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CFTC STAFF TECHNICAL ASSISTANCE RE. HOUSE FINANCIAL SERVICES DISCUSSION DRAFT OF OTC DERIVATIVES REFORM BILL

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ISSUE #1: AMENDMENTS TO CLARIFY PERMISSIBILITY OF VOICE BROKERAGE (AND TO ADDRESS AGRICULTURAL SWAPS)

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[Explanation: The amendments below provide that where no exchange or ASEF lists a cleared swap for trading, swaps in most commodities may be traded bilaterally, except for cleared swaps in agricultural commodities which may only be traded bilaterally to the extent permitted - and subject to any conditions imposed - by the CFTC. These amendments also permit swaps (such as voice brokered swaps) to be traded on or through the facilities ofan exchange or ASEF pursuant to rulemaking, which is a concept drawn from establishedpractices in the futures industry with respect to transactions that, for various reasons, are executed off-exchange but are reported, recorded, or cleared through the central marketplace. All references are to the Committee's Discussion Draft.]

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On page 27, strike line 14 through page 29, line 10.

On page 29, line 11, strike "(8)" and insert "(7)".

On page 29, after line 18, insert the following:

"(k) EXECUTION TRANSPARENCY.-

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"(1) REQUIREMENT.-A swap that is subject to the clearing requirement of subsection 0)(1) shall be traded on or through a board of trade designated as a contract
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market under section 5, or on or through an alternative swap execution facility registered under section 5h, that lists the swap for trading. "(2) EXCEPTIONs.-The requirement of paragraph (1) shall not apply to a swap if no designated contract market or alternative swap execution facility lists the swap for trading. "(3) AGRICULTURAL SWAPs.-No person shall offer to enter into, enter into or confirm the execution of, any swap in an agricultural commodity that is subject to paragraph (2) except pursuant to a rule or regulation of the Commission allowing the swap under such terms and conditions as the Commission shall prescribe.".

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On page 73, strike lines 11-13 and insert the following:

"(b) REQUIREMENTS FOR TRADING."( 1) An alternative swap execution facility that is registered under subsection (a) may list for trading any swap. "(2) RULES FOR TRADING THROUGH THE FACILITY.-Not later than 180 days after the date of enactment of the Over-the-Counter Derivatives Markets Act of2009, the Commission shall adopt rules to allow a swap to be traded through the facilities of a designated contract market or an alternative swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a swap, notwithstanding section 2(k), if the swap is reported, recorded, or confirmed in accordance with the rules of the designated contract market or alternative swap execution facility." .

CFTC-CREW-0667

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On page 135, strike line 7 through page 137, line 2, and insert the following:

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"(a) REQUIREMENT.-A security-based swap that is subject to the clearing requirement of section 3B(a)(I) shall be traded on or through an exchange, or on or through an alternative swap execution facility registered under section 3B, that lists the security-based swap for trading. "(b) EXCEPTIONs.-The requirement of subsection (a) does not apply to a security-based swap if no exchange or alternative swap execution facility lists the security-based swap for trading. " .

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On page 137, strike lines 19-21 and insert the following:

"(b) REQUIREMENTS FOR TRADING."(1) IN GENERAL.-An alternative swap execution facility that is registered under subsection (a) may list for trading any security-based swap. "(2) RULES FOR TRADING THROUGH THE FACILITY.-Not later than 180 days after the date of enactment of the Over-the-Counter Derivatives Markets Act of2009, the Commission shall adopt rules to allow a security-based swap to be traded through the facilities of an exchange or an alternative swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a security-based swap, notwithstanding section 5A, if the security-based swap is reported, recorded, or confirmed in accordance with the rules of the exchange or alternative swap execution facility." .

