# Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-14035 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** June 16, 2016 - **Citation:** 81 FR 39506 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 50 RIN 3038-AE20 Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is proposing to amend the Commission's rules to establish a new clearing requirement under the pertinent section of the Commodity Exchange Act (CEA). The amended regulation would require that interest rate swaps denominated in certain currencies or having certain termination dates, as described herein, be submitted for clearing by persons required to do so under the pertinent section of the CEA to a derivatives clearing organization (DCO) that is registered under the CEA (registered DCO) or a DCO that has been exempted from registration under the CEA (exempt DCO). DATES: Comments must be received on or before July 18, 2016. ADDRESSES: You may submit comments, identified by RIN number 3038-AE20, by any of the following methods: • CFTC Web site: http://comments.cftc.gov . Follow the instructions for submitting comments through the Comments Online process on the Web site. • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. • Hand Delivery/Courier: Same as Mail, above. • Federal eRulemaking Portal: http://www.regulations.gov . Follow the instructions for submitting comments. Please submit your comments using only one method. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to http://www.cftc.gov . You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission's regulations. 1 1 17 CFR 145.9. Commission regulations referred to herein are found on the Commission's Web site at http://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm . The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from http://www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director, Division of Clearing and Risk (DCR), at 202-418-5684 or sjosephson@cftc.gov ; Peter A. Kals, Special Counsel, DCR, at 202-418-5466 or pkals@cftc.gov ; Melissa A. D'Arcy, Special Counsel, DCR, at 202-418-5086 or mdarcy@cftc.gov ; Meghan A. Tente, Special Counsel, DCR, at 202-418-5785 or mtente@cftc.gov ; Michael A. Penick, Economist, Office of the Chief Economist (OCE), at 202-418-5279 or mpenick@cftc.gov ; or Lihong McPhail, Research Economist, OCE, at 202-418-5722 or lmcphail@cftc.gov, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. The Commission's First Clearing Requirement Determination B. Clearing Requirements in Other Jurisdictions C. Regulatory Background D. Commission Processes for Review and Surveillance of DCOs II. Review of Swap Submissions A. General Description of Information Considered B. Proposed Determination Analysis III. Proposed Amended Regulation 50.4(a) IV. Proposed Implementation Schedule V. Cost Benefit Considerations A. Statutory and Regulatory Background B. Overview of Swap Clearing C. Consideration of the Costs and Benefits of the Commission's Action D. Costs and Benefits of the Proposed Rule as Compared to Alternatives E. Section 15(a) Factors VI. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act I. Background A. The Commission's First Clearing Requirement Determination In December 2012, pursuant to section 2(h)(1)(A) of the CEA, which was added to the CEA by section 723 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Commission published its first clearing requirement determination (First Clearing Requirement Determination). 2 The First Clearing Requirement Determination was implemented between March 2013 and October 2013 based on the schedule described in regulation 50.25 and the preamble to the First Clearing Requirement Determination. 3 2 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012) (codified at 17 CFR 50.1 through 50.10). 3 See 17 CFR 50.25; 77 FR at 74319-21. The First Clearing Requirement Determination required the clearing of swaps within four classes of interest rate swaps and two classes of credit default swaps (CDS) that meet certain specifications. The Commission focused on these interest rate swaps and CDS in the First Clearing Requirement Determination because of the size of these markets relative to the derivatives market overall and because these swaps were already widely being cleared. 4 4 See 77 FR at 74287. The four classes of interest rate swaps required to be cleared by the First Clearing Requirement Determination were: (i) Fixed-to-floating swaps; (ii) basis swaps; (iii) overnight index swaps (OIS); and (iv) forward rate agreements (FRAs). As set forth in regulation 50.4(a), each class is limited to swaps having certain specifications pertaining to: (i) The currency in which the notional and payment amounts are specified; (ii) the floating rate index referenced in the swap; (iii) the stated termination date; (iv) optionality; (v) dual currencies; and (vi) conditional notional amounts. With respect to the currency specification, the Commission limited the interest rate swaps required to be cleared to those denominated in U.S. dollars (USD), Euros (EUR), British pounds (GBP), and Japanese yen (JPY). In coming to this decision, the Commission noted that the interest rate swaps denominated in these currencies accounted for an outsized portion of the entire interest rate swap market in terms of both notional amounts outstanding and trading volumes compared to interest rate swaps denominated in other currencies. 5 The Commission also noted that it expected to publish a clearing requirement determination for interest rate swaps denominated in additional currencies in the future. 6 For the reasons discussed below, the clearing requirement determination proposed today would amend the First Clearing Requirement Determination to add a requirement to clear fixed-to-floating interest rate swaps denominated in nine additional currencies in which Chicago Mercantile Exchange, Inc. (CME), Eurex Clearing AG (Eurex), LCH.Clearnet Ltd. (LCH), and Singapore Exchange Derivatives Clearing Ltd. (SGX), each a Commission-registered DCO, clear interest rate swaps. 7 These additional currencies are Australian dollar (AUD), Canadian dollar (CAD), Hong Kong dollar (HKD), Mexican peso (MXN), Norwegian krone (NOK), Polish zloty (PLN), Singapore dollar (SGD), Swedish krona (SEK), and Swiss franc (CHF) (collectively, the nine additional currencies). 8 The clearing requirement determination proposed today also would require the clearing of certain basis swaps denominated in AUD, which are currently cleared by CME and LCH. Under the First Clearing Requirement Determination, certain basis swaps denominated in USD, EUR, GBP, and JPY must be cleared. The proposal also would require the clearing of certain AUD-, NOK-, PLN-, and SEK-denominated FRAs. Under the First Clearing Requirement Determination, certain FRAs denominated in USD, EUR, GBP, and JPY must be cleared. 5 Id. at 74308. 6 Id. at 74309. In the First Clearing Requirement Determination, the Commission also stated that it intended to consider other swaps submitted by DCOs, such as agricultural, energy, and equity indices, as well as additional classes of CDS for a possible clearing requirement determination. See id. at 74287 and n.24. The Commission is committed to reviewing all swaps submitted by DCOs to determine whether such swaps should be required to be cleared, although it is possible that the Commission may determine that certain of these swaps are not appropriate for required clearing at this time. Finally, the Commission also may consider other classes of swaps for a clearing requirement determination, including additional types of CDS, as well as certain foreign exchange swaps, such as non-deliverable forwards. 7 Two DCOs that the Commission has exempted from registration, ASX Clear (Futures) Pty Ltd. (Australia) and OTC Clearing Hong Kong Ltd., clear some of the swaps covered by this proposed determination (AUD- and HKD-denominated interest rate swaps, respectively). Pursuant to Commission orders, these two DCOs are permitted to clear for U.S. proprietary accounts but not for U.S. customers. In addition, these DCOs have not submitted filings under Commission regulation 39.5(b). Consequently, this proposal addresses only those registered DCOs that have submitted swaps for consideration under CFTC regulations. 8 See Table 1 for information as to which registered DCOs clear fixed-to-floating interest rate swaps denominated in which currencies. With respect to the stated termination date specification, which also is referred to as the maturity of an interest rate swap, the First Clearing Requirement Determination stated that, for OIS denominated in USD, EUR, and GBP, the range of termination dates subject to the clearing requirement was 7 days to 2 years. At the time, the Commission found that OIS with termination dates within this range warranted a clearing requirement determination because they had sufficient notional outstanding and trading liquidity necessary for a DCO to successfully risk manage and price them. 9 9 Id. at 74310. When the First Clearing Requirement Determination was published, CME had not yet begun clearing OIS with termination dates greater than two years, and, although LCH had been offering such OIS for clearing, LCH data did not show any outstanding notional for these OIS. 10 Both LCH and CME now clear OIS out to 30 years, and Eurex offers to clear OIS out to 30 years as well. For the reasons discussed herein, the clearing requirement determination proposed today also would amend the First Clearing Requirement Determination to require the clearing of OIS with termination dates out to three years. Finally, the clearing requirement determination proposed today also would require the clearing of OIS denominated in AUD and CAD. 10 Id. B. Clearing Requirements in Other Jurisdictions Following is a summary of actions taken by other jurisdictions towards implementing clearing requirements for interest rate swaps denominated in the nine additional currencies. The Commission believes that it is important to harmonize its swap clearing requirement with clearing requirements promulgated in other jurisdictions. For example, if a non-U.S. jurisdiction issued a clearing requirement and a swap dealer (SD) located in the U.S. were not subject to that non-U.S. clearing requirement, then a swap market participant located in the non-U.S. jurisdiction might be able to avoid the non-U.S. clearing requirement by entering into a swap with the SD located in the U.S. As the Commission reviewed the regulation 39.5(b) submissions from DCOs, it considered whether those products offered for clearing at DCOs were subject, or were likely to be subject, to a clearing requirement in another jurisdiction. For those products that were the subject of a clearing requirement rule or proposal outside of the U.S., the Commission reviewed the product specifications of the products and the processes used by non-U.S. regulators. In addition, the Commission reviewed data produced in connection with any rule proposals or final rules implementing a clearing requirement in non-U.S. jurisdictions. Finally, the Commission considered comments submitted in response to clearing determination rule proposals in non-U.S. jurisdictions and any subsequent changes that regulators made to final rules implementing a clearing requirement. The Commission was informed by its review of non-U.S. jurisdictions' clearing requirement determinations and considered those determinations in preparing this proposed determination. Accordingly, the scope of the swaps included in this proposal reflects the Commission's desire to harmonize with our counterparts abroad and is informed by the work of those regulators, as described below. In addition, the specifications of the swaps included in this proposed determination are intended to be consistent with those referenced in clearing requirements published by the Commission's counterparts abroad. i. Australia The Australian Securities and Investments Commission (ASIC) has published regulations that will require certain Australian and non-Australian entities to clear AUD-, USD-, GBP-, EUR-, and JPY-denominated fixed-to-floating interest rate swaps, basis swaps, and FRAs, as well as AUD-, USD-, GBP-, and EUR-denominated OIS. 11 The regulations' swap classes are co-extensive to those described in existing Commission regulation 50.4(a) except for the addition of AUD-denominated swaps. The Commission's clearing requirement proposal would make its AUD-denominated swaps in the fixed-to-floating interest rate swap, basis swap, FRA, and OIS classes consistent with the AUD-denominated swaps required to be cleared by ASIC. The Australian clearing requirement commenced for certain financial entities in April 2016. 12 11 ASIC Derivative Transaction Rules (Clearing) 2015, available at: https://www.comlaw.gov.au/Details/F2015L01960 . 12 According to section 1.2.7 of the ASIC Derivative Transaction Rules (Clearing) 2015, the clearing requirement commenced on April 4, 2016, the first “Clearing Start Date.” ii. Canada In 2015, the Canadian Office of the Superintendent of Financial Institutions (OSFI) issued a “guideline” requiring certain Canadian financial institutions, as well as Canadian branches of non- Canadian financial institutions, to clear “standardized derivatives where practicable.” 13 Also, in 2015, Canada's provincial securities regulators published a draft rule that would require certain derivatives to be cleared. 14 On February 24, 2016, the Canadian provincial securities regulators published a revised draft rule that proposes subjecting the following classes of interest rate swaps to a clearing mandate: CAD-, USD-, EUR-, and GBP-denominated fixed-to-floating interest rate swaps, basis swaps, and FRAs, as well as CAD-, USD-, EUR-, and GBP-denominated OIS. 15 The Canadian provincial securities regulators' revised rule is expected to be finalized in 2016. The CAD-denominated swaps included in the Commission's proposal are covered by the Canadian provincial securities regulators' revised rule. 13 Derivatives Sound Practices Guideline, available at: http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b7.aspx#toc3 . 14 Draft National Instrument 94-101 respecting Mandatory Central Counterparty Clearing of Derivatives. Summary available at: http://www.albertasecurities.com/Regulatory%20Instruments/5022685-v5-Proposed_NI_94-101_package.pdf . 