Vol. 78 Friday, No. 105 May 31, 2013

Part III

Commodity Futures Trading Commission

17 CFR Part 43 Procedures To Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Final Rule

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COMMODITY FUTURES TRADING Off-Facility Swaps and Block Trades— 1. Policy Goals for Masking the Geographic COMMISSION Final Rules Detail for Swaps in the Other A. Criteria for Distinguishing Among Swap Commodity Asset Class 17 CFR Part 43 Categories in Each Asset Class 2. Proposed Amendments to § 43.4 1. Interest Rate and Credit Asset Classes 3. Application of Proposed § 43.4(d)(4)(iii) RIN 3038–AD08 a. Background and Proposed Appendix E to Part 43— b. Interest Rate Swap Categories Geographic Detail for Delivery or Pricing Procedures To Establish Appropriate i. Interest Rate Swap Data Summary Points Minimum Block Sizes for Large ii. Summary of Proposed Rule a. U.S. Delivery or Pricing Points Notional Off-Facility Swaps and Block c. Credit Swap Categories i. Natural Gas and Related Products i. Credit Swap Data Summary ii. Petroleum and Related Products Trades ii. Credit Swap Data Analysis iii. Electricity and Sources 2. Swap Category in the Equity Asset Class iv. All Remaining Other Commodities AGENCY: Commodity Futures Trading 3. Swap Categories in the FX Asset Class b. Non-U.S. Delivery or Pricing Points Commission. 4. Swap Categories in the Other c. Basis Swaps ACTION: Final rule. Commodity Asset Class d. Comments Received and Commission 5. Comments Regarding Swap Categories Determination SUMMARY: The Commodity Futures Across Asset Classes 4. Further Revisions to Part 43 Trading Commission is adopting B. Appropriate Minimum Block Size a. Additional Contracts Added to regulations to implement certain Methodologies for the Initial and Post- Appendix B to Part 43 statutory provisions enacted by Title VII Initial Periods b. Technical Revisions to Part 43 of the Dodd-Frank Wall Street Reform 1. Phase-in of Appropriate Minimum Block IV. Paperwork Reduction Act Sizes A. Background and Consumer Protection Act. 2. Overview of Proposed Approach B. Description of the Collection Specifically, in accordance with section 3. The 67-Percent Notional Amount 1. § 43.6(g)—Notification of Election 727 of the Dodd-Frank Act, the Calculation for Determination of 2. Amendments to § 43.4(d)(4) and 43.4(h) Commission is adopting regulations that Appropriate Minimum Block Sizes V. Cost-Benefit Considerations define the criteria for grouping swaps 4. Data for Determination of Appropriate A. Background into separate swap categories and Minimum Block Sizes in the Post-Initial B. The Statutory Mandate To Consider the establish methodologies for setting Period Costs and Benefits of the Commission’s 5. Methodology for Determining the Action: Section 15(a) of the CEA appropriate minimum block sizes for Appropriate Minimum Block Sizes by C. Rules Establishing Determination each swap category. In addition, the Asset Class Criteria and Methodology (§ 43.6(a)–(f) Commission is adopting further a. Interest Rate and Credit Default Swaps and (h)) measures under the Commission’s b. Equity 1. Rule Summary regulations to prevent the public c. FX a. Rule 43.6(a) Commission Determination disclosure of the identities, business i. Initial Period Methodology b. Rule 43.6(b) Swap Category transactions and market positions of ii. Post-Initial Period Methodology c. Rules 43.6(c)–(f) and (h) Methods for swaps market participants. d. Other Commodity Determining Appropriate Minimum i. Initial Period Methodology Block Sizes DATES: Effective date: July 30, 2013. ii. Post-Initial Period Methodology 2. Overview of Comments Received FOR FURTHER INFORMATION CONTACT: John 6. Special Provisions for the Determination 3. Costs W. Dunfee, Assistant General Counsel, of Appropriate Minimum Block Sizes for a. Direct Costs Office of the General Counsel, 202–418– Certain Types of Swaps b. Indirect Costs a. Swaps With Optionality 4. Benefits 5396, [email protected]; George Pullen, b. Swaps With Composite Reference Prices 5. Alternatives Economist, 202–418–6709, c. Physical Commodity Swaps a. Commission Determination of Minimum [email protected], or Nhan Nguyen, d. Currency Conversion Block Sizes Special Counsel, 202–418–5932, e. Successor Currencies b. Swap Category Alternatives [email protected], Division of Market C. Procedural Provisions c. Block Methodology Alternatives Oversight; Esen Onur, Economist, Office 1. § 43.6(a) Commission Determination 6. CEA Section 15(a) Factors of the Chief Economist, 202–418–6146, 2. § 43.6(f)(4) and (5) Publication and a. Protection of Market Participants and the [email protected]; Commodity Futures Effective Date of Post-Initial Appropriate Public Minimum Block Sizes b. Efficiency, Competitiveness and Trading Commission, Three Lafayette 3. § 43.6(g) Notification of Election Financial Integrity of Markets Center, 1155 21st Street NW., 4. § 43.7 Delegation of Authority c. Price Discovery Washington, DC 20581. 5. § 43.6(h)(6)—Aggregation d. Sound Risk Management Practices SUPPLEMENTARY INFORMATION: 6. § 43.6(i) Eligible Block Trade e. Other Public Interest Considerations Participants D. Cost-Benefit Considerations Relevant to Table of Contents III. Anonymity Protections for the Public the Block Trade/Large Notional Off- Dissemination of Swap Transaction and Facility Swap Election Process (§ 43.6(g)) I. Background Pricing Data 1. Costs Relevant to the Election Process A. The Dodd-Frank Act A. Policy Goals (§ 43.6(g)) B. The Initial Proposal B. Establishing Notional Cap Sizes for a. Incremental, Non-Recurring Expenditure 1. Overview Swap Transaction and Pricing Data To to a Non-Financial End-user, SEF or 2. Public Comments in Response to the Be Publicly Disseminated in Real-Time DCM To Update Existing Technology Initial Proposal 1. Policy Goals for Establishing Notional b. Incremental, Non-Recurring Expenditure C. Issuance of the Real-Time Reporting Cap Sizes to a Non-Financial End-User, SEF or Final Rule 2. Proposed Amendments Related to Cap DCM To Provide Training to Existing D. Further Block Proposal Sizes—§ 43.2 Definitions and § 43.4 Personnel and Update Written Policies 1. Policy Goals Swap Transaction and Pricing Data To and Procedures 2. Summary of Proposed Approach Be Publicly Disseminated in Real-Time c. Incremental, Recurring Expenses to a 3. Overview of Comments Received a. Initial Cap Sizes Non-Financial End-User, DCM or SEF 4. Additional Proposal Regarding b. Post-Initial Cap Sizes and the 75-Percent Associated With Incremental Aggregation of Blocks Notional Amount Calculation Compliance, Maintenance and II. Procedures To Establish Appropriate C. Masking the Geographic Detail of Swaps Operational Support in Connection With Minimum Block Sizes for Large Notional in the Other Commodity Asset Class the Proposed Election Process

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d. Incremental, Non-Recurring Expenditure I. Background a large notional swap transaction (block to an SDR To Update Existing trade) for particular markets and A. The Dodd-Frank Act Technology To Capture and Publicly contracts’’ and ‘‘the appropriate time Disseminate Swap Data for Block Trades On July 21, 2010, President Obama delay for reporting large notional swap and Large Notional Off-Facility Swaps signed the Dodd-Frank Wall Street transactions (block trades) to the 2. Comments Received Reform and Consumer Protection Act public.’’ 6 In promulgating regulations 3. Benefits Relevant to the Election Process (‘‘Dodd-Frank Act’’).1 Title VII of the under section 2(a)(13), section (§ 43.6(g)) Dodd-Frank Act 2 amended the 2(a)(13)(E)(iv) directs the Commission to 4. Alternatives 3 Commodity Exchange Act (‘‘CEA’’) to take into account whether public 5. Application of the Section 15(a) Factors establish a comprehensive new disclosure of swap transaction and to § 43.6(g) regulatory framework for swaps and a. Protection of Market Participants and the pricing data ‘‘will materially reduce security-based swaps. This legislation 7 Public market liquidity.’’ was enacted to reduce risk, increase The second statutory requirement b. Efficiency, Competitiveness and transparency and promote market Financial Integrity relevant to this final rule is found in integrity within the financial system by, c. Price Discovery sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) d. Sound Risk Management Practices inter alia: (1) Providing for the of the CEA. Through these sections, e. Other Public Interest Considerations registration and comprehensive Congress sought to ‘‘ensure that the E. Costs and Benefits Relevant to regulation of swap dealers (‘‘SDs’’) and public reporting of swap transaction and Anonymity Protections (Amendments to major swap participants (‘‘MSPs’’); (2) pricing data [would] not disclose the § 43.4(d)(4) and (h)) imposing mandatory clearing and trade names or identities of the parties to 1. Amendments to § 43.4(d)(4) execution requirements on standardized [swap] transactions.’’ 8 Accordingly, 2. Amendments to § 43.4(h) derivative products; (3) creating robust § 2(a)(13)(E)(i) of the CEA requires the 3. Costs Relevant to the Amendments to recordkeeping and real-time reporting Commission to protect the identities of § 43.4(d)(4) and (h) regimes; and (4) enhancing the counterparties to mandatorily-cleared 4. Benefits Relevant to the Amendments to Commission’s rulemaking and swaps, swaps excepted from the § 43.4 enforcement authorities with respect to, mandatory clearing requirement, and 5. Alternatives among others, all registered entities and voluntarily-cleared swaps. Section 6. Application of the Section 15(a) Factors intermediaries subject to the 2(a)(13)(C)(iii) of the CEA requires the to the Amendments to § 43.4 Commission’s oversight. Commission to prescribe rules that a. Protection of Market Participants and the Section 727 of the Dodd-Frank Act maintain the anonymity of business Public created section 2(a)(13) of the CEA, b. Efficiency, Competitiveness and transactions and market positions of the which authorizes and requires the 9 Financial Integrity Commission to promulgate regulations counterparties to an uncleared swap. c. Price Discovery for the real-time public reporting of In order to carry out the requirements d. Sound Risk Management Practices swap transaction and pricing data.4 of section 2(a)(13), including among e. Other Public Interest Considerations Section 2(a)(13)(A) provides that ‘‘real- other things the two statutory F. Costs and Benefits Relevant to time public reporting’’ means reporting requirements regarding blocks and § 43.6(h)(6)—Aggregation ‘‘data relating to a swap transaction, anonymity described above, the 1. Overview of Comments Received including price and volume, as soon as Commission issued a notice of proposed 2. Costs technologically practicable after the rulemaking on December 7, 2010 (the 3. Benefits time at which the swap transaction has ‘‘Initial Proposal’’). On January 9, 2012, 4. Section 15(a) Factors been executed.’’ 5 Section 2(a)(13)(B) the Commission issued a final rule a. Protection of Market Participants and the regarding Real-Time Public Reporting of Public states that the purpose of section 2(a)(13) is ‘‘to authorize the Commission Swap Transaction Data adopting several b. Efficiency, Competitiveness, and provisions contained in the Initial Financial Integrity of the Futures to make swap transaction and pricing data available to the public in such form Proposal (the ‘‘Real-Time Reporting Markets Final Rule’’). The Real-Time Reporting c. Price Discovery and at such times as the Commission d. Sound Risk Management Practices determines appropriate to enhance price 6 Section 2(a)(13)(E) explicitly refers to the swaps e. Other Public Interest Considerations discovery.’’ described only in sections 2(a)(13)(C)(i) and G. Costs and Benefits Relevant to In general, section 2(a)(13) of the CEA 2(a)(13)(C)(ii) of the CEA (i.e., clearable swaps, § 43.6(i)—Eligible Block Trade Parties directs the Commission to prescribe including swaps that are exempt from clearing). As 1. Overview of Comments Received regulations providing for the public noted in the Commission’s Initial Proposal (as 2. Costs availability of transaction and pricing defined below), its Real-Time Reporting Final Rule (as defined below), and its Further Block Proposal 3. Benefits data for certain swaps. Section 2(a)(13) (as defined below), the Commission, in exercising 4. Section 15(a) Factors places two other statutory requirements its authority under CEA section 2(a)(13)(B) to a. Protection of Market Participants and the on the Commission that are relevant to ‘‘make swap transaction and pricing data available Public this final rule. First, sections to the public in such form and at such times as the Commission determines appropriate to enhance b. Efficiency, Competitiveness, and 2(a)(13)(E)(ii) and (iii) of the CEA Financial Integrity of the Futures price discovery,’’ is authorized to prescribe rules respectively require the Commission to similar to those provisions in section 2(a)(13)(E) to Markets prescribe regulations specifying ‘‘the uncleared swaps described in section 2(a)(13)(C)(iii) c. Price Discovery criteria for determining what constitutes and (iv) of the CEA. d. Sound Risk Management Practices 7 CEA section 2(a)(13)(E)(iv). Section 5h(f)(2)(C) of e. Other Public Interest Considerations the CEA imposes a similar directive upon registered 1 VI. Regulatory Flexibility Act See Public Law 111–203, 124 Stat. 1376 (2010). swap execution facilities (‘‘SEF’’) by requiring that 2 VII. Example of a Post-Initial Appropriate The short title of Title VII of the Dodd-Frank Act they set forth rules for block trades for swap is the ‘‘Wall Street Transparency and execution purposes. Minimum Block Size Determination Accountability Act of 2010.’’ 8 156 Cong. Rec. S5921 (daily ed. July 15, 2010) Using the 67-Percent Notional Amount 3 See 7 U.S.C. 1 et seq. (Statement of Sen. Blanche Lincoln). Calculation 4 See generally CEA section 2(a)(13), 7 U.S.C. 9 This provision does not cover swaps that are VIII. List of Commenters Who Responded to 2(a)(13). ‘‘determined to be required to be cleared but are not the Further Block Proposal 5 CEA section 2(a)(13)(A). cleared.’’ See CEA section 2(a)(13)(C)(iv).

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Final Rule, however, did not adopt most determining the appropriate minimum of information and data relevant to the of the provisions in the Initial Proposal block sizes for large notional off-facility swap. In particular, proposed pertaining to appropriate block sizes swaps and block trades; 13 and (3) a § 43.4(e)(1) in the Initial Proposal and anonymity. Instead, the framework for timely reporting of such provided that an SDR could not publicly Commission issued a further notice of transactions and trades.14 Proposed report swap transaction and pricing data proposed rulemaking regarding § 43.5(g) provided that registered swap in a manner that discloses or otherwise Procedures to Establish Appropriate data repositories (‘‘SDRs’’) would be facilitates the identification of a party to Minimum Block Sizes for Large responsible for calculating the a swap. Proposed § 43.4(e)(2) would Notional Off-Facility Swaps and Block appropriate minimum block size for have placed a requirement on SEFs, Trades on March 15, 2012 (the ‘‘Further each ‘‘swap instrument’’ using the DCMs and reporting parties to provide Block Proposal’’).10 Each of these greater result of the distribution test 15 an SDR with a specific description of issuances is described more fully below. and the multiple test.16 Proposed the underlying asset and tenor of a § 43.2(y) broadly defined ‘‘swap swap. This proposed section also B. The Initial Proposal instrument’’ as ‘‘a grouping of swaps in included a qualification with respect to 1. Overview the same asset class with the same or the reporting of the specific description. similar characteristics.’’17 Proposed In particular, this section provided that On December 7, 2010, the § 43.5(h) provided that for any swap ‘‘[the] description must be general Commission published in the Federal listed on a swap execution facility enough to provide anonymity but Register a notice of proposed (‘‘SEF’’) or designated contract market specific enough to provide for a rulemaking to implement section (‘‘DCM’’), the SEF or DCM must set the meaningful understanding of the 2(a)(13) of the CEA, which included appropriate minimum block trade size economic characteristics of the specific provisions pursuant to sections at a level at or above that established by swap.’’ 19 This qualification would have 11 2(a)(13)(E)(i)–(iv) and 2(a)(13)(C)(iii). an SDR for the relevant swap applied to all swaps. In this Initial Proposal, the Commission instrument.18 In the Initial Proposal, the set out proposed provisions to satisfy, With respect to anonymity, the Initial Commission acknowledged that swaps among other things, the statutory Proposal set forth several provisions to that are executed on or pursuant to the requirements discussed above regarding address issues pertinent to protecting rules of a SEF or DCM do not raise the minimum block sizes and anonymity the identities of parties to a swap. same level of concerns in protecting the protections. With respect to the first Essentially, these proposed provisions identities, business transactions or statutory requirement, the Commission sought to protect the identities of parties market positions of swap counterparties proposed: (1) Definitions for the terms to a swap through the limited disclosure since these swaps generally lack ‘‘large notional off-facility swap’’ and customization.20 As a result, the 12 ‘‘block trade’’; (2) a method for including the appropriate time delay requirements Commission provided that SEFs and set forth in § 43.5.’’ See § 43.2, 77 FR 1243. DCMs should tailor the description 10 See Procedures to Establish Appropriate 13 See proposed § 43.5, 75 FR 76174–76. required by proposed § 43.2(e) Minimum Block Sizes for Large Notional Off- 14 Proposed § 43.5(k)(1) in the Initial Proposal Facility Swaps and Block Trades, 77 FR 15,460, provided that the time delay for the public depending on the asset class and place Mar. 15, 2012. dissemination of data for a block trade or large of execution of each swap. 11 See Real-Time Public Reporting of Swap notional off-facility swap shall commence at the In contrast, the Commission Transaction Data, 75 FR 76139, Dec. 7, 2010, as time of execution of such trade or swap. See 75 FR acknowledged that the public corrected in Real-Time Public Reporting of Swap 76176. Proposed § 43.5(k)(2) provided that the time dissemination of a description of the Transaction Data Correction, 75 FR 76930, Dec. 10, delay for standardized block trades and large 2010. Interested persons are directed to the Initial notional off-facility swaps (i.e., swaps that fall specific underlying asset and tenor of Proposal for a full discussion of each of the under CEA Section 2(a)(13)(C)(i) and (iv)) would be swaps that are not executed on or proposed part 43 rules. 15 minutes from the time of execution. Id. The pursuant to the rules of a SEF or DCM 12 The Initial Proposal defined the term ‘‘large Initial Proposal did not provide specific time delays for large notional off-facility swaps (i.e., swaps that (i.e., swaps that are executed bilaterally) notional swap.’’ See proposed § 43.2(l), 75 FR may result in the unintended disclosure 76171. The Real-Time Reporting Final Rule fall under Section 2(a)(13)(C)(ii) and (iii)). Instead, finalized the term as ‘‘large notional off-facility proposed § 43.5(k)(3) provided that the time delay of the identities, business transactions swap,’’ to denote, in relevant part, that the swap is for such swaps shall be reported subject to a time or market positions of swap not executed pursuant to a SEF or designated delay that may be prescribed by the Commission. Id. counterparties, particularly for swaps in contract market’s (‘‘DCM’’) rules and procedures. the other commodity asset class.21 To See § 43.2, 77 FR 1182, 1244, Jan. 9, 2012. The Real-Time Reporting Final Rule established Specifically, the Real-Time Reporting Final Rule time delays for the public dissemination of block address this issue, the Commission defined the term as an ‘‘off-facility swap that has trades and large notional off-facility swaps in § 43.5. proposed in § 43.4(e)(2) that an SDR a notional or principal amount at or above the See 77 FR 1247–49. publicly disseminate a more general appropriate minimum block size applicable to such 15 The distribution test, described in proposed § 43.5(g)(1)(i) of the Initial Proposal, required that description of the specific underlying publicly reportable swap transaction and is not a 22 block trade as defined in § 43.2 of the Commission’s an SDR take the rounded transaction sizes of all asset and tenor. In the Initial Proposal, regulations.’’ Id. Throughout this final rulemaking, trades executed over a period of time for a the Commission provided a the Commission uses the term ‘‘large notional off- particular swap instrument and create a distribution hypothetical example of how an SDR facility swap’’ as adopted in the Real-Time of those trades. An SDR would then determine the minimum threshold amount as an amount that is could mask or otherwise protect the Reporting Final Rule. underlying asset from public disclosure The Initial Proposal’s definition of ‘‘block trade’’ greater than 95 percent of the notional or principal was similar to the final definition in the Real-Time transaction sizes for the swap instrument for an Reporting Final Rule. See proposed § 43.2(f), 75 FR applicable period of time. See 75 FR 76175. 19 See 75 FR 76174. 76171. The Real-Time Reporting Final Rule defines 16 The multiple test, described in proposed 20 See 75 FR 76151 (‘‘In contrast, for those swaps the term ‘‘block trade’’ as a publicly reportable § 43.5(g)(1)(ii) in the Initial Proposal, required that that are executed on a swap market, the swap transaction that: ‘‘(1) [i]nvolves a swap that an SDR multiply the block trade multiple by the Commission believes that since such contracts will is listed on a SEF or DCM; (2) [o]ccurs away from ‘‘social size’’ of a particular swap instrument. be listed on a particular trading platform or facility, the [SEF’s or DCM’s] trading system or platform and Proposed § 43.2(x) defined ‘‘social size’’ as the it will be unlikely that a party to a swap could be is executed pursuant to the [SEF’s or DCM’s] rules greatest of the mean, median or mode transaction inferred based on the reporting of the underlying and procedures; (3) has a notional or principal size for a particular swap instrument. The asset and therefore parties to swaps executed on amount at or above the appropriate minimum block Commission proposed a block trade multiple of swap markets must report the specific underlying applicable to such swap; and (4) [i]s reported five. Id. assets and tenor of the swap.’’). subject to the rules and procedures of the [SEF or 17 See proposed § 43.2(y), 75 FR 76172. 21 See 75 FR 76150–51. DCM] and the rules described in [part 43], 18 See 75 FR 76176. 22 See 75 FR 76174.

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in a manner too specific so as to divulge comments submitted regarding the Public Roundtable and in comment the identity of a swap counterparty. The Initial Proposal’s provisions regarding letters submitted in support thereof, Commission, however, did not set forth appropriate minimum block sizes and interested parties recommended that the a specific manner in which SDRs should anonymity protections are summarized Commission adopt a phased-in carry out this requirement.23 in detail in the Further Block approach with respect to establishing To further protect the identities, Proposal.28 block trade rules. business transactions or market Following the close of the comment On January 9, 2012, the Commission positions of swap counterparties, period for the Initial Proposal, the issued the Real-Time Reporting Final proposed § 43.4(i) of the Initial Proposal Commission took several actions in Rule, finalizing several provisions that included a rounding convention for all consideration of the comments received were proposed in the Initial Proposal.34 swaps, which included a ‘‘notional cap’’ regarding the proposed methodology to Those provisions implement, among provision. The proposed notional cap determine appropriate minimum block other things: (1) Several definitions provision provided, for example, that if sizes, the proposed anonymity proposed in the Initial Proposal relevant the notional size of a swap is greater protections and the proposed to this final rule, including ‘‘asset than $250 million, then an SDR only implementation approach.29 A class’’; 35 (2) the scope of part 43; (3) the would publicly disseminate a notation discussion of the Commission’s actions reporting responsibilities of the parties of ‘‘$250+’’ rather than the actual and their impact on the Further Block to each swap; (4) the requirement that notional size of the swap.24 Proposal is set out immediately below. SDRs publicly disseminate swap The Commission issued the Initial C. Issuance of the Real-Time Reporting transaction and pricing data; (5) the data Proposal for public comment for a Final Rule fields that SDRs will publicly period of 60 days, but later reopened the disseminate; (6) the time-stamping and comment period for an additional 45 In consideration of the public recordkeeping requirements of SDRs, comments submitted in response to the days.25 After issuing the Initial SEFs, DCMs and the ‘‘reporting party’’ Initial Proposal, the Commission Proposal, the Commission received 105 to each swap; 36 (7) the interim time obtained and analyzed swap data in comment letters and held 40 meetings delays for public dissemination and the order to better understand the trading with interested parties regarding the time delays for public dissemination of 26 activity of swaps in certain asset large notional off-facility swaps and proposed provisions. 30 classes. The Commission also block trades; and (8) interim notional 2. Public Comments in Response to the reviewed additional information, cap sizes for all swaps that are publicly Initial Proposal including a study pertaining to the disseminated.37 Based on commenters’ The commenters to the Initial mandatory trade execution requirement recommendations, however, the Proposal provided general and specific and post-trade transparency concerns Commission did not adopt proposed that arose out of two of the § 43.5 and stated its intent to re-propose comments relating to the proposed 31 provisions regarding the determination Commission’s proposed rulemakings, a calculation methodology for of appropriate minimum block sizes and as well as a report issued by two appropriate minimum block sizes based industry trade associations on block on additional data and analysis in a anonymity protections for the identities, 32 business transactions and market trade reporting in the swaps market. In separate rulemaking.38 positions of swap counterparties.27 The addition, the Commission and the Securities and Exchange Commission D. Further Block Proposal 23 See 75 FR 76150. The Initial Proposal further (‘‘SEC’’) held a two-day public On March 15, 2012, the Commission provided that the requirement in proposed roundtable on Dodd-Frank Act issued for comment the Further Block § 43.4(e)(2) was separate from the requirement that implementation on May 2–3, 2011 Proposal.39 Based on the public a reporting party report swap data to an SDR (‘‘Public Roundtable’’).33 During the pursuant to section 2(a)(13)(G) of the CEA. See 75 comments received in response to the FR 76174. Initial Proposal, and in order to 24 See 75 FR 76152. are available through the Commission’s Web site at: successfully implement the real-time http://comments.cftc.gov/PublicComments/ 25 The initial comment period for the Initial CommentList.aspx?id=919. public reporting regulatory framework Proposal closed on February 7, 2011. The comment 28 periods for most proposed rulemakings See Further Block Proposal at 77 FR 15463–66. 29 Act, 76 FR 23211, Apr. 26, 2011. A copy of the implementing the Dodd-Frank Act—including the Commission staff also consulted with the staffs transcript is accessible at: http://www.cftc.gov/ucm/ proposed part 43 rules—subsequently were of several other federal financial regulators in groups/public/@newsroom/documents/file/csjac_ reopened for the period of April 27 through June connection with the issuance of the Further Block transcript050211.pdf. 2, 2011. Proposal. 30 34 See 77 FR 1182. 26 The interested parties who either submitted A detailed discussion of Commission staff’s 35 comment letters or met with Commission staff review and analysis process is set out below in The Real-Time Reporting Final Rule includes included end-users, potential swap dealers, asset sections II.A.1.b.i. and c.i. final definitions for the following terms: (1) block managers, industry groups/associations, potential 31 See ISDA, Costs and Benefits of Mandatory trade; (2) large notional off-facility swap; (3) SDRs, a potential SEF, multiple law firms on behalf Electronic Execution Requirements for Interest Rate appropriate minimum block size; and (4) asset of their clients and a DCM. Of the 105 comment Products, 24 (ISDA Discussion Paper No. 2, Nov. class. As noted above, the Real-Time Reporting letters submitted in response to the Initial Proposal, 2011), available at http://www2.isda.org/ Final Rule did not define the term swap instrument. 42 letters focused on various issues relating to block attachment/Mzc0NA==/ISDA%20Mandatory%20 This final rule adopts a new term, swap category, trades and large notional off-facility swaps. Of the Electronic%20Execution%20 which groups swaps for the purpose of determining 40 meetings, five meetings focused on various Discussion%20Paper.pdf. This paper cited the whether a swap transaction qualifies as a large issues relating to block trades and large notional off- Commission’s notice of proposed rulemaking with notional off-facility swap or block trade. See note facility swaps. All comment letters received in respect to SEFs (Core Principles and Other 17 supra. response to the Initial Proposal may be found on the Requirements for Swap Execution Facilities, 76 FR 36 See § 43.2 of the Commission’s regulations. 77 Commission’s Web site at: http:// 1214, 1220, Jan. 7, 2011) and the Initial Proposal. FR 1244. The Real-Time Reporting Final Rule comments.cftc.gov/PublicComments/ 32 See ISDA and SIFMA, Block trade reporting finalized the definition of ‘‘reporting party’’ as a CommentList.aspx?id=919. over-the-counter derivatives markets, 6 (Jan. 2011), ‘‘party to a swap with the duty to report a publicly 27 A list of the full names and abbreviations of available at http://www.isda.org/speeches/pdf/ reportable swap transaction in accordance with this commenters who responded to the Initial Proposal Block-Trade-Reporting.pdf. part [43] and section 2(a)(13)(F) of the [CEA].’’ 77 and who the Commission refers to in the Further 33 See Joint Public Roundtable on Issues Related FR 1244. Block Proposal is included in section VI below. As to the Schedule for Implementing Final Rules for 37 See 77 FR 1244. noted above, letters from these commenters and Swaps and Security-Based Swaps Under the Dodd- 38 See 77 FR 1185. others submitted in response to the Initial Proposal Frank Wall Street Reform and Consumer Protection 39 See 77 FR 15460.

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established in the Real-Time Reporting could expose swap counterparties to appropriate minimum block sizes for Final Rule, the Commission proposed higher trading costs.45 In this regard, the block trades and large notional off- provisions in the Further Block Proposal publication of detailed information facility swaps; and (3) anonymity that: (1) Specify the criteria for about an outsize swap transaction may provisions for the public reporting of determining swap categories and alert the market to the possibility that transaction data. A summary of the methodologies for determining the the original liquidity provider to the Commission’s proposed approach is appropriate minimum block sizes for outsize swap transaction will be re- provided below. large notional off-facility swaps and entering the market to offset that 2. Summary of Proposed Approach block trades; and (2) provide increased transaction.46 Other market participants protections to the identities of swap might be alerted to the liquidity The Commission proposed a two- counterparties to large swap provider’s need to offset risk and period, phased-in approach to transactions and certain other therefore would have a strong incentive implement regulations for determining commodity swaps, which were not fully to exact a premium from the liquidity appropriate minimum block sizes.47 addressed in the Real-Time Reporting provider. As a result, liquidity providers Specifically, the Commission proposed Final Rule.40 possibly could be deterred from phasing-in minimum block sizes during an initial period and setting them 1. Policy Goals becoming counterparties to outsize swap transactions if swap transaction thereafter on an ongoing basis (i.e., the In section 2(a)(13) of the CEA, and pricing data is publicly post-initial period) so that market Congress intended that the Commission disseminated before liquidity providers participants could better adjust their consider both the benefits of enhanced can offset their positions. The swap trading strategies to manage risk, market transparency and the effects Commission anticipates that, in turn, secure new technologies and make such transparency would have on this result could negatively affect necessary arrangements in order to 41 market liquidity. Section liquidity in the swaps market. comply with part 43 reporting 2(a)(13)(E)(iv) of the CEA places In consideration of these potential requirements. The Commission constraints on the requirements for the outcomes, the Further Block Proposal proposed two provisions relating to the real-time public reporting of swap sought to provide maximum public Commission’s determination of transaction and pricing data by transparency, while taking into account appropriate minimum block sizes: (1) mandating that the Commission shall the concerns of liquidity providers Initial appropriate minimum block sizes ‘‘take into account whether the public regarding possible reductions in market under proposed § 43.6(e); and (2) post- disclosure [of swap transaction and liquidity. To do so, the Further Block initial appropriate minimum block sizes pricing data] will materially reduce Proposal established the following more under proposed § 43.6(f). 42 market liquidity.’’ While the detailed criteria: (1) Swap categories In proposed § 43.6(e), the Commission Commission anticipates that the public (relative to the definition of swap proposed establishing initial dissemination of swap transaction and instrument in the Initial Proposal); (2) a appropriate minimum block sizes for pricing data will generally reduce costs phased-in approach to determining each category of swaps within the associated with price discovery and interest rate, credit, foreign exchange prevent information asymmetries such transaction unlikely to transact at a (‘‘FX’’) and other commodity asset 48 between market makers and end- competitive price. classes. The Commission listed the users,43 it also believes that the benefits 45 Consistent with this final rule, the Commission prescribed initial appropriate minimum of enhanced market transparency are clarified in the SEF final rule that a swap block sizes in proposed appendix F to not boundless, particularly in swap transaction qualifies as a block trade based on the part 43 based on these swap size of the swap transaction, not based on whether 49 markets with limited liquidity. the swap is subject to the trade execution categories. For interest rate and credit The Commission understands that the requirement under section 2(h)(8) of the CEA. See swaps, the Commission reviewed actual publication of detailed information Core Principles and Other Requirements for Swap market data and prescribed initial regarding ‘‘outsize swap transactions’’ 44 Execution Facilities, p. 72 (May 16, 2013)]. In appropriate minimum block sizes for § 37.200 of the Commission’s regulations, the Commission has codified the statutory text of SEF swap categories in these asset classes 40 In several places in the Real-Time Reporting Core Principle 2 under section 5h(f)(2)(C) of the Final Rule, the Commission stated that it planned CEA, which requires a SEF to establish rules 47 The Commission proposed the same phased-in to address these requirements in a separate, governing the operation of its trading facility, approach for determining cap sizes, which help to forthcoming release. See, e.g., 77 FR 1185, 1191, including trading procedures for block trades. 17 protect the anonymity of counterparties’ market 1193 and 1217. The Further Block Proposal was CFR 37.200(c). Similarly, the Commission’s positions and business transactions as required in that release. proposed rulemaking regarding core principles and the CEA. For a more detailed discussion of the 41 In considering the benefits and effects of other requirements for DCMs under § 38.504 of the Commission’s proposed approach with respect to enhanced market transparency, the Commission Commission’s regulations, the Commission requires cap sizes, see section III.B. notes that the ‘‘guiding principle in setting DCMs to adopt rules that comply with all of the The two-period, phased-in approach would appropriate block trade levels [is that] the vast provisions of part 43, including the block trade become effective after the implementation of the majority of swap transactions should be exposed to provisions finalized herein. Core Principles and part 43 provisions in the Real-Time Reporting Final the public market through exchange trading.’’ Other Requirements for Designated Contract Rule. Until the date on which the proposed Congressional Record—Senate, S5902, S5922 (July Markets, 75 FR 80572, 80617 (Dec. 22, 2010). provisions in the Further Block Proposal become 15, 2010). 46 The price of such a transaction would reflect effective, all swaps would be subject to a time delay 42 CEA section 2(a)(13)(E)(iv). See also CEA market conditions for the underlying commodity or pursuant to the provisions in part 43. section 5h(f)(2)(C) (concerning the treatment of reference index and the liquidity premium for 48 The Commission proposed that swaps in the block trades on SEFs for trade execution purposes). executing the swap transaction. The time delays in equity asset class do not qualify as block trades and 43 See e.g., CEA section 2(a)(13)(B) (‘‘The purpose part 43 of the Commission’s regulations will protect large notional off-facility swaps. See proposed of this section is to authorize the Commission to end-users and liquidity providers from the expected § 43.6(d). Otherwise, the Commission proposed make swap transaction and pricing data available to price impact of the disclosure of publicly reportable prescribing swap categories for each asset class as the public in such form and at such times as the swap transactions. Trading that exploits the need of set forth in proposed § 43.6(b). These swap Commission determines appropriate to enhance traders to reduce or offset their positions has been categories would remain the same during the initial price discovery.’’). defined in financial economics literature as and post-initial periods. 44 As used in the Further Block Proposal and this ‘‘predatory trading.’’ See e.g., Markus Brunnermeier 49 The Commission notes SEFs and DCMs would final rule, an ‘‘outsize swap transaction’’ is a and Lasse Heje Pedersen, Predatory Trading, not be prohibited under the Further Block Proposal transaction that, as a function of its size and the Journal of Finance LX 4, Aug. 2005, available at from setting block sizes for swaps at levels that are depth of the liquidity of the relevant market (and http://pages.stern.nyu.edu/∼lpederse/papers/ higher than the appropriate minimum block sizes equivalent markets), leaves one or both parties to predatory_trading.pdf. as determined by the Commission.

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based on that data. For the other asset April 10, 2013.55 Financial Entities practices used by most federal agencies classes, the Commission did not have begin reporting swap transactions for when releasing to the public company- access to relevant market data. As such, swaps executed starting April 10, 2013, specific information—by removing during the initial period, the in the FX, equity, and other commodity obvious identifiers, limiting geographic Commission proposed using a asset classes on May 29, 2013.56 Non- detail (e.g., disclosing general, non- methodology based on whether a swap SDs, non-MSPs, and non-Financial specific geographical information about or swap category is ‘‘economically Entities begin reporting swap the delivery and pricing points) and related’’ to a futures contract.50 Swaps transactions for swaps executed starting masking high-risk variables by and swap categories that are not April 10, 2013, in the interest rate and truncating extreme values for certain economically related to a futures credit default swap asset classes on July variables (e.g., capping notional contract would remain subject to a time 1, 2013.57 Non-SDs, non-MSPs, and values).61 non-Financial Entities begin reporting delay (i.e., treated as block trades or 3. Overview of Comments Received large notional off-facility swaps, as swap transactions for swaps executed applicable, regardless of notional starting April 10, 2013, in the FX, The Commission received comments amount) during the initial period. equity, and other commodity asset from 35 interested parties representing a classes on August 19, 2013.58 broad range of interests including: In proposed § 43.6(f)(1), the Accordingly, the Commission and SDRs financial end-users, swap dealers, asset Commission provided that the duration will have one year of reliable data as of managers, industry groups/associations, of this initial period would be no less April 10, 2014. potential SEFs, and a DCM.62 Some than one year after an SDR started The proposed initial period would commenters expressed general support collecting reliable data for a particular expire following the publication of a for the Further Block Proposal’s asset class as determined by the Commission determination of post- provisions regarding minimum block Commission. During the initial period, initial appropriate minimum block sizes sizes and anonymity; others objected to the Commission would review reliable in accordance with the publication particular aspects of the Further Block data for each asset class. For the process set forth in proposed § 43.6(f)(4) Proposal and/or offered purposes of this proposed provision, and (5). Thereafter, the Commission recommendations for clarification or reliable data would include all data would set post-initial appropriate modification of specific proposed collected by an SDR for each asset class minimum block sizes for swap regulations. in accordance with the compliance categories no less than once each In addition to a general solicitation for chart in the adopting release to part 45 calendar year using the calculation comment on all aspects of the Further of the Commission’s regulations.51 methodology set forth in proposed Block Proposal, the Commission The Commission stated in the Further § 43.6(c)(1).59 requested comment on a number of Block Proposal and is currently of the The Commission also proposed specific, focused questions related to view that data is per se reliable if it is special rules for determining particular provisions. For example, collected by an SDR for an asset class appropriate minimum block sizes in commenters were asked to address after the respective compliance date for certain instances. In particular, in issues related to: (i) The appropriate such asset class as set forth in part 45 proposed § 43.6(d), the Commission criteria for determining swap categories of the Commission’s regulations or by prescribed special rules for swaps in the in the five asset classes; (ii) the other Commission action. The equity asset class. In proposed § 43.6(h), appropriate methodology for Commission notes that SDRs have been the Commission proposed establishing determining appropriate minimum collecting data pursuant to the special rules for determining block sizes for swaps in the five asset compliance dates for certain market appropriate minimum block sizes in classes; (iii) whether and how a phase- certain circumstances including, for participants and asset classes since in of block thresholds should be example, rules for converting currencies December 2012. DCMs and Swap implemented; (iv) special rules with and rules for determining whether a Dealers (‘‘SDs’’) began reporting swap respect to swaps with optionality, swaps swap with optionality qualifies for block transactions in the interest rate and with composite reference prices, trade or large notional off-facility swap credit default swap asset classes on physical commodity swaps, currency treatment.60 December 31, 2012.52 DCMs and SDs conversions, and successor currencies; In the Further Block Proposal’s began reporting swap transactions in the (v) the role of SEFs and DCMs in proposed amendments to § 43.4(h) and FX, equity, and other commodity asset 43.4(d)(4), the Commission also 61 classes on February 28, 2013.53 Major The Commission proposed to follow the prescribed measures to fulfill the CEA’s necessary procedures for releasing microdata files Swap Participants (‘‘MSPs’’) began anonymity requirements in connection as outlined by the Federal Committee on Statistical reporting swap transactions in all five Methodology: (i) Removal of all direct personal and 54 with the public dissemination of institutional identifiers, (ii) limiting geographic asset classes on February 28, 2013. publicly reportable swap transactions. Financial Entities began reporting swap detail, and (iii) top-coding high-risk variables which The Commission proposed adopting the are continuous. See Federal Committee on transactions in the interest rate and Statistical Methodology, Report on Statistical Disclosure Limitation Methodology 94 (Statistical credit default swap asset classes on 55 See ‘‘Time-Limited No-Action Relief for Swap Policy Working Paper 22, 2d ed. 2005), http:// Counterparties that are not Swap Dealers or Major www.fcsm.gov/working-papers/totalreport.pdf. The 50 Swap Participants, from Certain Swap Data See infra notes 169–174 and accompanying report was originally prepared by the Subcommittee Reporting Requirements of Parts 43, 45 and 46 of text. on Disclosure Limitation Methodology in 1994 and 51 the Commission’s Regulations,’’ Commission Letter See Swap Data Recordkeeping and Reporting was revised by the Confidentiality and Data Access No. 13–10 (Apr. 9, 2013). Requirements, 77 FR 2136, 2196, Jan. 13, 2012. Committee in 2005. 52 56 See id. See ‘‘Commission Q & A—On the Start of Swap 62 A list of the full names and abbreviations of 57 Data Reporting’’ (Oct. 9, 2012). See id. commenters who responded to the Further Block 53 See ‘‘No-Action Relief for Swap Dealers from 58 See id. Proposal is included in section VIII below. As noted Certain Swap Data Reporting Requirements of Part 59 In particular, the Commission proposed a 67- above, letters from these commenters and others 43, Part 45, and Part 46 of the Commission’s percent notional amount calculation, which is submitted in response to the Initial Proposal are Regulations Due to Effects of Hurricane Sandy,’’ discussed in more detail in section II.B.3. available through the Commission’s Web site at Commission Letter No. 12–41 (Dec. 5, 2012). 60 See infra Section II.B.6. for a discussion of the http://comments.cftc.gov/PublicComments/ 54 See id. special rules. CommentList.aspx?id=919.

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determining appropriate minimum The Commission received a total of Interest rates; 66 equity; credit; FX; 67 block sizes for swaps that they list; (vi) nine comment letters in response to the and other commodities.68 the process by which the Commission proposed rules regarding eligible parties The proposed swap category criteria would notify the public of appropriate to a block trade and aggregation of are intended to address the following minimum block sizes; (vii) the process orders. Four of the letters responded to two policy objectives: (1) Categorizing through which a qualifying swap the Initial Proposal and five letters together swaps with similar quantitative transaction would be treated as a block responded to the Proposed Aggregation or qualitative characteristics that trade or large notional off-facility swap; Rule. Many of the comments received warrant being subject to the same (viii) the appropriate methodology for applied equally to the same provisions appropriate minimum block size; and determining the maximum limit of the contained in both proposed § 43.6(h)(6) (2) minimizing the number of the swap principal, notional amount of a swap and 43.6(i), which address the categories within an asset class in order that is publicly disseminated; (ix) aggregation of orders and the eligible to avoid unnecessary complexity in the appropriate anonymity protections for 69 parties to a block trade. determination process. In the the public dissemination of publicly Commission’s view, balancing these reportable swap transactions in the II. Procedures To Establish Appropriate policy objectives and considering the other commodity asset class. Minimum Block Sizes for Large characteristics of different types of The Commission also requested Notional Off-Facility Swaps and Block swaps within an asset class are comment with respect to the cost- Trades—Final Rules necessary in establishing appropriate benefit considerations in the Further criteria for determining swap categories Block Proposal and specifically A. Criteria for Distinguishing Among within each asset class. The five asset requested commenters to provide a Swap Categories in Each Asset Class classes established by the Commission feasible alternative approach to In the Further Block Proposal, the in the Real-Time Reporting Final Rule establishing minimum block sizes that are discussed briefly in the paragraph Commission proposed to use the term would impose less regulatory burden on below, followed by a discussion of the ‘‘swap category’’ to convey the concept swap market participants and the proposed swap category criteria for each of a grouping of swap contracts that general public. Commenters also were asset class. would be subject to a common expressly invited to provide data In the Further Block Proposal, the appropriate minimum block size.64 regarding the direct and indirect Commission proposed breaking down quantifiable costs with the proposed Specifically, the Commission proposed each asset class into separate swap criteria for establishing minimum block specific criteria for defining swap categories to determine appropriate thresholds. categories in each asset class. As minimum block sizes for such adopted in the Real-Time Reporting 4. Additional Proposal Regarding categories. During the initial and post- Final Rule, § 43.2 of the Commission’s Aggregation of Blocks initial periods, the Commission would regulations defines ‘‘asset class’’ as ‘‘a group swaps in the five asset classes Among the requirements contained in broad category of commodities, into the prescribed swap categories as the Initial Proposal, proposed including, without limitation, any set forth in proposed § 43.6(b). § 43.5(b)(1) provided that eligible parties ‘excluded commodity’ as defined in to a block trade (or large notional swap) section 1a(19) of the [CEA], with 66 In the Real-Time Reporting Final Rule, the must be Eligible Contract Participants common characteristics underlying a Commission determined that cross-currency swaps (‘‘ECPs’’), except that a DCM may allow swap.’’ 65 Section 43.2 also identifies the are a part of the interest rate asset class. See 77 FR a Commodity Trading Advisor (‘‘CTA’’), 1193. The Commission noted that this following five swap asset classes: investment advisor, or foreign person determination is consistent with industry practice. meeting certain criteria to transact block 67 The U.S. Department of the Treasury (‘‘Treasury’’) has issued a Final Determination, trades for customers who are not ECPs. pursuant to sections 1a(47)(E)(i) and 1b of the CEA, Further, proposed § 43.5(m) prohibited that exempts FX swaps and FX forwards from the aggregation of orders for different definition of ‘‘swap’’ under the CEA. Therefore, the trading accounts in order to satisfy the requirements of section 2(a)(13) of the CEA would not apply to those transactions, and such appropriate minimum block size transactions would not be subject to part 43 of the requirement, except if done so on a Commission’s regulations. See Determination of DCM by a CTA, investment adviser, or Foreign Exchange Swaps and Foreign Exchange foreign person meeting certain criteria. Forwards under the Commodity Exchange Act, 77 FR 69694, Nov. 20, 2012. Nevertheless, section After it issued its Further Block 1a(47)(E)(iii) of the CEA provides that FX swaps Proposal, the Commission determined and FX forwards transactions still are not excluded that the aggregation provision and the from regulatory reporting requirements to an SDR. provision that specified the eligible Further, the Commission notes that Treasury’s final determination excludes FX swaps and FX forwards, parties to a block trade, including the but does not apply to FX options or non-deliverable proposed requirement that persons FX forwards. As such, FX instruments that are not transacting block trades on behalf of covered by Treasury’s final determination are customers must receive prior written subject to part 43 of the Commission’s regulations. 68 The Real-Time Reporting Final Rule defines the consent to do so, were inadvertently term ‘‘other commodity’’ to mean any commodity omitted from the Further Block Requirements for Parties to Block Trades, 77 FR that is not categorized in the other asset classes as Proposal. These provisions were then 38229, June 27, 2012. may be determined by the Commission. See 77 FR the subject of a separate notice of 64 Proposed § 43.6(b) does not set out a definition 1244. The definition of asset class in § 43.2 also provides that the Commission may later determine for the term ‘‘swap category.’’ Instead, proposed proposed rulemaking issued on June 27, that there are other asset classes not identified 63 2012 (‘‘Proposed Aggregation Rule’’). § 43.6(b) sets out the provisions that group swaps currently in that section. See 77 FR 1243. within each asset class with common risk and 69 These objectives are specific to the 63 Rules Prohibiting the Aggregation of Orders to liquidity profiles, as determined by the determination of appropriate swap category criteria Satisfy Minimum Block Sizes or Cap Size Commission. and are intended to promote the general policy Requirements, and Establishing Eligibility 65 See § 43.2, 77 FR 1243. goals described above in section I.D.1.

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Twenty-one commenters addressed trading activity, price impact and Established in 2005, the ODSG is the Further Block Proposal’s use of liquidity in the markets for swaps in the chaired by the Federal Reserve Bank of swap categories.70 The vast majority of interest rate and credit asset classes. New York and is comprised of domestic the comments did not question the use Based on that review, the Commission and international supervisors of of swap categories generally, and proposed criteria for determining swap representatives from major OTC focused on the specific criteria proposed categories in these two asset classes. derivatives market participants.79 In for determining swap categories within Specifically, the Commission proposed particular, the ODSG coordinated with each asset class instead. Better Markets defining swap categories for: (1) Interest the ‘‘G–14 banks’’ in order to gain and ICI expressly supported the rate swaps based on unique written permission to access the non- Commission’s proposed use of swap combinations of tenor 76 and currency; public swap data.80 categories.71 Better Markets stated that and (2) credit default swaps (‘‘CDS’’) MarkitSERV 81 provided the interest ‘‘the concept of a ‘swap category’ is based on unique combinations of tenor rate swap data set. The interest rate useful, in that it allows greater and conventional spread.77 swap data set covered transactions granularity than the far broader notion The Commission obtained confirmed on the MarkitWire platform of ‘asset class.’ ’’ 72 ICI ‘‘support[ed] the transaction-level data for these asset between June 1, 2010 and August 31, CFTC’s proposal to establish categories classes from two third-party service 2010 where at least one party was a of swaps within different asset classes providers with the assistance of the G–14 Bank.82 that would be subject to a common Over-the-Counter Derivatives The Warehouse Trust Company LLC appropriate minimum block size to Supervisors Group (‘‘ODSG’’).78 (‘‘The Warehouse Trust’’) provided the better calibrate the block thresholds to CDS data set.83 The CDS data set the relative liquidity of the swap 76 As used in the Further Block Proposal, the covered CDS transactions for a three- categories in each asset class.’’ 73 ICAP, tenor of a swap refers to the amount of time from the effective or start date of a swap to the end date month period beginning on May 1, 2010 however, disagreed with the of such swap. In circumstances where the effective and ending on July 31, 2010.84 Commission’s use of swap categories or start date of the swap was different from the trade The Commission filtered both data and stated that ‘‘the Commission’s date of the swap, the Commission used the later sets in order to analyze only transaction- proposal is mistaken in its use of ‘swap occurring of the two dates to determine tenor. Two commenters addressed how the Commission level data corresponding to ‘‘publicly categories’ . . . as opposed to using the should determine tenor for backdated swaps. AFR reportable swap transactions,’’ as standard liquid tenors of swap stated that backdating a swap is the equivalent of defined in § 43.2 of the Real-Time contracts.’’ 74 a swap with a date of its inception, but with a price After consideration of the comments that includes an adjustment for the backdating Credit Suisse; Deutsche Bank AG; Goldman Sachs related to the use of swap categories, the feature of the transaction; AFR wrote that tenor should be determined accordingly. CL–AFR at 5–6. & Co.; HSBC Group; J.P. Morgan; Morgan Stanley; Commission is adopting swap categories Similarly, ISDA/SIFMA requested that the The Royal Bank of Scotland Group; Societe as proposed in § 43.6, with certain Commission determine the tenor of a back dated Generale; UBS AG; and Wells Fargo Bank, N.A. modifications based upon both general swap as the time from the date of execution of the 81 MarkitSERV is a post-trade processing concerns expressed by commenters in swap (as opposed to the start date) to the maturity company wholly owned by Markit. From its date of the swap. CL–ISDA/SIFMA at 10. After formation in 2009 until April 2013, MarkitSERV regard to the use of swap categories, consideration of these comments, the Commission was jointly owned by Markit and The Depository specific concerns raised in regard to the maintains the same approach from the Further Trust & Clearing Corporation (‘‘DTCC’’). criteria for determining swap categories Block Proposal. 82 The interest rate swap data was limited to within each asset class, and other 77 As generally used in the industry, the term transactions and events submitted to the 75 ‘‘conventional spread’’ represents the equivalent of MarkitWire platform. MarkitWire is a trade relevant market developments. The a swap dealer’s quoted spread (i.e., an upfront fee confirmation service offered by MarkitSERV. following sections address the based on a fixed coupon and using standard 83 The Warehouse Trust, a subsidiary of DTCC comments regarding specific asset assumptions such as auctions and recovery rates). DerivSERV LLC, is regulated as a member of the classes and set out, where appropriate, More information regarding the use of this term can U.S. Federal Reserve System and as a limited the Commission’s responsive be found at Markit, The CDS Big Bang: purpose trust company by the New York State Understanding the Changes to the Global CDS Banking Department. The Warehouse Trust modifications of the swap categories Contract and North American Conventions, at provides the market with a trade database and approach. http://www.markit.com/cds/announcements/ centralized electronic infrastructure for post-trade resource/cds_big_bang.pdf, (Mar. 2009), at 19. processing of OTC credit derivatives contracts over 1. Interest Rate and Credit Asset Classes 78 Section 8(a) of the CEA protects non-public, their entire lifecycle. See DTCC, The Warehouse a. Background transaction-level data from public disclosure. Trust Company, About the Warehouse Trust Section 8(a)(1) provides, in relevant part, that ‘‘the Company, http://www.dtcc.com/about/subs/ The Commission was able to obtain Commission may not publish data and information derivserv/warehousetrustco.php. and review non-public swap data to that would separately disclose the business 84 The Warehouse Trust data contained make inferences about patterns of transactions or market positions of any person and ‘‘allocation-level data,’’ which refers to trade secrets or names of customers . . . .’’ To assist transactional data that does not distinguish between commenters, the Further Block Proposal included isolated transactions and transactions that, although 70 See generally CL–AFR; CL–AII; CL–Barclays; various tables and summary statistics depicting the documented separately, comprise part of a larger CL–Better Markets; CL–CME; CL–FIA; CL–GFMA; ODSG data in aggregate forms. In the discussion transaction. CL–ICAP; CL–ICAP Energy; CL–ICI; CL–ISDA/ that follows, the Commission additionally has The Commission notes the work of other SIFMA; CL–Kinetix; CL–MFA; CL–Morgan Stanley; described the methodology it employed in regulators in aggregating observations believed to be CL–Parascandola; CL–Parity; CL–Pierpont; CL– reviewing, analyzing and drawing conclusions part of a single transaction. See Kathryn Chen, et SDMA; CL–SIFMA; CL–WMBAA; CL–Vanguard. based on the ODSG data. al., Federal Reserve Bank of New York Staff Report, 71 CL–Better Markets at 5; CL–ICI at 4. 79 See OTC Derivatives Supervisors Group— An Analysis of CDS Transactions: Implications for 72 CL–Better Markets at 5. Federal Reserve Bank of New York, http:// Public Reporting, (Sept. 2011), at 25, http:// 73 CL–ICI at 4. www.ny.frb.org/markets/otc_derivatives www.newyorkfed.org/research/staff_reports/ 74 CL–ICAP at 8. _supervisors_group.html (last visited May 6, 2013). sr517.html. The Commission notes that this 75 The Commission is using the term ‘‘swap The ODSG was formed ‘‘in order to address the allocation-level information could produce a category’’ instead of ‘‘swap instrument’’ in this final emerging risks of inadequate infrastructure for the downward bias in the notional amounts of the swap rule. Although the Commission is not adopting a rapidly growing market in the credit derivatives . transactions in the data sets provided by the ODSG. definition of ‘‘swap category,’’ the Commission . . .’’ The ODSG works directly with market In turn, this downward bias would produce smaller believes that this term groups swap contracts that participants to plan, monitor and coordinate appropriate minimum block trade sizes relative to would be subject to the same appropriate minimum industry progress toward collective commitments a data set that, if available with appropriate block size based on asset class with common made by firms. execution time stamps, would reflect the aggregate quantitative or qualitative characteristics, i.e., risk 80 The G–14 banks are Bank of America-Merrill notional amount of swaps completed in a single and liquidity profiles. Lynch; Barclays Capital; BNP Paribas; Citigroup; transaction.

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Reporting Final Rule.85 As such, the Commission excluded from its analysis 166,847 transactions with a combined duplicate and non-price forming notional value of approximately $45.4 85 ‘‘Publicly reportable swap transaction’’ means, transactions.86 The Commission also trillion dollars.88 These transactions unless otherwise provided in part 43: (1) Any converted the notional amount of each executed swap that is an arm’s-length transaction included trades with a wide range of between two parties that results in a corresponding swap transaction into a common notional amounts, 28 different change in the market risk position between the two currency denominator, the U.S. dollar.87 currencies, eight product types, 57 parties; or (2) any termination, assignment, novation, exchange, transfer, amendment, b. Interest Rate Swap Categories different floating rate indexes and tenors conveyance, or extinguishing of rights or ranging from under one week to 55 obligations of a swap that changes the pricing of the i. Interest Rate Swap Data Summary years. Summary statistics of the filtered swap. Examples of an executed swap that do not fall within the definition of publicly reportable The filtered transaction records in the interest rate swap data set are presented swap transaction may include: (1) Certain internal interest rate swap data set contained in Table 1.89 swaps between 100-percent-owned subsidiaries of the same parent entity; and (2) portfolio compression exercises. These examples represent terminations, and structurally excluded records swaps that are not transacted at arm’s length, but since the Commission was unable to determine if that do result in a corresponding change in the these records were price-forming. The Commission market risk position between two parties. See 77 FR also excluded CDS transactions that were notated 88 The Commission only reviewed relevant 1244. as single name transactions. The data sets also transaction records in the interest rate swap data 86 The excluded records represented activities included transaction records created for workflow set. As noted above, the Commission excluded such as option exercises or assignments for purposes (and therefore redundant), duplicates and duplicate and non-price forming transactions from physical, risk optimization or compression transaction records resulting from name changes or its review. See supra note 86 for a list of excluded mergers. transactions, and amendments or cancellations that transaction records. were assumed to be mis-confirmed. A transaction 87 The Commission calculated the average daily 89 See the International Organization for was assumed to be mis-confirmed when it was exchange rates between relevant currencies and the canceled without a fee, which the Commission has U.S. dollar for the three-month period covered by Standardization (ISO) standard ISO 4217 for inferred was the result of a confirmation correction. the data. This average daily exchange rate was then information on the currency codes used by the The Commission also excluded interest rate applied to the notional amounts for non-U.S. dollar Commission. For information on floating rate transactions that were indicated as assignments, denominated swap transactions. indexes, see also ISDA, 2006 Definitions (2006), and supplements.

