Real-Time Public Reporting of Swap Transaction Data

Federal RegisterJan 9, 2012

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 43

RIN 3038-AD08

Real-Time Public Reporting of Swap Transaction Data

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“CFTC” or “Commission”) is adopting regulations to implement certain statutory provisions enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Specifically, in accordance with the Dodd-Frank Act, the Commission is adopting rules to implement a framework for the real-time public reporting of swap transaction and pricing data for all swap transactions.

DATES:

Effective date:

March 9, 2012.

FOR FURTHER INFORMATION CONTACT:

Thomas Leahy, Associate Director, Division of Market Oversight (“DMO”) at (202) 418-5278 or

tleahy@cftc.gov;

Jeffrey L. Steiner, Special Counsel, DMO at (202) 418-5482 or

jsteiner@cftc.gov;

Susan Nathan, Senior Special Counsel, DMO at (202) 418-5133 or

snathan@cftc.gov;

Jason Shafer, Attorney-Advisor, Office of General Counsel at (202) 418-5097 or

jshafer@cftc.gov;

or Laurie Gussow, Attorney-Advisor, DMO at (202) 418-7623 or

lgussow@cftc.gov;

Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Overview

B. Summary of the Proposed Part 43 Regulations

1. Proposed § 43.3—Method and Timing for Real-Time Public Reporting

2. Proposed § 43.4—Swap Transaction and Pricing Data To Be Publicly Disseminated in Real-Time

3. Proposed § 43.5—Block Trades and Large Notional Swaps for Particular Markets and Transactions

4. Proposed Appendix A to Part 43

C. Overview of Comments Received

D. Proposed § 43.5—Block Trades and Large Notional Swaps

II. Part 43 of the Commission's Regulations—Final Rules

A. Section 43.1—Purpose, Scope and Rules of Construction

1. Scope—Generally

2. Swaps Between Affiliates and Portfolio Compression Exercises

3. Uncleared or Bespoke Swaps

4. Foreign Exchange (“FX”) Asset Class

5. Limitations and Special Accommodations

6. Liquidity

7. International Issues

8. Final Rule Text of § 43.1

B. Section 43.2—Definitions

1. Harmonization

2. Defined Terms

3. Additional Issues Relating to Defined Terms

C. Section 43.3—Method and Timing for Real-Time Public Reporting

1. Responsibilities of Parties to a Swap (§ 43.3(a))

2. Public Dissemination of Swap Transaction and Pricing Data (§ 43.3(b))

3. Requirements for Registered Swap Data Repositories in Providing the Public Dissemination of Swap Transaction and Pricing Data (§ 43.3(c))

4. Requirements for Third-Party Service Providers (Proposed § 43.3(d))

5. Availability of Swap Transaction and Pricing Data to the Public (§ 43.3(d))

6. Errors and Omissions (§ 43.3(e))

7. Hours of Operation of Registered Swap Data Repositories (§ 43.3(f))

8. Acceptance of Data During Closing Hours (§ 43.3(g))

9. Timestamp Requirements (§ 43.3(h))

10. Fees Charged by SDRs (§ 43.3(i))

D. Section 43.4—Swap Transaction and Pricing Data to be Publicly Disseminated in Real-Time

1. In General (§ 43.4(a))

2. Public Dissemination of Data Fields (§ 43.4(b))

3. Additional Swap Information (§ 43.4(c))

4. Amendments to Data Fields (Proposed § 43.4(d))

5. Anonymity of the Parties to a Publicly Reportable Swap Transaction (§ 43.4(d))

6. Unique Product Identifier (§ 43.4(e))

7. Reporting of Notional or Principal Amounts to a Registered Swap Repository (§ 43.4(f))

8. Public Dissemination of Rounded Notional or Principal Amounts (§ 43.4(g))

9. Public Dissemination Caps on Notional or Principal Amounts (§ 43.4(h))

E. Section 43.5—Time Delays for Public Dissemination of Swap Transaction and Pricing Data

F. Appendix A to Part 43 (“Data Fields for Public Dissemination”)

III. Effectiveness/Implementation and Interim Period

IV. Paperwork Reduction Act

V. Cost-Benefit Considerations

VI. Regulatory Flexibility Act

VII. List of Commenters

I. Background

A. Overview

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

Title VII of which amended the Commodity Exchange Act (“CEA” or the “Act”)

to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was intended 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.

Public Law 111-203, 124 Stat. 1376 (2010), available at

http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.”

7 U.S.C. 1,

et seq.

Section 727 of the Dodd-Frank Act added to the CEA new section 2(a)(13), which establishes standards and requirements related to real-time reporting and the public availability of swap transaction and pricing data. This section directs the Commission to promulgate rules providing for the public availability of such data in real-time,

in such form and at such times as the Commission deems appropriate to enhance price discovery.

CEA section 2(a)(13)(C) establishes the four types of swaps for which transaction and pricing data must be reported to the public in real-time.

Because these categories together comprise all swaps, the real-time reporting requirements apply to all swaps, including those swaps executed on or pursuant to the rules of a registered swap execution facility (“SEF”) or a designated contract market (“DCM”), and those swaps executed bilaterally between counterparties and

not pursuant to the rules of a SEF or DCM (“off-facility swaps”).

New Section 2(a)(13)(A) of the CEA defines real-time public reporting as reporting “data relating to a swap transaction, including price and volume, `as soon as technologically practicable' after the time at which the swap transaction has been executed.”

CEA section 2(a)(13)(B) states that “[t]he purpose of this section is to authorize the Commission to make swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery.”

The four categories are: (i) Swaps that are subject to the mandatory clearing requirement in CEA section 2(h)(1) [added by Section 723(a)(3) of the Dodd-Frank Act]; (ii) swaps that are not subject to the mandatory clearing requirement but are nonetheless cleared at a registered derivatives clearing organization (“DCO”); (iii) swaps that are not cleared at a registered DCO and which are reported to a registered swap data repository (“SDR”) or to the Commission pursuant to CEA section 2(h)(6); and (iv) swaps that are “determined to be required to be cleared” under CEA section 2(h)(2) but are not cleared.

As explained more fully in the Commission's Notice of Proposed Rulemaking, the legislative history of the Dodd-Frank Act suggests that the real-time reporting requirements of CEA section 2(a)(13) apply to all swaps.

See

Commission, Notice of Proposed Rulemaking: Real-Time Public Reporting of Swap Transaction Data, 75 FR 76140 (Dec. 7, 2010) (“Real-Time NPRM” or “Proposing Release”).

With regard to swaps that are subject to the mandatory clearing requirement (or excepted from such requirement) and those that are not required to be cleared by a registered DCO but are cleared, CEA section 2(a)(13)(E) directs the Commission to prescribe rules that (i) ensure that publicly disclosed information does not identify the participants; (ii) specify the criteria for determining what constitutes a large notional swap transaction (block trade) for particular markets and contracts; (iii) specify the appropriate time delay for reporting large notional swap transactions (block trades) to the public; and (iv) take into account whether public disclosure will materially reduce market liquidity. CEA section 2(a)(13)(E) does not require explicitly that the rules promulgated by the Commission contain similar provisions for the uncleared swaps described in CEA section 2(a)(13)(C)(iii) and (iv). However, in exercising its authority under CEA section 2(a)(13)(B) to “make swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery,” the Commission is authorized to prescribe rules similar to those provisions in CEA section 2(a)(13)(E) for uncleared swaps described in CEA sections 2(a)(13)(C)(iii) and (iv).

In addition, the Commission is required by CEA section 2(a)(13)(C)(iii) to prescribe real-time public reporting requirements for uncleared swaps, other than those uncleared swaps described in CEA section 2(a)(13)(C)(iv), “in a manner that does not disclose the business transactions and market positions of any person.”

B. Summary of the Proposed Part 43 Regulations

On December 7, 2010, the Commission published for comment proposed part 43 of its regulations to implement the real-time reporting mandate of the Dodd-Frank Act.

At the foundation of these regulations was the Commission's belief that real-time public dissemination of swap transaction and pricing data supports the fairness and efficiency of markets and increases transparency, which in turn improves price discovery and decreases risk (

e.g.,

liquidity risk). The Commission's Proposing Release thus introduced, in addition to definitions of terms and processes relevant to real-time public reporting, rules governing: (1) The entities or persons that shall be responsible for reporting swap transaction and pricing data; (2) the entities or persons that shall be responsible for publicly disseminating such data; (3) the data fields and guidance with respect to the appropriate format and manner for data to be reported to the public in real time; (4) the appropriate minimum size and time delay for block trades and large notional swaps; and (5) the proposed effective date and implementation schedule for the proposed rules.

See

Real-Time NPRM

supra

note 6. Interested persons are directed to the Real-Time NPRM for a full discussion of each of the proposed part 43 rules.

The Commission's proposed part 43 rules reflected consultation with staff of both the Securities and Exchange Commission (the “SEC”)

and the Board of Governors of the Federal Reserve.

The proposed rules also were informed by discussions during a joint public roundtable to discuss swap data, SDRs and real-time reporting conducted by CFTC and SEC staff on September 14, 2010 (the “Roundtable”); public comments received and posted on the Commission's Internet Web site;

and meetings and discussions between CFTC staff and market participants.

Section 763 of the Dodd-Frank Act authorizes the SEC to promulgate rules “to provide for the public availability of security-based swap transaction, volume, and pricing data * * *.” The SEC is adopting rules related to the real-time reporting of security-based swaps as required by Section 763 of the Dodd-Frank Act.

Section 712(a)(1) of the Dodd-Frank Act requires staff to consult with the SEC and other prudential regulators.

Comment letters received in response to the Proposing Release may be found on the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

As proposed, part 43 applied to all swaps

as defined in CEA section 1a(47) and as may be further defined by Commission regulations. The proposed rules applied real-time reporting requirements to registered entities (SEFs, DCMs and registered swap data repositories (“SDRs”)) and the swap counterparties—including registered or exempt SDs, registered or exempt MSPs and U.S.-based end-users.

As noted, the categories of swaps described in CEA section 2(a)(13)(C) account for all swaps, whether cleared or uncleared and regardless of whether executed on or pursuant to the rules of a SEF or DCM, or executed off-facility.

1. Proposed § 43.3—Method and Timing for Real-Time Public Reporting

CEA section 2(a)(13) directed the Commission to prescribe rules specifying the method and timing for real time public reporting. Consistent with that mandate, the Commission proposed in § 43.3 to require: (1) The parties to a swap transaction (including agents of the parties) to report swap transaction and pricing data to the appropriate registered entity in a timely manner;

and (2) registered entities to publicly disseminate swap transaction and pricing data.

To implement its authority to make swap transaction and pricing data available to the public in such form and at such times as it determines appropriate to enhance price discovery, the Commission proposed in § 43.3 to establish the manner in which swap counterparties must report the swap transaction and pricing data to the appropriate registered entity, the manner in which registered entities must publicly disseminate the data in real time and the responsibilities of the reporting party to each swap. Proposed § 43.3 also established requirements for acceptance and public dissemination of swap transaction and pricing data by SDRs and third-party service providers and specified standards for data recordkeeping and retention as well as availability and accessibility of real-time swap transaction and pricing data. In addition, proposed § 43.3 established the process by which errors or omissions in publicly disseminated swap transaction and pricing data would be cancelled and/or corrected, the hours of operation for SDRs and the procedures for scheduling closing hours.

See

CEA section 2(a)(13)(F).

See

CEA section 2(a)(13)(D).

2. Proposed § 43.4—Swap Transaction and Pricing Data To Be Publicly Disseminated in Real-Time

CEA section 2(a)(13)(B) directs the Commission to make swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery. Proposed § 43.4 required that swap transaction information be reported to a real-time disseminator and established the manner and format in which this data will be publicly disseminated. In that regard, appendix A to proposed part 43 provides a list of data fields which an SDR must publicly disseminate regarding swap transactions, and pricing data, as well as guidance on an acceptable public reporting format and order for the listed data fields.

CEA sections 2(a)(13)(C) and (E) reflect Congress' intent that regulators “ensure that the public reporting of swap transactions and pricing data does not disclose the names or identities of

the parties to the transactions.”

In response, the Commission proposed in § 43.4(e)(1) to prohibit the public dissemination of swap transaction and pricing information which identifies or otherwise facilitates the identification of a party to a swap. This section further provided that an SDR may not report such data in a manner that discloses or otherwise facilitates the identification of a party to a swap. The Commission recognized that the latter prohibition may result in a loss of clarity with respect to the precise characteristics of swaps in certain circumstances, and required in proposed § 43.4(e)(2) that a reporting party or a swap market

provide the real-time disseminator with a specific description of the underlying asset and tenor of a swap that is general enough to provide anonymity but specific enough to permit a meaningful understanding of the swap. For certain off-facility swaps—particularly “other commodity” swaps that have underlying assets with specific delivery or pricing points—market participants may be able to infer the identity of a party or swap counterparties based on the description of an underlying asset. Accordingly, proposed § 43.4(e)(2) was intended to permit reporting parties of off-facility swaps to publicly disseminate a description of an underlying asset or tenor in a way that does not disclose a party to a swap but nonetheless provides a meaningful understanding of the swap for purposes of enhancing price discovery.

156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement of Sen. Blanche Lincoln).

The term “swap market” was defined in proposed § 43.2(z) as “any registered swap execution facility or registered designated contract market that makes swaps available for trading.” As discussed below, the Commission is not adopting the term “swap market” and is, for clarity, changing such references to “registered swap execution facility or designated contract market.”

The Commission described a hypothetical example in which the underlying asset to an off-facility swap that has a specific delivery point at Lake Charles, Louisiana—a contract commonly known to be traded by only two companies. Disclosing the underlying asset to the public would effectively disclose that one of those two companies was entering into the trade.

See

Real-Time NPRM

supra

note 6, at 76150. Proposed § 43.4(e)(2) would enable the reporting party to use a broader geographic region in place of the specific delivery point.

In proposing § 43.4(e), the Commission recognized that SEFs and DCMs may differ and that new types of swaps may emerge. For that reason, the Commission did not propose specific guidelines for describing an underlying asset for the purposes of this rule. Because the specificity of the description would vary based on particular markets and contracts, the proposed rules were intended to provide reporting parties with discretion in reporting swap transaction and pricing data. Proposed § 43.4(e)(2) and proposed part 23 of the Commission's regulations

would require SDs and MSPs who do not specifically describe an underlying asset and/or tenor because such disclosure would facilitate the identification of a counterparty, to document why the specific information was not publicly disseminated.

The Commission issued proposed part 23 which was published in the

Federal Register

on November 23, 2010. 75 FR 71397. Proposed part 23 provided, inter alia, the business conduct standards for SDs and MSPs. Proposed § 23 establishes reporting, recordkeeping, and daily trading records requirements for SDs and MSPs. Specifically, § 23.201(d) provides that SDs and MSPs would be required to maintain records of information required to be reported on a real-time basis and records of information relating to large notional swaps in accordance with proposed part 43 and CEA section (2)(a)(13). When a less specific data field is reported in order to protect anonymity of participants to such swap, then the record must contain the rationale for reporting a less specific data field. The comment period for proposed part 23 closed on June 3, 2011; however the rule has not yet been adopted.