15 Draft Regulation 94-101 respecting Mandatory Central Counterparty Clearing of Derivatives (2nd Publication). Summary available at: http://www.lautorite.qc.ca/files/pdf/reglementation/instruments-derives/reglements/94-101/2016-02-24/2016fev24-94-101-avis-cons-en.pdf . iii. European Union On August 6, 2015, the European Commission adopted an interest rate swap clearing requirement that the European Securities and Markets Authority (ESMA) developed pursuant to the European Market Infrastructure Regulation (EMIR). 16 The European interest rate swap class is coextensive with current Commission regulation 50.4(a), except that with respect to OIS, the European class covers OIS with a termination date range of up to three years instead of two. Like current regulation 50.4(a), the European class covers interest rate swaps denominated in USD, EUR, GBP, and JPY, not in any of the nine additional currencies. 17 Compliance with the European clearing requirement will be phased in between 2016 and 2018 depending on the type of counterparty. 18 16 European Commission press release announcing the European Clearing Obligation, available at: http://europa.eu/rapid/press-release_IP-15-5459_en.htm . 17 Regulation (EU) No. 648/2012. See Revised Opinion, Draft RTS on the Clearing Obligation on Interest Rate Swaps, Annex I, pages 24-25 (Mar. 6, 2015), available at: https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-511_revised_opinion_on_draft_rts_on_the_clearing_obligation.pdf . 18 Id. at 21-23 (Articles 2-5). In November 2015, following the close of a comment period, ESMA recommended to the European Commission that the European Union Clearing Obligation be expanded to cover NOK-, PLN-, and SEK-denominated fixed-to-floating interest rate swaps and FRAs. 19 The NOK-, PLN-, and SEK-denominated fixed-to-floating interest rate swaps and FRAs included in the Commission's proposal are covered by ESMA's recommendation to the European Commission. 20 19 https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-1629_-final_report_clearing_obligation_irs_other_currencies.pdf . 20 Poland and Sweden are members of the European Union, but Norway is not. iv. Hong Kong On February 5, 2016, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority jointly published conclusions to a consultation paper proposing mandatory clearing for certain interest rate swaps. 21 The regulators submitted draft rules to the Legislative Council to implement a clearing requirement covering fixed-to-floating interest rate swaps and basis swaps denominated in USD, GBP, EUR, JPY, and HKD, as well as OIS denominated in USD, GBP, and EUR. 22 The legislative process has been completed, and the final rules are to take effect in September 2016. 23 The HKD-denominated interest rate swaps included in the Commission's proposal are covered by the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority's final rules. 21 Consultation Conclusions and Further Consultation on Introducing Mandatory Clearing and Expanding Mandatory Reporting, available at: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=15CP4 . 22 Id. See also Securities and Futures (OTC Derivative Transactions—Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules, The Government of the Hong Kong Special Administrative Region Gazette, available at: http://www.gld.gov.hk/egazette/pdf/20162005/es22016200528.pdf . 23 Id. v. Mexico In 2015, Banco de Mexico, the Mexican central bank, published a clearing requirement mandating that certain Mexican financial institutions clear MXN-denominated fixed-to-floating interest rate swaps having a termination date range of approximately two months to 30 years and that reference the Mexican “Interbank Equilibrium Interest Rate” (TIIE). 24 The clearing requirement became effective for certain Mexican counterparties on April 1, 2016. The clearing requirement will commence for certain non-Mexican counterparties executing swaps opposite Mexican counterparties during the second half of 2016. 25 The MXN-denominated interest rate swaps included in the Commission's proposal are covered by the Banco de Mexico's clearing requirement. 24 Rules for Derivatives Transactions (Circular 4/2012), Banco de México, available at: http://www.banxico.org.mx/disposiciones/circulares/%7BD7250B17-13A4-B0B7-F4E5-04AF29F37014%7D.pdf . 25 See Financial Stability Board, Ninth Progress Report on Implementation, OTC Derivatives Market Reforms, Appendix D (Timetable for Implementation of Central Clearing Commitment) (July 24, 2015), available at: http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-Ninth-July-2015-Progress-Report.pdf [hereinafter “Ninth Progress Report on Implementation”], at Appendix D. vi. Singapore In 2015, the Monetary Authority of Singapore (MAS) published proposed regulations that would require the clearing of SGD-denominated fixed-to-floating interest rate swaps referencing the Swap Offer Rate (SOR) and USD-denominated fixed-to-floating interest rate swaps referencing LIBOR. 26 The SGD-denominated interest rate swaps included in the Commission's proposal are covered by the MAS's proposed regulations. 26 Summary published by MAS available at: http://www.mas.gov.sg/News-and-Publications/Media-Releases/2015/MAS-Consults-on-Proposed-Regulations-for-Mandatory-Clearing-of-OTC-Derivatives.aspx . See also Ninth Progress Report on Implementation, at Appendix D. vii. Switzerland In 2015, the Swiss parliament adopted legislation providing a framework for a swap clearing requirement. A clearing requirement is expected to be phased in during the second half of 2016. It is not yet known which products such a clearing requirement would cover. 27 27 See Ninth Progress Report on Implementation, at Appendix D. C. Regulatory Background Like the First Clearing Requirement Determination, the clearing requirement proposed herein would require the clearing of certain interest rate swaps pursuant to section 2(h) of the CEA. Under section 2(h)(1)(A) of the CEA, it is unlawful for any person to engage in a swap unless that person submits such swap for clearing to a DCO that is registered under the CEA or a DCO that is exempt from registration under the CEA if the swap is required to be cleared. A clearing requirement determination may be initiated by a swap submission from a registered DCO. 28 Section 2(h)(2)(B)(i) of the CEA requires a DCO to submit to the Commission each swap, or any group, category, type, or class of swaps that it plans to accept for clearing and provide notice to its members of the submission. Regulation 39.5(b) implements the procedural elements of section 2(h)(2)(B)-(C) by establishing the procedures for the submission of swaps by a DCO to the Commission for a clearing requirement determination. 29 28 Section 2(h)(2) of the CEA provides the Commission with authority to issue a determination that a swap is required to be cleared pursuant to two separate review processes. CEA section 2(h)(2)(A) provides for a Commission-initiated review process whereby the Commission, on an ongoing basis, must review swaps (or a group, category, type or class of swaps) to make a determination as to whether a swap (or group, category, type or class of swaps) should be required to be cleared. The other process provided under section 2(h)(2)(B) of the CEA entails the Commission's review of swaps that are submitted by DCOs. Specifically, CEA section 2(h)(2)(B)(i) requires that each DCO submit to the Commission each swap (or group, category, type or class of swaps) that it plans to accept for clearing. The swaps subject to this proposed determination were submitted by DCOs pursuant to CEA section 2(h)(2)(B)(i) and Commission regulation 39.5. 29 Section 2(h)(2)(B)-(C) of the CEA describes the process pursuant to which the Commission is required to review swap submissions from DCOs to determine whether the swaps should be subject to the clearing requirement. D. Commission Processes for Review and Surveillance of DCOs i. Part 39 Regulations Set Forth Standards for Compliance Section 5b(c)(2) of the CEA sets forth 18 core principles with which DCOs must comply to be registered and to maintain registration. The core principles address numerous issues, including financial resources, participant and product eligibility, risk management, settlement procedures, default management, system safeguards, reporting, recordkeeping, public information, and legal risk. Each of the DCOs that submitted the interest rate swaps that are the subject of this proposed determination are registered with the Commission. The DCOs' regulation 39.5(b) submissions discussed herein identify swaps that the DCOs are currently clearing. Consequently, the Commission has been reviewing and monitoring compliance by the DCOs with the core principles for clearing the submitted swaps. The primary objective of the Commission's supervisory program is to ensure compliance with applicable provisions of the CEA and implementing regulations, and, in particular, the core principles applicable to DCOs. A primary concern of the program is to monitor and mitigate potential risks that can arise in derivatives clearing activities for the DCO, its members, and entities using the DCO's services. Accordingly, the Commission's supervisory program takes a risk-based approach. In addition to the core principles set forth in section 5b(c)(2) of the CEA, section 5c(c) of the CEA governs the procedures for review and approval of new products, new rules, and rule amendments submitted to the Commission by DCOs. Part 39 of the Commission's regulations implements sections 5b and 5c(c) of the CEA by establishing specific requirements for compliance with the core principles, as well as procedures for registration, for implementing DCO rules, and for clearing new products. Part 40 of the Commission's regulations sets forth additional provisions applicable to a DCO's submission of rule amendments and new products to the Commission. The Commission has means to enforce compliance, including the Commission's ability to sue the DCO in federal court for civil monetary penalties, 30 issue a cease and desist order, 31 or suspend or revoke the registration of the DCO. 32 In addition, any deficiencies or other compliance issues observed during ongoing monitoring or an examination are frequently communicated to the DCO and various measures are used by the Commission to ensure that the DCO appropriately addresses such issues, including escalating communications within the DCO management and requiring the DCO to demonstrate, in writing, timely correction of such issues. 30 See section 6c of the CEA. 31 See section 6b of the CEA. 32 See section 5e of the CEA. ii. Initial Registration Application Review and Periodic In-Depth Reviews Section 5b of the CEA requires a DCO to register with the Commission. In order to do so, an organization must submit an application demonstrating that it complies with the core principles. During the review period, the Commission generally conducts an on-site review of the prospective DCO's facilities, asks a series of questions, and reviews all documentation received. The Commission may ask the applicant to make changes to its rules to comply with the CEA and the Commission's regulations. After registration, the Commission conducts examinations of DCOs to determine whether the DCO is in compliance with the CEA and Commission regulations. The examination consists of a planning phase where staff reviews information the Commission has on hand to determine whether the information raises specific issues and to develop an examination plan. The examination team participates in a series of meetings with the DCO at its facility. Commission staff also communicates with relevant DCO staff, including senior management, and reviews documentation. Data produced by the DCO is independently tested. Finally, when relevant, walk-through testing is conducted for key DCO processes. Commission staff also reviews DCOs that are systemically important (SIDCOs) at least once a year. CME has been determined to be a SIDCO. iii. Commission Daily Risk Surveillance Commission risk surveillance staff monitors the risks posed to and by DCOs, clearing members, and market participants, including market risk, liquidity risk, credit risk, and concentration risk. The analysis includes review of daily, large trader reporting data obtained from market participants, clearing members, and DCOs, which is available at the trader, clearing member, and DCO levels. Relevant margin and financial resources information also is included within the analysis. Commission staff regularly conducts back testing to review margin coverage at the product level and follows up with the relevant DCO regarding any exceptional results. Independent stress testing of portfolios is conducted on a daily, weekly, and ad hoc basis. The independent stress tests may lead to individual trader reviews and/or futures commission merchant (FCM) risk reviews to gain a deeper understanding of a trading strategy, risk philosophy, risk controls and mitigants, and financial resources at the trader and/or FCM level. The traders and FCMs that have a higher risk profile are then reviewed during the Commission's on-site review of a DCO's risk management procedures. Given the importance of DCOs within the financial system and the heightened scrutiny as more transactions are moved into central clearing, the goal of the Commission risk surveillance staff is: (1) To identify positions in cleared products subject to the Commission's jurisdiction that pose significant financial risk; and (2) to confirm that these risks are being appropriately managed. Commission risk surveillance staff undertakes these tasks at the trader level, the clearing member level, and the DCO level. That is, staff identifies both traders that pose risks to clearing members and clearing members that pose risks to the DCO. Staff then evaluates the financial resources and risk management practices of traders, clearing members, and DCOs in relation to those risks. Commission risk surveillance staff routinely monitors conditions in assigned markets throughout the day. Because of the work done in identifying accounts of interest, analysts are able to focus their efforts on those traders whose positions warrant heightened scrutiny under current conditions. To gain insight into how markets operate during stressed market conditions, an essential technique in evaluating risk is the use of stress testing. Stress testing is the practice of determining the potential loss (or gain) to a position or portfolio based on a hypothetical price change or a hypothetical change