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TABLE 1—SUMMARY STATISTICS FOR THE INTEREST RATE SWAP DATA SET BY PRODUCT TYPE, CURRENCY, FLOATING INDEX AND TENOR

Notional Percentage of Percentage of amount total notional Number of total transactions 90 (billions of amount transactions USD) (%)

Product Type: Single Currency Interest Rate Swap ...... 128,658 77 16,276 36 Over Night Index Swap (OIS) ...... 12,816 8 16,878 37 Forward Rate Agreement (FRA) ...... 5,936 4 7,071 16 Swaption ...... 11,042 7 2,256 5 Other ...... 8,395 5 2,909 6 Currency: European Union Euro Area euro (EUR) ...... 46,412 28 18,648 41 United States dollar (USD) ...... 50,917 31 11,377 25 United Kingdom pound sterling (GBP) ...... 16,715 10 7,560 17 Japan yen (JPY) ...... 19,502 12 4,253 9 Other ...... 33,301 20 3,553 8 Floating Index: USD–LIBOR–BBA ...... 48,651 29 9,411 21 EUR–EURIBOR–Reuters ...... 39,446 24 9,495 21 EUR–EONIA–OIS–COMPOUND ...... 6,517 4 9,122 20 JPY–LIBOR–BBA ...... 19,194 12 4,010 9 GBP–LIBOR–BBA ...... 12,835 8 2,419 5 GBP–WMBA–SONIA–COMPOUND ...... 2,014 1 5,123 11 Other ...... 38,190 23 5,809 13 Tenor: 91 1 Month ...... 3,171 2 11,859 26 3 Month ...... 10,229 6 11,660 26 6 Month...... 2,822 2 1,701 4 1 Year...... 9,522 6 3,484 8 2 Year ...... 16,450 10 3,347 7 3 Year...... 9,628 6 1,488 3 5 Year ...... 26,139 16 2,712 6 7 Year ...... 6,599 4 661 1 10 Year ...... 34,000 20 2,746 6 30 Year ...... 9,616 6 448 1 Other ...... 38,671 23 5,284 12

Sample Totals ...... 166,847 100 45,390 100

set organized by product type, currency, percentile of a distribution of the data Table 2 below sets out the notional floating index and tenor. The table also set. amounts of the interest rate swap data includes the notional amounts in each

TABLE 2—NOTIONAL AMOUNTS OF INTEREST RATE SWAP DATA SET ORGANIZED BY PRODUCT TYPE, CURRENCY, FLOATING INDEX AND TENOR [In millions of USD]

Mean Percentiles notional amount 5th 10th 25th 50th 75th 90th 95th

Product Type: Single Currency Interest Rate Swap ...... 127 4 9 23 52 117 252 438 OIS ...... 1,293 6 13 63 341 1,261 3,784 5,282 FRA ...... 1,168 90 133 266 631 1,039 2,000 3,018 Swaption ...... 204 3 20 50 100 226 500 642 Other ...... 346 * 1 23 89 250 631 1,132 Currency: EUR ...... 400 6 15 38 91 249 631 1,617 USD ...... 221 5 12 31 89 200 500 1,000 GBP ...... 435 1 1 15 57 167 755 1,698 JPY ...... 221 11 13 28 57 124 339 790 Other ...... 108 4 6 13 30 78 175 308 Floating Index: USD–LIBOR–BBA ...... 192 5 12 30 76 180 500 803

90 The percentages were rounded to the nearest 91 In producing Table 1, the Commission counted swap’s start date as ending on the nearest complete whole number. Due to the rounding, the total tenors for swaps with an end date within four month. percentages for the listed categories do not add up calendar days of a complete month relative to the to exactly 100%.

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TABLE 2—NOTIONAL AMOUNTS OF INTEREST RATE SWAP DATA SET ORGANIZED BY PRODUCT TYPE, CURRENCY, FLOATING INDEX AND TENOR—Continued [In millions of USD]

Mean Percentiles notional amount 5th 10th 25th 50th 75th 90th 95th

EUR–EURIBOR–Reuters ...... 241 8 17 38 79 189 416 757 EUR–EONIA–OIS–COMPOUND ...... 1,385 4 10 61 315 1,261 3,784 6,306 JPY–LIBOR–BBA ...... 211 11 12 28 57 113 339 658 GBP–LIBOR–BBA ...... 181 1 4 23 54 151 377 755 GBP–WMBA–SONIA–COMPOUND ...... 2,450 75 113 283 1,509 3,018 6,037 9,055 Other ...... 152 2 4 12 31 88 264 500 Tenor: 92 1 Month...... 3,523 37 252 1,251 2,522 3,784 7,546 12,074 3 Month ...... 1,081 11 38 208 604 1,250 2,000 3,018 6 Month...... 581 19 49 150 377 747 1,261 1,892 1 Year...... 348 20 31 70 151 341 755 1,261 2 Year...... 205 10 16 39 111 243 453 631 3 Year...... 154 10 16 44 95 169 315 500 5 Year...... 107 5 9 25 63 113 226 316 7 Year ...... 105 7 13 29 57 113 221 315 10 Year...... 83 5 10 23 50 95 175 252 30 Year ...... 47 4 7 18 26 50 95 132 Other ...... 249 2 4 15 50 126 340 883

data set’s total combined notional Commission observed that points of The Commission also analyzed the amount. concentrated transaction activity along interest rate swap data set to classify the the yield curve correspond with specific ii. Summary of Proposed Rule counterparties into broad groups.93 The tenors (e.g., three months, six months, Commission’s analysis of the interest Based upon the data described above, one year, two years, etc.). Second, the rate swap data set revealed that the Commission proposed § 43.6(b)(1) Commission observed a tendency for the approximately 50 percent of the establishing swap categories in the transacted notional amounts to decrease transactions were between buyers and interest rate asset class based on tenor as tenor increased (e.g., longer-dated sellers who were both identified as G– and underlying currency. tenors in the data set generally had 14 banks and that these transactions The Commission proposed interest lower average notional sizes). Based on represented a combined notional rate swap tenor groupings based on two these observations, table 3 below details amount of approximately $22.85 observations regarding the data in the the eight proposed tenor groups for the trillion, or 50 percent of the relevant IRS interest rate swap data set. First, the interest rate asset class.

TABLE 3—PROPOSED TENOR GROUPS FOR INTEREST RATES ASSET CLASS 94

And tenor less than or Tenor group Tenor greater than equal to

1 ...... Three months (107 days). 2 ...... Three months (107 days) ...... Six months (198 days). 3 ...... Six months (198 days) ...... One year (381 days). 4 ...... One year (381 days) ...... Two years (746 days). 5 ...... Two years (746 days) ...... Five years (1,842 days). 6 ...... Five years (1,842 days) ...... Ten years (3,668 days). 7 ...... Ten years (3,668 days) ...... 30 years (10,973 days). 8 ...... 30 years (10,973 days)

Similarly, through its analysis of the referenced in a swap explains a interest rate swap data set, the significant amount of variation in Commission found that the currency notional size and, hence, can be used to categorize interest rate swaps 95 The 92 In producing Table 2, the Commission counted two G–14 banks was approximately $280 million; 95 The Commission considered alternative tenors for swaps with an end date within four (3) the average notional size of transactions approaches of using the individual floating rate calendar days of a complete month relative to the involving both a G–14 bank and a non G–14 bank indexes or currencies to determine swap categories swap’s start date as ending on the nearest complete (which traded at least 100 swap transactions) was in the interest rate asset class. These alternative month. approximately $260 million. approaches would have the benefit of being more 93 MarkitSERV anonymized the identities of the 94 The Commission chose to extend the tenor correlated to an underlying curve than the adopted counterparties and indicated whether a G–14 bank groups about one-half month beyond the commonly currency and tenor groupings. The data contained was a party to the swap transaction. Summary observed tenors to group similar tenors together and 57 floating rate indexes and 28 currencies, which statistics relating to these anonymous numbers capture variations in day counts. The Commission would result in 456 and 224 categories respectively, included the following: (1) The total count of added an additional 15 days beyond a multiple of after sorting by the eight identified tenor groups. unique counterparties was approximately 300; (2) one year to the number of days in each group to The Commission anticipates, however, that the average notional size of transactions involving avoid ending each group on specific years. grouping swaps using individual rates or currencies

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Commission proposed currency amounts or substantial volume of moderate volume and total notional groupings after considering: (1) The currency groups. After considering these amounts; 97 and (3) non-major swap transaction total notional amounts factors, the Commission proposed three currencies, which generally exhibit and transaction volumes of currency currency categories for the interest rate moderate to very low volume and total groups based on the number of asset class: (1) Super-major currencies, notional amounts.98 transactions; and (2) the average which are currencies with large volume Table 4 below summarizes the transaction notional amounts and lack and total notional amounts; 96 (2) major Commission’s three proposed currency of evidence of large transacted notional currencies, which generally exhibit swap categories.

TABLE 4—PROPOSED CURRENCY CATEGORIES FOR INTEREST RATES ASSET CLASS

Currency category Component currencies

Super-Major Currencies ...... United States dollar (USD), European Union Euro Area euro (EUR), United Kingdom pound sterling (GBP), and Japan yen (JPY). Major Currencies 99 ...... Australia dollar (AUD), Switzerland franc (CHF), Canada dollar (CAD), Republic of South Africa rand (ZAR), Republic of Korea won (KRW), Kingdom of Sweden krona (SEK), New Zealand dollar (NZD), Kingdom of Norway krone (NOK) and Denmark krone (DKK). Non-Major Currencies ...... All other currencies.

Table 5 below presents details on the rate swap data set organized by currency sample characteristics of the interest and tenor swap categories.

TABLE 5—SAMPLE CHARACTERISTICS OF PROPOSED INTEREST RATE SWAP CATEGORIES 100

Percent of Notional Percent of Currency category Tenor group Number of transactions (billions of total notional transactions (%) USD) (%)

Super-major ...... 1 11,394 7 22,347 50 Super-major ...... 2 2,563 2 1,813 4 Super-major ...... 3 6,277 4 3,302 7 Super-major ...... 4 12,395 7 3,420 8 Super-major ...... 5 32,148 19 4,818 11 Super-major ...... 6 42,675 26 4,220 9 Super-major ...... 7 24,237 15 1,433 3 Super-major ...... 8 1,857 1 56 0 Major ...... 1 2,305 1 1,818 4 Major ...... 2 445 0 124 0 Major ...... 3 2,113 1 302 1 Major ...... 4 2,639 2 226 1 Major ...... 5 5,380 3 293 1 Major ...... 6 3,707 2 129 0 Major ...... 7 704 0 19 0 Major ...... 8 <200 ...... Non-Major ...... 1 403 0 64 0 Non-Major ...... 2 247 0 26 0 Non-Major ...... 3 2,073 1 165 0 Non-Major ...... 4 3,354 2 256 1 Non-Major ...... 5 5,873 4 116 0 Non-Major ...... 6 3,935 2 41 0 Non-Major ...... 7 <200 ...... Non-Major ...... 8 <200 ......

set organized by currency and tenor tenor category, as well as the notional Table 6 below sets out the notional categories. The table includes the mean amounts in each percentile of a amounts of the interest rate swap data notional amount of each currency and distribution of the data set.

would not substantially increase the explanation of 97 Major currencies represent about 6 percent of in the interest rate and FX futures markets. The variations in notional amounts, while it could result the total notional amount and about 10 percent of Commission is of the view that this list of in cells with relatively few observations in some the total transactions in the data set. Some of these currencies is consistent, in part, with the currency-tenor categories. Hence, the Commission currencies host liquid futures markets for interest Commission’s existing regulations in § 15.03(a), does not believe there would be a significant benefit rates, and all exhibit liquid FX markets. which defines ‘‘major foreign currency’’ as ‘‘the to offset the additional compliance burden that a 98 Non-major currencies represent less than two currency, and the cross-rates between the more granular approach would impose on market currencies, of Japan, the United Kingdom, Canada, participants. percent of the total notional amount and about 10 percent of the transactions in the data set. These Australia, Switzerland, Sweden and the European 96 Super-major currencies represent over 92 percent of the total notional amounts and 80 currencies typically do not have corresponding Monetary Union.’’ 17 CFR 15.03(a). percent of the total transactions in the data set. It interest rate and FX futures markets. 100 Tables 5 and 6 do not include sample is noteworthy that these currencies have well- 99 The Commission selected these currencies for characteristics for swap categories with less than developed, i.e., liquid futures markets for general inclusion in the definition of major currencies 200 transactions in order to preserve the anonymity interest rates and FX rates. based on the relative liquidity of these currencies of the parties to these transactions.

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TABLE 6—NOTIONAL AMOUNTS OF INTEREST RATE SWAP DATA SET ORGANIZED BY THE PROPOSED INTEREST RATE SWAP CATEGORIES [In millions of USD]

Transactions Percentiles Currency group Tenor Mean group 5th 10th 25th 50th 75th 90th 95th

Super-major ...... 1 1,961 10 36 500 1,000 2,260 4,000 6,306 Super-major ...... 2 708 13 41 200 500 883 1,500 2,260 Super-major ...... 3 526 47 75 150 272 565 1,179 1,809 Super-major ...... 4 276 19 43 100 176 304 565 848 Super-major ...... 5 150 9 21 50 100 158 301 482 Super-major ...... 6 99 6 12 30 54 100 204 305 Super-major ...... 7 59 1 5 14 31 63 126 200 Super-major ...... 8 30 0 0 1 13 37 65 118 Major ...... 1 789 80 133 175 312 573 921 1,313 Major ...... 2 279 50 70 120 210 350 480 921 Major ...... 3 143 13 26 52 97 175 264 438 Major ...... 4 86 9 16 33 66 104 184 240 Major ...... 5 54 4 8 19 44 72 109 145 Major ...... 6 35 4 7 13 23 46 72 96 Major ...... 7 27 5 7 11 20 31 49 75 Major ...... 8 <200 ...... Non-major ...... 1 160 19 37 64 129 225 315 450 Non-major ...... 2 106 16 23 39 72 145 233 311 Non-major ...... 3 79 8 22 31 56 102 157 224 Non-major ...... 4 76 6 9 16 27 50 78 108 Non-major ...... 5 20 2 4 8 14 23 39 54 Non-major ...... 6 10 2 2 4 8 13 21 29 Non-major ...... 7 <200 ...... Non-major ...... 8 <200 ......

The Commission received twelve In addition to the comments received generally supported the use of tenor comments regarding the use of tenor to regarding the Further Block Proposal, buckets to establish swap categories in establish swap categories in the interest the Commission also considered the the interest rate asset class. rate swap asset class. Five commenters research in the Federal Reserve Bank of Commenters, however, disagreed with expressed support for the Further Block New York’s March 2012 staff report the proposed tenor buckets. Proposal’s suggested tenor buckets.101 entitled ‘‘An Analysis of OTC Interest In the Further Block Proposal, tenor Five other commenters recommended Rate Derivatives Transactions: buckets were proposed based on nine tenor buckets straddling the most Implications for Public Reporting’’ (the observations of the distributions of liquid tenor points as follows: 0–3 ‘‘Federal Reserve Staff Analysis’’). In notional sizes and volume with the months, 3–6 months, 6–18 months, 18 that report, Federal Reserve staff tested objectives of grouping swaps with similar characteristics while months-3 years, 3–7 years, 7–12 years, for a relationship between tenor and maintaining a manageable number of 12–20 years, 20–30 years, and more than trade size. The Federal Reserve staff identified nine tenor buckets, as swap categories. The tenor buckets 30 years.102 These commenters opposed to the eight identified by the proposed by the Commission were suggested that these nine tenor Commission. The tenor buckets associated with concentrations of groupings would provide greater identified by the Federal Reserve staff liquidity at commonly recognized granularity and avoid grouping together were the same as those proposed by the points along the interest rate yield swaps with different levels of liquidity. Commission in the Further Block curve. In general, the Commission Similarly, ICI suggested that narrower Proposal, with a further division of the observed that transactions in the data tenor groupings would provide greater set (and presumed market liquidity) 103 Commission’s 0–3 month bucket into a granularity. Kinetix also expressed 0–1 month bucket and a 1–3 month tended to cluster at certain tenors. concern with the proposed tenor bucket.105 In establishing the categories, the buckets, stating that they grouped After consideration of the comments Commission proposed groupings that together products with sharply different received and the Federal Reserve Staff placed actively traded tenors at the trading volumes.104 Analysis, the Commission is adopting upper boundary of the category § 43.6(b)(1) with one modification—the groupings because the calculation of the 101 CL–AFR at 5; CL–Better Markets at 5; CL–MFA addition of another tenor grouping at minimum block threshold in a category at 4; CL–Pierpont at 3; CL–SDMA at 8 (‘‘The CFTC the shorter end of the interest rate yield will be most influenced by the notional categories are . . . appropriate and accurate in amounts of the most heavily traded terms of currency, index, and tenor.’’) curve. The Commission notes, as an 102 CL–AII at 8; CL–Barclays at 7; CL–ISDA/ initial matter, that commenters swaps in a category, i.e., those at the SIFMA at 10; CL–SIFMA at 7; CL–Vanguard at 5. active tenor points. Hence, the 103 See CL–ICI at 5. 105 The Federal Reserve staff specifically found minimum block thresholds for shorter 104 Kinetix stated that ‘‘[t]he major flaw comes that ‘‘when [they] reduced the number of buckets dated swaps in a category will tend to from including in a bucket products with sharply at the short end of the trading curve (by merging be set based on the typical notional different trading volumes.’’ Kinetix recommended the 0–1 month and 1–3 month buckets into a 0–3 bucketing products by average trade volume, month bucket), the explanatory power of [their] value of longer dated swaps. Since the product type, and tenor, but did not suggest specific regression declined 24%.’’ Federal Reserve Staff longer dated swaps tend to trade in tenor buckets. CL–Kinetix at 2. Analysis at 16. smaller notional amounts, establishing

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the categories in this manner will tend category, consider the impact on a bucket with the 5-year tenor interest rate to result in a more conservative (i.e., seven-year interest rate swap that is swaps. In this scenario, the liquid tenor smaller) minimum block threshold for proposed to be grouped in a tenor point within the bucket is the 5-year shorter tenored swaps within the bucket with swaps having a tenor interest rate swap; thus, the 5-year category. In addition, because the greater than 5 years and less than or interest rate swap, with more than shorter-dated swaps within an equal to 10 years. The most liquid tenor 26,000 transactions yielding an average established swap category may point (i.e., the tenor point with the notional amount of $104 million (USD), experience less liquidity, due to smaller greatest number of observations) within is the primary driver in determining the trading volumes, these swaps may also this bucket would be the 10-year minimum block threshold for the tenor benefit from the setting of a lower interest rate swap; thus, the 10-year bucket and results in a larger block size minimum block threshold. interest rate swap would be the primary for the 7-year tenor interest rate swaps The narrower tenor buckets driver in determining the minimum recommended by commenters, in than under the currently proposed swap block threshold for swaps in the 5 to 10- category. contrast, tend to straddle the liquid year tenor bucket. Table 7 is a subset of tenor points. If the Commission were to the information from Table 1 that The Commission is of the view that establish tenor buckets straddling the illustrates this point. Specifically, there the tenor with the most transactions in liquid tenor points (rather than having are 6,599 swaps with a tenor of seven the swap category, and thus having the a liquid tenor point be the upper years, yielding an average notional most weight in the block calculations, boundary of a tenor bucket), then the amount of $100 million (USD) and should be at the high end of the tenor minimum block threshold for swaps 34,000 swaps with a tenor of ten years grouping for the swap category. Given within a category would be more yielding an average notional size of $81 the tendency for average notional size to heavily influenced by swaps centrally million (USD). By combining these into decrease as tenor increases as shown in located in the category. Thus, longer the same category, the Commission is Table 7 below, the Commission views dated swaps in a category, which tend adopting a conservative approach in this as a more conservative approach to to trade in smaller notional sizes, would setting minimum block thresholds, be subject to higher minimum block setting block sizes for the less liquid thresholds, meaning fewer would be tenors. which results in lower block sizes for eligible for the block trade exemption. Under the commenters’ approach, swap transactions at tenors that may To illustrate the impact of placing the however, the seven-year interest rate experience less liquidity. liquid tenor point at the top of the swap is grouped in the same tenor

TABLE 7—SUMMARY STATISTICS FOR THE INTEREST RATE SWAP DATA SET BY TENOR 106

Number of Notional amount Average notional Tenor 107 amount transactions (billions of USD) (billions of USD)

1 Month ...... 3,171 11,859 3.740 3 Month ...... 10,229 11,660 1.140 6 Month ...... 2,822 1,701 0.603 1 Year ...... 9,522 3,484 0.366 2 Year ...... 16,450 3,347 0.203 3 Year ...... 9,628 1,488 0.155 5 Year ...... 26,139 2,712 0.104 7 Year ...... 6,599 661 0.100 10 Year ...... 34,000 2,746 0.081 30 Year ...... 9,616 448 0.047 Other ...... 38,671 5,284 0.137

days to less than or equal to 3 months). Commission has determined to add a In response to comments generally While the Commission did not receive less than 46 day tenor group. This calling for narrower tenor buckets, the any comments specifically discussing would provide greater granularity and Commission is adopting an additional the less than 46 day tenor, the establish notional swap groupings that tenor bucket in order to provide greater Commission received numerous account more precisely for the effects of granularity as requested by commenters. comments recommending greater increased transparency on liquidity for The Commission is splitting the first granularity. Based upon the comments swaps of a shorter tenor. tenor group in the Further Block received requesting nine tenor buckets Proposal (0–3 months) into two tenor and the Federal Reserve Staff Analysis Accordingly, the Commission is groups (0–46 days, and greater than 46 identifying nine tenor buckets, the adopting the following tenor buckets:

106 In producing Table 7, the Commission the swap’s start date as ending on the nearest 107 Tenor groups include swaps having tenors counted tenors for swaps with an end date within complete month. within 4 calendar days of a complete month, plus four calendar days of a complete month relative to or minus, of the stated tenor. All other swaps are included in the ‘‘Other’’ category.

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TABLE 8—TENOR GROUPS FOR INTEREST RATES ASSET CLASS 108

And tenor less than or Tenor group Tenor greater than equal to

1 ...... 46 days. 2 ...... 46 days ...... Three months (107 days). 3 ...... Three months (107 days) ...... Six months (198 days). 4 ...... Six months (198 days) ...... One year (381 days). 5 ...... One year (381 days) ...... Two years (746 days). 6 ...... Two years (746 days) ...... Five years (1,842 days). 7 ...... Five years (1,842 days) ...... Ten years (3,668 days). 8 ...... Ten years (3,668 days) ...... 30 years (10,973 days). 9 ...... 30 years (10,973 days) ......

and EUR to those in JPY and GBP. separate swap categories contained in The Commission received eleven Similarly, the commenters who the rule achieves the objectives of comments regarding whether interest specifically requested that the grouping swaps with similar rate swaps should be categorized into Commission establish separate swap characteristics while maintaining a the super-major, major, and non-major categories for each of the super-major manageable number of swap categories. currency groupings as proposed. Five currencies focused on perceived The Commission also received a commenters supported the currency differences in liquidity. While USD and number of comments recommending groupings proposed in the Further Block EUR interest rate swaps feature the that interest rate swaps should be Proposal.109 Four commenters urged the highest liquidity, the Commission is of categorized based on criteria other than Commission to establish a separate the view that, based upon all of the tenor and currency. Four commenters swap category for each individual criteria mentioned above, the super- suggested a range of additional interest currency in determining block major currencies are most similar to rate swap categories for the purposes of thresholds.110 Two more commenters each other (and different from major 112 establishing block thresholds.113 Two specifically recommended that each of and non-major currencies) to warrant other commenters suggested grouping the four super-major currencies should treatment as a group, rather than swaps by product type in addition to be categorized separately, rather than as separately. tenor and currency groupings.114 a group, in determining block The Commission considered Another commenter, Kinetix, thresholds.111 alternative approaches of using the recommended grouping products by After consideration of the comments individual currencies to determine swap average trade volume, as well as by received, the Commission is adopting categories in the interest rate asset class. product type and tenor.115 Of the four § 43.6(b)(1)(i) as proposed in regard to While these alternative approaches commenters who expressed support for currency categories. The currencies would have provided greater correlation the proposed tenor and currency were grouped into the three categories to an underlying curve than the adopted groupings,116 two of them argued that in the Further Block Proposal based groupings, the Commission believes that further granularity would cause some upon the swap transaction total notional this would not substantially increase the swaps to be subject to lower block amounts and transaction volumes of explanation of variations in notional thresholds than are appropriate.117 currency groups based on the number of amounts, but rather would result in After consideration of the comments transactions, and the average transaction categories with too few observations. received, the Commission is adopting notional amounts of currency groups. Hence, the Commission does not believe § 43.6(b)(1)(i) as proposed and § 43. The commenters who requested that all that there would be a significant benefit 6(b)(1)(ii) with the modifications currencies be categorized by individual to offset the additional compliance discussed above. Although some level of currency mainly focused on differences burden that a more granular approach in liquidity among the four super-major would impose on market participants. 113 Barclays suggested unique block levels for currencies, particularly when The Commission notes that adoption of each of the following swap categories: each super comparing interest rate swaps in USD the proposed currency categories major currency, swaps against standard floating rate indices, basis swaps, inflation swaps, swaptions, establishes 27 separate swap categories caps and floors, cross-currency swaps, and 108 As in the Further Block Proposal, the for interest rate swaps. Separate structured swaps. CL–Barclays at 7–8. ISDA/SIFMA Commission chose to extend the tenor groups about categorization of all currencies would suggested the following additional swap categories: one-half month beyond the commonly observed fixed versus non-benchmark floating rate indexes tenors to group similar tenors together and capture result in nearly 200 separate swap and basis swaps, inflation swaps (a specified variations in day counts. The Commission added an categories. Separate categorization of the inflation rate index), options (swaption and cap/ additional 15 days beyond a multiple of one year super-major currencies alone would floor markets); cross-currency swaps (each leg to the number of days in each group to avoid ending each group on specific months or years. result in 54 swap categories. The denominated by different currency), and exotics. CL–ISDA/SIFMA at 9. SIFMA and Vanguard 109 CL–AFR at 5; CL–Better Markets at 5; CL–MFA Commission believes that the 27 suggested swap categorization based on optionality at 4; CL–Pierpont at 3; CL–SDMA at 8 (‘‘The CFTC or other characteristics such as distinctions between categories are . . . appropriate and accurate in 112 The Commission notes that the difference ‘‘plain vanilla,’’ ‘‘interest rate options,’’ and terms of currency, index, and tenor.’’) between the total notional and transactional volume ‘‘other,’’ as well as separate categories for major 110 CL–AII at 8; CL–ICI at 5; CL–SIFMA at 8–9; of swaps referencing Japanese yen—the lowest floating rate indices. CL–SIFMA at 8–9; CL– CL–Vanguard at 6. among those swaps in the super-major currency Vanguard at 5–6. 111 CL–Barclays at 7; CL–ISDA/SIFMA at 7–8. category—and of swaps referencing the Australian 114 CL–ICI at 5; CL–MFA at 5. While ISDA/SIFMA supported separate categories Dollar—the highest among those swaps in the major 115 for super-major currencies, their comment also currency category—is significantly larger than such CL–Kinetix at 2. suggests separate categorization for each individual differences between swaps within each adopted 116 CL–AFR at 5; CL–Better Markets at 5; CL– currency. Similarly, SIFMA’s comment, while currency category. This observation supports Pierpont at 3; CL–SDMA at 8 (‘‘The CFTC categories requesting separate categorization generally, states adopting the Commission’s approach in assigning are . . . appropriate and accurate in terms of that dividing the four proposed super-major certain swaps in the super-major currency category currency, index, and tenor.’’) currencies is most important. CL–SIFMA at 8–9. against the major currency category. 117 CL–AFR at 5; CL–Better Markets at 5.

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categorization of swaps is useful to minimum block sizes and allow for within the definition of publicly capture different levels of trading adequate risk offsets using instruments reportable swap transactions,118 with a activity and hedging potential, where a within a category. The modification combined notional value of number of different swaps could be described above in regard to tenor will approximately $4.6 trillion dollars.119 used to hedge the same risk, the over- provide some further granularity at the The CDS data set contained transactions identification of swap categories will short end of the yield curve, as based on 26 broad credit indexes.120 Of eventually lead to a dilution of suggested by commenters above, while those indexes, both the iTraxx Europe observations within categories. still achieving the objectives of grouping Series and the Dow Jones North Categories having small numbers of swaps with similar characteristics and America investment grade CDS indexes observations could be subject to highly reducing unnecessary complexity for (‘‘CDX.NA.IG’’) served as the basis for market participants in determining volatile minimum block sizes over time. over 20 percent of the total number of whether their swaps are classified Over-identification also would be transactions and over 33 percent of the within a particular swap category. expected to lead to underestimations of total notional value in the relevant CDS the ability to offset risks using related c. Credit Swap Categories data set. Table 9 sets out summary swap instruments. The Commission statistics of the CDS data set for CDS believes that it has struck a balance i. Credit Swap Data Summary indexes with greater than five between over- and under-categorizing The CDS data set contained 98,931 transactions per day on average. swaps that will result in more stable CDS index records that would fall

TABLE 9—SUMMARY STATISTICS BY CDS INDEX NAME

Percentage of Notional Percentage of Number of total amount total notional Names transactions transactions (in millions of amount (%) USD) (%)

ITRAXX EUROPE SERIES 13 V1 ...... 18,287 18.48 1,138,362 24.83 CDX.NA.IG.14 ...... 12,611 12.75 1,083,974 23.64 ITRAXX EUROPE XO SERIES 13 V1 ...... 8,713 8.81 153,365 3.34 CDX.NA.HY.14 ...... 7,984 8.07 172,599 3.76 ITRAXX EUROPE SENIOR FINANCIALS SERIES 13 V1 ...... 4,774 4.83 187,978 4.10 CDX.NA.IG.9 ...... 4,134 4.18 388,650 8.48 ITRAXX EUROPE XO SERIES 13 V2 ...... 3,959 4.00 66,894 1.46 CDX.NA.IG.9 TRANCHE ...... 3,357 3.39 112,411 2.45 ITRAXX SOVX CEEMEA SERIES 3 V1 ...... 3,252 3.29 32,291 0.70 CDX.EM.13 ...... 3,052 3.08 34,952 0.76 ITRAXX SOVX WESTERN EUROPE SERIES 3 V1 ...... 2,377 2.40 74,068 1.62 ITRAXX AUSTRALIA SERIES NUMBER 13 V1 ...... 2,138 2.16 31,540 0.69 ITRAXX EUROPE SERIES 9 V1 ...... 1,893 1.91 188,364 4.11 ITRAXX EUROPE SUB FINANCIALS SERIES 13 V1 ...... 1,779 1.80 50,241 1.10 ITRAXX EUROPE SERIES 9 V1 TRANCHE ...... 1,577 1.59 50,269 1.10 ITRAXX JAPAN SERIES NUMBER 13 V1 ...... 1,406 1.42 19,100 0.42 ITRAXX ASIA EX–JAPAN IG SERIES NUMBER 13 V1 ...... 1,319 1.33 15,856 0.35 ITRAXX SOVX ASIA PACIFIC SERIES 3 V1 ...... 1,001 1.01 11,666 0.25 ITRAXX EUROPE HIVOL SERIES 13 V1 ...... 788 0.80 30,585 0.67 CMBX.NA.AAA.1 ...... 463 0.47 13,384 0.29 ITRAXX EUROPE SERIES 12 V1 ...... 452 0.46 71,161 1.55 CMBX.NA.AJ.3 ...... 392 0.40 6,332 0.14 CMBX.NA.AAA.2 ...... 381 0.39 8,433 0.18 LCDX.NA.14 ...... 380 0.38 7,063 0.15 MCDX.NA.14 ...... 350 0.35 2,798 0.06 CMBX.NA.AAA.4 ...... 337 0.34 6,024 0.13 CMBX.NA.A.1 ...... 332 0.34 3,834 0.08 IOS.FN30.500.09 ...... 317 0.32 7,836 0.17

Total ...... 87,805 88.75 3,970,029 86.59

ii. Credit Swap Data Analysis proposed the following six broad tenor (which include the five-year tenor); (4) groups in the credit asset class: (1) Zero over six to eight-and-a-half years (2,208– As noted above, the Commission to two years (0–746 days); (2) over two 3,120 days); (5) over eight-and-a-half to proposed using tenor and conventional to four years (747–1,476 days); (3) over spread criteria to define swap categories for CDS indexes. The Commission four to six years (1,477–2,207 days)

118 See note 85 supra. three different currencies: USD (53%), EUR (46%), (12) iTRAXX Europe Series; (13) iTRAXX Europe 119 The CDS index transactions in the data set and JPY (1%). The Commission notes that in all but Subs; (14) iTRAXX Japan 80; (15) iTRAXX Japan made up approximately 33 percent of the total a handful of records, each reference index HiVol; (16) iTRAXX Japan Series; (17) iTRAXX filtered records and 75 percent of the CDS markets’ transaction was denoted in a single currency. LEVX Senior; (18) iTRAXX SOVX Asia; (19) 120 notional amount for the three months of data Those indexes were: (1) ABX.HE; (2) CDX.EM; iTRAXX SOVX CEEMA; (20) iTRAXX Western provided. The data set contained over 250 different (3) CDX.NA.HY; (4) CDX.NA.IG; (5) Europe; (21) LCDX.NA; (22) MCDX.NA; (23) reference indexes; 400 reference index and tenor CDX.NA.IG.HVOL; (6) CDX.NA.XO; (7) CMBX.NA; combinations; and 450 reference index, tenor, and (8) IOS.FN30; (9) iTRAXX Asia ex-Japan HY; (10) PO.FN30; (24) PRIMEX.ARM; (25) PRIMEX.FRM; tranche combinations. The data set also contained iTRAXX Asia ex-Japan IG; (11) iTRAXX Australia; and (26) TRX.NA.

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12.5 years (3,121–4,581 days) and (6) (‘‘bps’’) and 350 bps levels.123 The conventional spread levels: (1) CDS greater than 12.5 years (4,581 days).121 Commission found that significant indexes with spread values under 175 With respect to the conventional differences existed in the CDS data set bps; (2) CDS indexes with spread values spread criterion, the Commission between CDS indexes with spread between 175 and 350 bps; and (3) CDS determined ranges of spread values values under 175 bps and those in the indexes with spread values above 350 based on a review of the distribution of other two CDS categories (spread values bps. Table 9 shows the summary 122 spreads in the entire CDS data set. In between 175 to 350 bps; spread values statistics of the proposed criteria to particular, the Commission observed above 350 bps). Accordingly, the determine swap categories for swaps in that the relevant CDS data set Commission proposed three separate the credit asset class.124 partitioned at the 175 basis points

TABLE 9—CDS INDEX SAMPLE STATISTICS BY PROPOSED SWAP CATEGORY CRITERIA

Sum of notional Spread amounts Number of trades (in billions of USD)

≤175 ...... 3,761 59,887 175-to-350 ...... 233 11,045 350> ...... 577 27,998 Tenor Sum of notional (in calendar days) amounts Number of trades

0–746 ...... 146 1,421 747–1,476 ...... 569 6,774 1,477–2,207 ...... 3,490 79,357 2,208–3,120 ...... 159 2,724 3,121–4,581 ...... 18 497 4,582+ ...... 190 8,157

The Commission sought comment on proposed use of spread criteria, but also suggested separate swap categories for this proposed approach, a series of suggested that the Commission should individual CDX index series.130 Better alternative criteria to be used, and clarify that the spread for a CDS Markets, however, argued that using alternative categories. The Commission transaction will be based on the traded individual CDX index series to create received eight comments regarding the spread, rather than on the fixed swap categories would be too granular proposed swap categories for CDS. Five coupon.128 Barclays, however, and recommended that CDS be divided of the comments focused on the commented that traded spreads should into single-name and index categories, proposed tenor buckets in the Further not be used for categorizing CDS with indexes further subdivided into Block Proposal. SIFMA and Vanguard because swaps may move daily between five groups: sovereign, corporate, suggested that the 4–6 year tenor bucket threshold buckets as spreads can move municipal, mortgage-backed securities, be divided into four buckets: 4 to 4.5 substantially over short periods, which and other.131 Four commenters years, 4.5 to 5 years, 5 to 5.5 years, and would create an unacceptable level of recommended that tranches of indices 5.5 to 6 years.125 AII and ICI also operational risk for market participants receive their own unique swap recommended narrowing the tenor in trying to achieve compliance.129 category.132 Two commenters suggested 126 categories for CDS. MFA generally In addition to the comments regarding grouping CDS by different product supported the Commission’s proposed the tenor and conventional spread type.133 MFA recommended separate 127 grouping by tenor. criteria proposed, commenters also swap categories for indexes and options Two of the comments focused on the provided a number of recommendations (as well as tranches).134 Finally, eight proposed conventional spread criteria. regarding other potential swap commenters suggested differentiating ISDA/SIFMA expressed support for the categories for CDS. Three commenters between on-the-run and off-the-run CDS

121 The Commission assessed the possibility of 122 See supra note 77 for a definition of logged value of the notional amount of the swap applying the tenor categories proposed for swaps in ‘‘conventional spread.’’ was the dependent variable. the interest rate asset class to the distribution of 123 The Commission proposed partition levels by 125 CL–SIFMA at 7–8 (‘‘We believe that such notional sizes in the CDS indexes and anticipates a qualitative examination of multiple histogram groupings would better approximate sets of swaps the level of granularity proposed to categorize distributions of the traded and fixed spreads from with similar liquidity characteristics’’); CL– swaps in the interest rate asset class by tenor would the CDS data set. This qualitative examination was Vanguard at 5. be inappropriate for the CDS index market. The confirmed through a partition test (using JMP 126 CL–AII at 8; CL–ICI at 5. Commission anticipates that this level of software), including both before and after 127 CL–MFA at 5. granularity would be inappropriate because the vast controlling for the effects of tenor on the 128 CL–ISDA/SIFMA at 6 (‘‘swap categories majority of CDS index transactions in the data set should be based on the current spread of a had a tenor of five years (or approximately 1,825 distribution. The Commission observed that 175 transaction in order to reflect . . . changes in days). Based on the concentration of CDS index bps explained the greatest difference in means of liquidity’’). transactions in five-year tenors, the Commission the two data sets resulting from a single partition 129 CL–Barclays at 8. proposed six tenor bands for CDS indexes. of the data. The Commission also observed that 350 130 CL–AII at 8; CL–Barclays at 8; CL–ISDA/ The Commission chose to extend the tenor groups bps was an appropriate partition for CDS index SIFMA at 6. about one-half month beyond the commonly transactions with spreads over 175 bps. 131 observed tenors to group similar tenors together and 124 The Commission found that these categories CL–Better Markets at 6. capture variations in day counts. The Commission were good predictors of notional size. This finding 132 CL–AII at 8; CL–Barclays at 8; CL–ISDA/ added an additional 15 days beyond a multiple of was based on an analysis which used the tenor and SIFMA at 6; MFA at 5. one year to the number of days in each group to spread categories in Table 9 as explanatory 133 CL–ICI at 5; CL–ISDA/SIFMA at 6. avoid ending each group on specific years. variables in a least squares regression, where the 134 CL–MFA at 5.

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indices.135 MFA specifically suggested (e.g., asset backed indexes, municipal between on-the-run and off-the-run CDS separate minimum block sizes for the indexes, sovereign indexes) also trade at indexes, the Commission believes that current 5-year on-the-run CDS indices tenors other than five years.138 while on-the-run and off-the-run for CDX.NA.IG, CDX.NA.HY, iTraxx The Commission, however, decided indexes may differ in terms of available Europe, and iTraxx Europe not to use ‘‘on-the-run’’ or ‘‘off-the-run’’ liquidity, they nonetheless are Crossover.136 designations for grouping CDS indexes economically related to each other After consideration of the comments into categories for the following reasons: within the categories proposed by the received, the Commission is adopting (i) The underlying components of swaps Commission such that on-the-run § 43.6(b)(2) as proposed. In general, the with differing versions or series based indexes could be used to offset much of Commission believes that the proposed on the same named index are broadly the risk associated with off-the-run criteria—tenor and conventional similar, if not the same, and are indexes. The Commission also notes spread—provide an appropriate way to indicative of economic substitutability that the tenor buckets contained in the group swaps with economic similarities across versions or series; (ii) differences adopted rule generally result in separate and to reduce unnecessary complexity in the average notional amount across categorization for on-the-run and off- for market participants in determining differing versions or series were the-run indexes. For the CDS data set, whether a particular swap is classified explained by differences in tenor; and the vast majority of swaps in the 4–6 within a particular swap category. In (iii) using versions or series as the year tenor bucket were on-the-run regard to ISDA/SIFMA’s suggested criterion for defining CDS swap indexes, while the vast majority of clarification, the Commission clarifies categories may result in an unnecessary swaps in the 0–2, 2–4, and 6–8.5 year that the spread for a CDS transaction level of complexity.139 Hence, the tenor buckets were off-the-run. will be based on the traded spread, Commission believes that while on-the- In response to commenters that rather than on the fixed coupon. run and off-the-run indexes may differ specifically recommended separate Specifically, the Commission believes in terms of available liquidity, they swap categorization for tranches, the that the proposed tenor and nonetheless are economically related to Commission believes that the proposed conventional spread categories each other within the categories swap categorization based upon sufficiently capture the variation in proposed by the Commission; therefore, conventional spread criteria will result notional size that is necessary for setting on-the-run indexes could be used to in separate categorizations related to appropriate minimum block sizes and offset much of the risk associated with tranches where appropriate.141 For that refining these categories as off-the-run indices. Moreover, while the example, tranches having significantly suggested by commenters will not off-the-run swaps generally had less different levels of risk will potentially improve the clustering of swaps in order trading activity, and presumably less have spreads traded at levels that differ to better set appropriate minimum block liquidity, than the on-the-run swaps, enough from the underlying index so as sizes. For example, the Commission off-the-run index swaps had larger to be placed in categories that would notes that the tenor buckets contained notional sizes, on average, than on-the receive a different block trade size. The in the adopted rule generally result in run swaps in the same category. Hence, conventional spread reflects the risk of separate categorization for on-the-run the more liquid, on-the-run swaps will the underlying transaction and the and off-the-run indexes for swaps in the drive the block size in a category and Commission believes that the risk CDS data set. On-the-run indexes, for will result in lower block sizes for the associated with the transaction will be example, comprised the vast majority of less liquid swaps in the category.140 The the primary determinant of how swaps in the 4–6 year tenor bucket, Commission feels that this is a more difficult a transaction is to hedge. Thus, while off-the-run indexes were the vast conservative approach to setting block the Commission believes that majority of swaps in the 0–2, 2–4, and sizes for less liquid swaps. categorization of CDS by conventional 6–8.5 year tenor buckets. In response to the commenters that spread will capture differences related The Commission determined these specifically requested a differentiation to tranches where appropriate. swap categories based on the way The Commission notes that the activity in the CDS data set clustered 138 For example, based on the observed CDS data adopted § 43.6(b)(2) establishes 18 towards the center of each tenor band. set, the majority of municipal credit default index swaps traded with tenors of around 10 years. separate swap categories for CDS swaps. While the majority of transactions in the 139 An on-the-run CDS index represents the most While none of the commenters provided CDS data set consisted of on-the-run recently issued version of an index. For example, suggestions as to precisely how to corporate credit default index swaps every six months, Dow Jones selects 125 investment categorize CDS by tranche, the with a five-year tenor, the Commission grade entities domiciled in North America to make up the Dow Jones North American investment grade Commission believes that creating found that significant trading of index (‘‘CDX.NA.IG’’). Each new CDX.NA.IG index additional swap categories for tranches corporate credit default index swaps is given a new series number while market would result in swap categories totaling also occurred in other tenor ranges.137 participants continue to trade the old or ‘‘off-the- run’’ CDX.NA.IG series. The index provider a multiple of the proposed 18 swap The Commission believes that its determines the composition of each index through categories, as each CDS index has approach is appropriate since CDS on a defined list of reference entities. The index multiple tranches. Establishing swap indexes other than corporate indexes provider has discretion to change the composition categories based upon tenor and of the list of reference entities for each new version

135 or series of an index. In its analysis of the CDS data MFA specifically suggested separate minimum set, the Commission generally observed either no 141 In the CDS market, a ‘‘tranche’’ means a block sizes for the current 5-year on-the-run CDS change or a small change (ranging from one percent particular segment of the loss distribution of the indices for CDX.NA.IG, CDX.NA.HY, iTraxx to ten percent) of existing composition in the underlying CDS index. For example, tranches may Europe, and iTraxx Europe Crossover. CL–MFA at reference entities underlying a new version or series be specified by the loss distribution for equity, 5; CL–AII at 8; CL–Barclays at 8; CL–ICAP at 7; CL– of an index. Because of these two dynamics (tenor mezzanine (junior) debt, and senior debt on the ISDA/SIFMA at 5–6; CL–SIFMA at 8; CL–Vanguard and index composition), the CDS data set contained referenced entities. The Commission found that the at 5. transactions within a given index with different tranche-level data was even more granular than 136 CL–MFA at 5. versions and series that were, in some instances, index-level data. Similarly, the Commission 137 For example, based on the observed CDS data identical, and in others, not identical, across anticipates that grouping the relevant CDS data set set, corporate CDS indexes traded in all but the varying tenors. in tranche criterion may not be practicable because longest of the tenor groups. The vast majority of 140 This is similar to the example provided for the it may produce too many swap categories and as a transactions outside of the 4–6 year tenor group tenor groupings in interest rate swaps in Section result would impose unnecessary complexity on were off-the-run series. II.A.1. market participants.

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conventional spread criterion as in the equity asset class.142 Five other could negatively impact the price adopted § 43.6(b)(2) meets the objectives commenters recommended that the discovery function of the underlying of grouping swaps with economic Commission treat equity swaps equity cash market and futures market. similarity and reducing confusion for similarly to the other asset classes and Accordingly, the Commission is market participants in determining establish swap categories based upon a adopting § 43.6(b)(3) as proposed.150 range of criteria.143 AII recommended whether their swaps are classified 3. Swap Categories in the FX Asset Class within a particular swap category. that equity swaps should be treated as The Commission proposed The Commission believes that this blocks based on liquidity, and urged the establishing swap categories for the FX approach will mitigate the Commission to consider linking equity asset class based on unique currency administrative burden to both market swap categories to the liquidity of the 144 combinations, with § 43.6(b)(4)(i) participants and to the Commission by underlying index. Barclays recommended that swap categories distinguishing futures-related swaps 151 limiting the number of swap categories from swaps that are not futures-related for which appropriate minimum block should be established for equity swaps taking into account transaction volume (covered under proposed sizes need to be calculated. In regard to § 43.6(b)(4)(ii)). Distinguishing futures- Barclay’s concern that swaps would by index and equity asset class type, and that broad-based indices should related swaps from other swaps would move between categories, the allow the Commission to set initial Commission believes that instances have separate block levels based upon 145 appropriate minimum block sizes for where a given swap will move daily futures market levels. ICI recommended closer study of data on certain swaps based on DCM block sizes between spread levels will be limited equity swap transactions due to for FX futures contracts. given the small number of spread potential differences in liquidity in the The Commission based its approach categories and the observed distribution underlying equity cash market.146 ISDA/ on the assumption that FX swaps and of trades. Additionally, the quantitative SIFMA recommended categorizing futures contracts based upon the same nature of the block category calculation equity swaps on the basis of underlying currency draw upon the same liquidity should limit the operational risk by index or basket, product type, notional pools. The Commission proposed in providing clarity and ease of notice to size, and tenor.147 SIFMA stated that the §§ 43.6(b)(4)(i) and (b)(4)(ii) to market participants as to what the Commission should establish equity distinguish FX swaps and instruments minimum block sizes are, even if they swap block categories based upon based on the existence of a related are subject to change. liquidity of the underlying indices.148 futures contract. Liquidity in the If market participants reach the After consideration of the comments underlying futures market for the conclusion that the Commission has received, the Commission is adopting currency combinations established in determined specific swap categories in § 43.6(b)(3) as proposed. While a proposed § 43.6(b)(4)(i) suggested a way that will materially reduce market number of the commenters point out sufficient liquidity in the swaps market liquidity, then those participants are differences in liquidity in the for these currency combinations. encouraged to submit data to support underlying equity indices to support The Commission proposed their conclusion. If, through its own separate swap categories within the establishing swap categories for futures- surveillance of swaps market activity, equity asset class and establishment of related swaps under proposed the Commission becomes aware that a block sizes in equities, these differences § 43.6(b)(4)(i) based on the unique specific swap categorization for do not undermine the premises currency combinations between the determination of appropriate minimum underlying the Commission’s proposal. currency of each of the following: the block levels would reduce market Even taking into account differences in United States, European Union, United liquidity, then the Commission may liquidity, (1) there is still a highly liquid Kingdom, Japan, Australia, Switzerland, exercise its legal authority to take action underlying cash market for equities; and Canada, Republic of South Africa, by rule or order to mitigate the potential (2) the equity index swaps market is Republic of Korea, Kingdom of Sweden, effects on market liquidity with respect small relative to the futures, options, New Zealand, Kingdom of Norway, to swaps in that swap category. and cash equity index markets. These Denmark, Brazil, China, Czech characteristics, combined with the fact Republic, Hungary, Israel, Mexico, New 2. Swap Category in the Equity Asset that there are no time delays for Class reporting block trades in the underlying 150 The Securities and Exchange Commission (‘‘SEC’’) has proposed general criteria that it would The Commission proposed a single equity cash market, makes consider to set appropriate minimum block trade swap category for swaps in the equity establishment of swap categories, and sizes for security-based swaps. The SEC, however, asset class. The Commission proposed therefore minimum block thresholds, for has not proposed specific numerical thresholds at equity swaps inappropriate.149 The this time, but rather intends to propose such this approach based on: (1) The thresholds upon the adoption of Regulation SBSR— existence of a highly liquid underlying Commission notes that establishing time Reporting and Dissemination of Security-Based cash market for equities; (2) the absence delays for reporting block trades in the Swap Information. 75 FR 75208, 75228 (Dec. 2, swaps market when no time delays exist 2010). On May 1, 2013, the SEC reopened the of time delays for reporting block trades comment period regarding this proposed rule. See in the underlying equity cash market; Reopening of Comment Periods for Certain 142 CL–AFR at 6. (3) the small relative size of the equity Rulemaking Releases and Policy Statement 143 CL–AII at 9; CL–Barclays at 9; CL–ICI at; index swaps market relative to the Applicable to Security-Based Swaps Proposed ISDA/SIFMA at 10–11; SIFMA at 5. Pursuant to the Securities Exchange Act of 1934 144 futures, options, and cash equity index CL–AII at 9. and the Dodd-Frank Wall Street Reform and markets; and (4) the Commission’s goal 145 CL–Barclays at 9. Consumer Protection Act (May 1, 2013). to protect the price discovery function 146 CL–ICI at 5. 151 Under § 43.2, a futures-related swap is defined of the underlying equity cash market 147 CL–ISDA/SIFMA at 10–11. as a swap (as defined in section 1a(47) of the Act and futures market. 148 CL–SIFMA at 5. and as further defined by the Commission in 149 See infra Section II.B(5)(b). In the event that implementing regulations) that is economically The Commission received six time delays are established for reporting block related to a futures contract. See infra notes 169– comments regarding swap categories in trades in the underlying equity cash market, the 174 and accompanying text. Under § 43.6(b)(4)(i), a the equity asset class. AFR supported Commission may consider establishing swap futures-related swap is a swap where one of the categories and minimum block thresholds for equity underlying currencies of the swap is the subject of the single swap category proposed for swaps. a futures contract listed on a DCM.

