data if satisfied that the Appropriate Domestic or Appropriate Foreign Regulator is acting within the scope of its authority. Request for Comment. The Commission requests the following comments relating to regulator access of data maintained by SDRs. (1) What mechanisms or other processes should the Commission consider in connection with Appropriate Domestic Regulators and/or Appropriate Foreign Regulators access to the data maintained by SDRs? (2) Should the Commission provide that Appropriate Domestic Regulators and Appropriate Foreign Regulators specifically request access from an SDR for each individual data request? Or, should the Commission provide for a single prospective data access request to SDRs by Appropriate Domestic and Foreign Regulators followed up by a certification at intervals determined by the Commission? For each specific instance of access or regulatory use of an SDR's data by Appropriate Domestic Regulators and Appropriate Foreign Regulators, should the Commission be notified in each case by the SDR? (3) Given the regulatory outlines set forth by the Dodd-Frank Act, what would be an appropriate way for regulators to access the swap data held by SDRs for the purpose of fulfilling their regulatory responsibilities? (d) Confidentiality and Indemnification Agreement. Consistent with proposed § 49.18, the Appropriate Domestic Regulator or Appropriate Foreign Regulator prior to receipt of any requested data or information from a registered SDR must execute a “Confidentiality and Indemnification Agreement” with the registered SDR. This requirement is mandated by Section 21(d) of the CEA and applies to those entities set forth in Section 21(c)(7) of the CEA. Upon execution of a Confidentiality and Indemnification Agreement with a registered SDR, the Appropriate Domestic Regulator or Appropriate Foreign Regulator is required to notify and provide a copy of the Confidentiality and Indemnification Agreement to the Commission. The specific entities identified in Section 21(c)(7) include: (i) Each appropriate prudential regulator specified in Section 1a(39) of the; (ii) FSOC; (iii) SEC; (iv) Department of Justice; and (v) any other person the Commission deems appropriate, including foreign financial supervisors, foreign central banks and foreign ministries. Pursuant to the general authority of the Commission as set forth in Section 21(c)(7)(E) of the CEA to deem any other person “appropriate,” the Commission proposes, for purposes of this Regulation, to deem “appropriate” the FRBNY, OFR and those foreign regulators with an existing MOU or other similar type of information sharing arrangement executed with the Commission. 79 79 Any other Foreign Regulator that would require access to SDR data would need to be specifically approved and deemed “appropriate” by the Commission as set forth in proposed § 49.17. Proposed § 49.18 implementing Section 21(d) of the CEA requires that the Confidentiality and Indemnification Agreement executed with each Appropriate Domestic Regulator and/or Appropriate Foreign Regulator provide that such entity abide by the confidentiality requirements set forth in Section 8 of the CEA relating to the swap data that is to be provided by the registered SDR. Moreover, the Confidentiality and Indemnification Agreement must also provide that each Section 21(c)(7) entity agree to indemnify the registered SDR and the Commission for any expenses arising from litigation relating to the information provided under Section 8 of the CEA. The Commission is mindful of the potential difficulty that certain domestic and foreign regulators may have in executing a Confidentiality and Indemnification Agreement with an SDR pursuant to Section 21(d) of the CEA 80 due to various statutory laws, regulations and/or customs. This provision could have the unintended effect of inhibiting access to the data maintained by SDRs, and, possibly hindering the ability of certain foreign regulators to fulfill their corresponding statutory mandates. To promote and ensure international harmonization as envisioned in Section 752 of the Dodd-Frank Act, the Commission continues to coordinate with its foreign regulatory counterparts on pending and proposed regulatory initiatives. To the extent consistent with the regulatory framework set forth in the Dodd-Frank Act, and the CEA generally, the Commission will endeavor to provide sufficient access to SDR data to appropriate domestic and foreign regulatory authorities. 