in a price input such as option volatility. Commission risk surveillance staff conducts a wide array of stress tests. Some stress tests are based on the greatest price move over a specified period of time such as the last five years or the greatest historical price change. Another stress testing technique is the use of “event based” stress testing that replicates the price changes on a particular date in history, such as September 11, 2001, or Hurricane Katrina. Price changes can be measured as a dollar amount or a percentage change. This flexibility can be helpful when price levels have changed by a large amount over time. For example, the actual price changes in equity indices in October 1987 are not particularly large at today's market levels but the percentage changes are meaningful. The general standard in designing stress tests is to use “extreme but plausible” market moves. After identifying accounts at risk and estimating the size of the risk, the third step is to compare that risk to the assets available to cover it. Because stress testing, by definition, involves extreme moves, hypothetical results will exceed initial margin requirements on a product basis, i.e., the price moves will be in the 1% tail. Many large traders, however, carry portfolios of positions with offsetting characteristics. In addition, many traders and clearing members deposit excess initial margin in their accounts. Therefore, even under stressed conditions, in many instances the total initial margin available may exceed potential losses or the shortfall may be relatively small. Each DCO maintains a financial resources package that protects the DCO against clearing member defaults. If a clearing member defaults on its obligations, the first layer of protection against a DCO default is the defaulting clearing member's initial margin as well as the defaulting clearing member's guaranty fund contribution. The second layer of protection against a DCO default, after the defaulting clearing member's initial margin and guaranty fund contribution, is the DCO's capital contribution. The third layer of protection against a DCO default is the DCO's mutualized resources, which often include guaranty fund contributions of non-defaulting clearing members and assessments of non-defaulting clearing members. These layers of protection comprise the DCO's financial resources package. Commission risk surveillance staff compares the level of risk posed by clearing members to a DCO's financial resources package on an ongoing basis. Pursuant to Commission regulation 39.11(a), a DCO must have sufficient financial resources to cover a default by the clearing member posing the largest risk to the DCO. Pursuant to Commission regulation 39.33(a), a systemically important DCO must have sufficient financial resources to cover defaults by the clearing members posing the two largest risks to the DCO. Commission risk surveillance staff periodically compares stress test results with DCOs to assess their financial capacity. Commission risk surveillance staff frequently discusses the risks of particular accounts or positions with relevant DCOs. For example, as a follow-up to a trader review, Commission risk surveillance staff might compare its stress test results with those of the DCO. As also noted above, in the case of FCMs, there have been instances where, as a result of Commission risk surveillance staff comments or inquiries, DCOs have taken action to revise their stress tests and/or financial resources package to align with Commission risk surveillance staff's recommendations. II. Review of Swap Submissions A. General Description of Information Considered CME and LCH provided the Commission with regulation 39.5(b) submissions relating to: Fixed-to-floating interest rate swaps denominated in the nine additional currencies; AUD-denominated basis swaps; and USD-, EUR-, and GBP-denominated OIS with termination dates of up to 30 years. CME and LCH provided § 39.5(b) submissions pertaining to the FRAs and OIS listed in Table 1, below. CME and SGX provided submissions relating to MXN- and SGD-denominated fixed-to-floating interest rate swaps, respectively. Eurex provided a submission relating to CHF-denominated fixed-to-floating interest rate swaps and OIS denominated in USD, EUR, and GBP with terms up to 30 years plus 10 business days. 33 Based on representations made by LCH to the Commission, LCH will begin offering MXN-denominated fixed-to-floating interest rate swaps during 2016. CME, Eurex, LCH, and SGX are eligible to clear interest rate swaps. 34 33 The § 39.5(b) submissions are available on the Commission's Web site at: http://www.cftc.gov/IndustryOversight/IndustryFilings/index.htm . Submission materials that a submitting DCO marked for confidential treatment are not available for public review, pursuant to regulations 39.5(b)(5) and 145.9(d). 34 A DCO is presumed eligible to accept for clearing swaps that are of the group, category, type, or class that the DCO already clears. See 17 CFR 39.5(a)(1). Table 1 summarizes the relevant interest rate swaps submitted by CME, Eurex, LCH, and SGX. Table 1—Summary of Interest Rate Swap Submissions Under Regulation 39.5( b ) Currency Floating rate index Maximum stated termination date (years) CME Eurex LCH SGX Fixed-to-Floating Interest Rate Swaps AUD BBSW 30 Yes No Yes No CAD CDOR 30 Yes No Yes No CHF LIBOR 30 Yes Yes Yes No HKD HIBOR 10 Yes No Yes No MXN TIIE-BANXICO 21 Yes No No 35 No NOK NIBOR 10 Yes No Yes No PLN WIBOR 10 Yes No Yes No SGD SOR-VWAP 10 Yes No Yes Yes SEK STIBOR 30 Yes No Yes No Basis Swap AUD BBSW 30 Yes No Yes No Overnight Index Swaps USD FedFunds 30 Yes Yes Yes No EUR EONIA 30 Yes Yes Yes No GBP SONIA 30 Yes Yes Yes No AUD AONIA-OIS 5.5 No No Yes No CAD CORRA-OIS 2 No No Yes No Forward Rate Agreements AUD BBSW 3 Yes No No No NOK NIBOR 2 Yes No Yes No PLN WIBOR 2 Yes No Yes No SEK STIBOR 3 Yes No Yes No The Commission notes that these interest rate swaps are all single currency swaps without optionality, as defined by the applicable DCO. 35 LCH plans to offer clearing of MXN-denominated fixed-to-floating interest rate swaps in 2016. The submissions from CME, Eurex, LCH, and SGX provided the information required by regulation 39.5(b)(3)(i)-(viii), which, along with other information, has assisted the Commission in making a quantitative and qualitative assessment that these swaps should be subject to a clearing requirement determination. 36 In making this proposed clearing requirement determination, the Commission considered the ability of CME, Eurex, LCH, and SGX to clear a given swap, as well as data supplied cumulatively from each DCO for these swaps. The Commission also reviewed the existing rule frameworks and risk management policies of each DCO. 36 In their submissions, CME and LCH stated that they had provided notice of the submissions to members as required by regulation 39.5(b)(3)(viii). SGX stated that its § 39.5(b) submission was published on its Web site. Eurex stated that it will forward its § 39.5(b) submission to its members so that they may comment. Additionally, the Commission considered industry data, as available, as well as other publicly available data sources, including information that has been made publicly available pursuant to part 43 of the Commission's regulations (part 43 data). 37 This notice of proposed rulemaking also reflects consultation with the staff of the Securities and Exchange Commission, U.S. prudential regulators, and international regulatory authorities. Finally, as regulation 39.5(b)(5) provides for a 30-day comment period for any clearing requirement determination, the Commission will consider public comment before making any final clearing requirement determination. 37 The Commission notes that it also has access to data pursuant to part 45 of the Commission's regulations (part 45 data) that is used in the cost benefit considerations in section V below. For the purposes of this proposal, the Commission decided to use the part 43 data in the determination analysis in section II.B below to enable commenters to review the same data that the Commission reviewed in making the determination. The Commission may in the future rely on aggregated, anonymized part 45 data in making such determinations. B. Proposed Determination Analysis i. Background Information on Interest Rate Swaps Interest rate swaps generally are agreements wherein counterparties agree to exchange payments based on a series of cash flows over a specified period of time, typically calculated using two different rates, multiplied by a notional amount. As of June 2015, according to an estimate by the Bank for International Settlements (BIS), there was approximately $435 trillion in outstanding notional of interest rate swaps, which represents approximately 79% of the total outstanding notional of all derivatives. 38 38 Semi-Annual OTC Derivatives Statistics at End-June 2015, published December 2015 available at: https://www.bis.org/statistics/derstats.htm . The BIS data provides the broadest market-wide estimates of interest rate swap activity available to the Commission. The Commission receives swaps market information pursuant to Parts 43 and 45 of the Commission's regulations. See also Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136 (Jan. 13, 2012); Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012). However, this data only includes swaps subject to the Commission's jurisdiction, i.e., those swaps subject to the Dodd-Frank Act. The BIS data represents the broader swaps market, some of which is not reportable to the Commission under the Dodd-Frank Act. Section 2(h)(2)(A)(i) of the CEA provides that the Commission shall review each swap, or any group, category, type, or class of swaps to make a determination as to whether the swap or group, category, type, or class of swaps should be required to be cleared. The proposed clearing requirement determination would amend the four classes of interest rate swaps that the Commission defined in the First Clearing Requirement Determination: 1. Fixed-to-floating swaps: Swaps in which the payment or payments owed for one leg of the swap is calculated using a fixed rate and the payment or payments owed for the other leg are calculated using a floating rate. 2. Basis swaps: Swaps for which the payments for both legs are calculated using floating rates. 3. Forward rate agreements: Swaps in which payments are exchanged on a pre-determined date for a single specified period and one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate that is set on a pre-determined date. 4. Overnight Index Swaps: Swaps for which one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate based on a daily overnight rate. Interest rate swaps within the classes described above are required to be cleared according to the First Clearing Requirement Determination if they meet certain specifications: (i) Currency in which notional and payment amounts of a swap are specified; (ii) floating rate index referenced in the swap; and (iii) stated termination date of the swap. The Commission also included the following three “negative” specifications: 39 (i) no optionality; (ii) no dual currencies; and (iii) no conditional notional amounts. 40 The clearing requirement determination proposed today analyzes the additional interest rate swaps submitted by CME, Eurex, LCH, and SGX according to these classifications and specifications. 39 The negative specifications are product specifications that are explicitly excluded from the clearing requirement. All specifications are listed in regulation 50.4. 40 The First Clearing Requirement Determination described the term “conditional notional amount” as “notional amounts that can change over the term of a swap based on a condition established by the parties upon execution such that the notional amount of the swap is not a known number or schedule of numbers, but may change based on the occurrence of some future event. This term does not include what are commonly referred to as `amortizing' or `roller coaster' notional amounts for which the notional amount changes over the term of the swap based on a schedule of notional amounts known at the time the swap is executed. Furthermore, it would not include a swap containing early termination events or other terms that could result in an early termination of the swap if a DCO clears the swap with those terms.” See 77 FR at 74302 n. 108. ii. Consistency With Core Principles for Derivatives Clearing Organizations Section 2(h)(2)(D)(i) of the CEA requires the Commission to determine whether a clearing requirement determination would be consistent with the core principles for registered DCOs set forth in section 5b(c)(2) of the CEA and implemented in part 39 of the Commission's regulations. 41 CME, Eurex, LCH, and SGX, each a registered DCO, already clear the swaps identified in the regulation 39.5(b) submissions described above. 42 Accordingly, CME, Eurex, LCH, and SGX already are required to comply with the DCO core principles with respect to the interest rate swaps being considered by the Commission as part of this clearing requirement determination. Moreover, each of these DCOs is subject to the Commission's review and surveillance procedures with respect to these swaps. 41 The core principles address numerous issues, including financial resources, participant and product eligibility, risk management, settlement procedures, default management, system safeguards, reporting, recordkeeping, public information, and legal risk. See CEA section 5b(c)(2)(A)-(R); 17 CFR part 39, subparts B and C. 42 Currently, CME is the only registered DCO clearing MXN-denominated fixed-to-floating interest rate swaps. LCH intends to file a § 39.5(b) submission regarding this swap in 2016. LCH does not anticipate that it will need to make a change to its risk management framework in order to commence clearing MXN-denominated fixed-to-floating interest rate swaps. For the purposes of reviewing whether the regulation 39.5(b) submissions are consistent with the DCO core principles, the Commission has relied on both the information received in the regulation 39.5(b) submissions and, as discussed above, its ongoing review and risk surveillance programs. The Commission believes that CME, Eurex, LCH, and SGX would be capable of maintaining compliance with the DCO core principles following a clearing requirement determination for the interest rate swaps that they currently clear. The Commission has not found any evidence to conclude that subjecting any of the interest rates swaps identified herein to a clearing requirement would alter compliance by CME, Eurex, LCH, or SGX with the DCO core principles. Accordingly, the Commission believes that each of the regulation 39.5(b) submissions discussed herein is consistent with section 5b(c)(2) of the CEA. Request for Comment The Commission requests comment as to whether the proposed clearing requirement determination would adversely affect CME's, Eurex's, LCH's, or SGX's ability to comply with the DCO core principles. iii. Consideration of the Five Statutory Factors for Clearing Requirement Determinations Section 2(h)(2)(D)(ii)(I)-(V) of the CEA identifies five factors that the Commission must “take into account” in making a clearing requirement determination. 