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Zealand, Poland, Russia, and Turkey.152 CEA, that exempts FX swaps and FX combinations may be treated as Hence, proposed § 43.6(b)(4)(i) would forwards from the definition of ‘‘swap’’ blocks.163 establish a separate swap category for under the CEA. Therefore, the The changes to § 43.6(b)(4) will each of the 231 unique currency requirements of section 2(a)(13) of the significantly reduce the number of swap combinations between these currencies. CEA would not apply to those categories, hence reducing complexity, In proposed § 43.6(b)(4)(ii), the transactions, and such transactions but will still ensure coverage of the most Commission would establish an would not be subject to part 43 of the liquid currency combinations.164 additional swap category based on Commission’s regulations.159 While not affording block treatment to unique currency combinations not Nevertheless, section 1a(47)(E)(iii) of the all swaps in the FX asset class subject included in proposed § 43.6(b)(4)(i).153 CEA provides that FX swaps and FX to part 43, these modifications will The Commission received six forwards transactions still are not increase the number of currency combinations which will be eligible to comments regarding the proposed swap excluded from regulatory reporting be blocks, many of which have limited categories for the FX asset class based requirements to an SDR. Further, the on unique currency combinations. Two liquidity.165 Yet, this modified approach Commission notes that Treasury’s final commenters recommended additional still allows the Commission to set initial determination excludes FX swaps and swap categories for the FX asset class.154 appropriate minimum block sizes for FX forwards, but does not apply to FX Barclays suggested that EUR- and USD- the most liquid categories based on the denominated transactions should be options or non-deliverable FX forwards. block trade size thresholds set by DCMs categorized separately from less liquid As such, FX instruments that are not for economically-related futures transactions and that distinct block covered by Treasury’s final contracts, as enumerated under adopted levels should apply to the following determination are subject to part 43 of § 43.6(b)(4)(i). The Commission believes product categories: Forwards, non- the Commission’s regulations. that the categories established by deliverable forwards, non-deliverable After consideration of the comments proposed § 43.6(b)(4)(i) and kept under options, vanilla options, and other more received and the complexity of the adopted § 43.6(b)(4)(i) provide the complex options.155 GFMA proposed approach, the Commission is separate classification for EUR- and recommended more granular swap adopting § 43.6(b)(4) with USD-denominated transactions categories that would group specific modifications. The Commission is recommended by Barclays.166 instruments according to similarity of modifying proposed § 43.6(b)(4)(i) to liquidity profile.156 AFR, however, establish swap categories based on the 163 See Table 10 for the enumerated swap commented that the governing principle unique currency combinations between categories established by § 43.6(b)(4)(i). 164 According to the BIS Triennial Central Bank in establishing swap categories should one super-major currency paired with Survey: Foreign Exchange and Derivatives Market be the reasonable relationship of swaps one of the following: (1) Another super Activity in April 2010 (preliminary results, dated within a category to a liquid class of major currency 160; (2) a major September 2010), the currency combinations swaps or futures that are potential currency 161; or (3) a currency of Brazil, enumerated under adopted § 43.6(b)(4)(i) comprise hedges for that category and expressed more than 80% of global FX market turnover. China, Czech Republic, Hungary, Israel, According to the Survey of North American concern that adding any additional Mexico, New Zealand, Poland, Russia, Foreign Exchange Volume in October 2012, the granularity might violate this or Turkey. This approach differs from proposed categories established by § 43.6(b)(4)(i) principle.157 AII and ICI urged the the proposal in that the adopted swap cover more than 86% of the notional value of total Commission to remove block trading monthly volume of FX swaps that are priced or categories will not include the unique facilitated by traders in North America. The Survey thresholds so that all transactions would currency combinations between major of North American Foreign Exchange Volume is be treated as blocks for the FX asset currencies and other major currencies, conducted by the Foreign Exchange Committee, which includes representatives of major financial class during the initial period, and between major currencies and each of allow for collection and analysis of SDR institutions engaged in foreign currency trading in the ten additional enumerated non- the United States and is sponsored by the Federal data during this period to determine major currencies, and between the ten Reserve Bank of New York. The survey is designed appropriate swap categories for the post- additional enumerated non-major to measure the level of turnover in the foreign 158 exchange market. Turnover is defined as the gross initial period. currencies. Under § 43.6(b)(4) as The Commission notes that, since the value in U.S. dollar equivalents of purchases and adopted, all swap transactions subject to sales entered into during the reporting period. The Further Block Proposal, Treasury has part 43 162 in these unique currency data covers a one-month period in order to reduce issued a Final Determination, pursuant the likelihood that very short-term variations in to sections 1a(47)(E)(i) and 1b of the activity might distort the data and include all 159 See Determination of Foreign Exchange Swaps transactions that are priced or facilitated by traders and Foreign Exchange Forwards under the in North America (United States, Canada, and 152 For example, the euro (EUR) and the Canadian Commodity Exchange Act, 77 FR 69,694, Nov. 20, Mexico). Transactions concluded by dealers outside dollar (CAD) combination would be one swap 2012. of North America are excluded even if they are category; whereas, the Swedish krona (SEK) and the 160 As set out in Section II.A.1., the super-major booked to an office within North America. The Korean won (KRW) combination would be a currencies are the United States dollar (USD), survey also excludes transactions between separate swap category. European Union Euro Area euro (EUR), United branches, subsidiaries, affiliates, and trading desks 153 Under proposed § 43.6(e)(2), swaps having Kingdom pound sterling (GBP), and Japan yen of the same firm. The October 2012 data can be currency combinations described in § 43.6(b)(4)(ii) (JPY). located at http://www.newyorkfed.org/fxc/2012/ would all be eligible to be treated as a block trade 161 As set out in Section II.A.1., the major octfxsurvey2012.pdf. or large notional off-facility swap. Only in the post- currencies are the Australia dollar (AUD), 165 For example, the unique currency initial period would the proposed rules set an Switzerland franc (CHF), Canada dollar (CAD), combination of the Australian Dollar (AUD) and the appropriate minimum block size for this category of Republic of South Africa rand (ZAR), Republic of Canadian Dollar (CAD) had a minimum block FX swaps. See infra Section II.B(5)(c)(ii). Korea won (KRW), Kingdom of Sweden krona threshold of 10,000,000 CAD in the Further Block 154 CL–Barclays at 10; CL–GFMA at 2–3. (SEK), New Zealand dollar (NZD), Kingdom of Proposal. Under adopted § 43.6(b)(4), all trades in 155 CL–Barclays at 10. Norway krone (NOK) and Denmark krone (DKK). this unique currency combination will be eligible 156 CL–GFMA at 2–3. GFMA also suggested that 162 As stated above, this section only applies to for block treatment. (1) FX swaps should be distinguished by tenor, and FX options and non-deliverable FX forwards. 166 The Commission emphasizes that the swap that (2) block size thresholds should vary based on Treasury has exempted FX swaps and FX forwards categories for the FX asset class are unique currency time of day, in order to take into account liquidity from the definition of ‘‘swap’’ under the CEA. See combinations between each of the super-major across time zones. Determination of Foreign Exchange Swaps and currencies, major currencies, and additional 157 CL–AFR at 6. Foreign Exchange Forwards under the Commodity currencies listed. The classification of EUR and 158 CL–AII at 3; CL–ICI at 5. Exchange Act, 77 FR 69,694, Nov. 20, 2012. Continued

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The Commission will also modify Czech koruna (CZK) and the Brazilian already large number without § 43.6(b)(4)(ii) to establish one swap real (BRL) will be in the same category drastically increasing the number of category for the currency combinations as the SEK–KRW swap. While the swaps swaps that will be subject to real-time not included in § 43.6(b)(4)(i). This grouped into one category by reporting without a delay. Establishing category will encompass the other § 43.6(b)(4)(ii) may have different swap categories based upon unique currency combinations proposed, but liquidity levels, these swaps will all be currency combinations as in adopted not adopted, by the Commission, as well subject to the time delays provided to § 43.6(b)(4)(i) meets the objectives of as other non-futures related currency block trades and large notional off- grouping swaps with economic swaps. With the modifications to facility swaps in both the initial and similarity and reducing confusion for § 43.6(b)(4), the euro (EUR) and the post-initial periods. market participants in determining Canadian dollar (CAD) combination will The Commission notes that the whether their swaps are classified still be one swap category as in the adopted § 43.6(b)(4)(i) establishes 78 within a particular swap category. The original proposal pursuant to unique currency combinations, covering Commission believes that these changes § 43.6(b)(4)(i). However, the Swedish a vast majority of the notional value of will reduce the administrative burden to krona (SEK) and the Korean won (KRW) FX swaps concluded by traders in North both market participants and to the combination will be grouped with all America. Creating additional swap Commission by reducing the number of the other swaps covered by categories, as suggested by Barclays and swap categories for which appropriate § 43.6(b)(4)(ii) into one swap category. GFMA,167 would result in swap minimum block sizes need to be As a further example, a swap of the categories totaling a multiple of this calculated.168

TABLE 10—SWAP CATEGORIES ESTABLISHED UNDER § 43.6(b)(4)(i)

Super-major currencies Euro British pound Japanese yen U.S. dollar (EUR) (GBP) (JPY) (USD)

British Pound (GBP) ...... EUR–GBP Japanese Yen (JPY) ...... EUR–JPY GBP–JPY U.S. Dollar (USD) ...... EUR–USD GBP–USD JPY–USD Australian Dollar (AUD) ...... AUD–EUR AUD–GBP AUD–JPY AUD–USD Canadian Dollar (CAD) ...... CAD–EUR CAD–GBP CAD–JPY CAD–USD Swiss Francs (CHF) ...... CHF–EUR CHF–GBP CHF–JPY CHF–USD Denmark Krone (DKK) ...... DKK–EUR DKK–GBP DKK–JPY DKK–USD Korean Won (KRW) ...... KRW–EUR KRW–GBP KRW–JPY KRW–USD Swedish Krona (SEK) ...... SEK–EUR SEK–GBP SEK–JPY SEK–USD Norwegian Krone (NOK) ...... NOK–EUR NOK–GBP NOK–JPY NOK–USD New Zealand Dollar (NZD) ...... NZD–EUR NZD–GBP NZD–JPY NZD–USD South African Rand (ZAR) ...... ZAR–EUR ZAR–GBP ZAR–JPY ZAR–USD Brazilian Real (BRL) ...... BRL–EUR BRL–GBP BRL–JPY BRL–USD Czech Koruna (CZK) ...... CZK–EUR CZK–GBP CZK–JPY CZK–USD Hungarian Forint (HUF) ...... HUF–EUR HUF–GBP HUF–JPY HUF–USD Israeli Shekel (ILS) ...... ILS–EUR ILS–GBP ILS–JPY ILS–USD Mexican Peso (MXN) ...... MXN–EUR MXN–GBP MXN–JPY MXN–USD Polish Zloty (PLN) ...... PLN–EUR PLN–GBP PLN–JPY PLN–USD Chinese Renminbi (RMB) ...... RMB–EUR RMB–GBP RMB–JPY RMB–USD Russian Ruble (RUB) ...... RUB–EUR RUB–GBP RUB–JPY RUB–USD Turkish Lira (TRY) ...... TRY–EUR TRY–GBP TRY–JPY TRY–USD

4. Swap Categories in the Other groupings create categories of swaps common product type under proposed Commodity Asset Class which are economically related to § 43.6(b)(5)(iii). specific futures contracts (i.e., futures- The Commission proposed defining The Commission proposed to related swaps 169) or swap contracts ‘‘economically related’’ 170 in § 43.2 as a determine swap categories in the other under proposed §§ 43.6(b)(5)(i) and (ii). direct or indirect reference to the same commodity asset class based on three The third set of groupings creates commodity at the same delivery sets of groupings. The first two sets of categories based on swaps sharing a location or locations,171 or with the

USD as super-major currencies simply means that creates 78 categories requiring the calculation of Further, the Commission explained that ‘‘an both currencies are individually eligible for appropriate minimum block sizes in the post-initial ‘indirect’ price link to an Enumerated Physical inclusion among the unique currency combinations period. Commodity Contract or an Other Contract described used for swap categorization. In the FX asset class, 169 Proposed § 43.2 defines a futures-related swap in appendix B to part 43 includes situations where there is no separate bucket for super-major as a swap (as defined in section 1a(47) of the Act the swap reference price is linked to prices of a currencies (such as the buckets in the interest rate and as further defined by the Commission in cash-settled contract described in appendix B to swap asset class described above). implementing regulations) that is economically part 43 that itself is cash-settled based on a 167 CL–Barclays at 10; CL–GFMA at 2–3. related to a futures contract. The Commission is physical-delivery settlement price to such 168 In the Further Block Proposal, every unique adopting this definition as proposed. contract.’’ Id. at n.289. currency combination would be considered a 170 In the Real-Time Reporting Final Rule, the 171 unique swap category, which means there would be Commission explained: ‘‘For the purposes of part For example, a swap utilizing the Platts Gas hundreds of different swap categories for the FX 43, swaps are economically related, as described in Daily/Platts IFERC reference price is economically asset class. Proposed § 43.6(b)(4)(i) alone § 43.4(d)(4)(ii)(B), if such contract utilizes as its sole related to the Henry Hub Natural Gas (NYMEX) established 231 swap categories. Many additional floating reference price the prices generated directly (futures) contract because it is based on the same categories would have been established under or indirectly from the price of a single contract commodity at the same delivery location as that proposed § 43.6(b)(4)(ii). The adopted § 43.6(b)(4) described in appendix B to part 43.’’ 77 FR 1211. underlying the latter contract.

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same or substantially similar cash Therefore, proposed § 43.6(b)(5)(i) Proposed § 43.6(b)(5)(ii) listed the 18 market price series.172 The Commission would establish 42 swap categories such futures contracts to which these swaps noted that this definition would (1) that each contract would be the basis for are economically related, and hence, ensure that swap contracts with shared its own other commodity swap category, establishes 18 swap categories.178 These reference price characteristics indicating and all swaps that are economically swap categories would include any economic substitutability (i.e., swaps in related to that contract would be swap that is economically related to the category can be used to offset some included in that swap category. such contracts. The swap categories or all of the risks associated with The Commission has separately established by proposed § 43.6(b)(5)(i) positions in the underlying commodity) enumerated these contracts since it differ from the swap categories are grouped together within a common previously has identified these established by proposed § 43.6(b)(5)(ii) swap category; 173 and (2) provide commodity contracts as: (1) Having high in that the former may be economically further clarity as to which swaps are levels of open interest and significant related to futures or swap contracts that described in § 43.4(d)(4)(ii)(B), which cash flow; and (2) serving as a reference are not subject to the block trade rules was previously finalized under the Real- price for a significant number of cash of a DCM, whereas the latter are Time Reporting Final Rule.174 market transactions. Moreover, the economically related to futures The first set of swap categories, Commission has also previously contracts that are subject to the block covered under proposed § 43.6(b)(5)(i), determined that any swap that trade rules of a DCM.179 would establish separate swap references or is economically related to The third set of swap categories, categories for swaps that are these contracts (along with the Brent covered under proposed § 43.6(b)(5)(iii), economically related to one of the Crude Oil (ICE) contract or any contract would establish swap categories for all contracts listed in appendix B to part that is economically related to it) has other commodity swaps that are not 43. Therefore, proposed § 43.6(b)(5)(i) sufficient liquidity to ensure that the categorized under proposed would establish one swap category for public dissemination of swap § 43.6(b)(5)(i) or (ii). These swaps are each contract listed in appendix B to transaction and pricing data for swaps not economically related to any of the part 43. The Real-Time Reporting Final based on this reference asset poses little contracts listed in appendix B to part 43 Rule previously finalized appendix B to risk of disclosing identities of parties, or any of the contracts listed in part 43, which lists 29 Enumerated business transactions, or market proposed § 43.6(b)(5)(ii). For these other 177 Physical Commodity Contracts and positions. commodity swaps, the Commission Other Contracts (i.e., Brent Crude Oil The second set of swap categories, would determine the appropriate swap 175 (ICE)). In the Further Block Proposal, covered under proposed § 43.6(b)(5)(ii), category based on the product types the Commission proposed to add 13 would establish swap categories based described in appendix D to part 43 to electricity and natural gas swap on swaps in the other commodity asset which the underlying asset(s) of the 176 class that are: (1) Not economically contracts to appendix B to part 43. swap would apply or otherwise relate. related to one of the futures or swap Proposed appendix D to part 43 172 For example, a swap utilizing the Standard contracts listed in appendix B to part establishes ‘‘Other Commodity Groups’’ and Poor’s (‘‘S&P’’) 500 reference price is 43; and (2) economically related to a and certain ‘‘Individual Other economically related to the S&P 500 Stock Index relevant futures contract that is subject futures contract because it is based on the same Commodities’’ within those groups. To to the block trade rules of a DCM. cash market price series. the extent that there is an ‘‘Individual 173 The Commission proposed to amend § 43.2 to Other Commodity’’ listed, the define ‘‘reference price’’ as a floating price series (‘‘AEC’’) traded on the IntercontinentalExchange, (including derivatives contract and cash market Inc. (‘‘ICE’’) (See 75 FR 23697); NWP Rockies Commission would deem the prices or price indices) used by the parties to a Financial Basis Contract (‘‘NWR’’) traded on ICE ‘‘Individual Other Commodity’’ as a swap or swaption to determine payments made, (See 75 FR 23704); PG&E Citygate Financial Basis separate swap category. For example, exchanged or accrued under the terms of a swap Contract (‘‘PGE’’) traded on ICE (See 75 FR 23710); contract. The Commission proposed to use this term Waha Financial Basis Contract (‘‘WAH’’) traded on regardless of whether the underlying in connection with the establishment of a method ICE (See 75 FR 24655); Socal Border Financial Basis asset to an off-facility swap is ‘‘Sugar through which parties to a swap transaction may Contract (‘‘SCL’’) traded on ICE (See 75 FR 24648); No. 14’’ or ‘‘Sugar No. 5,’’ the elect to apply the lowest appropriate minimum HSC Financial Basis Contract (‘‘HXS’’) traded on underlying asset would be grouped as block size applicable to one component swap ICE (See 75 FR 24641); ICE Chicago Financial Basis category of such swap transaction. See infra Section Contract (‘‘DGD’’) traded on ICE (See 75 FR 24633); ‘‘Sugar.’’ The Commission thereafter II.B(6)(b). The Commission is adopting this SP–15 Financial Day-Ahead LMP Peak Contract definition as proposed. (‘‘SPM’’) traded on ICE (See 75 FR 42380); SP–15 178 As proposed, these additional other 174 The Real-Time Reporting Final Rule Financial Day-Ahead LMP Off-Peak Contract commodity swap categories would be based on the previously finalized § 43.4(d)(4)(ii)(B), which (‘‘OFP’’) traded on ICE (See 75 FR 42380); PJM WH following futures contracts: CME Cheese; CBOT requires a registered SDR to publicly disseminate Real Time Peak Contract (‘‘PJM’’) traded on ICE (See Distillers’ Dried Grain; CBOT Dow Jones-UBS any publicly reportable swap transaction in the 75 FR 42390); PJM WH Real Time Off-Peak Contract Commodity Index Excess Return; CBOT Ethanol; other commodity asset class that is ‘‘economically (‘‘OPJ’’) traded on ICE (See 75 FR 42390); Mid-C CME Frost Index; CME Goldman Sachs Commodity related’’ to one of the contracts described in Financial Peak Contract (‘‘MDC’’) traded on ICE Index (GSCI) (GSCI Excess Return Index); NYMEX appendix B to part 43, but did not define (See 75 FR 38469); Mid-C Financial Off-Peak Gulf Coast Gasoline; NYMEX Gulf Coast Sour Crude ‘‘economically related.’’ This definition, as Contract (‘‘OMC’’) traded on ICE (See 75 FR 38469). Oil; NYMEX Gulf Coast Ultra Low Sulfur Diesel; proposed and to be adopted here, would apply to As discussed further below, as of October 12, CME Hurricane Index; CME International Skimmed the use of this term throughout all of part 43 of the 2012, ICE withdrew its listing of these contracts as Milk Powder; NYMEX New York Harbor Ultra Low Commission’s regulations. a result of converting its cleared OTC swap Sulfur Diesel; CBOT Nonfarm Payroll; CME Rainfall 175 As noted by the Commission in the Real-Time contracts and related options to futures listed at ICE Index; CME Snowfall Index; CME Temperature Reporting Final Rule, the 28 Enumerated Physical Futures U.S. and ICE Futures Europe. Accordingly, Index; CME U.S. Dollar Cash Settled Crude Palm Commodity Contracts are traded on U.S. DCMs, ICE converted these contracts into economically Oil; and CME Wood Pulp. while Brent Crude Oil (ICE) futures contracts are equivalent futures contracts and has listed them for 179 This distinction is noteworthy because primarily traded in Europe. 77 FR 1211 n. 288. trading. See ICE—Swaps to Futures Transition, proposed § 43.6(e)(3) provides that ‘‘[p]ublicly 176 See infra Section II.B5(d)(i). The Commission https://www.theice.com/S2F.jhtml (last visited May reportable swap transactions described in had previously issued orders deeming these 7, 2013). Therefore, as discussed further below, the § 43.6(b)(5)(i) that are economically related to a contracts as ‘‘significant price discovery contracts’’ Commission has determined in this final rule to add futures contract in appendix B to this part [43] shall in connection with trading on exempt commercial the converted contracts to appendix B to part 43, not qualify to be treated as block trades or large markets (‘‘ECMs’’), based on, among other factors, such that each contract will serve as a basis for an notional off-facility swaps (as applicable) [during their material liquidity and price discovery other commodity swap category. See infra Section the initial period], if such futures contract is not function. See infra Section III.C(4)(a). These II.A(4). subject to a designated contract market’s block contracts included: AECO Financial Basis Contract 177 77 FR 1211. trading rules.’’

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would set the appropriate minimum second year.183 Other commenters, of the 13 electricity and natural gas block size for each of the swap however, opposed the proposed swap contracts proposed to be added to categories listed in appendix D to part categories as too narrow and appendix B to part 43 into DCM-listed, 43. recommended broadening the definition economically equivalent futures In circumstances where a swap does of ‘‘economically related’’ and reducing contracts,188 the Commission is making not apply or otherwise relate to a the number of swap categories to reflect one modification by establishing swap specific ‘‘Individual Other Commodity’’ increasing price correlation between categories and adopting initial listed under the ‘‘Other Commodity different categories of commodities as appropriate minimum block sizes Group’’ in appendix D to part 43, the well as existing hedging practices by corresponding to those set by a DCM for Commission would categorize such market participants.184 those futures contracts. With respect to swap as falling under the respective Parity Energy requested that the the swap categories established under ‘‘Other’’ swap categories. For example, Commission establish a separate § 43.6(b)(5)(i), the Commission believes an emissions swap would be categorized category for swaps that are economically that establishing categories for swaps as ‘‘Emissions,’’ while a swap in which related to crude oil options because that are economically related to one of the underlying asset is aluminum would transactions in crude oil options are the referenced futures contracts is be categorized as ‘‘Base Metals—Other.’’ typically fewer and larger in size than appropriate because these contracts Additionally, in circumstances where transactions in crude oil futures have previously been identified as (1) the underlying asset of swap does not contracts.185 Parity Energy also agreed having high levels of open interest and apply or otherwise relate to an with the proposed distinction in swap significant cash flow; and (2) serving as ‘‘Individual Other Commodity’’ or an categories between swaps that are a reference price for a significant ‘‘Other’’ swap category, the Commission economically related to natural gas number of cash market transactions. would categorize such swap as either swaps and swaps that are economically With respect to the swap categories ‘‘Other Agricultural’’ or ‘‘Other Non- related to natural gas swap options.186 established under § 43.6(b)(5)(i)–(ii), the Agricultural.’’ The Commission is adopting the Commission is establishing swap Comments on the proposed swap definition of ‘‘economically related’’ as categories and adopting initial categories in the other commodity asset proposed. The Commission believes that appropriate minimum block sizes which class varied. CME Group agreed with broadening the definition, as suggested correspond with those set by a DCM for the proposed approach to establishing by some commenters, would reduce the economically related futures contracts swap categories in the other commodity precision with which swaps in the other in the initial period.189 Hence, to the asset class in the initial period because commodity asset class can be properly extent possible, the Commission is it would allow appropriate minimum categorized. As proposed, the definition relying upon the DCMs’ knowledge of block level sizes to be set based on the of ‘‘economically related’’ is sufficient and experience with liquidity in related minimum block sizes set by DCMs.180 in that it (1) ensures that swap contracts futures markets until additional data ICI, however, recommended that the with shared reference price becomes available. With respect to the Commission obtain and analyze trading characteristics (indicating economic swap categories established under data from SDRs first before determining substitutability) are grouped together § 43.6(b)(5)(iii), the Commission whether the proposed swap categories within a common swap category and (2) believes that setting swap categories by are appropriate.181 provides further clarity as to which product type would allow the Several commenters commented on swaps are described in Commission to set appropriate the granularity of the proposed swap § 43.4(d)(4)(ii)(B). minimum block sizes for groups of categories. Some commenters Furthermore, the Commission transactions that have similar recommended more granular categories believes that its general approach to underlying physical commodity market to account for the differences in establishing swap categories under characteristics. Accordingly, the liquidity and execution risk between § 43.6(b)(5)(i)–(iii) is appropriate and is Commission does not believe that shorter- and longer-dated contracts.182 adopting the text of § 43.6(b)(5)(i)–(iii) establishing swap categories that are Similarly, Barclays also commented that largely as proposed, with the exception broader than proposed is necessary to of some proposed swap categories in swap categories in the other commodity 187 enhance market transparency. asset class should consider that § 43.6(b)(5)(ii). With the conversion related to the following NYMEX futures contracts: products typically experience a 183 CL–Barclays at 9. Gulf Coast Gasoline; Gulf Coast Ultra Low Sulfur reduction in liquidity beyond the first or 184 CL–Better Markets at 6–7; CL–AFR at 6–7. Diesel; and New York Harbor Ultra Low Sulfur 185 CL–Parity at 4–5. Diesel. As of October 15, 2012, NYMEX eliminated 180 CL–CME 3–4. Proposed § 43.6(e)(1) 186 Id. As proposed, the initial minimum block block trading in these contracts because they have established appropriate minimum block sizes in the size for swaps that are economically related to no open interest. The Commission is also removing initial period for swap categories in proposed Henry Hub Natural Gas futures was set at 1,000,000 the swap category for swaps that reference or are § 43.6(b)(5)(i)–(ii) based on the block sizes for mmBtu; the initial minimum block size for Henry related futures contracts set by DCMs, except for Hub Natural Gas options was set at 5,500,000 economically related to Non-Farm Payroll futures natural gas and electricity swaps proposed to be mmBtu. contract, the International Skimmed Milk Powder, added to appendix B of part 43. 187 The Commission is not adopting separate and Wood Pulp as these contracts are no longer 181 CL–ICI at 5. swap categories that it proposed in the Further listed for trading. 182 CL–ICAP Energy at 4; CL–fia at 3. Block Proposal for swaps that are economically 188 See supra note 176. 189 See infra Section II.B(5)(d).

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Furthermore, the Commission is not 5. Comments Regarding Swap a SEF or DCM; (2) few market using additional criteria to create more Categories Across Asset Classes participants have transacted in these granular swap categories in the other The Commission received a number swaps or in economically-related swaps; commodity asset class. While of comments suggesting that, for all or (3) few swap transactions are commodity swaps within a particular asset classes, the Commission establish executed during a historic period in swap category may feature different separate swap categories, with separate these swaps or in economically-related liquidity and risk profiles based on their appropriate minimum block sizes, for swaps.198 Parascandola recommended tenor, the Commission is not aware of infrequently traded or illiquid swaps. block treatment for small notional and any data that would warrant additional Javelin and SDMA did not think odd-lot trades, particularly in index swap categories. As swaps trading data infrequently-traded swaps posed an products where the notional amount is 199 becomes available, the Commission will obstacle and recommended swap below $10 million. Kinetix suggested examine such data to determine categorization that would account for that transactions in any product with fewer than 250 transactions annually whether establishing additional swap hedging for illiquid swaps through should receive treatment as block categories would be appropriate. synthetic/portfolio hedging through liquidity of economically equivalent trades.200 Vanguard urged a more The other main modification to the swaps.192 Barclays suggested that all granular approach to swap categories swap categories established under swaps made available to trade that trade and thresholds to ‘‘recognize distinct § 43.6(b)(5) is that the Commission is less than three times a day should be liquidity pools.’’ 201 Vanguard and not adopting separate swap categories treated as blocks, as market makers SIFMA suggested that swaps that trade for swaps that are economically related otherwise will be reluctant to quote fewer than 14 trades per day should be to the options contracts listed in prices.193 Alternatively, Barclays blocks.202 AII suggested block treatment appendix F of the Further Block suggested removing such swaps from for swaps that trade less than 5 times Proposal.190 Consistent with the the ‘‘available to trade’’ category and per day.203 Commission’s definitions of thereby exempting them from post-trade After consideration of the comments ‘‘economically-related’’ and ‘‘futures- reporting.194 ISDA/SIFMA requested received, the Commission is adopting related swap,’’ the Commission block treatment for all infrequently the swap categories described in the considers such swaps, which feature an traded swaps and suggested a sections above. The Commission optionality component, to be benchmark tied to precise daily trading believes that the trade frequency of a economically related to the frequency including a time delay for single instrument is but one measure of corresponding futures contracts adopted illiquid products generally.195 To liquidity for such a swap and does not in appendix F of this final rule for support this approach, ISDA/SIFMA factor in the pool of instruments that are capable of providing an economically purposes of determining swap cited a Commission study showing that equivalent position, either individually categories. This approach to market participants prefer off-exchange or on a portfolio basis. categorizing such swaps is consistent bilateral execution for illiquid with the Commission’s methodology to instruments because of liquidity B. Appropriate Minimum Block Size 196 establish initial appropriate minimum concerns. ISDA/SIFMA suggested Methodologies for the Initial and Post- block size for swaps with optionality for that a single transaction, regardless of Initial Periods size, in such infrequently-traded or all asset classes.191 Under this illiquid swaps may move the market.197 The Commission proposed a tailored methodology, the notional size of swaps GFMA suggested treating all approach for determining appropriate with optionality in the initial period infrequently-traded swaps as blocks and minimum block sizes during the initial will be equal to the notional size of the defines such transactions as exhibiting and post-initial periods for each asset swap component without the optional all or some of the following features: (1) class. In the subsections below, the component. As discussed further below, The constituent swap or swaps to which Commission sets out a more detailed the Commission is adopting this they are economically related are not discussion of the appropriate minimum methodology as proposed, and therefore executed on, or pursuant to the rules of, block size methodologies for swaps will not consider optionality in the within: (1) Swap categories in the determination of a swap contract’s 192 CL–Javelin at 5–6; CL–SDMA at 6. interest rate and credit asset classes; (2) notional size—allowing block sizes to be 193 CL–Barclays at 4. the single swap category in the equity established based on the block sizes set 194 Id. asset class; (3) swap categories in the FX by DCMs for options contracts would 195 ISDA/SIFMA recommended that every asset class; and (4) swap categories in transaction (regardless of size) in a swap category the other commodity asset class. contradict this approach. for which there are no more than 14 swaps traded per business day receive block treatment for a Thereafter, the Commission discusses period of 1 year. CL–ISDA/SIFMA at 12. special rules for determining the 190 These options contracts listed in proposed 196 According to ISDA/SIFMA, ‘‘[f]orcing the appropriate minimum block sizes across Appendix F, which are subject to a minimum DCM same transparency standards on market participants asset classes. block size rule, included Cocoa (ICE); Coffee (ICE); for both liquid and illiquid products will be detrimental. Instantaneous trade disclosure for Cotton No. 2 (ICE); Frozen Concentrated Orange 198 CL–GFMA at 3. highly illiquid products, combined with the Juice (ICE); Gold (COMEX and NYSE Liffe); New potential for SEF or DCM execution, is likely to 199 CL–Parascondola at 1. York Harbor No. 2 Heating Oil (NYMEX); Silver erode their liquidity further and to do severe 200 CL–Kinetix at 1. (COMEX and NYSE Liffe); Sugar #11 (ICE); and damage to the safety and soundness of the system 201 CL–Vanguard at 5. Sugar #16 (ICE). as a whole.’’ Id. 202 CL–SIFMA at 10; CL–Vanguard at 7. 191 See infra Section II.C. 197 Id. 203 CL–AII at 6.

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1. Phase-In of Appropriate Minimum Eight commenters suggested that the that the Commission should phase in Block Sizes Commission establish a more the block threshold in order to allow As discussed in Section I.C.2. above, conservative threshold during the initial trading on SEFs and DCMs to develop the Commission proposed a phase-in of period. AII recommended that the and suggested setting the threshold its regulations regarding appropriate Commission either remove block trading based on a 25-percent notional amount minimum block size methodologies so thresholds during the initial period or calculation.213 SIFMA proposed a multi- that market participants could better lower the thresholds below the phase process for establishing block adjust their swap trading strategies to proposed levels to appropriately levels, starting with a one-year data manage risk, secure new technologies, transition the market and avoid collection phase, followed by an initial unnecessarily harming liquidity.208 and make necessary arrangements to period with low block levels.214 The Barclays recommended introducing comply with part 43. Thus, the block levels would then be decreased if Commission proposed two provisions block levels that allow for empirical analysis of the transaction data and the Commission found that liquidity relating to the Commission’s significantly decreased or bid-ask determination of appropriate minimum sequentially increasing block sizes until such point as the desired equilibrium spreads significantly increased over the block sizes: (1) Initial appropriate quarter for swaps close to, but below, minimum block sizes under proposed between transparency and liquidity is 209 the block threshold.215 WMBAA § 43.6(e); and (2) post-initial appropriate reached. GFMA stated that, if the encouraged the Commission to minimum block sizes under proposed Commission used a percentage notional implement lower block trade thresholds § 43.6(f). test, then it should introduce it in a The Commission received ten phased manner to assess the impact on while the post-trade reporting comments regarding the proposed the market over time and ensure it has requirements are implemented and phase-in of its appropriate minimum sufficient flexibility to amend the market participants begin providing block size methodologies. Four notional percentage.210 ICAP Energy data to SDRs for cleared and uncleared commenters, AII, EEI, SIFMA, and proposed specific initial block swaps.216 Vanguard, requested that the thresholds for PJM at 50 MW/Hr and for After consideration of the comments SP–15 and Mid-C at 30 MW/Hr, and for Commission apply block status to all above, the Commission is adopting a 204 natural gas basis swaps at 2500 swaps during the initial period. AII phased-in approach as proposed, but MMBTUs/day.211 ICI, while supporting stated that removing (or lowering) block with modifications in response to the thresholds would appropriately a 50 percent notional amount calculation, urged the Commission to comments above regarding phasing, as transition the market and avoid harming more fully described below. liquidity.205 SIFMA recommended phase-in the calculation for very illiquid collecting SDR data during the initial instruments (less than 3 or 4 trades per 2. Overview of Proposed Approach period and gradually and iteratively week) by first implementing a 25 phasing in block thresholds.206 percent notional amount calculation, in The chart below summarizes swap Vanguard also expressed concern order to alleviate potential harmful categories and calculation regarding the liquidity impacts of effects of disclosure of large block sizes methodologies that the Commission setting block thresholds without more on liquidity, particularly in illiquid proposed for each asset class in both the data.207 swaps markets.212 ISDA/SIFMA stated initial period and the post-initial period.

204 CL–AII at 3; CL–EEI at 5; CL–SIFMA at 3; CL– 208 CL–AII at 3. Vanguard at 7. 209 CL–Barclays at 11. 213 CL–ISDA/SIFMA at 13. 205 CL–AII at 3. 210 CL–GFMA at 3. 214 CL–SIFMA at 3. 206 CL–SIFMA at 3. 211 CL–ICAP Energy at 3. 215 Id. 207 212 CL–Vanguard at 7. CL–ICI at 7. 216 CL–WMBAA at 4.

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PROPOSED APPROACH

Asset class Swap category criteria Initial implementation period Post-initial implementation period 217

Interest Rates ...... By unique currency and tenor group- 67-percent notional amount calculation 67-percent notional amount calculation Credit ...... ing 218 by swap category 219 by swap category 220 By tenor and conventional spread grouping 221 FX ...... By numerated FX currency combina- Based on DCM futures block size by tions (i.e., futures related) 222 swap category 223 By non-enumerated FX currency com- All trades may be treated as block binations (i.e., non-futures re- trades 225 lated) 224 Other Commodity .... By economically-related Appendix B to Based on DCM futures block size by part 43 contract if the swap is (1) fu- swap category 227 tures related and (2) the relevant fu- tures contract is subject to DCM block trade rules 226 By economically-related Appendix B to No trades may be treated as blocks 229 part 43 contract if the swap is: (1) futures related and (2) the relevant futures contract is not subject to DCM block trade rules 228 By economically-related Appendix B to Appropriate minimum block size equal part 43 contract if the swap is (1) a to $25 million 231 listed natural gas or electricity swap contract and (2) the relevant Appen- dix B contract is not futures re- lated 230 By swaps that are economically re- Based on DCM futures block size by lated to the list of 18 contracts listed swap category 233 in § 43.6(b)(5)(ii) 232 By Appendix D to part 43 commodity All trades may be treated as block group, for swaps not economically trades 235 related to a contract listed in Appen- dix B to part 43 or to the list of 18 contracts listed in § 43.6(b)(5)(ii) 234

Equity ...... All equity swaps 236 ...... No trades may be treated as blocks 237

3. The 67-Percent Notional Amount determine initial and post-initial data is accumulated; 239 (step 2) convert Calculation for Determination of appropriate minimum block sizes for to the same currency or units and use Appropriate Minimum Block Sizes swaps in the interest rate and credit a ‘‘trimmed data set’’; 240 (step 3) The Commission proposed using a 67- asset classes pursuant to proposed determine the sum of the notional percent notional amount calculation to §§ 43.6(c)(1), 43.6(e)(1), and amounts of swaps in the trimmed data 43.6(f)(1).238 The Commission also set; (step 4) multiply the sum of the 217 This post-initial implementation period would proposed using a 67-percent notional notional amount by 67 percent; (step 5) commence after an initial period, lasting at least amount calculation to determine post- rank order the observations by notional one year. Thereafter, the Commission would amount from least to greatest; (step 6) determine appropriate minimum block sizes a initial appropriate minimum block sizes minimum of once annually. See proposed for swaps in the FX and other calculate the cumulative sum of the § 43.6(f)(1). commodity asset classes pursuant to observations until the cumulative sum 218 See proposed § 43.6(b)(1). § 43.6(f)(1). is equal to or greater than the 67-percent 219 See proposed § 43.6(c)(1). notional amount calculated in step 4; 220 See proposed § 43.6(f)(2). The 67-percent notional amount (step 7) select the notional amount 221 See proposed § 43.6(b)(2). calculation as proposed is a associated with that observation; (step 222 See proposed § 43.6(b)(4)(i). methodology under which the 8) round the notional amount of that 223 See proposed § 43.6(e)(1). Commission would: (Step 1) select all of 224 See proposed § 43.6(b)(4)(ii). observation to two significant digits, or 225 See proposed § 43.6(e)(2). the publicly reportable swap if the notional amount associated with 226 See proposed § 43.6(b)(5)(i). transactions within a specific swap that observation is already significant to 227 See proposed § 43.6(e)(1). category using a rolling three-year two digits, increase that notional 228 See proposed § 43.6(b)(5)(i). window of data beginning with a amount to the next highest rounding 229 See proposed § 43.6(e)(3). minimum of one year’s worth of data 230 See proposed § 43.6(b)(5)(i). and adding one year of data for each 239 231 See proposed § 43.6(e)(3). See note 85 supra for the definition of publicly reportable swap transaction. Since the Commission 232 See proposed § 43.6(b)(5)(ii). calculation until a total of three years of proposed to determine all appropriate minimum 233 See proposed § 43.6(e)(1). block sizes based on reliable data for all publicly 238 234 See proposed § 43.6(b)(5)(iii) and the product Proposed § 43.6(c)(1) describes the 67-percent reportable swap transactions within a specific swap types groupings listed in proposed appendix D to notional amount calculation. Proposed § 43.6(e)(1) category, the Commission does not view the fact part 43. provides the provisions relating to the methodology that more than one SDR may collect such data as 235 See proposed § 43.6(e)(2). for determining appropriate minimum block sizes raising any material concerns. 236 See proposed § 43.6(b)(3). during the initial period for swaps in the interest 240 See proposed amendment to § 43.2 and the 237 See proposed § 43.6(d). rate and credit asset classes, inter alia. discussion infra in this section.

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point of two significant digits; 241 and will sacrifice liquidity for certain swap minimum block sizes, several argued (step 9) set the appropriate minimum products and alter the proper that lower appropriate minimum block block size at the amount calculated in functioning of the marketplace in the sizes were inconsistent with step 8. An example of how the name of transparency.’’ 249 congressional intent. Barnard and Commission would apply this proposed Several of the commenters who SDMA specifically stated that a 50 methodology is set forth in section VII opposed the 67 percent notional amount percent notional amount calculation of this final rule. calculation and/or supported lower would not constitute a ‘‘vast majority’’ Twenty-eight commenters provided appropriate minimum block sizes of swap transactions as intended by general comments on the resulting specifically discussed the 50 percent Congress.256 Moreover, commenters also proposed block sizes or on the general notional amount calculation. These suggested that the 67 percent notional approach of using a notional amount commenters generally expressed amount calculation supported the calculation. Out of the 28 commenters, concern that the 67 percent notional statutory requirements of section 14 opposed the 67 percent notional amount calculation resulted in 2(a)(13) of the CEA as well as amount calculation and/or supported appropriate minimum block sizes that congressional intent. For example, lower appropriate minimum block are too high and would result in Arbor stated that ‘‘the 67% rule and the sizes,242 12 supported the 67 percent reduced liquidity in these markets. Market Depth test are consistent with notional amount calculation and/or Freddie Mac and ICI expressly [c]ongressional [i]ntent, promotes supported higher appropriate minimum supported a 50 percent notional amount transparency and trading of SEFs, block sizes,243 1 commenter felt unable calculation.250 Pierpont and WMBAA provides better market data, and is a to comment on the 67 percent notional recommended a notional amount conservative approach given the amount calculation without actual swap calculation of no greater than 50 market’s size.’’ 257 CRT and Currenex data,244 and 1 commenter opposed the percent.251 ICAP Energy and SIFMA stated that the 67 percent notional 67 percent notional calculation for the recommended a notional amount amount calculation would achieve a other commodity asset class, but also calculation below 50 percent, but proper balance between market felt that the 50 percent notional preferred a 50 percent notional amount transparency and market liquidity.258 calculation was too low for interest calculation to a 67 percent notional Jefferies stated that the 67 percent 245 rates. amount calculation.252 AII and ICAP notional amount calculation was Of the 14 commenters who opposed recommended not using a notional consistent with congressional intent.259 the 67 percent notional amount amount calculation at all, but preferred Seven commenters expressed a calculation and/or supported lower a 50 percent notional amount preference for the 67 percent notional appropriate minimum block sizes, two calculation to a 67 percent notional amount calculation, but also supported commenters, CME and Barclays, amount calculation.253 another alternative.260 ODEX, RJ opposed the notional amount Some of the commenters who O’Brien, and Spring Trading expressed calculation generally, but not opposed the 67 percent notional amount support for the 67 percent notional necessarily the resulting block sizes.246 calculation and/or supported lower amount calculation, but also suggested CME stated that the rule is arbitrary and appropriate minimum block sizes did so that a higher notional amount unrelated to the explicit goals of Dodd- conditionally. MFA preferred the 50 Frank with respect to setting calculation would be preferable, percent notional amount calculation 261 appropriate minimum block sizes.247 particularly in the post-initial period. over the 67 percent primarily in the AFR, Better Markets, Javelin, and SDMA Barclays stated that the calculation is initial period—‘‘if swap categories are not based on any analysis of the impact all recommended a 75 percent or higher not properly distinguished, and the notional amount calculation and a that these thresholds will have on Commission cannot ensure a calibration liquidity or on the corresponding costs market depth and market breadth of the initial minimum block sizes to 262 to market participants.248 The other test. current market conditions, we hesitate commenters in this group generally A number of commenters also to endorse the 67 percent notional expressed concern that the appropriate expressed concern regarding imposing amount calculation in the final minimum block sizes were too large and the proposed 67 percent notional rulemaking and prefer instead that the would reduce liquidity and/or disrupt amount calculation prior to analysis of Commission use a 50 percent notional markets. For example, AII stated that swap data collected by SDRs. AII amount calculation, particularly in the ‘‘we believe that if the CFTC utilizes the recommended lowering or eliminating initial period, with a phase-in to a 67 67 percent notional calculation required block thresholds until complete data has percent notional amount calculation under the Proposed Rules, the CFTC been reported to SDRs so as not to over time.’’ 254 Two other commenters 241 For example, if the observed notional amount supported the 50 percent notional 256 The ‘‘guiding principle in setting appropriate is $1,250,000, the amount should be increased to amount calculation, but in the context block trade levels [is that] the vast majority of swap $1,300,000. This adjustment is made to assure that of specific asset classes—Freddie Mac transactions should be exposed to the public market at least 67 percent of the total notional amount of for the interest rate asset class and ICAP through exchange trading.’’ Congressional Record— transactions in a trimmed data set are publicly Senate, S5902, S5922 (July 15, 2010); CL–Barnard disseminated in real time. Energy for the other commodity asset at 3; CL–SDMA at 2. 255 242 Commenters in this category include AII, class ‘‘for year two and beyond.’’ 257 CL–Arbor at 1. Barclays, CME, Freddie Mac, ICAP Energy, ICAP Of the 12 commenters who supported 258 CL–CRT at 1–2; CL–Currenex at 2. North America, ICI, ISDA/SIFMA, MFA, Morgan the 67 percent notional amount 259 CL–Jefferies at 1–2. Stanley, Pierpont, SIFMA, Vanguard, WMBAA. calculation and/or higher appropriate 260 CL–AFR at 8–9; CL–Better Markets at 7–8; CL– 243 Commenters in this category include Arbor, Spring Trading at 2; CL–ODEX at 1; CL–RJ O’Brien AFR, Barnard, Better Markets, CRT, Currenex, at 1; CL–AFR at 8–9; CL–Better Markets at 7–8; CL– 249 CL–AII at 2. Javelin, Jefferies, ODEX, RJ O’Brien, SDMA, Spring Javelin at 2; CL–SDMA at 2. Trading. 250 CL–Freddie at 2; CL–ICI at 6–7. 261 CL–ODEX at 1; CL–RJ O’Brien at 1; CL–Spring 244 251 CL–GFMA at 3. CL–Pierpont at 3; CL–WMBAA at 3. Trading at 2. 245 252 CL–FIA at 2–3. CL–ICAP Energy at 3; CL–SIFMA at 10. 262 CL–AFR at 8–9; CL–Better Markets at 7–8; CL– 246 CL–CME at 2; CL–Barclays at 10. 253 CL–AII at 6; CL–ICAP Energy at 4. Javelin at 2; CL–SDMA at 2. For a discussion of 247 CL–CME at 2. 254 CL–MFA at 3–4. market depth and market breadth, see infra note 271 248 CL–Barclays at 10. 255 CL–Freddie at 2; CL–ICAP Energy at 3. and accompanying text.

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impair market liquidity.263 Barclays Many commenters expressed support with higher thresholds available based recommended introducing block levels for adopting the market depth test 272 on liquidity levels.279 Spring Trading that allow for empirical analysis of the and other commenters additionally suggested using the market depth test on transaction data and sequentially supported utilizing the market breadth a quarterly basis to refine the 67-percent increasing block sizes until such point test.273 Several commenters stated that threshold during the initial period.280 as the desired equilibrium between such tests would provide a more Jefferies recommended using the test in transparency and liquidity is accurate depiction of overall liquidity in the post-initial period to complement reached.264 Better Markets suggested specific markets, and thus would the 67-percent notional amount transitioning to a market depth and produce more appropriate minimum calculation in the initial period for market breadth test after the block sizes.274 Other commenters stated interest rate and credit swaps.281 Commission has collected a year of SDR that employing the tests would be Some commenters noted the need for data.265 GFMA could not comment on consistent with congressional intent available and sufficient data to adopt the 67 percent notional amount expressed in the Dodd-Frank Act.275 the market depth and market breadth calculation in the absence of swap MFA, however, cautioned that current tests. AFR commented that sufficient data.266 ICAP Energy stated that once market depth may be an unreliable data was already available based on post-implementation swap data is indicator because it may vary over time information provided on trading screens obtained, then the Commission and and be subject to manipulation.276 of trading venues.282 Other commenters, industry will be in better position to Several commenters supported using however, stated that additional market assess liquidity and propose block the market depth and market breadth data would allow the tests to produce a levels.267 ICI stated that, for those asset test in conjunction with the proposed more adequate snapshot of liquidity.283 classes where no data is available, it is notional amount calculation For example, SDMA recommended impossible to determine whether the methodology and proposed different adopting the tests after obtaining six Commission has identified the most approaches. Some commenters months of data; Vanguard and Better relevant criteria for swap categories.268 recommended using the market depth Markets recommended a year.284 ISDA/SIFMA suggested that for new test during the initial period as a cross- After consideration of the comments interest rate swap products the check against the Commission’s received in regard to phasing-in the 277 Commission should allow for block notional amount calculations. SDMA appropriate minimum block size and treatment until sufficient data is and Javelin argued that a market depth the 67-percent notional amount available.269 Vanguard stated that block and market breadth analysis would calculation, the Commission is adopting thresholds cannot be established absent justify adoption of a 75-percent notional § 43.6(e)(1) with the following an adequate data source and time for amount threshold in the initial modifications. For the initial period, the 278 assessment.270 period; AFR suggested, however, that Commission is adopting the 50 percent In the Further Block Proposal, the such a threshold could be set as a floor, notional amount calculation to Commission specifically requested determine appropriate minimum block comment regarding other potential contracts identified in step 1; (step 4) identify the sizes in the interest rate swaps and four 30-minute periods that contain the highest methods for determining appropriate credit asset classes. The Commission is amount of executed notional volume each day for of the view that this approach provides minimum block thresholds. While the each contract of the pre-trade price transparency set Commission received numerous identified in step 1 and retain 120 observations for a more gradual phase-in of minimum related to each 30-minute period for each day of the block sizes as recommended by comments regarding the efficacy of a look-back period; (step 5) determine the average notional amount calculation and the numerous commenters. Moreover, this bid-ask spread over the look-back period of one year will allow SDRs to collect at least one appropriate percentage to use in making by averaging the spreads observed between the such a calculation, the Commission only largest bid and executed offer for all the year of reliable data for each swap observations identified in step 3; (step 6) for each category prior to the application of the received significant comments regarding of the 120 observations retained in step 4, calculate higher 67-percent notional amount one other method. The Commission the sum of the notional amount of all orders calculation to determine appropriate received a number of comments collected from step 3 that fall within a range, minimum block sizes in the post initial regarding whether the Commission calculate the average of all of these observations for the look-back period and divide by two; (step 7) to period, which the Commission is should use a market depth and market determine the trimmed market depth, calculate the adopting as discussed below. sum of the market depth determined in step 6 for breadth test, instead of the 67 percent For the post-initial period, the notional amount calculation all swap contracts within a swap category; (step 8) to determine the average trimmed market depth, use Commission is adopting § 43.6(f)(1) as methodology, to calculate the relevant the executed notional volumes determined in step proposed. The 67-percent notional initial minimum block sizes and the 2 and calculate a notional volume-weighted average amount calculation is intended to post-initial minimum block sizes.271 of the notional amounts determined in step 6; (step 9) using the calculations in steps 7 and 8, calculate ensure that within a swap category, the market breadth based on the following formula: approximately two-thirds of the sum 263 CL–AII at 6. market breadth = averaged trimmed market depth total of all notional amounts are 264 CL–Barclays at 11. + (trimmed market depth ¥ average trimmed 265 CL–Better Markets at 9–10. market depth) × .75; (step 10) set the appropriate reported on a real-time basis. This 266 CL–GFMA at 3. minimum block size equal to the lesser of the approach would ensure that market 267 CL–ICAP Energy at 2. values from steps 8 and 9. 77 FR 15,482. participants have a timely view of a 268 CL–ICI at 4. 272 CL–CME at 2; CL–ODEX at 2; CL–Spring substantial portion of swap transaction 269 CL–ISDA/SIFMA at 14. Trading at 2; CL–MFA at 7; CL–FIA at 2. and pricing data to assist them in 273 270 CL–Vanguard at 7. CL–Arbor at 1; CL–AFR at 8–9; CL–Jeffries at 2; CL–SDMA at 3–6; CL–Javelin at 4–6; CL–RJ determining, inter alia, the competitive 271 Market depth and market breadth was O’Brien at 1; CL–Better Markets at 9–10; CL–CRT proposed to be calculated as follows: (step 1) at 2; CL–FIA at 2. 279 CL–AFR at 9. Identify swap contracts with pre-trade price 274 280 CL–Spring Trading at 2. transparency within a swap category; (step 2) CL–AFR at 9; CL–Spring Trading at 2; CL–FIA at 2; CL–SDMA at 8. 281 calculate the total executed notional volumes for CL–Jefferies at 3. 275 each swap contract in the set from step 1 and CL–Arbor at 1; CL–CME at 2; CL–AFR at 3. 282 CL–AFR at 9. calculate the sum total for the swap category over 276 CL–MFA at 7. 283 CL–Jefferies at 2; CL–Javelin at 6; CL–Arbor at the look back period; (step 3) collect a market depth 277 CL–MFA at 7; CL–SDMA at 7; CL–Spring 1; CL–RJ O’Brien at 1; CL–CRT at 2. snapshot of all of the bids and offers once each Trading at 2. 284 CL–Better Markets at 10; CL–SDMA at 7; CL– minute for the pre-trade price transparency set of 278 CL–SDMA at 5; CL–Javelin at 2. Vanguard at 7.

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price for swaps within a relevant swap a submission or its own surveillance of December 31, 2012.289 DCMs and SDs category. The Commission anticipates swaps market activity the Commission began reporting swap transactions in the that enhanced price transparency would may exercise its legal authority to take FX, equity, and other commodity asset encourage market participants to action by rule or order to mitigate the classes on February 28, 2013.290 Major provide liquidity (e.g., through the potential effects on market liquidity Swap Participants (‘‘MSPs’’) began posting of bids and offers), particularly with respect to swaps in a particular reporting swap transactions in all five when transaction prices move away swap category. asset classes on February 28, 2013.291 from the competitive price. The With respect to the market depth and Financial Entities began reporting swap Commission also anticipates that market breadth test, the Commission is transactions in the interest rate and enhanced price transparency would declining to adopt this approach to credit default swap asset classes on improve market integrity and price determine appropriate minimum block April 10, 2013.292 Financial Entities discovery, while reducing information sizes at this time. The Commission begin reporting swap transactions for asymmetries enjoyed by market makers considers the test a viable alternative to swaps executed starting April 10, 2013, in predominately opaque swap the notional amount calculation in the FX, equity, and other commodity markets.285 methodology, but also recognizes asset classes on May 29, 2013.293 Non- In the Commission’s view, using the several prerequisites to implementing SDs, non-MSPs, and non-Financial 67-percent notional amount calculation such a test. For example, the Entities begin reporting swap in the post-initial period also would Commission would need to determine transactions for swaps executed starting minimize the potential impact of real- which contracts within a swap category April 10, 2013, in the interest rate and time public reporting on liquidity risk. offer pre-trade price transparency— credit default swap asset classes on July The Commission views this calculation electronically displayed and executable 1, 2013.294 Non-SDs, non-MSPs, and methodology as an incremental bids and offers as well as displayed non-Financial Entities begin reporting approach to achieve real-time price available volumes for execution. As swap transactions for swaps executed transparency in swaps markets. The noted by commenters, adequate market starting April 10, 2013, in the FX, Commission believes that its trading data also must be available to equity, and other commodity asset methodology, in conjunction with the collect a market depth snapshot of all of classes on August 19, 2013.295 50-percent notional amount calculation the bids and offers for the pre-trade Accordingly, the Commission and SDRs during the initial period, represents a price transparency set of applicable will have one year of reliable data as of tailored approach towards achieving the contracts. The Commission is also April 10, 2014. goal of subjecting ‘‘a vast majority’’ of cognizant of MFA’s concerns regarding The Commission notes that in swap transactions to real-time public the potential for manipulation of market response to either a submission or its reporting.286 depth. Given the time needed for own surveillance of swaps market As noted above, CEA section trading infrastructure to develop and the activity, the Commission may exercise 2(a)(13)(E)(iv) directs the Commission to significant time and cost considerations its legal authority to take action by rule take into account whether the public involved in collecting such data from or order to delay the imposition of post- disclosure of swap transaction and SEFs and DCMs, the Commission will initial appropriate minimum block pricing data ‘‘will materially reduce continue to examine the merits of sizes, particularly with respect to swap market liquidity.’’ 287 If market adopting the market depth and market categories in the other commodity asset participants conclude that the breadth test. class. The Commission is currently of the Commission has set appropriate 4. Data for Determination of Appropriate minimum block sizes for a specific swap view that data is per se reliable if it is collected by an SDR for an asset class Minimum Block Sizes in the Post-Initial category in a way that will materially Period reduce market liquidity, then those after the respective compliance date for As referenced above in § 43.6(f)(2), the participants are encouraged to submit such asset class as set forth in part 45 Commission proposed determining data to support their conclusion. In of the Commission’s regulations or by post-initial appropriate minimum block addition, through its own surveillance other Commission action. The sizes utilizing a three-year rolling of swaps market activity, the Commission notes that SDRs have been window (beginning with a minimum of Commission may become aware that an collecting data pursuant to the one year and adding one year of data for appropriate minimum block size would compliance dates for certain market each calculation until a total of three reduce market liquidity for a specific participants and asset classes since years of data is accumulated) of swap swap category.288 In response to either December 2012. DCMs and Swap Dealers (‘‘SDs’’) began reporting swap transaction and pricing data. The Commission received eight 285 The proposed calculation stands in contrast to transactions in the interest rate and the proposed 95th percentile-based distribution test credit default swap asset classes on comments regarding the use of a three- set out in the Initial Proposal. See the discussion 289 in section I.B. of the Further Block Proposal. receives for individual or across multiple swap See ‘‘Commission Q & A—On the Start of 286 See note 41 supra. This phased-in approach categories. Id. GFMA stated that if the Commission Swap Data Reporting’’ (Oct. 9, 2012). 290 seeks to improve transparency while not having a establishes a notional calculation test, then it See ‘‘No-Action Relief for Swap Dealers from negative impact on market liquidity. should ensure that it has sufficient flexibility to Certain Swap Data Reporting Requirements of Part 287 7 U.S.C. 2(a)(13)(E)(iv). amend minimum block sizes. CL–GFMA at 4. 43, Part 45, and Part 46 of the Commission’s 288 The Commission received two comments GFMA recommended that the Commission should Regulations Due to Effects of Hurricane Sandy,’’ supporting the Commission’s authority to set be able to ‘‘swiftly alter’’ block trade levels to Commission Letter No. 12–41 (Dec. 5, 2012). 291 appropriate minimum block sizes outside of the enable some trading to be conducted in a newly See id. proposed annual look-back period. MFA argued illiquid market, without the benefit of reference to 292 See ‘‘Time-Limited No-Action Relief for Swap that the Commission’s goal to balance transparency a data set. Id. The Commission notes that Counterparties that are not Swap Dealers or Major and liquidity would be better achieved with the § 43.6(f)(1) provides that the Commission shall Swap Participants, from Certain Swap Data flexibility to adjust minimum block sizes quickly to update post-initial appropriate minimum block Reporting Requirements of Parts 43, 45 and 46 of respond to material market changes. CL–MFA at 8. levels ‘‘[n]o less than once each calendar year.’’ the Commission’s Regulations,’’ Commission Letter MFA recommended that the Commission should Accordingly, the Commission notes that it has the No. 13–10 (Apr. 9, 2013). have the authority to update post-initial minimum ability to adjust post-initial minimum block sizes 293 See id. block sizes in extraordinary circumstances and on under the types of extraordinary circumstances 294 See id. a case-by-case basis, based on SDR data that it raised by commenters. 295 See id.