The Commission anticipated that unique product identifiers may develop for various swap products in various markets. Proposed § 43.4(f) provided that if a unique product identifier is developed that sufficiently describes the information in one or more of the data fields for public dissemination, consistent with appendix A to proposed part 43, the unique product identifier may be used in lieu of such data fields. Absent a unique product identifier, the publicly disseminated swap transaction and pricing data must contain all of the appropriate product identification fields in appendix A to proposed part 43.

As proposed, § 43.4(g) required public dissemination of any swap-specific event

that occurs during the life of a swap and affects the price of the swap (a “price forming continuation event”). Proposed §§ 43.4(h) and (i) would govern public reporting of the notional or principal amount for all swaps. As proposed, these rules would require (i) a reporting party to transmit to a SEF or DCM the actual notional or principal size of any swap (including large notional swaps) or any block trade; and (ii) a SEF or DCM to transmit to a real-time disseminator the actual notional or principal size for all swaps executed on or pursuant to its rules. Section 43.4(j) proposed a rounding convention for notional or principal size and provided that the rounding should be applied at the point of public dissemination.

Swap-specific events would include novations, swap unwinds, partial novations and partial swap unwinds.

3. Proposed § 43.5—Block Trades and Large Notional Swaps for Particular Markets and Transactions

CEA sections 2(a)(13)(E)(ii) and (iii) require the Commission to prescribe rules “to specify the criteria for determining what constitutes a large notional swap transaction (block trade) for particular markets and contracts” and “to specify the appropriate time delay for reporting large notional swap transactions (block trades) to the public,” with respect to swaps subject to the clearing mandate (including swaps that are excepted from the clearing mandate pursuant to CEA section 2(h)(7)) and those swaps that are not subject to the clearing mandate but are cleared. Similar provisions are not explicitly required for uncleared swaps, however, the Commission is authorized pursuant to its authority under CEA section 2(a)(13)(B) to prescribe similar rules for uncleared swaps described in CEA sections 2(a)(13)(C)(iii) and (iv). Proposed § 43.5 established: (1) The procedures for determining the appropriate minimum sizes for block trades and large notional swaps; and (2) the appropriate time delays for the reporting of block trades and large notional swaps. In describing the proposed block trade rules, the Commission noted that it would continue to analyze and study the effects of increased transparency on post-trade liquidity in the context of block trades and large notional swaps.

The Commission anticipated that new data would continue to inform this discussion and could cause subsequent revision of the Proposing Release.

See

75 FR 76159 at note 67.

As noted, CEA section 2(a)(13)(A) requires that all parties to swap transactions, including parties to block trades and large notional swaps, report data relating to swap transactions “as soon as technologically practicable after the time at which the swap transaction has been executed.” The Dodd-Frank Act also requires that the Commission promulgate rules “to specify the appropriate time delay for reporting large notional swaps transactions (block trades) to the public.”

In writing such rules, the Commission is charged to “take into account whether public disclosure will materially reduce market

liquidity.”

The Commission recognized that the potential market impact of reporting a block trade or large notional swap is an important consideration in the determination of an appropriate time delay before public dissemination of block trade or large notional swap transaction and pricing data. Proposed § 43.5(k) specified the appropriate time delays for public dissemination of block trades and large notional swaps and established that the time delay for public dissemination begins at execution of the swap.

CEA section 2(a)(13)(E)(iii). As noted above, the Commission is only required to prescribe rules relating to CEA section 2(a)(13)(E) for swaps subject to the mandatory clearing requirement (including those excepted from such requirement pursuant to CEA section 2(h)(7)) and swaps that are not subject to the mandatory clearing requirement but are cleared, as described in CEA sections 2(a)(13)(C)(i) and (ii).

CEA section 2(a)(13)(E)(iv). As noted above, the Commission is only required to prescribe rules relating to CEA section 2(a)(13)(E) for swaps subject to the mandatory clearing requirement (including those excepted from such requirement pursuant to CEA section 2(h)(7)) and swaps that are not subject to the mandatory clearing requirement but are cleared, as described in CEA sections 2(a)(13)(C)(i) and (ii).

4. Proposed Appendix A to Part 43

The Commission anticipated that real-time swap transaction and pricing data may be publicly disseminated by multiple real-time disseminators in the same asset class. In order to minimize the effects of fragmentation and enhance consistency both within and among asset classes, the Commission proposed in appendix A to part 43 a number of data fields that should be publicly disseminated and provided guidance on the format and manner of reporting. The Commission believes that the public dissemination of standardized data should reduce the search costs to the public and market participants while increasing consolidation of real-time swap transaction and pricing data and promoting post-trade transparency and price discovery.

C. Overview of Comments Received

In addition to the comments specifically discussed herein, the Commission also received comments from various groups during the course of external meetings. Those commenters include, among others: Rabobank Nederland, Insurance Groups (American Counsel of Life Insurers, Genworth, Manulife, John Hancock Life, New York Life, Northwestern Mutual, Prudential, MetLife and Allstate Life); Fidelity Investments; and Vanguard.

The Commission received comments from 88 interested parties

representing a cross-section of the global financial services industry, including trade associations for both financial and non-financial end-users, potential SDs and MSPs; law firms representing diverse interests; exchanges; and numerous service and technology providers.

While many commenters expressed general support for the proposed part 43 rules, they also offered recommendations for clarification or modification of specific proposed regulations. Other commenters objected to particular aspects of the Proposing Release.

The initial comment period with respect to proposed part 43 closed on February 7, 2011. The comment periods for most proposed rulemakings implementing the Dodd-Frank Act—including the proposed part 43 rules—subsequently were reopened for the period of April 27 through June 2, 2011.

A complete list of the full names and abbreviations of commenters is included in section VII at the end of this release; comment letters are available through the Commission Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

In addition to a general solicitation for comment on all aspects of the Proposing Release, the Commission requested comment on a number of specific, focused questions related to particular provisions. For example, commenters were asked to address issues related to (i) the appropriate implementation schedule for the final rules; (ii) which swap counterparties should be covered by the reporting requirements of part 43 in order to enhance price discovery; (iii) the responsibilities of the swap counterparties to report swap transaction and pricing data (including the advisability of establishing maximum timeframes in which reporting parties must report data to an SDR); (iv) whether the final rules should address the reporting and public dissemination of swap transaction and pricing data for swaps transacted between two non-U.S. persons; (v) the circumstances under which SEFs and DCMs are deemed to have satisfied their public dissemination requirements; (vi) recordkeeping and retention requirements, including the anticipated costs associated with storing real-time swap transaction and pricing data for an extended period of time; (vii) protection of the anonymity of swap counterparties (including the utility of rounding notional amounts); (viii) the utility of the proposed data fields (including whether dissemination of additional data fields would enhance transparency and price discovery); and (ix) whether there would be an adverse price impact for traders and/or an impact on liquidity if all market participants knew the swap transaction and pricing details of all swaps in real-time.

As noted, the SEC is separately authorized by section 763 of the Dodd-Frank Act to adopt real-time reporting rules for security-based swaps (“SBSs”). Because the Commission and the SEC regulate different products and markets and thus may have proposed differing regulatory requirements, the Commission particularly requested comments on the impact of any differences between the two regulatory approaches.

The Commission also requested comment with respect to its cost-benefit considerations generally, and specifically asked whether there are alternative ways it can meet its mandate under section 727 of the Dodd-Frank Act in a less costly manner. Similarly, commenters were invited to submit data or other information quantifying or qualifying the costs and benefits of the Proposing Release.

The comments received will be addressed as appropriate throughout the following discussion of the final rules.

D. Proposed § 43.5—Block Trades and Large Notional Swaps

Several commenters urged that the Commission study additional data before setting appropriate minimum block sizes and time delays

for public dissemination of block trades and large notional off-facility swaps.

The Commission recognized the merit in those concerns, and subsequent to publication of the proposed part 43 rules, it continued to receive and analyze swap data for various asset classes in order to make informed decisions with respect to the appropriate criteria for determining block trade sizes and the initial appropriate minimum block trade sizes. The Commission agrees with the commenters that additional analysis is necessary prior to issuance of final rules for appropriate minimum block sizes, and accordingly has determined not to make final its proposed § 43.5 rules specifying the criteria for determining block trade sizes. Instead, the Commission intends to issue a separate notice of proposed rulemaking that will specifically address the appropriate criteria for determining appropriate minimum block trade sizes in light of data and comments received.

Comments on these issues received in connection with the instant rulemaking will be considered by the Commission in its re-proposal of the block trade rules.

Commenters included: MFA; Barclays; AII; GS; UBS; GFXD; Freddie Mac; ISDA/SIFMA; Better Markets; ABC/CIEBA; SIFMA AMG; WMBAA; FHLBanks; Coalition for Derivatives End-Users; Cleary; and Vanguard.

In light of clarifications in § 43.2, the terms “large notional swap” and “large notional off-facility swap” will be used interchangeably throughout this Adopting Release.

See infra

note 29.

The notice of proposed rulemaking regarding block trade sizes and criteria is referenced throughout this release as the “block trade re-proposal” or “re-proposal of the block trade rules.”

II. Part 43 of the Commission's Regulations—Final Rules

As proposed in the Real-Time NPRM, the provisions of part 43 governed the

method and timing of real-time public reporting; swap transaction and pricing data to be publicly disseminated in real-time; and time delays for public dissemination of swap transaction and pricing data. The purpose, scope and rules of construction of part 43 were established in proposed § 43.1; proposed definitions of terms and processes relevant to real-time public reporting were specified in proposed § 43.2. Proposed § 43.3 established the method and timing for real-time public reporting and dissemination of swap transaction and pricing data; this rule also delineated the responsibilities of swap counterparties and SDRs, and established procedures for recordkeeping, correction of errors and omissions, and hours of operation. Proposed § 43.4 specified the format in which swap transaction and pricing data would be publicly disseminated and appendix A to proposed part 43 described the fields for which an SDR must publicly disseminate swap transaction and pricing data. As proposed, § 43.5 prescribed the criteria for determining what constitutes a large notional swap transaction (block trade) and specified the appropriate time delay for reporting block trades to the public.

While the Commission has adopted the part 43 rules substantially as proposed, there are several salient changes.

As noted above, the Commission is not adopting those elements of proposed § 43.5 relating to the establishment of block trade sizes. The Commission believes, in accordance with comments, that further study and analysis of block trade data is necessary prior to establishing minimum block trade size and for that reason has determined to make final only those elements of proposed § 43.5 relating to timestamp requirements and time delays for the public dissemination of swap transaction and pricing data. In that regard, § 43.5 provides that until the Commission establishes an appropriate minimum block size for a swap or group of swaps, the time delays specified therein will apply to all swaps that do not have an appropriate minimum block size. The anonymity provisions in § 43.4 have been clarified, and the Commission has eliminated a provision in proposed § 43.3 which would have permitted dissemination of swap transaction and pricing data by third-party service providers. Instead, the Commission will require that all public dissemination of such data occur through an SDR. Unless otherwise discussed in this section, the regulations are adopted as proposed.

This adopting release is referred to herein as the “Adopting Release.”

A. Section 43.1—Purpose, Scope and Rules of Construction

Proposed § 43.1 applied to all swaps as defined in CEA section 1a(47) and as may be further defined by Commission regulation. The provisions of part 43 also applied to the categories of swaps set forth in CEA section 2(a)(13)(C); those categories account for the universe of swaps subject to the Dodd-Frank Act's regulatory regime, whether cleared or uncleared, and regardless of whether executed on a SEF, DCM or off-facility. The proposed rules applied real-time reporting requirements to SEFs, DCMs, SDRs and the swap counterparties, including registered or exempt SDs, registered or exempt MSPs and U.S.-based end-users. The Commission requested comment generally on the scope of transactions covered by this part, and specifically with respect to which swap counterparties should be subject to the reporting requirements of this part.

1. Scope—Generally

Proposed § 43.1(a) stated that the purpose of part 43 related to “the collection and public dissemination of certain swap transaction and pricing data to enhance transparency and price discovery.”

As proposed, § 43.1(b)(1) stated that the provisions of part 43 applied to all swaps as defined in CEA section 1(a)(47) and any implementing regulations therefrom, including the categories of swaps set forth in section 2(a)(13)(C) of the Act.

Further, proposed § 43.1(b)(2) provided that the provisions of part 43 apply to all SEFs, DCMs, SDRs and swap counterparties (including registered or exempt SDs, registered or exempt MSPs and U.S.-based end-users). Proposed § 43.1(c) specified the rules of construction for part 43, and explained that although the examples in part 43 and the related appendices are not exclusive, compliance with an example would constitute compliance with such portions of the rule to which the example relates.

CEA section 2(a)(13)(B) provides that the purpose of section 727 of the Dodd-Frank Act is “to authorize the Commission to make swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery.”

CEA section 2(a)(13)(C) provides that “[t]he Commission is authorized and required to provide by rule for the public availability of swap transaction and pricing data” for four categories of swaps: (1) Swaps subject to the mandatory clearing requirement described in CEA section 2(h)(1) (including those swaps that are excepted from the requirement pursuant to CEA section 2(h)(7)); (2) swaps that are not subject to the mandatory clearing requirement described in CEA section 2(h)(1), but are cleared at a registered DCO; (3) swaps that are not cleared at a registered DCO and are reported to an SDR under CEA section 2(h)(6) (reporting for this category of swaps must be done in a manner that does not disclose the business transactions and market positions of any person); and (4) swaps that are determined to be required to be cleared under CEA section 2(h)(2) but are not cleared.

Forty-six commenters addressed various aspects of the scope provisions.

Commenters expressed concerns related to swaps between affiliates, portfolio compression exercises,

uncleared and bespoke

swaps, end-user to end-user swaps, foreign exchange swaps, international issues, distress scenarios and other scope-related issues.

See supra

note 23.

A separate proposed rulemaking under part 23 addresses rules relating to portfolio compression. 75 FR 81519 (Dec. 18, 2010).

As used throughout this Adopting Release, “bespoke” indicates that a swap is off-facility and is not standardized.

In addition, one commenter stated that the reporting and disclosure requirements could violate the First and Fifth Amendments to the United States Constitution by purportedly compelling “non-commercial speech” without satisfying a heightened standard and by “taking” protected private information without just compensation.

See

CL-Sadis and Goldberg. The Commission has carefully considered these comments and pertinent judicial precedent. It believes that the data reporting and disclosure requirements at issue would not violate the First Amendment because, among other reasons, the information at issue is commercial speech subject to a lower, reasonably-related standard.