43 In regulation 39.5(b), the Commission developed a process for reviewing DCO swap submissions to determine whether such swaps should be subject to a clearing requirement determination. The following is the Commission's consideration of the five factors as they relate to (a) fixed-to-floating interest rate swaps denominated in the nine additional currencies, (b) AUD-denominated basis swaps, (c) AUD-, NOK-, PLN-, and SEK-denominated FRAs, (d) USD-, EUR-, and GBP-denominated OIS with termination dates of up to three years, and (e) AUD- and CAD-denominated OIS, as submitted by CME, Eurex, LCH, and SGX pursuant to regulation 39.5(b). 43 The factors are: (1) The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data; (2) The availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded; (3) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract; (4) The effect on competition, including appropriate fees and charges applied to clearing; and (5) The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property. One particular topic that the Commission considered as it reviewed the five statutory factors for this clearing requirement is the effect a new clearing mandate would have on a DCO's ability to withstand stressed market conditions. The post-financial crisis reforms that have increased the use of central clearing also have increased the importance of ensuring that central counterparties are resilient, particularly in times of stress. The Commission has been working with other domestic and international regulators to make sure that adequate measures are taken to address the potential financial stability risks posed by central counterparties. The Commission is focused on the financial stability of DCOs and is committed to monitoring all potential risks they face, including those related to increased clearing due to a new clearing requirement. Accordingly, how DCOs manage risk during times of market stress, as well as whether DCOs could manage the incremental risk in stressed market conditions that may result from the Commission mandating these products for clearing, are critical factors that the Commission considered in issuing this proposal. a. Factor (I)—Outstanding notional exposures, trading liquidity, and adequate pricing data. The first of the five factors requires the Commission to consider “the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data” related to “a submission made [by a DCO].” 44 As explained in the proposal for the First Clearing Determination, there is no single source of data for notional exposures and trading liquidity for individual products within the global interest rate swap market. 45 The Commission has considered multiple sources of data 46 on the interest rate swap market that provide the information the Commission needs to evaluate the first factor, including: (1) Publicly available real time data disseminated by DTCC Data Repository (DDR), a provisionally-registered swap data repository (SDR), 47 pursuant to part 43 data; (2) data from CME, Eurex, LCH, and SGX in their capacities as DCOs; (3) data from the BIS; (4) data from the International Swaps and Derivatives Association (ISDA); and (5) data from the Futures Industry Association (FIA). 48 44 See CEA section 2(h)(2)(D)(ii). 45 See 77 FR 47170, 47193 and n. 100, Aug. 7, 2012 (citing Bank of England, “Thoughts on Determining Central Clearing Eligibility of OTC Derivatives,” Financial Stability Paper No. 14, March 2012, at 11, available at: http://www.bankofengland.co.uk/financialstability/Documents/fpc/fspapers/fs_paper14.pdf .) As discussed above, the Commission receives data regarding swaps subject to its jurisdiction pursuant to parts 43 and 45 of the Commission's regulations. The Commission also receives regular reporting from registered DCOs, as well as its registered entities. 46 The Commission reviews part 43 data, as well as data from CME, Eurex, LCH, and SGX, on an ongoing basis. Although the part 43 data that is included below in section II.B.iii.a is dated as of the Second Quarter 2015, Commission staff has not observed significant changes in the level of trading activity that would cause the Commission to change its finding that there is regular trading activity in these markets, as well as a measurable amount of data, leading the Commission to believe that there are significant outstanding notional exposures and trading liquidity in the products that are the subject of this proposal. In addition, although the data from DCOs presented below in section II.B.iii.a is dated as of the Second Quarter 2015, Commission staff has not observed significant changes in the notional amounts outstanding or the aggregate notional values of swaps being cleared that would cause the Commission to change its finding that there are significant outstanding notional exposures and trading liquidity in the interest rate swaps that are the subject of this proposal. 47 CME SDR and Bloomberg SDR, each a registered SDR, collect data regarding interest rate swaps but have not collected data relevant to this proposed determination. ICE Trade Vault, another registered SDR, does not accept interest rate swaps. 48 In the First Clearing Requirement Determination, the Commission also considered (i) market data published weekly by TriOptima that covered swap trade information submitted voluntarily by 14 large derivatives dealers and (ii) trade-by-trade data provided voluntarily by the 14 dealers to the OTC Derivatives Supervisors Group (ODSG). See 77 FR at 74307. The Commission is not using these sources for the determination proposed today because TriOptima no longer collects its data, and the ODSG data was a one-time exercise conducted between June and August 2010. The Commission invites market participants to submit data from any available data sources that it has not considered. 1. Outstanding notional exposures and trading liquidity: Fixed-to-floating interest rate swaps denominated in the nine additional currencies. In assessing the extent of outstanding notional exposures and trading liquidity for a particular swap, the Commission reviews various data series to ascertain whether there is an active market for the swap, including whether the swap is traded on a regular basis as reflected by trade count, and whether there is a measurable amount of notional exposures, such that a DCO can adequately risk manage the swap. In particular, the Commission reviewed the aggregate notional exposure and the trade count data from a number of sources for each swap subject to this proposal. While there is no defined standard for an active market, the Commission believes the data indicates that there are sufficient outstanding notional exposures and trading liquidity for fixed-to-floating interest rate swaps denominated in the nine additional currencies to support a clearing requirement determination. The part 43 data presented in Table 2 generally demonstrates that there is significant activity in new fixed-to-floating interest rate swap trades denominated in each of the nine additional currencies. Table 2 presents aggregate notional values and trade counts of fixed-to-floating interest rate swaps denominated in these currencies that were executed during the three-month period from April 1 to June 30, 2015. 49 49 The data on notional amounts the Commission receives for interest rate swaps pursuant to part 43 is subject to caps, which vary based on currency, reference rate, swap class ( e.g., FRA vs. OIS), and maturity of the underlying swap. As a result, the data in Table 2 will underestimate the amount of notional outstanding for the reported trades, as around 25% of the trades contained capped notional amounts. See 17 CFR 43.4(h). According to the adopting release accompanying part 43, the Commission caps notional amounts to ensure the anonymity of the parties to a large swap and maintain the confidentiality of business transactions and market positions. See Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182, 1213 (Jan. 9, 2012). The rules were amended in May 2013 as they relate to caps. See Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades, 78 FR 32866, May 13, 2013. The Commission notes the market for any swap is global. Even if the bulk of the activity in a particular swap occurs between counterparties located in a single jurisdiction, Table 2 demonstrates that there is significant participation by U.S. persons in each of the swaps covered by this proposed determination. 50 50 Under the Commission's general policy, neither part 43 reporting nor the clearing requirement apply to a swap where neither counterparty is a U.S. person (although these requirements generally would apply, with the possibility of substituted compliance, to certain swaps involving foreign branches of U.S. SDs or major swap participants (MSPs), or non-U.S. persons that are guaranteed by or affiliate conduits of U.S. persons). See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292, 45369-70 (July 26, 2013). 51 This table reflects data that was publically disseminated by DDR and reported to it by the reporting counterparty, a SEF, or designated contract market (DCM) pursuant to part 43. As such, the Commission did not independently verify the accuracy of the swap data. The transactions disseminated to the public were rounded pursuant to regulation 43.4(g). As a result, this table may underestimate the amount of notional outstanding for the reported trades. This table does not include cancelled and corrected swaps that counterparties reported under part 43. The Commission converted the notional amounts to USD according to the exchange rates of June 30, 2015. Two other SDRs provisionally registered with the Commission, CME SDR and Bloomberg SDR, also collect information pursuant to part 43. During the second quarter of 2015, neither of those SDRs collected information pertaining to the interest rate swaps that are the subject of this proposed determination. Table 2—Part 43 Data Fixed-to-Floating Interest Rate Swaps Aggregate Notional Amounts and Trade Counts Reported Second Quarter 2015 51 Currency Notional reported (USD) Trade count MXN 403,621,757,132 15,492 CAD 318,497,173,863 4,125 AUD 322,042,446,624 4,898 SEK 82,092,397,444 1,779 PLN 47,267,162,195 1,463 NOK 23,974,272,144 659 SGD 45,618,398,397 995 CHF 48,986,953,725 899 HKD 21,704,787,338 469 Table 3.1 demonstrates the notional amounts outstanding of fixed-to-floating interest rate swaps, denominated in each of the nine additional currencies except for MXN, cleared at LCH as of July 17, 2015. 52 52 As mentioned above, LCH intends to commence clearing fixed-to-floating interest rate swaps denominated in MXN in 2016. Table 3.1—LCH Data Fixed-to-Floating Interest Rate Swaps Notional Amounts Outstanding as of July 17, 2015 53 Currency Outstanding notional 54 (USD) CAD $3,479,830,407,148 AUD 3,311,898,621,627 CHF 1,110,123,528,868 SEK 942,508,451,280 SGD 735,450,982,935 PLN 500,992,688,256 NOK 402,746,575,455 HKD 385,067,416,327 Table 3.2 describes the aggregate notional values and trade counts of fixed-to-floating interest rate swaps denominated in these currencies that were cleared at LCH during the three-month period from April 1 to June 30, 2015. 53 Data includes zero coupon swaps, variable notional swaps, and inflation swaps. Data excludes basis swaps, FRAs, and OIS. LCH converted values to USD. All data from LCH cited in this notice of proposed rulemaking is “single-sided” such that notional amounts correspond to the notional amounts of swaps submitted for clearing. LCH publishes outstanding notional amounts of the swaps it has cleared. See LCH's Web site, available at: http://www.swapclear.com/what/clearing-volumes.html . 54 As mentioned above, LCH intends to commence clearing fixed-to-floating interest rate swaps denominated in MXN in 2016. Table 3.2—LCH Data Fixed-to-Floating Interest Rate Swaps Aggregate Notional Amounts Cleared and Trade Counts 55 Second Quarter 2015 Currency Aggregate notional 56 (USD) Trade count AUD $747,580,867,222 11,675 CAD 591,935,914,049 8,097 SEK 192,434,187,521 5,827 SGD 188,573,379,738 4,872 CHF 175,203,370,522 3,659 PLN 99,184,390,887 4,249 NOK 72,569,065,080 2,855 HKD 65,655,762,520 1,868 Table 4.1 demonstrates the notional amounts outstanding of fixed-to-floating interest rate swaps, denominated in each of the nine additional currencies, cleared at CME as of July 17, 2015. 55 Like the outstanding notional data, this data includes zero coupon swaps, variable notional swaps, and inflation swaps. 56 The aggregate notional amounts cleared at LCH will appear to be greater than that reflected in the part 43 data because the part 43 data only captures swap data subject to the Dodd-Frank Act, while LCH, a UK entity, clears swaps for participants who may not be subject to the Commission's jurisdiction. The fact that LCH's notional amounts are higher supports this proposed clearing requirement determination because it suggests that there may be extensive liquidity in these swaps outside the U.S., of which DCOs could take advantage in order successfully to risk manage and price these swaps. Table 4.1—CME Data Fixed-to-Floating Interest Rate Swaps—Open Interest 57 as of July 17, 2015 58 Currency Open interest (USD) CAD $295,213,937,641 MXN 283,989,842,748 AUD 192,208,979,188 SEK 30,834,434,233 NOK 25,396,100,018 CHF 18,322,872,584 PLN 4,157,627,521 HKD 1,937,495,645 SGD 1,014,201,616 Table 4.2 describes the aggregate notional values of fixed-to-floating interest rate swaps denominated in these currencies that were cleared at CME during the three-month period from April 1 to June 30, 2015. 