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year rolling window of data. AII smooth out fluctuations in data such as between using a trimmed data set versus believed it would be more prudent for those that may result from, for example, an unfiltered data set to calculate the the Commission to base block trading seasonality. block size threshold because the public thresholds on a shorter time frame, As referenced above, the Commission lacks the data to make this using newer data. AII recommended proposed to amend § 43.2 of the determination on its own.309 that the Commission should only use Commission’s regulations to define the After consideration of the comments the highest of the three-year, one-year, term ‘‘trimmed data set’’ as a data set received, the Commission is adopting or one-quarter data collected in the that has had extraordinarily large § 43.2 as proposed and applying the determinations.296 GFMA stated that the notional transactions removed by concept of a trimmed data set in three-year rolling data set is unlikely to transforming the data into a logarithm § 43.6(c) as proposed. The Commission be sensitive enough to shorter term with a base of ten (Log10), computing the believes that removing the largest changes in market liquidity and mean, and excluding transactions that transactions, but not the smallest therefore risks setting block sizes that do are beyond four standard deviations transactions, may provide a better data not reflect current market conditions.297 above the mean. Proposed § 43.6(c) uses set for establishing the appropriate ICI believed that a three-year window this term in connection with the minimum block size, given that the may not provide an appropriate data set calculations that the Commission would smallest transactions may reflect to calculate the block threshold, and undertake in determining appropriate liquidity available to offset large encouraged the Commission to look at a minimum block sizes and cap sizes. transactions. Moreover, in the context of one-year set of data and a one-quarter The Commission received five setting a block trade level (or large set of data to determine whether the comments regarding the proposed use of notional off-facility swap level), a calculation would produce more a trimmed data set. Three commenters method to determine relatively large accurate results.298 ISDA/SIFMA supported the use of a trimmed data set, swap transactions should be recommended a 6-month window for but suggested alternative approaches. distinguished from a method to determining appropriate minimum ISDA/SIFMA opposed the proposed determine extraordinarily large block sizes, as a three-year rolling methodology and believed that it would transactions; the latter may skew window is over-inclusive, particularly establish a threshold that is too high to measures of the central tendency of in CDS.299 Kinetix expressed concern exclude large transactions.304 Therefore, transaction size (i.e., transactions of that historical data may not be ISDA/SIFMA recommended that the usual size) away from a more 310 indicative of current market Commission look instead at the raw representative value of the center. conditions.300 MFA was concerned that block size (calculated based on all Therefore, trimming the data set the three-year window would constrain transactions in the relevant swap increases the power of these statistical the ability to shorten the look-back category) and eliminate any trades more measures. In response to the period if material changes in market than five times larger than the block commenters who oppose data trimming, conditions warranted a smaller data set, threshold.305 ISDA/SIFMA alternatively the Commission emphasizes that and recommended retaining the option recommended that the Commission only trimming the data set is necessary to to shorten the look-back window for the exclude transactions that are three avoid the skewing of these measures, observed data set.301 SIFMA believed standard deviations beyond the mean which could lead to the establishment that block reassessments should look to because the proposed methodology of inappropriately high minimum block data on swaps executed since the (excluding transactions that are four sizes. previous reassessment, rather than from standard deviations beyond the mean) 5. Methodology for Determining the a three-year data window as proposed would capture large transactions that Appropriate Minimum Block Sizes by by the Commission.302 Vanguard would otherwise skew the data.306 For Asset Class believed the assessment should be made purposes of applying a market depth and market breadth test, Javelin and a. Interest Rate and Credit Default on the basis of data recorded over a Swaps rolling three-month period for each SDMA recommended trimming each swaps category.303 data set to focus only on bids or offers As described above, the Commission After consideration of the comments at the ‘‘current price’’—the Commission proposed using a 67-percent notional received, the Commission is adopting would (1) determine the mid-point of amount calculation to determine § 43.6(f)(2) with modifications. Based the bid-offer spread; (2) capture orders appropriate minimum block sizes for upon the numerous comments between the bid and this value; and (3) swaps in the interest rate and credit recommending a data set covering a capture orders between the offer and asset classes in both the initial and post- shorter time frame, the Commission will this value.307 initial periods pursuant to §§ 43.6(c)(1), determine post-initial appropriate Two commenters opposed data 43.6(e)(1), and 43.6(f)(1). There was an minimum block sizes under § 43.6(f)(2) trimming on the grounds that it is exception to the use of the 67-percent utilizing a one-year window of swap irrelevant to the purpose of determining notional amount calculation for the transaction and pricing data. This minimum block trade sizes. AFR and initial period in three swap categories in approach will allow the Commission to Better Markets believed that trimming the interest rate and credit asset classes better calibrate block thresholds to the data set would ultimately skew which contained less than 30 changes in market liquidity, while at the minimum block size calculations, such transactions that would meet the same time providing enough data to that certain-sized trades would be definition of publicly reportable swap classified as block trades.308 Better transaction: (1) Interest rate swap 296 CL–AII at 11. Markets stated that the Commission 309 297 CL–GFMA at 4. should disclose the discrepancies CL–Better Markets at 9. 310 298 CL–ICI at 7–8. A measure of central tendency, also known as a measure of location, in a distribution is a single 299 CL–ISDA/SIFMA at 14. 304 CL–ISDA/SIFMA at 14. value that represents the typical transaction size. 300 305 CL–Kinetix at 1. Id. Two such measures are the mean and the median. 301 CL–MFA at 8. 306 Id. For a general discussion of statistical methods, see 302 CL–SIFMA at 6–7. 307 CL–Javelin at 5; CL–SDMA at 8. e.g., Wilcox, R. R., Fundamentals of Modern 303 CL–Vanguard at 7. 308 CL–AFR at 7; CL–Better Markets at 9. Statistical Methods (Springer 2d ed. 2010), (2010).

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category—major currency/30 years +; (2) about liquidity and depth of swaps for the initial period, the Commission interest rate swap category—non-major markets.316 Pierpont commented that, should calibrate initial minimum block currency/30 years +; and (3) for instances where one counterparty to sizes against current market CDScategory—350 bps +/6 to 8.5 years. a swap is not a registered swap dealer, conditions.325 Vanguard stated that If the Commission were to use the the Commission should determine block block thresholds cannot be established proposed 67 percent notional levels based on a 25 percent notional absent an adequate data source and time calculation method, then two of the amount calculation.317 for assessment.326 WMBAA believed three swap categories would have For credit default swaps, the that, in basing rules on three months of resulted in appropriate minimum block Commission received four comments data from over two years ago, the sizes higher than those proposed. The regarding the application of the 67 Commission has failed to ‘‘examine the remaining swap category contained no percent notional amount calculation to relevant data and articulate a data. Accordingly, for these three swap determine initial and post-initial satisfactory explanation for its action categories in the initial period, the minimum block sizes. Jefferies including a rational connection between Commission proposed using the lowest supported the Commission’s proposal, the facts found and the choices made’’ appropriate minimum block size for stating that the 67 percent notional as well as ‘‘determine as best it can the their respective asset classes based on amount calculation was consistent with economic implications of the rule.’’ 327 the respective data set.311 In the interest congressional intent and observed As described more fully above, in rate asset class, the swap category with liquidity.318 Javelin recommended that response to comments regarding the the lowest block size was the non-major the Commission maintain the proposed data sets used for interest rate and credit currency/5 to 10 years, with an 67 percent notional amount calculation default swaps, the use of an incremental appropriate minimum block size of $22 or raise the threshold higher, to a 75 approach, and the comments regarding million (USD). In the credit asset class, percent notional amount calculation.319 phasing and the 67-percent notional the swap category with the lowest block Four commenters supported a market amount calculation regardless of asset size was the category 350 bps +/8.5 to depth and market breadth test for class, the Commission is adopting a 12.5 years, with an appropriate CDS.320 phased-in approach to notional amount minimum block size of $21 million The Commission also received seven calculation. The Commission is (USD). Hence, the appropriate minimum comments specifically regarding the adopting § 43.6(e)(1) and (f)(1) as block size was proposed to be set at $22 interest rate swaps and CDS data sets proposed, with modifications. In the million (USD) for the two interest rate used for determining swap categories initial period, the Commission is swap categories with insufficient data and establishing appropriate minimum adopting the 50-percent notional and at $21 million (USD) for the block thresholds in the initial period. amount calculation to determine corresponding CDS category. AII commented that the data for interest appropriate minimum block sizes in the For interest rate swaps specifically, rate swaps and CDS is no longer interest rate and credit asset classes. The the Commission received eight reflective of the market, nor is it Commission believes that this approach comments regarding the application of reflective of the market that will result provides for a more gradual phase-in of the 67 percent notional amount once the Commission’s regulations are minimum block sizes, as explained calculation to determine initial and implemented in full, and urged the more fully above.328 post-initial minimum block sizes. Commission not to rely on minimal and The Commission did not receive any 321 Jefferies supported the Commission’s outdated data. ICI stated that the comments regarding the exception to proposal, stating that the 67 percent historical data on which the the 67 percent notional amount notional amount calculation was Commission relies may not be reflective calculation for swap categories consistent with congressional intent and of the swaps market once the Dodd- containing fewer than 30 transactions. 312 Frank Act requirements are fully Accordingly, the Commission will observed liquidity. FIA did not 322 explicitly support the 67 percent implemented. Freddie stated that the continue to apply this exception in notional amount calculation, but stated interest rate data set may not be instances where the a Interest Rate or that a 50 percent notional amount comprehensive enough to form the basis Credit swap category contains fewer calculation for interest rate swaps of the proposed minimum block sizes, than 30 transactions in calculating particularly where the proposed post- would be significantly too low.313 appropriate minimum block thresholds initial appropriate minimum block sizes Javelin, ODEX, SDMA, and Spring for the initial period. are determined after transaction and Trading all recommended that the pricing data has been collected for a b. Equity Commission maintain the proposed 67 year.323 ICAP recommended that, if the percent notional amount calculation or The Commission proposed under Commission relies on historical market raise the threshold higher.314 Javelin § 43.6(d) that all swaps in the equity data, then it should use data that is and SDMA both suggested a 75 percent asset class would not qualify for more current and demonstrated to be notional amount calculation in treatment as a block trade or large representative of the market.324 MFA conjunction with a market breadth and notional off-facility swap (i.e., these stated that, given limitations related to market depth approach.315 Other swaps would not be subject to a the size, composition, and timeliness of reporting time delay under part 43). As commenters, however, suggested lower the data set that the Commission used values for the notional amount noted above, the Commission proposed calculation—Freddie recommended a 50 this approach based on (1) the existence 316 CL–Freddie at 2. of a highly liquid underlying cash percent notional calculation in the 317 CL–Pierpont at 3. market; (2) the absence of time delays absence of more comprehensive data 318 CL–Javelin at 1–2. 319 CL–Javelin at 2. for reporting block trades in the 311 77 FR at 15480. 320 CL–CRT at 1–2; CL–Javelin at 5–6; CL–Jefferies underlying equity cash market; (3) the 312 CL–Javelin at 1–2. at 2; CL–SDMA at 2–7. 313 CL–FIA at 2. 321 CL–AII at 7. 325 CL–MFA at 6–7. 314 CL–Javelin at 2; CL–ODEX at 1; CL–SDMA at 322 CL–ICI at 5. 326 CL–Vanguard at 7. 2; CL–Spring Trading at 2. 323 CL–Freddie at 2. 327 CL–WMBAA at 4–5. 315 CL–Javelin at 2; CL–SDMA at 2. 324 CL–ICAP at 8. 328 See supra Section II.B(3).

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small relative size of the equity swaps liquid underlying cash market; and (2) asset class in the initial period, the market relative to the futures, options a small equity swaps market relative to Commission proposed under § 43.6(e)(2) and cash equity index markets; and (4) the futures, options, and cash equity that all such swaps would qualify to be the Commission’s goal to protect the index markets. These characteristics, treated as block trades or large notional price discovery function of the combined with the fact that there are no off-facility swaps (i.e., these swaps underlying equity cash market and time delays for reporting block trades in would be subject to a time delay under futures market. the underlying equity cash market, part 43 of the Commission’s The Commission received six makes establishment of swap categories regulations). The Commission expected comments regarding swap categories in and block thresholds for equity swaps that this provision, as provided, only the equity asset class. One commenter, inappropriate.337 Accordingly, the would apply to the most illiquid swaps. AFR, felt that no block trade treatment Commission is adopting § 43.6(d) as The Commission received three is appropriate as proposed for the equity proposed. comments specifically related to the asset class.329 Five other commenters proposed methodology for determining recommended that the Commission treat c. FX appropriate minimum block sizes for equity swaps similarly to the other asset The Commission proposed to use swap categories in the FX asset class classes and establish swap categories different methodologies for the initial during the initial period. SDMA based upon a range of criteria.330 and post-initial periods to determine supported the Commission’s proposed AII disagreed with the Commission’s appropriate minimum block sizes for block trade thresholds for the FX asset proposal that no equity swaps should be swaps categories in the FX asset class. class.341 AII, however, urged the treated as blocks and suggested The Commission’s proposed approach is Commission to consider removing the harmonization with the SEC’s approach premised on the absence of actual block trading threshold during the for large equity trades.331 Barclays also market data on which to determine initial period for the FX asset class, so disagreed with disallowing block levels appropriate minimum block sizes in the as to allow the Commission to use SDR for all equity swaps and recommended initial period. Subsection a. below data to properly evaluate the market.342 that the equity asset class should be includes a discussion of the initial ICAP recommended an initial block treated similarly to the other asset period methodology. Subsection ii. level of $10 million in the 1-month classes, such that broad based indices below includes a discussion of the post- contract on a variety of FX non- should have separate block levels based initial period methodology. deliverable forward contracts.343 upon futures market levels.332 Barclays The Commission notes that, since the i. Initial Period Methodology also suggested that the Commission Further Block Proposal, Treasury has coordinate with the SEC in setting The Commission proposed under issued a Final Determination, pursuant minimum block levels.333 ICI § 43.6(e)(1) to set the appropriate to sections 1a(47)(E)(i) and 1b of the recommended interim time delays for minimum block sizes for swaps in the CEA, that exempts FX swaps and FX all equity swaps until a closer study of FX asset class during the initial period forwards from the definition of ‘‘swap’’ data on equity swap transactions is based on whether such swap is under the CEA. Therefore, the completed, due to potential differences economically related to a futures requirements of section 2(a)(13) of the in liquidity in the underlying equity contract, i.e., a futures-related swap.338 CEA would not apply to those cash market.334 ISDA/SIFMA requested For futures-related swaps in the FX transactions, and such transactions that the Commission reconsider its asset class, proposed § 43.6(e)(1) would not be subject to part 43 of the proposal and suggested that the provides that the Commission would Commission’s regulations.344 Commission establish block sizes based establish the appropriate minimum Nevertheless, section 1a(47)(E)(iii) of the on the consideration of total trading block sizes based on the block trade size CEA provides that FX swaps and FX volume of swaps linked to the relevant thresholds set by DCMs for forwards transactions still are not underlying index or basket of equity economically-related futures excluded from regulatory reporting securities.335 SIFMA stated that the contracts.339 The Commission set forth requirements to an SDR. Further, the Commission should establish the initial appropriate minimum block Commission notes that Treasury’s final appropriate minimum block sizes for sizes in proposed appendix F to part 43 determination excludes FX swaps and equity swaps based upon liquidity of of the Commission’s regulations.340 For FX forwards, but does not apply to FX the underlying indices.336 non-futures related swaps in the FX options or non-deliverable FX forwards. After consideration of the comments As such, FX instruments that are not received, the Commission is adopting 337 In the event that time delays are established covered by Treasury’s final § 43.6(d) as proposed. While a number for reporting block trades in the underlying equity determination are subject to part 43 of of the commenters pointed out cash market, the Commission may consider establishing swap categories and block thresholds the Commission’s regulations. differences in liquidity in the for equity swaps. After consideration of the comments underlying equity indices as a 338 See supra note 169. received, the Commission is adopting justification for swap categorization, 339 For example, if swap A is economically § 43.6(e)(1) and (2) as proposed. these differences do not alter the related to futures F, and futures F is subject to the However, given the changes to proposed premises underlying the Commission’s block trade rules of a DCM that applies at a notional § 43.6(b)(4)(i), which significantly amount of $1 million, then swap A would qualify proposal. Even taking these differences for treatment as a block trade or large notional off- reduce the number of swap categories, into account, there is still (1) a highly facility swap if the notional amount of swap A the Commission believes that this exceeds $1 million. approach encompasses the most liquid 329 CL–AFR at 6. 340 In situations when two or more DCMs offer for FX swaps and instruments, including all 330 CL–AII at 9; CL–Barclays at 9; CL–ICI at; trading futures contracts that are economically related, the Commission has selected the lowest ISDA/SIFMA at 10–11; SIFMA at 5. 341 CL–SDMA at 2. 331 CL–AII at 9. applicable non-zero futures block size as the initial appropriate minimum block size. The Commission 342 CL–AII at 3 n.10. 332 CL–Barclays at 9. believes that this approach would reduce the 343 CL–ICAP at 10. 333 Id. chance that the appropriate minimum block size 344 See Determination of Foreign Exchange Swaps 334 CL–ICI at 5. established by the Commission in the initial period and Foreign Exchange Forwards under the 335 CL–ISDA/SIFMA at 10–11. would have an unintended adverse effect on market Commodity Exchange Act, 77 FR 69694, Nov. 20, 336 CL–SIFMA at 5. liquidity for the relevant swap category. 2012.

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super-major currency combinations, as swap categories and then apply the 67 of the Commission’s regulations; 353 (2) well as all super-major and major percent notional amount calculation to swaps that are economically related to currency combinations. This approach determine the appropriate minimum certain futures contracts; 354 and (3) further encompasses many important block sizes. other swaps.355 With regards to (1), the super-major and non-major currency The Commission received three Commission proposed setting initial combinations, many of which already comments specific to the proposed appropriate minimum block sizes for have block trade size thresholds set by methodology for determining publicly reportable swap transactions in DCMs for economically-related futures appropriate minimum block sizes for which the underlying asset directly contracts.345 The Commission believes swap categories in the FX asset class references or is economically related to that this approach is appropriate during during the post-initial period. SDMA the natural gas or electricity swap the initial period in the absence of supported the Commission’s proposed contracts listed in appendix B to part 43 actual swap data. The approach during block trade thresholds for the FX asset of the Commission’s regulations.356 The the initial period would draw upon the class.350 Barclays and GFMA, however, proposed methodology for determining experience of DCMs in considering the expressed concern that the 67 percent the appropriate minimum block sizes potential impacts on liquidity risk that notional amount calculation was for other commodity swaps in the post- enhanced transparency may cause in proposed without actual swap data initial period follows the same connection with futures contract regarding the FX asset class.351 methodology—the 67 percent notional execution.346 The Commission After consideration of the comments amount methodology—used for understands that DCMs have set block received, the Commission is adopting determining the post-initial appropriate sizes primarily in consideration of the § 43.6(f)(2) with the modification that minimum block sizes in the interest objectives of enhancing pre-trade only those swap categories established rate, credit and FX asset classes. A more transparency and reducing liquidity in § 43.6(b)(4)(i) will have minimum detailed description of the risk.347 The Commission notes that block sizes set using this methodology methodologies during the initial and DCMs are required to set block sizes for in the post-initial period, while the post-initial periods, as well as the rules futures in compliance with relevant core remainder of the swaps covered by for the special treatment of listed principles (including Core Principle § 43.6(b)(4)(ii) will continue to be natural gas and electricity swaps are 9) 348 and Commission regulations.349 treated as blocks. The Commission presented in the subsections below. believes that applying the 67 percent ii. Post-Initial Period Methodology notional amount calculation will ensure i. Initial Period Methodology In the post-initial period, the that the vast majority of swap With respect to swaps that reference Commission proposed under § 43.6(f)(2) transactions are subject to real-time or are economically related to one of the to utilize the 67 percent notional reporting.352 In addition, applying the futures contracts listed in appendix B to amount calculation to determine 67 percent notional amount calculation part 43 357 or in § 43.6(b)(5)(ii), the appropriate minimum block sizes for to all five asset classes in the post-initial Commission proposed to set the swap categories in the FX asset class. period provides a consistent, bright-line appropriate minimum block size based The Commission would group all rule regarding how appropriate on the block sizes for related futures publicly reportable swap transactions in minimum block thresholds will be the FX asset class into their respective calculated, thus providing clarity to 353 See proposed § 43.6(b)(5)(i). The Commission is adopting most of the proposed categories in this market participants engaging in swap final rule, subject to some modifications. See supra 345 See Q18 of the Further Block Proposal, which transactions. By allowing all swaps note 190 and accompanying text. sets forth an alternative approach to proposed swap 354 categories based on unique currency combinations. covered by § 43.6(b)(4)(ii) to be treated As proposed under § 43.6(b)(5)(ii), these 77 FR 15476. as blocks, the Commission is being futures contracts were: CME Cheese; CBOT 346 The Commission notes further that DCMs conservative in its approach in Distillers’ Dried Grain; CBOT Dow Jones-UBS Commodity Index Excess Return; CBOT Ethanol; historically have had the appropriate incentive to potentially less liquid markets where balance these considerations because they benefit CME Frost Index; CME Goldman Sachs Commodity from liquidity generally (i.e., commissions from the impacts to market participants of Index (GSCI) (GSCI Excess Return Index); NYMEX transaction volume in block and non-block trades inappropriate block trades could be Gulf Coast Gasoline; Gulf Coast Sour Crude Oil; provides DCMs with their primary source of substantial. The Commission believes NYMEX Gulf Coast Ultra Low Sulfur Diesel; CME revenue). Hurricane Index; CME International Skimmed Milk that this approach provides additional Powder; NYMEX New York Harbor Ultra Low 347 The Commission is of the view that the pre- trade and post-trade contexts are sufficiently similar time to analyze data in order to establish Sulfur Diesel; CBOT Nonfarm Payroll; CME Rainfall such that policies directed at balancing improved swap categories as suggested Index; CME Snowfall Index; CME Temperature transparency and liquidity concerns in a pre-trade by commenters. Index; CME U.S. Dollar Cash Settled Crude Palm context are relevant in considering what an Oil; and CME Wood Pulp. The Commission is appropriate balance is in the post-trade context. In d. Other Commodity adopting most of the proposed categories in this the pre-trade context, block sizes are set near or at final rule, subject to some modifications. See supra the point where a trader would be able to offset the The Commission proposed using note 187. risk of an equally large transaction without bearing different methodologies for the initial 355 See proposed § 43.6(b)(5)(iii). liquidity risk. and post-initial periods to determine 356 The Commission notes that pursuant to 348 Core Principle 9 of section 5(d) of the CEA appropriate minimum block sizes for proposed § 43.6(b)(5)(i), each of the listed natural provides that a DCM ‘‘shall provide a competitive, gas and electricity swap contracts proposed to be open, and efficient market and mechanism for swaps categories in the other listed in appendix B to part 43 would be considered executing transactions. . . . ’’ 7 U.S.C. 7(d)(9). commodity asset class. The proposed its own swap category. As discussed further above, Current appendix B to part 38 of the Commission’s methodology for determining the the Commission is adopting these categories in this regulations provides that in order to maintain appropriate minimum block sizes in the final rule. See supra Section II.A(4). compliance with Core Principle 9, DCMs allowing 357 The futures contracts that are currently listed block trading ‘‘should ensure that the block trading initial period differs based on the three on appendix B to part 43 are the 28 Enumerated does not operate in a manner that compromises the types of other commodity swap Reference Contracts plus Brent Crude Oil (ICE). The integrity of prices or price discovery on the relevant categories: (1) Those swaps based on 13 electricity and natural gas swap contracts that market.’’ See 17 CFR 38 app. B. contracts listed in appendix B to part 43 the Commission had proposed to add to appendix 349 For example, section 40.6 of the Commission’s B to part 43 of the Commission’s regulations were regulations include a process by which registered not futures contracts. As noted above, however, entities may certify rules or rule amendments that 350 CL–SDMA at 2. these contracts have been converted into establish or change block trade sizes for futures 351 CL–Barclays at 10; CL–GFMA at 3. economically equivalent futures contracts that are contracts. See 17 CFR 40.6. 352 See supra note 256. listed on a DCM. See supra note 176.

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contracts set by DCMs.358 Similar to its reference or are economically related to Energy and EEI argued that the rationale with respect to setting initial these natural gas and electricity swap proposed limits were too high given the appropriate minimum block sizes for contracts.361 relative illiquidity of these markets.368 swaps in the FX asset class, the SDMA expressed support for the ICAP Energy recommended the Commission believed that this approach proposed methodology for swaps in the following minimum block sizes: PJM would utilize the experience of DCMs in other commodity asset class.362 With WH (on-peak and off-peak)—50 MW/hr; considering liquidity effects of respect to the swaps in which the SP–15 Financial Day-Ahead LMP (on- enhancing pre-trade transparency in underlying asset references or is peak and off-peak)—30/MW/hr; Mid-C setting block sizes for these contracts. economically related to one of the Financial (on-peak and off-peak—30 For swaps that reference or are natural gas or electricity swaps listed in MW/hr).369 EEI requested that the economically related to a futures appendix B to part 43, EEI also Commission treat all electricity swaps contract listed in appendix B to part 43 expressed support for denominating the transactions as block trades during the that is not subject to a DCM block trade minimum block size in U.S. dollars, initial period or, in the alternative, set rule, the Commission proposed in rather than by a quantity such as the initial minimum block size at no § 43.6(e)(3) to disallow treatment as a Mwh.363 EEI argued that denominating higher than $3 million.370 block trade or large notional off-facility minimum block sizes in U.S. dollars ICAP Energy and EEI also opposed the swap. The Commission based this would promote standardization across proposed $25 million initial minimum approach on an inference that DCMs the various trading hubs in the block size with respect to the swap have not set block trade rules for certain electricity and natural gas markets.364 categories for the natural gas swaps futures contracts because of the degree Several commenters, however, proposed to be added to appendix B to of liquidity in those futures markets. objected to certain aspects of the part 43. EEI requested that the In the initial period, the Commission proposed $25 million (USD) initial Commission treat all natural gas swaps proposed in § 43.6(e)(2) to treat all non- appropriate minimum block size. Two transactions as block trades during the futures-related swaps 359 in the other commenters recommended setting the initial period because of their relatively commodity asset class as block trades or block sizes based on mmBtu/day and illiquid markets.371 In the alternative, large notional off-facility swaps (i.e., MW/hr for natural gas and electricity EEI recommended setting the initial these swaps would be subject to a swaps, respectively, rather than setting minimum block size at no higher than reporting time delay under part 43, the block sizes based on notional $3 million, which would approximately 365 irrespective of notional amount). The amount. ICAP Energy commented in equate the proposed initial block size Commission believed that non-futures- particular that adopting the latter for the Henry Hub Natural Gas futures related swaps in the other commodity approach would be inappropriate, given contract.372 ICAP Energy recommended asset class generally have lower that prices for such commodities setting the initial minimum block size at liquidity in contrast to the more liquid fluctuate due to peak season usage or 373 366 2500 mmBtu. interest rate, credit and equity asset delivery location. ICAP Energy also Parity Energy commented on the classes, as well as other commodity commented that it was not clear as to ambiguity of the term ‘‘economically swaps that are economically related to how the notional value of swaps with related’’ and requested clarification that liquid futures contracts (i.e., those optionality would be calculated; natural gas swaps with optionality that futures contracts listed in appendix B to calculating notional value based on the reference or are economically related to part 43). premium of the option, for example, the Henry Hub Natural Gas options The Commission also proposed to would adversely affect low-premium would be subject to the initial minimum amend appendix B to part 43 of the options such as out-of-the-money calls block size proposed for that particular 367 Commission’s regulations to add 13 and puts. swap category (5,500,000 mmBtu), natural gas and electricity swap Two commenters opposed the rather than the block size for Henry Hub contracts, which the Commission proposed $25 million (USD) initial Natural Gas futures (1,000,000 previously has determined to be liquid minimum block size with respect to the mmBtu).374 contracts serving a price discovery swap categories for the electricity swaps 360 Parity Energy opposed the proposed function, with each contract serving added to appendix B to part 43. ICAP initial minimum block size of 100,000 as the basis for a swap category in the bbl. to crude oil swaps with optionality other commodity asset class. The 361 For swaps in which the underlying asset references or is economically related to one of the as too low and recommended that the Commission further proposed to set the Commission establish a separate initial initial appropriate minimum block size natural gas or electricity swaps, the Commission proposed to treat such natural gas and electricity minimum block size for such swaps at for each of these categories to $25 swaps differently than other publicly reportable 1,000,000 bbl., which would be million (USD), which would apply to swap transactions in the other commodity asset consistent with CME’s minimum block natural gas and electricity swaps that class when setting the initial appropriate minimum block sizes. The Commission recognized that size for Light Sweet Crude Oil traders typically offset their positions in the natural 375 358 options. In situations when two or more DCMs offer for gas and electricity markets through trading OTC trading futures contracts that are economically ICAP Energy commented that swaps forward contracts, swaps, plain vanilla options, that reference or are economically related, the Commission has selected the lowest non-standard options and other customized applicable non-zero futures block size among the arrangements since existing futures contracts listed DCMs as the initial appropriate minimum block on DCMs only cover a limited number of electricity 368 CL–ICAP Energy at 5; CL–EEI at 5. size. The Commission believes that this approach delivery points. The proposed $25 million initial 369 CL–ICAP Energy at 5. would reduce the chance that the appropriate minimum block level corresponded to the level of 370 minimum block size established by the Commission CL–EEI at 8. the interim and initial cap sizes. For a discussion 371 in the initial period would have an unintended CL–EEI at 8. of interim and initial cap sizes, see supra section adverse effect on market liquidity for the relevant 372 According to EEI, the proposed initial III.A of the Further Block Proposal. swap category. minimum block size of 1,000,000 mmBtu for the 362 CL–SDMA at 2 n.1. 359 These non-futures related swaps are not Henry Hub Natural Gas futures contract is 363 economically related to one of the futures contracts CL–EEI at 11 n. 29. approximately equal to a minimum block size of $3 listed in proposed appendix B to part 43 or in 364 Id. million. EEI Comment Letter at 8–9. proposed § 43.6(b)(5)(ii). See proposed 365 CL–ICAP Energy at 4; CL–Barclays at 9. 373 CL–ICAP Energy at 5. § 43.6(b)(5)(iii). 366 CL–ICAP Energy at 4. 374 CL–Parity at 3. 360 See supra Section II.A(4). 367 Id. 375 Id. at 4–5.

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related to the NYMEX New York Harbor notional size of the swap component illiquid nature of the electricity and RBOB Gasoline futures contract, for without the optional component; natural gas basis swaps market.385 Based which the Commission has not set an accordingly, the appropriate minimum on the non-standardized and bespoke initial minimum block size under block size will be based on the block nature of many electricity and natural proposed appendix F, should be subject sizes for economically related futures gas swap transactions, EEI to a block size that is consistent with the contracts set by DCMs.380 recommended that the Commission one set by DCMs for the related futures The Commission is otherwise eliminate post-initial minimum block contract.376 adopting the rule generally as proposed sizes for the electricity and natural gas The Commission has considered the under § 43.6(e) with respect to swaps in swap categories for the swaps added to comments above regarding the the other commodity asset class, but appendix B to part 43.386 EEI also appropriate unit of measurement and also is updating initial appropriate recommended that the Commission initial appropriate minimum block size minimum block sizes proposed in eliminate minimum post-initial block for the natural gas and electricity swap appendix F, consistent with block sizes sizes for the electricity swap category categories in the other commodity asset set by DCMs for the relevant related under appendix D.387 In the alternative, class. Based on those comments and the futures contract.381 In response to ICAP EEI recommended that the Commission other commodity swap categories Energy’s request, the Commission is also set the minimum block sizes for each of adopted by the Commission in this final setting an initial minimum block size these categories at no greater than $3 rule that are based on the converted for swaps that reference or are million.388 natural gas and electricity futures economically related to the NYMEX After consideration of the comments contracts,377 the Commission is setting New York Harbor RBOB Gasoline received, the Commission is adopting the appropriate minimum block sizes futures contract that is based on the § 43.6(f)(1) as proposed for swap for these categories in the initial period DCM block size set for that contract. categories in the other commodity asset based on the block sizes set by DCMs for class for the post-initial period. The these futures contracts. The Commission ii. Post-Initial Period Methodology reasons stated by the Commission above is adopting this approach for several In the post-initial period, the in support of this methodology in the reasons. This approach is consistent Commission provided in proposed post-initial period also apply to swaps with the Commission’s approach for § 43.6(f)(3) to determine appropriate in this asset class. The Commission swaps that reference or are minimum block sizes for swaps in the believes that this methodology will economically related to one of the other commodity asset class by using ensure that the vast majority of swap futures contracts previously listed in the 67-percent notional amount transactions are subject to real-time appendix B to part 43 or adopted calculation set forth in proposed reporting.389 In addition, applying the § 43.6(b)(5)(ii), which utilizes the § 43.6(c)(1). The 67-percent notional same post-initial notional amount experience of DCMs in setting block amount calculation would be applied to calculation to the other commodity asset sizes for these contracts. The publicly reportable swap transactions in class provides a consistent, bright-line Commission also believes this approach each swap category observed during the rule regarding how appropriate is more conservative than the proposed appropriate time period. minimum block thresholds will be $25 million initial minimum block size, Several commenters opposed the 67- calculated, thus providing clarity to which might adversely affect market percent notional amount calculation market participants engaging in swap liquidity for the electricity and natural methodology for swaps in the other transactions. gas swaps markets. Further, this commodity asset class in the post-initial 6. Special Provisions for the approach responds to comments by period.382 CME and WMBAA Determination of Appropriate Minimum setting the initial minimum block sizes characterized the proposed Block Sizes for Certain Types of Swaps based on underlying units, rather than methodology as overbroad and The Commission recognizes the notional amount, and would be more recommended a more tailored approach appropriate to avoid price fluctuations complexity of the swaps market may based on the trading profiles of each make it difficult to determine and to establish consistency with post- 383 particular market. Barclays appropriate minimum block sizes for initial calculation methodology. commented that the Commission has no In response to Parity Energy and particular types of swaps under the data or evidence demonstrating that methodologies discussed above. For that consistent with the Commission’s such a notional amount would properly adopted approach to swaps categories in reason, the Commission proposed balance liquidity and transparency § 43.6(h), which sets out a series of the other commodity asset class under 384 considerations. ICAP Energy special rules that apply to the § 43.6(b)(5)(i)–(ii), the Commission is recommended a lower post-initial not establishing initial appropriate determination of the appropriate notional amount—either 33 or 50 minimum block sizes for particular minimum block sizes based on DCM percent—that would account for the block sizes for swaps that reference or types of swaps. The Commission proposed special rules with respect to: are economically related to the options 380 See infra Section II.B. (a) Swaps with optionality; (b) swaps contracts listed in proposed appendix 381 The Commission is also amending the initial 390 F.378 The Commission is establishing minimum block size for swaps that reference or are with composite reference prices ; (c) initial appropriate minimum block size economically related to the GSCI Excess Return 385 for such swaps based on the adopted Index, Dow Jones-UBS Commodity Index, Gulf CL–ICAP Energy at 3. Coast Sour Crude Oil, and Palladium futures 386 CL–EEI at 8–9. methodology for swaps with optionality, contract. The Commission is also removing the 387 Id. at 9. 379 as discussed further below. The initial minimum block size for swaps that reference 388 EEI requested that the Commission delay the notional size of swaps with optionality or are economically related to the Non-Farm adoption of minimum block sizes for the swaps in in the initial period will be equal to the Payroll, International Skimmed Milk Powder, and these categories for at least one year until it has Wood Pulp futures contracts, as these contracts are obtained at least one year of data from an SDR; in no longer listed for trading. See supra note 187. the interim, all relevant transactions would be 376 CL–ICAP Energy at 1–2. 382 CL–Barclays at 10; CL–CME at 2, 4; CL– eligible for block trade treatment. CL–EEI at 11. 377 See supra note 176. WMBAA at 2–3. 389 See note 41 supra. 378 See supra note 187 and accompanying text. 383 CL–CME at 4; CL–WMBAA at 2–3. 390 In the Further Block Proposal, the Commission 379 See infra Section II.C. 384 CL–Barclays at 10. proposed amending § 43.2 to define ‘‘swaps with

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‘‘physical commodity swaps’’ 391; (d) ICAP Energy, however, supported the million and for futures D-related swaps currency conversions; and (e) successor proposed approach of adopting the is $1 million. If a swap is based on a currencies. Each of these special rules is block sizes set by DCMs for natural gas composite reference price that itself is discussed in the subsections below. and electricity outright options.397 based on the weighted average of futures After consideration of the comments price A, futures price B, futures price C, a. Swaps With Optionality received, the Commission is adopting and futures price D (25% equal A swap with optionality highlights § 43.6(h)(1) as proposed. In response to weightings for each), and the notional special concerns in terms of ICAP Energy, the Commission believes size of the swap is $4 million (i.e., $1 determining whether the notional size that the proposed approach provides an million for each component swap), then of such swap would be treated as a easily calculable method for market the swap would qualify as a block trade block trade or large notional off-facility participants to ascertain whether their or large notional off-facility swap based swap. Proposed § 43.6(h)(1) addressed swaps with optionality features would on the futures B-related swap these concerns by providing that the qualify as a block trade or large notional appropriate minimum block size. notional size of swaps with optionality off-facility swap. The Commission is The Commission received one would equal the notional size of the aware that this approach does not take comment regarding proposed swap component without the optional into account the risk profile of a swap § 43.6(h)(2). AFR recommended that component. For example, a LIBOR 3- with optionality compared to that of a transactions that are composites of month call swaption with a calculated ‘‘plain-vanilla swap,’’ but believes that swaps that are economically equivalents notional size of $9 billion for the swap this approach is reasonable to minimize of futures contracts should be component—regardless of option complexity. disaggregated and separately priced for component, strike price, or the the purpose of determining applicability appropriate delta factor—would have a b. Swaps With Composite Reference Prices of the block rules. AFR also notional size of $9 billion for the recommended that the Commission be purpose of determining whether the Swaps with two or more reference vigilant of the use of composite swaps swap would qualify as a block trade or prices (i.e., composite reference prices) by counterparties in order to ‘‘evade the 392 large notional off-facility swap. raise concerns as to which reference purpose of Section 727 and the The Commission received two price market participants should use to Proposed Rules.’’ 400 comments regarding proposed determine whether such swap qualifies With respect to spread transactions, § 43.6(h)(1). FIA stated that the as a block trade or large notional off- 398 ICAP Energy recommended that the approach failed to recognize potential facility swap. Proposed § 43.6(h)(2) minimum block size limit be based differences in liquidity between the provides that the parties to a swap 393 upon the lowest limit leg of the swap and an underlying swaption. transaction with composite reference transaction, in a manner consistent with FIA also pointed out that the Further prices (i.e., two or more reference the proposed approach to setting Block Proposal did not explicitly prices) may elect to apply the lowest minimum block size limits for the address how to handle combinations of appropriate minimum block size 401 394 mixed asset swap class. options. With respect to options applicable to any component swap Based upon the comments received, transactions involving swaps in the category. This provision also would the Commission is adopting § 43.6(h)(2) electricity, natural gas, and crude oil apply to: (1) Locational or grade-basis with certain clarifications based upon swap categories that are used to carry swaps that reflect differences between general concerns expressed by out complex strategies, ICAP Energy two or more reference prices; and (2) commenters regarding the use of recommended treating all such swaps utilizing a reference price based composite swaps to evade minimum transactions, as well as related swap on weighted averages of component block sizes. The Commission is of the hedges, as block trades.395 ICAP Energy reference prices.399 view that this rule provides market cited the complex nature of these Under proposed § 43.6(h)(2), market participants with a straightforward and transactions and the common participants would need to decompose uncomplicated way in which to involvement of an intermediary in their composite reference price swap determine whether such swap would carrying them out as reasons for across- transaction in order to determine the-board treatment as block trades.396 whether their swap would qualify as a qualify as a block trade or large notional block trade or large notional off-facility off-facility swap, but that a clarification is needed to avoid the risk of evasion composite reference prices’’ as swaps based on swap. For example, assume that the reference prices composed of more than one appropriate minimum block size for raised by commenters. In response to reference price that are in differing swap categories. futures A-related swaps is $3 million, ICAP Energy’s comments, the The Commission proposed to use this term in Commission highlights to provide connection with the establishment of a method for futures B-related swaps is $800,000, through which parties to a swap transaction can for futures C-related swaps is $1.2 clarity that ‘‘any component swap determine whether a component to their swap category’’ as used above in the would qualify the entire swap as a block trade or 397 CL–ICAP Energy at 7. methodology applies to swaps with a large notional off-facility swap. The Commission is 398 single Unique Swap Identifier (‘‘USI’’) adopting this definition as proposed. Swaps with composite reference prices are composed of reference prices that relate to one for the combination of swaps identified 391 In the Further Block Proposal, the Commission another based on the difference between two or proposed to amend § 43.2 of the Commission’s with a single Unique Product Identifier more underlying reference prices—for example, a regulations by defining the term ‘‘physical (‘‘UPI’’) and not to groups of different locational basis swap (e.g., a natural gas Rockies commodity swap’’ as a swap in the other Basis swap) that utilizes a reference price based on swaps each with separate USIs commodity asset class that is based on a tangible the difference between a price of a commodity at transacted on or near the same time.402 commodity. The Commission is adopting this one location (e.g., a Henry Hub index price) and a definition as proposed. Further, the reference to ‘‘any price at another location (e.g., a Rock Mountains 392 component swap category’’ does not In essence, this approach would assume a index price). delta factor of one with respect to the underlying 399 In other words, swaps with a composite swap for swaptions. 400 reference price composed of reference prices that CL–AFR at 5. 393 CL–FIA at 3. relate to one another based on an additive 401 CL–ICAP Energy at 6. 394 Id. relationship. This term would include swaps that 402 The real-time public reporting rules would 395 CL–ICAP Energy at 6. are priced based on a weighted index of reference apply to each of the separate USIs as previously 396 Id. prices. finalized in part 43. 17 CFR 45.5.

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limit the application of this standard to The Commission received no successor currency to be a super-major those composite reference swaps comments regarding proposed currency.406 For countries with a GDP comprised of only multiple asset classes § 43.6(h)(3). The Commission is greater than $500 billion but less than and instead should be understood to adopting § 43.6(h)(3) as proposed. $2 trillion, the Commission would classify the successor currency as a apply more broadly to composite swaps d. Currency Conversion of multiple asset classes (i.e., a mixed major currency.407 For nations with a asset swap), intra asset classes, and intra Under proposed § 43.6(h)(4), the GDP less than $500 billion, the swap category composite reference Commission provided that when Commission would classify the prices. determining whether a swap transaction successor currency as a non-major To provide further clarity and denominated in a currency other than currency.408 clarification in response to AFR’s U.S. dollars qualifies as a block trade or The Commission received no comment, the Commission provides the large notional off-facility swap, swap comments regarding proposed following additional example of counterparties and registered entities § 43.6(h)(5). The Commission is may use a currency exchange rate that determining whether a composite adopting § 43.6(h)(5) as proposed. is widely published within the reference price swap transaction would preceding two business days from the C. Procedural Provisions qualify as a block trade or large notional date of execution of the swap off-facility swap. For example, assume 1. Sec. 43.6(a) Commission transaction in order to determine such that the appropriate minimum block Determination qualification. This proposed approach size for swap category E is $50 million The Commission proposed that it would enable market participants to use and for swap category F is $200 million. determine the appropriate minimum a currency exchange rate that they deem If a single swap transaction with a block size for any swap listed on a SEF to be the most appropriate or easiest to corresponding singular reporting or DCM, and for large notional off- obtain. facility swaps. Proposed § 43.6(a) obligation is based on a composite The Commission received no specifically provides that the reference price that itself is based on the comments regarding proposed Commission would establish the weighted average of (1) one component § 43.6(h)(4). The Commission is appropriate minimum block sizes for in swap category E; (2) a second adopting § 43.6(h)(4) as proposed. component in swap category E; and (3) publicly reportable swap transactions a component in swap category F (33% e. Successor Currencies based on the swap categories set forth in equal weightings for each), and the As noted above, the Commission proposed § 43.6(b) in accordance with notional size of the swap is $75 million proposed using currency as a criterion the provisions set forth in proposed (i.e., $25 million for each component to determine swap categories in the §§ 43.6(c), (d), (e), (f) and (h), as swap), then the swap would not qualify interest rate asset class.403 The applicable. as a block trade or large notional off- Commission also proposed to classify The Commission received eight facility swap based on either the swap the euro (EUR) as a super-major comments regarding determination of category E or the swap category F currency, among other currencies.404 appropriate minimum block sizes for appropriate minimum block size. Proposed § 43.6(h)(5) provides that for swaps listed on a SEF or DCM. Four commenters favored allowing SEFs and c. Physical Commodity Swaps currencies that succeed a super-major currency, the appropriate currency DCMs to set appropriate minimum Block trade sizes for physical classification for such currency would block sizes for the swaps they list. CME commodities are generally expressed in be based on the corresponding nominal stated that the Commission would be terms of notional quantities (e.g., gross domestic product (‘‘GDP’’) better served by retaining the ability to barrels, bushels, gallons, metric tons, classification (in U.S. dollars) as set block levels in the private, bilateral troy ounces, etc.). The Commission determined in the most recent World swaps market and deferring to the expertise of SEFs and DCMs to set the proposed a similar convention for Bank World Development Indicator at 409 determining the appropriate minimum the time of succession. This proposed levels in their markets. ICAP block sizes for block trades and large provision is intended to address the suggested that the Commission utilize notional off-facility swaps. In particular, possible removal of one or more of the the same approach as for the futures proposed § 43.6(h)(3) provides that 17 EU member states that use the markets, where futures exchanges set notional sizes for physical commodity euro.405 their own block sizes, and allow SEFs swaps shall be expressed in terms of Proposed § 43.6(h)(5)(i)–(iii) further to set block sizes since they have an notional quantities using the notional specifies the manner in which the incentive to provide as much Commission would classify a successor information about trading interest as unit measure utilized in the related 410 futures contract market or the currency for each country that was once possible without hurting liquidity. predominant notional unit measure a part of the predecessor currency. Morgan Stanley suggested that the used to determine notional quantities in Specifically, the Commission proposes Commission could allow DCMs and the cash market for the relevant, to use GDP to determine how to classify SEFs to set appropriate block sizes, underlying physical commodity. This a successor currency. For countries with subject to Commission approval, as approach ensures that appropriate a GDP greater than $2 trillion, the DCMs and SEFs would benefit from Commission would classify the setting block sizes in a way that minimum block size thresholds for 411 physical commodities are not subject to maximizes liquidity. WMBAA stated volatility introduced by fluctuating 403 See proposed § 43.6(b)(1)(i) and the related that the Commission should authorize discussion in section II.B.1. of the Further Block SEFs to analyze ongoing swaps market prices. This approach also eliminates Proposal. complications arising from converting a 404 See the proposed amendment to § 43.2, 406 See proposed § 43.6(h)(6)(i). defining ‘‘super-major currencies.’’ physical commodity transaction in one 407 See proposed § 43.6(h)(6)(ii). 405 The 17 European Union member states that currency into another currency to 408 use the euro are: Austria, Belgium, Cyprus, Estonia, See proposed § 43.6(h)(6)(iii). determine qualification for treatment as 409 Finland, France, Germany, Greece, Ireland, Italy, CL–CME at 3. a block trade or large notional off- Luxembourg, Malta, the Netherlands, Portugal, 410 CL–ICAP at 5–6. facility swap. Slovakia, Slovenia and Spain. 411 CL–Morgan Stanley at 3.

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trading activity and trade data to agrees with Javelin that allowing SEFs set, to respond to a market that quickly determine uniform thresholds that and DCMs to set appropriate minimum becomes illiquid.422 MFA also distinguish transactions that move block thresholds could lead to a race to supported providing this authority, but markets from those that do not, and the bottom that would harm believed that the Commission should work to ensure that block trade regimes transparency and reduce competition. In exercise this authority based on SDR for swaps executed on SEFs and DCMs the Commission’s view, the data received for individual or multiple are as consistent as possible to avoid Commission’s approach is also the least swap categories.423 arbitrage.412 burdensome from a cost-benefit Based on its argument that block Four commenters supported the perspective because it significantly levels set by SEFs should not be higher Commission’s proposal that the reduces the direct costs imposed on than those set by DCMs, ICAP Energy Commission set minimum block levels. registered entities. Moreover, while recommended allowing for automatic Three of those commenters § 43.6(a) states that the Commission will adjustment to occur during the course of recommended that SEFs and DCMs determine minimum block sizes, as the year.424 should not be able to set minimum recommended by some of the The Commission is adopting the rule block thresholds above the level commenters, the Commission notes that as proposed, with the one modification mandated by the Commission. Javelin SEFs and DCMs nonetheless will have that proposed § 43.6(f)(3) and (4) will be asserted that the CFTC should set block the discretion to set block sizes for adopted as § 43.6(f)(4) and (5). The rule trade rules and not SEFs, so as to avoid swaps at levels that are higher than the as adopted only requires that the a race to the bottom that would harm appropriate minimum block sizes Commission to update post-initial transparency and threaten determined by the Commission. minimum block sizes at least once a competition.413 SIFMA stated that the year and therefore does not preclude the Commission should set minimum block 2. 43.6(f)(4) and (5) Publication and Commission from doing so on a more trade size thresholds and argued that Effective Date of Post-Initial frequent basis. The Commission allowing SEFs and DCMs to set a block Appropriate Minimum Block Sizes anticipates that it will examine and re- size threshold above the minimum level Proposed § 43.6(f)(3) provided that the calculate such block sizes at regular mandated by the Commission without Commission would publish the post- intervals, but also acknowledges that the guidance is inconsistent with the initial appropriate minimum block sizes liquidity of a swap market may change Commission’s statutory duty ‘‘to specify on its Web site. Proposed § 43.6(f)(4) significantly outside of such intervals. the criteria for determining what provided that these sizes would become Therefore, the Commission reserves the constitutes a large notional swap effective on the first day of the second authority to update minimum block transaction (block trade) for particular month following the date of publication. sizes when warranted and as necessary markets and contracts.’’ 414 AII also Per proposed § 43.6(f)(1), the to respond to such circumstances. In stated that SEFs or DCMs should not Commission would publish updated response to GFMA and MFA, the have the ability to set block sizes for post-initial appropriate minimum block Commission agrees with MFA and swaps at higher levels than the sizes in the same manner no less than emphasizes that in all circumstances, appropriate minimum block sizes once each calendar year. minimum block sizes will be updated determined by the Commission, as SEFs Several commenters recommended based on the relevant market data in particular have interests that may not that post-initial appropriate minimum received. be aligned with buy-side firms and may block sizes should be updated more In response to ICAP Energy’s not be incentivized to ensure that frequently than on an annual basis.417 recommendation, the Commission notes market disruption is minimal.415 ICI, AII and SIFMA recommended a that adopting such a requirement would In addition, ICAP Energy stated that quarterly or at least a semi-annual potentially create minimum block size SEF block limits for futures equivalent calculation in order to account for re-alignment issues for SEFs, swap contracts should adjust changes in liquidity in the market.418 particularly during the initial period for automatically to meet DCM contract Spring Trading and Vanguard swaps in the other commodity class. limits adjustments between annual recommended a quarterly calculation Under this requirement, SEFs would be revisions of SEF block limits, so that the that would allow block levels to be more de facto subject to a DCM’s own Commission does not set SEF block responsive to the market.419 Kinetix, business decisions, i.e., block trade size levels at levels higher than the block however, recommended that calculations that are based on trading levels set by DCMs. calculations should be carried out on a that does not occur on their own facility Based upon the comments received, monthly basis.420 MFA suggested that or platform. Further, the Commission the Commission is adopting § 43.6(a) as the Commission maintain the optional has noted that SEFs and DCMs may set proposed. The Commission agrees with ability to update the minimum block minimum block sizes that are higher the commenters who recommended that size on a more frequent basis as well as than those prescribed by the appropriate minimum block thresholds shorten the look-back window for the Commission; this recommended for swaps be set by the Commission, relevant data set.421 requirement would otherwise preclude rather than SEFs or DCMs. The Some commenters asserted that the such an ability in certain cases. Commission concurs with SIFMA that it Commission should have the authority Accordingly, the Commission declines has a statutory duty ‘‘to specify the to update appropriate minimum block to adopt this requirement. criteria for determining what constitutes sizes outside of the proposed 1-year set 3. Sec. 43.6(g) Notification of Election a large notional swap transaction (block look-back period. GFMA believed that trade) for particular markets and the Commission should have this Proposed § 43.6(g) set forth the contracts.’’ 416 The Commission also authority, without reference to a data election process through which a qualifying swap transaction would be 412 CL–WMBAA at 5. 417 CL–GFMA at 3. treated as a block trade or large notional 413 CL–Javelin at 6. 418 CL–ICI at 7; CL–AII at 11; CL–SIFMA at 6–7. 414 CL–SIFMA at 11–12. 419 CL–TeraExchange at 2; CL–Vanguard at 7. 422 CL–GFMA at 4. 415 CL–AII at 10. 420 CL–Kinetix at 2. 423 CL–MFA at 8. 416 CL–SIFMA at 11–12; 7 U.S.C. 2(a)(13)(E)(ii). 421 CL–MFA at 8. 424 CL–ICAP Energy at 4.

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off-facility swap, as applicable. Commission actions to the Director of more than $25 million in total assets Proposed § 43.6(g)(1) would establish a the Division of Market Oversight under management. In the two-step notification process relating to (‘‘Director’’) and to other employees as Commission’s view, such a prohibition block trades. Proposed § 43.6(g)(2) designated by the Director from time to would be integral to ensuring the would establish the notification process time. In particular, this proposed integrity of block trade principles and relating to large notional off-facility delegation would grant to the Director preserving the basis for the anonymity swaps. the authority to determine: (1) New associated with establishing cap sizes. Proposed § 43.6(g)(1)(i) contained the swap categories as described in The Commission received a number first step in the two-step notification proposed § 43.6(b); (2) post-initial of comments on the proposed process relating to block trades. In appropriate minimum block sizes as aggregation rule, particularly as to the particular, the parties to a publicly described in proposed § 43.6(f); and (3) enumerated persons who would reportable swap transaction that has a post-initial cap sizes as described in the otherwise be allowed to aggregate orders notional amount at or above the proposed amendments to § 43.4(h)(2) of from different trading accounts. Barnard appropriate minimum block size would the Commission’s regulations.426 The supported the rule, noting that it would be required to notify the SEF or DCM purpose of the proposed delegation help ensure that non-block transactions (pursuant to the rules of such SEF or provision would be to facilitate the comply with the exchange trading DCM) of their election to have their Commission’s ability to respond requirements and real-time reporting qualifying publicly reportable swap expeditiously to ever-changing swap obligations, thereby increasing transaction treated as a block trade.425 market and technological conditions. transparency and price discovery, With respect to the second step, The Commission is of the view that this promoting market integrity, improving proposed § 43.6(g)(1)(ii) provided that delegation would help ensure timely efficiency and competitiveness in the the SEF or DCM that receives an and accurate real-time public reporting swap markets, and ultimately providing election notification would be required of swap transaction and pricing data timely information to enable market to notify the relevant SDR of such block and further ensure anonymity in participants to improve their risk trade election when transmitting swap connection with the public reporting of management practices.427 Barnard transaction and pricing data to the SDR such data. Proposed § 43.7(b) provided suggested that the Commission add an for public dissemination. that the Director may submit to the additional requirement—that the ‘‘block Similar to the first step set forth in Commission for its consideration any trade is suitable for customers of such proposed § 43.6(g)(1), proposed matter that has been delegated pursuant persons’’—on the basis that such a § 43.6(g)(2) would provide, in part, that to this authority. Proposed § 43.7(c) requirement would improve consistency a reporting party who executes an off- provided that the delegation to the in the rules applicable to swap and facility swap with a notional amount at Director would not prevent the futures markets.428 or above the applicable appropriate Commission, at its election, from ABC and CIEBA stated that qualified minimum block size would be required exercising the delegated authority. investment advisers who are not CTAs to notify the relevant SDR of its election The Commission received no should be able to aggregate block trade to treat such swap as a large notional 429 comments regarding proposed § 43.7(a) orders for different trading accounts. off-facility swap. This section provided and therefore is adopting § 43.7(a) as Tradeweb commented that CTAs who further that the reporting party would be proposed. trade on a SEF should also be permitted required to notify the relevant SDR in to aggregate trades on behalf of their connection with the reporting party’s 5. Section 43.6(h)(6) Aggregation customers for purposes of block transmission of swap transaction and Proposed § 43.6(h)(6) would prohibit trades.430 JP Morgan commented that pricing data to the SDR pursuant to the aggregation of orders for different this rule appears to reflect a concern § 43.3 of the Commission’s regulations. trading accounts in order to satisfy the that private negotiation affords less The Commission received no minimum block size or cap size protection to unsophisticated investors comments regarding proposed § 43.6(g). requirements, except that aggregation than trading through the central The Commission is adopting § 43.6(g) as markets, and that since all entities that proposed. would be permissible if done on a DCM or SEF by a person who: (i)(A) Is a CTA transact in the OTC market already must 4. Sec. 43.7 Delegation of Authority registered pursuant to Section 4n of the be ECPs, the analogous concern about customer protection in the swaps Under proposed § 43.7(a), the CEA or exempt from such registration under the Act, or a principal thereof, market is already addressed.431 Commission would delegate the ICI opposed the minimum assets authority to undertake certain and who has discretionary trading authority or directs client accounts, (B) under management requirement in proposed § 43.6(h)(6)(ii) and argued that 425 In order to qualify as a block trade, a swap is an investment adviser who has must (1) be listed on a registered SEF or DCM; (2) discretionary trading authority or the Commission did not articulate a occur away from the registered SEF’s or DCM’s directs client accounts and satisfies the rationale or policy reason for this 432 trading system or platform and is executed pursuant criteria of § 4.7(a)(2)(v) of this chapter, requirement. ICI stated that while to its rules and procedures; and (3) have a notional advisers to registered funds would or principal amount at or above the appropriate or (C) is a foreign person who performs minimum block size applicable to such swap. See a similar role or function as the persons typically meet the asset requirement, § 43.2. By definition, a block trade must occur away described in (A) or (B) and is subject as advisers with less than the proposed from the SEF or DCM’s trading system or platform such to foreign regulation, and (ii) has and thus cannot be transacted on the SEF or DCM’s 427 CL–Barnard at 2. trading system or platform. Moreover, the swap 428 CL–Barnard at 2. must be at or above the appropriate minimum block 426 See the discussion of post-initial cap sizes in 429 size at the time that it becomes a publicly reportable section III.B. infra. As noted above, the Commission CL–ABC/CIEBA at 3. swap transaction. Any swap that is executed on a proposed an amendment to § 43.2 to define the term 430 CL–Tradeweb at 5. Tradeweb’s comment was SEF or DCM’s trading system or platform, regardless ‘‘cap size’’ as the maximum limit of the principal, received in response to the Initial Proposal and not of whether it is for a size at or above the appropriate notional amount of a swap that is publicly the Aggregation Proposed Rule, the latter which minimum block size for such swap, is not a block disseminated. This term applies to the cap sizes allowed for CTAs to aggregate on SEFs. 75 FR at trade under this definition, and, thus, is required determined in accordance with the proposed 76174. to be publicly disseminated in real-time pursuant amendments to § 43.4(h) of the Commission’s 431 CL–JPM at 9, n.13. to § 43.4. regulations. 432 CL–ICI at 3.

