AGENCY:

Commodity Futures Trading Commission.

ACTION:

Interim final rule; request for comment.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting, and invites comments on, an interim final rule (“Interim Final Rule”) to amend the definition of “material terms” to maintain current portfolio reconciliation requirements for swap dealers and major swap participants following the effective date of changes to a recently amended Commission regulation.

DATES:

Effective Date. This interim final rule is effective January 5, 2021.

Comment Date: Comments must be received on or before March 8, 2021.

Comments submitted by mail will be accepted as timely if they are postmarked on or before that date.

ADDRESSES:

You may submit comments, identified by RIN 3038-AF08, by any of the following methods:

• CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.
• Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street NW, Washington, DC 20581.
• Hand Delivery/Courier: Follow the same instructions as for Mail, above.

Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged.

Instructions: All submissions received must include the agency name and RIN number for this rulemaking. For additional details on submitting comments, see the “Public Participation” heading of the SUPPLEMENTARY INFORMATION section of this document.

FOR FURTHER INFORMATION CONTACT:

Joshua Sterling, Director, (202) 418-6056, jsterling@cftc.gov; Jacob Chachkin, Special Counsel, (202) 418-5496, jchachkin@cftc.gov; or Gregory Scopino, Special Counsel, gscopino@cftc.gov, 202-418-5175, Market Participants Division (“MPD”), Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

Commission regulation 23.502 ^[1] requires swap dealers (“SDs”) and major swap participants (“MSPs”), as defined in § 1.3 of the Commission's regulations,^[2] to reconcile their swap portfolios with one another and provide non-SD and non-MSP counterparties with regular opportunities for portfolio reconciliation.^[3] Commission regulation 23.500(i) defines “portfolio reconciliation” as any process by which the two counterparties to one or more swaps exchange the material terms and valuations of all swaps in the swap portfolio between the counterparties and resolve any identified discrepancy in such material terms and valuations.^[4] Commission regulation 23.500(g) defines “material terms” to mean the minimum “primary economic terms” of a swap, as defined in appendix 1 of part 45 of the Commission's regulations, with the exception of 24 enumerated terms that were excluded from the definition of “material terms” as part of a Commission effort to reduce the regulatory burden on SDs and MSPs by eliminating the need to reconcile data field terms that were static or did not impact the valuation of swaps.^[5] In explaining the rationale for requiring SDs and MSPs to engage in portfolio reconciliation, the Commission noted that portfolio reconciliation can identify and reduce overall risk “[b]y identifying and managing mismatches in key economic terms and valuation for individual transactions across an entire portfolio.” ^[6]

On September 17, 2020, the Commission adopted a final rule revising parts 45, 46 and 49 of its regulations on swap data recordkeeping and reporting requirements for swap data repositories (“SDRs”), derivatives clearing organizations (“DCOs”), swap execution facilities, derivatives contract markets, SDs, MSPs, and swap counterparties that are neither SDs nor MSPs (“SDR Rule”).^[7] As part of the SDR Rule, the Commission made significant changes to appendix 1 of part 45 of the Commission regulations, which, as discussed above, is referenced in the definition of “material terms” set forth in Commission regulation 23.500(g). As a result of these changes, among other things, the new appendix 1 will no longer use the concept of “primary economic terms” and will no longer contain the data fields that are explicitly referenced in § 23.500(g).^[8]

II. Interim Final Rule

To maintain the status quo for portfolio reconciliation requirements under § 23.502 and ensure that SDs and MSPs can continue to engage in their required portfolio reconciliation exercises without disruption, in this Interim Final Rule the Commission is copying existing appendix 1 of part 45 as a new appendix 1 to subpart I of part 23, and amending § 23.500(g) to reference appendix 1 to subpart I of part 23 instead of appendix 1 to part 45.^[9] By doing so, the Commission will enable SDs and MSPs to avoid having to modify their portfolio reconciliation procedures and practices under § 23.502 despite the changes made by the SDR Rule. By this Interim Final Rule, the Commission is making technical organizational changes to its regulations to ensure that market participants will continue engaging in portfolio reconciliation exercises in their current manner, without disruption. Thus, the goal of these technical amendments is to maintain the Commission's regulatory requirements in connection with portfolio reconciliation without change. Without these amendments, market participants would lack meaningful regulatory reference concerning how to perform portfolio reconciliation exercises in light of changes made to appendix 1 of part 45 by the SDR Rule.

III. Public Participation

The Commission is issuing this Interim Final Rule to maintain the status quo for portfolio reconciliation requirements under § 23.502 and ensure that SDs and MSPs can continue to engage in their required portfolio reconciliation exercises without disruption, as discussed above. This approach enables these regulatory changes to take effect sooner than would be possible with the publication of a notice of proposed rulemaking in advance. Nonetheless, the Commission welcomes public comments from interested persons regarding any aspect of its consideration of, and the changes made by, this Interim Final Rule, as well as the following pertaining to potential additional amendments in the future.

Should the Commission propose modifying appendix 1 to subpart I of part 23 (as adopted by this Interim Final Rule) to make it more consistent with appendix 1 to part 45 (as amended by the SDR Rule) or make other changes? If yes, what specific modifications should the Commission propose and why? In addition, should the Commission provide that the reconciliation of a Unique Product Identifier (“UPI”) constitutes the reconciliation of each other material term that is included in the UPI? Why or why not?