80 Section 21(d) of the CEA provides: Before the swap data repository may share information with any entity described in subsection (c)(7)-(1) the swap data repository shall receive a written agreement from each entity stating that the entity shall abide by the confidentiality requirements described in Section 8 relating to the information on swap transactions that is provided; and (2) each entity shall agree to indemnify the swap data repository and the Commission for any expenses arising from litigation related to the information provided under section 8. See 7 U.S.C. 24a(d). The Commission believes that access to the swap data maintained by SDR will assist regulators to, among other things, monitor risk exposures of individual counterparties to swap and swap transactions, monitor concentrations of risk exposures, and evaluate systemic risks. The Commission notes that, pursuant to Section 8(e) of the CEA, the Commission may share confidential information in its possession obtained in connection with its administration of the CEA to “any foreign futures authority, department or agency of any foreign government or any political subdivision thereof” acting within the scope of their jurisdiction. 81 81 See 7 U.S.C. 12(e). Request for Comment: The Commission requests comment from those regulators that may be affected by Section 21(d) of the CEA and the proposed related Regulations. In particular, the Commission requests comment on the following questions: • Are the proposed time frames for Commission response relating to access to swap data maintained by a SDR by Appropriate Domestic and Appropriate Foreign Regulators reasonable? Should the Commission provide for an expedited or emergency procedure? (e) Access to SDRs by Third Party Service Providers. Section 21(c)(3) 82 of the CEA directs registered SDRs to maintain data in such form and manner as may be required by the Commission. Section 21(c)(6) 83 of the CEA requires registered SDRs to maintain the privacy of any and all swap data that the registered SDR receives from a SD, counterparty, or any other registered entity. The operations of registered SDRs may require them to provide occasional access to data and information to third party service providers for the purpose of obtaining certain technology and SDR infrastructure services. Proposed § 49.17 permits such access provided these third party service providers have implemented strict confidentiality procedures that protect data and information from improper disclosure. Prior to swap data access, third party service providers will be required to execute a “Confidentiality Agreement” setting forth minimum confidentiality procedures and permissible uses of data received. 82 Section 21(c)(3) reads: “A swap data repository shall— * * * maintain the data described in paragraph (1) in such form, in such manner, and for such period as may be required by the Commission.” 7 U.S.C. 24a(c)(3). 83 Section 21(c)(6) reads: “A swap data repository shall— * * * maintain the privacy of any and all swap transaction information that the swap data repository receives from a swap dealer, counterparty, or any other registered entity.” 7 U.S.C. 24a(c)(6). (f) Access to SDRs by Market Participants. Section 21(c)(6) of the CEA requires registered SDRs to maintain the privacy and confidentiality of any and all swap transaction information that the registered SDR receives from a SD, counterparty, or any other registered entity. As mentioned above, Section 21(f)(3) 84 of the CEA requires an SDR to establish and enforce rules to mitigate conflicts of interest, among other things. As detailed further below, the Commission has identified certain conflicts that may implicate access to SDR Information. Consequently, in partial implementation of Sections 21(c)(6) and 21(f)(3) of the CEA, proposed § 49.17 generally prohibits access to swaps data maintained by a registered SDR by market participants, such as commercial end-users, SDs and MSPs unless the specific data was originally submitted by such party. 84 See supra text accompanying notes 62-63. (g) Commercial Use of Data Maintained by the SDR. As outlined by Sections 21(c)(6) and (c)(7) of the CEA, Congress in the Dodd-Frank Act was concerned with maintaining the confidentiality of information provided to registered SDRs by SDs, counterparties or any other Commission-registered entity. 85 Furthermore, as outlined in Section 21(f)(3) of the CEA, Congress in the Dodd-Frank Act was concerned that conflicts of interest may affect SDR operations. As detailed below, the Commission has identified certain conflicts of interest that may implicate commercial use of SDR Information (other than swap data subject to real-time public dissemination). In response to concerns reflected in Sections 21(c)(6), 21(c)(7), and 21(f)(3), the Commission believes that “commercial use” of any data submitted and maintained by an SDR must be severely restricted. The privacy and confidentiality concerns set forth in Section 21(c)(6) of the CEA do not apply to the swap data subject to proposed part 43 of the Commission's Regulations, which set forth the requirements for real-time public reporting of swap data by SDRs. 85 7 U.S.C. 24a(c)(6)-(7). Therefore, in partial implementation of Sections 