See, e.g.,

Zauderer

Office of Disciplinary Counsel of Supreme Court of Ohio,

471 U.S. 626, 650-53 (1985) (state bar did not violate First Amendment by requiring attorneys to fully disclose fee and cost arrangements in advertisements; the speech was commercial because it pertained to the economic interests of the parties, applicable standard was therefore whether the disclosure requirement was reasonably related to legitimate state interest, and the disclosure requirement at issue was rationally related to the state's interest in preventing deception of consumers). The Commission also believes that the requirements at issue would not violate the Fifth Amendment. Among other reasons, participants have no reasonable investment-backed expectation that information they submit will be kept confidential because they voluntarily submit it, knowing that it will be publicly disclosed to the extent provided by statute and regulation. In addition, the reporting and disclosure requirements are reasonably related to the government's legitimate interests in transparency and price discovery.

See, e.g.,

Ruckelshaus

Monsanto,

467 U.S. 986, 1006-07 (1984) (determining that there was no regulatory taking where applicant for pesticide registration was required by federal pesticide law to submit certain trade secret product data to EPA that EPA could then publicly disclose; applicant knew at time of submission that statute authorized EPA to do so, applicant therefore could not have had a “reasonable investment-backed expectation” that data would be kept confidential, and the government's action was reasonably related to legitimate government interest in an area of public concern and regulation).

2. Swaps Between Affiliates and Portfolio Compression Exercises

Several commenters questioned whether swaps between affiliates should be subject to the real-time public reporting requirements of part 43. Some commenters stated that swaps between affiliates have no price discovery or transparency value and thus should not be publicly reported.

One commenter noted that the real time dissemination of anonymous data regarding swaps between affiliates that price credit and market risk at or near zero might distort price discovery, rather than enhance it.

Other commenters stated variously that inter-affiliate trades and portfolio management exercises should not be considered “reportable transactions,”

and that reporting swaps between affiliates will add reporting requirements to end-users.

A commenter noted the reporting of data on physical gas and power transactions between affiliates is excluded in other contexts.

Another argued that the public reporting of inter-affiliate transactions could seriously interfere with the internal risk management practices of a corporate group, thereby prompting market participants to act in a way that would prevent the corporate group from following through with its risk management strategy. This commenter suggested that such a result could raise the costs to corporate groups of managing risk internally, in addition to confusing market participants with irrelevant information.

See, e.g.,

CL-Cleary; CL-FSR; CL-Working Group of Commercial Energy Firms; CL-Coalition of Energy End-Users; CL-ISDA/SIFMA; CL-Japanese Banks; and CL-Coalition for Derivatives End-Users.

The commenter stated that “default risk among affiliated entities within a corporate group is negligible,” and “an inter-affiliate swap does not price hedging costs the same as a market-facing swap because each inter-affiliate swap is entered into on the general assumption that the market risk of all transactions within the corporate group will be hedged by the centralized hedging affiliate under a market-facing transaction.” CL-Shell at 6.

See

CL-TriOptima; CL-WMBAA.

See

CL-Coalition for Derivatives End-Users.

See

CL-Working Group of Commercial Energy Firms.

See

CL-Cleary.

The Commission agrees with the comments regarding the public dissemination of certain swaps between affiliates and portfolio compression exercises. The Commission concurs that publicly disseminating swap transaction and pricing data related to certain swaps between affiliates would not enhance price discovery, as such swap transaction and pricing data would already have been publicly disseminated in the form of the related market-facing swap. This information may create an inaccurate appearance of market depth. Notably, there is a very high volume of swaps between affiliates in certain asset classes (

e.g.,

foreign exchange).

To require public dissemination of all such transactions could be very costly for market participants. Where there are no price discovery benefits to publicly disseminating such transactions, the Commission has determined not to require the public dissemination of these transactions at this time.

See

CL-GFXD. “Many millions of trades occur daily between different affiliates of the same institution which are not relevant to the institution's external market positioning.”

Id.

at p. 13.

Accordingly, the Commission is adopting a definition in § 43.2 for the term “publicly reportable swap transaction” that does not presently require the public dissemination of internal swaps.

Specifically, a publicly reportable swap transaction means, among other things, any executed swap that is an arm's length transaction between two parties that results in a corresponding change in the market risk position between the two parties. As adopted, the definition of a publicly reportable swap transaction also provides, by way of example, that internal transactions to move risk between wholly-owned subsidiaries of the same parent, without having credit exposure to the other party

would not presently require public dissemination because such swaps are not arm's-length transactions.

As discussed and referenced in this rule, internal swaps between one-hundred percent owned subsidiaries of the same parent entity may include back-to-back swap transactions between or among such wholly-owned subsidiaries to help manage the risks associated with a market-facing swap transaction. In general, a back-to-back swap transaction effectively transfers the risks associated with a market-facing swap transaction to an affiliate that was not an original party to such transaction.

Back-to-back swap transactions may occur in a number of different ways. For example, an affiliate immediately may enter into a mirror swap transaction with its affiliate on the same terms as the marketing-facing swap transaction. By way of further example, a market-facing affiliate may enter into multiple transactions with affiliates that are not at arm's-length in order to transfer the risks associated with an arm's-length, market-facing transaction.

Section 608 of the Dodd-Frank Act adds to paragraph 7 of the definition of “covered transaction” in Section 23A of the Federal Reserve Act (12 U.S.C. 371(c)): “(G) a derivative transaction, as defined in paragraph (3) of section 5200(b) of the Revised Statutes of the United States (12 U.S.C. 84(b)), with an affiliate, to the extent that the transaction causes a member bank or a subsidiary to have credit exposure to the affiliate.” Hence, all derivatives transactions will be subjected to Section 23A of the Federal Reserve Act to the extent that they cause the bank to have credit exposure to the affiliate. Section 23B of the Federal Reserve Act contains an arm's-length requirement stating that a member bank and its subsidiaries may engage in any covered transaction with an affiliate only “(A) on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or its subsidiary, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies, or (B) in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.” The Commission considers any covered transaction between affiliates as described in Sections 23A and 23B of the Federal Reserve Act to be publicly reportable swap transactions.

Similarly, the Commission agrees that portfolio compression exercises should not be publicly disseminated at this time.

The purpose of such transactions is to mitigate risk between counterparties and any new swaps that were executed as a result of portfolio compression exercises would be a result of the compression itself and not an arm's-length transaction between the parties.

As adopted, the definition of a publicly reportable swap transaction also cites portfolio compression exercises as an example that does not presently require public dissemination.

In its proposed part 23 release relating to “Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and Major Swap Participants,” portfolio compression is defined as “a mechanism whereby substantially similar transactions among two or more counterparties are terminated and replaced with a smaller number of transactions of decreased notional value in an effort to reduce the risk, cost, and inefficiency of maintaining unnecessary transactions on the counterparties' books.” 75 FR 81532.

See

CL-TriOptima; CL-Shell.

3. Uncleared or Bespoke Swaps

The Commission received comments from various market participants relating to the scope of CEA section 2(a)(13) and proposed part 43, as it applies to uncleared and bespoke swaps. Some commenters stated that only standardized, cleared swaps should be real-time reported and publicly disseminated. Others urged that uncleared trades be treated differently than cleared trades and that the statute does not require that non-standardized swaps be real-time reported (

e.g.,

customized trades should receive a greater time prior to public dissemination).

A commenter argued that only uncleared swaps that perform a significant price discovery function should be publicly disseminated.

Another commenter argued that bespoke trade data has little value and public dissemination of such information involves complex technical issues.

Still another commenter explained that the public dissemination of swap transaction and pricing data should be phased in based on liquidity.

In contrast, two commenters said that the real-time reporting requirements should apply to all swaps, both standard and bespoke.

The commenter recommended that the Commission utilize a process to identify swaps that perform a “significant price discovery” function.

See

CL-Dominion.

See

CL-TriOptima.

See

CL-FINRA.

See

CL-IECA; CL-Better Markets.

Several commenters asserted that bespoke or customized swap transactions are not subject to real-time reporting, citing a perceived absence of authority under CEA section 2(a)(13)(C)(iii) to include these transactions. Others commented that bespoke transactions should not be subjected to real-time public reporting obligations because the transactions do not enhance price discovery and may compromise anonymity of the parties to the swap.

Some commenters focused on perceived burdens to end-users inherent in the proposed rules; many stated that end-users should not be required to report swaps.

Additionally, certain commenters stated that end-users do not have sufficient technology to report swaps; one commenter stated that end-user to end-user swaps should have next business day reporting.

Others contended that end-users should be treated differently because the public dissemination of swaps information involving such parties does not enhance price discovery.

Two commenters questioned the value of disclosing information relating to end-user to end-user power swaps compared to the harm that disclosing such information would have to these end-users and the public in general.

See

CL-IPAA; CL-IECA; CL-COPE; CL-PCS Nitrogen Fertilizer; CL-Coalition of Energy End-Users; CL-NFPEEU; CL-API; and Meeting with EEI (Feb. 10, 2011).

See

CL-IPAA.

See

CL-COPE; CL-Coalition of Energy End-Users.

See

CL-Coalition of Energy End-Users; CL-NFPEEU.

The Commission interprets CEA section 2(a)(13)(C) to grant the Commission the authority to require the real-time public reporting of all swaps in order enhance price discovery.

Accordingly, the Commission does not believe that the transactions described above (

e.g.,

bespoke, end-user to end-user, etc.) should be excluded from real-time reporting obligations. Such swap transactions, unlike internal swaps between affiliates and portfolio compression exercises, are executed at arm's length and result in a change in market risk between the swap counterparties. Thus, the Commission believes that the public dissemination of these transactions will provide price discovery benefits and transparency to the swap markets.

The Commission stated in in the Proposing Release that it interprets CEA section 2(a)(13)(C) to apply to all swap transactions. The Commission agrees with the overall concern expressed by commenters regarding the statutory duty to ensure confidentiality. CEA sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i) emphasize the importance of not identifying swap counterparties. As discussed more fully below, CEA section 2(a)(13)(C)(iii) explicitly directs the Commission to require that real-time public reporting of transactions occur in a manner that does not disclose a party's business transactions and market position.

However, the Commission agrees with commenters that the real-time public dissemination of swap transaction and pricing data should be phased in with longer initial time delays for public dissemination, as well as phased in compliance dates, for different asset classes and market participants within an asset class. Phasing in real-time reporting for certain transactions by allowing for longer initial time delays and phased compliance dates addresses concerns regarding bespoke transactions, including market liquidity and the ability for parties to report transactions. In particular, phasing in the public dissemination of bespoke transactions will allow the Commission to ensure that the public dissemination of such transactions will protect the identities of swap participants, not disclose the business transactions and market positions of any person involved in an uncleared swap and mitigate any adverse impact on market liquidity.

4. Foreign Exchange (“FX”) Asset Class

Several commenters sought clarification as to which FX swaps will be subject to the real-time public reporting requirements; some argued that FX forwards and swaps should not be subject to real-time public reporting rules. One commenter argued that the universe of FX market participants is massive given that FX transactions are an integral part of the global payment systems, presenting a practical challenge to ensuring that all relevant reporting participants are able to report.

To the extent that FX swaps or forwards, or both, are excluded from the definition of “swap” pursuant to a determination by United States Department of the Treasury (“Treasury”), the requirements of CEA section 2(a)(13) would not apply to those transactions, and such transactions shall not be subject to the real-time public reporting requirements of part 43. Treasury issued a proposed determination on April 29, 2011, in which it stated that FX swaps and forwards that would be excluded from the definition of “swap,” and thereby exempt from certain requirements established in the Dodd-Frank Act, including registration and clearing. However, the CEA provides that, even if Treasury determines that FX swaps and forwards may be excluded from the definition of “swap,” these transactions are not excluded from regulatory reporting requirements to an SDR.

Nonetheless, such transactions would not be subject to the real-time reporting requirements under part 43. Treasury has proposed to act pursuant to the authority in Section 721 of the Dodd-Frank Act that permits a determination that certain FX swaps and forwards should not be regulated as swaps and are not structured to evade the Dodd-Frank Act. The Commission has noted that, as proposed, Treasury's determination would exclude FX swaps and forwards, as defined in CEA section 1a, but would not apply to FX options or non-deliverable forwards (“NDFs”).

FX instruments that are not covered by Treasury's final determination would still be subject to the real-time public reporting rules described in part 43.

See

CEA section 1(a)(47)(E).

See

76 FR 29818, 29835-29837 (May 23, 2011) (proposed rulemaking issued jointly by Commission and SEC to further define, among others, the term “swap”).

See

76 FR 25774 (May 5, 2011). Treasury's proposed determination may also be found at

http://www.treasury.gov/initiatives/wsr/Documents/FX%20Swaps%20and%20Forwards%20NPD.pdf.

Section 43.1 as adopted does not distinguish between transactions within the FX asset class; such a decision to exclude FX forwards and swaps will be determined by Treasury pursuant to CEA section 1(a)(47).

5. Limitations and Special Accommodations

Several scope-related comments focused on very specific issues. Some commenters argued that novations should not be publicly reportable swap transactions. Another commenter asserted that the Commission has no statutory basis for requiring that post-swap events (

e.g.,

novations, amendments, terminations, etc.) be subject to part 43. This commenter stated that real-time reporting should be limited to trade execution and that lifecycle events should not be reported.

See

CL-NFPEEU.

The Commission agrees that to the extent that novations or other lifecycle events do not change the pricing of an initial execution of the swap they would not be considered publicly reportable swap transactions and therefore would not be publicly disseminated.

As two

commenters pointed out, the reporting of a novation that is just a change in ownership could lead to duplication in reporting and misrepresentative prices in the market.

As discussed more fully below, in the case of novations where there is no change in the pricing, the novations would not be publicly reportable swap transactions pursuant to § 43.2.

See

the definition of “publicly reportable swap transaction” in § 43.2.

See

CL-Barclays; CL-Working Group of Commercial Energy Firms.

The Commission recognizes that there are certain swap contract amendments or other transactions that could enhance price discovery. Those transactions that have a price impact should be subject to the real-time reporting rules of part 43. If price-changing lifecycle events were not required to be publicly disseminated, swap counterparties could enter into a swap at one price and then immediately enter into an amendment to change a material term of the swap. The Commission is clarifying the definition of “publicly reportable swap transaction” to ensure that only those lifecycle or continuation events that have a price-changing impact should be publicly disseminated. Requiring such price-forming continuation data to be publicly disseminated eliminates the incentive for swap counterparties to enter into a swap followed by an amendment in order to disguise the price of a swap.

Commenters stated that illiquid markets should not be subject to real-time reporting.

The Commission believes that, consistent with CEA section 2(a)(13), such swaps generally are subject to the public dissemination requirements of part 43. Certain accommodations, however, have been made for such swaps in part 43, including longer initial time delays for public dissemination in final § 43.5.

See

CL-Members of Congress; CL-MS. Additionally, one commenter suggested less frequent reporting for illiquid parts of the market. CL-Chesapeake.

One commenter stated that power markets should not be subject to real-time reporting.

