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2012-18383

2012-18383

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44441
Federal Register
/Vol. 77, No. 146/Monday, July 30, 2012/Rules and Regulations
1
Section 2(h)(7) of the CEA provides anexception to the Clearing Requirement when one of the counterparties to a swap (i) is not a financialentity, (ii) is using the swap to hedge or mitigatecommercial risk, and (iii) notifies the Commissionhow it generally meets its financial obligationsassociated with entering into a non-cleared swap.
2
Under section 2(h)(2)(B)(ii), the Commissionmust consider swaps listed for clearing by a DCOas of the date of enactment of the Dodd-Frank Act.
3
Commission regulations referred to herein arefound at 17 CFR Ch. 1.
4
See
76 FR 58186 (Sept. 20, 2011).
following ways: By mail address to theOffice of Inspector General (OIG),National Aeronautics and SpaceAdministration, 300 E Street SW.,Washington, DC 20546–0001 via theNASA OIG Hotline at 1–800–424–9183,or cyber hotline at
3. Section 1275.101 is amended byrevising paragraphs (a) and (m) to readas follows:
§1275.101Definitions.
(a) Research misconduct meansfabrication, falsification, or plagiarismin proposing, performing, or reviewingresearch, or in reporting researchresults. Research misconduct does notinclude honest error or differences of opinion. Research as used in this partincludes all basic and applied researchas defined in OMB Circular A–11 in allfields of science, engineering, andmathematics, including, but not limitedto, research in space and Earth sciences,economics, education, linguistics,medicine, psychology, social sciences,statistics, and biological and physicalresearch (ground based andmicrogravity), including researchinvolving human subjects or animals.* * * * *(m) NASA Adjudication Official is theNASA Associate Administrator of aMission Directorate, Chief Technologist,or Chief Engineer, depending on theresearch area involved in themisconduct allegation (as described inthe list of NASA research disciplinesand their associated directoratescontained in the Appendix to this part).* * * * *
4. The Appendix to Part 1275 isrevised to read as follows:
Appendix to Part 1275—ResearchMisconduct
NASA Research Disciplines and RespectiveAssociated Directorates
1. Aeronautics Research—AeronauticsResearch Mission Directorate2. Space Science Research—ScienceMission Directorate3. Earth Science Research andApplications—Science Mission Directorate4. Biomedical Research—HumanExploration and Operations MissionDirectorate5. Fundamental Biology—HumanExploration and Operations MissionDirectorate6. Fundamental Physics—HumanExploration and Operations MissionDirectorate7. Research for Exploration Systems notcovered by the disciplines above—HumanExploration and Operations MissionDirectorate8. Research for the International SpaceStation not covered by the disciplinesabove—Human Exploration and OperationsMission Directorate9. Other engineering research not covered by disciplines above—NASA Chief Engineer10. Other technology research not covered by disciplines above—NASA Chief Technologist
Charles F. Bolden, Jr.,
Administrator.
[FR Doc. 2012–18435 Filed 7–27–12; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Part 50
RIN 3038–AD60
Swap Transaction Compliance andImplementation Schedule: ClearingRequirement Under Section 2(h) of theCEA
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Final rule.
SUMMARY
:
The Commodity FuturesTrading Commission (Commission orCFTC) is adopting regulations toestablish a schedule to phase incompliance with the clearingrequirement under new section2(h)(1)(A) of the Commodity ExchangeAct (CEA or Act), enacted under TitleVII of the Dodd-Frank Wall StreetReform and Consumer Protection Act(Dodd-Frank Act). The schedule willprovide additional time for compliancewith this requirement. This additionaltime is intended to facilitate thetransition to the new regulatory regimeestablished by the Dodd-Frank Act in anorderly manner that does not undulydisrupt markets and transactions.
DATES
:
The rules will become effectiveSeptember 28, 2012.
FOR FURTHER INFORMATION CONTACT
:
Sarah E. Josephson, Deputy Director,202–418–5684,
Brian O’Keefe, Associate Director, 202–418–5658.
or PeterKals, Attorney-Advisor, 202–418–5466,
,Division of Clearing andRisk, Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. BackgroundII. Comments on the Notices of ProposedRulemakingA. Comment PeriodB. HarmonizationC. Cross-Border and Affiliate TransactionsD. Comprehensive ImplementationScheduleE. Prerequisite RulesF. Definitions1. Active Fund2. Third-Party Subaccount3. Category 1 and Category 2 EntitiesG. Compliance Schedule for the ClearingRequirement4. Application to All Swap Types5. Timing of Implementation SchedulesIII. Cost-Benefit ConsiderationsIV. Related MattersA. Regulatory Flexibility ActB. Paperwork Reduction Act
I. Background
Section 723(a)(3) of the Dodd-FrankAct amended the CEA to provide, undernew section 2(h)(1)(A) of the CEA, thatit shall be unlawful for any person toengage in a swap unless that personsubmits such swap for clearing to aderivatives clearing organization (DCO)that is registered under the CEA or aDCO that is exempt from registrationunder the CEA if the swap is requiredto be cleared (the ClearingRequirement).