57 CME uses the term “open interest” to refer to notional outstanding. CME converted the values to USD. All data from CME cited in this notice of proposed rulemaking is “single-sided” such that notional amounts correspond to the notional amounts of swaps submitted for clearing. 58 Data excludes basis swaps, FRAs, and OIS. CME publishes open interest amounts of the swaps it has cleared. See CME's Web site, available at: http://www.cmegroup.com/trading/interest-rates/cleared-otc/#data . Table 4.2—CME Data Fixed-to-Floating Interest Rate Swaps Aggregate Notional Amounts Cleared and Trade Counts Second Quarter 2015 Currency Aggregate notional (USD) Trade count MXN $193,941,151,671 7,749 AUD 51,591,005,387 1,194 CAD 91,523,261,511 2,995 SEK 9,712,957,726 998 NOK 5,298,232,932 422 CHF 2,665,840,791 173 PLN 1,097,490,552 577 SGD 355,136,534 32 HKD 211,815,688 16 As of July 17, 2015, the notional amount of SGD-denominated fixed-to-floating interest rate swaps cleared at SGX was $58.5 billion. 59 59 SGX converted this value from SGD to USD. This figure is “single-sided” such that the notional amount corresponds to the notional amounts of swaps submitted for clearing. SGX publishes outstanding notional amounts on its Web site, available at: http://www.sgx.com . As another data source, the Commission looked to BIS data. BIS' most recent triennial central bank survey for interest rate swaps describes the daily average notional values of interest rate swaps, including fixed-to-floating interest rate swaps, on a worldwide basis, denominated in each of the nine additional currencies. Table 5—Excerpt From BIS Triennial Central Bank Survey 2013 60 Over-the-Counter Single Currency Interest Rate Derivatives Turnover Currency Daily average notional of swaps (including fixed- to-floating), worldwide (USD) 61 AUD $62,854,000,000 CAD 26,794,000,000 SEK 14,618,000,000 MXN 9,285,000,000 CHF 5,335,000,000 SGD 3,349,000,000 NOK 2,560,000,000 PLN 2,138,000,000 HKD 1,992,000,000 More recently, BIS has published statistics showing significant outstanding notional amounts for CAD-, CHF-, and SEK-denominated interest rate swaps: Approximately $10.3 trillion CAD-denominated, approximately $3.2 trillion CHF-denominated, and approximately $2.4 trillion SEK-denominated. 62 60 BIS Triennial Central Bank Survey, Interest Rate Derivatives Market Turnover in 2013, Tables 1 and 2.1-2.6 (December 2013), available at: http://www.bis.org/publ/rpfxf13irt.pdf . 61 Data as of April 2013. BIS converted the figures to USD. 62 Interest rate derivatives by instrument, counterparty, and currency. Notional amounts outstanding, expressed in USD, at end June 2015, available at: http://stats.bis.org/statx/srs/table/d7?p=20151&c= . This report does not provide data specific to interest rate swaps denominated in the rest of the nine additional currencies. On a daily basis, using data collected from DDR, ISDA's “SwapsInfo” report publishes the notional value and trade counts of fixed-to-floating interest rate swaps denominated in four of the nine additional currencies. 63 For example, Table 6 shows the aggregate notional values and trade counts of such swaps entered into on September 15, 2015. 63 SwapsInfo provides data from DDR and Bloomberg SDR “required to be disclosed under U.S. regulatory guidelines.” SwapsInfo does not provide information specific to interest rate swaps denominated in the rest of the nine additional currencies. The SwapsInfo referenced in Table 6 only includes information from DDR. See SwapsInfo Web site, available at: http://www.swapsinfo.org/charts/derivatives/price-transaction . Table 6—Excerpt From ISDA SwapsInfo Interest Rate Derivatives—Price/Transaction Data Fixed-to-Floating Interest Rate Swaps Currency Approximate aggregate notional amount executed on September 15, 2015 (USD) 64 Aggregate trade count executed on September 15, 2015 AUD $2,143,376,093 51 CAD 1,515,366,916 30 MXN 283,339,847 142 PLN 141,249,743 19 The Commission also reviewed data published by the FIA, in its “SEF Tracker” report, 65 consisting of weekly aggregate notional values of interest rate swaps, including FRAs, denominated in various currencies, including five of the nine additional currencies, which have been transacted on 12 swap execution facilities (SEFs) that are now registered with the Commission. 66 Table 7 shows the aggregate notional values of interest rate swaps denominated in AUD, CAD, MXN, PLN, and SEK executed on SEFs during the week of May 25, 2015, as well as such swaps denominated in CHF, HKD, and NOK. 67 64 The Commission converted the values to USD as of Sept. 18, 2015. ISDA SwapsInfo does not provide data for CHF-, HKD-, NOK-, SEK-, or SGD-denominated interest rate swaps. 65 SEF Tracker is published periodically on FIA's Web site, available at: https://fia.org/sef-tracker . 66 The SEFs include: BGC; Bloomberg; DW; GFI; Javelin; ICAP; IGDL; LatAm; Tradition; trueEx; Tullet Prebon; and TW. The Commission recognizes that under section 2(h)(8) of the CEA and regulations 37.10 and 38.12, the adoption of the clearing requirement proposed herein could result in a trade execution requirement for some or all of the interest rate swaps discussed in this proposal. 67 The published report does not contain information for CHF-, HKD-, and NOK-denominated interest rate swaps. FIA provided figures for those swaps to the Commission. According to FIA, no SGD-denominated interest rate swaps were transacted on SEFs during the week of May 25, 2015. During the week of July 26, 2015, the aggregate notional amount of SGD-denominated interest rate swaps executed on SEFs was $7,305,402. Table 7—FIA Data Weekly Notional Volume of Interest Rate Swaps (Including FRAs) by Currency 68 Currency Aggregate weekly notional volume executed on SEFs Week of May 25, 2015 (USD) 69 AUD $36,194,670,000 MXN 19,526,810,000 CAD 12,527,450,000 CHF 6,686,971,251 SEK 5,958,000,000 PLN 1,420,000,000 NOK 1,403,918,860 HKD 51,589,605 In summary, the data indicates varying levels of activity, measured by outstanding notional amounts and trade counts, in fixed-to-floating interest rate swaps denominated in the nine additional currencies. The Commission also acknowledges that the data comes from various, limited periods of time that do not explicitly include periods of market stress. However, the Commission believes that the data demonstrates sufficient regular trading activity and outstanding notional exposures in the swaps to provide the liquidity necessary for DCOs to successfully risk manage these products and to support a clearing requirement. 68 May 2015 edition of FIA SEF Tracker, available at: https://fia.org/articles/fia-releases-sef-tracker-report-may. 69 FIA converted the values to USD. Request for Comment The Commission requests comment regarding whether there are sufficient outstanding notional exposures and trading liquidity in fixed-to-floating interest rate swaps denominated in any or all of the nine additional currencies, during both stressed and non-stressed market conditions, to support a clearing requirement. 2. Outstanding notional exposures and trading liquidity: AUD-denominated basis swaps. The First Clearing Requirement Determination required the clearing of certain USD-, EUR-, GBP-, and JPY-denominated basis swaps. As part of the proposed clearing requirement determination, the Commission is proposing to amend the basis swap class to include AUD-denominated basis swaps. According to part 43 data, 366 new AUD-denominated basis swaps were executed during the three-month period from April 1 to June 30, 2015. The aggregate notional value of these swaps was $32,559,762,900. 70 Also, during this period, there was no volume of AUD-denominated basis swaps cleared at CME, but the outstanding notional in such swaps cleared at CME as of June 30, 2015 was $69,662,645,400. During the second quarter of 2015, 786 new AUD-denominated basis swaps were cleared at LCH. The aggregate notional value of these swaps was $74,012,261,949. As of July 17, 2015, the outstanding notional value of AUD-denominated basis swaps cleared at CME and LCH was $183,995,548,759 and $443,819,944,145, respectively. 71 70 This figure comes from data that was publically disseminated by DDR and reported to it by the reporting counterparty, a SEF, or designated contract market (DCM) pursuant to part 43. As such, the Commission did not independently verify the accuracy of the swap data. The transactions disseminated to the public were rounded pursuant to regulation 43.4(g). As a result, this figure may underestimate the amount of notional outstanding for the reported trades. This figure does not include cancelled and corrected swaps that counterparties reported under part 43. The Commission converted the aggregate notional amount to USD according to the exchange rates of June 30, 2015. 71 CME and LCH converted these figures to USD. While the data considered above comes from limited periods of time that do not explicitly include periods of market stress, the Commission believes that the data demonstrates sufficient regular trading activity and outstanding notional exposures in AUD-denominated basis swaps to provide the liquidity necessary for DCOs to successfully risk manage these products and to support a clearing requirement. Request for Comment The Commission requests comment regarding whether there are sufficient outstanding notional exposures and trading liquidity in AUD-denominated basis swaps, during both stressed and non-stressed market conditions, to support a clearing requirement. 3. Outstanding notional exposures and trading liquidity: AUD, NOK-, PLN-, and SEK-denominated FRAs. The First Clearing Requirement Determination required the clearing of certain USD-, EUR-, GBP-, and JPY-denominated FRAs. As part of the proposed clearing requirement determination, the Commission is proposing to amend the FRA class to include AUD-, NOK-, PLN-, and SEK-denominated FRAs. Table 8 presents aggregate notional values and trade counts of AUD-, NOK-, PLN-, and SEK-denominated FRAs executed during the second quarter of 2015, collected by DDR. Table 8—Part 43 Data FRAs Aggregate Notional Amounts and Trade Count Reported Second Quarter 2015 72 Currency Aggregate notional reported (USD) Trade count AUD $225,910,666,800 1,058 SEK 183,646,587,508 514 NOK 105,087,098,253 397 PLN 14,455,487,594 103 Table 9.1 presents the notional amounts outstanding of NOK-, PLN-, and SEK-denominated FRAs cleared at LCH as of July 17, 2015. 72 This table reflects data that was publically disseminated by DDR and reported to it by the reporting counterparty, a SEF, or DCM pursuant to part 43. As such, the Commission did not independently verify the accuracy of the swap data. The transactions disseminated to the public were rounded pursuant to regulation 43.4(g). As a result, this table may underestimate the amount of notional outstanding for the reported trades. This table does not include cancelled and corrected swaps that counterparties reported under part 43. The Commission converted the notional amounts to USD according to the exchange rates of June 30, 2015. Table 9.1—LCH Data FRAs Notional Outstanding as of July 17, 2015 Currency Notional reported (USD) SEK $706,370,365,302 NOK 544,670,239,925 PLN 274,120,726,256 Table 9.2 presents the aggregate notional values and trade counts of NOK-, PLN-, and SEK-denominated FRAs cleared at LCH during the second quarter of 2015. Table 9.2—LCH Data FRAs Aggregate Notional Amounts Cleared and Trade Count Second Quarter 2015 Currency Notional reported (USD) Trade count SEK $369,900,226,814 1,600 NOK 348,764,102,890 1,874 PLN 232,246,791,831 1,029 Table 10.1 presents the notional amounts outstanding of AUD-, NOK-, PLN-, and SEK-denominated FRAs cleared at CME as of July 17, 2015. Table 10.1—CME Data FRAs Open Interest as of July 17, 2015 Currency Notional reported (USD) SEK $1,448,168,085 PLN 360,386,524 NOK 122,512,986 AUD 0 Table 10.2 presents the aggregate notional values and trade counts of AUD-, NOK-, PLN-, and SEK-denominated FRAs cleared at CME during the second quarter of 2015. Table 10.2—CME Data FRAs Aggregate Notional Amounts Cleared and Trade Count Second Quarter 2015 73 Currency Notional reported (USD) Trade count SEK $1,504,300,488 6 AUD 0 0 NOK 0 0 PLN 0 0 The Commission recognizes that the part 43 data provided in Table 8 comes from a limited period of time that does not explicitly include periods of market stress. The Commission also notes the absence of any clearing activity in AUD-denominated FRAs and the absence of clearing activity at CME in NOK, PLN, and SEK during the second quarter of 2015. However, the Commission believes that the part 43 data provided in Table 8 demonstrates sufficient regular trading activity and outstanding notional exposures in AUD-, NOK-, PLN-, and SEK-denominated FRAs to provide the liquidity necessary for DCOs to successfully risk manage these products and to support a clearing requirement. Moreover, the Australian clearing requirement, which took effect in April 2016, covers AUD-denominated FRAs. 74 73 Although there was no clearing activity in NOK- or PLN-denominated FRAs during the second quarter of 2015, CME continues to offer clearing of these products. During the fourth quarter of 2015, CME cleared an aggregate notional amount of $4.1 billion in AUD-denominated FRAs. 74 See section I.B. Request for Comment The Commission requests comment regarding whether there are sufficient outstanding notional exposures and trading liquidity in AUD-, NOK-, PLN, and SEK-denominated FRAs, during both stressed and non-stressed market conditions, to support a clearing requirement. 4. Outstanding notional exposures and trading liquidity: OIS with termination dates of up to three years. The First Clearing Requirement Determination required the clearing of certain USD-, EUR- and GBP-denominated OIS with a stated termination date range of seven days to two years. Interest rate swaps are often multi-year contracts with termination dates out to 50 years or more depending on the class and currency of the swap. As part of the proposed clearing requirement determination, the Commission is proposing to amend the maximum termination date to three years for USD-, EUR- and GBP-denominated OIS that have been required to be cleared pursuant to the First Clearing Requirement Determination. This would make the Commission's OIS clearing requirement consistent with the one that will take effect in the European Union in 2016. 