The Commission acknowledges this commenter's concern; swaps in the power market are priced in reference to specific locations and thus present issues regarding the protection of the identities of the counterparties. To the extent that these are off-facility swaps, the Commission intends to propose to describe the form and manner for their reporting in its block trade re-proposal. As discussed more fully below, until such standards are adopted, such off-facility swaps would not be subject to the real-time public reporting requirements of part 43.

See

CL-NFPEEU.

A few commenters argued that physical forwards should be expressly excluded from the real-time reporting requirements. Others contended that various types of swaps—including total return swaps, stand-alone options and structured transactions—should not be subject to the real-time reporting requirements of part 43 or should be given special accommodations. To the extent that any of these types of swaps are excluded from the definition of “swap,” such transactions are not subject to the real-time reporting requirements. Accordingly, the Commission does not intend to provide any specific exemption from part 43 at this time.

The Commission received two comments regarding special accommodations for real-time public reporting in distress scenarios and DCO default scenarios.

One commenter stated that special accommodations should be made for distress scenarios; the other stated that swaps in connection with a DCO's default management should not be reported. This commenter also provided language to address this situation in the final rule.

See

CL-Barclays; CL-LCH.Clearnet.

The Commission agrees that, depending on the circumstances, default and distress scenarios may warrant different reporting requirements. The Commission believes that distress and DCO default scenarios may be situations in which the Commission may exercise its authority to temporarily suspend real-time public reporting obligations under part 43. The Commission may address such emergency authority in a future Commission rulemaking. The Commission does not accept the recommendation that real-time reporting obligations be suspended automatically upon the occurrence of a distress scenario; in its view any suspension or delay of reporting should occur only upon a Commission determination. Further, the Commission believes that time delays described in § 43.5 will address some of the concerns expressed in these comments.

6. Liquidity

Some commenters asserted that real-time public reporting could cause a reduction of liquidity, particularly in already illiquid markets.

The Commission believes that the availability of previously-inaccessible swap pricing data in close to real-time will increase the competition among potential swap counterparties regarding the pricing of such swaps, and that such increased competition will be a central benefit of the real-time reporting rules. The enhanced transparency and reliability of transactional data provided by the real-time dissemination of swap transaction data can be expected to promote confidence in the fairness and integrity of swaps markets. Thus, the Commission anticipates that while a trade-off between liquidity and transparency may manifest itself in the beginning of the implementation period, the increased transparency ultimately should increase participation in the swaps markets.

See, e.g.,

CL-Chesapeake; CL-Dominion; CL-MS; CL-ATA and Meeting with Barclays (January 24, 2011).

The Commission believes that it has achieved the appropriate balance between transparency and liquidity. However, the Commission recognizes that certain market participants may disagree with the Commission and choose not to enter into certain types of swaps. The Commission believes that increased price transparency will attract additional liquidity providers based on confidence that their competitive pricing will better attract business.

Another key benefit of real-time reporting of previously unavailable swap transaction and pricing data is enhanced price discovery. Broader access to information will be of particular value to buy-side participants and end-users. As one commenter noted, the ability to observe information about recent transactions and to seek customized trades offers potential benefits to end-users.

In this regard, the Commission disagrees with commenters who opined that transaction data about bespoke, bilateral swaps provides no price discovery information. On the contrary, such information helps to complete the picture of the swap market for all market participants, and would likely inform traders seeking to transact economically similar—although not identical—swaps.

See

CL-Reval.

As SDs and MSPs adapt to the real-time public reporting of swap transaction data, the Commission anticipates that these market participants, who typically are large and technologically sophisticated, will compete on price to attract end-users and other typically smaller, less-sophisticated market participants as swap counterparties. The Commission believes that its phase in approach to dissemination delays provided in § 43.5 of this rule will allow market participants time to adapt to the new procedures.

7. International Issues

The Commission received several comments addressing international

concerns as they relate to the scope of the Proposing Release. Four commenters stated that the Commission should explicitly require that only data relating to swap transactions involving at least one U.S.-person must be reported and publicly disseminated.

Seven comments urged that the Commission consult with foreign regulators before establishing extraterritoriality scope;

one comment stated that jurisdictional boundaries should be defined

and seven comments stated that any SD or MSP in a swap should be the reporting party regardless of whether it is a U.S. person.

Additionally, the Public Roundtable on Dodd-Frank Implementation produced comments regarding the need for the CFTC and SEC to harmonize their reporting requirements with international regulators.

See

CL-ISDA/SIFMA; CL-GFXD; CL-Foreign Headquartered Banks; and CL-Working Group of Commercial Energy Firms.

See

CL-ISDA/SIFMA; CL-Commodity Markets Council; CL-Foreign Headquartered Banks; CL-WFE/IOMA; CL-Tradeweb; CL-SIFMA AMG; and CL-Soc Gen.

See

CL-ISDA/SIFMA.

See

CL-Vanguard; CL-MarkitSERV; CL-SIFMA AMG; CL-ICI; CL-ISDA/SIFMA; CL-BlackRock; and CL-DTCC.

See

CL-MarkitSERV; CL-AFGI; and CFTC/SEC Public Roundtable on International Issues Relating to Dodd-Frank (Aug. 1, 2011). Public Roundtable comments can be found at http://comments.cftc.gov/publiccomments/commentlist.aspx?id=1065.

Two commenters questioned whether the Commission has the legal authority to implement proposed § 43.1(b)(2) with respect to non-U.S. parties

and suggested the Commission reach agreements with foreign regulators before requiring that all transactions with any U.S. person be subject to the requirements in part 43.

As proposed, § 43.1(b) established the scope of part 43. Proposed § 43.1(b)(2) provides that the part 43 rules apply to all SEFs, DCMs, SDRs, as well as parties to a swap including registered SDs, registered MSPs and U.S.-based end-users.

See

CL-ISDA/SIFMA; CL-GFXD.

The Commission recognizes the benefits of consultation with international regulators in developing the real-time public reporting rules set forth in part 43 of the Commission's regulations. To that end, Commission staff has had discussions with a number of international regulators, including the UK FSA, AEuropean Commission (“EC”),

European Parliament Rapporteur for the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories, European Securities and Markets Authority (“ESMA”), Canadian Provincial Regulators and Japan FSA.

Commission staff continues to discuss with international regulators issues related to extraterritoriality.

It should be noted that the 2004 version of Markets in Financial Instruments' Directive (“MiFID”) contained language for equities that “Member States shall, at least, require regulated markets to make public the price, volume and time of the transactions executed in respect of shares admitted to trading. Member States shall require details of all such transactions to be made public, on a reasonable commercial basis and as close to real-time as possible.” The European Commission published its MiFID and Markets in Financial Instruments Regulation (“MiFIR”) on October 20, 2011. The European Commission's legislative proposals require that regulated markets, multilateral trading facilities (“MTFs”) and organized trading facilities (“OTFs”) shall make public the price, volume and time of transaction executed for all derivatives admitted to trading or which are traded on an MTF or an OTF. These organized trading venues shall make this transaction data public as close to real-time as is technically possible. Investment firms that make public trades outside of trading venues must make those trades available through Approved Publication Arrangements which are regulated by MiFID.

In addition, the Commission met with European industry representatives, including Credit Suisse, Deutsche Bank, Citi, J.P. Morgan, Barclays, Goldman Sachs and UBS (Mar. 22, 2011).

Several commenters stated that an SD or MSP should be the reporting party regardless of whether it is a U.S. person. The Commission generally agrees that if a registered SD or MSP is a party to a publicly reportable swap transaction, it should be the reporting party, to the extent that such transaction is subject to real-time reporting. The Commission understands the need for flexibility where one party to a swap is a U.S. counterparty and the other is a foreign counterparty. Accordingly, as discussed in greater detail below, the Commission is adopting language in § 43.3(a)(3) that allows parties to a publicly reportable swap transaction involving an off-facility swap to mutually agree on the reporting party for such transaction; such agreement would be a term of the swap.

8. Final Rule Text of § 43.1

After consideration of comments relating to the purpose, scope and rules of construction in proposed § 43.1, the Commission is adopting § 43.1 substantially as proposed, with some clarifying changes responsive to commenters' concerns relating to the extraterritorial scope of part 43. Additionally, as discussed below, the Commission is adopting other provisions, including a revised definition of “publicly reportable swap transaction” that responds to many commenters' concerns.

The Commission is adopting § 43.1(a) as proposed, with technical and clarifying changes including (i) changing the words “set forth” to “implements;” (ii) changing the word “collection” to “reporting;” and (iii) the addition of a reference to the Dodd-Frank Act. The Commission is adopting § 43.1(b) with technical and clarifying changes relating to numbering and word changes as well as with a change to the last sentence. The last sentence of § 43.1(b), as adopted, states that “[t]his part shall apply to registered entities as defined in the Act, as well as to parties to a swap including SDs, MSPs and U.S.-based market participants in a manner as the Commission may determine.” The change to the last sentence of § 43.1(b) deletes the references to “registered or exempt” when referring to SDs and adds the clause “in a manner as the Commission may determine” as compared to proposed § 43.1(b). Finally, § 43.1(c) is being adopted with two clarifying changes: “constitute” is changed to “shall constitute;” and “such” is changed to “the particular.”

B. Section 43.2—Definitions

As proposed, § 43.2 specified definitions for a number of terms and concepts related to real-time public reporting of swap transaction and pricing data. In response, the Commission received comments from 20 interested parties, including industry associations representing myriad financial market participants, potential SDs, an asset manager, potential SDRs and a DCM. In addition to comments on the definitions proposed in § 43.2, commenters addressed terms not defined in proposed § 43.2, such as “illiquid market.”

1. Harmonization

A number of commenters suggested that the Commission and the SEC harmonize the use of the defined terms in proposed § 43.2 in order to foster operational efficiency, lessen the incidence of errors and place fewer burdens on reporting agencies.

The Commission agrees that harmonization of certain terms is desirable and the two agencies have coordinated their responses to the Dodd-Frank Act as closely as possible. The Commission notes that the two agencies have jurisdiction over different types of swaps which necessitates some differences in terminology. The Commission believes therefore that any differences between the two commissions with respect to defined terms are justified and necessary to accomplish the purposes of the Act.

See

CL-GFXD; CL-ISDA/SIFMA; and CL-Vanguard.

2. Defined Terms

Section 43.2 contains the definitions for terms and concepts throughout part 43 and its related appendices.

The specific terms defined in § 43.2 are discussed below.

Proposed § 43.2 used subparagraph lettering for the definitions; however, the Commission has removed the subparagraph lettering from final § 43.2 to enable the addition of defined terms as rules relating to block trades and large notional off-facility swaps are promulgated, without necessitating a renumbering with § 43.2.

Act—Proposed § 43.2(a)

The Commission is adopting the definition as proposed with a clarifying citation to the United States Code.

No comments were received in connection with the proposed definition for “Act.”

Affirmation—Proposed § 43.2(b)

A commenter suggested that the use of terms like “affirmation” should reflect long-standing market conventions that differ according to the type of underlying reference asset.

Another commenter pointed to a perceived loophole in the Commission's proposed definition that would allow for the avoidance of block trade reporting by agreeing on swap terms at one point in time and affirming terms of trade details later.

The Commission believes that the definition as proposed provided adequate clarity to permit flexibility for different market participants, asset classes and methods of execution. The Commission is not persuaded by the argument that the proposed definition contains a loophole that would allow for the avoidance of block trade reporting. The Commission believes that the business conduct and straight-through processing rules proposed in part 23 of its regulations,

in addition to anti-evasion requirements (proposed to be included in part 1 of its regulations), should provide adequate oversight rules.

See

CL-ISDA/SIFMA. As discussed below, this comment was broadly applied to terms such as “execution” and “confirmation.”

See

Communication with Darrell Duffie (Dec. 15, 2010).

See supra

note 18.

Proposed part 1 of the Commission's regulations provides that all transactions that are willfully structured to evade the requirements of the Dodd-Frank Act will be treated as swaps.

See

76 FR 29818 at 29865-66 (May 23, 2011). The rule has not yet been adopted.

Comments emphasizing the need for harmonization between the CFTC and the SEC focused in part on the definition of “affirmation.” The SEC's proposed Regulation SBSR does not include the concept of “affirmation”; however, the Commission believes that this difference is not material.

For the reasons discussed above, the Commission believes that the proposed definition of “affirmation” provides adequate clarity for different market participants, asset classes and methods of execution. Accordingly, the Commission is adopting the definition as proposed.

Appropriate Minimum Block Size—Proposed § 43.2(c)

The Commission is adopting the definition of “appropriate minimum block size” with a few modifications. As discussed below, since the definition of “swap instrument” is not being adopted in these final rules, the reference to that definition is removed.

The statement in the proposed definition regarding the calculation of appropriate minimum block sizes has been removed since those proposed rules are being reconsidered at this time.

No comments were received in connection with the language of the proposed definition for “appropriate minimum block size.”

As Soon as Technologically Practicable—Proposed § 43.2(d)

Proposed § 43.2(d) defined the term “as soon as technologically practicable” as “as soon as possible, taking into consideration the prevalence of technology, implementation and use of technology by comparable market participants.” The Commission anticipated that this term could have different interpretations for different swap counterparties (

i.e.,

SDs, MSPs and end-users), for different types of swaps (

e.g.,

energy swaps, credit default swaps, interest rate swaps, etc.) and for different methods of execution (

i.e.,

SEFs, DCMs and off-facility swaps).

The Commission received twelve comments from various interested parties, including trading platforms, industry groups/associations and a data vendor. One commenter

stated that while the SEC's proposed definition of “real time” more easily replicates current market practice than “as soon as technologically practicable,” the CFTC and SEC should propose one consistent definition of real-time reporting for their respective rules.

See

CL-Chris Barnard.

While the comments generally support the flexibility of the definition, some commenters requested further clarification. One commenter, for example, requested that the Commission distinguish between SDs that are banks and those that are non-banks.

Another commenter requested clarification whether “as soon as technologically practicable” would mean the same thing for swaps executed on or pursuant to the rules of a SEF or DCM as for swaps under CEA section 2(h)(7).

See

CL-Working Group of Commercial Energy Firms.

See

CL-Coalition for Derivatives End-Users.

Some commenters suggested that the Commission refrain from establishing maximum reporting time frames, except for large SDs and MSPs or, at a minimum, either adopt longer time frames for reporting for market participants that are not SDs or MSPs, or allow custom and market practice to eventually define the time period that is a responsible interpretation of “technologically practicable.”

Other commenters addressed the concept of backstops for real-time reporting for non-block trades.

One stated that there must be a maximum time limit of no longer than five minutes,

while another said that maximum reporting timeframes should be given only for SDs and MSPs (or at a minimum reporting timeframes should be longer for end-users).

Another commenter contended that real-time reporting should occur after confirmation to reduce errors and omissions and since the confirmation process is what drives the booking of a trade into a firm's trade capture system.

Id.