1
Section 2(h)(2) chargesthe Commission with the responsibilityfor determining whether a swap isrequired to be cleared (a ClearingRequirement determination), throughone of two avenues: (1) Pursuant to aCommission-initiated review; or (2)pursuant to a submission from a DCO of each swap, or any group, category, type,or class of swaps that the DCO ‘‘plansto accept for clearing.’’
2
TheCommission is proposing its firstClearing Requirement determinationconcurrently with its adoption of thiscompliance schedule rule. Thefinalization of that proposal will triggerthe compliance schedule provided forunder this adopting release.On September 20, 2011, theCommission published proposed§39.5(e)
3
to phase in compliance of theClearing Requirement upon theCommission’s issuance of a ClearingRequirement determination pursuant to§39.5(b) or (c).
4
That notice of proposedrulemaking (NPRM) also included animplementation schedule for therequirement pursuant to amendedsection 2(h)(8)(A), which requires aswap subject to the Clearing
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44442
Federal Register
/Vol. 77, No. 146/Monday, July 30, 2012/Rules and Regulations
5
The Commission will address the proposedcompliance schedules for trading documentationand margining under section 4s of the CEA, 76 FR58176 (Sept. 20, 2011), at the same time that itfinalizes the underlying documentation and marginrules.
6
A Category 1 Entity is defined under §50.25(a)to include a swap dealer; security-based swapdealer; major swap participant; major security- based swap participant; or active fund (also defined by §50.25(a)).
7
A Category 2 Entity is defined under §50.25(a)to include a commodity pool; a private fund asdefined in section 202(a) of the Investment AdvisersAct of 1940 other than an active fund; or a personpredominantly engaged in activities that are in the business of banking, or in activities that arefinancial in nature as defined in section 4(k) of theBank Holding Company Act of 1956, provided that,in each case, the entity is not a Third-PartySubaccount. As proposed, this category containedemployee benefit plans under the EmployeeRetirement Income and Security Act of 1974, butunder the final rule, these plans will not beincluded in Category 2.
See
 below for furtherdiscussion.
8
As proposed, the rule required compliancewithin 90, 180, or 270 days after the effective dateset by the Commission for a Clearing Requirementdetermination. In order to clarify precisely whenthe compliance period will commence, theCommission has modified the rule to indicate thatthe compliance periods begin as of the date of publication of final Clearing Requirementdetermination rules in the
Federal Register
. Fromthis point, market participants have either 90, 180,or 270 days to come into compliance.
Requirement to be executed on adesignated contract market (DCM) orswap execution facility (SEF), unless noSEF or DCM makes the swap availableto trade (the Trade ExecutionRequirement). The Commission ishereby adopting proposed §39.5(e), asnewly designated §50.25, to establish aschedule for compliance only for theClearing Requirement. A separaterulemaking will promulgate the finalimplementation schedule for the TradeExecution Requirement.
5
 The compliance schedule for theClearing Requirement is based on thetype of market participants entering intoa swap subject to the ClearingRequirement. The compliance schedule balances several goals. First, theCommission believes that some marketparticipants, such as certain managedaccounts, referred to under §50.25 as‘‘Third-Party Subaccounts,’’ may requireadditional time to bring their swaps intocompliance with the ClearingRequirement. Pursuant to §39.5(e)(finalized as §50.25), these marketparticipants would be affordedadditional time to clear their swaps sothat they will be able to document newclient clearing arrangements, connect tomarket infrastructure such as DCOs, andprepare themselves and their customersfor the new regulatory requirements.Another goal of the complianceschedule is to have adequaterepresentation of market participantsinvolved at the outset of implementinga new regime for requiring certainswaps to be cleared. The Commission believes that having a cross-section of market participants involved at theoutset of formulating and designing therules and infrastructure under whichthe Clearing Requirement isimplemented will best meet the needs of all market participants.The compliance schedule set forth in§50.25 defines three categories of market participants: Category 1Entities,
6
Category 2 Entities,
7
and allother market participants. As describedin §50.25(b), a swap between twoCategory 1 Entities must comply withthe Clearing Requirement no later than90 days after the publication of theClearing Requirement determination inthe
Federal Register
.