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minimum would also have a valid need more than $25 million in total assets CME has stated that the threshold ‘‘is an to engage in block trades on behalf of under management are able to aggregate effort to establish the professionalism the funds they manage.433 ICI further orders from different accounts. The and sophistication of the registrant’’ 446 stated that no relationship exists Commission also agrees that CTAs who while also expanding the number of between the amount of assets managed trade on a SEF should be permitted to CTAs and investment advisers eligible and the legitimacy of aggregating client aggregate customer trades, which would to aggregate trades.447 The Commission orders. ICI also disagreed that an be allowed under the rule as adopted, believes that the $25 million threshold investment adviser seeking to aggregate subject to the enumerated conditions. is an appropriate requirement to ensure orders must satisfy the criteria of With respect to JP Morgan’s comment, that persons allowed to aggregate trades § 4.7(a)(2)(v) of the Commission’s the Commission notes that customers are appropriately sophisticated with regulations.434 ICI suggested that the trading swaps on DCMs do not have to these transactions, while at the same Commission only require an investment be ECPs. As discussed further below, time not excluding an unreasonable adviser to be registered under § 203 of adopted § 43.6(i)(1) allows non-ECP number of CTAs, investment advisers, the Investment Advisers Act of 1940 or customers to be parties to block trades and similar foreign persons. pursuant to the laws of any state through a qualifying CTA, investment The Commission also disagrees with without specifying a minimum adviser, or similar foreign person.440 It ICI’s contention that investment registration length or location for is possible, therefore, that those non- advisers should not be required to deposit of client assets.435 ECP DCM customers may not be aware satisfy the criteria under § 4.7(a)(2)(v), Two comments requested if they received the best terms for their which requires an investment adviser to clarifications to the proposed rule. individual swap transactions that are (1) be registered and active as an WMBAA sought clarification that the aggregated with other transactions. investment adviser for two years or Commission did not intend for the Protection for such customers is (2) provide securities investment advice Proposed Rule to prevent the use of therefore necessary, as it is for to securities accounts which, in the ‘‘work up’’ in over-the-counter unsophisticated customers in other aggregate, have total assets in excess of swaps.436 WMBAA stated that a block markets. $5 million deposited at one or more size calculation should not be In response to Barnard’s suggested registered securities brokers.448 The performed until the work up period additional requirement,441 the Commission first adopted provisions ends, but expressed concern that the Commission acknowledges that the similar to current § 4.7(a)(2)(v) in work up trades could be considered same or similar phrase appears in the 1992 449 as objective indications that a aggregation.437 SIFMA noted that rules of many exchanges.442 The person had the investment proposed § 43.6(h)(6) does not restrict Commission, however, does not believe sophistication and experience needed to the aggregation prohibition to ‘‘block that it is necessary to incorporate such evaluate the risks and benefits of trades’’ and, as a result, ‘‘large notional specific language to the rule because investing in commodity pools or a off-exchange swaps’’ could be subject to persons such as CTAs and investment portfolio large enough to indicate the the aggregation prohibition.438 SIFMA advisers are already subject to broad same, along with the financial resources requested that the Commission add anti-fraud prohibitions under their to withstand the investment risks.450 In language to clarify that the aggregation governing statutes.443 Moreover, 2000,451 the Commission extended the prohibition does not apply to large adopted § 43.6(i)(2), discussed further same criteria in current § 4.7(a)(2)(v) to notional off-exchange swaps.439 below, also requires that any person registered investment advisers for the 452 After consideration of the comments transacting a block trade on behalf of a same reasons. The Commission received, the Commission is adopting customer receive prior written believes that these objective criteria, proposed § 43.6(h)(6) as proposed. In instruction or consent from the which demonstrate that an investment response to the comment by ABC and customer. adviser possesses the necessary CIEBA, the Commission notes that In response to ICI’s opposition to the investment expertise, should also apply qualified investment advisers, who are minimum asset threshold under with respect to allowing such persons to not CTAs, are able to aggregate block § 43.6(h)(6)(ii), the Commission notes aggregate client orders. trade orders from different trading that this threshold reflects common In response to WMBAA, the accounts. Under § 43.6(h)(6)(i)(B) and industry practice.444 CME, for example, Commission clarifies that the (ii), investment advisers that satisfy the has enforced the $25 million threshold aggregation prohibition will not affect criteria under § 4.7(a)(2)(v) and have in its rules since September 2000.445 the work up process. By definition, a block trade occurs away from a DCM or 433 Id. 440 See infra Section II.C(6). 434 Id. at 4. An investment adviser satisfies the 441 CL–Barnard at 2. $25,000,000, based on customer suggestions. See CME Submission 00–93 (Sept. 1, 2000); CME criteria of § 4.7(a)(2)(v) if the investment adviser 442 See, e.g., Chicago Mercantile Exchange Rule Submission 00–99 at 5–6. registers pursuant to § 203 of the Investment 526(I). See also Chicago Board of Trade Rule 526(I); 446 Advisers Act of 1940, or pursuant to the laws of any Eris Exchange, LLC Rule 601(b)(10); and New York Id. at 6 (quoting letter addressed to Jean A. state, and the investment adviser has been Mercantile Exchange, Inc. Rule 526(I). Webb, Secretary of the Commission from John G. Gaine, President, Managed Funds Association dated registered and active for two years or provides 443 See CEA section 4o (CTAs); Investment April 24, 2000 regarding ‘‘Chicago Mercantile security investment advice to securities accounts Advisors Act of 1940 section 206. which, in the aggregate, have total assets in excess Exchange new Proposed Rule 526’’). 444 See, e.g., CME Rule 526. See also CBOE of $5,000,000 deposited at one or more registered 447 Id. at 4, 6–7. CME also stated in the filing that Futures Exchange LLC Rule 415(a)(i); Chicago securities brokers. 17 CFR 4.7(a)(2)(v). it planned to readdress the threshold amount as it Board of Trade Rule 526; Eris Exchange, LLC Rule 435 gained experience with block trades, but has CL–ICI at 3. 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ 436 declined to modify the amount. CL–WMBAA at 2. During a work up OMX Futures Exchange, Inc. Rule E23; New York 448 transaction, a swap price is agreed upon for trading Mercantile Exchange, Inc. Rule 526(I); NYSE Liffe 17 CFR 4.7(a)(2)(v). and the trade is then reported to market US, LLC Rule 423; and OneChicago LLC Rule 417. 449 57 FR 34853, 34854–55 (Aug. 7, 1992). The participants, who then have the opportunity to 445 See CME Submission 00–99 (Sept. 21, 2000) final rule reduced the amount on deposit threshold ‘‘join the trade’’ by placing a firm bid or offer to buy (modifying CME Rule 526 to reduce the threshold to $5 million from the $10 million required by the or sell a particular quantity. Id. from $50,000,000 to $25,000,000). CME originally proposed rule. See 57 FR 3148, 3152 (Jan. 28, 1992). 437 Id. at 2–3. planned to lower the threshold from $50,000,000 to 450 See 57 FR at 34854 (quoting 57 FR at 3152). 438 Id. at 3. $5,000,000, but withdrew the submission and 451 65 FR 11253, 11257–58 (Mar. 2, 2000). 439 Id. instead proposed to lower the threshold to 452 Id. at 11257 (quoting 57 FR at 3152).

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SEF.453 The trades that are part of the certain persons were submitted with The Commission also disagrees with work up process will occur on a DCM respect to the exception to certain SIFMA’s contention regarding the or SEF, and therefore are not block persons transacting blocks on a DCM on burdens of obtaining consent. This trades and are not subject to the behalf of non-ECPs. For example, ICI burden consent will be minimal because aggregation prohibition. opposed the minimum assets under § 43.6(i)(2) states that the instruction or Finally, as to SIFMA’s requested management requirement in proposed consent may be provided through a clarification, the Commission notes that §§ 43.6(i)(1) and similarly argued that power of attorney or similar document that it does intend to include large the Commission did not articulate a that provides discretionary trading notional off-facility swaps in the rationale or policy reason for this authority or the authority to direct aggregation prohibition under requirement.455 trading in the account. The consent may § 43.6(h)(6). The appropriate minimum Specific comments were also received therefore be included in existing and block size applies to both block trades on proposed § 43.6(i)(2).456 ICI future customer agreements. The and large notional off-facility swaps,454 requested a clarification that only a Commission further disagrees that a and thus the aggregation prohibition person transacting a block trade on general grant of investment discretion or should be applied to both types of behalf of a customer who is not an ECP notice to the customer should satisfy transactions. must receive prior written instruction or § 43.6(i)(2). A customer’s written consent.457 ICI argued that written 6. Section 43.6(i) Eligible Block Trade instruction or consent is necessary instruction or consent from an ECP is Participants because a customer potentially may not not necessary because these customers receive the best terms for an individual Proposed § 43.6(i)(1) provided that can engage in block trades and that swap transaction that is part of an parties to a block trade must be ECPs, investment advisers with discretionary aggregation. The written instruction or as defined under Section 1a(18) of the trading authority registered with the consent makes the customer aware that CEA and the Commission’s regulations. SEC already have the ability to aggregate block trades may be used on its behalf, The proposed rule includes an orders on behalf of clients without allowing the customer to decide exception to the ECP requirement by obtaining separate consent.458 whether to allow these transactions. providing that a DCM may allow (i) A SIFMA commented that proposed The Commission notes that a similar CTA registered pursuant to Section 4n § 43.6(i)(2) may require asset managers consent requirement was included in of the CEA, or exempt from registration to obtain consent from each client for the Commission’s proposed DCM under the CEA, or a principal thereof, whom they will engage in block rule.464 The Commission believes that who has discretionary trading authority trades.459 SIFMA contended that this the customer protection functions of the or directs client accounts, (ii) an requirement would be costly and consent requirement apply, regardless of investment adviser who has unnecessary, and that notice to the the degree of separation between the discretionary trading authority or customers 460 or a general grant of customer and the DCM or SEF. As directs client accounts and satisfies the investment discretion in the investment discussed above, the consent criteria the criteria of 4.7(a)(2)(v0 of the management agreement, power of requirement ensures that customers are Commission’s regulations, or (iii) a attorney, or similar document should be informed of the use of block trades for foreign person who performs a similar sufficient.461 SIFMA further commented their accounts. If a CTA, an investment role or function to the persons described that proposed § 43.6(i)(2) is unlike rules adviser, or a similar foreign person in (i) or (ii) and is subject as such to governing DCMs in the futures plans to aggregate customer orders for foreign regulation, to transact block context.462 SIFMA also argued that DCM block trades, then the customers must trades for customers who are not ECPs, rules requiring consent for block trades have the opportunity to evaluate if such CTA, investment adviser or only require the direct members of the whether the customer agrees to the use foreign person has more than $25 DCM to obtain consent from the of aggregation, as evidenced by the million in total assets under members’ direct customers, not from the written instruction or consent, management. Proposed § 43.6(i)(2) customers’ customers. Additionally, regardless of whether the CTA, further provided that a person SIFMA contended that a client consent investment adviser, or similar foreign transacting a block trade on behalf of a requirement does not apply to advisers person is a direct member of a DCM or customer must receive prior written with respect to futures trades and SEF. instruction or consent from the should not apply to advisers with customer to do so. Such instruction or respect to swaps trades.463 III. Anonymity Protections for the consent may be provided in a power of After consideration of the comments Public Dissemination of Swap attorney or similar document, by which received, the Commission is adopting Transaction and Pricing Data the customer provides the person with § 43.6(i) as proposed. The Commission A. Policy Goals discretionary trading authority or the declines to adopt ICI’s clarification and Section 2(a)(13)(E)(i) of the CEA authority to direct the trading in the notes that § 43.6(i)(2) is intended to directs the Commission to protect the customer’s account. ensure that all customers of CTAs, identities of counterparties to swaps As discussed above, similar investment advisers, and similar foreign subject to the mandatory clearing comments regarding the exceptions to persons, whether the customers are requirement, swaps excepted from the the prohibitions against aggregation for ECPs or not, are fully informed of the use of block trades on their behalf. 464 Core Principles and Other Requirements for 453 Section 43.2 defines a ‘‘block trade’’ as a Designated Contract Markets. 75 FR 80572, Dec. 22, publicly reportable swap transaction that ‘‘occurs 455 CL–ICI at 3. 2010. The final DCM rule, however, did not include away from the registered swap execution facility’s 456 CL–ICI at 5; CL–SIFMA at 1–2. this proposed regulation which was promulgated, or designated contract market’s trading system or 457 CL–ICI at 5. along with various other regulations, to implement platform and is executed pursuant to the registered 458 Core Principle 9. As noted in the final rule, given swap execution facility’s or designated contract Id. 459 the number of comments received under Core market’s rules and procedures.’’ CL–SIFMA at 1. 460 Principle 9, the Commission believed that 454 Section 43.2 defines a ‘‘large notional off Id. at 2. additional time was appropriate before finalizing facility swap’’ as having ‘‘notional or principal 461 Id. the proposed rules for Core Principle 9; it expects amount at or above the appropriate minimum block 462 Id. at 1 n.4. to consider the proposed rules at a future date. 77 size.’’ 463 Id. FR 36643, June 19, 2012.

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mandatory clearing requirement, and statutory requirements in section size, to the extent that an appropriate voluntarily cleared swaps. Similarly, 2(a)(13) of the CEA. First, the cap size minimum block size exists.472 section 2(a)(13)(C)(iii) of the CEA provisions would help protect the The Commission proposed to amend requires that the Commission prescribe anonymity of counterparties’ market § 43.4(h) both to establish initial cap rules that maintain the anonymity of positions and business transactions as sizes for each swap category within the business transactions and market required in section 2(a)(13)(C)(iii) of the five asset classes and also to delineate positions of the counterparties to an CEA.467 Second, the masking of a process for the post-initial period uncleared swap.465 In proposed extraordinarily large positions also takes through which the Commission would amendments to § 43.4(h) and 43.4(d)(4), into consideration the requirement establish post-initial cap sizes for each as described further below, the under section 2(a)(13)(E)(iv) that the swap category.473 The Commission also Commission proposed measures to Commission take into account the proposed changing the term ‘‘interim’’ protect the identities of counterparties impact that real-time public reporting as it is used in § 43.4(h) in the Real- and to maintain the anonymity of their could have in reducing market Time Reporting Rule to ‘‘initial’’ in business transactions and market liquidity.468 order to correspond with the description positions in connection with the public of the initial period in proposed 2. Proposed Amendments Related to dissemination of publicly reportable § 43.6(e). Cap Sizes—§ 43.2 Definitions and § 43.4 swap transactions. The Commission Swap Transaction and Pricing Data To a. Initial Cap Sizes proposed to follow the practices used by Be Publicly Disseminated in Real-Time 474 most federal agencies when releasing to In the initial period, proposed the public company-specific The Commission proposed an § 43.4(h)(1) would set the cap size for information—by removing obvious amendment to § 43.2 to define the term each swap category as the greater of the identifiers, limiting geographic detail ‘‘cap size’’ as the maximum limit of the interim cap sizes in all five asset classes (e.g., disclosing general, non-specific principal, notional amount of a swap set forth in the Real-Time Reporting geographical information about the that is publicly disseminated. This term Final Rule (§ 43.4(h)(1)–(5)) or the delivery and pricing points) and applies to the cap sizes determined in appropriate minimum block size for the masking high-risk variables by accordance with the proposed respective swap category.475 If such truncating extreme values for certain amendments to § 43.4(h) of the appropriate minimum block size does variables (e.g., capping notional Commission’s regulations. not exist, then the cap sizes shall be set values).466 Section 43.4(h) of the Commission’s at the interim cap sizes set forth in the regulations currently establishes interim Real-Time Reporting Final Rule B. Establishing Notional Cap Sizes for cap sizes for rounded notional or (§ 43.4(h)(1)–(5)). Swap Transaction and Pricing Data to principal amounts for all publicly For the initial period, AII and ISDA/ Be Publicly Disseminated in Real-Time reportable swap transactions. In the SIFMA argued that the cap size should 1. Policy Goals for Establishing Notional Real-Time Reporting Final Rule, the be the lower of block size and the Cap Sizes Commission finalized § 43.4(h) to interim cap size in § 43.4(h)(1).476 EEI provide that the notional or principal stated that the cap size of $25 million In addition to establishing appropriate amounts shall be capped in a manner for both the electricity swap contracts minimum block sizes, the Commission that adjusts in accordance with the proposed to be added to appendix B and also proposed to amend § 43.4(h) to appropriate minimum block size that the electricity swaps in the other establish cap sizes for notional and corresponds to a publicly reportable commodity swap categories in appendix principal amounts that would mask the swap transaction.469 Section 43.4(h) D, which would be based on the interim total size of a swap transaction if it further provides that if no appropriate cap sizes established by the Commission equals or exceeds the appropriate in the Real-Time Reporting Final Rule, minimum block size for a given swap minimum block size exists, then the cap is too high. EEI instead recommended category. For example, if the block size size on the notional or principal amount shall correspond to the interim cap sizes both a fixed cap size and a minimum for a category of interest rate swaps was 477 $1 billion, the cap size was $1.5 billion, that the Commission has established for block size of $3 million. 470 After consideration of the comments and the actual transaction had a the five asset classes. In § 43.4(h) and received, the Commission is adopting notional value of $2 billion, then this as described in the Real-Time Reporting swap transaction would be publicly Final Rule, the Commission notes that 472 Leading industry trade associations agree that reported with a delay and with a SDRs will apply interim cap sizes until such time as appropriate minimum cap sizes are an appropriate mechanism to ensure notional value of $1.5+ billion. that price discovery remains intact for block trades, 471 The proposed cap size provisions are block sizes are established. The while also protecting post-block trade risk consistent with the two relevant Commission continues to believe that management needs from being anticipated by other the interim cap sizes for each swap market participants. See ISDA and SIFMA, Block Trade Reporting for Over-the-Counter Derivatives 465 category should correspond with the This provision does not cover swaps that are Market, Jan. 18, 2011. ‘‘determined to be required to be cleared but are not applicable appropriate minimum block 473 The Commission does not intend the cleared.’’ See 7 U.S.C. 2(a)(13)(C)(iv). provisions in this final rule to prevent a SEF or 466 The Commission is following the necessary 467 See 7 U.S.C. 2(a)(13)(C)(iii). DCM from sharing the exact notional amounts of a procedures for releasing microdata files as outlined 468 See 7 U.S.C. 2(a)(13)(E)(iv). swaps transaction on or pursuant to the rules of its by the Federal Committee on Statistical 469 platform with market participants on such platform Methodology: (i) Removal of all direct personal and See 77 FR 1247. 470 Sections 43.4(h)(1)–(5) established the irrespective of the cap sizes set by the Commission. institutional identifiers, (ii) limiting geographic To share the exact notional amounts of swaps, the detail, and (iii) top-coding high-risk variables which following interim cap sizes for the corresponding asset classes: (1) Interest rate swaps at $250 million SEF or DCM must comply with § 43.3(b)(3)(i) of the are continuous. See Federal Committee on Commission’s regulations. See 77 FR 1245. Statistical Methodology, Report on Statistical for tenors greater than zero up to and including two 474 The initial period is the period prior to the Disclosure Limitation Methodology 94 (Statistical years, $100 million for tenors greater than two years effective date of a Commission determination to Policy Working Paper 22, 2d ed. 2005), http:// up to and including 10 years, and $75 million for www.fcsm.gov/working-papers/totalreport.pdf. The tenors greater than 10 years; (2) credit swaps at establish applicable post-initial cap sizes. See report was originally prepared by the Subcommittee $100 million; (3) equity swaps at $250 million; (4) proposed § 43.4(h)(1). on Disclosure Limitation Methodology in 1994 and foreign exchange swaps at $250 million; and (5) 475 See 77 FR 1249. was revised by the Confidentiality and Data Access other commodity swaps at $25 million. 476 CL–AII at 12; CL–ISDA/SIFMA at 15. Committee in 2005. 471 See 77 FR 1215. 477 CL–EEI at 11–12.

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§ 43.4(h)(1) as proposed. EEI transactions within a specific swap stated that the 75 percent notional recommends a lower cap size for category using a rolling three-year amount would be too high for specific swap categories—particularly window of data beginning with a determining cap size because the lack of electricity swaps—but it does not minimum of one year’s worth of data depth and liquidity in the swaps market recommend any change to the proposed and adding one year of data for each could cause public reporting of block interplay between cap size and calculation until a total of three years of sizes to reveal identities, business appropriate minimum block size during data is accumulated; (step 2) convert to transactions, and market positions of the interim period. The cap size for the the same currency or units and use a participants, and recommended a 67 interim period was established by the trimmed data set; (step 3) determine the percent notional amount calculation for Real-Time Reporting Final Rule, and the sum of the notional amounts of swaps determining cap size in the post-initial Commission considered the appropriate in the trimmed data set; (step 4) period.483 ISDA/SIFMA also stated that level for these cap sizes at that time. The multiply the sum of the notional the added transparency from reporting Commission did not propose altering amount by 75 percent; (step 5) rank transaction sizes between 67 percent the interim cap size in the Further Block order the observations by notional and 75 percent would not outweigh the Proposal, and thus did not receive amount from least to greatest; (step 6) harm to liquidity from additional comments regarding altering the interim calculate the cumulative sum of the disclosure, and urges the Commission to cap size beyond that of EEI. The observations until the cumulative sum ensure that the post-initial cap size is Commission does not believe that is equal to or greater than the 75 percent always equal to the relevant block altering the interim cap size would be notional amount calculated in step 4; size.484 MFA commented that it is appropriate under such circumstances. (step 7) select the notional amount unnecessary for the Commission to AII and ISDA/SIFMA recommended associated with that observation; (step establish cap sizes that differ from that the cap size be set as the lower of 8) round the notional amount of that minimum block sizes as there is not a the appropriate minimum block size observation to two significant digits, or meaningful transparency benefit that and the interim cap sizes set forth in the if the notional amount associated with would outweigh the resource burdens Real-Time Reporting Rule. The that observation is already significant to on the Commission, SDRs, SEFs, and Commission, however, disagrees with two digits, increase that notional other market participants.485 SIFMA this view of the relationship between amount to the next highest rounding recommended that the Commission block thresholds and cap sizes. All of point of two significant digits; and (step should set the notional cap size at the the information regarding a block trade 9) set the appropriate minimum block block threshold, as the added public is reported to the market at the end of size at the amount calculated in step 8. dissemination could harm liquidity in the block time delay. Cap sizes, on the Consistent with the Commission’s the same manner that a higher block other hand, are never expressed to the proposed process to determine the trade size threshold might.486 Vanguard market. Because this information is not appropriate post-initial minimum block believes that it is essential that the cap reported to the market in real-time, nor sizes, proposed § 43.4(h)(3) provided match the block trade threshold, as to reported to the market at all, the that the Commission would publish do otherwise would compromise the Commission believes that cap sizes post-initial cap sizes on its Web site. liquidity protections afforded by the should be set at a higher level than Proposed § 43.4(h)(4) provided that nuanced assessment of block trade block sizes, in order to minimize the unless otherwise indicated on the thresholds.487 amount of information that is never Commission’s Web site, the post-initial Two other commenters suggested publicly disseminated. Accordingly, the cap sizes would become effective on the alterations of the Commission’s Commission is adopting § 43.4(h)(1) as first day of the second month following proposed cap sizes. Barclays proposed. the date of publication. recommended that the post-initial The Commission received 10 period cap sizes be introduced at more b. Post-Initial Cap Sizes and the 75- comments regarding the 75 percent Percent Notional Amount Calculation nuanced levels that reflect the notional amount calculation for differences between product’s traded Pursuant to proposed § 43.4(h)(2)(ii), determining post-initial cap sizes. One volumes.488 EEI recommended a much the Commission would use a 75 percent commenter, Javelin, supported the 75 lower fixed cap size for Electricity Swap notional amount calculation, as percent notional amount calculation Contracts and the Other Commodity proposed in § 43.6(c)(2), to determine and stated that it was consistent with Electricity Swap Category.489 the appropriate post-initial cap sizes for the minimum block size threshold After consideration of the comments 480 all swap categories for the purpose of established by the Commission. above, the Commission is adopting reporting block trades or large notional Seven commenters, however, 478 § 43.4(h)(2)(ii) as proposed. The off-facility swaps of significant size. recommended that the Commission set Commission is of the view that setting This calculation methodology would be post-initial cap sizes matching the post- post-initial cap sizes above appropriate different from the 67 percent notional initial minimum block size thresholds minimum block sizes would provide amount calculation methodology that established by the Commission. AII additional pricing information with the Commission proposed in recommended setting the post-initial respect to large swap transactions, § 43.6(c)(1), which would be used to cap size for each swap category at the which are large enough to be treated as determine appropriate minimum block same level as the post-initial block size 479 block trades (or large notional off- sizes. threshold and states that the 75 percent facility swaps), but small enough that For the 75 percent notional amount notional amount calculation is far too they do not exceed the applicable post- calculation, the Commission would high.481 GFMA similarly stated that the determine the appropriate cap size same rationale should apply to cap and 483 CL–ICI at 8. through the following process, pursuant block sizes, as both have potential 484 CL–ISDA/SIFMA at 15. to proposed § 43.6(c)(2): (step 1) select negative impacts on liquidity.482 ICI 485 CL–MFA at 8–9. all of the publicly reportable swap 486 CL–SIFMA at 12. 480 CL–Javelin at 2. 487 CL–Vanguard at 7. 478 See proposed § 43.6(c)(2). 481 CL–AII at 12. 488 CL–Barclays at 6. 479 See proposed § 43.6(c)(2). 482 CL–GFMA at 5. 489 CL–EEI at 11–12.

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initial cap size. This additional swap counterparties in § 43.4(d). transactions that reference such information may enhance price Section 43.4(d) generally prohibits an contracts (and any underlying assets discovery by publicly disseminating SDR from publicly disseminating swap that are economically related thereto) more information relating to market transaction and pricing data in a manner would not disclose the identities, depth and the notional sizes of publicly that discloses or otherwise facilitates the market positions and business reportable swap transactions, while still identification of a swap counterparty.490 transactions of swap counterparties. protecting the anonymity of swap Notwithstanding that prohibition, Pursuant to the Real-Time Reporting counterparties and their ability to lay off § 43.4(d)(3) provides that SDRs are Final Rule, any publicly reportable risk when executing extraordinarily required to publicly disseminate data swap transaction in the other large swap transactions. that discloses the underlying asset(s) of commodity asset class that is excluded The Commission notes that Section publicly reportable swap transactions. under § 43.4(d)(4)(ii) would not be 2(a)(13) tasks the Commission with Section 43.4(d)(4) contains special subject to the reporting and public bringing real-time public reporting to provisions for swaps in the other dissemination requirements for part 43 the swaps market. Section 2(a)(13)(E) commodity asset class. These swaps upon the effective date of the Real-Time expressly provides that the Commission raise special concerns because the Reporting Final Rule. The Commission determine appropriate time delays for public disclosure of the underlying noted in the Real-Time Reporting Final block trades and large notional off- asset(s) may in turn reveal the identities, Rule that it planned to address the facility swaps. However, these market positions and business group of other commodity swaps that provisions only call for a time delay— transactions of the swap counterparties. were not subject to the rules of part 43 they do not provide for information to To address these concerns, § 43.4(d)(4) in a forthcoming release.493 be kept from the market in perpetuity. limits the types of swaps in the other Accordingly, the Commission proposed All of the information regarding a block commodity asset class that are subject to in the Further Block Proposal to address trade is reported to the market at the public dissemination. Specifically, the public dissemination of swap end of the block time delay. Cap sizes, § 43.4(d)(4)(ii) of the Commission’s transaction and pricing data for the on the other hand, are never expressed regulations provides that, for publicly group of other commodity swaps that to the market. Because this information reportable swap transactions in the are not covered currently by is not reported to the market in real- other commodity asset class, SDRs must § 43.4(d)(4)(ii). time, nor reported to the market at all, publicly disseminate the actual The Commission is of the view that the Commission believes that cap sizes underlying assets only for: (1) those given the lack of data on the liquidity should be set at a higher level than swaps executed on or pursuant to the for certain swaps in the other block sizes. The 75 percent notional test rules of a SEF or DCM; (2) those swaps commodity asset class, the lack of data balances the competing interests of referencing one of the contracts on the number of market participants in providing meaningful real-time public described in appendix B to part 43; and these other commodity swaps markets, reporting to the swaps market and (3) those swaps that are economically and the statutory requirement to protect protecting the anonymity of swap related to one of the contracts described the anonymity of market participants,494 market participants, while taking into in appendix B to part 43.491 Essentially, the public dissemination of less specific account potential impacts on market the Commission has determined that information for swaps with specific liquidity. these three categories of swap have geographic or pricing detail may be If market participants conclude that sufficient liquidity such that the appropriate. The Commission believes the Commission has set cap sizes for a disclosure of the underlying asset would that the public dissemination of the specific swap category in a way that will not reveal the identities, market exact underlying assets for swaps in this materially reduce market liquidity, then positions and business transactions of group of the other commodity asset those participants are encouraged to the swap counterparties. class may subject the identities, market submit data to support their conclusion. In its Real-Time Reporting Final Rule, positions and business transactions of In addition, through its own the Commission included in appendix B market participants to unwarranted surveillance of swaps market activity, to part 43 a list of contracts that, if public disclosure if additional the Commission may become aware that referenced as an underlying asset, protections are not established with a cap size would reduce market should be publicly disseminated in full respect to the geographic detail of the liquidity for a specific swap category. In without limiting the commodity or underlying asset. For that reason, the response to either a submission or its geographic detail of the asset. In the Commission proposed that SDRs mask own surveillance of swaps market Further Block Proposal, the Commission or otherwise disguise the geographic activity, the Commission has the legal proposed adding 13 contracts to details related to the underlying assets authority to take action by rule or order appendix B to part 43 under the ‘‘Other of a swap in connection with the public to mitigate the potential effects on Contracts’’ heading.492 The Commission dissemination of such swap transaction market liquidity of cap sizes with believes that since it previously has and pricing data.495 determined that these 13 contracts have respect to swaps in a particular swap 2. Proposed Amendments to § 43.4 category. material liquidity and price references, among other things, the public In order to accommodate the policy C. Masking the Geographic Detail of dissemination of the full underlying goals described above, the Commission Swaps in the Other Commodity Asset asset for publicly reportable swap proposed adding § 43.4(d)(4)(iii) to part Class 43 to establish rules regarding the 1. Policy Goals for Masking the 490 See § 43.4(d)(1) of the Commission’s 493 Geographic Detail for Swaps in the regulations. See 77 FR 1211. 491 Appendix B to part 43 provides a list of 28 494 See sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) Other Commodity Asset Class ‘‘Enumerated Physical Commodity Contracts’’ as of the CEA. 7 U.S.C. 2(a)(13)(C)(iii), (E)(i). In the Real-Time Reporting Final well as 1 contract under the ‘‘Other Contracts’’ 495 Limiting the geographical detail is a typical heading. See 77 FR 1182 app. B. statistical disclosure control used by other federal Rule, the Commission sets forth general 492 Appendix B to part 43 currently lists only agencies as described in the Report on Statistical protections for the identities, market Brent Crude Oil (ICE) under the ‘‘Other Contracts’’ Disclosure Limitation Methodology. See supra note positions and business transactions of heading. 61.

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public dissemination of the remaining swaps in the other commodity asset prices in different markets.499 The group of swaps in the other commodity class. To the extent that the underlying Commission anticipates that a asset class (i.e., those not described in asset of a publicly reportable swap distinction for natural gas is necessary § 43.4(d)(4)(ii)). In the Commission’s transaction described in proposed to enhance price discovery while view, proposed § 43.4(d)(4)(iii) would § 43.4(d)(4)(iii) does not have a specific protecting the identities of the parties, ensure that the public dissemination of delivery or pricing point, the provisions business transactions and market swap transaction and pricing data of proposed § 43.4(d)(4)(iii) and positions of market participants. would not unintentionally disclose the proposed appendix E to part 43 would The proposed five markets for public identities, market positions and not apply. Specifically, proposed dissemination of delivery or pricing business transactions of any swap appendix E to part 43 provides top- points for natural gas swaps are as counterparty to a publicly reportable coding for various geographic regions, follows: (i) Midwest (including North swap transaction in the other both in the United States and Dakota, South Dakota, Minnesota, commodity asset class. In particular, internationally. Wisconsin, Michigan, Indiana, Illinois, Iowa, Nebraska, Kansas, Oklahoma, proposed § 43.4(d)(4)(iii) provides that Subsection (a) below includes a Missouri and Arkansas); (ii) Northeast SDRs must publicly disseminate the description of the top-coding U.S. (including Maine, New Hampshire, details about the geographic location of regions. Subsection (b) below includes a Vermont, Massachusetts, Rhode Island, the underlying assets of the other description of the top-coding non-U.S. Vermont, Connecticut, New York, commodity swaps not described in regions. Finally, subsection (c) below Pennsylvania, Kentucky, Ohio, West § 43.4(d)(4)(ii) (i.e., other commodity outlines the proposed system for SDRs swaps that have a specific delivery or Virginia, New Jersey, Delaware, to publicly disseminate ‘‘basis pricing point) pursuant to proposed Maryland and Virginia); 500 (iii) Gulf swaps.’’497 appendix E to part 43. Proposed (including Louisiana and Texas); (iv) appendix E to part 43 is discussed in the a. U.S. Delivery or Pricing Points Southeast (including Tennessee, North next subsection. Carolina, South Carolina, Georgia, The Commission recognizes that Table E1 in proposed appendix E to Florida, Alabama and Mississippi); and requiring the public dissemination of part 43 lists the geographic regions that (v) Western (including Montana, less specific geographic detail for an an SDR would publicly disseminate for Wyoming, Colorado, New Mexico, other commodity swap may, to some an off-facility swap in the other Idaho, Utah, Washington, Oregon, extent, diminish the price discovery commodity asset class that is described California, Nevada and Arizona). For value of swap transaction and pricing in proposed § 43.4(d)(4)(iii). The any other pricing points in the United data for such swap. The Commission Commission proposed that an SDR States, SDRs would publicly believes, however, that the public publicly disseminate swap transaction disseminate ‘‘Other U.S.’’ in place of the dissemination of such data will still and pricing data for certain energy and actual pricing or delivery point for such provide the market with useful power swaps in the other commodity natural gas swaps. information relating to market depth, asset class, as described in more detail ii. Petroleum and Related Products trading activity and pricing information below, in a different manner than the for similar types of swaps. remaining other commodities. In order In proposed § 43.4(d)(4)(iii) and The Commission also proposed to mask the specific delivery or pricing proposed appendix E to part 43, the making conforming amendments to detail of these energy and power swaps, Commission set forth a method to § 43.4(d). Specifically, the Commission the Commission proposed using describe the publicly reportable swap proposed amending the introductory established regions or markets that are transactions that have petroleum or language to § 43.4(d)(4)(i) by deleting associated with these underlying assets. related products as an underlying asset and have a specific delivery or pricing ‘‘§ 43.4(d)(4)(ii)’’ and adding in its place i. Natural Gas and Related Products ‘‘§ 43.4(d)(4)(ii) and (iii)’’ to make clear point in the United States. In particular, that SDRs have to publicly disseminate In proposed § 43.4(d)(4)(iii) and the proposal would require SDRs to swaps data under § 43.4(d)(4)(iii) in proposed appendix E to part 43, the publicly disseminate a description of accordance with part 43.496 Commission set forth a method to the specific delivery or pricing point The Commission received no describe the publicly reportable swap based on one of the seven Petroleum comments regarding § 43.4(d)(4)(i) and transactions that have natural gas or Administration for Defense Districts (ii). The Commission is adopting related products as an underlying asset (‘‘PADD’’) regions.501 The PADD regions § 43.4(d)(4)(i) and (ii) as proposed. and have a specific delivery or pricing indicate economically and geographically distinct regions for the 3. Application of Proposed point in the United States. In particular, purposes of administering oil allocation. § 43.4(d)(4)(iii) and Proposed Appendix the proposal required SDRs to publicly E to Part 43—Geographic Detail for disseminate a description of the specific 499 See FERC, Natural Gas Market Overview: Spot Delivery or Pricing Points delivery or pricing point based on one of the five industry specific natural gas Gas Prices, http://www.ferc.gov/market-oversight/ Proposed appendix E to part 43 mkt-gas/overview/ngas-ovr-avg-spt-ng-pr.pdf markets set forth by the Federal Energy (updated Jan.10, 2013). In addition, there is includes the system that SDRs would be Regulatory Commission (‘‘FERC’’).498 evidence that the spot prices in these markets and required to use to mask the specific The FERC Natural Gas Markets reflect the corresponding futures prices are highly delivery or pricing points that are a part natural deviations found in the spot correlated. D. Murray, Z. Zhu, ‘‘Asymmetric price of an underlying asset in connection responses, market integration and market power: A with the public dissemination of swap study of the U.S. natural gas market,’’ Energy 497 For the purposes of the Further Block Proposal Economics, 30 (2008) 748–65. transaction and pricing data for certain and this final rule, basis swaps are defined as swap 500 The District of Columbia would be included transactions in which one leg of the swap references in this region, if any specific delivery or pricing 496 In addition to proposing limitations on the a contract described in appendix B to part 43 (or points existed at the time of the Further Block geographic detail for public dissemination of is economically related thereto) and the other leg Proposal. underlying assets for certain swaps in the other of the swap does not. 501 See PADD Map, Appendix A, Petroleum commodity asset class, the Commission also 498 See FERC, National Gas Markets—Overview, Administration for Defense Districts, http:// proposed amending § 43.4(g) and (h) to make http://www.ferc.gov/market-oversight/mkt-gas/ www.eia.gov/todayinenergy/detail.cfm?id=4890, conforming changes. overview.asp (last viewed May 6, 2013). (last viewed May 6, 2013).

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The Department of Energy’s Energy iv. All Remaining Other Commodities market positions of market participants. Information Administration (‘‘EIA’’) In proposed § 43.4(d)(4)(iii) and In Table E2, the Commission proposed collects and publishes oil supply and proposed appendix E to part 43, the the countries and regions that an SDR demand data with respect to the PADD Commission set forth a method to must publicly disseminate. In proposing regions.502 Accordingly, to provide describe any swaps in the other the use of these geographic breakdowns consistency with EIA publications and commodity asset class that do not have for the public reporting of international information regarding regional patterns, oil, natural gas, electricity, or petroleum delivery or pricing points, the the Commission proposed that specific as an underlying asset, but have specific Commission considered world regions delivery or pricing points with respect delivery or pricing points in the United that have significant energy to such petroleum product swaps are States. In particular, the Commission consumption, whether ISDA-specific publicly disseminated based on PADD proposed that SDRs publicly documentation exists for a particular regions. disseminate information with respect to country, and whether public disclosure The PADD regions for public these swaps based on the 10 federal would compromise the anonymity of dissemination of delivery or pricing regions established by the U.S. Energy the swap counterparties. points for such petroleum product Information Administration (‘‘EIA’’). The Commission proposed the swaps are as follows: (i) PADD 1A (New The Commission believed that the use following international regions for England); (ii) PADD 1B (Central of the 10 federal regions would provide publicly disseminating specific delivery Atlantic); (iii) PADD 1C (Lower consistency among different types of or pricing points of publicly reportable Atlantic); (iv) PADD 2 (Midwest); (v) underlying assets in the other swap transactions described in PADD 3 (Gulf Coast); (vi) PADD 4 commodity asset class with respect to § 43.4(d)(4)(iii): (i) North America (Rocky Mountains); and (vii) PADD 5 delivery and pricing point descriptions. (publicly disseminate ‘‘Canada’’ or (West Coast).503 For any other pricing The 10 federal regions that SDRs ‘‘Mexico’’); (ii) Central America points in the United States, SDRs would would use for public dissemination (publicly disseminate ‘‘Central publicly disseminate the term ‘‘Other under the proposal for all remaining America’’); (iii) South America (publicly U.S.’’ in place of the actual pricing or other commodity swaps are as follows: disseminate ‘‘Brazil’’ or ‘‘Other South delivery point for such petroleum (i) Region I (including Connecticut, America’’); (iv) Europe (publicly product swaps. Maine, Massachusetts, New Hampshire, disseminate ‘‘Western Europe,’’ ‘‘Northern Europe,’’ ‘‘Southern Europe,’’ iii. Electricity and Sources Rhode Island and Vermont); (ii) Region II (including New Jersey and New York); or ‘‘Eastern Europe’’); (v) Russia In proposed § 43.4(d)(4)(iii), the (iii) Region III (including Delaware, (publicly disseminate ‘‘Russia’’); 506 (vi) Commission also set forth a method to District of Columbia, Maryland, Africa (publicly disseminate ‘‘Northern describe publicly reportable swap Pennsylvania, Virginia and West Africa,’’ ‘‘Western Africa,’’ ‘‘Eastern transactions that have electricity and Virginia); (iv) Region IV (including Africa,’’ ‘‘Central Africa,’’ or ‘‘Southern sources as an underlying asset and have Alabama, Florida, Georgia, Kentucky, Africa’’); (vii) Asia-Pacific (publicly a specific delivery or pricing point in Mississippi, North Carolina, South disseminate ‘‘Northern Asia,’’ ‘‘Central the United States. In particular, the Carolina and Tennessee); (v) Region V Asia,’’ ‘‘Eastern Asia,’’ ‘‘Western Asia,’’ proposal would require SDRs to (including Illinois, Indiana, Michigan, ‘‘Southeast Asia,’’ or ‘‘Australia/New publicly disseminate the specific Minnesota, Ohio and Wisconsin); (vi) Zealand/Pacific Islands’’). The delivery or pricing point based on a Region VI (including Arkansas, Commission considered whether a more description of one of the FERC Electric Louisiana, New Mexico, Oklahoma and granular approach is necessary for 504 Power Markets. Texas); (vii) Region VII (including Iowa, certain regions in order to enhance price The markets for public dissemination Kansas, Missouri and Nebraska); (viii) discovery while still protecting of delivery or pricing points for such Region VIII (including Colorado, anonymity. For example, Mexico, electricity swaps are as follows: (i) Montana, North Dakota, South Dakota, Canada and Russia may benefit from a California (CAISO); (ii) Midwest Utah and Wyoming); (ix) Region IX more granular public dissemination of (MISO); (iii) New England (ISO–NE); (including Arizona, California, Hawaii delivery or pricing points given the (iv) New York (NYISO); (v) Northwest; and Nevada); and (x) Region X amount of energy production in those (vi) Pennsylvania-New Jersey-Maryland (including Alaska, Idaho, Oregon and regions. (PJM); (vii) Southeast; (viii) Southwest; Washington).505 To the extent that a publicly (ix) Southwest Power Pool (SPP); and reportable swap transaction described in (x) Texas (ERCOT). For any other b. Non-U.S. Delivery or Pricing Points proposed § 43.4(d)(4)(iii) references the pricing points in the United States, Table E2 in proposed appendix E to United States as a whole and not a SDRs would publicly disseminate the part 43 provided the appropriate specific delivery or pricing point, term ‘‘Other U.S.’’ in place of the actual manner for SDRs to publicly proposed appendix E would require an pricing or delivery point for such disseminate non-U.S. delivery or pricing SDR to publicly disseminate that electricity and sources swaps. points for all publicly reportable swap reference. For example, an SDR would transactions described in the proposed publicly disseminate a weather swap 502 See U.S. Energy Information Administration § 43.4(d)(4)(iii). The Commission is of that references ‘‘U.S. Heating Monthly’’ (EIA)—Petroleum & Other Liquids, http:// www.eia.gov/petroleum/data.cfm (last viewed May the view that SDRs should not publicly as ‘‘U.S. Heating Monthly.’’ disseminate the actual location for these 6, 2013). c. Basis Swaps 503 Alternatively, the Commission is considering international delivery or pricing points combining the East Coast PADD into one category, since the public disclosure of such The Commission proposed requiring such that any oil swap with a specific delivery or information may disclose the identities SDRs to ensure that specific underlying pricing point as PADD 1A (New England), PADD 1B assets are publicly disseminated for (Central Atlantic) or PADD 1C (Lower Atlantic) of parties, business transactions and would be publicly disseminated as PADD 1 (East basis swaps that qualify as publicly Coast). 505 See U.S. Energy Information Administration, 504 See FERC, Electric Power Markets—Overview, U.S. Federal Region Map, http://www.eia.gov/ 506 Note that Russia is not included in ‘‘Eastern http://www.ferc.gov/market-oversight/mkt-electric/ electricity/regionsmap/fedregstates.html (last Europe’’ or in ‘‘Northern Asia’’ and instead should overview.asp (last viewed May 6, 2013). visited May 6, 2013). be publicly disseminated as ‘‘Russia.’’

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reportable swap transactions. The Corporation (‘‘NERC’’) regions for swaps—were significant price discovery Commission recognizes that basis swaps publicly disseminating delivery or contracts (‘‘SPDCs’’) in connection with exist in which one leg of the swap pricing points for electricity swaps trading on exempt commercial markets references a contract described in described in proposed § 43.4(d)(4)(iii). (‘‘ECMs’’).511 Each of the 13 contracts appendix B to part 43 (or is The NERC regions are broader than the had undergone an analysis in which the economically related to one such FERC regions and include much of Commission considered the following contract) and the other leg of the swap Canada. Specifically, the NERC regions five criteria: (i) Price linkage (the extent references an asset or pricing point not are as follows: (i) Florida Reliability to which the contract uses or otherwise listed in appendix B to part 43. Coordinating Council (FRCC); (ii) relies on a daily or final settlement price Currently, § 43.4(d)(4)(ii)(A)–(B) Midwest Reliability Organization of a contract listed for trade on or requires an SDR to publicly disseminate (MRO); (iii) Northeast Power subject to the rules of a DCM); (ii) the actual underlying asset of the leg of Coordinating Council (NPCC); (iv) arbitrage (the extent to which the price the basis swap that references or is ReliabilityFirst Corporation (RFC); (v) of the contract is sufficiently related to economically related to a contract listed SERC Reliability Corporation (SERC); the price of a contract listed on a DCM in appendix B to part 43. To the extent (vi) Southwest Power Pool, RE (SPP); to permit market participants to that a basis swap is executed on or (vii) Texas Regional Entity (TRE); (viii) effectively arbitrage between the two pursuant to the rules of a SEF or DCM, Western Electricity Coordinating markets); (iii) material price reference an SDR would also publicly disseminate Council (WECC).509 The Commission is (the extent to which, on a frequent and the specific underlying asset. With of the view that using these regions as recurring basis, bids, offers or respect to the leg of a basis swap that suggested by EEI will provide further transactions in a commodity are directly does not reference a contract in masking of specific delivery details and based on, or are determined by appendix B to part 43, however, the thus further protection against public referencing, the prices generated by Commission proposed to require SDRs disclosure of identities, business contracts being traded or executed on to publicly disseminate the underlying transactions, and market positions of the ECM); (iv) material liquidity (the asset of that leg pursuant to proposed swap market participants, as extent to which volume of the contract § 43.4(d)(4)(iii) and proposed appendix recommended by Barclays and Spring is sufficient to have a material effect on E to part 43, i.e., with top-coding Trading. other contracts listed for trading); and provisions. (v) other material factors.512 4. Further Revisions to Part 43 d. Comments Received and Commission To the extent that the SPDC contracts Determination a. Additional Contracts Added to have been de-listed and replaced by Appendix B to Part 43 listed futures contracts, the Commission The Commission received three believes that the latter contracts have comments regarding the masking of Appendix B to part 43 currently lists contracts that, if referenced as an similar material liquidity and material specific delivery or pricing detail of price reference, among other things. energy and power swaps. EEI underlying asset, would require SDRs to publicly disseminate the full geographic Therefore, the Commission anticipates recommended that the Commission that, the public dissemination of the full mask data regarding Other Commodity detail of the asset. In the Real-Time Reporting Final Rule, the Commission underlying asset for publicly reportable Electricity Swaps according to the North swap transactions that reference such American Electric Reliability provided that SDRs were required to publicly disseminate any underlying futures contracts (and any underlying Corporation eight regions rather than assets that are economically related the FERC regions proposed.507 Barclays asset of a publicly reportable swap transaction that references or is thereto) would not disclose the recommended that the Commission use identities, market positions and wider geographic regions when publicly economically related to any contract or contracts listed in appendix B to part 43 business transactions of market disseminating data for commodity participants and would enhance price swaps with very specific underlying in the same manner. As noted above, the Commission discovery in the related markets.513 The assets and/or delivery points and Commission did not receive any other develop an appropriate process to avoid proposed adding 13 natural gas and 508 electricity contracts under the ‘‘Other comments, and accordingly, is adopting identifying issuers of debt. Spring these additions to appendix B. Trading supported further measures to Commodity’’ heading in appendix B to prevent public disclosure of identities, part 43 that have been de-listed and b. Technical Revisions to Part 43 business transactions, and market converted into futures contracts listed on a DCM.510 Nevertheless, the addition In the Real-Time Reporting Final positions of swap market participants, Rule, the Commission states that the and recommended disclosing a subset of of these 13 contracts to appendix B effectively would require SDRs to data on a collective basis at a later date. 511 publicly disseminate these contracts the Id. After consideration of the comments 512 The Dodd-Frank Act deleted and replaced received, the Commission is adopting same way as the other contracts that are CEA section 2(h)(7), which contained the five § 43.4(d)(4)(iii) with the following currently listed in appendix B to part criteria for determining a SPDC. The Dodd-Frank modification. For publicly reportable 43. That is, an SDR would publicly Act amended CEA section 4a(a) to include CEA disseminate the actual underlying asset section 4a(a)(4), which contains a similar version of swap transactions that have electricity the five criteria for determining a SPDC in the and sources as an underlying asset and (and any underlying asset(s) that are context of excessive speculation. have a specific delivery or pricing point economically related) without any 513 The Commission notes that it is not adding in the United States, the Commission is limitation of the geographic detail. ‘‘Henry Financial LD1 Fixed Price,’’ a listed futures contract that was converted from ‘‘Henry Financial requiring SDRs to publicly disseminate The Commission had previously determined that these 13 contracts—as LD1 Fixed Price Swap’’ (which was previously the specific delivery or pricing point deemed by the Commission to be a SPDC), to based on a description of one of the appendix B to part 43. This contract is 509 North American Electric Reliability See NERC, Key Players: Regional Entities, economically related to the ‘‘New York Mercantile http://www.nerc.com/ Exchange Henry Hub Natural Gas,’’ which is listed page.php?cid=1%7C9%7C119 (last visited May 6, under ‘‘Enumerated Physical Commodity 507 CL–EEI at 12–13. 2013). Contracts’’ in appendix B to part 43. Therefore, 508 CL–Barclays at 6. 510 See supra note 176. listing this contract again would be redundant.

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transactions described of Management and Budget (‘‘OMB’’) for 1. § 43.6(g)—Notification of Election § 43.4(d)(4)(ii)(A)–(C), i.e., the instances review. The OMB submission process Section 43.6(g) amends the first and in which the actual underlying asset for included completing a supporting second collections of information a publicly reportable swap transaction statement with the agency’s burden within the meaning of the PRA. In in the other commodity asset class is to estimate and justification for the particular, § 43.6(g) contains the be publicly disseminated, are meant to collection. The information collection provisions regarding the election to be exclusive of one another. Under these established within this rulemaking, have a swap transaction treated as a sections, an SDR is required to publicly which included the agency’s burden block trade or large notional off-facility disseminate the actual underlying estimate and justification, was subjected swap, as applicable. Section 43.6(g)(1) asset(s) of a swap in the other to the rulemaking’s public comment establishes a two-step notification commodity asset class, where the swap process. No public comments were process relating to block trades. Section (1) is executed on or pursuant to the received affecting the information 43.6(g)(2) establishes the notification rules of a SEF or DCM; (2) references a burden and justification. contract listed on appendix B to part 43; process relating to large notional off- Section 43.6 and amendments to facility swaps. Section 43.6(g) is an or (3) is economically related to a § 43.4 amend an existing collection of contract on appendix B. Accordingly, essential part of this rulemaking because information within the meaning of the it provides the mechanism through the Commission proposed a technical PRA in two respects. Accordingly, the clarification to § 43.4(d)(4)(ii)(B) to which market participants will be able Commission submitted the Further to elect to treat their qualifying swap clarify the intent that these elements are Block Proposal to the OMB for review exclusive of one another, as articulated transaction as a block trade or large pursuant to 44 U.S.C. 3507(d) and 5 notional off-facility swap. in the preamble to the Real-Time CFR1320.11. OMB has assigned control Section 43.6(g)(1)(i) contains the first Reporting Final Rule. number 3038–0070 to the existing step in the two-step notification process The Commission did not receive any collection of information, which is titled relating to block trades. In particular, comments regarding the technical ‘‘Part 43—Real-Time Public Reporting.’’ this section provides that the parties to clarification to § 43.4(d)(4)(ii)(B). The Commission invited the public to a swap that are executed at or above the Accordingly, the Commission is comment on any aspect of the proposed appropriate minimum block size for the adopting § 43.4(d)(4)(ii)(B) as proposed. amendments to existing collections of applicable swap category are required to information. The responses to this IV. Paperwork Reduction Act notify the SEF or DCM (as applicable) of amended collection of information are A. Background their election to have their qualifying mandatory. The Commission did not swap transaction treated as a block The purposes of the Paperwork receive any comments regarding the trade. The Commission understands that Reduction Act of 1995, 44 U.S.C. 3501 proposed amendments. Accordingly, the SEFs and DCMs use automated, et seq. (‘‘PRA’’) are, among other things, Commission is not revising the electronic, and in some cases, voice to minimize the paperwork burden to estimates contained in the Further Block processes to execute swap transactions; the private sector, ensure that any Proposal, which are described in the therefore, the transmission of the collection of information by a following sections. government agency is put to the greatest notification of a block trade election possible uses, and minimize duplicative B. Description of the Collection also would either be automated, electronic or communicated through information collections across the On January 9, 2012, the Commission 514 voice. government. The PRA applies with issued the Real-Time Reporting Final extraordinary breadth to all information, Rule, which includes three collections The Commission estimates that there ‘‘regardless of form or format,’’ are 125 SDs and MSPs, and 1,000 other of information requirements within the 518 whenever the government is ‘‘obtaining, meaning of the PRA. The first collection non-financial end-user parties. The causing to be obtained [or] soliciting’’ of information requirement under Part Commission estimates that, on average, information, and includes required 43 imposed a reporting requirement on SD/MSP reporting parties would likely ‘‘disclosure to third parties or the a SEF or DCM when a swap is executed notify a SEF or DCM of a block trade public, of facts or opinions,’’ when the on a trading facility or on the parties to election approximately 1,000 times per information collection calls for a swap transaction when the swap is year while non-SD/MSP reporting ‘‘answers to identical questions posed executed bilaterally. The second parties likely would notify a SEF or to, or identical reporting or DCM of a block trade election collection of information requirement 519 recordkeeping requirements imposed under Part 43 created a public approximately five times per year. 515 on, ten or more persons.’’ The PRA dissemination requirement on SDRs. Thus, the Commission estimates that requirements have been determined to The third collection of information there would be 130,000 notifications of include not only mandatory but also a block trade election by reporting requirement created a recordkeeping 520 voluntary information collections, and requirement for SEFs, DCMs, SDRs and parties under § 43.6(g) each year. include both written and oral 516 any reporting party (as such term is communications. defined in part 43 of the Commission’s 518 The Commission has previously estimated that To effectuate the purposes of the PRA, 125 SDs and MSPs will register with the regulations). Congress requires all agencies to Commission and 1,000 non-financial end-users (i.e., Sections 43.4 and 43.6 amend the first non-SD/non-MSPs) will be required to report swap quantify and justify the burden of any transactions annually. 77 FR 1229–30. information collection it imposes.517 and second collections of information within the meaning of the PRA as 519 The Commission anticipates that these figures This requirement includes submitting will change as a function of changes in the market each collection, whether or not it is described below. The analysis with structure and practices in the U.S. swaps markets. contained in a rulemaking, to the Office respect to the amended collections as a 520 The Commission estimates the total number of result of § 43.6 is set out in section 1 notifications as follows: 125 SDs/MSPs × 1,000 notifications = 125,000 notifications per year; 1,000 514 below. The analysis with respect to the See 44 U.S.C. 3501. non-SDs/non-MSPs × 5 notifications = 5,000 515 See 44 U.S.C. 3502. amended collections as a result of notifications per year; therefore, the total across all 516 See 5 CFR 1320.3(c)(1). amendments to § 43.4 is set out in types of entities would be 130,000 notifications per 517 See 44 U.S.C. 3506. section 2 below. year.