See

CL-Better Markets; CL-Markit; and CL-Coalition for Derivatives End-Users.

See

CL-Better Markets.

See

CL-Coalition for Derivatives End-users.

See

CL-DTCC.

The Commission acknowledges that SDs and MSPs are more likely to have the infrastructure and resources available to report their swap transaction and pricing data to an SDR faster than other categories of market participants (

i.e.,

financial and non-financial end-users). However, the Commission believes it would be premature to establish maximum timeframes at this time without information on the manner and frequency in which these swaps are executed or a clear understanding of the technological capabilities of reporting parties. Declining to establish backstops is a less prescriptive approach that takes into account the different technological capabilities of different markets and market participants. The Commission can analyze timestamp data, which is not currently available, to determine whether reporting parties are reporting “as soon as technologically practicable.”

In response to comments requesting further clarification of the definition, the Commission believes that the proposed definition provided adequate flexibility for different market participants, asset classes and methods of execution. If the definition of “as

soon as technologically practicable” were more rigid (

e.g.,

setting forth maximum reporting times) the costs to less sophisticated reporting parties could be greater, particularly in the initial phases of the rule.

The Commission notes that real-time swap transaction and pricing data must be reported “as soon as technologically practicable” after “execution” which is linked to the “affirmation” of the swap. “Confirmation” of the swap may occur at a point after the affirmation and execution, or at the same time (

e.g.,

SEF or DCM execution of a swap).

With respect to comments regarding backstops, the Commission believes that there could be potentially significant costs to certain market participants—particularly end-users—in complying with a backstop. For this reason as well, the Commission has determined to retain the flexibility of the definition by excluding backstops. While the SEC's proposed Regulation SBSR provided a 15-minute backstop, it is important to note that the markets overseen by the SEC have significantly fewer end-users participating in the credit and equities markets than the markets under the Commission's authority. The Commission believes this distinction justifies the difference in approach between the agencies.

For the reasons discussed above, the Commission has retained a less prescriptive definition of “as soon as technologically practicable” in order to provide adequate flexibility for different market participants, asset classes and methods of execution, particularly when weighed against the potential costs to market participants to comply with more rigid timeframes. Accordingly, the Commission is adopting the definition as proposed.

Asset Class—Proposed § 43.2(e)

Proposed § 43.2(e) provided that the asset classes include five major categories: Interest rate, currency, credit, equity and “other commodity,” as well as any other asset class that may be determined by the Commission. Commenters offered various views with respect to categorizing the asset classes. One commenter recommended that relatively few defined asset classes would create increased aggregation of services and reduce the risks of duplication or omission in public dissemination or erroneous consolidation by the public of available data, while also reducing the burden on market participants to connect and reconcile among multiple SDRs.

ISDA and SIFMA jointly opined that providing sub-asset classes for “other commodity” would be advisable for reporting requirements.

See

CL-DTCC.

See

CL-ISDA/SIFMA.

One commenter expressed concern with respect to the definition, treatment and reporting of an FX forward under the Proposing Release.

This commenter requested clarification that spot transactions with value dates less than or equal to T+2

are excluded from the definition and further requested clarification with respect to the reporting obligations on those FX products that may be excluded by Treasury. Commenters also requested further clarification in defining an “FX swap” and “cross currency swap.” These commenters distinguished between a cross currency swap (an interest rate product with multi-payment schedules, traded by interest rate desks with interest rate market participants) and an FX swap (“FX products traded by distinct FX desks with different market participants using different internal and external systems infrastructure”).

In the commenters' opinion, cross-currency swaps should be reported in the interest rate asset class, while FX swaps should be reported in a separate FX asset class.

See

CL-GFXD.

The terms “T+1” and “T+2” refer to the transaction date plus one day or two days, respectively.

See

CL-GFXD.

One commenter suggested that, with respect to FX instruments, market conventions are needed to determine whether (i) both legs of the transaction are reported by a single counterparty; or (ii) whether the transaction is instead reported separately as two legs by two counterparties with two separate trade identifications. Additionally, the commenter suggested that an FX sub-classification system should be categorized by an industry association sufficiently familiar with the FX market.

Id.

One commenter recommended that the definition of “asset class” be harmonized with the SEC's definition to facilitate ease of tracking by market participants.

100

The Commission believes that references to the credit and equity asset classes should, to the extent possible, be defined consistently between the two agencies, but notes that the SEC will not be regulating products in asset classes other than credit and equity. Because the Commission is best situated to define the asset classes within its jurisdiction, it believes that any differences between the CFTC and the SEC with respect to the definition of “asset class” have their origins in different statutory and regulatory schemes and are justified and necessary.

100

See

CL-Vanguard.

The Commission is persuaded by the suggestions regarding the subdivision of asset classes and agrees that fewer asset classes will decrease fragmentation of data and reduce the burden of market participants to reconcile among multiple SDRs. Additionally, since an SDR that accepts swap transaction and pricing data for a swap within an asset class must accept data for all swaps in that asset class, market participants will more likely be able to report data for both real-time and regulatory reporting purposes.

101

The Commission also agrees that there is merit to providing a sub-class for the “other commodity” asset class. The “other commodity” asset class may be broken down into sub-asset classes for purposes of public dissemination;

102

however, the “other commodity” asset class remains an asset class that includes energy, metals, precious metals, agricultural commodities, weather, property and other commodities.

101

See

§ 49.10(b).

See also

§ 43.3(c)(2).

102

Accordingly, appendix A to part 43 provides a data field for public dissemination entitled “sub-asset class for other commodity.”

Finally, the Commission agrees that clarification and additional guidance is needed to address FX products.

103

Specifically, the Commission has determined to include cross-currency swaps in the interest rate asset class and FX options, swaps and forwards will be included in an FX asset class. Therefore, the Commission has modified the definition to better reflect the fact that the industry typically characterizes “currency” swaps as “interest rate swaps.”

104

Accordingly, the Commission is replacing the term “currency” in the definition of asset class with “foreign exchange” in § 43.2 to accurately reflect the asset classes employed by the swaps market.

103

See

CL-GFXD.

104

This characterization is based on the attributes of currency swaps that resemble the structure and operation exhibited by interest rate swaps while in “foreign exchange” swaps, the underlying currencies are exchanged by the parties.

As discussed above, to the extent that FX swaps or forwards, or both, are excluded from the definition of “swap” pursuant to a determination by Treasury, the requirements of CEA section 2(a)(13) would not apply to those transactions, and such transactions shall not be subject to the real-time reporting requirements of part 43. Under Treasury's proposed determination, while FX swaps and forwards would be excluded from the

real-time reporting requirements of part 43, FX options and NDFs would not be excluded and would be subject to part 43's real-time reporting requirements.

105

See

76 FR 25774 at 25776. “[U]nlike most derivatives, foreign exchange swaps and forwards have fixed payment obligations, are physically settled, and are predominantly short-term instruments.”

The Commission has determined to clarify the definition of “asset class” by changing the asset class from “currency” to “foreign exchange.” In addition, such change would place “cross-currency swaps” in the “interest rate” asset class. Finally, the Commission is making technical changes to the definition of “asset class.” For example, “the broad category of goods, services or commodities” is changed to “a broad category of commodities, including, without limitation, any `excluded commodity' as defined in Section 1a(19) of the Act, with common characteristics underlying a swap.”

106

The terms “commodity” and “excluded commodity” as used in the definition of “asset class” are defined in CEA sections 1a(9) and 1a(19) respectively.

Block Trade—Proposed § 43.2(f)

The Commission has determined to modify the proposed definition of “block trade” by making certain technical and conforming changes in light of other definitional changes and terminology usage throughout part 43.

107

The Commission clarified that a block trade involves a swap that is “listed on a SEF or DCM” and therefore deleted the phrase “made available for trading.” Such change ensures that block trades may be executed with respect to any listed contract. Additionally, the Commission clarified certain aspects of the definition, including changing the word “off” to “away from” to indicate that a block trade is executed away from the trading system or platform. The other revisions to the “block trade” definition provide clarification and reflect consistency with other changes to the final rule. As previously discussed, this rulemaking does not address issues related to the determination of appropriate minimum block sizes.

107

The Commission received no comments addressing its proposed definition of “block trade.”

Business Day

The Commission has determined to add “business day” as a defined term to address the final time delay provisions in § 43.5. The Commission defined the term “business day” in § 43.2 as follows: “Business day means the twenty-four hour day, on all days except Saturdays, Sundays and legal holidays in the location of the reporting party or registered entity reporting data for the swap.”

The Commission believes that defining business day as twenty-four hours is necessary given the global nature of the swaps market. The determination of the business day will be based on the time zone of the location of the reporting party, SEF or DCM. For example, if the reporting party is an SD located in London who enters into a swap with a U.S.-based entity, London time would be used to determine the business day.

Business Hours

The Commission did not receive comments suggesting a definition of “business hour;” however, it believes that the addition of such defined term is necessary to provide clarity with respect to the real-time reporting provisions in final § 43.5. The term “business hours” is defined in § 43.2 as follows: “Business hours means the consecutive hours of one or more consecutive business days.”

Since “business day” is defined as the twenty-four hour day, “business hours” are consecutive hours during and across “business days.” For example if a publicly reportable swap transaction has a time delay of 24 business hours and it is executed at 6 a.m. EST on Friday, then such swap would be publicly disseminated at 6 a.m. EST on Monday, assuming that weekend days are not business days in the locale of the reporting party.

Confirmation—Proposed § 43.2(g)

One commenter stated that the definition of confirmation was appropriately broad.

108

With respect to the proposed requirement that a confirmation would legally supersede any previous agreement (electronic or otherwise), this commenter requested clarification or confirmation that this provision does not mean that a confirmation supersedes terms in the package of documentation that make up the “agreement,” unless the parties themselves so agree.

109

The commenter stated that this clarification is necessary because some fiduciaries of plans ensure that the terms of a swap are the best terms available from the perspective and interests of plan participants by having the lead fiduciary centralize the negotiation of the terms of the Schedule and Paragraph 13 of the ISDA Agreement.

110

108

See

CL-ABC/CIEBA.

See supra

note 80.

109

Id.

110

The Schedule provides an opportunity for parties to a swap to negotiate terms of or add terms to the pre-printed ISDA Master Agreement. Paragraph 13 provides an opportunity for parties to a swap to negotiate the terms of or add terms to the Credit Support Annex (New York Agreement) for the OTC swap transaction.

A commenter suggested that use of terms such as “confirmation” should reflect long-standing market conventions that differ according to the type of underlying reference asset.

111

Another commented similarly that the definition used for “confirmation” should reflect the underlying conventions that are prevalent in the FX market, which may be different to those used in other asset classes.

112

111

See

CL-ISDA/SIFMA. This suggestion is part of a broader comment recommending that defined terms should follow market conventions.

112

See

CL-GFXD.

The Commission agrees that clarification is necessary with respect to the proposed requirement that a confirmation would legally supersede any previous agreement (electronically or otherwise).

113

The Commission believes that adding the phrase “relating to the swap” following “previous agreement” provides sufficient clarity. Absent a requirement that the confirmation legally supersedes the previous agreement relating to the swap, transparency could be lost as key terms could be included in the schedule or credit support annex and conflict with terms later added to the confirmation. It is industry practice that the confirmation is the controlling document, and such confirmation will usually incorporate the schedule, master and any collateral arrangement(s) by reference.

113

See

CL-ABC/CIEBA.

With respect to the comment that “confirmation” should reflect long-standing market conventions that differ according to the type of underlying reference class, the Commission believes that the definition as proposed, with the modification as described above, provides adequate clarity to allow flexibility for different market participants, asset classes and methods of execution. Therefore, the Commission is adopting the definition of confirmation as proposed with some minor clarifications, including adding “relating to the swap” to the end of the definition to make clear that the agreement that would be legally superseded would have to relate to the same swap.

Confirmation by Affirmation—Proposed § 43.2(h)

This term is adopted as proposed, except for the deletion of the last

sentence of the proposed definition.

114

Upon further consideration, while it agrees with that statement, the Commission believes that this statement is not necessary and therefore should not be included in the definition.

114

Proposed § 43.2(h) contained the sentence: “With the affirmation by one party to the complete swap terms submitted by the other party, the swap is legally confirmed and a legally binding confirmation is consummated (

i.e.,

confirmation by affirmation).”

Embedded Option—Proposed § 43.2(i)

This defined term is adopted as proposed with a minor clarification. The proposed definition stated that an embedded option was a right, but not an obligation, provided to one party of a swap by the other party “to the same swap that provides the party in possession of the option * * *.” The Commission is clarifying this language to provide that the “party holding the option” that has the ability to change any of the economic terms of the swap “as those terms previously were established at confirmation (or were in effect on the start date).”

Executed—Proposed § 43.2(j)

The Commission is adopting this term as proposed.

Execution—Proposed 43.2(k)

Proposed § 43.2(k) defined “execution” as the agreement between parties to the terms of a swap that legally binds the parties to such terms under applicable law. An agreement may be in electronic form (

e.g.,

on a SEF or DCM or via instant message); oral (

e.g.,

telephonically); in writing (

e.g.,

a bespoke, structured transaction where documents are exchanged); or in some other format not contemplated at this time. Execution is simultaneous with or immediately follows the affirmation of the swap. The SEC does not define “execution” in its Proposed Regulation SBSR, but rather defines “time of execution” as the “point at which the counterparties to an SBS become irrevocably bound under applicable law.”

115

One commenter asserted that the use of terms such as “execution” should reflect long-standing market conventions that differ according to the type of underlying reference asset.

116

The commenter further stated that harmonization of these terms in the Commission's and SEC's rules for a particular product type will foster operational efficiency, lessen the incidence of errors, and place fewer burdens on reporting agencies. Another commenter stated that the definition used for “execution” should reflect the underlying conventions that are prevalent in the FX market, which may be different from those used in other asset classes.

117

115

See

75 FR 75211, n. 30 (Dec. 2, 2010).

116

See

CL-ISDA/SIFMA.

See supra

note 80.

117

See

CL-GFXD.

In response to the comments that “execution” should reflect long-standing market conventions that differ according to the type of underlying reference asset and underlying conventions in the FX market, the Commission believes that the definition as proposed provides adequate clarity to allow flexibility for different market participants, asset classes and methods of execution. Additionally, the definition is substantially similar to that in proposed Commission regulation § 23.500(d).

118

“Execution” is defined in proposed § 23.500(d) to mean, with respect to a swap transaction, “an agreement by the counterparties (whether orally, in writing, electronically, or otherwise) to the terms of the swap transaction that legally binds the counterparties to such terms under applicable law.”

See

75 FR 81519 at 81530.

However, in order to provide additional clarity with respect to the definition of “execution,” the Commission is modifying the last sentence of the proposed definition to read, “Execution occurs simultaneous with or immediately following the affirmation of the swap.” The Commission believes that swaps associated with structured transactions will, for the most part, be bespoke, or customized, transactions. These structured transactions will be identified as bespoke when publicly disseminated. Additionally, the Commission believes it is necessary to make clear that execution (

i.e.,

when a legally binding contract is formed) for certain structured transactions may not occur until the documents are signed and/or the deal is funded.