75 75 See discussion of the pending European Union Clearing Obligation in section I.B. Table 11 presents aggregate notional values and trade counts of USD-, EUR-, and GBP-denominated OIS with terms of two to three years executed during the second quarter of 2015, collected by DDR. Table 11—Part 43 Data 2-3 Year OIS Aggregate Notional Amounts and Trade Count Reported 76 Second Quarter 2015 Currency Aggregate notional (USD) Trade count EUR $7,582,189,400 47 USD 4,611,000,000 32 GBP 1,377,942,400 15 Tables 12 and 13 present the notional amounts outstanding, the aggregate notional values cleared and trade counts, of USD-, EUR-, and GBP-denominated OIS with terms of two to three years. 76 This table reflects data that was publically disseminated by DDR and reported to it by the reporting counterparty, SEF, or DCM pursuant to part 43. As such, the Commission did not independently verify the accuracy of the swaps. The transactions disseminated to the public were rounded pursuant to regulation 43.4(g). As a result, this table may underestimate the amount of notional outstanding for the reported trades. This table does not include cancelled and corrected swaps that counterparties reported under part 43. The Commission converted the notional amounts to USD according to the exchange rates of June 30, 2015. 77 LCH converted the EUR and GBP values to USD. Table 12—LCH Data 2-3 Year OIS Notional Outstanding, Aggregate Notional Cleared, and Trade Count 77 Currency Notional outstanding as of July 17, 2015 (USD) Aggregate notional cleared second quarter 2015 (USD) Trade count second quarter 2015 EUR $456,729,830,424 $369,018,669,593 1,252 GBP 91,417,244,109 64,071,802,837 187 USD 90,058,657,103 46,523,581,500 120 Table 13—CME Data 2-3 Year OIS Open Interest, Aggregate Notional Cleared, and Trade Count 78 Currency Open interest as of July 17, 2015 (USD) Aggregate notional cleared second quarter 2015 (USD) Trade count second quarter 2015 EUR $53,456,578,566 $6,888,346,279 12 USD 151,923,747,195 9,334,544,737 6 GBP 27,764,067,455 857,520,000 4 As part of the proposed clearing requirement determination, the Commission also is proposing to add AUD- and CAD-denominated OIS to the OIS class included in regulation 50.4(a). This would make the Commission's OIS clearing requirement consistent with the one that is in effect in Australia and that is expected to take effect in Canada in 2017. 79 78 CME converted the EUR and GBP values to USD. 79 See discussion of the Australian and proposed Canadian swap clearing requirements in section I.B. Table 14 presents aggregate notional values and trade counts of AUD- and CAD-denominated OIS executed during the second quarter of 2015 collected by DDR. Table 14—Part 43 Data AUD- and CAD-OIS Aggregate Notional Amounts and Trade Count Reported 80 Second Quarter 2015 Currency Aggregate notional (USD) Trade count AUD $307,048,016,016 537 CAD 51,645,589,883 107 Tables 15.1 and 15.2 present the notional amounts outstanding, as well as aggregate notional values cleared and trade counts, of AUD- and CAD-denominated OIS cleared at LCH. 80 This table reflects data that was publically disseminated by DDR and reported to it by the reporting counterparty, SEF, or DCM pursuant to part 43. As such, the Commission did not independently verify the accuracy of the swaps. The transactions disseminated to the public were rounded pursuant to regulation 43.4(g). As a result, this table may underestimate the amount of notional outstanding for the reported trades. This table does not include cancelled and corrected swaps that counterparties reported under part 43. The Commission converted the notional amounts to USD according to the exchange rates of June 30, 2015. Table 15.1—LCH Data AUD-Denominated OIS Notional Outstanding, Aggregate Notional Cleared, and Trade Count 81 Currency Notional outstanding as of January 15, 2016 82 (USD) Aggregate notional cleared January 4-15, 2016 (USD) Trade count January 4-15, 2016 AUD $25,739,497,700 $26,199,691,300 25 Table 15.2—LCH Data CAD-Denominated OIS Notional Outstanding, Aggregate Notional Cleared, and Trade Count 83 Currency Notional outstanding as of July 17, 2015 (USD) Aggregate notional cleared second quarter 2015 (USD) Trade count second quarter 2015 CAD $506,221,411,997 $216,524,096,571 260 While the Commission recognizes that the data considered above comes from limited periods of time that do not explicitly include periods of market stress, the Commission believes that the data demonstrates sufficient regular trading activity and outstanding notional exposures in USD-, GBP-, and EUR-denominated OIS with a termination date range of two to three years, as well as AUD- and CAD-denominated OIS, to provide the necessary liquidity for DCOs to successfully risk manage these products and to support a clearing requirement. 81 LCH converted the AUD values to USD. 82 LCH began clearing AUD-denominated OIS on January 4, 2016. 83 LCH converted the CAD values to USD. Request for Comment The Commission requests comment regarding whether there are sufficient outstanding notional exposures and trading liquidity in the OIS covered by this proposed determination, during both stressed and non-stressed market conditions, to support a clearing requirement. 5. Pricing data: Fixed-to-floating swaps denominated in the nine additional currencies; AUD-denominated basis swaps; AUD-, NOK-, PLN-, and SEK-denominated FRAs; USD-, GBP, and EUR-OIS with termination dates of up to three years; and AUD- and CAD-OIS. The Commission regularly reviews pricing data on the interest rate swaps that are the subject of this proposal and has determined that these swaps are capable of being priced off of deep and liquid markets. Commission staff receives and reviews margin model information from CME, Eurex, LCH, and SGX that addresses how such DCOs would follow particular procedures to ensure that market liquidity exists in order to exit a position in a stressed market, including the products subject to this proposal. In particular, Commission staff analyzes the level of liquidity in the specific product markets and assesses the time required to determine a price. Based on this information, the Commission staff has no reason to believe that there is, or will be, difficulty pricing the products subject to this proposal in a stressed environment. Because of the stability of access to pricing data from these markets, the pricing data for non-exotic interest rate swaps that are currently being cleared is generally viewed as reliable. Therefore, the Commission believes that there is adequate pricing data to support a proposed clearing requirement determination. In addition, CME, Eurex, LCH, and SGX provided information that supports the Commission's conclusion that there is adequate pricing data to warrant a clearing requirement determination in the products subject to this proposal. LCH and CME believe there is adequate pricing data for risk and default management. CME publicly represents that its interest rate swap valuations are fully transparent and rely on pricing inputs obtained from wire service feeds. In its § 39.5(b) submission, SGX asserted that the valuation rate sources it uses, and the manner in which it determines mark-to-market prices, are in alignment with industry practices. CME, Eurex, LCH, and SGX obtain daily prices from third-party data providers, clearing members, and/or major banks. As discussed above, the Commission reviews margin models and related pricing data submitted by CME, Eurex, LCH, and SGX. One source of information that they use to determine adequate pricing data is a regular survey of swap traders that asks the traders to estimate what it would cost to liquidate positions of different sizes in different currencies. The information obtained during these market participant surveys is incorporated into to each of CME, Eurex, LCH, and SGX's internal margin models so that each is confident that it will be able to withstand stressed market conditions. Establishing accurate pricing data is one component of each of CME, Eurex, LCH, and SGX's ability to risk manage their interest rate swaps offered for clearing. The Commission believes that the methods used by these DCOs provide information on pricing that is accurate and demonstrates the ability to price the products subject to this proposal successfully, now and if they are subject to a clearing requirement. Request for Comment The Commission requests comment regarding whether there is adequate pricing data for DCO risk and default management of the products subject to this proposal. Based on the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data, the Commission proposes to require that interest rate swaps with the specifications shown in Table 16 be cleared. 84 84 This information also appears in revised regulation 50.4(a). See section III. Table 16—Specifications for Interest Rate Swaps To Be Cleared in § 50.4( a ) Specification Fixed-to-floating swap class 1. Currency Australian Dollar (AUD) Canadian Dollar (CAD) Euro (EUR) Hong Kong Dollar (HKD) Mexican Peso (MXN) Norwegian Krone (NOK). 2. Floating Rate Indexes BBSW CDOR EURIBOR HIBOR TIIE NIBOR. 3. Stated Termination Date Range 28 days to 30 years 28 days to 30 years 28 days to 50 years 28 days to 10 years 28 days to 21 years 28 days to 10 years. 4. Optionality No No No No No No. 5. Dual Currencies No No No No No No. 6. Conditional Notional Amounts No No No No No No. Specification Fixed-to-floating swap class 1. Currency Polish Zloty (PLN) Singapore Dollar (SGD) Swedish Krona (SEK) Swiss Franc (CHF) Sterling (GBP) U.S. Dollar (USD) Yen (JPY). 2. Floating Rate Indexes WIBOR SOR-VWAP STIBOR LIBOR LIBOR LIBOR LIBOR. 3. Stated Termination Date Range 28 days to 10 years 28 days to 10 years 28 days to 15 years 28 days to 30 years 28 days to 50 years 28 days to 50 years 28 days to 30 years. 4. Optionality No No No No No No No. 5. Dual Currencies No No No No No No No. 6. Conditional Notional Amounts No No No No No No No. Specification Basis swap class 1. Currency Australian Dollar (AUD) Euro (EUR) Sterling (GBP) U.S. Dollar (USD) Yen (JPY). 2. Floating Rate Indexes BBSW EURIBOR LIBOR LIBOR LIBOR. 3. Stated Termination Date Range 28 days to 30 years 28 days to 50 years 28 days to 50 years 28 days to 50 years 28 days to 30 years. 4. Optionality No No No No No. 5. Dual Currencies No No No No No. 6. Conditional Notional Amounts No No No No No. Specification Forward rate agreement class 1. Currency Australian Dollar (AUD) Euro (EUR) Polish Zloty (PLN) Norwegian Krone (NOK). 2. Floating Rate Indexes BBSW EURIBOR WIBOR NIBOR. 3. Stated Termination Date Range 3 days to 3 years 3 days to 3 years 3 days to 2 years 3 days to 2 years. 4. Optionality No No No No. 5. Dual Currencies No No No No. 6. Conditional Notional Amounts No No No No. Specification Forward rate agreement class 1. Currency Swedish Krona (SEK) Sterling (GBP) U.S. Dollar (USD) Yen (JPY). 2. Floating Rate Indexes STIBOR LIBOR LIBOR LIBOR. 3. Stated Termination Date Range 3 days to 3 years 3 days to 3 years 3 days to 3 years 3 days to 3 years. 4. Optionality No No No No. 5. Dual Currencies No No No No. 6. Conditional Notional Amounts No No No No. Specification Overnight index swap class 1. Currency Australian Dollar (AUD) Canadian Dollar (CAD) Euro (EUR) Sterling (GBP) U.S. Dollar (USD). 2. Floating Rate Indexes AONIA-OIS CORRA-OIS EONIA SONIA FedFunds. 3. Stated Termination Date Range 7 days to 2 years 7 days to 2 years 7 days to 3 years 7 days to 3 years 7 days to 3 years. 4. Optionality No No No No No. 5. Dual Currencies No No No No No. 6. Conditional Notional Amounts No No No No No. Request for Comment The Commission requests comment as to whether it should consider other data to determine whether outstanding notional exposures, trading liquidity, or adequate pricing data are sufficient to support this proposed clearing requirement. If so, please provide or identify any additional data that may assist the Commission in this regard. The Commission also requests comment as to whether fixed-to-floating interest rate swaps denominated in certain of the nine additional currencies are more or less suitable for a clearing requirement in terms of outstanding notional values, trading liquidity, or pricing data. In addition, the Commission requests comment regarding whether other evidence or criteria should inform the Commission's assessment that the swaps covered by this proposal are suitable for clearing. Finally, the Commission requests comment about the types of swap counterparties that would be affected by the proposed determination. For example, as noted above, under the Commission's general policy the clearing requirement would not apply to swaps involving non-U.S. counterparties in certain situations. 85 The Commission also notes that the exception and exemptions that currently apply to the existing swap clearing requirement would also apply to the proposed clearing requirement. 86 85 See section II.B.iii.a.1. Under the Commission's general policy, the clearing requirement does not apply to a swap where neither counterparty is a U.S. person (although these requirements generally would apply, with the possibility of substituted compliance, to certain swaps involving foreign branches of U.S. swap dealers or major swap participants, or non-U.S. persons that are guaranteed by or affiliate conduits of U.S. persons). See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292, 45369-70 (July 26, 2013). 86 The exception and exemptions to the clearing requirement are codified in subpart C to part 50 of the Commission's regulations. b. Factor (II)—Availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure. Section 2(h)(2)(D)(ii)(II) of the CEA requires the Commission to take into account the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the proposed classes of swaps on terms that are consistent with the material terms and trading conventions on which they are now traded. The Commission believes that CME, Eurex, LCH, and SGX have developed rule frameworks, capacity, operational expertise and resources, and credit support infrastructure to clear the interest rate swaps they currently clear, including those products subject to this proposal, on terms that are consistent with the material terms and trading conventions on which those swaps are being traded. The Commission subjects CME, Eurex, LCH, and SGX to ongoing review and risk surveillance programs to ensure compliance with the core principles for the submitted swaps. 