All comments must be submitted in English, or if not, accompanied by an English translation. Please refer to the ADDRESSES section above. Except as described below regarding confidential business information, all comments are considered part of the public record and will be posted as received to http://comments.cftc.gov for public inspection. The information made available online includes personal identifying information (such as name and address) which is voluntarily submitted by the commenter. You should submit only information that you wish to make available publicly.

If you want to submit material that you consider to be confidential business information as part of your comment, but do not want it to be posted online, you must submit your comment by mail or hand delivery/courier and include a petition for confidential treatment as described in § 145.9 of the Commission's regulations.^[10]

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from http://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the rulemaking record and will be considered as required under the Administrative Procedure Act (“APA”) ^[11] and other applicable laws, and may be accessible under the Freedom of Information Act.^[12]

IV. Related Matters

A. Administrative Procedure Act

The APA generally requires federal agencies to publish a notice of proposed rulemaking and provide an opportunity for public comment before issuing a new rule.^[13] However, an agency may issue a new rule without a pre-publication public comment period when it for “good cause” finds that prior notice and comment is “impracticable, unnecessary, or contrary to the public interest.” ^[14] The Commission has determined that there is good cause to find that a pre-publication comment period is unnecessary because this Interim Final Rule involves technical, ministerial changes that simply move the placement of the current requirements from one part of the Commission's regulations (part 45) to another (part 23) to retain the status quo for purposes of part 23's mandated portfolio reconciliation exercises.^[15] For this reason, the Commission finds that it is unnecessary to publish notice of these amendments under section 553(b)(3)(B) of the APA.

For the same reason, the Commission also finds good cause to dispense with the 30-day delayed effective date requirement under section 553(d)(3) of the APA.^[16] Accordingly, the amendments will be effective immediately upon publication in the Federal Register.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act ^[17] requires federal agencies to consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, to provide a regulatory flexibility analysis regarding the economic impact on those entities. Because, as discussed above, the Commission is not required to publish a notice of proposed rulemaking for this rule, a regulatory flexibility analysis is not required.^[18]

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) ^[19] imposes certain requirements on Federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information, as defined by the PRA. The Commission may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid Office of Management and Budget control number.

Because it maintains the status quo under § 23.502, this final rulemaking will not impose any new recordkeeping or information collection requirements, or other collections of information.

D. Consideration of Costs and Benefits

Section 15(a) of the CEA ^[20] requires the Commission to “consider the costs and benefits” of its actions before promulgating a regulation under the CEA. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors.

This Interim Final Rule does not impose any substantive regulatory obligations on any person. Rather, the Commission is adopting technical amendments to part 23 of its regulations to maintain the status quo for portfolio reconciliation requirements under § 23.502 and ensure that SDs and MSPs can continue to engage in their required portfolio reconciliation exercises without disruption, as discussed above. Accordingly, relative to the status quo baseline there are no material, quantifiable costs or benefits associated with this rulemaking. This Interim Final Rule does not impact the efficiency, competitiveness, and financial integrity of the futures markets because this Interim Final Rule is nothing more than a technical, administrative action that moves specific requirements from part 45 of the Commission's regulations to part 23.

E. Antitrust Laws

Section 15(b) of the CEA ^[21] requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the CEA as well as the policies and purposes of the CEA, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the CEA.

The Commission believes that the public interest to be protected by the antitrust laws is the promotion of competition. The Commission has considered this Interim Final Rule to determine whether it is anticompetitive and has identified no anticompetitive effects. Having done so, it also has not identified any less anticompetitive means of achieving the purposes of the CEA.

List of Subjects in 17 CFR Part 23

• Authority delegations (Government agencies)
• Commodity futures
• Reporting and recordkeeping requirements

For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR part 23 as set forth below:

PART 23—SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

1. The authority citation for part 23 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), Pub. L. 111-203, 124 Stat. 1641 (2010).

2. In § 23.500, revise paragraph (g) to read as follows:

3. Add Appendix 1 to subpart I of part 23 to read as follows:

Part 23, Subpart I, Appendix 1

Note:

The following appendices will not appear in the Code of Federal Regulations.

Appendices to Portfolio Reconciliation Requirements for Swap Dealers and Major Swap Participants—Revision of “Material Terms” Definition—Voting Summary and Chairman's and Commissioners' Statements

Appendix 1—Voting Summary

On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative.

Appendix 2—Statement of Commissioner Dan M. Berkovitz

I support today's interim final rule that will maintain the continuity of swap portfolio reconciliation requirements for swap dealers. In September 2012, the Commission established in regulation 23.502 the requirement for swap dealers to regularly reconcile key material terms of swaps in portfolios with certain counterparties. These portfolios can include hundreds, thousands, and even tens of thousands of individual swap transactions. Regularly reconciling economic terms that determine the periodic payments made on swap portfolios reduces the likelihood of significant disputes and potential payment shortfalls or interruptions. Reducing these events reduces risk in the financial system, particularly during times of market stress.^[1]

On September 17, 2020, the Commission adopted a final rule revising parts 45, 46, and 49 of its regulations on swap data recordkeeping and reporting requirements. In the amendments, significant changes were made to material terms that are cross-referenced in regulation 23.502. The unintended consequence would be to render the portfolio reconciliation requirement ineffective when the swap data regulations go into effect in approximately 60 days. The IFR corrects this unintended consequence by reestablishing the same material economic terms identified for regulation 23.502, thereby maintaining the status quo for the portfolio reconciliation requirement. This is a necessary action to maintain the risk reducing effects of that requirement.

Footnotes