Large Notional Swap—Proposed § 43.2(l)

Although no comments were received in connection with the proposed definition, the Commission has determined to make certain technical and conforming changes consistent with other definitional changes and terminology throughout part 43: The term “large notional swap” is renamed “large notional off-facility swap” for added clarity. All references to “large notional swap” should be read interchangeably with the term “large notional off-facility swap” for the purposes of these part 43 rules. In addition, the Commission has made minor technical and conforming changes to the definition. Specifically, the definition is simplified to clarify that the term large notional off-facility swaps applies to all off-facility swaps with a notional or principal amount at or above the appropriate minimum block size that nevertheless are not block trades.

Minimum Block Trade Size—Proposed § 43.2(m)

The Commission is not adopting a definition for “minimum block trade size'' at this time; the definition will be addressed in connection with the block trade re-proposal to be published for comment in the

Federal Register

Newly-Listed Swap—Proposed § 43.2(n)

The Commission is not adopting a definition for “newly-listed swap” in this final rulemaking; the definition will be addressed in connection with the block trade re-proposal to be published for comment in the

Federal Register

Novation—Proposed § 43.2(o)

The Commission is adopting the defined term “novation” as proposed with a minor, non-substantive clarification.

Off-Facility Swap—Proposed § 43.2(p)

One commenter contended that the definition of “off-facility swaps” unnecessarily complicate an already complex process and is not required by the Act.

119

The Commission disagrees: Terms and sufficiently detailed definitions assist readers to understand the rule, to adequately define complex products and to assist in describing the requirements for registered entities and market participants.

119

See

CL-NFPEEU.

While there are no substantive changes to this definition, the Commission made minor technical and conforming changes by adding “publicly” before “reportable swap transaction” to conform with the change to the defined term.

Other Commodity—Proposed § 43.2(q)

Although the Commission did not receive comments addressing the definition of “other commodity,” it has determined to modify the definition to more appropriately reflect other revisions to proposed § 43.2. The proposed definition stated, “Other commodity means any commodity that cannot be grouped in the credit, currency, equity or interest rate asset class categories.” Section 43.2 defines “other commodity” as follows: “Other commodity means any commodity that is not categorized in the other asset classes as may be determined by the Commission.”

The phrase “as may be determined by the Commission” modifies the phrase “other asset classes” to adequately reflect the language in the definition of “asset class.”

Public Dissemination and Publicly Disseminate—Proposed § 43.2(r)

The proposed definition of “publicly disseminate” states that data should be disseminated on a non-discriminatory basis. Commenters requested further clarification relating to the definition of “publicly disseminate.” One believed that the definition was too passive in describing how the data is delivered. Two commenters asked for clarification whether the data that is publicly disseminated is pre- or post-allocation.

The Commission clarifies that the swap transaction and pricing data that must be publicly disseminated is pre-allocation data. Accordingly, the notional or principal amount that would be publicly disseminated would be the pre-allocated amount.

The Commission disagrees that the definition of “publicly disseminate” is too passive in describing how the data are delivered. The Commission believes that “publicly disseminate” should mean making the data readily available in a non-discriminatory manner to those who wish to access it, rather than pushing out the data to market participants, data vendors, news media, etc.

In the Commission's view the proposed definition of “publicly disseminate,” is sufficiently clear. This definition is intended to convey that the data are available to all interested parties. The Commission believes that posting the swap transaction and pricing data on an Internet Web site and providing the Commission with a link to a conspicuous Internet Web site on which anyone can freely access the information is sufficient to satisfy the definition of publicly disseminate. The Commission expects to post these links on its Web site to provide market participants and the public with a central location to access such data.

120

The Commission's Web site can be accessed at

www.cftc.gov.

The Commission agrees with commenters that the term “widely published” should be clarified, and has defined “widely published” in § 43.2 to mean, “to publish and make available through electronic means and in a manner that is freely available and readily accessible to the public.”

Real-Time Disseminator—Proposed § 43.2(s)

All real-time data must be sent to SDRs, and SDRs must ensure that such data is publicly disseminated. For this reason, the Commission has concluded that a separate definition of “real-time disseminator” could be confusing and is unnecessary. Accordingly, the Commission has determined not to adopt this defined term in § 43.2.

Real-Time Public Reporting—Proposed § 43.2(t)

The Commission is adopting this term as proposed.

121

No comments were received in response to the proposed definition of “real-time public reporting.”

Remaining Party—Proposed § 43.2(u)

This Commission is adopting this term as proposed.

122

No comments were received in response to the proposed definition of “remaining party.”

Reportable Swap Transaction—Proposed § 43.2(v)

Proposed § 43.2(v) defined this term as “any executed swap, novation, swap unwind, partial novation, partial swap unwind or such post-execution event that affects the price of a swap.” The proposed definition included both the execution of a swap and certain price-affecting events that occur over the life of a swap. The Commission believes novations and swap unwinds are events that may affect the price of the swap and should be publicly disseminated in real-time, but only to the extent that they affect the pricing of the swap. In addition to novations and swap unwinds, other price-affecting events over the life of a swap may be considered “reportable swap transactions.” One commenter contended that the criteria for “reportable swap transaction” should exclude internal transactions between related or affiliated parties, such as back-to-back transactions between trading centers for the purpose of transferring the management of risk, where the pricing of the individual transaction could be influenced by group internal issues.

123

Another commenter stated that the reporting of lifecycle events should be limited to price-forming events. This commenter further suggested the inclusion of an unconditional requirement to report any information which could affect prices or pricing attributes during the life of a swap.

124

123

See

CL-TriOptima.

124

See

CL-Chris Barnard.

The Commission recognizes commenters' concerns regarding the criteria for “reportable swap transaction” and also agrees that the reporting of lifecycle events should be limited to price-forming events. Accordingly, it is modifying the definition of “reportable swap transaction” in proposed § 43.2(v) to address these concerns. The defined term has been changed to “publicly reportable swap transaction” to make clear that the scope of the definition covers only those swaps and lifecycle events that are to be publicly disseminated pursuant to part 43, and not necessarily all of the swaps and lifecycle events that must be reported to SDRs for regulatory purposes. The Commission is limiting the scope of publicly reportable swap transactions to those executed swaps that are arm's-length and that result in a change in the market risk position between two parties. The Commission also is providing clarifying examples in the definition regarding executed swaps that need not be publicly disseminated because they are not arm's-length transactions between two parties, notwithstanding that they do result in a corresponding change in the market risk position between the two parties. The definition provides that such swaps include: (1) Internal swaps between one-hundred percent owned subsidiaries of the same parent entity; and (2) portfolio compression exercises.

125

The Commission notes that the examples provided in the definition of “publicly reportable swap transaction” are not exhaustive.

The Commission's definition of publicly reportable swap transaction does not include swaps that are not executed at arm's-length. These transactions do not serve the price discovery objective of CEA section 2(a)(13)(B). Moreover, the public dissemination of such trades and exercises may reveal the identity of a counterparty in violation of CEA sections 2(a)(13)(E)(i) and (C)(iii). Further, the public dissemination of such information may mislead the market.

126

The definition also modifies the list of lifecycle events (“price-forming continuation events”). This modification was made to provide clarity as to the types of lifecycle events that are publicly reportable swap transactions and to provide conformity between Commission regulations.

127

126

See

the discussion of § 43.1 for further discussion relating to swaps between affiliates and portfolio compression exercises.

127

This language is consistent with the definition of “swap transaction” in proposed § 23.500(m).

See

75 FR 81519 (December 28, 2010).

Reporting Party—Proposed § 43.2(w)

The Commission is adopting this definition as proposed with minor conforming changes including adding the word “publicly” before “reportable swap transaction” and adding “43” after “part.”

Social Size—Proposed § 43.2(x)

The Commission is not adopting the defined term “social size” at this time. The Commission will address the concept of “social size” in a forthcoming re-proposal of the block trade rules to be published for comment in the

Federal Register

. Comments regarding “social size” received in connection with the Proposing Release will be considered by the Commission in its re-proposal of the block trade rules.

Swap Instrument—Proposed § 43.2(y)

In the Proposing Release, the Commission stated that swap instrument groupings or categories should be relatively broad for the purposes of calculating minimum block sizes.

128

The Commission solicited comments addressing how it should refine the definition and received eleven comments from various interested parties, including industry associations representing myriad financial market participants, SDs, an asset manager, potential SDRs and a financial end-user. Several commenters requested further clarification of this definition. Others challenged the Commission's ability to develop adequate swap instrument categories and a definition without adequate data.

128

See

Real-Time NPRM

supra

note 6, at 76145.

Some commenters urged the Commission to consider various criteria when creating groupings or categories of swaps instruments. One commenter provided a list of major currencies to consider while another cited a list of the key drivers of liquidity. Another commenter submitted information on how liquidity should be considered when determining the swap instrument groupings. Other commenters argued that the groupings or categories for “swap instrument” should be more specific. One commenter suggested that the Commission define the relevant swap markets and contracts with sufficient granularity to appropriately reflect different types of swap transactions. The Commission does not believe it is necessary to adopt a more granular definition of swap contracts in light of the revisions to the asset class definition, the re-proposal relating to block trades sizes and the implementation phase in.

The Commission agrees that its ability to develop adequate swap instrument groupings or categories would benefit from adequate market data as well as further research. Therefore the Commission has determined not to define “swap instrument” at this time. The Commission will address the concept of “swap instrument” in a re-proposal of the block trade rules to be published for comment in the

Federal Register

129

Comments regarding “swap instrument” received in connection with the Proposing Release also will be considered by the Commission in its re-proposal of the block trade rules.

Swap Market—Proposed § 43.2(z)

As discussed above, the Commission disagrees that definitions such as “swap markets,” “off-facility swaps,” “real-time price disseminators” and “third party service providers” unnecessarily complicate an already complex process.

130

The Commission believes that such terminology, including sufficiently-detailed definitions, is necessary to assist readers' understanding of the rule and to adequately define and describe complex products and the requirements of registered entities and market participants. Nor does the Commission agree that the creation of such terms is inconsistent with the statute. The Commission believes the terms are consistent with the statutory purposes and/or requirements of CEA section 2(a)(13). However, in the interest of clarity the Commission is replacing the term “swap market” with “registered swap execution facility or designated contract market” in the final rule.

130

See

CL-NFPEEU.

Swap Unwind—Proposed § 43.2(aa)

In light of changes to the term “publicly reportable swap transaction,” the Commission is not adopting the defined term “swap unwind.”

Third-Party Service Provider—Proposed § 43.2(bb)

In light of changes to final § 43.3, the Commission is not adopting the defined term “third-party service provider.”

Transferee—Proposed § 43.2(cc)

The Commission is adopting this defined term as proposed.

Transferor—Proposed § 43.2(dd)

The Commission is adopting this defined term as proposed.

Unique Product Identifier—Proposed § 43.2(ee)

The Commission is adopting this defined term as proposed with the clarification that the definition refers to a “product in an asset class or sub-asset class” and not the asset class itself, as well as an additional reference to appendix A to part 43.

U.S. Person—Proposed § 43.2(ff)

The Commission is not adopting the defined term “U.S. person” since the term is not used in the final rules.

3. Additional Issues Relating to Defined Terms

Several commenters suggested adding defined terms that were not included in proposed § 43.2:

Illiquid Markets

Commenters suggested that the Commission define “illiquid markets” subject to this provision by reference to particular commodities, such as jet fuel, or by a formula relating to the average number of transactions per day. One comment suggested that market segments be defined by distance on the forward curve.

131

The commenter believes that many swap contracts in physical commodities that are longer than nine months forward should be eligible for a delay in public dissemination. Another commenter suggested that the determination of what constitutes an illiquid market should be based on the number of reported transactions, and that any market in which the average number of transactions (measured annually) is less than five transactions per day be deemed to be “illiquid.”

132

131

See

CL-ATA.

132

See

CL-MS.

The Commission has considered these comments, but does not believe that a definition of “illiquid markets” is necessary to this rulemaking. Comments regarding liquidity are discussed in this Adopting Release and will be further considered by the Commission in its re-proposal of the block trade rules.

Widely Published

One commenter suggested that the term “widely published,” as used within the definition of “public dissemination and publicly disseminate” is subject to interpretation and should be separately defined.

133

Accordingly, the Commission has defined “widely published” in § 43.2 as follows: “Widely published means to publish and make available through electronic means in a manner that is freely available and readily accessible to the public.”

133

See

CL-CME.

C. Section 43.3—Method and Timing for Real-Time Public Reporting

As proposed, § 43.3 specified both the manner in which swap counterparties must report swap transaction and pricing data to the appropriate registered entity, and the manner in which registered entities must publicly disseminate such data. This section also established requirements for: (1) Acceptable forms of media through which swap transaction and pricing data may be made available to the public; (2) appropriate methods to cancel or correct erroneous or omitted data that has been publicly disseminated; (3) the hours of operation that SEFs, DCMs and SDRs must maintain for the public dissemination of swap transaction and pricing data; and (4) recordkeeping of data.

1. Responsibilities of Parties to a Swap (§ 43.3(a))

CEA section 2(a)(13)(F) provides the Commission with authority to determine reporting requirements for swap counterparties:

[p]arties to a swap (including agents of the parties to a swap) shall be responsible for reporting swap transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission.

As proposed, § 43.3(a) provided that the reporting party to each swap transaction would be responsible for reporting to a real-time disseminator “as soon as technologically practicable.” The designation of the responsible party depended on the execution of the swap transaction. For swap transactions executed on a SEF or DCM, proposed § 43.3(a)(2)(i) provided that the SEF or DCM must report to a real-time disseminator “as soon as technologically practicable.” For off-facility swaps, proposed § 43.3(a)(3) established the following hierarchy of counterparties to determine who has the responsibility to report to an SDR:

• If only one party is an SD or MSP, the SD or MSP shall be the reporting party.

• If one party is an SD and the other party is an MSP, the SD shall be the reporting party.

• If both parties are SDs, the SDs shall designate which party shall be the reporting party.

• If both parties are MSPs, the MSPs shall designate which party shall be the reporting party.

• If neither party is an SD or MSP, the parties shall designate which party (or its agent) shall be the reporting party.

Proposed § 43.3(a)(3) provided that the reporting party must report swap transaction and pricing data to a real-time disseminator “as soon as technologically practicable.” The above-referenced hierarchy is consistent with the reporting requirements for uncleared swaps to an SDR under CEA section 4r(a).