87 As discussed above, as part of a registered DCO's initial registration review and periodic in-depth reviews thereafter, the Commission reviews the DCO's rule framework, capacity, and operational expertise and resources to clear the submitted swaps. The Commission may request that the DCO or DCO applicant change its rules to comply with the CEA and Commission regulations. 87 Section 5c(c) of the CEA governs the procedures for review and approval of new products, new rules, and rule amendments submitted to the Commission by DCOs. Parts 39 and 40 of the Commission's regulations implement section 5c(c) by: (i) Establishing specific requirements for compliance with the core principles as well as procedures for registration, implementing DCO rules, and clearing new products; and (ii) establishing provisions for a DCO's submission of rule amendments and new products to the Commission. After registration, the Commission conducts examinations of DCOs to determine whether the DCO is in compliance with the CEA and Commission regulations. Moreover, Commission risk surveillance staff monitors the risks posed to and by the DCO, in ways that include regularly conducting back testing to review margin coverage at the product level and following up with the DCO and its clearing members regarding any exceptional results. CME, Eurex, LCH, and SGX have procedures pursuant to which they regularly review their clearing of the interest rate swaps subject to this proposal in order to confirm, or make adjustments to, margins and other risk management tools. When reviewing CME, Eurex, LCH, and SGX's risk management tools, the Commission considers whether the DCO is able to manage risk during stressed market conditions to be one of the most significant considerations. CME, Eurex, LCH, and SGX have developed detailed risk-management practices, including a description of the risk factors considered when establishing margin levels such as historical volatility, intraday volatility, seasonal volatility, liquidity, open interest, market concentration, and potential moves to default, among other risks. 88 The Commission reviews and oversees CME's, Eurex's, LCH's, and SGX's risk management practices and development of margin models. Margin models are further refined by stress testing and daily back testing. When assessing whether CME, Eurex, LCH, and SGX can clear swaps safely during stressed market conditions, stress testing and back testing are key tools the Commission considers as well. 88 Each of CME, Eurex, LCH, and SGX has published a document outlining its compliance with the Principles for Financial Market Infrastructures (“PFMIs”) published by the Committee on Payments and Market Infrastructures (“CPMI” formerly CPSS) and the International Organization of Securities Commissions (“IOSCO”). See CME Clearing: Principles for Financial Market Infrastructures Disclosure, available at: http://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf. See Assessment of Eurex Clearing AG's compliance against the CPSS-IOSCO Principles for financial market infrastructures (PFMI) and disclosure framework associated to the PFMIs, available at: http://www.eurexclearing.com/blob/148684/58e6fe89e3f54ebe169e530ac2235b43/data/cpss-iosco-pfmi_assessment_2014_en.pdf. See LCH's CPMI-IOSCO Self Assessment 2014, available at: http://www.lchclearnet.com/documents/731485/762558/CPMI_IOSCO_Assessment_of_LCH+ClearnetLtd+2014.pdf/45876bd6-3818-4b76-a463-2952a613c326. See SGX PFMI Disclosure Documents, available at: http://www.sgx.com/wps/portal/sgxweb/home/clearing/derivatives/pfmi_disclosure. CME, Eurex, LCH, and SGX design stress tests to simulate “extreme but plausible” market conditions based on historical analysis of product movements and/or based on hypothetical forward-looking scenarios that are created with the assistance of market experts and participants. Commission staff monitors and oversees the use and development of these stress tests. CME, Eurex, LCH, and SGX conduct stress tests daily. In addition, CME, Eurex, LCH, and SGX conduct reverse stress testing to ensure that their default funds are sized appropriately. Reverse stress testing uses plausible market movements that could deplete guaranty funds and cause large losses for top clearing members. 89 These four DCOs analyze the results of stress tests and reverse stress tests to determine if any changes to their financial resources or margin models are necessary. Commission risk surveillance staff also monitors markets in real-time and also performs stress tests against the DCOs' margin models as an additional level of oversight, and may recommend changes to a margin model. 89 For example, CME, Eurex, LCH, and SGX may use scenarios for stress testing and reverse stress testing that capture, among other things, historical price volatilities, shifts in price determinants and yield curves, multiple defaults over various time horizons, and simultaneous pressures in funding and asset markets. CME, Eurex, LCH, and SGX conduct back testing on a daily basis to ensure that the margin models capture market movements for member portfolios. Back testing serves two purposes: it tests margin models to determine whether they are performing as intended and it checks whether the margin models produce margin coverage levels that meet the DCO's established standards. CME conducts daily back testing for each major asset class, and SGX performs daily back testing on a contract level to examine margin models in more detail. LCH may call additional margin from clearing members if back testing demonstrates margin erosion. The back testing process helps CME, Eurex, LCH, and SGX determine whether their clearing members satisfy the required margin coverage levels and liquidation time frame. Before offering a new product for clearing, such as the interest rate swaps subject to this proposal, CME, Eurex, LCH, and SGX take stress tests and back testing results into account to determine whether the clearinghouse has sufficient financial resources to offer new clearing services. In addition, the Commission reviews margin models and default resources to ensure that the DCOs can risk manage their portfolio of products offered for clearing. The Commission believes that this combination of stress testing and back testing in anticipation of offering new products for clearing provides CME, Eurex, LCH, and SGX with greater certainty that new product offerings will be risk-managed appropriately. The process of stress testing and back testing also gives the DCOs practice incorporating the new product into their models. In addition to the Commission's surveillance and oversight, CME, Eurex, LCH, and SGX continue to monitor and test their margin models over time so that they can operate effectively in stressed and non-stressed market environments. CME, Eurex, LCH, and SGX review and validate their margin models regularly and in the case of CME and SGX, no less than annually. CME and LCH use the following additional measures to risk manage their margin coverage levels for interest rate swaps denominated in various currencies, including: Regularly surveying traders to estimate what it would cost to liquidate positions of different sizes in different currencies and then incorporating those costs into the amount of initial margin that a clearing member is required to post, and tailoring their margin models to account for several attributes specific to various currencies. Finally, aside from margin coverage requirements, CME, Eurex, LCH, and SGX can monitor and manage credit risk exposure by asset class, clearing member, account, or even by individual customers. They manage credit risk by establishing position and concentration limits based on product type or counterparty. The Commission recognizes that these limits reduce potential market risks so that DCOs are better able to withstand stressed market conditions. CME, Eurex, LCH, and SGX monitor exposure concentrations and may require additional margin deposits for clearing members with weak credit scores, with large or concentrated positions, with positions that are illiquid or exhibit correlation with the member itself, and/or where the member has particularly large exposures under stress scenarios. The ability to call for any additional margin, on top of collecting initial and variation margin, to meet the current DCO exposure is another tool that CME, Eurex, LCH, and SGX may use to protect against stressed market conditions. In support of its ability to clear the products subject to this proposal, CME's § 39.5(b) submission cites to its rulebook to demonstrate the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear interest rate swap contracts on terms that are consistent with the material terms and trading conventions on which the contracts are then traded. LCH's submissions state that LCH has the capability and expertise not only to manage the risks inherent in the current book of interest rate swaps cleared, but also to manage the increased volume that a clearing requirement for additional currently clearable products could generate. SGX's submission states that SGD-denominated fixed-to-floating interest rate swaps are cleared under an established rule framework and operational infrastructure that has been accepted by SGX's clearing members. SGX asserted further that it has the appropriate risk management, operations, and technology capabilities in place to ensure that it is able to liquidate positions in these swaps in an orderly manner should a default occur. Similarly, Eurex's submission states that it clears interest rate swaps pursuant to its well-developed rule framework and support infrastructure. Importantly, the Commission notes that CME, Eurex, LCH, and SGX each developed their interest rate swap clearing offerings in conjunction with market participants and in response to the specific needs of the marketplace. In this manner, CME's, Eurex's, LCH's, and SGX's clearing services are designed to be consistent with the material terms and trading conventions of a bilateral, uncleared market. When assessing whether CME, Eurex, LCH, and SGX can clear the swaps subject to this proposed clearing requirement determination safely during times of market stress, the Commission reviewed the public disclosures published by CME, Eurex, LCH, and SGX. In addition, the Commission reviewed the risk management practices used by these DCOs, and the Commission has determined that the application of such practices to the products subject to this proposed clearing requirement determination should ensure that the products can be cleared safely during times of market stress. Therefore, the Commission is proposing this clearing requirement determination. Request for Comment The Commission requests comments concerning all aspects of this factor, including whether commenters agree that CME, Eurex, LCH, and SGX can satisfy the factor's requirements. In particular, the Commission seeks comment regarding whether CME, Eurex, LCH, and SGX have the ability to clear the swaps subject to this proposed clearing requirement during times of market stress. c. Factor (III)—Effect on the mitigation of systemic risk. Section 2(h)(2)(D)(ii)(III) of the CEA requires the Commission to take into account the effect of the clearing requirement on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract. The Commission believes that the market for the swaps covered by this proposed determination is significant and that mitigating counterparty risk through clearing likely would reduce systemic risk in that market generally. Data collected by SDRs demonstrates that Commission-registered SDs are counterparties to an overwhelming majority of swaps reported to the Commission. Because only SDs with a significant volume of swaps activity are required to register with the Commission, 90 by expanding the swap clearing requirement, a greater percentage of an SD's swap activity will be centrally cleared and risk managed. For example, central clearing reduces the interconnectedness of the swap positions of SDs, and other swap market participants, because the DCO, an independent third party that takes no market risk, guarantees the collateralization of swap counterparties' exposures. Mitigating counterparty credit risk for SDs with systemically important swap positions through clearing likely would reduce systemic risk in the swap market and the financial system as a whole. 91 90 See definition of SD, codified in Commission regulation 1.3(ggg). 91 In its § 39.5(b) submission, SGX asserts that central clearing reduces counterparty credit risk because the central counterparty interposes itself between the initial buyer and seller and because clearing creates efficiencies through the consolidation of collateral management. In addition to managing counterparty credit risk, centrally clearing the swaps covered by this proposal through a DCO will reduce systemic risk through the following means: Providing counterparties with daily mark-to-market valuations and exchange of variation margin pursuant to a risk management framework; requiring posting of initial margin to cover potential future exposures in the event of a default; offering multilateral netting to substantially reduce the number and notional amount of outstanding bilateral positions; reducing swap counterparties' operational burden by consolidating collateral management and cash flows; eliminating the need for novations or tear-ups because clearing members may offset opposing positions; and increasing transparency. The Commission recognizes that the recently issued margin requirements for uncleared swaps for SDs and MSPs will require some market participants to post and collect margin for those swaps not subject to the Commission's clearing requirement. 92 This margin requirement was not finalized at the time the Commission issued the First Clearing Requirement Determination. As a result, the Commission considered the clearing requirement in light of existing market practice. Going forward, the requirement to margin uncleared swaps in certain instances will mitigate the accumulation of risk between counterparties in a manner similar to that of central clearing. However, the Commission believes that central clearing, including required clearing such as that proposed herein, offers greater risk mitigation than bilateral margining for swaps that are sufficiently standardized and meet the Commission's other requirements for suitability. First, absent any applicable exception or exemption, 93 this clearing requirement would apply to all transactions in the swaps covered by this proposal, whereas the uncleared margin requirements apply only to swaps executed by SDs, MSPs, and certain “financial end-users.” 