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The Commission estimates that the or $400,678 in total annual burden to transmit this information; other burden hours associated with hours costs 523 and $11.8 million in total reporting parties, because of the expense § 43.6(g)(1)(i) would include: (i) 30 start-up capital costs.524 associated with building an electronic seconds on average for parties to a swap With respect to the second step, infrastructure, may contract with third to determine whether a particular swap proposed § 43.6(g)(1)(ii) provides that parties (including their swap transaction qualifies as a block trade the SEF or DCM, as applicable, that counterparty) to transmit the based on the appropriate minimum receives an election notification is notification of a large notional off- block size of the applicable swap required to notify an SDR of a block facility swap election. category; and (ii) 30 seconds on average trade election when transmitting swap The Commission estimates that the for the parties to electronically transmit transaction and pricing data to such incremental time and cost burden or otherwise communicate their notice SDR for public dissemination. As noted associated with the § 43.6(g)(2) would of election. SDs, MSPs and reporting above, the Commission anticipates that include: (i) One minute for a reporting parties would use existing traders (or SEFs and DCMs would use automated, party to determine whether a particular other professionals earning similar electronic and, in some cases, voice swap transaction qualifies as a large salaries) to electronically transmit or processes to execute swap transactions. notional off-facility swap based on the otherwise communicate their notice of The Commission estimates that there appropriate minimum block size of the election. Based on the Securities will be approximately 58 SEFs and applicable swap category; and (ii) one Industry and Financial Market DCMs. Accordingly, the Commission minute for the reporting party (or its Association’s 2011 Securities Industry estimates that the total annual burden designee) to electronically transmit or Salary Survey, the Commission associated with the second step in communicate through voice processes estimates that these block traders would § 43.6(g)(1)(ii) would be approximately its notice of election. The Commission earn approximately $184.90 per hour in $610,740 in non-recurring annualized estimates that, of the approximately total compensation.521 Accordingly, the capital and start-up costs.525 The Real- 2,250 hours incurred by 125 SDs/MSPs Commission estimates that the total Time Reporting Final Rule already has and 1,000 non-SD/MSPs, all of those annual burden hour costs associated addressed the recurring annualized hours would be spent by traders and with the first step in proposed costs for the hour burden. market analysts (or designee).526 § 43.6(g)(1)(i) would be 2,167 hours 522 Section 43.6(g)(2) is similar to the first SIFMA’s report states that traders and step set forth in § 43.6(g)(1). That is, market analysts make $184.90 per hour 521 The Commission previously has utilized wage § 43.6(g)(2) provides, in part, that a in total compensation.527 rate estimates based on average salary and average reporting party who executes a bilateral The Commission estimates that, on prior year bonus information for the securities industry compiled by SIFMA. These wage estimates swap transaction that is at or above the average, each of the estimated 125 SD/ are derived from an industry-wide survey of appropriate minimum block size is MSP counterparties would likely notify participants and thus reflect an average across required to notify the SDR of its election an SDR of a large notional off-facility entities; the Commission notes that the actual costs to treat such swap as a large notional swap election approximately 500 times for any individual company or sector may vary from the average. off-facility swap. This section provides per year while each of the estimated The Commission estimated the dollar costs of further that the reporting party is 1,000 non-SD/MSP counterparties hourly burdens for different types of relevant required to notify the SDR in connection would notify an SDR approximately five professionals using the following calculations: with the reporting party’s transmission times per year. Accordingly, the (1) [(2010 salary + bonus) * (salary growth per of swap transaction and pricing data to Commission estimates that there are, on professional type, 2010–2011)] = Estimated 2010 total annual compensation. The most recent data the SDR for public dissemination. The average, approximately 67,500 provided by the SIFMA report describe the 2010 Commission anticipates that reporting notifications large notional off-facility total compensation (salary + bonus) by professional parties may have various methods swaps under § 43.6 each year. type, the growth in base salary from 2010 to 2011 for each professional type, and the 2011 base salary through which they will transmit Accordingly, the Commission estimates for each professional type; therefore, the information to SDRs, which would that the total annual burden associated Commission estimated the 2011 total compensation include a large notional off-facility swap with § 43.6(g)(2) would be for each professional type, but, in the absence of election. Most reporting parties would approximately 2,250 annual labor hours similarly granular data on salary growth or 528 compensation from 2011 to 2012 and beyond, did use automated and electronic methods or $416,025 in annual labor costs. not estimate dollar costs beyond 2011. [(Estimated 2011 total annual compensation)/(1,800 annual 523 The underlying adjusted labor cost estimate of 526 The economic costs associated with entering work hours)] = Hourly wage per professional type.] $184.90 per hour used in this estimate is calculated into a third party service arrangement to transmit (2) [(Hourly wage) * (Adjustment factor for based on the adjusted wages of swap traders. See an electronic notice to an SDR are difficult to overhead and other benefits, which the Commission note 521 supra. determine. There are too many variables that are has estimated to be 1.3)] = Adjusted hourly wage 524 The estimated costs are based on the involved in determining those costs. per professional type.] Commission’s estimate of the incremental, non- Notwithstanding this difficulty, the Commission (3) [(Adjusted hourly wage) * (Estimated hour recurring expenditures to reporting entities, foresees that, for many reporting parties that burden for compliance)] = Dollar cost of compliance including non-SD/non-MSPs (i.e., non-financial infrequently trade swaps, the annualized cost of for each hour burden estimate per professional end-users) to: (1) update existing technology, entering into a third-party service arrangement of type.] including updating its OMS system ($7,170); and this type would likely be less than the total annual The sum of each of these calculations for all (2) provide training to existing personnel and cost of building an electronic infrastructure to professional types involved in compliance with a update written policies and procedures ($3,360). transmit electronic notices directly to an SDR. given element of the Further Block Proposal See section V.D.1. infra. The Commission believes 527 See note 521 supra. represents the total cost for each counterparty, that SDs/MSPs would incur similar non-recurring 528 The labor hour estimate is calculated as reporting party, swap dealer, major swap start-up costs. The Commission has previously follows: (125 SDs/MSPs × 500 notifications) + participant, SEF, DCM, or SDR, as applicable to that estimated that 125 SDs and MSPs will register with (1,000 non-SDs/non-MSPs × 5 notifications) = element of the proposal. the Commission and 1,000 non-financial end-users 67,500 notifications × 2 minutes/notification = 522 To comply with the election process in (i.e., non-SD/non-MSPs) will be required to report 135,000 minutes/60 minutes/hour = 2,250 hours. proposed § 43.6(g), a market participant likely in a year. See 77 FR 1229–30. The labor cost estimate is calculated as follows: would need to provide training to its existing 525 The Commission bases this estimate on 58 2,250 labor hours × $140.93 per hour total personnel and update its written policies and projected SEFs and DCMs, each of which will incur compensation = $317,092. The Commission notes procedures to account for this new process. The costs of investing in update technology, including that the calculation in the Further Block Proposal total annual burden hours equals the total hours for updating its OMS system ($6,761.20); and training incorrectly listed the labor hour estimate as 2,255 swap dealers and major swap participants plus the existing personnel and updating written policies hours (rather than 2,250). The labor cost estimate total hours for non-swap dealers and non-major and procedures ($3,195.00). See section V.D.1. was then incorrectly listed as $317,797 (rather than swap participants. infra. $317,092) due to the incorrect labor hour estimate.

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In addition, the Commission estimates would be $154,021 in annualized hour benefits of this rulemaking, which that § 43.6(g)(2) results in $11.8 million burden costs.531 amends portions of part 43 (the Real- in non-recurring annualized capital and The Commission’s regulations Time Reporting Final Rule).535 Part 43 start-up costs.529 The Real-Time currently provide a system establishing implements section 727 of the Dodd- Reporting Final Rule addressed all cap sizes. Section 43.4(h) of the Frank Act.536 ongoing operational and maintenance Commission’s regulations provides that Enacted in the wake of the 2008 costs.530 cap sizes for swaps in each asset class financial crisis with the aim of shall equal the appropriate minimum preventing a repeat of the severe harm 2. Amendments to § 43.4(d)(4) and block size corresponding to such that crisis caused, Title VII of the Dodd- 43.4(h) publicly reportable swap transaction. If Frank Act establishes a comprehensive no appropriate minimum block size new regulatory framework for swaps The Commission addresses the public exists, then § 43.4(h) sets out specific and security-based swaps.537 Among dissemination of certain swaps in the interim cap sizes for each asset class.532 other things, the legislation seeks to other commodity asset class in This final rule amends § 43.4(h) to promote market integrity, reduce risk, § 43.4(d)(4). Section 43.4(d)(4)(ii) establish new cap sizes in the post- and increase transparency within the provides that for publicly reportable initial period using a 75-percent financial system as a whole and swaps swaps in the other commodity asset notional amount calculation. Under this markets in particular. Consistent with class, the actual underlying assets must amendment, the Commission will the view that the financial crisis was not be publicly disseminated for: (1) Those perform the calculation; however, SDRs attributable to a single weakness, but a swaps executed on or pursuant to the will update their technology and other combination of several,538 Title VII does rules of a SEF or DCM; (2) those swaps systems at a minimum of once per year not provide for a single-dimensional fix. referencing one of the contracts to publicly disseminate swap Rather, it weaves together a described in appendix B to part 43; and transaction and pricing data with the multidimensional regulatory construct (3) any publicly reportable swap cap sizes issued by the Commission. designed to ‘‘mitigate costs and risks to transaction that is economically related The Commission estimates that the taxpayers and the financial system.’’ 539 to one of the contracts described in incremental start-up costs associated Section 727 concerns a fundamental appendix B to part 43. Pursuant to the with the amendment to §§ 43.4(d)(4) component in the Dodd-Frank Act and 43.4(h) for an SDR would include: Real-Time Reporting Final Rule, any construct: public swap transaction (1) Reprograming its technology swap that is in the other commodity reporting. This provision adds section infrastructure to accommodate the 2(a)(13) to the CEA ‘‘to authorize the asset class that does not fall under masking system and post-initial cap § 43.4(d)(4)(ii) would not be subject to Commission to make swap transaction sizes methodology; (2) updating its and pricing data available to the public reporting and public dissemination written policies and procedures to requirements upon the effective date of in such form and at such times as the ensure compliance with § 43.4(d)(4)(iii) Commission determines appropriate to the Real-Time Reporting Final Rule. and the amendment to § 43.4(h); and (3) enhance price discovery.’’ 540 In In this final rule, the Commission is training staff on the new policies and addition, the section directs the promulgating a new provision procedures.533 Commission to promulgate certain rules, (§ 43.4(d)(4)(iii)), which would develop V. Cost-Benefit Considerations including rules that: a system for the public dissemination of • Require ‘‘real-time public exact underlying assets in the other A. Background reporting’’—i.e., ‘‘reporting data related commodity asset class with a ‘‘mask’’ Section 15(a) of the Commodity to a swap transaction, including price based on geographic detail. The Exchange Act 534 (‘‘CEA’’) mandates that and volume, as soon as technologically Commission is adopting a new the Commission consider the costs and practicable after the time at which the appendix to part 43, which contains the swap transaction has been geographical top-codes that SDRs would 531 The Commission estimates that there will be executed’’ 541—of swap transactions 542; • use in masking certain other commodity 5 SDRs, which will collect swaps data in the other specify ‘‘the criteria for determining commodity asset class. Each SDR would collect what constitutes a large notional swap swaps in connection with such swaps swaps data on approximately 10,000 swap public dissemination of swap transactions in the other commodity asset class. The transaction (block trade) for particular transaction and pricing data under part commission estimates that it will take each SDR on markets and contracts’’ and ‘‘the average approximately 1 minute to publicly appropriate time delay for reporting 43. The Commission anticipates that disseminate swaps data related to these new swap there will be approximately 50,000 transactions. The number of burden hours for these 535 Real-Time Public Reporting of Swap SDRs would be 833 hours. As referenced in note additional swaps reported to an SDR Transaction Data, 77 FR 1182, Jan. 9, 2012. 523 supra, the total labor costs for a swap trader is each year in the other commodity asset 536 $140.93. Thus, the total number of burden hour Dodd-Frank Wall Street Reform and Consumer class, which the Commission estimates costs equal the total number of burden hours (833 Protection Act section 727, Public Law 111–203, burden hours) × $140.93. 124 Stat. 1376 (2010) (‘‘Dodd-Frank Act’’). 537 Dodd-Frank Act section 701, et seq. 529 The estimated costs are based on the 532 The Real-Time Reporting Final Rule 538 Commission’s estimate of the incremental, non- calculated and addressed the total ongoing burden See, e.g., Financial Crisis Inquiry Commission, recurring expenditures to reporting entities, hours and burden hour costs. See 77 FR 11232. ‘‘The Financial Crisis Inquiry Report: Final Report including non-SD/non-MSPs (i.e., non-financial 533 The economic costs associated with entering of the National Commission on the Causes of the end-users) to (1) update existing technology, into a third party service arrangement to transmit Financial and Economic Crisis in the United including updating its OMS system ($6,761.20); and an electronic notice to an SDR are difficult to States,’’ Jan. 2011, at xxiv, available at http:// (2) provide training to existing personnel and determine because of too many variables involved www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO- update written policies and procedures ($3,195.00). in determining those costs. Notwithstanding this FCIC.pdf (listing uncontrolled leverage; lack of See section V.D.1. infra. The Commission believes difficulty, the Commission believes that, for many transparency, capital and collateral requirements; that SDs/MSPs would incur similar non-recurring reporting parties that infrequently trade swaps, the speculation; interconnection among firms; and start-up costs. The Commission has previously annualized cost of entering into a third-party concentrations of risk in the market as contributing estimated that 125 SDs and MSPs will register with service arrangement of this type would likely be factors). the Commission and 1,000 non-financial end-users less than the total annual cost of building an 539 S. Rep. No. 111–176, at 92 (2010). (i.e., non-SD/non-MSPs) will be required to report electronic infrastructure to transmit electronic 540 CEA section 2(a)(13)(B). in a year. 77 FR 1229–30. notices directly to an SDR. 541 CEA section 2(a)(13)(A). 530 See 77 FR at 1232. 534 7 U.S.C. 19(a). 542 CEA section 2(a)(13)(C).

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large notional swap transactions (block trades and large-notional off-facility • obligating set forth a methodology trades) to the public;’’ 543 swaps data according to asset class 550; for calculating post-initial appropriate • take into account whether public and (4) a system to protect the minimum block sizes 557; disclosure of swap transaction and anonymity of parties to a swap, • providing a procedure that allows pricing data ‘‘will materially reduce including interim notional cap sizes for parties to a swap to elect block trade or market liquidity’’ 544; all swaps that are publicly disseminated large notional off-facility swap • protect the identities of and the creation of an exception from treatment for a swap transaction; 558 and counterparties to swaps and maintain the real-time public reporting • establishing a system to ensure the the anonymity of business transactions requirement for certain swaps in the anonymity of certain swaps in the other and market positions of swap ‘‘other commodity’’ asset class.551 commodity asset class,559 including a counterparties.545 The Real-Time Public Reporting Final methodology for the calculation of In January 2012, the Commission Rule as adopted in January 2012, initial or post-initial cap sizes.560 adopted the part 43 Real-Time however, deferred its responsibility to The rules do not, however, amend part Reporting Final Rule implementing promulgate rules that ‘‘specify the 43 in a manner that alters the section 2(a)(13)of the CEA.546 Generally criteria for determining what constitutes appropriate time delays for block trades summarized, the Real-Time Reporting a large notional [off-facility] swap and large notional off-facility swaps, nor Final Rule defined the terms ‘‘block transaction [or block trade] for do they require investment in a trade’’ and ‘‘large notional off-facility particular markets and contracts’’ as completely new information swap,’’ 547 and established the: (1) CEA section 2(a)(13)(E)(ii) requires. infrastructure beyond what is necessary Responsibilities of the parties to each Pending the adoption of such to comply with the existing provisions swap to report swap transaction and supplemental part 43 rules, the of part 43.561 With this release, in pricing data to a swap data repository Commission adopted ‘‘interim time conjunction with the separate SEF core (‘‘SDR’’) and the types of data they must delays for all swaps.’’ 552 Accordingly, at principles rulemaking 562 and the made report 548; (2) requirements for SDRs to present no swap transaction data is available to trade rulemaking,563 the publicly disseminate such data in real- publicly disseminated in real-time; Commission is implementing the trade time or, in the case of block trades and interim time delays are in place for all execution mandate of CEA Section large-notional off-facility swaps, subject swaps.553 2(h)(8). Due to the clearing mandate, the to a time delay 549; (3) applicable time The final rules adopted in this release Final Rule at this time mainly will affect delays for public dissemination of block amend part 43 to establish appropriate pre-trade transparency only in the minimum block sizes, lift the blanket interest rate and credit default asset 543 See CEA sections 2(a)(13)(E)(ii) and (iii). interim time-delay for all swaps from classes. In regard to the foreign Section 2(a)(13)(E) explicitly refers to the swaps real-time public reporting, and provide exchange and other commodity asset described only in sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA (i.e., clearable swaps, further anonymity provisions to protect classes, the Commission notes that there including swaps that are exempt from clearing). The the identities of swap counterparties is no clearing mandate for foreign Commission, in exercising its authority under CEA and transactions. More specifically, and exchange swaps and other commodity section 2(a)(13)(B) to ‘‘make swap transaction and swaps at this time. Thus, the swaps pricing data available to the public in such form as discussed in more detail above, these and at such times as the Commission determines rules do so by: block rule does not currently affect pre- appropriate to enhance price discovery,’’ is • creating ‘‘swap categories’’ (i.e., trade transparency for these asset authorized to prescribe rules similar to those groupings of swaps within the same classes. As these markets evolve, the provisions in section 2(a)(13)(E) to uncleared swaps asset class based on underlying Commission will continue to monitor described in section 2(a)(13)(C)(iii) and (iv) of the CEA. Thus, the Commission is establishing block characteristics) to which a common developments within each asset class thresholds for the swaps described in Sections appropriate minimum block size and may exercise its legal authority to 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA as applies 554; take action by rule or order if necessary required by Section 2(a)(13)(E). The Commission is • prescribing a two-period, phased in to address changes in the markets. establishing large notional off-facility swap thresholds for swaps described in Sections approach to implement regulations, This rulemaking requires the 2(a)(13)(C)(iii) and 2(a)(13)(C)(iv) pursuant to its comprised of an initial period and an Commission to carefully navigate a authority under Section 2(a)(13)(B). on-going (post-initial) period to allow tension that CEA section 2(a)(13) 544 CEA section 2(a)(13)(E)(iv). market participants sufficient time for recognizes: while section 2(a)(13)(C) 545 See CEA sections 2(a)(13)(E)(i) and compliance 555; requires the Commission to promulgate 2(a)(13)(C)(iii). • establishing initial appropriate 546 Real-Time Public Reporting of Swap rules to bring real-time public reporting Transaction Data, 77 FR 1182, Jan. 9, 2012. minimum block sizes based on the to the swaps market, section 547 The Real-Time Reporting Final Rule defines Commission’s review and analysis of 2(a)(13)(E)(iv) requires that in doing so the term ‘‘Block trade’’ as a publicly reportable swap market data across certain asset swap transaction that: ‘‘(1) [i]nvolves a swap that classes 556; 557 See § 43.6(c) and (f). is listed on a SEF or DCM; (2) [o]ccurs away from 558 See § 43.6(g). the [SEF’s or DCM’s] trading system or platform and 559 is executed pursuant to the [SEF’s or DCM’s] rules 550 See § 43.5, 77 FR 1247. See amendments to § 43.4(d)(4). and procedures; (3) has a notional or principal 551 See § 43.4 (d) and (h), 77 FR 1,246. Section 560 See §§ 43.4(h) and 43.6(c). amount at or above the appropriate minimum block 43.4(h) states that ‘‘[t]he rounded notional or 561 The costs and benefits attendant to the time applicable to such swap ; and (4) [i]s reported principal amount that is publicly disseminated for delay and development of an infrastructure for subject to the rules and procedures of the [SEF or a publicly reportable swap transaction shall be block trades and large notional off-facility swaps are DCM] and the rules described in [part 43], capped. . . . ’’ If the notional or principal amount discussed in Real-Time Public Reporting of Swap including the appropriate time delay requirements of a publicly reportable swap transaction is greater Transaction Data, 77 FR 1182, 1232, Jan. 9, 2012. set forth in § 43.5.’’ See § 43.2, 77 FR 1243. than the cap size, the publicly reported size for the 562 See, the Core Principles and Other The Real-Time Reporting Final Rule defined the trade will be ‘‘[cap size]+.’’ For example, if the Requirements for Swap Execution Facilities notice term ‘‘Large notional off-facility swap as an ‘‘off- relevant cap size is 250 million, the publicly of proposed rulemaking, 76 FR 1214 (Jan. 7, 2011). reported size will be ‘‘250+.’’ facility swap that has a notional or principal 563 The Commission separately proposed rules to 552 77 FR 1217; see also § 43.5(c). amount at or above the appropriate minimum block determine whether a swap is ‘‘made available to 553 size applicable to such publicly reportable swap See § 43.5(c)(1). trade’’ for purposes of the trade execution transaction and is not a block trade as defined in 554 See § 43.6(b), which defines swap category by requirement in CEA section 2(h)(8). Process for a § 43.2 of the Commission’s regulations.’’ Id. asset class. Designated Contract Market or Swap Execution 548 See § 43.3, 77 FR 1244. 555 See § 43.6(e) and (f). Facility To Make a Swap Available to Trade, 76 FR 549 See § 43.4, 77 FR 1246. 556 See § 43.6(e) and appendix F to part 43. 77728 (proposed Dec. 14, 2011).

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the Commission ‘‘take into account assures that transparency is introduced Unless otherwise indicated, the whether the public disclosure will incrementally, taking into account Commission has looked to a non- materially reduce market liquidity.’’ The whether public disclosure will financial end-user that already has Commission has followed both ‘‘materially reduce market liquidity.’’ developed the technical capability and directives. Accordingly, a central focus For example, to cushion potential infrastructure necessary to comply with of the Commission’s consideration of liquidity impact, the thresholds for the requirements set forth in part 43 as costs and benefits of this rulemaking is swaps in the interest rate and credit a reference entity for estimating this the interplay between the important assets classes will initially rest rulemaking’s direct costs under the benefits of enhanced swap transaction conservatively at 50 percent, thus assumption that the costs for this transparency that real-time public allowing transactions above 50 percent particular market participant would dissemination affords 564 and the of the notional amount to remain represent the maximum degree of potential that, in certain circumstances, shielded from real-time public compliance costs.571 The Commission transparency could reduce swap market reporting, before transitioning to 67 anticipates, however, that in many cases liquidity. As evident by commenters’ percent in the post-initial period. While the actual costs to established market divergent opinions, the optimal point in this departure from the proposal means participants (including swap this interplay, and how to set it, defies that fewer swaps will be subject to real- counterparties, SDRs and other precision.565 Given this fact, these rules time transparency during the initial registered entities) would be lower than reflect the Commission’s reasoned period, it affords the Commission the for the reference entity—perhaps judgment of how best to meaningfully opportunity to collect and analyze data significantly so, depending on the type, effectuate real-time public reporting of on the use of block thresholds and to flexibility, and scalability of systems swap transactions—and the apply that data to its evaluation of the already in place. transparency Congress intended—in a risks attendant to a less transparent Wherever reasonably feasible, the manner that takes into account the market. Simultaneously introducing a Commission has endeavored to quantify impact on market liquidity. Briefly, the conservative, 50 percent threshold also the costs and benefits of this Commission will use a 67% percent allows the Commission to assess rulemaking. In a number of instances, notional calculation to determine the whether there are material reductions in the Commission lacks the data and threshold over which block trades and the liquidity for some swaps and take information required to precisely large notional off-facility swaps will be any measures to stave off those estimate costs, owing to the fact that eligible for block trade treatment, reductions, as the rules allow the these markets do not yet exist or are not meaning that most swaps will be Commission to review and refine the yet fully developed. The Commission 566 reported in real-time. At the same thresholds as liquidity and transparency requested that commenters provide any time, a phased implementation schedule needs may warrant in the future.567 data or other information that would be useful in the estimation of the 564 The benefits of public dissemination of swap B. The Statutory Mandate To Consider transaction and pricing data are detailed in Real- the Costs and Benefits of the 570 Currently, the part 43 requirements are not Time Public Reporting of Swap Transaction Data, Commission’s Action: Section 15(a) of applicable to swaps in the other commodities asset 77 FR at 1234. As the Commission explained in that the CEA class that reference underlying assets not included release and reaffirms here, swap transaction in Appendix B to Part 43. The Real-Time Reporting reporting and public dissemination benefits market 568 Rule provides notice that, until such time as the participants and the public in a number of respects. Section 15(a) of the CEA requires anonymity provisions of this final rule are finalized, Among others discussed in that earlier release, and the Commission to consider the costs those off-facility swaps not listed in appendix B to considered by reference herein, these include and benefits of its actions before part 43 are not be required to comply with the real- enhanced: price discovery, ability to manage risk as promulgating a regulation under the time reporting and public dissemination a result of improved visibility into swap market risk requirements under part 43. However, such swaps pricing, and improved swap market price CEA or issuing certain orders. Section are subject to the regulatory reporting requirements, competition. Additionally, the transparency 15(a) further specifies that the costs and described in proposed part 45. According to the BIS afforded through public dissemination of swap benefits shall be evaluated in light of the report http://bis.org/publ/qtrpdf/r_qs1209.pdf, transaction and pricing data ‘‘will enhance the following five broad areas of market and commodities (as a whole and not just the subset Commission’s ability to detect anomalies in the identified above) only represent slightly more than market . . . and provide a check against a public concern: (1) Protection of market one third of one percent (0.36%) of the notional reoccurrence of the type of systemic risk build-up participants and the public; (2) amounts outstanding as a percentage of the global that occurred in 2008 when ‘the market permitted efficiency, competitiveness, and OTC derivatives market for the end of December enormous exposure to risk to grow out of the sight financial integrity of futures markets; (3) 2011. For this small subset of other commodity of regulators and other traders [and d]erivatives swaps, the starting point for the purposes of the exposures that could not be readily quantified price discovery; (4) sound risk Commission’s consideration of the costs and exacerbated panic and uncertainty about the true management practices; and (5) other benefits is the same as the starting point for the financial condition of other market participants, public interest considerations. The Commission’s consideration of costs and benefits of contributing to the freezing of credit markets.’ ’’ Id. Commission considers the costs and the Real-Time Reporting Rule. A detailed (quoting Congressional Research Service Report for discussion of the Commission’s consideration of Congress, The Dodd-Frank Wall Street Reform and benefits resulting from its discretionary those costs and benefits is contained in the Real- Consumer Protection Act: Title VII, Derivatives, by determinations with respect to the Time Reporting Rule. See 77 FR at 1232–1240. Mark Jickling and Kathleen Ann Ruane (August 30, section 15(a) factors. 571 A non-financial end-user is a new market 2010). entrant with no prior swaps market participation or 565 Indeed, CEA section 2(a)(13)(E)(iv), in simply These amending rules become infrastructure. This reference point is different from requiring that the Commission ‘‘take into account effective in—and their costs and the reference point(s) used in the PRA analysis in whether public disclosure will materially reduce benefits are considered relative to—the section V above for the following two reasons: (1) market liquidity,’’ does not require that the context of the conditions now in place the burdens in the PRA are narrower than the costs Commission attempt to determine the precise discussed in this section (i.e., the PRA analysis optimal relationship between transparency and under part 43. That is: all publicly solely discusses costs relating to collections of liquidity or assure no liquidity loss. reportable swap transactions are information, whereas this cost-benefit analysis 566 Using the Over-the-Counter Derivatives currently subject to a time delay and are considers all costs relating to the proposed rules); Supervisors Group (‘‘ODSG’’) data for interest rate not publicly reported in real-time.569 570 and (2) as discussed above, the cost-benefit analysis swaps, the Commission notes that the 67 percent determines costs relative to one market participant notional amount calculation would result in 94 that presumably would bear the highest burdens in percent of trades being reported in real-time. A 567 See § 43.6(f). implementing the proposed rules, whereas the PRA discussion of the ODSG and the data set is set forth 568 7 U.S.C. 19(a). analysis seeks to estimate the costs of the proposed in section II.C.1 of this final rule. 569 See § 43.5(c). rules on all market participants.

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quantifiable costs and benefits of this swaps by asset class based on existing considered block trades or large rulemaking 572; no commenters supplied liquidity in underlying cash markets, notional off-facility swaps. such data or other information. Where it relevant economic indicators, the After an SDR has collected reliable was not feasible to quantify (e.g., underlying asset class, and the data for a particular asset class, because of the lack of accurate data or Commission’s analysis of relevant swap § 43.6(f)(1) provides that the appropriate metrics), the Commission market data supplied to the Commission shall determine post-initial has considered the costs and benefits of Commission.574 appropriate minimum block sizes for all these rules in qualitative terms. swaps in the interest rate, credit, FX and For purposes of considering their c. Rules 43.6(c)–(f) and (h) Methods for other commodity asset classes based on costs and benefits, the Commission has Determining Appropriate Minimum the 67-percent notional amount organized these rules in three groups: Block Sizes calculation. The Commission is also (1) Block trade rules concerning the Rules 43.6(c)–(f) and (h) prescribe a adopting special rules for the criteria for determining swap categories phased-in approach, with an initial determination of appropriate minimum and the methodologies to be used to period and a post-initial period for block sizes that would apply to all asset determine the initial and post-initial determining appropriate minimum classes, including rules applicable to appropriate minimum block sizes for block sizes for each swap category. swaps with optionality, swaps with large notional off-facility swaps and Appendix F to part 43 contains a composite reference prices, physical block trades; (2) block trade rules schedule of appropriate minimum block commodity swaps, currency conversion, concerning the method by which swap sizes effective during the initial period. and successor currencies.577 counterparties may elect to treat a The schedule reflects a different 2. Overview of Comments Received qualifying swap transaction as a block appropriate minimum block size trade or a large notional off-facility methodology for the interest rate and The Commission received numerous swap, as applicable, and SEFs and credit asset classes than for the equity, comments regarding the potential costs DCMs notify an SDR of a block trade FX and other commodity asset classes. and benefits to market participants and election; and (3) rules concerning The initial appropriate minimum block the public in response to the rules anonymity protections. Each group is sizes for the interest rate and credit asset establishing the criteria and discussed below. class are derived from data supplied by methodology for determining block thresholds. Commenters were divided C. Rules Establishing Determination the ODSG.575 As set forth in Appendix on whether the Commission properly Criteria and Methodology (§ 43.6(a)–(f) F to this Final Rule, the Commission is considered costs or misstated or ignored and (h)) calculating the appropriate minimum the benefits of the rules. Some Rules 43.6(a)–(f) and (h) specify the block sizes in interest rate and credit asset classes based upon the 50-percent commenters touched on the cost benefit Commission’s criteria for establishing considerations directly by promoting swap categories and methodology for notional amount calculation set forth in § 43.6(c)(1) in the initial period. various alternatives to the proposed determining appropriate minimum rules.578 Comments relating to the block sizes. The subsections that follow Rule 43.6(d) states that swaps in the Commission’s consideration of costs provide a brief contextual summary equity asset class shall not be treated as and benefits are discussed specifically description of the rules; identify and block trades or large notional off-facility in the sections below. discuss the costs and benefits swaps (i.e., equity swaps would not be attributable to the rules in light of subject to a time delay as provided in 3. Costs comments; consider alternatives; and part 43). a. Direct Costs consider costs and benefits relative to With respect to the FX and other Rules 43.6(a)–(f) and (h) will impose factors specified in CEA section 15(a). commodity asset classes, the recurring costs on swap market 1. Rule Summary appropriate minimum block sizes for participants and registered entities (i.e., swaps during the initial period is SEFs, DCMs, or SDRs) to accommodate Rules 43.6(a)–(f) and (h) are described divided primarily between swaps that previously in this release.573 A the Commission’s publication of post- are futures-related swaps and those that initial appropriate minimum block sizes summary of each follows: 576 are not futures-related. Appendix F to at least once each calendar year a. Rule 43.6(a) Commission part 43 lists the proposed initial following the initial period. In the Determination appropriate minimum block sizes for Further Block Proposal, the Commission Rule 43.6(a) provides that the swap categories in the FX and other anticipated that in order for registered Commission will determine the commodity asset classes. For swaps in entities to comply with the rule, they appropriate minimum block size for any the FX and other commodity asset would need to update their existing data swap on a SEF or DCM, and for large classes that are not listed in appendix F systems and that process would entail notional off-facility swaps. The rule also to part 43, § 43.6(e)(2) generally approximately 40 initial, non-recurring sets forth a schedule whereby the provides that these swaps will be personnel hours at an approximate cost Commission will calculate and publish of $2,728 for each registered entity.579 all appropriate minimum block sizes 574 Data was supplied to the Commission by This estimate included the potential MarkitSERV and The Warehouse Trust Company across all asset classes no less than once LLC. The data is more fully described in Section number of burden hours required to each calendar year, following an initial II.A.1.a. of this release. period (as described below). 575 A discussion of the ODSG and the data set is 577 See proposed rule § 43.6(h). set forth in section II.C.1 of this final rule. 578 E.g., CL–AII at 6; CL–SIFMA at 10; CL– b. Rule 43.6(b) Swap Category 576 As explained above in section II.C., the WMBAA at 8; CL–CME at 2; CL–Vanguard at 3; CL– Rule 43.6(b) specifies the Commission believes that the difference in Morgan Stanley at 3; CL–ICAP Energy at 3; CL– methodology for determining initial appropriate Barnard at 1; CL–Freddie at 2; CL–Barclays at 10. Commission’s approach for grouping minimum block sizes for swaps in the FX and other 579 The estimate is calculated as follows: (Senior commodity asset classes is warranted because: (1) Programmer at 20 hours) + (Systems Analyst at 20 572 Further Block Proposal Q93(a)–(e), 77 FR at Swaps in these asset classes are closely linked to hours). A senior programmer’s adjusted hourly 15507. futures markets; and (2) DCMs have experience in wage is $81.52. A systems analyst’s adjusted hourly 573 See section II, supra. setting block sizes for futures. wage is $54.89. See note 521 supra.

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make a one-time adjustment to internal incur these costs regardless of how the calculation set forth in proposed procedures, reprogram systems and Commission determines block § 43.6(c)(1) would have a negative implement processes to segregate the thresholds. Accordingly, the impact on market liquidity.584 data by swap categories and incorporate Commission considers WMBAA’s SIFMA and AII asserted that the 67 data on appropriate minimum block criticism of the cost estimates in this percent notional amount calculation is sizes as published by the Commission at rulemaking misplaced. Moreover, the under inclusive for most swap least once each calendar year. Commission has intentionally categories and that the Commission Market participants other than structured the requirements of § 43.6(a) should start with low block sizes (or registered entities, and specifically non- to mitigate these costs; this rule’s classify all swaps as block trades) until financial end users, expectedly will approach seeks to leverage the existing data can be accumulated.585 need to train their existing personnel connectivity, infrastructure and Consequences of a high threshold, they and update their written policies and arrangements that market participants maintain, would be reduced liquidity, procedures to comply with § 43.6(a)–(f) and registered entities will have already fragmentation of trading, higher and (h). The Commission estimated that established to comply with the part 43 transaction costs and higher swap the training and updating of policies regulations. pricing costs to end users.586 AII stated and procedures will impose an initial The Commission did not find, nor that high block sizes would permit front non-recurring burden of approximately was it provided, additional information running of swap dealers’ hedging 15 personnel hours at an approximate that was sufficient to change the cost activities.587 SIFMA suggested that the cost of $1,430 for each non-financial basis. Therefore, the Commission is Commission identify minimum end-user.580 This cost estimate included maintaining the Further Block liquidity thresholds for certain swaps in the number of potential burden hours Proposal’s approach to calculating the each swap category below which all required to produce and design training direct costs resulting from the swaps should be treated as blocks.588 materials, conduct training with existing methodology for determining block SIFMA stated that 67 percent is too high personnel, and revise and circulate thresholds. However, the Commission is to prevent liquidity impact; that 20–33 written policies and procedures in revising its estimates to reflect wage rate percent of trades should be blocks; and compliance with the proposed data updated since the Further Block that 50 percent is better than 67 requirements. Proposal was published. The percent.589 The Commission received one Commission estimates that for registered WMBAA advocated using a 50 comment specifically addressing direct entities to update existing technology as percent or lower block level and that the costs. WMBAA disagreed with the necessary will entail approximately 40 Commission rely on more timely and Further Block Proposal’s projected cost initial, non-recurring personnel hours at complete data to avoid impairing estimates and contended that the an approximate cost of $2,874 for each liquidity.590 CME asserted that 67 Commission’s approach ‘‘is overly registered entity.582 The Commission percent is arbitrary, has no relationship simplistic and does not contemplate the estimates that training for existing to the explicit goals of Dodd-Frank with actual efforts a SEF will have to personnel and updating written policies respect to block trading of swaps, and undertake to implement the block trade and procedures will impose an initial would materially reduce market regime, including the two-step non-recurring burden of approximately liquidity.591 notification process, the technology 15 personnel hours at an approximate Vanguard commented that block rules upgrades, providing training to existing cost of $1,456 for each non-financial bringing transparency may ultimately personnel and updating written policies end-user.583 increase liquidity, but an abrupt change could decrease liquidity.592 Vanguard and procedures, among other necessary b. Indirect Costs actions to comply with the CFTC’s instead favored a lower, 25 percent proposed rule.’’ 581 The Commission received numerous initial notional calculation methodology Because WMBAA did not provide comments regarding indirect costs that or perhaps providing block treatment to data to support or monetize its cost could result from the establishment of all swaps for one-year before phasing in concern, the Commission has criteria and methodology for setting notional amount calculation thresholds, considered them qualitatively. Further, appropriate minimum block thresholds. maintaining that a lack of data WMBAA’s disagreement with the The majority of these comments focused compromises the setting of blocks and Further Block Proposal’s cost estimates on the issue of market liquidity; and risks a negative liquidity impact.593 does not concern the incremental cost to many of the comments provided Vanguard further urged more swap augment and maintain systems and alternatives for either lower notional category granularity by identifying processes that the Commission believes amount calculation thresholds, and discrete ‘‘liquidity pools’’, and asserted entities need have in place to comply extended phase-in or restricting the that the lack of a sufficient time delay with the real time reporting requirement asset classes to which thresholds would would hamper liquidity providers’ of Section 2(a)(13) of the CEA; rather it apply. Eleven commenters suggested ability to enter into off-setting trades.594 concerns the cost to comply with that that the 67 percent notional amount statutory requirement as prescribed by 584 CL–AII at 6; CL–SIFMA at 10; CL–WMBAA at the existing part 43 implementation 582 The estimate is calculated as follows: (Senior 8; CL–CME at 2; CL–Vanguard at 3; CL–Morgan Programmer at 20 hours) + (Systems Analyst at 20 Stanley at 3; CL–ICAP Energy at 3; CL–Barnard at regulations. SEFs and DCMs would hours). A senior programmer’s adjusted hourly 1; CL–Freddie at 2; CL–Barclays at 10. wage is $86.89. A systems analyst’s adjusted hourly 585 CL–AII at 6; CL–SIFMA at 10. 580 This estimate is calculated as follows: wage is $56.79. See note 521 supra. 586 CL–AII at 6; CL–SIFMA at 10. (Compliance Manager at 10 hours) + (Director of 583 This estimate is calculated as follows: 587 CL–AII at 6. Compliance at 3 hours) + (Compliance Attorney at (Compliance Manager at 10 hours) + (Director of 588 CL–SIFMA at 10. 2 hours) = 15 hours per non-financial end-user who Compliance at 3 hours) + (Compliance Attorney at 589 CL–SIFMA at 10. is a reporting party. A compliance manager’s 2 hours) = 15 hours per non-financial end-user who 590 CL–WMBAA at 8. adjusted hourly wage is $77.77. A director of is a reporting party. A compliance manager’s 591 compliance’s hourly wage is $158.21. A compliance adjusted hourly wage is $74.17. A director of CL–CME at 2. attorney’s hourly wage is $89.43. See note 521 compliance’s hourly wage is $169.16. A compliance 592 CL–Vanguard at 3. supra. attorney’s hourly wage is $103.18. See note 521 593 CL–Vanguard at 3. 581 CL–WMBAA at 8. supra. 594 CL–Vanguard at 3.

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Morgan Stanley, AII, and CME all the proposed SEF rules.603 SIFMA Specifically, Javelin stated that the stated that the approach in the Further expressed the concern that ‘‘liquidity Commission should set a higher block Block Proposal would sacrifice liquidity seekers’ [sic] could provide other market threshold than the 67 percent notional in the name of transparency in participants with the information amount calculation ‘‘where the market contravention of the statute.595 needed to front run the successful is protected from disruption and where Specifically, Morgan Stanley dealer in the hedge market.’’ 604 SIFMA greater transparency, competition and commented that the proposed rules concluded that ‘‘the Commission should liquidity are ensured.’’ 611 SDMA would diminish liquidity because the implement lower block trade size commented that ‘‘[t]oo low a block market would know details of thresholds to avoid significant decreases threshold and fewer trades will be transactions that are about to take place; in liquidity or increases in bid-ask executed on SEFs as little structural Morgan Stanley also provided examples spreads.’’ 605 change in swaps execution occurs, of IRS swaps under the proposed Several commenters objected to the increased competition fails to manifest threshold that might move the market Commission’s use of data in the Further itself and more diverse liquidity is and, without providing further support, Block Proposal. Five commenters 606 impaired.’’ 612 AFR asserted that some stated that application of the 67 percent asserted that the Further Block Proposal drop in liquidity was assumed by notional amount calculation in CDS fails to adequately consider costs and Congress when it enacted the provision would result in too few trades receiving benefits and relies upon obsolete data. and that ‘‘there is no authoritative study treatment as blocks and reduce AII 607 stated that the Commission relies supporting the concept that immediate liquidity.596 Morgan Stanley urged the upon inadequate and outdated data, that disclosure would distort prices because Commission to lower block thresholds the rules will impede competition and of market liquidity.’’ 613 Similarly, and apply them only to vanilla increase costs, and that the Commission Better Markets argued that any structures with standard maturities; should look to TRACE as a model for information embargo should be Morgan Stanley further advocated for more deliberate disclosure eliminated, stating that ‘‘there is no DCM/SEFs to set block sizes because implementation. authoritative study validating the notion they would maximize liquidity.597 Vanguard 608 suggested phasing in the that market liquidity would be ICAP and Barnard asserted that the requirements because the new rules are adversely affected if Block Trade data 614 Further Block Proposal fails to evaluate a ‘‘paradigm shift,’’ and issuing final were fully disclosed.’’ Better Markets the effect of the block thresholds on rules on block trades requires more data also stated that the public benefits of liquidity.598 ICAP stated that the collection before implementation. swap data transparency under the Further Block Proposal greatly outweigh Commission misconstrued the Several commenters suggest the the private costs to the disclosing legislative intent of Dodd-Frank Act Commission collect more and better entities and to the swaps market because the Further Block Proposal 1) data before setting block levels. They participants; Better Markets argued that proposes a ‘‘results-oriented’’ approach; criticize not only the dearth of relevant Congress’ ultimate objective in the 2) does not determine if the 67 percent data but how the Commission has Dodd-Frank Act was to prevent another methodology would minimize impact interpolated the data through trimming crisis and avert the massive costs it on market liquidity; and 3) establishes mechanism. SIFMA suggests that all would inflict upon the public (including block size thresholds based on notional swaps should be treated as blocks for all market participants), and that the size rather than number of first year of compliance during which 599 consideration of costs and benefits transactions. In addition, ICAP stated data is collected, then the Commission should focus on this overriding public that the Further Block Proposal failed to should take a conservative approach to interest.615 identify a ‘‘market moving’’ transaction establish and iteratively modify for certain swaps, as intended by In response to comments advocating thresholds based on liquidity and bid- for a more gradual phase in of Congress and does not propose a ask spread of swaps that near the 600 methodology. Freddie stated that, in 609 appropriate minimum block thresholds, established block size threshold. the Commission is adopting rules the absence of data, minimum block The Commission also received sizes for Interest Rate swaps are too high establishing a more conservative 50 comments suggesting costs in terms of percent notional amount calculation for and will materially reduce market market liquidity or other factors in liquidity.601 determining block thresholds in the setting the appropriate minimum block Interest Rate Swap and Credit Default The Commission also received thresholds too low (or benefits in setting comments raising potential indirect Swap categories during the initial the appropriate minimum block period. This will allow for a more costs besides market liquidity impact. thresholds at 67 percent of notional or Barclays stated that mandatory clearing gradual phase-in of the 67 percent higher). Conversely, four commenters notional amount calculation for and uncleared margin requirements may expressed support for the Further Block compound the costs of increased determining block thresholds in the Proposal’s 67 percent notional amount post-initial period than what was transparency created by high block trade calculation methodology or suggested thresholds.602 SIFMA stated that the proposed. The block trade methodology that a lower threshold would result in that will be implemented by the Commission’s cost-benefit consideration a decrease in liquidity.610 is insufficient and incorrect in the Commission also allows minimum context of mandatory execution under appropriate block trade amounts to 603 CL–SIFMA at 4. change periodically in response to the 604 CL–SIFMA at 4. new data collected in the market. 595 CL–Morgan Stanley at 3; CL–AII at 6; CL–CME 605 CL–SIFMA at 4. The Commission believes that this at 2. 606 CL–Vanguard at 3; CL–ISDA/SIFMA at 11–13; 596 CL–Morgan Stanley at 3. CL–SIFMA at 10; CL–WMBAA at 8; and CL–AII at implements the congressional directive 597 CL–Morgan Stanley at 3. 6. 598 CL–ICAP Energy at 3; CL–Barnard at 1. 607 CL–AII at 6. 611 CL–Javelin at 2. 599 CL–ICAP Energy at 3. 608 CL–Vanguard at 3. 612 CL–SDMA at 1. 600 CL–ICAP at Energy at 3. 609 CL–SIFMA at 4. 613 CL–AFR at 4. 601 CL–Freddie at 2. 610 CL–ODEX at 2; CL–SDMA at 3–6; CL–Javelin 614 CL–Better Markets at 4. 602 CL–Barclays at 10. at 4–6; CL–Arbor at 1. 615 CL–Better Markets at 4.

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for transparency while accounting for Recognizing the potential for such include periodical recalibration of swap possible material reductions in liquidity indirect costs, the Commission believes criteria as anticipated under this rule as through the phasing-in of real-time it has designed the criteria and well as the Commission’s ability to reporting of a portion of the swaps methodology outlined in the rule in a exercise its legal authority to take action market. In contrast, SIFMA’s suggestion manner that strikes an appropriate by rule or order to mitigate any potential of treating all swaps as blocks while the balance between the importance of price harm due to hindered competition.617 discovery and transparency, and Commission collects data inverts the 4. Benefits public policy rationale underlying concerns about potential costs to market congressional requirements for participants. By establishing a 67 The Commission believes that transparency through real-time public percent notional amount calculation for § 43.6(a)–(f) and (h) will generate several reporting. The most useful data for appropriate minimum block thresholds overarching benefits to swap market determining at what levels blocks would in the post initial period, the participants, registered entities and the be appropriate is data collected for Commission will bring transparency general public. Most notably, the swaps reported in real-time when through real-time reporting to the vast Commission expects that the criteria market participants have the ability to majority of transactions in the swap and methodologies for setting execute block trades above minimum market. appropriate minimum block sizes will block thresholds. Data collected prior to The Commission believes that the provide greater price transparency for a the point where real-time reporting and phase-in approach provides swap substantial portion of swap transactions block levels are functioning together is market participants with adequate time in a manner carefully calibrated to useful (and has been used by the to incrementally adjust their trading preserve and promote swaps market Commission in fashioning block practices, technology infrastructure and liquidity. More specifically, the thresholds in the initial period for business arrangements to comply with regulations will provide price the new block trade regime. As a result, transparency by lifting the current part swaps in the interest rate and credit 618 asset classes), but provides an the rule’s approach promotes liquidity 43 real-time reporting time delay in incomplete picture absent since the Commission believes that a a measured manner for swap implementation of the real-time transparent market with improved pre- transactions with notional values under reporting regime. The Commission’s 67 trade price transparency is likely to specified threshold levels. At the same time, the Commission’s percent notional amount calculation in attract customers. The Commission criteria and methodology—including the post-initial period is designed to expects that indirect costs described carefully crafted block trade and large- adjust appropriate minimum block above will be mitigated through notional off-facility swap categories— levels once this data becomes available. improved price discovery and a decrease in the cost of hedging practices are designed to retain time-delay status Notwithstanding the fact that the for end users due to improved for those high-notional-value commenters did not provide data to transparency and competition in the transactions, where doing otherwise support or monetize their cost concerns, marketplace. could negatively impact market the Commission has considered their The Commission also considered the liquidity. In addition to avoiding qualitative comments regarding the potential that different swaps and potential negative market liquidity potential costs that the Commission’s futures block criteria and methodology impact associated with transactions that appropriate minimum block threshold might competitively disadvantage SEFs remain eligible for a reporting time- methodology may have on market to the extent certain market participants delay, the Commission also expects the liquidity. consider swaps and futures products liquidity in the market to increase since The Commission agrees with competitive substitutes; thus, in turn, a more transparent market is likely to Vanguard that transparency ultimately frustrating public interests that attract more customers. The promotes increased market liquidity. Congress, in authorizing SEFs in the Commission expects improved Transparency afforded through the Dodd-Frank Act, intended to further. transparency and liquidity to have a publication of swap transaction and For several reasons, the Commission positive effect on the prices market pricing data is likely to attract more does not believe this will occur. First, as participants will pay for their swaps as market participants to the market place, discussed in the SEF Rulemaking, the thereby increasing market liquidity Commission has provided SEFs with 617 Historically (and under a rule proposed in a depth. However, the Commission also various functionalities designed to pending rulemaking concerning Core Principle 9 for understands the tension between Designated Contract Markets (‘‘DCMs’’)), DCMs provide flexibility that will promote the have discretion to set minimum block thresholds achieving greater swap transaction trading of swaps on SEFs.616 Second, by for futures trading, the Dodd-Frank Act amended transparency and liquidity: required using futures block thresholds as a the CEA to require that the Commission specify reporting of large transactions without a reference for initially setting the criteria criteria to determine swap block trades without imposing an equivalent requirement for time delay (i.e., as soon as for economically related swaps, the rule, Commission specification of futures block criteria. technologically practicable) presents at a minimum, substantially mitigates See Core Principles and Other Requirements for potential for downside cost to certain any such theoretical costs. Further, the Designated Contract Markets, 75 FR 80572, 80616– market participants, most particularly Commission has, and will use, 17 (Dec. 22, 2010) (Notice of Proposed Rulemaking; proposed § 38.503(a) would require that a board of market makers providing liquidity. The corrective tools if experience in these trade that permits block trade transactions on immediate reporting of swaps that newly-regulated markets indicates futures contracts have rules governing such approach, but fall shy of the appropriate potential for differences in swaps and transactions, including rules limiting block trades minimum block size threshold, may in futures block criteria and methodology to large transactions and imposing minimum size requirements, and that block trade size be certified certain circumstances increase the to harm market users through hindered or approved by the Commission); Core Principles difficulty, and thus cost, for liquidity product competition. These tools and Other Requirements for Designated Contract providers to lay off attendant price risks Markets, 77 FR 36612, 36643 (Final Rule; in the market. As the commenters 616 See, the Core Principles and Other announces Commission intent to take additional time to consider the proposed rules for block suggest, market makers ultimately could Requirements for Swap Execution Facilities notice of proposed rulemaking, 76 FR 1214 (Jan. 7, 2011), transactions and other aspects of proposed rules pass these costs on to their end-user for details of functionalities that provide flexibility under Core Principle 9). clients. to promote trading of swaps on SEFs. 618 See 77 FR 1240.

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well as to cause a decrease in the cost statutory requirement of CEA section from more numerous and/or non- of hedging due to improved 2(a)(13)(E)(ii) that the Commission uniform swap categories. The transparency and competition in the ‘‘specify the criteria for determining Commission made use of swaps market market. The Commission also expects what constitutes a large notional swap data, as well as market convention, in that lower hedging costs and improved transaction (block trade) for particular making its determination of how best to transparency will reduce systemic risk markets and contracts.’’ 619 form swap categories and asset classes potential. A swaps market that is b. Swap Category Alternatives as well as buckets within each asset transparent to regulators and the public class. Ultimately, the Commission in real-time, without the interim delays Commenters 620 noted what they determined that that the best approach for all transactions imposed in Part 43, described as a lack of granularity in the was to allow for products with similar provides for a system that will assist the Commission’s choice of swaps characteristics and risk structures to be Commission’s oversight ability. Finally, categories, which they cautioned would grouped together, given that in certain the Commission believes that this added result in the grouping of liquid swaps circumstances market participants view transparency will ultimately strengthen together with illiquid swaps in the same similar financial products as close 621 the swaps market by affording swap category. Vanguard suggested a substitutes and use them as such for risk academics, the media, public and more granular approach to setting swap mitigating purposes. The Commission market participants the opportunity to categories and block sizes according to has fashioned its swaps categories to, monitor, study, and analyze these ‘‘distinct liquidity pools.’’ ISDA/ where possible, group together swaps 622 previously opaque segments of the SIFMA suggested subjecting a swap that could be used to hedge the same economy. to block thresholds as long as the swap risk or otherwise establish an equivalent The rules’ phased-in implementation has sufficient trading frequency and position. will introduce greater transparency in trades in such volume that allows full Grouping economically-substitutable an incremental, measured and flexible hedging in a short period of time and swaps together makes the setting of manner so that appropriate minimum also prevents widening of the spread as block sizes can respond to changing a result of public reporting. In support appropriate minimum block sizes on an markets. Section 43.6(f)(2) permits the of such a test, the comment cited individual product basis unnecessary Commission to set appropriate research and data to suggest that and potentially dangerous in that it minimum block sizes no less than once disclosure does not necessarily lead to would allow for like risks to trade annually during the post-initial period. increased transparency and swaps with differently. If swap market conditions were to varying levels of liquidity will be c. Block Methodology Alternatives change significantly after the subject to the same block size. Many implementation of the provisions of this commenters expressed that the The Commission also considered final rule, there is nothing that prevents Commission’s determination of swap various alternatives to its proposed the Commission from reacting to take categories would result in block levels methodologies for determining action further improving price that are insufficiently granular to appropriate minimum block thresholds transparency or mitigating adverse account for differences between swap in both the initial and the post initial effects on market liquidity. In an effort asset classes and within swap periods. As discussed more fully in to add more flexibility to respond to categories, including the differences in Section II.B., the Commission received continuing swaps market evolution, the transaction frequency and volume.623 various comments suggesting methodology in § 43.6(c)–(f) and (h) will Some commenters suggested that all alternatives to the phased-in approach recalibrate appropriate minimum block infrequently traded swaps, under a contained in the Further Block Proposal. sizes regularly to ensure that those sizes specified level, should be treated as Many commenters compared the 67 remain appropriate for, and responsive block trades.624 The various swap percent notional amount calculation to to, these changing markets. category alternatives suggested by a 50 percent notional amount commenters are more fully discussed calculation, as specifically requested by 5. Alternatives and considered in Sections II.A.1–5 of the Commission in Question 33 of the The Commission considered this final rule. Further Block Proposal. Twelve alternatives to the determination criteria The Commission believes that its commenters preferred the 67 percent and methodology adopted in this approach of establishing specific criteria notional amount calculation to a 50 rulemaking. The chief alternatives for grouping swaps into a finite set of percent notional amount calculation; raised by commenters or otherwise defined swap categories is preferable to whereas, nine commenters preferred the considered by the Commission the alternatives noted; it provides (1) 50 percent notional amount calculation concerned three topics—Commission’s appropriate granularity that mitigates to the 67 percent notional amount determination of minimum block sizes, the potential for like risks to trade calculation. ODEX, RJ O’Brien, and swap categories, and block differently; and (2) a clear Spring Trading expressed support for methodology—as discussed below. organizational framework that avoids the 67 percent notional amount administrative burdens for market calculation, but also suggested that a a. Commission Determination of participants that otherwise could arise higher notional amount calculation Minimum Block Sizes would be preferable, particularly in the Under § 43.6(a) the Commission will 619 See also 111 Cong. Rec. S. 5921 (daily ed., July post-initial period.625 AFR, Better determine minimum block sizes; this 15, 2010) (Statement of Sen Lincoln) (the regulators are given authority to establish what constitutes a Markets, Javelin, and SDMA all approach limits the direct burden on ‘block trade’ or ‘large notional’ swap transaction for recommended a 75 percent or higher market participants and registered particular contracts as well as appropriate time notional amount calculation and a entities relative to an alternative that delay in reporting transactions to the public’’). market depth and market breadth 620 CL–Vanguard at 7; CL–ISDA/SIFMA at 14; would require them to engage a 626 CL–SIFMA at 10; and CL–Better Markets at 4. test. quantitative analysis to ascertain 621 CL–Vanguard at 7. appropriate minimum block sizes for 622 CL–ISDA/SIFMA at 14; and CL–SIFMA at 10. 625 CL–ODEX at 1; CL–RJ O’Brien at 1. themselves. Such an alternative 623 CL–ISDA/SIFMA at 14; CL–Vanguard at 7. 626 CL–AFR at 8–9; CL–Better Markets at 7–8; CL– approach is inconsistent with the 624 CL–ISDA/SIFMA at 14. Javelin at 2; CL–SDMA at 2.