21(c)(6), 21(c)(7), and 21(f)(3), proposed § 49.17 generally provides that SDR Information (as defined in proposed § 49.2(a)(13)) may not be used for commercial or business purposes by the registered SDR or any of its affiliated entities. In connection with its obligation to maintain the privacy and confidentiality of SDR Information as outlined in Sections 21(c)(6), 21(c)(7), and 21(f)(3) of the CEA, registered SDRs are required to adopt and implement adequate “firewalls” to protect the swaps data required to be maintained under proposed § 45.2 86 and Section 21(c)(3) of the CEA from any improper, commercial use. 86 See Data NPRM, supra note 28. Proposed § 49.17 permits a limited exception to the commercial use restrictions for market participants, such as end-users, SDs and MSPs, who submit SDR Information maintained by the registered SDR. The exception requires that the registered SDR must receive the express written consent of the counterparties to the swap. The Commission is concerned that a registered SDR may attempt to use this limited “commercial use” exception as a condition for the reporting of end-users, SDs and/or MSPs swap transactions. Accordingly, in proposed § 49.27 the Commission submits that a registered SDR must be equitable and must not discriminate against submitters of data regardless of whether such a submitter has agreed to any “commercial use” of its data. 8. Emergency Procedures—Section 21(c)(8) of the CEA Section 21(c)(8) of the CEA, as amended by Section 728 of the Dodd-Frank Act, provides that a “swap data repository shall establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allows for the timely recovery and resumption of operations and the fulfillment of the responsibilities and obligations of the organization.” 87 Section 21(c)(8) of the CEA reflects SDRs' critical role as central storehouses of information in the new swap market structure established by the Dodd-Frank Act. In particular, it recognizes that SDRs must be available to meet their statutory obligations in all circumstances, and that swap data must be readily accessible to the Commission and other regulators even in emergency situations. To effectuate the purposes of Section 21(c)(8) of the CEA, the Commission proposes § 49.23, which requires SDRs to adopt specific policies and procedures for the responsible exercise of emergency authority in the event of natural, man-made, information technology, and other, emergencies. 87 Section 21(c)(8) of the CEA. 7 U.S.C. 24a(c)(8). While SDRs are a new type of registered entity created by Dodd-Frank, proposed § 49.23 applies existing emergency procedure concepts borrowed from analogues in the Commission's regulatory experience. For example, prior to the enactment of the Dodd-Frank Act, DCMs were subject to former DCM Core Principle 6, which contemplated exigent circumstances that might justify the exercise of emergency authority by a DCM. 88 The application guidance for former DCM Core Principle 6 set forth the Commission's requirements for emergency procedures. It stated, in part, that a DCM “should have clear procedures and guidelines for contract market decision-making regarding emergency intervention in the market, including procedures and guidelines to avoid conflicts of interest while carrying out such decision making.” 89 The application guidance also stated that a DCM's procedures and guidelines for the exercise of emergency authority should include “notifying the Commission of the exercise of [emergency authority], explaining how conflicts of interest are minimized, and documenting the contract market's decision-making process and the reasons for using its emergency authority.” 90 88 Former Section 5(d)(6) of the CEA, 7 U.S.C. 7(d)(6). 89 17 CFR part 38, App. B, Application Guidance for former Core Principle 6. 90 Id. The Commission has generally found that procedures implemented by DCMs in response to former DCM Core Principle 6 allowed for adequate responses in the event of emergencies. 91 Accordingly, the Commission is proposing new application guidance and acceptable practices to implement emergency procedures core principles for both DCMs and SEFs that are modeled on former DCM Core Principle 6 and its application guidance. 92 Similarly, the Commission's proposed § 49.23 for SDR emergency procedures is modeled on relevant provisions of the statutory text, application guidance, and acceptable practices, as applicable, for the former and current DCM and SEF emergency procedures core principles. 