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ISSUE #2: DEFINITION OF "MAJOR SWAP PARTICIPANT"

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On page 12, strike line 17 through page 14, line 17 and insert the following: "(40) MAJOR SWAPPARTICIPANT.-

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"(A) The term 'major swap participant' means any person that is not a swap dealer

"(i) that maintains a substantial net position in outstanding swaps, excluding positions held primarily for hedging commercial risk; or "(ii) whose failure to perform under the terms of a swap would have a material adverse effect on the capital of a counterparty to the swap. "(B) The Commission and the Securities and Exchange Commission shall jointly implement this definition by rule or regulation in a manner that is prudent for the effective monitoring, management and oversight of the financial system. In the event the agencies are unable to agree upon a rule or regulation within 180 days of the enactment of the Over-the-Counter Derivatives Markets Act of2009, the Secretary of the Treasury shall implement this definition by rule or regulation, which shall be binding on and adopted by such agencies.". (11) by adding after paragraph (40) the following: "(41) MAJOR SECURITY-BASED SWAPPARTICIPANT.-

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"(A) The term 'major security-based swap participant' means any person that is not a swap dealer and-

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"(i) that maintains a substantial net position in outstanding security-based swaps, excluding positions held primarily for hedging commercial risk; or "(ii) whose failure to perform under the terms of a security-based swap would have a material adverse effect on the capital of a counterparty to the security-based swap. "(B) The Commission and the Commodity Futures Trading Commission shall jointly implement this definition by rule or regulation in a manner that is prudent for the effective monitoring, management and oversight of the financial system. In the event the agencies are unable to agree upon a rule or regulation within 180 days of the enactment of the Over-the-Counter Derivatives Markets Act of2009, the Secretary of the Treasury shall implement this definition by rule or regulation, which shall be binding on and adopted by such agencies.".

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CFTC-CREW-0670

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ISSUE #3: CLEARING REQUIREMENT FOR END-USERS

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PREFERRED APPROACH: AMENDMENT PERMITTING USE OF NON-CASH COLLATERAL AND INDIVIDUALIZED CREDIT ARRANGEMENTS
[Explanation: The following amendments would: i) eliminate the exception from mandatory clearing where one counterparty is not a swap dealer or major swap participant; and ii) provide for the use ofnon-cash collateral and individualized credit arrangements for margin payments by a swap counterparty that is not a swap dealer or major swap participant. Parallel amendments also are includedfor the securities side with respect to security-based swaps. ]

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On page 29, strike lines 11 through 18, and insert the following: "(8) ALTERNATIVE MARGIN ARRANGEMENTS.-With respect to a swap that is subject to the requirements of subsection 0)(1), a swap dealer or major swap participant may accept from a counterparty to the swap that is not a swap dealer or major swap participant margin in forms other than cash, or may provide credit or other financing arrangements to enable such counterparty to meet any margin obligations.".

On page 62, insert after line 7 the following: "(D) ALTERNATIVE MARGIN ARRANGEMENTS.- For a counterparty to a swap that is not a swap dealer or major swap participant, margin requirements for swaps set by the Prudential Regulators, the Commission, and the Securities and Exchange Commission under this subsection shall provide for the use of margin in forms other than cash, or shall permit such counterparty to

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enter into credit and or other financing arrangements with a swap dealer or major swap participant." .

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On page 165, insert after line 16 the following: "(D) ALTERNATIVE MARGIN ARRANGEMENTS.- For a counterparty to a security-based swap that is not a security-based swap dealer or major security-based swap participant, margin requirements for security-based swaps set by the Prudential Regulators, the Commission, and the Securities and Exchange Commission under this subsection shall provide for the use of margin in forms other than cash, or shall permit such counterparty to enter into credit and or other financing arrangements with a security-based swap dealer or major security-based swap participant." .

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ALTERNATIVE APPROACH:

LIMITATION ON END-USER EXCEPTION TO CLEARING REQUIREMENT
On page 29, strike lines 16 through 18 and insert the following: "(B) one of the counterparties to the swap is a governmental entity or nonfinancial institution (or an insurance company that is regulated by a State and a regulated subsidiary or affiliate thereof) that uses swaps in a manner incidental to the entity's or institution's business in order to hedge actual commercial risks.".

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