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Nine commenters preferred the 50 sizes.636 Many commenters expressed basis. This approach will afford market percent notional amount calculation to support for adopting the market depth participants a timely view of a the 67 percent notional amount test 637 and other commenters substantial portion of swap transaction calculation. additionally supported utilizing the and pricing data to assist them in Freddie Mac and ICI expressly market breadth test.638 determining the competitive price for supported a 50 percent notional amount As discussed more fully in Section swaps within a relevant swap category. calculation.627 Pierpont and WMBAA II.B., for the initial period the The Commission anticipates that this recommended a notional amount Commission is adopting the 50 percent enhanced price transparency will calculation of no greater than 50 notional amount calculation to encourage market participants to percent.628 ICAP Energy and SIFMA determine appropriate minimum block provide liquidity (e.g., through the recommended a notional amount sizes in the interest rate and credit asset posting of bids and offers), particularly calculation below 50 percent, but classes. This approach provides for a when transaction prices move away preferred a 50 percent notional amount more gradual phase-in of minimum from the competitive price. The calculation to a 67 percent notional block sizes, as recommended by Commission also anticipates that amount calculation.629 AII and ICAP numerous commenters. The enhanced price transparency thereby recommended not using a notional Commission believes that the phase-in will improve market integrity and price amount calculation at all, but preferred approach should provide swap market discovery, while also reducing a 50 percent notional amount participants with an adequate amount of information asymmetries enjoyed by calculation to a 67 percent notional time to incrementally adjust their market makers in predominately opaque amount calculation.630 trading practices, technology swap markets.639 AII recommended lowering or infrastructure and business In the Commission’s view, using the eliminating block thresholds until arrangements to comply with the new 67-percent notional amount calculation complete data has been reported to block trade regime. also would minimize the potential SDRs so as not to impair market For the post-initial period, the impact of real-time public reporting on Commission is adopting § 43.6(f)(1) as liquidity.631 Barclays recommended liquidity risk compared to other proposed. The 67-percent notional introducing block levels that allow for alternatives. The 67 percent notional amount calculation means that, within a empirical analysis of the transaction amount calculation represents a middle swap category, approximately two- data and sequentially increasing block ground between the many commenters thirds of the sum total of all notional sizes until such point as the desired who supported higher block thresholds amounts will be reported on a real-time equilibrium between transparency and and the many commenters who liquidity is reached.632 Better Markets preferred much more conservative 636 Market depth and market breadth was suggested transitioning to a market thresholds. The Commission believes proposed to be calculated as follows: (step 1) that its methodology, in conjunction depth/market breadth test after the Identify swap contracts with pre-trade price with the 50-percent notional amount Commission has collected a year of SDR transparency within a swap category; (step 2) calculation during the initial period, data.633 calculate the total executed notional volumes for each swap contract in the set from step 1 and represents a tailored and incremental The Commission also specifically calculate the sum total for the swap category over approach for achieving the goal of ‘‘a requested comments regarding other the look back period of one year; (step 3) collect a vast majority’’ of swap transactions potential methods for determining market depth snapshot of all of the bids and offers once each minute for the pre-trade price becoming subject to real-time public appropriate minimum block transparency set of contracts identified in step 1; 640 634 reporting. thresholds. While numerous (step 4) identify the four 30-minute periods that As noted above, CEA section comments addressed the efficacy of a contain the highest amount of executed notional 2(a)(13)(E)(iv) directs the Commission to notional amount calculation and the volume each day for each contract of the pre-trade price transparency set identified in step 1 and take into account whether the public appropriate percentage to use in making retain 120 observations related to each 30-minute disclosure of swap transaction and such a calculation, the comments reveal period for each day of the look-back period; (step pricing data ‘‘will materially reduce only one significant alternative 5) determine the average bid-ask spread over the market liquidity.’’ 641 If market methodology to calculating relevant look-back period of one year by averaging the spreads observed between the largest bid and participants reach the conclusion that initial and post-initial minimum block executed offer for all the observations identified in the Commission has set appropriate thresholds in place of a notional amount step 3; (step 6) for each of the 120 observations minimum block sizes for a specific swap calculation: block thresholds based on retained in step 4, calculate the sum of the notional category in a way that will materially 635 amount of all orders collected from step 3 that fall market depth and market breadth. within a range, calculate the average of all of these reduce market liquidity, then those The Commission received a number of observations for the look-back period and divide by participants are encouraged to submit comments regarding whether the two; (step 7) to determine the trimmed market data to support their conclusion. In Commission should use either market depth, calculate the sum of the market depth determined in step 6 for all swap contracts within addition, the Commission will conduct depth or market breadth criteria, instead a swap category; (step 8) to determine the average its own surveillance of swaps market of the 67-percent notional amount trimmed market depth, use the executed notional calculation methodology, to calculate volumes determined in step 2 and calculate a 639 The proposed calculation stands in contrast to the relevant initial minimum block sizes notional volume weighted average of the notional another alternative—the proposed 95th percentile- amounts determined in step 6; (step 9) using the and the post-initial minimum block based distribution test set out in the Initial calculations in steps 7 and 8, calculate the market Proposal. See the discussion in section I.B. of the breadth based on the following formula: market Further Block Proposal. No commenters suggested 627 CL–Freddie at 2; CL–ICI at 6–7. breadth = averaged trimmed market depth + or supported the distribution test in response to the ¥ 628 CL–Pierpont at 3; CL–WMBAA at 3. (trimmed market depth average trimmed market Further Block Proposal. depth) × .75; (step 10) set the appropriate minimum 640 629 CL–ICAP Energy at 3; CL–SIFMA at 10. The ‘‘guiding principle in setting appropriate block size equal to the lesser of the values from 630 CL–AII at 6; CL–ICAP Energy at 4. block trade levels [is that] the vast majority of swap steps 8 and 9. 77 FR 15482. transactions should be exposed to the public market 631 CL–AII at 6. 637 CME–CL at 2; ODEX–CLetter at 2; Spring through exchange trading.’’ Congressional Record— 632 CL–Barclays at 11. Trading-CL at 2; MFA–CL at 7; FIA–CL at 2. Senate, S5902, S5922 (July 15, 2010). As discussed 633 CL–Better Markets at 9–10. 638 Arbor-CL at 1; AFR–CL at 8–9; Jeffries-CL at above, this phased-in approach seeks to improve 634 See Further Block Proposal, Q32–54. 2; SDMA–CL at 3–6; Javelin-CL at 4–6; RJ O’Brien- transparency while not having a negative impact on 635 See Note 262 for an in depth description of the CL at 1; Better Markets-CL at 9–10; CRT–CL at 2; market liquidity. market depth and market breadth test. FIA–CL at 2. 641 7 U.S.C. 2(a)(13)(E)(iv).

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activity and how block sizes affect 6. CEA Section 15(a) Factors financial integrity of markets in several market liquidity in each of the specified a. Protection of Market Participants and ways. The Commission acknowledges 642 swap categories. In response to either the Public that because responsibility for a submission or its own surveillance of specifying swap categories and swaps market activity the Commission The Commission believes that the determining appropriate minimum criteria and methodology in § 43.6(a)–(f) may exercise its legal authority to take block sizes is with the Commission and (h) will protect swap market action by rule or order to mitigate the rather than registered entities, the participants by extending the delay for potential effects on market liquidity administrative burden on swap market reporting for publicly reportable swap participants is minimized. Further, the with respect to swaps in a particular transactions, as appropriate, while also swap category. rules afford flexibility to respond to accommodating the market participant continuing swaps market evolution, The Commission acknowledges that and public interest with enhanced including but not limited to changing the market depth and market breadth transparency. By setting appropriate industry practices and activities that the test is a viable alternative to the notional minimum block sizes in a thoughtful Commission foresees occurring as amount calculation methodology. and measured manner as contemplated market participants comply with However, it has several prerequisite in the final rule, the Commission regulations, including part 43, conditions that complicate the ability to believes that it has properly balanced implementing the Dodd-Frank Act implement it. For example, the the tradeoff between transparency and regulatory regime. More specifically, the Commission would need to determine liquidity interests. As a result, swap methodology in § 43.6(c)–(f) and (h) will which contracts within a swap category market participants will retain a means recalibrate appropriate minimum block offer pre-trade price transparency— to offset risk exposures related to their sizes regularly to ensure that those sizes electronically displayed and executable swap transactions at competitive prices. remain appropriate for, and responsive bids and offers as well as displayed In addition, the phased-in to, these changing markets. This ability, available volumes for execution. As implementation scheme outlined in this coupled with the potential for the rulemaking will introduce greater noted by commenters, adequate market Commission to adjust futures block transparency in an incremental, requirements in pending and future trading data also must be available to measured and flexible manner so that rulemakings (among other tools) also collect a market depth snapshot of all of appropriate minimum block sizes are helps assure that competitive the bids and offers for the pre-trade responsive to changing markets. implications that could arise between price transparency set of applicable Specifically, the Commission expects substitutable swaps and futures as contracts. The Commission is also that the availability of real-time pricing markets evolve are appropriately cognizant of MFA’s concerns regarding information for carefully enumerated addressed. The Commission believes the potential for manipulation of market categories of swap transactions will that the rules will introduce increased depth. Given the time needed for draw increased swap market liquidity market transparency for swaps in a trading infrastructure to develop and the through the competitive appeal of careful, measured manner that the significant time and cost considerations improved pricing efficiency that greater Commission believes will optimize the involved in collecting such data from transparency affords. More liquid, balance between liquidity and SEFs and DCMs, the Commission deems competitive swap markets, in turn, transparency concerns.644 it unfeasible to implement at this time; allow businesses to offset costs more c. Price Discovery the Commission will continue to efficiently than in completely opaque examine the merits of doing so in the markets, thus serving the interests of The criteria and methodology set out future. both market participants and the public in the rules will enhance swap market who should benefit through lower costs price discovery by eliminating, to the of goods and services. extent appropriate, the time delays for 642 The Commission received two comments Another benefit of increasing swaps the real-time public reporting. The supporting the Commission’s authority to set market transparency to regulators and methodology of this final rule will appropriate minimum block sizes outside of the the public in real-time, without the ensure that an SDR will be able to proposed annual look-back period. MFA argued publicly disseminate data for certain that the Commission’s goal to balance transparency interim delays for all transactions and liquidity would be better achieved with the imposed in Part 43, is better protection swaps as soon as technologically flexibility to adjust minimum block sizes quickly to of market participants and the public by practicable and the majority of the respond to material market changes. MFA improving the Commission’s oversight transactions in the market will be recommended that the Commission should have the ability and by giving academics, the visible to traders as well as the public. authority to update post-initial minimum block media, public and market participants Since the majority of trades will be sizes in extraordinary circumstances and on a case- the opportunity to monitor, study, and published and visible in real-time, by-case basis, based on SDR data that it receives for analyze these previously opaque reported prices are likely to be better individual or across multiple swap categories. indicators of competitive pricing. As GFMA stated that if the Commission establishes a segments of the economy. notional calculation test, then it should ensure that such, the rules promote improved price b. Efficiency, Competitiveness and discovery. it has sufficient flexibility to amend minimum 643 block sizes. GFMA recommended that the Financial Integrity of Markets Commission should be able to ‘‘swiftly alter’’ block The criteria and methodology set out 644 As noted above, under part 43 of the trade levels to enable some trading to be conducted in the rules will promote market Commission’s regulations (as now promulgated in in a newly illiquid market, without the benefit of efficiency, competitiveness and the Real-Time Reporting Final Rule), all publicly reference to a data set. The Commission notes that reportable swap transactions are subject to a time § 43.6(f)(1) provides that the Commission shall delay pending further amending regulation to 643 The Commission sees no potential impact to establish the criteria and methodology to update post-initial appropriate minimum block the financial integrity of futures markets from the distinguish block trades and large notional off- levels ‘‘[n]o less than once each calendar year.’’ criteria and methodology in its consideration of facility swaps from those swaps that do not meet Accordingly, the Commission notes that it has the section 15(a)(2)(B) of the CEA. Although by its those definitions. See 77 FR 1217. As a result, SDRs ability to adjust post-initial minimum block sizes terms, section 15(a)(2)(B) applies to futures, the as of now are not required to publicly disseminate under the types of extraordinary circumstances Commission finds this factor useful in analyzing the publicly reportable swap transactions as soon as raised by commenters. costs and benefits of swaps regulation, as well. technologically practicable.

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d. Sound Risk Management Practices SEFs and DCMs to use automated, The Commission specifically designed As discussed above, the Commission electronic—and in some cases voice— the election process so that non- believes that the criteria and processes to execute swap transactions; financial end-users, SEFs, DCMs, and methodology set forth in the rules will the transmission of the notification of a SDRs would be able to leverage any enhance price discovery since SDRs will block trade election, which may occur investments made for compliance with separately from the execution process, publicly disseminate price and other part 43 to also comply with § 43.6(g). also will be either automated, electronic Accordingly, the Commission expects data relevant to valuation as soon as or communicated through voice non-financial end-users, SEFs, DCMs technologically practicable for the processes. and SDRs to have the following direct, swaps for which the time-delay is lifted. Section 43.6(g)(1)(ii) sets out the quantifiable costs: (a) An incremental, This better and more accurate data will second step: the SEF or DCM, as non-recurring expenditure to update enable swap market participants, applicable, that receives an election existing technology to comply with generally, to better measure risk. An notification is required to notify an SDR § 43.6(g); (b) an incremental non- ability to better manage risk at an entity of a block trade election when recurring expenditure for training level should translate to improved transmitting swap transaction and existing personnel and updating written market participant risk management pricing data to such SDR for public policies and procedures for compliance generally. Improved risk measurement dissemination. with amendments to part 43; (c) and management potential, in turn, incremental recurring expenses mitigates the risk of another financial 1. Costs Relevant to the Election Process (§ 43.6(g)) associated with compliance, crisis by better equipping market maintenance and operational support in participants to value their swap Non-financial end-users who are connection with the election process; contracts and other assets during times reporting parties, as well as SEFs, and (d) additional incremental, non- of market instability. DCMs, and SDRs will likely bear the recurring expenditures to update e. Other Public Interest Considerations costs of complying with the election existing technology exclusive to SDRs. process in § 43.6(g). To comply with the SDRs also would have incremental, non- The Commission believes that the real-time reporting requirements of part recurring expenditures to update criteria and methodology in § 43.6(a)–(f) 43 already in place, these entities will existing technology.646 The Commission and (h) will allow the majority of swap have already invested in technology and also recognizes that the election process transactions and prices to be publicly personnel as well as established in § 43.6(g) is voluntary and that eligible disseminated, giving academics, the programs for continued systems entities would not elect block trade media, public and market participants maintenance, support and compliance; treatment for a swap transaction in the opportunity to monitor, study, and the Commission has previously circumstances in which they did not analyze these previously opaque described and considered these costs in perceive a net benefit in doing so. In the segments of the economy. This would 645 the Real-Time Reporting Final Rule. paragraphs that follow, the Commission allow the public to be better informed discusses each of these costs. about swaps markets and analyze 645 See 77 FR 1237. As noted in the Real-Time publicly available market data Reporting Final Rule, non-financial end-users (that a. Incremental, Non-Recurring disseminated in real-time. do not contract with a third party) will have initial Expenditure to a Non-Financial End- costs consisting of: (i) Developing an internal order User, SEF or DCM to Update Existing D. Cost-Benefit Considerations Relevant management system capable of capturing all relevant data ($26,689 per non-financial end-user) Technology 647 to the Block Trade/Large Notional Off- and a recurring annual burden of ($27,943 per non- Facility Swap Election Process financial end-user); (ii) establishing connectivity To comply with the election process (§ 43.6(g)) with an SDR that accepts data ($12,824 per non- in § 43.6(g), a non-financial end-user, financial end-user); (iii) developing written policies SEF, or DCM likely would need to: (1) Section 43.6(g) specifies the process and procedures to ensure compliance with part 43 Update its Order Management System for a market participant to elect that a ($14,793 per non-financial end-user); and (iv) (‘‘OMS’’) to capture the election to treat swap transaction be treated as a block compliance with error correction procedures ($2,063 per non-financial end-user). See id. With a qualifying publicly reportable swap trade or large notional off-facility swap respect to recurring costs, a non-financial end-user transaction as a block trade or large (‘‘the election process’’). Section will have: (i) Recurring costs for compliance, notional off-facility swap. In the Further 43.6(g)(1) establishes a two-step maintenance and operational support ($13,747 per non-financial end-user); (ii) recurring costs to Block Proposal, the Commission notification process relating to block maintain connectivity to an SDR ($100,000 per non- trades. Section 43.6(g)(2) establishes the financial end-user); and (iii) recurring costs to 646 SDRs that do not enter into contracts with a notification process relating to large maintain systems for purposes of reporting errors or third party would have incremental costs related to notional off-facility swaps. omissions ($1,366 per non-financial end user). See compliance with part 43 of the Commission’s Section 43.6(g)(1)(i) sets out the first id. regulations beyond those cost identified in the SDRs (that do not enter into contracts with a third release adopting part 49 of the Commission’s step in the block trade notification party) would have incremental costs related to regulations. See Swap Data Repositories: process: parties to a swap executed at or compliance with part 43 beyond those costs Registration Standards, Duties and Core Principles, above the appropriate minimum block identified in the release adopting part 49 of the 76 FR 54538 (Sept. 1, 2011). In the Real-Time size for the applicable swap category are Commission’s regulations. See Swap Data Reporting Final Rule, the Commission stated that Repositories: Registration Standards, Duties and each SDR would have: (1) A recurring burden of required to notify the SEF or DCM, as Core Principles, 76 FR 54538 (Sept. 1, 2011). In the approximately $856,666 and an annual burden of applicable, of their election to have their Real-Time Reporting Final Rule, the Commission $666,666 for system maintenance per SDR; (2) non- qualifying swap transaction treated as a stated that each SDR would have: (i) A recurring recurring costs to publicly disseminate ($601,003 block trade. Section 43.6(g)(1)(ii) sets burden of approximately $856,666 and an annual per SDR); and (3) recurring costs to publicly burden of $666,666 for system maintenance per disseminate ($360,602 per SDR). See id. out the second step: the SEF or DCM, as SDR; (ii) non-recurring costs to publicly 647 For the same reasons stated in the Real-Time applicable, that receives an election disseminate ($601,003 per SDR); and (iii) recurring Reporting Final Rule, the Commission assumes that notification is required to notify an SDR cots to publicly disseminate ($360,602 per SDR). SEFs and DCMs would experience the same or less of a block trade election when See id. costs as a non-financial end-user. See 77 FR 1236. In the Real-Time Reporting Final Rule, the Under § 43.6(g)(1), SEFs or DCMs would be transmitting swap transaction and Commission assumed that SEFs and DCMs will required to transmit a block trade election to an pricing data to such SDR for public experience the same or lower costs as a non- SDR only when the SEF or DCM receives notice of dissemination. The Commission expects financial end-user. See id. a block trade election from a reporting party.

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estimated that updating an OMS system non-financial end-user.650 This cost wage rate data. The Commission to permit notification to an SDR of a estimate included the number of estimates the updated approximate cost block trade or large notional off-facility potential burden hours required to of designing training materials, swap election would impose an initial produce design training materials, conducting training with existing non-recurring burden of approximately conduct training with existing personnel, and revising and circulating 80 personnel hours at an approximate personnel, and revise and circulate written policies and procedures in cost of $6,761 for each non-financial written policies and procedures in compliance with the requirements set end-user, SEF or DCM.648 This cost compliance with the requirements set forth in § 43.6(g) to be $370 for each estimate included an estimate of the forth in § 43.6(g). The Commission is non-financial end-user, DCM, or SEF.653 revising its estimates based on updated number of potential burden hours d. Incremental, Non-Recurring wage rate data. The Commission required to amend internal procedures, Expenditure to an SDR To Update estimates that providing training to reprogram systems and implement Existing Technology To Capture and existing personnel and updating written processes to permit a non-financial end- Publicly Disseminate Swap Data for policies and procedures would impose user to elect to treat their qualifying Block Trades and Large Notional Off- an initial non-recurring burden of swap transaction as a block trade or Facility Swaps large notional off-facility swap in approximately 39 personnel hours at an To comply with the election process compliance with the requirements set approximate cost of $3,360 for each 651 in § 43.6(g), an SDR likely would need forth in § 43.6(g). The Commission is non-financial end-user. to update its existing technology to revising its estimates based on updated c. Incremental, Recurring Expenses to a capture elections and disseminate wage rate data. The Commission Non-Financial End-User, DCM or SEF qualifying publicly reportable swap estimates that updating an OMS system Associated With Incremental transactions as block trades or large to permit notification to an SDR of a Compliance, Maintenance and notional off-facility swaps. In the block trade or large notional off-facility Operational Support in Connection Further Block Proposal, the Commission swap election would impose an initial With the Election Process estimated that updating existing non-recurring burden of approximately A non-financial end-user, DCM or technology to capture elections would 80 personnel hours at an approximate SEF likely would incur costs on an impose an initial non-recurring burden cost of $7,171 for each non-financial annual basis in order to comply with the of approximately 15 personnel hours at end-user, SEF or DCM.649 election process in § 43.6(g). In the an approximate cost of $1,310 for each 654 b. Incremental, Non-Recurring Further Block Proposal, the Commission SDR. This cost estimate included the Expenditure to a Non-Financial End- estimated that annual compliance; number of potential burden hours User to Provide Training To Existing maintenance and operation support required to amend internal procedures, Personnel and Update Written Policies would impose an incremental, recurring reprogram systems, and implement and Procedures burden of approximately five personnel processes to capture and publicly hours at an approximate cost of $340 for disseminate swap transaction and To comply with the election process each non-financial end-user, DCM or pricing data for block trades and large in § 43.6(g), a non-financial end-user SEF.652 This cost estimate included the notional off-facility swaps in likely would need to provide training to number of potential burden hours compliance with the requirements set its existing personnel and update its required to design training materials, forth in § 43.6(g). The Commission is written policies and procedures to conduct training with existing revising its estimates based on updated account for this new process. In the personnel, and revise and circulate wage rate data. The Commission Further Block Proposal, the Commission written policies and procedures in estimates the updated approximate cost estimated that providing training to compliance with the requirements set required to amend internal procedures, existing personnel and updating written forth in § 43.6(g). The Commission is reprogram systems, and implement policies and procedures would impose revising its estimates based on updated processes to capture and publicly an initial non-recurring burden of disseminate swap transaction and approximately 39 personnel hours at an 650 This estimate is calculated as follows: pricing data for block trades and large approximate cost of $3,200 for each (Compliance Manager at 5 hours) + (Director of notional off-facility swaps in Compliance at 2 hours) + (Compliance Attorney at compliance with the requirements set 2 hours) + (Senior Systems Analyst at 10) + (Senior 648 This estimate was calculated as follows: Programmer at 20) = 39 hours per non-financial forth in § 43.6(g) to be $1,390 for each 655 (Compliance Manager at 15 hours) + (Director of end-user who is a reporting party. A compliance SDR. Compliance at 10 hours) + (Compliance Attorney at manager has adjusted hourly wages of $77.77. 5 hours) + (Senior Systems Analyst at 30) + (Senior 651 This estimate was calculated as follows: 653 This estimate is calculated as follows: Programmer at 20) = 80 hours per non-financial (Compliance Manager at 5 hours) + (Director of (Director of Compliance at 1 hour) + (Compliance end-user who is a reporting party. A compliance Compliance at 2 hours) + (Compliance Attorney at Clerk at 3 hours) + (Compliance Attorney at 1 hour) manager has adjusted hourly wages of $77.77. A 2 hours) + (Senior Systems Analyst at 10) + (Senior = 5 hours per year per non-financial end-user who director of compliance has adjusted hourly wages Programmer at 20) = 39 hours per non-financial is a reporting party. A director of compliance’s of $158.21. A compliance attorney has adjusted end-user who is a reporting party. A compliance adjusted hourly wage is $169.16. A compliance hourly wages of $89.43. A senior systems analyst manager has adjusted hourly wages of $74.16. A clerk (junior compliance advisor) has adjusted has adjusted hourly wages of $64.50. A senior director of compliance adjusted hourly wages of hourly wages of $33.52. A compliance attorney’s programmer has adjusted hourly wages of $81.52. $169.16. A compliance attorney has adjusted hourly adjusted hourly wage is $103.17. 649 This estimate was calculated as follows: wages of $103.17. A senior systems analyst has 654 This estimate is calculated as follows: (Sr. (Compliance Manager at 15 hours) + (Director of adjusted hourly wages of $70.45. A senior Programmer at 8 hours) + (Sr. Systems Analyst at Compliance at 10 hours) + (Compliance Attorney at programmer has adjusted hourly wages of $86.89. 3 hours) + (Compliance Manager at 2 hours) + 5 hours) + (Senior Systems Analyst at 30) + (Senior 652 This estimate is calculated as follows: (Director of Compliance at 2 hours) = 15 hours per Programmer at 20) = 80 hours per non-financial (Director of Compliance at 1 hour) + (Compliance SDR. A senior programmer has adjusted hourly end-user who is a reporting party. A compliance Clerk at 3 hours) + (Compliance Attorney at 1 hour) wages of $81.52. A senior systems analyst has manager has adjusted hourly wages of $74.16. A = 5 hours per year per non-financial end-user who adjusted hourly wages of $64.50. A compliance director of compliance adjusted hourly wages of is a reporting party. A director of compliance has manager has adjusted hourly wages of $77.77. A $169.16. A compliance attorney has adjusted hourly adjusted hourly wages of $158.21. A compliance director of compliance has adjusted hourly wages wages of $103.17. A senior systems analyst has clerk (junior compliance advisor) has adjusted of $158.21. adjusted hourly wages of $70.45. A senior hourly wages of $31.22. A compliance attorney has 655 This estimate is calculated as follows: (Senior programmer has adjusted hourly wages of $86.89. adjusted hourly wages of 89.43. Programmer at 8 hours) + (Senior Systems Analyst

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2. Comments Received under part 43.657 Since this election Commission’s regulations. Market process is optional, entities need avail participants, registered entities and the The Commission received one themselves of the process only in general public benefit from this comment directly related to the costs of circumstances where the attendant enhanced swap market price the election process. As discussed more benefits warrant. transparency. fully above, WMBAA disagreed with the Second, the Commission believes that Further Block Proposal projected cost the election process will promote b. Efficiency, Competitiveness and estimates generally and contended that market efficiency by creating a Financial Integrity.658 the Commission failed to contemplate standardized process in § 43.6(g) for As noted above, the election process the actual efforts a SEF will have to market participants to designate will promote efficiency by providing undertake to implement the block trade publicly reportable swap transactions market participants and registered regime, including the two-step that are eligible for block trade or large notification process.656 In addition to notional off-facility swap treatment. In entities with a standardized process to the fact that WMBAA did not provide addition, this standardized process will delineate which publicly reportable data to support or monetize its position, further promote efficiency by allowing swap transactions are block trades or WMBAA’s disagreement with the market participants and registered large notional off-facility swaps. The Further Block Proposal’s election entities to leverage their existing voluntary nature of this election process process cost estimates does not concern technology infrastructure, connectivity, will also add to the efficiency of the the incremental cost to augment and personnel and other resources required swaps market since eligible entities will maintain systems and processes that the under parts 43 and 49 of the only choose to elect if it is financially Commission believes entities need have Commission’s regulations. The beneficial for them to do so. In addition, in place to comply with the real time Commission believes the final rule the proposed election process will reporting requirement of Section avoids imposing duplicative or promote efficiency by allowing non- 2(a)(13) of the CEA; rather it concerns conflicting obligations on market financial end-users, SEFs, DCMs and the cost to comply with that statutory participants and registered entities. SDRs to leverage their existing requirement as prescribed by the technology infrastructure, connectivity, existing part 43 implementation 4. Alternatives personnel and other resources required regulations. SEFs and DCMs would The Commission specifically asked under part 43 and part 49 of the incur these costs regardless of how the commenters whether there were Commission’s regulations. The use of Commission determines block alternative methods through which a existing technologies, connectivity, thresholds. Accordingly, the reporting party could elect to treat its personnel and other resources will Commission considers WMBAA’s qualifying swap transaction as a block create efficiencies for these entities and criticism of the cost estimates in this trade or large notional off-facility swap. mitigate the cost to comply § 43.6(g). In addition, the Commission asked rulemaking misplaced. Therefore, the The Commission has identified no whether it should require a variation on Commission is maintaining the Further potential impact on competitiveness the proposed election process where Block Proposal’s approach to calculating and financial integrity that would result SEFs, DCMs, and reporting parties the direct costs resulting from the from the implementation of the would be required to indicate under methodology for determining block proposed election process. thresholds, but is revising its estimates which swap category they were based on updated wage rate data. claiming block or large notional off- c. Price Discovery facility swap treatment. Finally, the 3. Benefits Relevant to the Election Commission asked whether it should The Commission has identified no Process (§ 43.6(g)) establish an alternative approach for potential material impact to price The Commission has identified two small end-users when such an end-user discovery that would result from the overarching benefits that the election is the reporting party to a qualified swap implementation of the election process process in § 43.6(g) would confer on transaction. outside of those discussed in section b. swap market participants, registered No comments were received either above. proposing or otherwise supporting an entities and the general public. First, d. Sound Risk Management Practices although § 43.6(g) sets out a purely alternative approach and as such, the administrative process with which Commission is adopting in § 43.6(g) The Commission has identified no market participants and registered relative to possible alternatives. potential impact on sound risk entities must comply, the Commission 5. Application of the Section 15(a) management practices that would result views this process as an integral Factors to § 43.6(g) from the implementation of the election component of the block trade framework process outside of those discussed in a. Protection of Market Participants and in this rulemaking and in part 43. section b. above. the Public Consequently, this election process will benefit market participants, registered Section 43.6(g) is an essential part of e. Other Public Interest Considerations entities and the general public by this rulemaking because it provides the The Commission has identified no providing greater price transparency in mechanism through which market potential impact on other public interest swaps markets than currently exists participants will be able to elect to treat considerations (other than those their qualifying swap transaction as a identified above) that would result from at 3 hours) + (Compliance Manager at 2 hours) + block trade or large notional off-facility the implementation of the election (Director of Compliance at 2 hours) = 15 hours per swap. Consequently, this process process. SDR. A senior programmer has adjusted hourly contributes to providing greater swap wages of $86.89. A senior systems analyst has market transparency than what adjusted hourly wages of $70.45. A compliance 658 Although by its terms, section 15(a)(2)(B) of manager has adjusted hourly wages of $74.16. A currently exists under part 43 of the the CEA applies to futures and not swaps, the director of compliance has adjusted hourly wages Commission finds this factor useful in analyzing the of $169.16. 657 See the discussion of benefits in section costs and benefits of regulating swaps, as well. See 656 CL–WMBAA at 8. VI.E.1.e above with respect to § 43.6(a)–(f) and (h). 7 U.S.C. 19(a)(2)(B).

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E. Costs and Benefits Relevant to 2. Amendments to § 43.4(h) § 43.4(d)(4) and (h).661 The Commission Anonymity Protections (Amendments to Section 43.4(h) establishes cap sizes set forth the potential costs of these § 43.4(d)(4) and (h)) for ‘‘rounded notional or principal swap provisions in the Further Block Proposal and requested comments regarding its This section discusses the two amounts’’ above which information on estimates. The Commission did not amendments to § 43.4. Section 43.4 as swaps transactions is publicly receive any comments regarding its now promulgated prescribes the manner reportable, for the purpose of providing estimates. in which SDRs must publicly anonymity for transactions where disseminate swap transaction and information on the notional or principal The Commission anticipates that pricing data. One amendment adds a amounts alone would likely reveal the these entities already will have made system for masking the geographical identity of the parties to the swap or non-recurring expenditures in data for certain swaps in the other sensitive business information. In doing technology and personnel in connection commodity asset class not currently so, the Commission notes that the with the requirements set forth in part subject to public dissemination, which objective of establishing cap sizes differs 43 and part 49 (which contain rules provides limited, but not detailed from that of establishing appropriate regarding the registration and regulation 659 information on the geographic location minimum block sizes. With respect to of SDRs). As such, SDRs already will be the latter, the objective is to ensure that of the underlying assets of those swaps. required to pay recurring expenses a block trade or large notional off- The other amendment establishes a associated with systems maintenance, facility swap can be sufficiently offset methodology to establish cap sizes that support and compliance as described in masks the size of swap transactions during a relatively short reporting delay. The former is strictly for the protection the cost-benefit discussion in the Real- above a certain threshold, which is Time Reporting Final Rule.662 different from the methodology for of the counterparties’ identity and sensitive business information. Notwithstanding these recurring determining appropriate minimum expenses, an SDR will have additional block sizes. Both amendments seek to Section 43.4(h) currently requires non-recurring expenditures associated protect the anonymity of the parties and SDRs to publicly disseminate the with the amendments to § 43.4. certain identifying information for notional or principal amounts of a Specifically, the Commission estimated swaps while also providing increased publicly reportable swap transaction transparency in swaps markets. represented by a cap size (i.e., $XX+) that updating existing technology will that adjusts in accordance with the impose an initial non-recurring burden 1. Amendments to § 43.4(d)(4) respective appropriate minimum block of approximately 34 personnel hours at an approximate cost of $3,190 for each The Commission addresses the public size for the relevant swap category. SDR.663 This cost estimate included an dissemination of information regarding Section 43.4(h) further provides that if certain swaps in the other commodity no appropriate minimum block size estimate of the number of potential asset class in § 43.4(d)(4). Section exists with respect to a swap category, burden hours required to amend 43.4(d)(4)(ii) currently provides that for then the cap size on the notional or internal procedures, reprogram systems publicly reportable swaps in this principal amount will correspond with and implement processes to capture and commodity asset class, information interim cap sizes that the Commission publicly disseminate swap transaction has established for the five asset and pricing data for block trades and identifying the underlying assets of the 660 swap must be publicly disseminated for: classes. large notional off-facility swaps in (a) those swaps executed on or pursuant The amendment to § 43.4(h) will to the rules of a SEF or DCM; (b) those require SDRs to continue to publicly 661 The Commission anticipates that reporting swaps referencing one of the contracts disseminate cap sizes that correspond to parties, SEFs and DCMs would not incur any new costs related to the amendments to § 43.4 because described in appendix B to part 43; and their respective appropriate minimum block sizes during the initial period. this section relates to the data that an SDR must (c) any publicly reportable swap publicly disseminate. Section 43.3 of the transaction that is economically related However, when the Commission Commission’s regulations sets out the requirements to one of the contracts described in publishes the post-initial appropriate for reporting parties, SEFs and DCMs in terms of minimum block sizes in accordance what is transmitted to an SDR. appendix B to part 43. Pursuant to the 662 See 76 FR 54572–75. As noted in SDR final Real-Time Reporting Final Rule, any with § 43.6(f), it will also publish post- initial cap sizes for each swap category rule, SDRs (that do not enter into contracts with a swap that is in the other commodity third party) would have incremental costs related asset class that falls under by applying a 75-percent notional to compliance with part 43 beyond those costs amount calculation on data collected by identified in the release adopting part 49 of the § 43.4(d)(4)(ii) will be subject to Commission’s regulations. See 76 FR 54573. In the reporting and public dissemination SDRs. The Commission will apply the 75-percent notional amount calculation Real-Time Reporting Final Rule, the Commission requirements. stated that each SDR would have: (i) A recurring to a one-year rolling window of such burden of approximately $856,666 and an annual In this final rule, the Commission is data corresponding to each relevant burden of $666,666 for system maintenance per adopting a new provision, swap category for each calendar year. SDR; (ii) non-recurring costs to publicly § 43.4(d)(4)(iii), that prescribes a system disseminate ($601,003 per SDR); and (iii) recurring for the public dissemination of exact 3. Costs Relevant to the Amendments to cots to publicly disseminate ($360,602 per SDR). § 43.4(d)(4) and (h) See 77 FR 1238. underlying assets in the other 663 This estimate is calculated as follows: (Sr. commodity asset class with a ‘‘mask’’ SDRs will bear some costs of Programmer at 20 hours) + (Sr. Systems Analyst at for sensitive and potentially revealing complying with the amendments to 10 hours) + (Compliance Manager at 2 hours) + geographic detail. The Commission also (Director of Compliance at 2 hours) = 34 hours per SDR. A senior programmer has adjusted hourly is adopting guidance in the form of a 659 The Commission received numerous wages of $81.52. A senior systems analyst has new appendix to part 43 that contains comments suggesting that the block thresholds and adjusted hourly wages of $64.50. A compliance the geographical details that SDRs will cap sizes established by the Commission should be manager has adjusted hourly wages of $77.77. A be able to use in masking eligible other the same. However, block thresholds and cap sizes director of compliance has adjusted hourly wages have different statutory mandates and serve of $158.21. The total number was calculated commodity swaps while maintaining different purposes. incorrectly in the Further Block Proposal. The compliance with public dissemination 660 See note 470 supra, which lists the interim initial cost to an SDR should have been $2,747, of swap transaction and pricing data. cap sizes set forth in § 43.4(h)(1)–(5). rather than $3,190.

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compliance with the requirements set have potential negative impacts on mitigate adverse effects on market forth in § 43.4(d). liquidity.666 ICI stated that the 75 liquidity.672 The Commission is revising its percent notional amount would be too estimates based on updated wage rate 4. Benefits Relevant to the Amendments high for determining cap size because to § 43.4 data. The Commission estimates the the lack of depth and liquidity in the updated approximate cost required to swaps market could cause public The Commission anticipates that the amend internal procedures, reprogram reporting of block sizes to reveal anonymity provisions of § 43.4 will systems and implement processes to identities, business transactions, and generate several overarching benefits to capture and publicly disseminate swap market positions of participants, and swap market participants, registered transaction and pricing data for block recommends a 67 percent notional entities and the general public. In the trades and large notional off-facility amount calculation for determining cap first instance, the Commission swaps in compliance with the size in the post-initial period.667 ISDA/ anticipates that the cap size requirements set forth in § 43.4(d) to be SIFMA stated that the added amendments to § 43.4(h) will benefit 664 $2,930 for each SDR. transparency from reporting transaction market participants, registered entities In addition, the Commission believes sizes between 67 percent and 75 percent and the general public by providing that § 43.4(d)(4)(iii) will result in some would be outweighed by the harm to greater price transparency with respect incremental, recurring costs for SDRs liquidity from additional disclosure, to swaps with notional amounts that fall because they will be required to and urges the Commission to ensure between the post-initial appropriate publicly disseminate other commodity that the post-initial cap size is always minimum block size and post-initial cap swaps data that were not previously equal to the relevant block size.668 MFA size for a particular swap category. within the scope of the public stated that it is unnecessary for the During the post-initial period, the dissemination requirement in § 43.4. Commission will set appropriate The Commission estimates that there Commission to establish cap sizes that differ from minimum block sizes as minimum block sizes based on the 67 will be approximately 50,000 additional percent notional amount calculation 673 there is not a meaningful transparency swaps reported to an SDR each year in and cap sizes based on the 75-percent benefit that would outweigh the the other commodity asset class, which notional amount calculation.674 resource burdens on the Commission, the Commission estimates will be Although swaps with notional amounts SDRs, SEFs, and other market $154,021 in annualized costs.665 that fall between these two sizes will be participants.669 SIFMA stated that the The Commission also anticipates that subject to a time delay, the exact § 43.4(d)(4)(iii) will result in some Commission should set the notional cap notional amounts of these swaps indirect costs to the market through size at the block threshold, as the added eventually will be publicly disclosed. reduced information, since notional public dissemination could harm The delayed public disclosure of the values of transactions beyond the cap liquidity in the same manner that a notional amount of these swaps will size limits will not be revealed to the higher block trade size threshold provide market participants, registered 670 public. The Commission lacks data to might. Vanguard stated that it is entities and the general public with quantify the costs associated with the essential that the cap match the block meaningful price transparency. reduction of information. However, trade threshold, as to do otherwise The masking provisions in the given the statutory mandate to protect would compromise the liquidity amendment to § 43.4(d)(4) and appendix market participant identities, the protections afforded by the nuanced D to part 43 will further benefit market 671 Commission believes such costs are assessment of block trade thresholds. participants, registered entities and the warranted and contemplated by The additional information provided general public by enhancing price Congress. to the market regarding the size of block discovery with respect to swaps that The Commission also received a trades that are below the cap size may currently are not required to be publicly number of comments regarding enhance price discovery by publicly disclosed under part 43. Section potential costs arising from the disseminating more information relating 43.4(d)(4) currently requires SDRs to established level for cap size. GFMA to market depth and the notional sizes publicly disseminate swap transaction stated that the same rationale should of publicly reportable swap and pricing data for publicly reportable apply to cap and block sizes, as both transactions. This, in turn, promotes swap transactions that reference or are economically related to the 29 contracts 664 increased market liquidity. This estimate is calculated as follows: (Sr. identified in appendix B to part 43. Programmer at 20 hours) + (Sr. Systems Analyst at In addition, the rule incorporates 10 hours) + (Compliance Manager at 2 hours) + flexibility to adjust post-initial cap sizes However, the Commission believes (Director of Compliance at 2 hours) = 34 hours per there are a significant number of swaps SDR. A senior programmer has adjusted hourly in response to changing markets. Section 43.4(h) will permit the in the other commodity asset class that wages of $86.89. A senior systems analyst has are not economically related to the 29 adjusted hourly wages of $70.45. A compliance Commission to set cap sizes no less than manager has adjusted hourly wages of $74.16. A once annually during the post-initial contracts identified on this appendix to director of compliance has adjusted hourly wages part 43. The amendment creating new period. If swap market conditions of $169.16. § 43.4(d)(4)(iii) will require the public 665 change significantly after the The Commission estimates that there will be dissemination of data on these swaps. 5 SDRs, which will collect swaps data in the other implementation of the provisions of this The real-time public reporting of these commodity asset class. Each SDR would collect rulemaking, then the Commission can swaps will enhance price discovery in swaps data on approximately 10,000 swap react in a timely manner to further transactions in the other commodity asset class. The the other commodity asset class. commission estimates that it will take each SDR on improve price transparency or to average approximately 1 minute to publicly 672 This benefit is consistent with one of the disseminate swaps data related to these new swap 666 CL–GFMA at 5. transactions. The number of burden hours for these considerations for implementation identified by 667 CL–ICI at 8. SDRs would be 833 hours. As referenced in note ISDA and SIFMA in their January 18, 2011 report. 668 523 supra, the total labor costs for a swap trader is CL–ISDA/SIFMA at 15. See Block trade reporting for over-the-counter $184.90. Thus, the total number of burden hour 669 CL–MFA at 8–9. derivatives markets, note 32 supra. costs equal the total number of burden hours (833 670 CL–SIFMA at 12. 673 See proposed § 43.6(c)(1). burden hours) × $184.90. 671 CL–Vanguard at 7. 674 See proposed § 43.6(c)(2).

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In addition, the rule incorporates it determines appropriate.680 However, transparency. The modification is: For flexibility to adjust post-initial cap sizes the statute only calls for a time delay— publicly reportable swap transactions in response to changing markets. it does not provide for information to be that have electricity and sources as an Section 43.4(h) will permit the kept from the market in perpetuity. All underlying asset and have a specific Commission to set cap sizes no less than of the information regarding a block delivery or pricing point in the United once annually during the post-initial trade is reported to the market at the States, the Commission is requiring period. If swap market conditions end of the block time delay. Notional or SDRs to public disseminate the specific change significantly after the principal amount information above cap delivery or pricing point based on a implementation of the provisions of this sizes, on the other hand, is never description of one of the North rulemaking, then the Commission can expressed to the market. Because the American Electric Reliability react in a timely manner to further notional amount of the trade is neither Corporation (‘‘NERC’’) regions for improve price transparency or to reported to the market in real-time, nor publicly disseminating delivery or mitigate adverse effects on market reported to the market at all, the pricing points for electricity swaps liquidity.675 Commission believes that cap sizes described in proposed § 43.4(d)(4)(iii). should be set at a higher level than Using the regions suggested by EEI 5. Alternatives block sizes. The 75 percent notional test further masks specific delivery details The Commission received numerous balances the competing interests of and thus provides additional protection comments supporting alternatives to the providing meaningful real-time public against public disclosure of identities, proposed anonymity provisions in reporting to the swaps market and business transactions, and market § 43.4(d)(4) and (h). These alternatives protecting the anonymity of swap positions of swap market participants, fall into two basic categories: (1) Post- market participants, while taking into as recommended by Barclays and Spring initial cap size level; and (2) preventing account potential impacts on market Trading. public disclosure of swap market liquidity. The Commission also considered the participant identity. In regard to cap The additional information provided alternative of having DCMs and SEFs set size, seven commenters recommended to the market regarding the size of block cap sizes. The Commission ultimately that the Commission set post-initial cap trades that are below the cap size may chose to determine cap sizes itself for sizes matching the minimum block size enhance price discovery by publicly the reason that doing so limits the direct thresholds established by the disseminating more information relating burden on registered entities to Commission. AII supported setting the to market depth and the notional sizes determine and implement appropriate post-initial cap size for each swap of publicly reportable swap cap sizes themselves. As such, the category at the same level as the block transactions. This, in turn, promotes chosen approach will promote market size threshold and states that the 75 increased market liquidity. efficiency for market participants and In regard to alternatives for preventing percent notional amount calculation is registered entities. the public disclosure of the identities of far too high.676 swap market participants, the 6. Application of the Section 15(a) For the initial period, AII and ISDA/ Commission received three comments Factors to the Amendments to § 43.4 SIFMA argued that the cap size should regarding the masking of specific a. Protection of Market Participants and be the lower of block size and the delivery or pricing detail of energy and 677 the Public interim cap size in § 43.4(h)(1). power swaps. EEI recommended that The amendments to § 43.4 protect Barclays recommended that the post the Commission mask data regarding swap counterparty anonymity on an initial period cap sizes be introduced at Other Commodity Electricity Swaps ongoing basis. While cap sizes for some more nuanced levels that reflect the according to the North American transactions can exceed appropriate differences between product’s traded Electric Reliability Corporation eight 678 minimum block sizes in certain volumes. EEI stated that the initial regions rather than the FERC regions circumstances (resulting in the public cap size of $25 million for both the proposed.681 Barclays recommended dissemination of notional/principal- Electricity Swap Contracts and the that the Commission use wider amount information after a time delay), Other Commodity Electricity Swap geographic regions when publicly the Commission believes that for the Category is too high, as is the 75 percent disseminating data for commodity vast majority of impacted swap notional amount for the post-initial swaps with very specific underlying transactions, the cap-size process and period. EEI recommended that the assets and/or delivery points and methodology is sufficient to distinguish Commission adopt a fixed cap size of $3 develop an appropriate process to avoid 679 correctly between those for which million for both periods. identifying issuers of debt.682 Spring masking of notional or principal amount The Commission has evaluated these Trading supported further measures to is required to maintain anonymity and various alternatives concerning post- prevent public disclosure of identities, those for which it is not.683 The initial cap size levels against the business transactions, and market Commission believes that setting post- statutory requirements imposed upon it positions of swap market participants, initial cap sizes above appropriate by Section 2(a)(13): bring real-time and recommended disclosing a subset of minimum block sizes will provide public reporting to the swaps market data on a collective basis at a later date. subject to time delays for block trades After consideration of the alternatives additional pricing information with and large notional off-facility swaps that suggested by commenters, the respect to large swap transactions, Commission is adopting § 43.4(d)(iii) which are large enough to be treated as 675 This benefit is consistent with one of the with the following modification that it block trades (or large notional off- considerations for implementation identified by believes affords greater anonymity facility swaps), but small enough that ISDA and SIFMA in their January 18, 2011 report. they do not exceed the applicable post- See Block trade reporting for over-the-counter protection relative to the Further Block derivatives markets, note 32 supra. Proposal, without adversely impacting 683 The Commission recognizes that adoption of 676 CL–AII at 12. rules that delineate cap sizes insufficient to provide 677 CL–AII at 12; CL–ISDA/SIFMA at 15. 680 Section 2(a)(13)(E) of the CEA. anonymity could cause prospective counterparties 678 CL–Barclays at 6. 681 CL–EEI at 12–13. to forego swap transactions, thus adversely 679 CL–EEI at 5. 682 CL–Barclays at 6. impacting market liquidity.

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initial cap size. This additional with notional amounts that fall between 1. Overview of Comments Received information may enhance price these two sizes will be subject to a time discovery by publicly disseminating delay, the exact notional amounts of The Commission received a number more information relating to market these swaps will be publicly disclosed of comments with the proposed aggregation rule but none directly depth and the notional sizes of publicly after the established time delay for addressing the costs and benefits reportable swap transactions, while still blocks and large notional off-facility considerations of the rule. protecting the anonymity of swap swaps. counterparties and their ability to lay off JP Morgan commented that the rule The masking provisions in the risk when executing extraordinarily appears to reflect a concern that private amendment to § 43.4(d)(4) and appendix large swap transactions. negotiation affords less protection to D to part 43 further benefit market unsophisticated investors than trading b. Efficiency, Competitiveness and participants, registered entities and the through the central markets, and that Financial Integrity 684 general public by enhancing price since all entities that transact in the The Commission believes that discovery with respect to swaps that OTC market already must be ECPs, the amendments to § 43.4(h) promote currently are not required to be publicly analogous concern about customer market efficiencies and competitiveness disclosed under part 43. The protection in the swaps market is since the approach will provide market amendment creating new already addressed.687 participants with the ability to continue § 43.4(d)(4)(iii) will require the public ICI opposed the minimum assets transacting swaps with the protection of dissemination of data on these swaps. under management requirement in anonymity, while promoting greater The Commission expects that the real- proposed § 43.6(h)(6)(ii) and argued that price transparency. time public reporting of these swaps the Commission did not articulate a The Commission does not believe that will enhance price discovery in the rationale or policy reason for this the implementation of the anonymity other commodity asset class. requirement.688 ICI also disagreed that protections established in § 43.4(h) will an investment adviser seeking to adversely impact the financial integrity d. Sound Risk Management Practices aggregate orders must satisfy the criteria of swap markets. The Commission has To the extent that the amendments to considered the comments provided of § 4.7(a)(2)(v) of the Commission’s § 43.4 mask the identity, business 689 regarding impacts on liquidity arising regulations. out of the 75 percent notional cap size. transactions and market positions of With respect to JP Morgan’s comment, The Commission does not agree that the swap counterparties, the Commission the Commission notes that customers cap size will have a substantial negative expects that the amendments to § 43.4 trading swaps on DCMs do not have to impact on market liquidity. As stated provide those traders with the be ECPs. As discussed further below, above, the additional pricing anonymity and time delay they require adopted § 43.6(i)(1) allows non-ECP information available to the market as a to manage their market risk efficiently. customers to be parties to block trades through a qualifying CTA, investment result of the 75 percent notional cap size e. Other Public Interest Considerations promotes enhanced price discovery by adviser, or similar foreign person.690 It publicly disseminating more The Commission does not anticipate is possible, therefore, that those non- information relating to market depth that the amendment to § 43.4(h) will ECP DCM customers may not be aware and the notional sizes of publicly have a material effect on public interest if they received the best terms for their reportable swap transactions, while still considerations other than those individual swap transactions that are protecting the anonymity of swap identified above. aggregated with other transactions. counterparties and their ability to lay off Protection for such customers is risk when executing extraordinarily F. Costs and Benefits Relevant to therefore necessary, as it is for large swap transactions. This, in turn, § 43.6(h)(6)—Aggregation unsophisticated customers in other markets. promotes market liquidity. Section 43.6(h)(6) specifies that, c. Price Discovery except as otherwise provided, it is In response to ICI’s opposition to the impermissible to aggregate orders for minimum asset threshold under The cap size amendments to § 43.4(h) § 43.6(h)(6)(ii), the Commission notes should benefit market participants, different accounts in order to satisfy minimum block trade or cap size that this threshold reflects common registered entities and the general industry practice.691 CME, for example, requirements. The rule further provides public by providing greater price has enforced the $25 million threshold transparency with respect to swaps with that aggregation may be permitted on a DCM or SEF if done by a person who: notional amounts that fall between the 687 (i)(A) is a CTA who is registered CL–JPM at 9, n.13. post-initial appropriate minimum block 688 CL–ICI at 3. size and post-initial cap size for a pursuant to Section 4n of the Act or is 689 Id. at 4. An investment adviser satisfies the particular swap category. During the exempt from registration under the Act, criteria of § 4.7(a)(2)(v) if the investment adviser post-initial period, the Commission will or a principal thereof, and has registers pursuant to § 203 of the Investment discretionary trading authority or Advisers Act of 1940, or pursuant to the laws of any set appropriate minimum block sizes state, and the investment adviser has been based on the 67 percent notional directs client accounts, (B) is an registered and active for two years or provides amount calculation 685 and cap sizes investment adviser who has security investment advice to securities accounts based on the 75-percent notional discretionary trading authority or which, in the aggregate, have total assets in excess 686 directs client accounts and satisfies the of $5,000,000 deposited at one or more registered amount calculation. Although swaps securities brokers. 17 CFR 4.7(a)(2)(v). criteria of § 4.7(a)(2)(v) of the 690 See infra Section II.C.6. 684 Although by its terms, section 15(a)(2)(B) Commission’s regulations, or (C) is a 691 See, e.g., CME Rule 526. See also CBOE applies to futures and not swaps, the Commission foreign person who performs a role or Futures Exchange LLC Rule 415(a)(i); Chicago finds this factor useful in analyzing the costs and function similar to the persons Board of Trade Rule 526; Eris Exchange, LLC Rule benefits of swaps regulation, as well. 7 U.S.C. described in (A) or (B) and is subject as 601(b)(10); ICE Futures U.S. Rule 4.07; NASDAQ 19(a)(2)(B). OMX Futures Exchange, Inc. Rule E23; New York 685 See proposed § 43.6(c)(1). such to foreign regulation, and (ii) has Mercantile Exchange, Inc. Rule 526(I); NYSE Liffe 686 See proposed § 43.6(c)(2). more than $25,000,000 in total AUM. US, LLC Rule 423; and OneChicago LLC Rule 417.