8
A swap betweena Category 2 Entity and a Category 1Entity or another Category 2 Entity mustcomply within 180 days, and all otherswaps must be submitted for clearing nolater than 270 days after the ClearingRequirement determination is publishedin the
Federal Register
. To clarify, theswap is subject to the latest compliancedate for one of the counterparties. Inother words, if a Category 1 Entityenters into a swap with a Category 2Entity, both parties have 180 days tosubmit the swap for clearing. However,the counterparty entitled to the latercompliance date may elect to clear theswap earlier, and in that event, itscounterparty is required to oblige.
II. Comments on the Notices of Proposed Rulemaking
The Commission received 26comments during the six-week publiccomment period following publicationof the NPRM. The Commissionconsidered each of these comments informulating the final regulation,§39.5(e) (finalized as §50.25).
A. Comment Period 
The Commission published the NPRMin the
Federal Register
on September20, 2011, and the public commentperiod closed on November 4, 2011.Financial Services Roundtable (FSR)comments that the public should be ableto comment on an implementationschedule for each swap subject to theClearing Requirement because thecharacteristics of one particular swapmay necessitate a very differentschedule from another.Pursuant to §39.5(b)(5) in the case of swap submissions and §39.5(c)(2) in thecase of Commission-initiated reviews,the public will have an opportunity tocomment on each of the Commission’sproposed Clearing Requirementdeterminations, and to comment onwhether the Commission should employthe compliance schedule for thatdetermination. In this manner, thepublic will have an opportunity tocomment on whether use of thecompliance schedule is appropriate fora given Clearing Requirementdetermination covering particularswaps.
B. Harmonization
The NPRM reflects consultation withthe staff of the Securities and ExchangeCommission (SEC), prudentialregulators, and international regulatoryauthorities. With respect to the latter,the Commission is mindful of the benefits of harmonizing its regulatoryframework with that of its counterpartsin foreign countries. The Commissiontherefore has monitored global advisory,legislative, and regulatory proposals,and has consulted with foreignregulators in developing the finalregulations.Vanguard, the Federal Home LoanBanks (FHLBs), and the InvestmentCompany Institute (ICI) eachrecommend that the Commissioncoordinate the compliance schedule forthe Clearing Requirement, as well asimplementation schedules concerningother Dodd-Frank Act requirements,with the SEC, the prudential regulators,and international regulators to avoidmarket disruption and avoid regulatoryarbitrage. The American Council of LifeInsurers (ACLI) urges the Commission tocoordinate with the SEC andinternational regulators to achievereductions in compliance costs. A jointletter by the Futures IndustryAssociation, the International Swapsand Derivatives Association, and theSecurities Industry and FinancialMarkets Association (FIA/ISDA/SIFMA)urges the Commission to coordinateimplementation schedules with thoseintroduced by the SEC, the NationalFutures Association, self-regulatoryorganizations, and market infrastructureproviders.In addition to the regulatorsreferenced above, the Commission hasconsulted with other U.S. financialregulators including: (1) The Board of Governors of the Federal ReserveSystem; (2) the Office of the Comptrollerof the Currency; and (3) the FederalDeposit Insurance Corporation. Staff from each of these agencies has had theopportunity to provide oral and/orwritten comments to this adoptingrelease, as well as to the proposal.
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44443
Federal Register
/Vol. 77, No. 146/Monday, July 30, 2012/Rules and Regulations
9
See
Cross-Border Application of Certain SwapsProvisions of the Commodity Exchange Act, 77 FR41213 (July 12, 2012).
10
See, e.g.,
Swap Data Recordkeeping andReporting Requirements, 77 FR 2136, 2195–2196(Jan. 13, 2012); Business Conduct Standards forSwap Dealers and Major Swap Participants withCounterparties, 77 FR 9734, 9803 (Feb. 17, 2012);and Derivatives Clearing Organization GeneralProvisions and Core Principles, 76 FR 69334, 69408(Nov. 8, 2011).
11
12
See
Customer Clearing Documentation, Timingof Acceptance for Clearing, and Clearing MemberRisk Management, 77 FR 21278 (April 9, 2012).
C. Cross-Border and AffiliateTransactions
The NPRM did not differentiate between domestic and foreign swapdealers (SDs), major swap participants(MSPs) or their counterparties, and didnot address affiliate transactions.MarkitSERV and the AlternativeInvestment Management Association(AIMA) each comment that the NPRM,as well as other proposals setting forthimplementation schedules forcomplying with Dodd-Frank Actrequirements, should clarify the statusof cross-border transactions. BetterMarkets states that trading relationships between an SD or MSP and its affiliateor an international counterparty shouldnot be treated any differently than anyother trading relationship. FIA/ISDA/SIFMA comments that the Commissionshould publish guidance concerning theextraterritorial application of Title VIIprior to the commencement of anyimplementation schedule.The Commission separately hasissued guidance on the cross-borderapplication of Title VII, including theClearing Requirement.