91 The Commission notes that former DCM Core Principle 6, and its successor Core Principle 6 pursuant to Section 735 of the Dodd-Frank Act, both incorporate market-specific emergencies and responses into their statutory requirements. For example, under both core principles, a DCM's emergency authority must include the authority to liquidate or transfer open positions in any contract; the authority to suspend or curtail trading in any contract; and the authority to require market participants in any contract to meet special margin requirements. The emergency policies and procedures required of SDRs pursuant to proposed § 49.23 do not incorporate these market-specific concepts as they are not relevant to SDRs. 92 The new DCM emergency procedures core principle is also enumerated as DCM Core Principle 6 and codified in Section 5(d)(6) of the CEA, 7 U.S.C. 7(d)(6); it is substantively similar to its predecessor. The new SEF emergency procedures core principle is enumerated as SEF Core Principle 8 and codified in Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8). (a) Emergency Policies and Procedures Required—Proposed § 49.23(a) Proposed § 49.23(a) requires that an SDR establish policies and procedures for the exercise of emergency authority in the event of any emergency, including but not limited to, natural, man-made, and information technology emergencies. Proposed § 49.23(a) will mirror language in the application guidance for former DCM Core Principle 6, which states that DCMs must “have clear procedures and guidelines for contract market decision-making regarding emergency intervention. * * * ” Similar language is also proposed in the guidance and acceptable practices for new DCM Core Principle 6 and new SEF Core Principle 8. Proposed § 49.23(a) and the new DCM Core Principle 6 and new SEF Core Principle 8 reflect the Commission's view that these policies must be transparent to the Commission and to market participants whose transaction data resides at the SDR. (b) Invocation of Emergency Authority—Proposed § 49.23(b) Proposed § 49.23(b) requires an SDR to enumerate the circumstances under which it is authorized to invoke its emergency authority, and the procedures that it must follow to declare an emergency. Such policies and procedures must also address the range of measures that an SDR is authorized to take when exercising emergency authority. Proposed § 49.23(b) helps ensure that an SDR can respond quickly to an emergency but reduces the possibility that SDRs will exercise such authority arbitrarily. Similar to the Commission's view on the development of emergency policies and procedures, proposed § 49.23(b) reflects the Commission's view that the use of emergency authority should be governed by transparent standards and be predictable to the Commission and to swap market participants. (c) Designation of Persons Authorized to Act in an Emergency—Proposed § 49.23(c) Proposed § 49.23(c) requires an SDR to designate, and notify the Commission of, one or more persons authorized to exercise emergency authority on its behalf. In the event that such designated persons are unavailable, an SDR must also establish a chain of command. The Commission believes that the proposed regulation reduces the possibility that emergency situations will be exacerbated by a lack of leadership and inadequate line of decisional authority. (d) Conflicts of Interest—Proposed § 49.23(d) Proposed § 49.23(d) requires that SDR policies and procedures include provisions to avoid conflicts of interest in any decision made pursuant to emergency authority. SDR policies and procedures must also require that the SDR's CCO be consulted in any emergency decision that may raise potential conflicts of interest. 93 The Commission believes that specific policies and procedures designed to avoid conflicts in the exercise of emergency authority will focus SDR decision-makers' attention and guide their decisions in ways that minimize the risk for actual or perceived conflicts of interest. 93 Section 21(e) of the CEA, 7 U.S.C. 24a(e) creates the position of CCO and prescribes detailed responsibilities to CCOs. Section 21(e)(2)(C) tasks CCOs with “resolv[ing] any conflicts of interest that may arise” in consultation with the SDR's board of directors, a body performing a similar function as the board, or the senior officer of the SDR. Proposed § 49.26 specifically implements new Section 21(e). 7 U.S.C. 24a(2)(C). (e) Notification to the Commission—Proposed § 49.23(e) Proposed § 49.23(e) requires that an SDR's policies and procedures include provisions for the exercise of emergency authority to notify the Commission as soon as reasonably practicable regarding any invocation of emergency authority by the SDR. When notifying the Commission of an exercise of emergency authority, an SDR must explain the reasons for taking such emergency action, explain how conflicts of interest were minimized, and document the decision-making process. In addition, any underlying documentation must be made available to the Commission upon request. These proposed provisions will help keep the Commission informed of emergency situations, allow the Commission to participate as necessary, and facilitate any review