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in its rules since September 2000.692 with respect to allowing such persons to 4. Section 15(a) Factors CME has stated that the threshold ‘‘is an aggregate client orders. a. Protection of Market Participants and effort to establish the professionalism The Commission believes that the $25 the Public 693 and sophistication of the registrant’’ million threshold, as well as requiring while also expanding the number of The Commission believes that the rule investment advisers to satisfy the will protect market participants from CTAs and investment advisers eligible criteria under § 4.7(a)(2)(v), are both to aggregate trades.694 The Commission unfair practices by preventing trades important for certifying that persons believes that the $25 million threshold that do not meet the minimum block allowed to aggregate trades are is an appropriate requirement to ensure trade threshold from enjoying extended appropriately sophisticated and that persons allowed to aggregate trades reporting times. This means that trades are appropriately sophisticated with important for protection of market that are not extraordinarily large, and these transactions, while at the same participants and public. hence, that do not need extra reporting time will not qualify as block trades and time not excluding an unreasonable 2. Costs number of CTAs, investment advisers, will be made public as soon as and similar foreign persons. The Commission expects that there technologically practicable. Hence, the will be some incremental cost attendant rule will increase transparency of non- The Commission also disagrees with block transactions, and thus, would ICI’s contention that investment to compliance with § 43.6(h)(6). The Commission believes that the overall protect market participants by informing advisers should not be required to their trading determinations through benefits to the market of allowing for the satisfy the criteria under § 4.7(a)(2)(v), increased transparency and price aggregation of orders under certain which requires an investment adviser to discovery. (1) be registered and active as an circumstances (i.e., if done on a investment adviser for two years or (2) designated contract market or a swap b. Efficiency, Competitiveness, and provide securities investment advice to execution facility by certain CTAs, Financial Integrity of the Futures securities accounts which, in the investment advisers or foreign persons) Markets aggregate, have total assets in excess of will mitigate costs of reduced market The Commission expects the $5 million deposited at one or more liquidity that could result from prohibition of aggregation of trades to registered securities brokers.695 The execution of such transactions away improve efficiency and competitiveness Commission first adopted provisions from the centralized marketplace. The in the markets by allowing more trades similar to current § 4.7(a)(2)(v) in Commission also expects there to be to be reported without the time delay 1992 696 as objective indications that a some advisors who will be prohibited that is applied to qualifying block person had the investment from aggregating orders for different trades. This means that a higher number sophistication and experience needed to trading accounts in order to satisfy the of trades will be eligible for real time evaluate the risks and benefits of minimum block size, or cap size reporting, and that will increase market investing in commodity pools or a requirements. The Commission also transparency as well as promote portfolio large enough to indicate the believes that as a result of some advisers competition in the swap markets. The same, along with the financial resources not being allowed to aggregate, there rule also will protect the integrity of the to withstand the investment risks.697 In might be some minimal unquantifiable derivatives market by ensuring that 2000,698 the Commission extended the cost associated with a decrease in smaller trades, which do not qualify as same criteria in current § 4.7(a)(2)(v) to block transactions, are executed on the competition among such traders in the registered investment advisers for the trading system where there is pre-trade market. same reasons.699 The Commission and post-trade transparency. believes that these objective criteria, 3. Benefits The Commission also recognizes that which demonstrate that an investment advisors who are prohibited from adviser possesses the necessary The rule is designed, in large part, to aggregating orders in order to satisfy the investment expertise, should also apply prevent circumvention of the exchange minimum block size or cap size trading requirements and of the real- requirements might not trade at the 692 See CME Submission 00–99 (Sept. 21, 2000) time reporting obligations associated most favorable prices in the market, (modifying CME Rule 526 to reduce the threshold with non-block transactions. Absent this which might have a negative effect on from $50,000,000 to $25,000,000). CME originally prohibition, the goals of the the number of such traders in the planned to lower the threshold from $50,000,000 to $5,000,000, but withdrew the submission and Commission’s regulations regarding market. While the Commission expects instead proposed to lower the threshold to block trading, namely increased that competition in the market may be $25,000,000, based on customer suggestions. See transaction transparency, better price negatively affected as a result of CME Submission 00–93 (Sept. 1, 2000); CME prohibiting aggregation, the Commission Submission 00–99 at 5–6. discovery and improved 693 Id. at 6 (quoting letter addressed to Jean A. competitiveness in the markets as well anticipates that the positive effects of Webb, Secretary of the Commission from John G. as better risk management, could be the rule on competition outweigh its Gaine, President, Managed Funds Association dated frustrated by those whose trades negative effects. April 24, 2000 regarding ‘‘Chicago Mercantile Exchange new Proposed Rule 526’’). individually fail to meet the minimum c. Price Discovery 694 Id. at 4, 6–7. CME also stated in the filing that block trade threshold (and cap size The Commission expects the rule to it planned to readdress the threshold amount as it threshold as a result), but nevertheless gained experience with block trades, but has improve price discovery in the swap declined to modify the amount. achieve the benefits intended for markets by preventing aggregation of 695 17 CFR 4.7(a)(2)(v). extraordinarily large positions by trades and as a result promoting more 696 57 FR 34853, 34854–55 (Aug. 7, 1992). The aggregating those individual trades. In trades to be publicly reported as soon as final rule reduced the amount on deposit threshold other words, such entities would be able technologically practicable. This will to $5 million from the $10 million required by the to evade the exchange-trading and proposed rule. See 57 FR 3148, 3152 (Jan. 28, 1992). result in enhanced swap market price 697 See 57 FR at 34854 (quoting 57 FR at 3152). reporting obligations that are integral to discovery, since market participants and 698 65 FR 11253, 11257–58 (Mar. 2, 2000). price transparency. the public will be able to observe real- 699 Id. at 11257 (quoting 57 FR at 3152). time pricing information for a higher

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percentage of transactions in the market. grant of investment discretion in the into a swap unless the swap is entered In addition, the Commission expects investment management agreement, into on, or subject to the rules of….a that the rule will enhance price power of attorney, or similar document designated contract market.’’ In discovery by ensuring that smaller should be sufficient.703 addition, the provisions allowing trades, which do not qualify as block The Commission disagrees with certain entities (as described in this transactions, are executed on the trading SIFMA’s contention regarding the release) to enter into block trades on system where there is pre-trade and burdens of obtaining consent. This behalf of their non-ECP customers on post-trade transparency and where burden consent will be minimal because DCMs is substantially similar to the buyers and sellers may make informed § 43.6(i)(2) states that the instruction or existing DCM rules that allow block trading decisions based on the market’s consent may be provided through a trading in the futures market. transparency. power of attorney or similar document Section 43.6(i)(2) further provides that that provides discretionary trading no person may conduct a block trade on d. Sound Risk Management Practices authority or the authority to direct behalf of a customer unless the person The Commission anticipates that the trading in the account. The consent may receives prior written instruction or criteria will likely result in enhanced therefore be included in existing and consent to do so. The rule further price discovery as discussed above. future customer agreements. The provides that such instruction or With better and more accurate data, Commission further disagrees that a consent may be provided in the power swap market participants will likely be general grant of investment discretion or of attorney or similar document by better able to measure and manage risk. notice to the customer should satisfy which the customer provides the person The Commission believes that if the § 43.6(i)(2). A customer’s written with discretionary trading authority or prohibition of aggregation of trades was instruction or consent is necessary the authority to direct the trading in its not adopted, swap transactions may not because a customer potentially may not be reported to an SDR ‘‘as soon as receive the best terms for an individual account. The Commission is of the view technologically practicable.’’ The swap transaction that is part of an that the cost associated with the written Commission also believes that by aggregation. The written instruction or instruction or consent is minimal. The preventing this delay in the reporting consent makes the customer aware that Commission estimates that a prior period of a swap transaction to an SDR, block trades may be used on its behalf, written instruction or consent the Commission will possess the allowing the customer to decide requirement would impose an initial information it needs to monitor the whether to allow these transactions, non-recurring burden of approximately transfer and positions of risk among through which the rule has the added 2 personnel hours at an approximate counterparties in the swaps market. benefit of protection of market cost of $155.54 for each CTA, investment adviser or foreign person.704 e. Other Public Interest Considerations participants and public. The Commission also would like to point 3. Benefits The Commission has not identified out that a cost estimate for that burden any other public interest considerations has already been presented in the The Commission has determined that regarding the rule. proposed rule and received no direct the benefits of § 43.6(i) are significant. G. Costs and Benefits Relevant to comments on that cost estimate. The rule allows customers who are not § 43.6(i)—Eligible Block Trade Parties ECPs to engage in block trade 2. Costs transactions through certain entities as 1. Overview of Comments Received Section 43.6(i)(1) requires that parties outlined in the rule. By permitting The Commission received few to a block trade must be eligible contract certain CTAs, investment advisers and comments with respect to the eligible participants, as defined under the CEA foreign persons to transact swaps on block trade parties rule. As discussed and Commission regulations, except behalf of non-ECP customers, the rule above, similar comments regarding the that a DCM may allow: (i) A CTA provides important safeguards for non- exceptions to the prohibitions against registered pursuant to Section 4n of the ECPs when entering into block aggregation for certain persons were Act or exempt from registration under transactions in swaps. The Commission submitted with respect to the exception the Act, or a principal thereof, and who believes that access to block trades will to certain persons transacting blocks on has discretionary trading authority or allow customers who are not ECPs to a DCM on behalf of non-ECPs. For directs client accounts, (ii) an diversify their risk or improve their example, ICI opposed the minimum investment adviser who has investment strategies. In addition, the assets under management requirement discretionary trading authority or Commission also anticipates the access in proposed § 43.6(i)(1) and similarly directs client accounts and satisfies the to block trades for non-ECPs to increase argued that the Commission did not criteria of § 4.7(a)(2)(v) of the their participation in swap markets, articulate a rationale or policy reason for Commission’s regulations, or (iii) a increasing liquidity in the markets for this requirement.700 foreign person who performs a similar everyone. The Commission received one role or function to the persons described The Commission acknowledges that specific comment related to costs on in (i) or (ii) and is subject as such to § 43.6(i)(2) has the added benefit of proposed § 43.6(i)(2). SIFMA foreign regulation, to transact block protection of market participants and commented that proposed § 43.6(i)(2) trades for customers who are not eligible public since the written instruction or may require asset managers to obtain contract participants, if such CTA, consent required in § 43.6(i)(2) of the consent from each client for whom they investment adviser or foreign person has rule makes the customer aware that will engage in block trades.701 SIFMA more than $25,000,000 in total AUM. block trades may be used on its behalf, contended that this requirement would This rule codifies, in part, the allowing the customer to decide be costly and unnecessary, and that requirement under Section 2(e) of the whether to allow these transactions. notice to the customers 702 or a general CEA, which requires that ‘‘[i]t shall be unlawful for any person, other than an 704 The estimate is calculated as follows: 700 CL–ICI at 3. eligible contract participant, to enter Compliance manager at 2 hours. A compliance 701 CL–SIFMA at 1. manager’s adjusted hourly wage is $77.77. See note 702 Id. at 2. 703 Id. 521 supra.

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4. Section 15(a) Factors VI. Regulatory Flexibility Act First, Section 43.3 of the Commission’s regulations already requires these a. Protection of Market Participants and The Regulatory Flexibility Act (‘‘RFA’’) requires Federal agencies to entities to report their swap transaction the Public 711 consider the impact of its rules on and pricing data to an SDR. The As discussed above, § 43.6(i)(2), by ‘‘small entities.’’ 705 A regulatory Commission is of the view that requiring that no person may conduct a flexibility analysis or certification requiring these entities to include an block trade on behalf of a customer typically is required for ‘‘any rule for additional notification or field in unless the person receives prior written which the agency publishes a general conjunction with the reporting of such instruction or consent to do so, protects notice of proposed rulemaking pursuant data would impose, at best, a marginal the customer by making sure the to’’ the notice-and-comment provisions and incremental cost. Second, the customer is aware that block trades may of the Administrative Procedure Act, 5 proposed rule was structured so that be used on its behalf. This means better U.S.C. 553(b).706 With respect to the most swaps that are expected to be protection for market participants and Further Block Proposal, the Commission executed by an end user would not the public since no one will be able to provided in its RFA statement that the require notification of the election by conduct a block trade on their behalf proposed rule would have a direct effect the end user, but rather by a party that without their consent. on a number of entities, specifically is subject to Commission registration DCMs, SEFs, SDs, MSPs, and certain and regulation. b. Efficiency, Competitiveness, and single end-users.707 In the Further Block The Commission did not receive any Financial Integrity of the Futures Proposal, the Chairman, on behalf of the comments respecting its RFA Markets Commission, certified that the certification. Accordingly, for the rulemaking would not have a significant reasons stated in the Further Proposal The Commission expects the rule to economic effect on a substantial number and set forth above, the Commission improve competitiveness in the markets of small entities. Comments on that continues to believe that the rulemaking by allowing customers who are not ECPs certification were sought. will not have a significant impact on a to have access to block trades through In the Further Block Proposal, the substantial number of small entities. certain CTAs, investment advisers and Commission provided that it previously Therefore, the Chairman, on behalf of foreign persons. The Commission had established that certain entities the Commission, hereby certifies, anticipates an increase in subject to its jurisdiction are not small pursuant to 5 U.S.C. 605(b), that the competitiveness due to the fact that entities for purposes of the RFA. procedure to establish appropriate more customers would use the swap Specifically, the Commission stated that minimum block sizes adopted herein markets as a result of this rule. An it had previously determined that SEFs will not have a significant economic increased participation in a market will and DCMs are not small businesses.708 impact on a substantial number of small also serve to increase liquidity, as well The Commission also stated that it is of entities. as competition, in that market. the view that SDs and MSPs are not VII. Example of a Post-initial 709 c. Price Discovery small businesses. Appropriate Minimum Block Size The Commission recognized that the Determination Using the 67-percent proposed rule could impose direct The Commission does not anticipate Notional Amount Calculation the rule to have any significant effect on burdens on parties to a swap, which the price discovery in the market. Commission has determined previously The example below describes the may include a percentage of small end steps necessary for the Commission to d. Sound Risk Management Practices users that are considered small determine the post-initial appropriate businesses for the purposes of the minimum block size based on The Commission does not anticipate RFA.710 § 43.6(c)(1) for a sample set of data in the rule to have any significant effect on Notwithstanding the imposition of ‘‘Swap Category Z.’’ For the purposes of risk management practices. this burden, however, the determination this example, Swap Category Z had 35 e. Other Public Interest Considerations to certify pursuant to § 605(b) of the transactions over the given observation RFA that the proposed rule would not period. The observations are described The Commission has not identified have a significant economic effect on a in table A below and are ordered by any other public interest considerations substantial number of small entities was time of execution (i.e., Transaction #1 regarding the rule. based upon two major considerations. was executed prior to Transaction #2).

TABLE A—SWAP CATEGORY Z TRANSACTIONS

Transaction #1 Transaction #2 Transaction #3 Transaction #4 Transaction #5

5,000,000 25,000,000 50,000,000 1.05 3,243,571

705 See 5 U.S.C. 601 et seq. 709 77 FR at 15499. users may be small entities.’’). The term reporting 706 See 5 U.S.C. 601(2), 603, 604, and 605. 710 See 77 FR 1240 (‘‘[T]he Commission party also includes swap dealers and major swap 707 As discussed more fully in the Further Block recognized that the proposed rule could have an participants. Proposal, the Commission is of the view that economic effect on certain single end users, in The Commission previously has determined that particular those end users that enter into swap registered entities such as SDs and MSPs are not these entities do fall within the definition of small transactions with another end-user. Unlike the small businesses. business for the purpose of the RFA. See 75 FR at other parties to which the proposed rulemaking 708 76170. 77 FR at 15499. See 17 CFR part 40 Provisions would apply, these end users are not subject to Common to Registered Entities, 75 FR 67282 (Nov. designation or registration with or to 711 See 77 FR 1240. 2, 2010); see also 47 FR 18618, 18619, Apr. 30, 1982 comprehensive regulation by the Commission. The and 66 FR 45604, 45609, Aug. 29, 2001. Commission recognized that some of these end

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TABLE A—SWAP CATEGORY Z TRANSACTIONS—Continued

Transaction #1 Transaction #2 Transaction #3 Transaction #4 Transaction #5

Transaction #6 Transaction #7 Transaction #8 Transaction #9 Transaction #10

100,000,000 525,000,000 10,000,000 15,000,000 25,000,000

Transaction #11 Transaction #12 Transaction #13 Transaction #14 Transaction #15

100,000,000 265,000,000 25,000,000 100,000,000 100,000,000

Transaction #16 Transaction #17 Transaction #18 Transaction #19 Transaction #20

100,000,000 150,000,000 50,000,000 100,000,000 50,000,000

Transaction #21 Transaction #22 Transaction #23 Transaction #24 Transaction #25

75,000,000 82,352,124 100,000,000 1,235,726 60,000,000

Transaction #26 Transaction #27 Transaction #28 Transaction #29 Transaction #30

100,000,000 50,000,000 50,000,000 100,000,000 100,000,000

Transaction #31 Transaction #32 Transaction #33 Transaction #34 Transaction #35

100,000,000 100,000,000 32,875,000 50,000,000 440,000,000

Step 1: Remove the transactions that In this example, assume that five of These five transactions, listed in table B do not fall within the definition of the 35 transactions in Swap Category Z below would be removed for the data set ‘‘publicly reportable swap transactions’’ do not fall within the definition of that will be used to determine the post- as described in § 43.2. ‘‘publicly reportable swap transaction.’’ initial appropriate minimum block size.

TABLE B—TRANSACTIONS THAT DO NOT FALL WITHIN THE DEFINITION OF ‘‘PUBLICLY REPORTABLE SWAP TRANSACTION’’

Transaction #4 Transaction #13 Transaction #16 Transaction #20 Transaction #21

1.05 25,000,000 100,000,000 50,000,000 75,000,000

Step 2A: Convert the publicly currency other than U.S. dollars, then after step 1 and step 2A are transformed reportable swap transactions in the the notional amounts of such publicly by Log10. The average and standard swap category to the same currency or reportable swap transactions would deviation (‘‘STDEV’’) of these units. have been adjusted by the daily transformed notional amounts would In order to accurately compare the exchange rates for the period to arrive then be calculated. Any transformed transactions in a swap category and at the U.S. dollars equivalent notional notional amount of a publicly reportable apply the appropriate minimum block amount. swap transaction that is larger than the size calculation, the transactions must Step 2B: Examine the remaining data average of all transformed notional be converted to the same currency or set for any outliers and remove any such amounts plus four times the standard unit. outliers, resulting in a trimmed data set. deviation would be omitted from the In this example, the publicly The publicly reportable swap data set as an outlier. reportable swap transactions were all transactions are examined to identify denominated in U.S. dollars, so no any outliers. If an outlier is discovered, In the data set used in this example, conversion was necessary. If the then it would be removed from the data none of the observations were large notional amounts of any of the publicly set. To conduct this analysis, the enough to qualify as an outlier, as reportable swap transactions in Swap notional amounts of all of the publicly shown in the calculations described in Category Z had been denominated in a reportable swap transactions remaining Table C.

TABLE C—TESTING FOR OUTLIERS IN THE PUBLICLY REPORTABLE SWAP TRANSACTION DATA SET

Log10 Average ...... 7.75 4*STDEV+Average ...... 10.2 Log10 STDEV ...... 0.611359 Omitted Values ...... None

4* STDEV ...... 2.45

Step 3: Sum the notional amounts of amounts being summed in this step are used for the process in step 2B used to the remaining publicly reportable swap the original amounts following step 2A identify and omit any outliers. transactions in the data set resulting and not the Log10 transformed amounts Using the equation described after step 2B. Note: The notional immediately below, the notional amounts are added to determine the

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sum total of all notional amounts Step 4: Calculate the 67 Percent from least to greatest. The resulting remaining in the data set for a particular Notional Amount. ranking yields the PRSTib. Table D swap category. In this example, the Using the resulting amount from step below reflects the ranking of the notional amounts of the 30 remaining 2B, a 67-percent notional amount value remaining publicly reportable swap publicly reportable swap transactions in would be calculated by using the transactions based on their notional Swap Category Z are added together to equation: amount sizes for this example.

come up with a net value of PRSTNV * 0.67 = G PRSTi = a publicly reportable swap 2,989,706,421. G = 67 percent of the sum total of the transaction in the data set ranked from notional amounts of all remaining least to greatest based on the notional publicly reportable swap transactions in amounts of such transactions. the set. Step 6A: Calculate the running sum of G = 2,003,103,302 all PRSTi. Step 5: Order and rank the 30 = Notional amount of swap transaction A running sum would be calculated i = Index variable of summation for the set observations based on notional amount of the publicly reportable swap by adding together the ranked and Ti = Indicator for publicly reportable swap ordered publicly reportable swap transactions transaction from least to greatest. The remaining publicly reportable transactions from step 5 (PRSTi) in least PRSTNV = Sum total of the notional amounts swap transactions having previously to greatest order. The calculations of of all remaining publicly reportable swap running sum values with respect to this transactions in the set been converted to U.S. dollar equivalents must be ranked, based on example are reflected in Table D below. PRSTNV = 2,989,706,421 the notional sizes of such transactions, RS Values = Running sum values

TABLE D—PRSTi VALUES AND RS VALUES

Rank Order #1 Rank Order #2 Rank Order #3 Rank Order #4 Rank Order #5 PRSTi Values ...... 1,235,726 3,243,571 5,000,000 10,000,000 15,000,000 RS Values ...... 1,235,726 4,479,297 9,479,297 19,479,297 34,479,297 Rank Order #6 Rank Order #7 Rank Order #8 Rank Order #9 Rank Order #10 PRSTi Values ...... 25,000,000 25,000,000 32,875,000 50,000,000 50,000,000 RS Values...... 59,479,297 84,479,297 117,354,297 167,354,297 217,354,297 Rank Order #11 Rank Order #12 Rank Order #13 Rank Order #14 Rank Order #15 PRSTi Values ...... 50,000,000 50,000,000 50,000,000 60,000,000 82,352,124 RS Values...... 267,354,297 317,354,297 367,354,297 427,354,297 509,706,421 Rank Order #16 Rank Order #17 Rank Order #18 Rank Order #19 Rank Order #20 PRSTi Values ...... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 RS Values...... 609,706,421 709,706,421 809,706,421 909,706,421 1,009,706,421 Rank Order #21 Rank Order #22 Rank Order #23 Rank Order #24 Rank Order #25 PRSTi Values ...... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 RS Values...... 1,109,706,421 1,209,706,421 1,309,706,421 1,409,706,421 1,509,706,421 Rank Order #26 Rank Order #27 Rank Order #28 Rank Order #29 Rank Order #30 PRSTi Values ...... 100,000,000 150,000,000 265,000,000 440,000,000 525,000,000 RS Values...... 1,609,706,421 1,759,706,421 2,024,706,421 2,464,706,421 2,989,706,421

Step 6B: Select first RS Value that is In this example, the PRSTt that Step 9: Set the appropriate minimum greater than or equal to G. corresponds to the RS Value determined block size at the amount calculated in In this example, G is equal to in step 6B (Rank Order #28) is step 8. 2,003,103,302, meaning that the RS 265,000,000. In this example, the appropriate Value that must be selected would have to be greater than that number. The first Step 8: Determine the rounded minimum block size for swap category RS Value that is greater than or equal to notional amount. Z would be 270,000,000 for the G can be found in the observation that Calculate the rounded notional observation period. corresponds to Rank Order #28 (see amount under the process described in Post-Initial Appropriate Minimum Table D). The RS Value of the Rank the proposed amendment to § 43.2. The Block Size = $270,000,000 Order #28 observation is 2,024,706,421. 265,000,000 amount would be rounded Step 7: Select the PRSTt that to the nearest 10 million for public VIII. List of Commenters Who corresponds to the observation dissemination, or 270,000,000. Responded to the Further Block determined in step 6B. Proposal

Acronym/Abbreviation Commenter

Abbott ...... Abbott, Robert. AFR ...... Americans for Financial Reform. ABC ...... American Benefits Counsel. Arbor ...... Arbor Research & Trading, Inc. AII ...... Association of Institutional Investors. Barclays ...... Barclays Bank PLC. Barnard ...... Barnard, Chris. Better Markets ...... Better Markets, Inc. CIEBA ...... Committee on the Investment of Employee Benefit Assets. CME Group ...... CME Group Inc.

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Acronym/Abbreviation Commenter

CRT ...... CRT Capital Group LLC. Currenex ...... Currenex, Inc. EEI ...... Edison Electric Institute. FIA ...... Futures Industry Association Principle Traders Group. Freddie ...... Freddie Mac. GFMA ...... Global Foreign Exchange Division of the Global Financial Markets Association. ICAP Energy ...... ICAP Energy LLC. ICAP ...... ICAP North America Inc. ISDA/SIFMA ...... International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. ICI ...... Investment Company Institute. Javelin ...... Javelin Capital Markets, LLC. Jefferies ...... Jefferies & Co., Inc. JPM ...... J.P. Morgan. Kearney ...... Kearney, Timothy. Kinetix ...... Kinetix Trading Solutions. MFA ...... Managed Funds Association. Morgan Stanley ...... Morgan Stanley. ODEX ...... ODEX Group. Parascandola ...... Parascandola, James. Parity ...... Parity Energy, Inc. Pierpont ...... Pierpont Securities Holdings LLC. R.J. O’Brien ...... R.J. O’Brien & Associates, Inc. SIFMA ...... Asset Management Group of the Securities Industry and Financial Markets Association. SDMA ...... Swaps & Derivatives Market Association. Spring Trading ...... Spring Trading, Inc. Vanguard ...... Vanguard. WMBAA ...... Wholesale Market Brokers’ Association, Americas. Wolkoff ...... Wolkoff Consulting Services LLC.

List of Subjects in 17 CFR Part 43 Futures-related swap means a swap one reference price from more than one Real-time public reporting, Block (as defined in section 1a(47) of the Act swap category. trades, Large notional off-facility swaps, and as further defined by the * * * * * Reporting and recordkeeping Commission in implementing Trimmed data set means a data set requirements. regulations) that is economically related that has had extraordinarily large to a futures contract. Accordingly, for the reasons notional transactions removed by discussed in the preamble, the * * * * * transforming the data into a logarithm Commodity Futures Trading Major currencies means the with a base of 10, computing the mean, Commission amends 17 CFR part 43 as currencies, and the cross-rates between and excluding transactions that are follows: the currencies, of Australia, Canada, beyond four standard deviations above Denmark, New Zealand, Norway, South the mean. PART 43—REAL-TIME PUBLIC Africa, South Korea, Sweden, and * * * * * REPORTING Switzerland. ■ 3. Amend § 43.4 as follows: ■ ■ 1. The authority citation for part 43 is Non-major currencies means all other A. Revise paragraph (d)(4)(i); ■ revised to read as follows: currencies that are not super-major B. Revise paragraph (d)(4)(ii)(B); currencies or major currencies. ■ C. Add paragraph (d)(4)(iii); Authority: 7 U.S.C. 2(a), 12a(5) and 24a, as * * * * * ■ D. Revise paragraph (h). amended by Pub. L. 111–203, 124 Stat. 1376 The revisions and addition read as (2010). Physical commodity swap means a follows: ■ 2. Amend § 43.2 by adding the swap in the other commodity asset class following definitions in alphabetical that is based on a tangible commodity. § 43.4 Swap transaction and pricing data order to read as follows: * * * * * to be publicly disseminated in real-time. * * * * * § 43.2 Definitions. Reference price means a floating price series (including derivatives contract (d) * * * * * * * * prices and cash market prices or price (4) * * * Cap size means, for each swap indices) used by the parties to a swap (i) A registered swap data repository category, the maximum notional or or swaption to determine payments shall publicly disseminate swap principal amount of a publicly made, exchanged or accrued under the transaction and pricing data for publicly reportable swap transaction that is terms of a swap contract. reportable swap transactions in the publicly disseminated. other commodity asset class in the * * * * * * * * * * manner described in paragraphs Economically related means a direct Super-major currencies means the (d)(4)(ii) and (d)(4)(iii) of this section. or indirect reference to the same currencies of the European Monetary (ii) * * * commodity at the same delivery Union, Japan, the United Kingdom, and (B) Any publicly reportable swap location or locations, or with the same United States. transaction that is economically related or a substantially similar cash market Swaps with composite reference to one of the contracts described in price series. prices means swaps based on reference Appendix B of this part; or * * * * * prices that are composed of more than * * * * *

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(iii) The underlying assets of swaps in Commission shall establish post-initial (i) Traded Spread rounded to the the other commodity asset class that are cap sizes using reliable data collected by nearest basis point (0.01) as follows: not described in paragraph (d)(4)(ii) of registered swap data repositories, as (A) 0 to 175 points; this section shall be publicly determined by the Commission, based (B) 176 to 350 points; or disseminated by limiting the geographic on the following: (C) 351 points and above; detail of the underlying assets. The (i) A one-year window of swap (ii) Tenor of swap as follows: identification of any specific delivery transaction and pricing data (A) Zero to two years (0–746 days); point or pricing point associated with corresponding to each relevant swap (B) Greater than two to four years the underlying asset of such other category recalculated no less than once (747–1,476 days); commodity swap shall be publicly each calendar year; and (C) Greater than four to six years disseminated pursuant to Appendix E of (ii) The 75-percent notional amount (1,477–2,207 days); this part. calculation described in § 43.6(c)(3) (D) Greater than six to eight-and-a-half * * * * * applied to the swap transaction and years (2,208–3,120 days); (E) Greater than eight-and-a-half to (h) Cap sizes. pricing data described in paragraph 12.5 years (3,121–4,581 days); and (1) Initial cap sizes. Prior to the (h)(2)(i) of this section. (F) Greater than 12.5 years (4,582 days effective date of a Commission (3) Commission publication of post- and above). determination to establish an applicable initial cap sizes. The Commission shall (3) Equity asset class. There shall be post-initial cap size for a swap category publish post-initial cap sizes on its Web one swap category consisting of all as determined pursuant to paragraph site at http://www.cftc.gov. (4) Effective date of post-initial cap swaps in the equity asset class. (h)(2) of this section, the initial cap sizes sizes. Unless otherwise indicated on the (4) Foreign exchange asset class. for each swap category shall be equal to Commission’s Web site, the post-initial Swap categories in the foreign exchange the greater of the initial appropriate cap sizes shall be effective on the first asset class shall be grouped as follows: minimum block size for the respective day of the second month following the (i) By the unique currency swap category in Appendix F of this date of publication. combinations of one super-major part or the respective cap sizes in ■ 4. Add § 43.6 to read as follows: currency paired with one of the paragraphs (h)(1)(i) through (h)(1)(v) of following: this section. If Appendix F of this part § 43.6 Block trades and large notional off- (A) Another super major currency; does not provide an initial appropriate facility swaps. (B) A major currency; or minimum block size for a particular (a) Commission determination. The (C) A currency of Brazil, China, Czech swap category, the initial cap size for Commission shall establish the Republic, Hungary, Israel, Mexico, such swap category shall be equal to the appropriate minimum block size for Poland, Russia, and Turkey; or appropriate cap size as set forth in publicly reportable swap transactions (ii) By unique currency combinations paragraphs (h)(1)(i) through (h)(1)(v) of based on the swap categories set forth in not included in paragraph (b)(4)(i) of this section. paragraph (b) of this section in this section. (i) For swaps in the interest rate asset accordance with the provisions set forth (5) Other commodity asset class. class, the publicly disseminated in paragraphs (c), (d), (e), (f) or (h) of Swap contracts in the other commodity notional or principal amount for a swap this section, as applicable. asset class shall be grouped into swap subject to the rules in this part shall be: (b) Swap categories. Swap categories categories as follows: (A) USD 250 million for swaps with shall be established for all swaps, by (i) For swaps that are economically a tenor greater than zero up to and asset class, in the following manner: related to contracts in Appendix B of including two years; (1) Interest rates asset class. Interest this part, by the relevant contract as (B) USD 100 million for swaps with rate asset class swap categories shall be referenced in Appendix B of this part; a tenor greater than two years up to and based on unique combinations of the or including ten years; and following: (ii) For swaps that are not (C) USD 75 million for swaps with a (i) Currency by: economically related to contracts in tenor greater than ten years. (A) Super-major currency; Appendix B of this part, by the (ii) For swaps in the credit asset class, (B) Major currency; or following futures-related swaps— (C) Non-major currency; and the publicly disseminated notional or (A) CME Cheese; (ii) Tenor of swap as follows: principal amount for a swap subject to (B) CBOT Distillers’ Dried Grain; the rules in this part shall be USD 100 (A) Zero to 46 days; (B) Greater than 46 days to three (C) CBOT Dow Jones-UBS Commodity million. Index; (iii) For swaps in the equity asset months (47 to 107 days); (C) Greater than three months to six (D) CBOT Ethanol; class, the publicly disseminated months (108 to 198 days); (E) CME Frost Index; notional or principal amount for a swap (D) Greater than six months to one (F) CME Goldman Sachs Commodity subject to the rules in this part shall be year (199 to 381 days); Index (GSCI), (GSCI Excess Return USD 250 million. (E) Greater than one to two years (382 Index); (iv) For swaps in the foreign exchange to 746 days); (G) NYMEX Gulf Coast Sour Crude asset class, the publicly disseminated (F) Greater than two to five years (747 Oil; notional or principal amount for a swap to 1,842 days); (H) CME Hurricane Index; subject to the rules in this part shall be (G) Greater than five to ten years (I) CME Rainfall Index; USD 250 million. (1,843 to 3,668 days); (J) CME Snowfall Index; (v) For swaps in the other commodity (H) Greater than ten to 30 years (3,669 (K) CME Temperature Index; asset class, the publicly disseminated to 10,973 days); or (L) CME U.S. Dollar Cash Settled notional or principal amount for a swap (I) Greater than 30 years (10,974 days Crude Palm Oil; or subject to the rules in this part shall be and above). (iii) For swaps that are not covered in USD 25 million. (2) Credit asset class. Credit asset paragraphs (b)(5)(i) and (b)(5)(ii) of this (2) Post-initial cap sizes. Pursuant to class swap categories shall be based on section, the relevant product type as the process described in § 43.6(f)(1), the unique combinations of the following: referenced in Appendix D of this part.

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(c) Methodologies to determine (viii) Round the notional amount of such publicly reportable swap appropriate minimum block sizes and that observation to two significant transaction shall be the appropriate cap sizes. In determining appropriate digits, or if the notional amount minimum block size that is in Appendix minimum block sizes and cap sizes for associated with that observation is F of this part. publicly reportable swap transactions, already significant to two digits, (2) Certain swaps in the foreign the Commission shall utilize the increase that notional amount to the exchange and other commodity asset following statistical calculations— next highest rounding point of two classes. All swaps or instruments in the (1) 50-percent notional amount significant digits; and swap categories described in paragraphs calculation. The Commission shall use (ix) Set the appropriate minimum (b)(4)(ii) and (b)(5)(iii) of this section the following procedure in determining block size at the amount calculated in shall be eligible to be treated as a block the 50-percent notional amount paragraph (c)(2)(viii) of this section. trade or large notional off-facility swap, calculation: (3) 75-percent notional amount as applicable. (i) Select all of the publicly reportable calculation. The Commission shall use (3) Exception. Publicly reportable swap transactions within a specific the following procedure in determining swap transactions described in swap category using a one-year window the 75-percent notional amount paragraph (b)(5)(i) of this section that of data beginning with a minimum of calculation: are economically related to a futures one year’s worth of data; (i) Select all of the publicly reportable contract in Appendix B of this part shall (ii) Convert to the same currency or swap transactions within a specific not qualify to be treated as block trades units and use a trimmed data set; swap category using a one-year window or large notional off-facility swaps (as (iii) Determine the sum of the notional of data beginning with a minimum of applicable), if such futures contract is amounts of swaps in the trimmed data one year’s worth of data; not subject to a designated contract set; (ii) Convert to the same currency or market’s block trading rules. (iv) Multiply the sum of the notional units and use a trimmed data set; (f) Post-initial process to determine amount by 50 percent; (iii) Determine the sum of the notional appropriate minimum block sizes. (v) Rank order the observations by amounts of swaps in the trimmed data (1) Post-initial period. After a notional amount from least to greatest; set; registered swap data repository has (vi) Calculate the cumulative sum of (iv) Multiply the sum of the notional collected at least one year of reliable the observations until the cumulative amount by 75 percent; data for a particular asset class, the sum is equal to or greater than the 50- (v) Rank order the observations by Commission shall establish, by swap percent notional amount calculated in notional amount from least to greatest; categories, the post-initial appropriate paragraph (c)(1)(iv) of this section; (vi) Calculate the cumulative sum of minimum block sizes as described in (vii) Select the notional amount the observations until the cumulative paragraphs (f)(2) through (f)(5) of this associated with that observation; sum is equal to or greater than the 75- section. No less than once each calendar (viii) Round the notional amount of percent notional amount calculated in year thereafter, the Commission shall that observation to two significant paragraph (c)(3)(iv) of this section; update the post-initial appropriate digits, or if the notional amount (vii) Select the notional amount minimum block sizes. associated with that observation is associated with that observation; (2) Post-initial appropriate minimum already significant to two digits, (viii) Round the notional amount of block sizes for certain swaps. The increase that notional amount to the that observation to two significant Commission shall determine post-initial next highest rounding point of two digits, or if the notional amount appropriate minimum block sizes for significant digits; and associated with that observation is the swap categories described in (ix) Set the appropriate minimum already significant to two digits, block size at the amount calculated in paragraphs (b)(1), (b)(2), (b)(4)(i) and increase that notional amount to the paragraph (c)(1)(viii) of this section. (b)(5) of this section by utilizing a one- (2) 67-percent notional amount next highest rounding point of two year window of swap transaction and calculation. The Commission shall use significant digits; and pricing data corresponding to each the following procedure in determining (ix) Set the appropriate minimum relevant swap category reviewed no less the 67-percent notional amount block size at the amount calculated in than once each calendar year, and by calculation: paragraph (c)(3)(viii) of this section. applying the 67-percent notional (i) Select all of the publicly reportable (d) No appropriate minimum block amount calculation to such data. swap transactions within a specific sizes for swaps in the equity asset class. (3) Certain swaps in the foreign swap category using a one-year window Publicly reportable swap transactions in exchange asset class. All swaps or of data beginning with a minimum of the equity asset class shall not be treated instruments in the swap category one year’s worth of data; as block trades or large notional off- described in paragraph (b)(4)(ii) of this (ii) Convert to the same currency or facility swaps. section shall be eligible to be treated as units and use a trimmed data set; (e) Initial appropriate minimum block a block trade or large notional off- (iii) Determine the sum of the notional sizes. Prior to the Commission making a facility swap, as applicable. amounts of swaps in the trimmed data determination as described in paragraph (4) Commission publication of post- set; (f)(1) of this section, the following initial initial appropriate minimum block (iv) Multiply the sum of the notional appropriate minimum block sizes shall sizes. The Commission shall publish the amount by 67 percent; apply: appropriate minimum block sizes (v) Rank order the observations by (1) Prescribed appropriate minimum determined pursuant to paragraph (f)(1) notional amount from least to greatest; block sizes. Except as otherwise of this section on its Web site at (vi) Calculate the cumulative sum of provided in paragraph (e)(1) of this http://www.cftc.gov. the observations until the cumulative section, for any publicly reportable (5) Effective date of post-initial sum is equal to or greater than the 67- swap transaction that falls within the appropriate minimum block sizes. percent notional amount calculated in swap categories described in paragraphs Unless otherwise indicated on the paragraph (c)(2)(iv) of this section; (b)(1), (b)(2), (b)(4)(i), (b)(5)(i) or Commission’s Web site, the post-initial (vii) Select the notional amount (b)(5)(ii) of this section, the initial appropriate minimum block sizes associated with that observation; appropriate minimum block size for described in paragraph (f)(1) of this

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section shall be effective on the first day (4) Currency conversion. Unless Act, or exempt from registration under of the second month following the date otherwise specified in this part, when the Act, or a principal thereof, who has of publication. the appropriate minimum block size or discretionary trading authority or (g) Required notification. cap size for a publicly reportable swap directs client accounts, (1) Block trade election. transaction is denominated in a (ii) An investment adviser who has (i) The parties to a publicly reportable currency other than U.S. dollars, parties discretionary trading authority or swap transaction that has a notional to a swap and registered entities may directs client accounts and satisfies the amount at or above the appropriate use a currency exchange rate that is criteria of § 4.7(a)(2)(v) of this chapter, minimum block size shall notify the widely published within the preceding or registered swap execution facility or two business days from the date of (iii) a foreign person who performs a designated contract market, as execution of the swap transaction in similar role or function as the persons applicable, pursuant to the rules of such order to determine such qualification. described in paragraphs (i)(1)(i) or (ii) of registered swap execution facility or (5) Successor currencies. For this section and is subject as such to designated contract market, of its currencies that succeed a super-major foreign regulation, to transact block election to have the publicly reportable currency, the appropriate currency trades for customers who are not eligible swap transaction treated as a block classification for such currency shall be contract participants if such commodity trade. based on the corresponding nominal trading advisor, investment adviser or (ii) The registered swap execution gross domestic product classification (in foreign person has more than facility or designated contract market, as U.S. dollars) as determined in the most $25,000,000 in total assets under applicable, pursuant to the rules of recent World Bank, World Development management. which a block trade is executed shall Indicator at the time of succession. If the (2) A person transacting a block trade notify the registered swap data gross domestic product of the country or on behalf of a customer must receive repository of such a block trade election nation utilizing the successor currency prior written instruction or consent when transmitting swap transaction and is: from the customer to do so. Such pricing data to such swap data (i) Greater than $2 trillion, then the instruction or consent may be provided repository in accordance with successor currency shall be included in the power of attorney or similar § 43.3(b)(1). among the super-major currencies; document by which the customer (2) Large notional off-facility swap (ii) Greater than $500 billion but less provides the person with discretionary election. A reporting party who executes than $2 trillion, then the successor trading authority or the authority to an off-facility swap that has a notional currency shall be included among the direct the trading in its account. amount at or above the appropriate major currencies; or ■ 5. Add § 43.7 to read as follows: minimum block size shall notify the (iii) Less than $500 billion, then the applicable registered swap data successor currency shall be included § 43.7 Delegation of authority. repository that such swap transaction among the non-major currencies. (a) Authority. The Commission hereby qualifies as a large notional off-facility (6) Aggregation. Except as otherwise delegates, until it orders otherwise, to swap concurrent with the transmission stated in this paragraph, the aggregation the Director of the Division of Market of swap transaction and pricing data in of orders for different accounts in order Oversight or such other employee or accordance with this part. to satisfy the minimum block trade size employees as the Director may designate (h) Special provisions relating to or the cap size requirement is from time to time, the authority: appropriate minimum block sizes and prohibited. Aggregation is permissible (1) To determine whether swaps fall cap sizes. The following special rules on a designated contract market or swap within specific swap categories as shall apply to the determination of execution facility if done by a person described in § 43.6(b); appropriate minimum block sizes and who: (2) To determine and publish post- cap sizes— (i) (A) Is a commodity trading advisor initial, appropriate minimum block (1) Swaps with optionality. The registered pursuant to Section 4n of the sizes as described in § 43.6(f); and notional amount of a swap with Act, or exempt from registration under (3) To determine post-initial cap sizes optionality shall equal the notional the Act, or a principal thereof, who has as described in § 43.4(h). amount of the component of the swap discretionary trading authority or (b) Submission for Commission that does not include the option directs client accounts, consideration. The Director of the component. (B) Is an investment adviser who has Division of Market Oversight may (2) Swaps with composite reference discretionary trading authority or submit to the Commission for its prices. The parties to a swap transaction directs client accounts and satisfies the consideration any matter that has been with composite reference prices may criteria of § 4.7(a)(2)(v) of this chapter, delegated pursuant to this section. elect to apply the lowest appropriate or (c) Commission reserves authority. minimum block size or cap size (C) Is a foreign person who performs Nothing in this section prohibits the applicable to one component reference a similar role or function as the persons Commission, at its election, from price’s swap category of such publicly described in paragraphs (h)(6)(i)(A) or exercising the authority delegated in reportable swap transaction. (h)(6)(i)(B) of this section and is subject this section. (3) Notional amounts for physical as such to foreign regulation; and, ■ 6. Amend Appendix B to Part 43 to commodity swaps. Unless otherwise (ii) Has more than $25,000,000 in total add the following contracts under the specified in this part, the notional assets under management. heading ‘‘Energy’’ after the existing amount for a physical commodity swap (i) Eligible Block Trade Parties. listing for ‘‘New York Mercantile shall be based on the notional unit (1) Parties to a block trade must be Exchange New York Harbor Heating measure utilized in the related futures ‘‘eligible contract participants,’’ as Oil’’: contract market or the predominant defined in Section 1a(18) of the Act and Appendix B to Part 43—Enumerated notional unit measure used to determine the Commission’s regulations. However, Physical Commodity Contracts and notional quantities in the cash market a designated contract market may allow: for the relevant, underlying physical (i) A commodity trading advisor Other Contracts commodity. registered pursuant to Section 4n of the * * * * *

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Energy Natural Gas and Related Products—Other Other—U.S. * * * * * Electricity and Sources Petroleum and Products ICE Futures SP–15 Day-Ahead Peak Fixed Coal New England (PADD 1A) Price Electricity Central Atlantic (PADD 1B) ICE Futures SP–15 Day-Ahead Off-Peak Uranium Lower Atlantic (PADD 1C) Fixed Price Electricity and Sources—Other Midwest (PADD 2) ICE Futures PJM Western Hub Real Time Precious Metals Gulf Coast (PADD 3) Peak Fixed Price Palladium Rocky Mountains (PADD 4) ICE Futures PJM Western Hub Real Time Off- Platinum West Coast (PADD 5) Peak Fixed Price Silver Other—U.S. ICE Futures Mid-Columbia Day-Ahead Peak Gold Electricity and Sources Fixed Price Precious Metals—Other Florida Reliability Coordinating Council ICE Futures Mid-Columbia Day-Ahead Off- Base Metals (FRCC) Peak Fixed Price Steel Midwest Reliability Organization (MRO) Chicago Basis Copper Northeast Power Coordinating Council HSC Basis Base Metals—Other (NPCC) Socal Border Basis Wood Products Reliability First Corporation (RFC) Waha Basis Lumber SERC Reliability Corporation (SERC) ICE Futures AB NIT Basis Pulp Southwest Power Pool, RE (SPP) NWP Rockies Basis Wood Products—Other Texas Regional Entity (TRE) PG&E Citygate Basis Real Estate Western Electricity Coordinating Council (WECC) * * * * * Real Estate Chemicals Other—U.S. ■ 7. Add Appendix D to Part 43 to read Chemicals All Remaining Other Commodities (Publicly as follows: Plastics disseminate the region. If pricing or Plastics delivery point is not region-specific, Appendix D to Part 43—Other Emissions indicate ‘‘U.S.’’) Commodity Swap Categories Emissions Region 1—(Includes Connecticut, Maine, Weather Massachusetts, New Hampshire, Rhode Other Commodity Group Weather Island, Vermont) Individual Other Commodity Multiple Commodity Index Region 2—(Includes New Jersey, New Grains Multiple Commodity Index York) Oats Other Agricultural Region 3—(Includes Delaware, District of Wheat Other Agricultural Columbia, Maryland, Pennsylvania, Corn Other Non-Agricultural Virginia, West Virginia) Rice Other Non-Agricultural Region 4—(Includes Alabama, Florida, Grains—Other ■ 8. Add Appendix E to Part 43 to read Georgia, Kentucky, Mississippi, North Livestock/Meat Products as follows: Carolina, South Carolina, Tennessee) Live Cattle Region 5—(Includes Illinois, Indiana, Pork Bellies Appendix E to Part 43—Other Michigan, Minnesota, Ohio, Wisconsin) Feeder Cattle Commodity Geographic Identification Region 6—(Includes Arkansas, Louisiana, Lean Hogs for Public Dissemination Pursuant to New Mexico, Oklahoma, Texas) Livestock/Meat Products—Other § 43.4(d)(4)(iii) Region 7—(Includes Iowa, Kansas, Dairy Products Missouri, Nebraska) Milk Registered swap data repositories are Region 8—(Includes Colorado, Montana, Butter required by § 43.4(d)(4)(iii) to publicly North Dakota, South Dakota, Utah, Cheese disseminate any specific delivery point or Wyoming) Dairy Products—Other pricing point associated with publicly Region 9—(Includes Arizona, California, Oilseed and Products reportable swap transactions in the ‘‘other Hawaii, Nevada) Soybean Oil commodity’’ asset class pursuant to Tables Region 10—(Includes Alaska, Idaho, Soybean Meal E1 and E2 in this appendix. If the underlying Oregon, Washington) Soybeans asset of a publicly reportable swap Table E2. Non-U.S. Delivery or Pricing Points Oilseed and Products—Other transaction described in § 43.4(d)(4)(iii) has a Fiber delivery or pricing point that is located in the Other Commodity Regions Cotton United States, such information shall be Country or Sub-Region Fiber—Other publicly disseminated pursuant to the North America (Other than U.S.) Foodstuffs/Softs regions described in Table E1 in this Canada Coffee appendix. If the underlying asset of a Mexico Frozen Concentrated Orange Juice publicly reportable swap transaction Central America Sugar described in § 43.4(d)(4)(iii) has a delivery or South America Cocoa pricing point that is not located in the United Brazil Foodstuffs/Softs—Other States, such information shall be publicly Other South America Petroleum and Products disseminated pursuant to the countries or Europe Jet Fuel sub-regions, or if no country or sub-region, by Western Europe Ethanol the other commodity region, described in Northern Europe Biodiesel Table E2 in this appendix. Southern Europe Fuel Oil Eastern Europe (excluding Russia) Heating Oil Table E1. U.S. Delivery or Pricing Points Russia Gasoline Other Commodity Group Africa Naphtha Region Northern Africa Crude Oil Natural Gas and Related Products Western Africa Diesel Midwest Eastern Africa Petroleum and Products—Other Northeast Central Africa Natural Gas and Related Products Gulf Southern Africa Natural Gas Liquids Southeast Asia-Pacific Natural Gas Western Northern Asia (excluding Russia)

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Central Asia Australia/New Zealand/Pacific Islands Appendix F to Part 43—Initial Eastern Asia ■ 9. Add Appendix F to Part 43 to read Appropriate Minimum Block Sizes by Western Asia Asset Class for Block Trades and Large as follows: Southeast Asia Notional Off-Facility Swaps

Currency group Currencies

Super-Major Currencies ...... United States dollar (USD), European Union Euro Area euro (EUR), United Kingdom pound sterling (GBP), and Japan yen (JPY). Major Currencies ...... Australia dollar (AUD), Switzerland franc (CHF), Canada dollar (CAD), Republic of South Africa rand (ZAR), Republic of Korea won (KRW), Kingdom of Sweden krona (SEK), New Zealand dollar (NZD), Kingdom of Norway krone (NOK), and Denmark krone (DKK). Non-Major Currencies ...... All other currencies.

INTEREST RATE SWAPS

50% Notional Currency group Tenor greater than Tenor less than or equal to (in millions)

Super-Major ...... 46 days ...... 6,400 Super-Major ...... 46 days ...... Three months (107 days) ...... 2,100 Super-Major ...... Three months (107 days) ...... Six months (198 days) ...... 1,200 Super-Major ...... Six months (198 days) ...... One year (381 days) ...... 1,100 Super-Major ...... One year (381 days) ...... Two years (746 days) ...... 460 Super-Major ...... Two years (746 days) ...... Five years (1,842 days) ...... 240 Super-Major ...... Five years (1,842 days) ...... Ten years (3,668 days) ...... 170 Super-Major ...... Ten years (3,668 days) ...... 30 years (10,973 days) ...... 120 Super-Major ...... 30 years (10,973 days) ...... 67 Major ...... 46 days ...... 2,200 Major ...... 46 days ...... Three months (107 days) ...... 580 Major ...... Three months (107 days) ...... Six months (198 days) ...... 440 Major ...... Six months (198 days) ...... One year (381 days) ...... 220 Major ...... One year (381 days) ...... Two years (746 days) ...... 130 Major ...... Two years (746 days) ...... Five years (1,842 days) ...... 88 Major ...... Five years (1,842 days) ...... Ten years (3,668 days) ...... 49 Major ...... Ten years (3,668 days) ...... 30 years (10,973 days) ...... 37 Major ...... 30 years (10,973 days) ...... 15 Non-Major ...... 46 days ...... 230 Non-Major ...... 46 days ...... Three months (107 days) ...... 230 Non-Major ...... Three months (107 days) ...... Six months (198 days) ...... 150 Non-Major ...... Six months (198 days) ...... One year (381 days) ...... 110 Non-Major ...... One year (381 days) ...... Two years (746 days) ...... 54 Non-Major ...... Two years (746 days) ...... Five years (1,842 days) ...... 27 Non-Major ...... Five years (1,842 days) ...... Ten years (3,668 days) ...... 15 Non-Major ...... Ten years (3,668 days) ...... 30 years (10,973 days) ...... 16 Non-Major ...... 30 years (10,973 days) ...... 15

CREDIT SWAPS

Spread group 50% Notional (Basis Points) Traded tenor greater than Traded tenor less than or equal to (in Millions)

Less than or equal to 175 ...... Two years (746 days) ...... 320 Less than or equal to 175 ...... Two years (746 days) ...... Four years (1,477 days) ...... 200 Less than or equal to 175 ...... Four years (1,477 days) ...... Six years (2,207 days) ...... 110 Less than or equal to 175 ...... Six years (2,207 days) ...... Eight years and six months (3,120 110 days). Less than or equal to 175 ...... Eight years and six months (3,120 Twelve years and six months (4,581 130 days). days). Less than or equal to 175 ...... Twelve years and six months (4,581 ...... 46 days). Greater than 175 and less than or equal ...... Two years (746 days) ...... 140 to 350. Greater than 175 and less than or equal Two years (746 days) ...... Four years (1,477 days) ...... 82 to 350. Greater than 175 and less than or equal Four years (1,477 days) ...... Six years (2,207 days) ...... 32 to 350. Greater than 175 and less than or equal Six years (2,207 days)...... Eight years and six months (3,120 20 to 350. days). Greater than 175 and less than or equal Eight years and six months (3,120 Twelve years and six months (4,581 26 to 350. days). days). Greater than 175 and less than or equal Twelve years and six months (4,581 ...... 63 to 350. days). Greater than 350 ...... Two years (746 days) ...... 66

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CREDIT SWAPS—Continued

Spread group 50% Notional (Basis Points) Traded tenor greater than Traded tenor less than or equal to (in Millions)

Greater than 350 ...... Two years (746 days) ...... Four years (1,477 days) ...... 41 Greater than 350 ...... Four years (1,477 days) ...... Six years (2,207 days) ...... 26 Greater than 350 ...... Six years (2,207 days) ...... Eight years and six months (3,120 13 days). Greater than 350...... Eight years and six months (3,120 Twelve years and six months (4,581 13 days). days). Greater than 350 ...... Twelve years and six months (4,581 ...... 41 days).

FOREIGN EXCHANGE SWAPS

Super-major currencies GBP (British JPY (Japanese EUR (Euro) pound) yen) USD (U.S. dollar)

Super-major currencies ...... EUR ...... 6,250,000 6,250,000 18,750,000 GBP ...... 6,250,000* 6,250,000 6,250,000 JPY ...... 6,250,000* 6,250,000* 1,875,000,000 USD ...... 18,750,000* 6,250,000* 1,875,000,000* Major currencies ...... AUD ...... 6,250,000* 0 10,000,000 10,000,000 CAD ...... 6,250,000* 0 10,000,000 10,000,000 CHF ...... 6,250,000* 6,250,000* 12,500,000 12,500,000 DKK ...... 0 0 0 0 KRW ...... 0 0 0 6,250,000,000 SEK ...... 6,250,000* 0 0 10,000,000 NOK ...... 6,250,000* 0 0 10,000,000 NZD ...... 0 0 0 5,000,000 ZAR ...... 0 0 0 25,000,000 Non-major currencies ...... BRL ...... 0 0 0 5,000,000 CZK ...... 200,000,000 0 0 200,000,000 HUF ...... 1,500,000,000 0 0 1,500,000,000 ILS ...... 0 0 0 50,000,000 MXN ...... 0 0 0 50,000,000 PLN ...... 25,000,000 0 0 25,000,000 RMB ...... 50,000,000 0 50,000,000 50,000,000 RUB ...... 0 0 0 125,000,000 TRY ...... 6,250,000* 0 0 10,000,000* All values that do not have an asterisk are denominated in the currency of the left hand side. All values that have an asterisk (*) are denominated in the currency indicated on the top of the table.

OTHER COMMODITY SWAPS

Related futures contract Initial appropriate minimum block size Units

...... AB NIT Basis (ICE) ...... 62,500 ...... MMBtu Brent Crude (ICE and NYMEX) ...... 25,000 ...... bbl. Cheese (CME) ...... 400,000 ...... lbs. Class III Milk (CME) ...... NO BLOCKS ...... Cocoa (ICE and NYSE LIFFE and NYMEX) ...... 1,000 ...... metric tons Coffee (ICE and NYMEX) ...... 3,750,000 ...... lbs. Copper (COMEX) ...... 625,000 ...... lbs. Corn (CBOT) ...... NO BLOCKS ...... bushels Cotton No. 2 (ICE and NYMEX) ...... 5,000,000 ...... lbs. Distillers’ Dried Grain (CBOT) ...... 1,000 ...... short tons Dow Jones-UBS Commodity Index (CBOT) ...... 30,000 times index ...... dollars Ethanol (CBOT) ...... 290,000 ...... gallons Feeder Cattle (CME) ...... NO BLOCKS ...... Frost Index (CME) ...... 200,000 times index ...... euros Frozen Concentrated Orange Juice (ICE) ...... NO BLOCKS ...... Gold (COMEX and NYSE Liffe) ...... 2,500 ...... troy oz. Goldman Sachs Commodity Index (GSCI), GSCI Excess Return Index (CME) 5,000 times index ...... dollars Gulf Coast Sour Crude Oil (NYMEX) ...... 5,000 ...... bbl. Hard Red Spring Wheat (MGEX) ...... NO BLOCKS ...... Hard Winter Wheat (KCBT) ...... NO BLOCKS ...... Henry Hub Natural Gas (NYMEX) ...... 500,000 ...... MMBtu HSC Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu Hurricane Index (CME) ...... 20,000 times index ...... dollars Chicago Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu

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OTHER COMMODITY SWAPS—Continued

Related futures contract Initial appropriate minimum block size Units

...... Lean Hogs (CME) ...... NO BLOCKS ...... Light Sweet Crude Oil (NYMEX) ...... 50,000 ...... bbl. Live Cattle (CME) ...... NO BLOCKS ...... Mid-Columbia Day-Ahead Off-Peak Fixed Price (ICE) ...... 250 ...... MW/Hr. Mid-Columbia Day-Ahead Peak Fixed Price (ICE) ...... 4,000 ...... MW/Hr. New York Harbor RBOB (Blendstock) Gasoline (NYMEX) ...... 1,050,000 ...... gallons New York Harbor No. 2 Heating Oil (NYMEX) ...... 1,050,000 ...... bbl. NWP Rockies Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu Oats (CBOT) ...... NO BLOCKS ...... Palladium (NYMEX) ...... 1,000 ...... troy oz. PG&E Citygate Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu PJM Western Hub Real Time Off-Peak Fixed Price (ICE) ...... 3,900 ...... MW/Hr. PJM Western Hub Real Time Peak Fixed Price (ICE) ...... 8,000 ...... MW/Hr. Platinum (NYMEX) ...... 500 ...... troy oz. Rainfall Index (CME) ...... 10,000 times index ...... dollars Rough Rice (CBOT) ...... NO BLOCKS ...... Silver (COMEX and NYSE Liffe) ...... 125,000 ...... troy oz. Snowfall Index (CME) ...... 10,000 times index ...... dollars Socal Border Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu Soybean (CBOT) ...... NO BLOCKS ...... Soybean Meal (CBOT) ...... NO BLOCKS ...... Soybean Oil (CBOT) ...... NO BLOCKS ...... SP–15 Day-Ahead Peak Fixed Price (ICE) ...... 4,000 ...... MW/Hr. SP–15 Day-Ahead Off-Peak Fixed Price (ICE) ...... 250 ...... MW/Hr. Sugar #11 (ICE and NYMEX) (futures) ...... 5,000 ...... metric tons Sugar #16 (ICE) (futures) ...... NO BLOCKS ...... Temperature Index (CME) ...... 400 times index ...... currency units U.S. Dollar Cash Settled Crude Palm Oil (CME) ...... 250 ...... metrics tons Waha Basis (ICE and NYMEX) ...... 62,500 ...... MMBtu Wheat (CBOT) ...... NO BLOCKS ......

Issued in Washington, DC, on May 16, Appendix 2—Statement of Chairman notional amount of a particular swap 2013, by the Commission. Gary Gensler category will benefit from pre-trade and post- Christopher J. Kirkpatrick, trade transparency. Also during this initial I support the final block rule for swaps, period, the block sizes for foreign exchange Deputy Secretary of the Commission. which is critical to promoting transparency and other commodity asset classes will be in this once opaque market. With this rule, Appendices to Procedures To Establish based upon the block sizes that designated the public will benefit from seeing the price contract markets have set for economically Appropriate Minimum Block Sizes for and volume of the majority of swaps related futures contracts. Large Notional Off-Facility Swaps and transactions in real time—as soon as After the initial period, the Commission Block Trades—Commission Voting technologically practicable—after a trade is will determine block sizes using a Summary and Statements of executed. Further, with this rule the public methodology that relies on the data collected Commissioners will benefit from the competition that will by swap data repositories. Block sizes will be arise as buyers and sellers must transact on set such that 67 percent of the notional transparent trading platforms. Note: The following appendices will not amount of a particular swap category will The methodology for determining block benefit from pre-trade transparency and appear in the Code of Federal Regulations. sizes is appropriately tailored to vary by asset enhanced post-trade transparency. class and by underlying referenced product The rule also includes measures to protect Appendix 1—Commission Voting or rate. the identities, market positions and business The Commission also has established a Summary transactions of swap counterparties when phased-in approach for setting and their swap transactions and pricing are On this matter, Chairman Gensler and implementing appropriate minimum block reported to the public. Commissioners Chilton and Wetjen voted in sizes. During an initial one-year period, block the affirmative; Commissioners Sommers and sizes in the interest rate and credit asset [FR Doc. 2013–12133 Filed 5–30–13; 8:45 am] O’Malia voted in the negative. classes will be set such that 50 percent of the BILLING CODE 6351–01–P

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