134

The Commission notes that CEA section 4r(a)(3) provides: (A) “With respect to a swap in which only 1 counterparty is a swap dealer or major swap participant, the swap dealer or major swap participant shall report the swap as required under [CEA sections 4r(a)(1) and (2)];” (B) “With respect to a swap in which 1 counterparty is a swap dealer and the other is a major swap participant, the swap dealer shall report the swap as required under [CEA sections 4r(a)(1) and (2)];” and (C) “With respect to any other swap not described in subparagraph (A) or (B), the counterparties to the swap shall select a counterparty to report the swap as required under [CEA sections 4r(a)(1) and (2)].”

Proposed § 43.3(a)(2)(i) also specified that for swaps executed on a SEF's or DCM's trading system or platform, “a reporting party shall satisfy its reporting requirement under this section by executing such reportable swap transaction on [such SEF or DCM].” Proposed § 43.3(b) provided that a SEF or DCM satisfies its reporting requirement by (i) sending the real-time swap transaction and pricing data to an SDR that accepts and publicly disseminates such data; or (ii) sending such data to a third party service provider. Proposed § 43.3(a)(3) provided that bilateral swaps must be sent to an SDR that accepts and publicly disseminates swap transaction and pricing data.

The Commission received 21 comments addressing the responsibilities of swap counterparties with respect to real-time public reporting. The commenters included industry associations representing myriad financial market participants, a potential SD, and several service providers to the OTC derivatives industry.

135

Commenters include: WFE/IOMA; GFXD; Tradeweb; Working Group of Commercial Energy Firms; FHLBanks; SIFMA AMG; DTCC; Markit; MarkitSERV; BlackRock; Barclays; ISDA/SIFMA; Coalition of Derivatives End-Users; ICE; Foreign Headquartered Banks; WMBAA; NFPEEU; ICI; FSR; Coalition of Energy End-Users; and Better Markets.

Several commenters expressed concern regarding the proposed framework for determining responsibility to report swap transaction and pricing data pursuant to part 43. Specifically, commenters questioned how responsibility is allocated when two parties are within the same category (

i.e.

, both parties are MSPs or end-users). Proposed § 43.3(a)(3) provided that when both parties to an off-facility swap are within the same category, the parties must designate which of them will be the reporting party. Some commenters agreed with this approach. Others, however, believe that the Commission should amend proposed part 43 to follow current market conventions. For instance, a few commenters noted that in the interdealer market, the seller of protection is responsible for confirming the swap transaction with a confirmation service.

136

Another commenter noted that while adopting current market conventions would eliminate confusion in asset classes like credit and equity, it would not eliminate confusion in other asset classes such as foreign exchange.

137

Commenters also questioned whether DCOs should be able to act as reporting parties when an off-facility swap is cleared.

138

Several other commenters argued that the reporting party should be able to contract with any third-party service providers to fulfill its reporting obligation, including SEFs and existing confirmation/matching service providers.

139

Many of these commenters emphasized the perceived adverse and disproportionate impact that reporting obligations would place on end-users.

140

Indeed, one commenter stated that an end-user would have to expend significant time and resources to develop infrastructure and automation to comply with the reporting requirements in the Proposing Release.

141

136

The commenters addressing this issue include: Barclays; BlackRock; ISDA/SIFMA; GFXD; Coalition of Energy End-Users; ICE; and MarkitSERV.

137

See

CL-GFXD.

138

The commenters include: Barclays; BlackRock; WFE/IOMA; ISDA/SIFMA; WMBAA; SIFMA AMG; ICI; NFPEEU; DTCC; Markit; and MarkitSERV.

139

See

CL-MarkitSERV.

140

See

CL-ICI; CL-SIFMA AMG.

141

See

CL-ICI.

Two commenters argued that, to ensure accuracy and reduce fragmentation, only regulated SDRs should be able to satisfy the real-time reporting requirement. Several commenters also stated that the Commission's Proposing Release was not consistent with the SEC's proposed Regulation SBSR regarding the explicit ability of end-users to use third parties to comply with their reporting obligations.

Certain comments focused on the Commission's reporting framework in proposed § 43.3(a)(3). Three commenters contended that the Proposing Release was somewhat inflexible and would create disproportionate burdens on end-users that would not have the capacity to report swap transaction and pricing data

in real-time.

142

To relieve this perceived burden, these commenters asked the Commission to allow parties to off-facility swaps to independently designate the reporting party or, in the alternative, to place most of the responsibility on dealers and MSPs. These commenters believe that the swap counterparties should be able to decide the reporting party, regardless of whether the parties are within the same category.

142

The specific commenters include: FSR; ICI; and SIFMA AMG.

As noted, the Proposing Release provided that the reporting party must report swap transaction and pricing data “as soon as technologically practicable.”

143

The Commission solicited comments as to whether it should establish maximum reporting timeframes for the various categories of reporting parties to swap transactions (

e.g.

, “as soon as technologically practicable but no later than X minutes”). In response, some commenters recommended that the Commission not establish maximum reporting timeframes, primarily because of the end-users' limited technological reporting capacity and the resulting significant financial burdens on end-users.

144

These commenters argued alternatively that if the Commission prescribes specific timeframes, it should aim for an appropriate balance between speed and accuracy and adopt longer time frames for end-users.

143

Additionally, CEA section 2(a)(13)(A) states that the definition of real-time public reporting means “to report data relating to a swap transaction, including price and volume, as soon as technologically practicable after the time at which the swap transaction has been executed.”

144

See

CL-Coalition for Derivatives End-Users; CL-ISDA/SIFMA.

Many commenters supported proposed § 43.3(a)(2)(i), which provided that the swap transaction and pricing data reporting requirement is itself satisfied by the act of execution on the SEF or DCM.

145

Commenters reasoned that SEFs and DCMs should have the capability to report transactions “as soon as technologically practicable” and to preserve anonymity. Two commenters recommended that the decision where to report remain with the parties of the swap and not be satisfied by executing on a SEF or DCM.

146

As noted in the discussion of § 43.1(b) above, commenters also raised extraterritoriality concerns with regard to reporting parties of swaps.

145

See

CL-ICE; CL-Tradeweb; CL-Coalition of Energy End-Users; CL-DTCC; and CL-MarkitSERV.

146

See

CL-DTCC; CL-MarkitSERV.

After consideration of these comments the Commission is adopting § 43.3(a) with certain revisions. The Commission received no comments directly addressing proposed § 43.3(a)(1). It is adopting these provisions with technical and clarifying changes to reflect changes to defined terms in § 43.2 as well as a clarification that the reporting should occur “after such publicly reportable swap transaction is executed.” Additionally, the Commission is adding a sentence at the end of this provision to make clear that, for purposes of part 43, any references to a “registered swap data repository” would include provisionally registered SDRs.

147

Pursuant to part 49, the Commission may grant provisional registration to an SDR if the applicant is in substantial compliance with the registration standards set forth in § 49.3(a)(4) and is able to demonstrate operational capability, real-time processing, multiple redundancy and robust security controls.

With respect to proposed § 43.3(a)(2)(i), the Commission agrees that SEFs and DCMs should serve as reporting parties for swaps that are executed on the execution platform. The Commission acknowledges the recommendation that the decision where to report the swap transaction and pricing data instead remain with the parties to the swap. However, the Commission believes that there are several benefits to requiring SEFs and DCMs to report these transactions directly to SDRs, including utilization of the technology of the execution platform, increased speed of reporting (and therefore increased transparency) and the ability for straight-through processing.

Proposed § 43.3(a)(2)(ii) prescribed the method and timing for real time public reporting of block trades executed pursuant to the rules of a SEF or DCM. Although the Commission has determined not to adopt the proposed § 43.5 rules relating to block trades, it believes that proposed § 43.3(a)(2)(i) and (ii) can be combined in this final rule to simplify the requirement. For the reasons discussed above, the Commission is adopting the provisions of § 43.3(a)(2) largely as proposed, with several clarifying, technical and conforming changes necessitated by other part 43 definitional and terminology changes.

The provision now references swaps “executed” on or pursuant to the rules of a SEF or DCM to ensure that block trades executed “pursuant to the rules of” a SEF or DCM would be included in the provision. Accordingly, if parties executed a block trade away from a SEF or DCM and then brought the swap transaction and pricing data pertaining to that block trade to the SEF or DCM pursuant to its rules, the parties to the swap would satisfy their reporting requirements under part 43. The SEF or DCM would then report the swap transaction data for public dissemination.

With respect to proposed § 43.3(a)(3), the Commission has considered comments that DCOs should be authorized to act as reporting parties when an off-facility swap is cleared. The Commission has also noted commenters' contention that the reporting party should be able to contract with any third party, including SEFs and existing confirmation/matching service providers, to satisfy its reporting obligation. The Commission agrees that the reporting party to an off-facility swap which is cleared should be able to contract with third parties (including DCOs or confirmation/matching service providers) to meet its reporting obligations under part 43.

148

The Commission believes that competition among third-party providers may foster the development of innovative and cost effective technological solutions that would create efficiencies for market participants that do not have the resources to develop such solutions. The use of third parties in reporting swap transaction and pricing data could reduce costs to market participants. For example, third parties may be able to develop low-cost and readily accessible web-based solutions to enable financial and non-financial end-users to comply with their reporting obligations when entering into transactions with other end-users.

149

148

In this circumstance, the Commission notes that the obligation to report remains with the reporting party.

149

It is important to note that DCOs may provide reporting services; however, real-time reporting and public dissemination must occur “as soon as technologically practicable” after execution unless subject to an appropriate time delay as described in § 43.5.

The Commission acknowledges that its Proposing Release and the SEC's proposed Regulation SBSR differ with respect to end-users' reporting obligations.

150

The Commission

explicitly permits end-users, SEFs and DCMs to utilize third parties to comply with reporting obligations described in § 43.3 in a manner similar to that described in the SEC's proposed Regulation SBSR. However, unlike proposed Regulation SBSR, the Proposing Release provided that a reporting party's reporting obligation is satisfied by executing a publicly reportable swap transaction on or pursuant to the rules of a SEF or DCM. SEFs and DCMs then have the obligation to report swaps that are executed on or pursuant to their trading system or platform to an SDR pursuant to § 43.3(b)(1), discussed below. A reporting party, SEF or DCM would retain the obligation to ensure that the appropriate information is provided in the appropriate timeframe to an SDR for public dissemination.

151

150

Proposed Regulation SBSR provided, “[P]roposed Rule 901(a) would not prevent a reporting party to a SBS from entering into an agreement with a third party to report the transaction on behalf of the reporting party. For example, for a SBS executed on a security-based swap execution facility (“SB SEF”) or a national securities exchange, the SB SEF or national securities exchange could transmit a transaction report for the SBS to a registered SDR. By specifying the reporting party with the duty to report SBS information under proposed Regulation SBSR, the Commission does not intend to inhibit the development of commercial ventures to provide trade processing services to SBS counterparties. Nevertheless, a SBS counterparty that is a reporting party would retain the obligation to ensure that information is provided to a registered SDR in the

manner and form required by proposed Regulation SBSR, even if the reporting party has entered into an agreement with a third party to report on its behalf.” 75 FR 75211-75212.

151

Thus, a reporting party, SEF or DCM would be liable for a violation of § 43.3 if, for example, a third party acting on behalf of a reporting party did not report the appropriate swap transaction and pricing data to an SDR for public dissemination.

The Commission has also considered comments addressing the allocation of reporting obligations when counterparties fall within the same market participant category. The Commission agrees that market conventions may determine which party will be obligated to report to an SDR when both parties to an off-facility swap are within the same category. However, the Commission favors a flexible approach and believes the swap counterparties should decide whether a market convention is used for determining the reporting party. In asset classes where market conventions currently exist, the Commission believes that parties to an off-facility swap should still have the same ability to agree on which party will serve as the reporting party.

In response to these comments, the Commission has added the language “[u]nless otherwise agreed to by the parties prior to the execution of the publicly reportable swap transaction, the following persons shall be reporting parties for off-facility swaps * * *” before the listing of reporting parties for off-facility swaps. The Commission concurs with commenters that there may be circumstances in which it makes greater economic or practical sense for a party other than the one described in the hierarchy in § 43.3(a)(3) to be the reporting party. This additional language will give the parties flexibility to agree on the reporting party in situations described in § 43.3(a)(3)(i) and (ii) as long as such agreement occurs prior to the execution of the publicly reportable swap transaction.

152

And the Commission believes that in the situations described in §§ 43.3(a)(3)(iii), (iv) and (v), the designation of the reporting party for an off-facility swap provided for in the rule should be agreed to prior to execution of such swap in order to ensure compliance with the requirements of part 43. The requirement serves to ensure that reporting after execution is not hampered by the parties' inability to agree.

152

To the extent that the parties have not agreed to the reporting party prior to the execution of the swap, the reporting party would be the SD or the MSP as applicable.

The Commission disagrees that the reporting framework in proposed § 43.3(a)(3) was inflexible and would create disproportionate burdens on end-users which do not have the capability to report swap transaction and pricing data in real-time.

153

In the Commission's view, the approach taken in the Proposing Release created a balanced framework by placing a greater burden on SDs and MSPs, but not mandating which party must report if two parties are of the same category. Further, the Commission is adding to this provision the flexibility to determine the reporting party for a particular transaction if both parties agree prior to execution of the swap. As discussed above, the Commission believes such an approach is preferable to a prescriptive rule governing reporting.

153

See

CL-FSR; CL-ICI; and CL-SIFMA AMG.

The reporting framework in § 43.3(a)(3) strikes an appropriate balance from a cost-benefit perspective. Avoiding a more prescriptive regime for assigning the reporting responsibility in transactions between parties of the same category should allow the parties to determine which party can report the transaction at a lower cost.

154

In the Commission's view, it is appropriate to assign a greater cost burden to SDs and MSPs than to the buy-side (including end-users), as SDs and MSPs are likely to be larger, more sophisticated and more active in swap markets and thus more able to realize economies of scale in carrying out reporting responsibilities. In addition, allowing reporting parties to contract with third parties should allay concerns regarding the potential disproportionate cost burden placed on end-users. Moreover, the Commission's definition of “as soon as technologically practicable” provides additional flexibility as its application includes consideration of the “prevalence, implementation and use of technology by comparable market participants.”

155

The hierarchy of reporting parties described in § 43.3(a)(3) for off-facility swaps would not apply to counterparties to block trades.

154

The Commission recognizes that a publicly reportable swap transaction may be a multi-asset or hybrid instrument (

e.g.

, a commodity-linked interest rate swap), meaning that each leg of such swap falls in a different asset class. The Commission believes that with respect to reporting such multi-asset or hybrid swaps pursuant to part 43, absent an agreement by the swap counterparties stating otherwise, the reporting party, SEF or DCM shall choose the SDR to which the real-time swap transaction and pricing data is reported for public dissemination. The Commission expects that if an SDR is available for only one leg of a hybrid swap, the reporting party, SEF or DCM will send the real-time swap transaction and pricing data to such SDR for public dissemination.

155

See supra

§ 43.2 and related discussion in section II.B.2.

Commenters have asserted that, to avoid ambiguity, the Commission should explicitly state in part 43 that only data relating to swap transactions where at least one party is a U.S.-based person are required to be reported and publicly disseminated in real-time.