9
With regard tointer-affiliate transactions, theCommission will be considering thisissue in an upcoming proposal.
D. Comprehensive ImplementationSchedule
This adopting release pertainsexclusively to the implementation of theClearing Requirement.The Coalition for Derivatives End-Users (CDE), a joint letter by the EdisonElectric Institute, the National RuralElectric Cooperative Association, andthe Electric Power Supply Association(Joint Associations); ICI; andMarkitSERV each argue that theCommission should create animplementation plan addressing all of its final Dodd-Frank rules and that theClearing Requirement complianceschedule should be part of thatcomprehensive schedule. CDEcomments further that a comprehensiveschedule is important to end-users,particularly in the areas of recordkeeping and reporting. The JointAssociations also comment that acomprehensive schedule should detailcompliance dates, both specific andmarket-wide, for each registered entityand that the Commission should requestfurther comment on this subject as morefinal rules are published.Vanguard comments that inimplementing Title VII, the Commissionshould focus first on systemic riskissues and then issues relating totransparency and trade practices.Implementation schedules should beorganized by type of participant andasset class. The schedules should alsoallow for voluntary compliance.ACLI argues that the Commission hasnot provided sufficient guidanceconcerning new rules and effectivedates in order for market participants toconduct a prudent review of resourceplanning. ACLI maintains thatcomplying with only some rules createsa risk that documents will have to berenegotiated when other rules arephased in.In this adopting release, theCommission is focused on providingadditional time to market participantsthat may require more time to complywith one of the key elements of theDodd-Frank Act—the ClearingRequirement. The compliance schedulethat is the subject of this adoptingrelease was proposed at the same timeas three other compliance schedules—schedules for the Trade ExecutionRequirement and two importantrequirements under section 4s of theCEA, documentation and margin foruncleared swaps. Each of theseproposed compliance schedulesresponded to particular concerns frommarket participants, especially thosethat are not required to register with theCommission. The Commission also haspublished compliance dates for phasingin implementation in nearly all of itsfinal rules.
10
In addition, theCommission has twice published on itsWeb site general schedules regardingthe sequence and timing for its ownconsideration of final rules.
11
 In response to ACLI, as discussedfurther below, the Commission hasfinalized all the documentationrequirements necessary for compliancewith the Clearing Requirement.
12
Withregard to Vanguard’s comment, theCommission intends to implement theClearing Requirement based on specificclasses of swaps, beginning with thoseasset classes that are currently beingcleared. The Commission believes thatimplementation of the ClearingRequirement will serve to reducesystemic risk by mitigating counterpartycredit risk through the use of themarking-to-market, margining, and riskmutualization provided by centralcounterparties. The adoption of thiscompliance schedule is an importantstep toward implementing thatrequirement. In addition, thecompliance schedule expressly allowsfor voluntary clearing prior to therequired compliance date, and marketparticipants currently are free to clearall swaps offered for clearing by DCOson a voluntary basis.
E. Prerequisite Rules
The preamble to the NPRM stated thatprior to requiring compliance with anyClearing Requirement determination,the Commission must publish thefollowing final rules: Definitions of swap, SD, and MSP; End-UserException to Mandatory Clearing of Swaps; and Protection of Cleared SwapsCustomer Collateral.The FHLBs comment that the rule textof an implementation rule should statethat the compliance schedule will nottake effect until the Commission haspublished applicable final rules. TheFHLBs believe that it is insufficient forthe preamble to make this point.The Joint Associations state that theycannot comment on the adequacy of either the compliance schedule for theClearing Requirement or otherimplementation schedules until variousfinal rules have been published,including the definitions of swap, SD,and MSP. The Joint Associations wantto see how many of their comments tothese rules have been adopted becausethis will affect how long it will taketheir members to comply with Title VIIrequirements. ICI comments that partiescannot prepare for centralized clearinguntil the Commission publishes thefinal rule concerning the definition of swap.Citadel, FHLBs, and FIA/ISDA/SIFMA each recommend that theCommission publish final rules relatedto clearing, such as customer clearingdocumentation, timing of acceptance forclearing, and clearing member riskmanagement, prior to phasing in theClearing Requirement. FHLBs state thatthe prior publication of the CustomerClearing Documentation, Timing of Acceptance for Clearing, and ClearingMember Risk Management rules isimportant so that market participantscan fully appreciate risks and not haveto renegotiate documentation.The Committee on Investment of Employee Benefit Assets (CIEBA)recommends that the Commission notimpose the Clearing Requirement untilfull physical segregation is available formargin of cleared swaps. CIEBA also
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