94 Second, this clearing requirement would require all swap counterparties to post initial margin with a DCO, whereas under the uncleared swap margin requirements, for certain swaps, specifically those between an SD or MSP and a financial end-user, initial margin is required to be posted and collected only if the financial end-user (together with its affiliates) has over $8 billion in gross notional exposures for uncleared swaps. 95 Third, swaps transacted through a DCO are secured by the DCO's guaranty fund and other available financial resources, which are intended to cover extraordinary losses that would not be covered by initial margin (“tail risk”), whereas swaps subject to the uncleared margin requirements are not secured by a guaranty fund or other financial resources available to the DCO but covered by unencumbered assets of the counterparty. 92 Margin Requirements for Uncleared Swaps for SDs and MSPs (final rule), 81 FR 636 (Jan. 6, 2016) (codified in subpart E of part 23 of the Commission's regulations). 93 The exception and exemptions to the clearing requirement are codified in subpart C to part 50 of the Commission's regulations. 94 Regulations 23.152 and 23.153. 95 Regulation 23.152. In their § 39.5(b) submissions, CME, Eurex, and LCH submit that subjecting interest rate swaps to central clearing helps mitigate systemic risk. According to LCH, if all clearable swaps are required to be cleared, then from a systemic risk perspective there will be a less disparate marketplace. CME believes that the 2008 financial crisis demonstrated the potential for systemic risk arising from the interconnectedness of over-the-counter (OTC) derivatives market participants and believes that centralized clearing will reduce systemic risk. While a clearing requirement removes a large portion of the interconnectedness of current OTC markets that leads to systemic risk, the Commission notes that central clearing, by its very nature, concentrates risk in a handful of entities. Similarly, SGX noted that the risk reducing and other benefits of central clearing must be weighed against the concentration of risk in a few clearinghouses. However, the Commission observes that central clearing was developed and designed to handle such concentration of risk. Moreover, as discussed at length above, the Commission's review and risk surveillance programs monitor and attempt to mitigate potential risks that can arise in derivatives clearing activities for the DCO, its members, and other entities using the DCO's services. Part of a DCO's risk management framework includes procedures for responding in stressed circumstances, such as a clearing member's default on its obligations. As discussed below, each of CME, Eurex, LCH, and SGX has a procedure for closing out and/or transferring a defaulting clearing member's positions and collateral. 96 Transferring customer positions to solvent clearing members in the event of a default is critical to reducing systemic risk. DCOs are designed to withstand defaulting positions and to prevent a defaulting clearing member's loss from spreading further and triggering additional defaults. If the introduction of this clearing requirement for interest rate swaps increases the number of clearing members and market participants in the swap market, then DCOs may find it easier to transfer positions from defaulting clearing members if there is a larger pool of potential clearing members to receive the positions. If this were to occur, then the Commission's interest rate swap clearing requirement proposal would reduce systemic risk by increasing the number of clearing members and market participants in these swaps, which is expected to provide DCOs with additional recipients for defaulting clearing members' positions in the event of a default. 96 For further discussion of treatment of customer and swap counterparty positions, funds and property in the event of a the insolvency of a DCO or one or more of its clearing members, please see Factor (V)—Legal certainty in the event of insolvency. See section II.B.iii.e. Each DCO has experience risk managing interest rate swaps, and the Commission has determined that each of CME, Eurex, LCH, and SGX has the necessary resources available to clear the swaps that are the subject of its submission. Accordingly, the Commission believes that CME, Eurex, LCH, and SGX would be able to manage the risk posed by clearing the additional swaps that would be required to be cleared by virtue of this expanded clearing requirement. In addition, the Commission believes that the central clearing of the interest rate swaps that are the subject of this proposal would serve to mitigate counterparty credit risk, and might increase the number of clearing members and market participants in these swaps, thereby potentially reducing systemic risk. Having taken into account the likely effect on the mitigation of systemic risk, the Commission is proposing this clearing requirement. Request for Comment The Commission requests comments concerning the proposed clearing requirement's effect on reducing systemic risk. Would the proposed clearing requirement increase the risk to CME, Eurex, LCH, SGX, or any other entity? If so, please explain why. The Commission also requests comment on whether CME, Eurex, LCH, and SGX are each capable of handling any increased risk that would result from the proposed clearing requirement, including in stressed market conditions. d. Factor (IV)—Effect on competition. Section 2(h)(2)(D)(ii)(IV) of the CEA requires the Commission to take into account the effect on competition, including appropriate fees and charges applied to clearing. As discussed above, of particular concern to the Commission is whether this proposed determination would harm competition by creating, enhancing, or entrenching market power in an affected product or service market, or facilitating the exercise of market power. Market power is viewed as the ability to raise price, including clearing fees and charges, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives. The Commission has identified one putative service market as potentially affected by this proposed clearing determination: A DCO service market encompassing those clearinghouses that currently clear the interest rate swaps subject to this proposal, i.e., CME, Eurex, LCH, and SGX. Without defining the precise contours of this market at this time, the Commission recognizes that, depending on the interplay of several factors, this proposed clearing requirement potentially could impact competition within the affected market. Of particular importance to whether any impact is, overall, positive or negative, is: (1) Whether the demand for these clearing services and swaps is sufficiently elastic that a small but significant increase above competitive levels would prove unprofitable because users of the interest rate swap products and DCO clearing services would substitute other clearing services co-existing in the same market(s); and (2) the potential for new entry into this market. The availability of substitute clearing services to compete with those encompassed by this proposed determination, and the likelihood of timely, sufficient new entry in the event prices do increase above competitive levels, each operate independently to constrain anticompetitive behavior. Any competitive import likely would stem from the fact that the proposed determination would remove the alternative of not clearing for interest rate swaps subject to this proposal. The proposed determination would not specify who may or may not compete to provide clearing services for the interest rate swaps subject to this proposal (as well as those not required to be cleared). Removing the uncleared option through this proposed rulemaking is not determinative of negative competitive impact. Other factors—including the availability of other substitutes within the market or potential for new entry into the market—may constrain market power. The Commission does not foresee that the proposed determination constructs barriers that would deter or impede new entry into a clearing services market. 97 Indeed, there is some basis to expect that the determination could foster an environment conducive to new entry. For example, the proposed clearing determinations, and the prospect that more may follow, is likely to reinforce, if not encourage, growth in demand for clearing services. Demand growth, in turn, can enhance the sales opportunity, a condition hospitable to new entry. 98 97 That said, the Commission recognizes that (1) to the extent the clearing services market for the interest rate swaps identified in this proposal, after foreclosing uncleared swaps, would be limited to a concentrated few participants with highly aligned incentives, and (2) the clearing services market is insulated from new competitive entry through barriers— e.g., high sunk capital cost requirements; high switching costs to transition from embedded incumbents; and access restrictions—the proposed determination could have a negative competitive impact by increasing market concentration. 98 See, e.g., U.S. Dep't. of Justice & Fed. Trade Comm'n., Horizontal Merger Guidelines (2010) section 9.2 (entry likely if it would be profitable which is in part a function of “the output level the entrant is likely to obtain”). In addition, the Commission notes that there are clearing organizations that clear the products subject to the determination proposed today that are not Commission-registered DCOs: (1) OTC Clearing Hong Kong Ltd., which the Commission has exempted from DCO registration and clears HKD-denominated interest rate swaps; (2) ASX Clear (Futures) Pty Ltd. (Australia), which the Commission has also exempted from DCO registration and clears AUD-denominated interest rate swaps; and (3) Asigna (Mexico), which clears MXN-denominated interest rate swaps. Request for Comment The Commission requests comment on the extent to which: (1) Entry barriers currently do or do not exist with respect to a clearing services market for the interest rate swaps subject to this proposal; (2) the proposed determinations may lessen or increase these barriers; and (3) the proposed determinations otherwise may encourage, discourage, facilitate, and/or dampen new entry into the market. In addition to what is noted above, the Commission requests comment, and quantifiable data, on whether the required clearing of any or all of these swaps will create conditions that create, increase, or facilitate an exercise of: (1) Clearing services market power in CME, Eurex, LCH, SGX, and/or any other clearing service market participant, including conditions that would dampen competition for clearing services and/or increase the cost of clearing services; and/or (2) market power in any product markets for interest rate swaps, including conditions that would dampen competition for these product markets and/or increase the cost of interest rate swaps identified in this proposal. The Commission seeks comment, and quantifiable data, on the likely cost increases associated with clearing, particularly those fees and charges imposed by DCOs, and the effects of such increases on counterparties currently participating in the market. The Commission also seeks comment regarding the effect of competition on DCO risk management. The Commission also welcomes comment on any other aspect of this factor. e. Factor (V)—Legal certainty in the event of insolvency. Section 2(h)(2)(D)(ii)(V) of the CEA requires the Commission to take into account the existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property. The Commission is proposing this clearing requirement based on its view that there is reasonable legal certainty with regard to the treatment of customer and swap counterparty positions, funds, and property in connection with cleared swaps, namely the fixed-to-floating interest rate swaps, basis swap, OIS, and FRAs subject to this proposal, in the event of the insolvency of the relevant DCO (CME, LCH, or SGX) or one or more of the DCO's clearing members. 99 99 The Commission is not discussing Eurex in terms of this factor because Eurex's DCO registration order does not currently permit Eurex to clear for customers. See Eurex DCO registration order, available at: http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/orgdcoeurexclrorder212016.pdf. The Commission concludes that, in the case of a clearing member insolvency at CME, where the clearing member is the subject of a proceeding under the U.S. Bankruptcy Code, subchapter IV of Chapter 7 of the U.S. Bankruptcy Code (11 U.S.C. 761-767) and parts 22 and 190 of the Commission's regulations would govern the treatment of customer positions. 100 Pursuant to section 4d(f) of the CEA, a clearing member accepting funds from a customer to margin a cleared swap must be a registered FCM. Pursuant to 11 U.S.C. 761-767 and part 190 of the Commission's regulations, the customer's interest rate swap positions, carried by the insolvent FCM, would be deemed “commodity contracts.” 101 As a result, neither a clearing member's bankruptcy nor any order of a bankruptcy court could prevent CME from closing out/liquidating such positions. However, customers of clearing members would have priority over all other claimants with respect to customer funds that had been held by the defaulting clearing member to margin swaps, such as the interest rate swaps subject to this proposal. 102 Thus, customer claims would have priority over proprietary claims and general creditor claims. Customer funds would be distributed to swap customers, including interest rate swap customers, in accordance with Commission regulations and section 766(h) of the Bankruptcy Code. Moreover, the Bankruptcy Code and the Commission's rules thereunder (in particular 11 U.S.C. 764(b) and 17 CFR 190.06) permit the transfer of customer positions and collateral to solvent clearing members. 100 The Commission observes that a FCM or DCO also may be subject to resolution under Title II of the Dodd-Frank Act to the extent it would qualify as covered financial company (as defined in section 201(a)(8) of the Dodd-Frank Act). Under Title II, different rules would apply to the resolution of an FCM or DCO. Discussion in this section relating to what [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-14035. Public record. Not legal advice.