156

The Commission believes that both U.S.-based and non-U.S.-based counterparties that transact on or pursuant to the rules of a SEF or DCM should be subject to all of the real-time reporting requirements.

156

See

CL-ISDA/SIFMA; CL-GFXD; CL-Foreign Headquartered Banks; and CL-TriOptima.

Proposed § 43.3(a)(4) provided a process for reporting off-facility swaps when no SDR was available. As discussed below, under the Commission's phase in and compliance date schedule, an SDR must be registered or provisionally registered for a particular asset class in order to comply with the part 43 requirements.

157

The Commission believes that coordinating the real-time reporting obligations with the regulatory reporting obligations will enable market participants to reduce reporting costs. Therefore, the Commission is not adopting § 43.3(a)(4) at this time.

157

The Commission notes that until such time as an SDR is registered or provisionally registered for an asset class, reporting parties, SEFs and DCMs are permitted to publicly disseminate real-time swap transaction and pricing data.

2. Public Dissemination of Swap Transaction and Pricing Data (§ 43.3(b))

CEA section 2(a)(13)(D) authorizes the Commission to require registered entities to publicly disseminate the swap transaction and pricing data required to be reported under CEA section 2(a)(13). Accordingly, proposed § 43.3(b) specified the method and timeliness of public dissemination of

swap transaction and pricing data for swaps that are executed on a SEF or DCM.

Proposed § 43.3(b)(1)(i) provided that a SEF or DCM must send or otherwise electronically transmit swap transaction and pricing data “as soon as technologically practicable” to: (1) An SDR that accepts swaps for the particular asset class of “reportable swap transactions;” or (2) a third-party service provider operating on behalf of the SEF or DCM. Such data would then be publicly disseminated in the same manner described in proposed § 43.3(a)(3) for swaps that are executed off-facility (

i.e.

, the SDR publicly disseminates such data “as soon as technologically practicable”). The Proposing Release specified that if a SEF or DCM chose to use a third-party service provider for public dissemination, the obligation to ensure that such data was publicly disseminated would remain with the SEF or DCM, since the third-party service provider would be an unregulated entity.

158

Accordingly, proposed § 43.3(b)(1)(i) required a SEF or DCM to remain vigilant in monitoring the timeliness and accuracy of the public dissemination if it chooses to use a third-party service provider.

158

While proposed § 43.3(c) generally required SDRs to register and comply with the requirements set forth in proposed part 49, neither the Commission's proposal nor the Commission itself has the authority to require third-party service providers to comply with the same requirements. Instead, proposed § 43.3(d) attempted an indirect approach at requiring third-party service providers to comply with proposed part 49's requirements. In particular, proposed § 43.3(d) provided that a [SEF or DCM] must ensure that the third-party service provider maintains standards for public reporting of swap transaction and pricing data that are, at a minimum, equal to those standards for registered SDRs as described in proposed § 43.3(c) and proposed part 49 of the Commission's regulations.

Proposed § 43.3(b)(2)(i) prohibited SEFs, DCMs or any reporting party to a swap from disclosing transaction and pricing data for a particular swap before an SDR or third-party service provider has disseminated data for that swap to the public. This prohibition—sometimes referred to as the “embargo rule”—is intended to ensure that swap transaction and pricing data is disseminated uniformly and is not published in a manner that creates an unfair advantage for any segment of market participants. At the same time, however, proposed § 43.3(b)(2)(ii) permitted a SEF or DCM to make swap transaction and pricing data available to participants on its market prior to public dissemination of such data. Similarly, proposed § 43.3(b)(2)(iii) permitted an SD to share swap transaction and pricing data with its customers prior to public dissemination of such data. These sections were intended to give SEFs, DCMs and SDs the flexibility to share swap transaction and pricing data with their market participants or customers, respectively, concurrent with the transmission of such data to an SDR or third-party service provider for public dissemination.

Various interested parties commented on the method of dissemination of swap transaction and pricing data to the public.

159

These commenters raised a number of issues including: (1) The use of SDRs for public dissemination; (2) the use of third-party service providers for public dissemination; (3) the requirement that SDRs accept all swaps in a particular asset class; (4) the embargo rule; and (5) the consolidation of data.

159

The commenters include: GFXD; Working Group of Commercial Energy Firms; Coalition of Energy End-Users; WFE/IOMA; ICI; NFPEEU; ISDA/SIFMA; Better Markets, Inc.; Coalition for Derivative End-Users; Reval; Tradeweb; DTCC; CME; Argus; Markit; MarkitSERV; BlackRock; FINRA; and NGX.

Two commenters asserted that SDRs should not be used to real-time report swap transaction and pricing data.

160

One urged that SDRs not be used because they are the last party to receive the swap data;

161

the other suggested that SDRs may have an unfair competitive advantage over third-party real-time disseminators.

162

Conversely, four commenters argued that only SDRs should be used for dissemination of real-time data.

163

One commenter requested that the Commission clarify the responsibilities of an SDR under part 43.

164

160

See

CL-Reval; CL-Argus.

161

See

CL-Reval.

162

See

Meeting with Argus (December 15, 2010).

163

See

CL-Markit; CL-NFPEEU; CL-MarkitSERV; and CL-DTCC.

164

See

CL-MarkitSERV.

Commenters expressed varying opinions with respect to the use of third-party service providers in public dissemination. One commenter supported the Commission's proposal to give SEFs and DCMs the option to use third-party service providers to satisfy their public dissemination obligation.

165

Five commenters opposed the use of potentially unregistered third-party service providers to satisfy the public dissemination obligation.

166

Several commenters expressly supported the use of DCOs to disseminate real-time data.

167

Specifically, one commenter stated that DCOs should publicly disseminate data for real-time purposes, because they currently have the infrastructure to support such operations.

168

One commenter questioned the Commission's statutory authority to introduce the third-party service provider concept. Indeed, this commenter argued that terms not in section 727 of the Dodd-Frank Act, such as third-party service provider, are unnecessary complications to an already complex statutory mandate and are not required by the Dodd-Frank Act.

169

165

See

CL-ISDA/SIFMA.

166

See

CL-Coalition of Energy End-Users; CL-MarkitSERV; CL-Tradeweb; CL-NFPEEU; and CL-DTCC.

167

See

CL-Working Group of Commercial Energy Firms; CL-Reval; CL-BlackRock; CL-CME; and CL-NFPEEU.

168

See

CL-CME.

169

See

CL-NFPEEU.

Commenters also offered solutions to the circumstance in which no SDR is available to disseminate swap transaction data. One commenter asserted that in those circumstances, if both counterparties are end-users, the reporting party should not be obligated to report at all.

170

Another recommended that if no SDR is available to accept swap transaction and pricing data for a specific asset class, the swap transaction and pricing data should be reported to the Commission by the end of the day.

171

170

See

CL-Coalition of Energy End-Users.

171

See

CL-GFXD.

Commenters also questioned the “embargo rule.” One commenter stated that permitting SEFs, DCMs and reporting parties to disclose data prior to public dissemination would afford them an unfair competitive advantage over the general public.

172

Another argued that any information embargo should be eliminated entirely.

173

Another commenter, however, argued that if data were publicly disseminated later, it would cause confusion because “[the] data, if disseminated after the fact * * * will not be representative of current market data when it is made public.”

174

One commenter argued that the role of “work-up” in the interdealer markets is important and data should not be reported to an SDR until the work-up process is completed.

175

Similarly, this commenter argued that with regard to the “work-up” process, trading platforms should be able to share the last trade information to market participants prior to reporting such data to an SDR.

172

See

CL-ICI.

173

See

CL-Better Markets.

174

See

CL-Coalition of Energy End-Users.

175

See

CL-WMBAA.

Several commenters urged the Commission to require the consolidation of swap transaction and

pricing data.

176

One commenter recommended that the Commission and the SEC jointly establish a single consolidator for the public dissemination of swap and security-based swap transaction and pricing data.

177

As the Commission noted in the Proposing Release, neither the CEA nor the Dodd-Frank Act grants the Commission explicit statutory authority to establish a real-time reporting consolidator.

178

The SEC's proposed Regulation SBSR similarly would require public dissemination of real-time swap data by SDRs and does not establish a consolidator.

179

176

See

CL-Coalition for Derivatives End-Users; CL-Better Markets; CL-Markit; CL-MarkitSERV; and CL-FINRA.

177

See

CL-FINRA.

178

See

75 FR 76149.

179

See

75 FR 75208.

With respect to proposed § 43.3(b)(1)(i) and comments addressing the use of SDRs for public dissemination, the Commission agrees with the majority of the commenters that third party service providers should not be used for public dissemination. Accordingly, the Commission is modifying the proposed rule to require that SEFs and DCMs satisfy the requirements of this subparagraph by transmitting swap transaction and pricing data to an SDR for public dissemination “as soon as technologically practicable” after such swap has been executed on the SEF or DCM.

180

The Commission expects that “transmittal” of such data would mean, at a minimum, some form of electronic conveyance. This change removes the requirement in proposed § 43.3(b)(1)(i) that SEFs and DCMs must publicly disseminate by sending data either to an SDR or to a third-party service provider. SEFs and DCMs may enter into a contractual relationship with a third party service provider to transmit the swap transaction and pricing data to an SDR; however, the SEF or DCM will remain responsible for such reporting requirement pursuant to part 43.

180

The Commission notes that, pursuant to § 48.8(a)(9)(i), registered foreign boards of trade must ensure that swap transaction data be sent to an SDR that is either registered with the Commission or has an information sharing arrangement with the Commission.

In its Proposing Release, the Commission imposed public dissemination obligations on SDRs that accept and publicly disseminate swap transaction and pricing data in real-time. Further, CEA section 2(a)(13)(D) provides the Commission with the authority to require registered entities to publicly disseminate swap data. The Commission is further clarifying § 43.3(b) by adding § 43.3(b)(2) to provide that SDRs must then ensure that such data is publicly disseminated as soon as technologically practicable” pursuant to part 43 for SEF and DCM executed swaps as well as off-facility swaps, unless a time delay described in § 43.5 is applicable. The Commission believes that this approach addresses various commenters' suggestions and concerns and is consistent with the SEC's approach in proposed Regulation SBSR. The Commission further believes that eliminating the option to use a third-party service provider will reduce (i) fragmentation in the market; (ii) search costs for market participants; and (iii) inconsistencies in data formats reported to various disseminators. Additionally, SDRs will be registered entities subject to the Commission's jurisdiction, whereas third-party service providers are unregistered entities over which the Commission has no authority. The Commission notes that the rule does not prohibit an SDR from contracting with a third party which may perform the public dissemination function. Should an SDR choose to enter into such a contractual relationship, it will remain responsible to ensure public dissemination under CFTC regulations.

With respect to proposed § 43.3(b)(1)(ii), the Commission has considered the comments and, as discussed, believes that reporting parties (including SEFs and DCMs) should be permitted to transmit their swap transaction and pricing data only to SDRs for public dissemination. Consistent with this determination, the Commission is eliminating in the final rule the option for SEFs, DCMs and reporting parties to send or otherwise electronically transmit their swap transaction and pricing data to a third-party service provider. However, the Commission believes that an SDR may ensure public dissemination by contracting with a third-party service provider to assist in the public dissemination of swap transaction and pricing data in real-time. Finally, in requiring that the reporting parties transmit the real-time swap transaction and pricing data only to SDRs, the Commission notes that nothing in part 43 would prohibit DCOs, SEFs or DCMs from registering as SDRs.

The Commission has considered the comments addressing the embargo rule and has determined to modify proposed § 43.3(b)(3) to provide further clarity.

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Three clarifying criteria are established in the final rule: (1) Disclosure is made only to market participants on such SEF or DCM (changed from “participants on its market”);

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(2) market participants are provided advance notice of such disclosure; and (3) any disclosure must be non-discriminatory.

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A SEF or DCM that wishes to disclose swap data prior to the public dissemination by an SDR must provide advance notice to its market participants of any disclosure of such swap transaction and pricing data.

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The Commission also notes that this policy is consistent with the practice of public dissemination in the futures markets. Further, pursuant to § 43.3(b)(3)(i)(A), SEFs and DCMs must not disclose such data prior to sending such data to an SDR for public dissemination.

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The Commission does not intend that § 43.3(b)(3) apply to risk management activities, post-trade processing or regulatory reporting where it would be necessary to transmit the full swap details to comply with such activities.

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For the purposes of § 43.3(b)(3)(i), the Commission believes that market participants on a SEF or DCM include those persons with trading privileges on such platform, as well as others without trading privileges that subscribe to the SEF or DCM for information services.

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The Commission seeks to avoid a situation that would permit discrimination among those market participants of a SEF or DCM.

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For example, a SEF or DCM may provide advance notice by including a provision in its rulebook describing the disclosure of swap transaction and pricing data to market participants.

Section 43.3(b)(3)(ii) replaces proposed § 43.3(b)(2)(iii) and establishes data reporting requirements for SDs and MSPs reporting to their customer bases that are substantially similar to part 43's data reporting requirements for SEFs and DCMs providing such information to their market participants. Section 43.3(b)(3)(ii)(B) establishes that an SD's or MSP's “customer base” includes parties that maintain accounts with or have been swap counterparties with such SD or MSP. This provision also expands the scope of parties that can share such swap data to include MSPs, as the Proposing Release permitted only SDs to share such data. Section 43.3(b)(3)(ii)(C) requires an SD or MSP to provide a swap counterparty to a publicly reportable swap transaction with advance notice of any disclosure by the SD or MSP of such swap transaction and pricing data.

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Further, SDs and MSPs must ensure that the data shared with their customer bases is not shared prior to sending such data to an SDR for public dissemination and that any disclosure is non-discriminatory.

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For example, advance notice is sufficiently given when an SD or MSP, prior to the execution of such publicly reportable swap transaction, informs a swap counterparty that it will disclose the relevant swap transaction and pricing data.

There are several advantages to this approach. Allowing participants to see last trade information for the particular markets on which they are trading, in many cases prior to the data being disseminated to the public, will

enhance price discovery. Information is not delayed to market participants on a particular SEF or DCM. This approach does not allow the sharing of information by a trading facility or platform immediately upon execution, as one commenter suggested. However, the Commission believes that the requirement to send swap transaction and pricing data to an SDR simultaneously with or prior to sharing such information with persons with trading privileges will reduce potential inequities while incentivizing faster reporting by SEFs, DCMs, SDs and MSPs that wish to share such data. If real-time reporting is delayed as part of a phase in, or if no SDR is registered or provisionally registered in an asset class, the individual markets could share the information to allow for last trade information and post-trade price discovery on a particular SEF or DCM, until such time as compliance is required.

The Commission notes that its part 49 rules governing SDRs do not permit SDRs to use real-time data between the time they receive the data from SEFs, DCMs and reporting parties and the time they publicly disseminate the data.

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See

76 FR 54550;