that the Commission may wish to conduct at a later date. Request for Comment. The Commission requests comment on the questions set forth below on SDR duties: (1) Should the Commission impose any additional duties on SDRs? For example, should SDRs be required to provide downstream processing services or ancillary services ( e.g., managing life-cycle events and asset servicing)? (2) Should the Commission establish more specific requirements to avoid contract invalidation by an SDR? C. Designation of Chief Compliance Officer Section 21(e) of the CEA, as amended by Section 728 of the Dodd-Frank Act, creates an internal regulatory framework for all SDRs, with the position of CCO serving as a focal point for compliance with the CEA and applicable Commission Regulations. The three-part structure of Section 21(e) requires, first, that every SDR designate an individual to serve as CCO. 94 Second, it enumerates specific duties for CCOs and establishes their responsibilities within an SDR. 95 Third, it outlines the requirements of a mandatory annual report from SDRs to the Commission, which must be prepared and signed by an SDR's CCO. 96 The Commission proposes to implement Section 21(e) of the CEA through proposed § 49.22, which further develops the already robust CCO requirements enacted by the Dodd-Frank Act. Section 21(e) of the CEA and proposed § 49.22 are summarized below. 94 See Section 21(e)(1) of the CEA, 7 U.S.C. 24a(e)(1). 95 See Section 21(e)(2) of the CEA, adopted as part of the Dodd-Frank Act, providing that a CCO shall: (A) report directly to the board or to the senior officer of the swap data repository; (B) review the compliance of the swap data repository with respect to the requirements and core principles described in this section; (C) in consultation with the board of the swap data repository, a body performing a function similar to the board of the swap data repository, or the senior officer of the swap data repository, resolve any conflicts of interest that may arise; (D) be responsible for administering each policy and procedure that is required to be established pursuant to this section; (E) ensure compliance with this Act (including regulations) relating to agreements, contracts, or transactions, including each rule prescribed by the Commission under this section; (F) establish procedures for the remediation of noncompliance issues identified by the chief compliance officer through any—(i) compliance office review; (ii) look-back; (iii) internal or external audit finding; (iv) self-reported error; or (v) validated complaint; and (G) establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. 7 U.S.C. 24a(e)(2). 96 See Section 21(e)(3)(A) of the CEA, adopted as part of the Dodd-Frank Act, providing that a CCO shall:[A]nnually prepare and sign a report that contains a description of—(i) the compliance of the swap data repository of the chief compliance officer with respect to this Act (including regulations); and (ii) each policy and procedure of the swap data repository of the chief compliance officer (including the code of ethics and conflict of interest policies of the swap data repository). (B) REQUIREMENTS.—A compliance report under subparagraph (A) shall—(i) accompany each appropriate financial report of the swap data repository that is required to be furnished to the Commission pursuant to this section; and (ii) include a certification that, under penalty of law, the compliance report is accurate and complete. 7 U.S.C. 24a(e)(3)(A)-(B). The first provision of Section 21(e)-21(e)(1)—provides only for the self-explanatory requirement that each SDR designate an individual to serve as its CCO. The second provision of Section 21(e) offers a detailed description of a CCO's role within an SDR. Specifically, Section 21(e)(2) includes seven enumerated duties incumbent upon all CCOs, and thereby outlines the internal regulatory structure of an SDR as contemplated by the Dodd-Frank Act. The enumerated duties of CCOs include: (1) Reporting directly to the SDR's board of directors or to its senior officer; (2) reviewing an SDR's compliance with the requirements and core principles described in Section 21; (3) resolving any conflicts of interest that may arise, in consultation with the board of directors or the senior officer of the SDR; (4) administering any policy or procedure that is required to be established by an SDR pursuant to Section 21; (5) ensuring compliance with the CEA and Commission Regulations as they pertain to agreements, contracts, or transactions entered into by an SDR; (6) establishing procedures for the remediation of noncompliance issues identified by the CCO; and (7) establishing and following appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. 97 97 7 U.S.C. 24a(e)(2 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-31133. Public record. Not legal advice.