Rules Prohibiting the Aggregation of Orders To Satisfy Minimum Block Sizes or Cap Size Requirements, and Establishing Eligibility Requirements for Parties to Block Trades, 38229-38236 [2012-15481]
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Federal Register / Vol. 77, No. 124 / Wednesday, June 27, 2012 / Proposed Rules
Yellowstone International Airport. This Class
D airspace area is effective during the
specific dates and times established in
advance by a Notice to Airmen. The effective
date and time will thereafter be continuously
published in the Airport/Facility Directory.
Issued in Seattle, Washington, on June 19,
2012.
Robert Henry,
Acting Manager, Operations Support Group,
Western Service Center.
Paragraph 6002 Class E airspace designated
as surface areas.
BILLING CODE 4910–13–P
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ANM MT E2
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Bozeman, MT [Modified]
Bozeman Yellowstone International Airport,
MT
(Lat. 45°46′39″ N., long. 111°09′07″ W.)
Within a 5.4-mile radius of Bozeman
Yellowstone International Airport. This Class
E airspace area is effective during the specific
dates and times established in advance by a
Notice to Airmen. The effective date and time
will thereafter be continuously published in
the Airport/Facility Directory.
Paragraph 6004 Class E airspace designated
as an extension to a Class D surface area.
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ANM MT E4
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Bozeman, MT [Modified]
Paragraph 6005 Class E airspace areas
extending upward from 700 feet or more
above the surface of the earth.
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ANM MT E5
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Bozeman, MT [Modified]
Bozeman Yellowstone International Airport,
MT
(Lat. 45°46′39″ N., long. 111°09′07″ W.)
That airspace extending upward from 700
feet above the surface within a 13.5-mile
radius of Bozeman Yellowstone International
Airport, and within 8 miles northeast and 13
miles southwest of the 316° bearing of the
airport extending from the 13.5-mile radius
to 24.4 miles northwest of the airport.
Paragraph 6006
areas.
En route domestic airspace
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emcdonald on DSK67QTVN1PROD with PROPOSALS
ANM MT E6
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Bozeman, MT [Modified]
Bozeman Yellowstone International Airport,
MT
(Lat. 45°46′39″ N., long. 111°09′07″ W.)
That airspace extending upward from
1,200 feet above the surface within a 50-mile
radius of the Bozeman Yellowstone
International Airport; excluding existing
lateral limits of controlled airspace 12,000
feet MSL and above.
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COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 43
RIN 3038–AD84
Rules Prohibiting the Aggregation of
Orders To Satisfy Minimum Block
Sizes or Cap Size Requirements, and
Establishing Eligibility Requirements
for Parties to Block Trades
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’) is
issuing a notice of proposed rulemaking
to add certain provisions to part 43 of
the Commission’s regulations pertaining
to block trades in swap contracts. The
provisions would: (i) Prohibit the
aggregation of orders for different
trading accounts in order to satisfy the
minimum block size or cap size
requirements, except for orders
aggregated by certain commodity
trading advisors (‘‘CTAs’’), investment
advisers and foreign persons (as
described in this release), if such person
has more than $25,000,000 in total
assets under management (‘‘AUM’’); (ii)
provide that parties to a block trade
must individually qualify as eligible
contract participants (‘‘ECPs’’), except
where a designated contract market
allows certain CTAs, investment
advisers and foreign persons (as
described in this release), to transact
block trades for customers who are not
ECPs, if such CTA, investment adviser
or foreign person has more than
$25,000,000 in total AUM; and (iii)
require that persons transacting block
trades on behalf of customers must
receive prior written instruction or
consent from the customer to do so.
DATES: Comments must be received on
or before July 27, 2012.
ADDRESSES: You may submit comments,
identified by RIN number [TBD], by any
of the following methods:
• The agency’s Web site: at https://
comments.cftc.gov. Follow the
instructions for submitting comments
through the Web site.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
SUMMARY:
Bozeman Yellowstone International Airport,
MT
(Lat. 45°46′39″ N., long. 111°09′07″ W.)
That airspace extending upward from the
surface within 3 miles each side of the 316°
bearing of Bozeman Yellowstone
International Airport extending from the 5.4mile radius of the airport to 15.5 miles
northwest of the airport, and that airspace 2.4
miles each side of the 212° bearing of the
Bozeman Yellowstone International Airport
extending from the 5.4-mile radius of the
airport to 7 miles southwest of the airport.
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[FR Doc. 2012–15698 Filed 6–26–12; 8:45 am]
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Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Please submit your comments using
only one method.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to www.cftc.gov. You
should submit only information that
you wish to make available publicly. If
you wish the Commission to consider
information that you believe is exempt
from disclosure under the Freedom of
Information Act, a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in § 145.9
of the Commission’s regulations.1
Commenters to this notice of
proposed rulemaking are requested to
refrain from providing comments with
respect to the provisions in part 43 of
the Commission’s regulations that are
beyond the scope of this notice of
proposed rulemaking. The Commission
only plans to address those comments
that are responsive to the policies,
merits and substance of the proposed
provisions set forth in this notice of
proposed rulemaking.
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 www.cftc.gov that it may deem to
be inappropriate for publication, such as
obscene language. All submissions that
have been redacted or removed that
contain comments on the merits of the
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Nancy Markowitz, Deputy Director,
Division of Market Oversight, 202–418–
5453, nmarkowitz@cftc.gov; Nadia
Zakir, Special Counsel, Division of
Market Oversight, 202–418–5720,
nzakir@cftc.gov; Laurie Gussow,
Attorney-Advisor, 202–418–7623,
lgussow@cftc.gov; George Pullen,
Economist, Division of Market
Oversight, 202–418–6709,
gpullen@cftc.gov; Esen Onur,
Economist, Office of the Chief
Economist, 202–418–6146,
eonur@cftc.gov; or Herminio Castro,
1 See
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Federal Register / Vol. 77, No. 124 / Wednesday, June 27, 2012 / Proposed Rules
Counsel, Office of General Counsel,
202–418–6705, hcastro@cftc.gov,
Commodity Futures Trading
Commission, Three Lafayette Center,
1155 21st Street NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
I. Background
emcdonald on DSK67QTVN1PROD with PROPOSALS
A. The Dodd-Frank Act
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’).2 Title VII of the
Dodd-Frank Act 3 amended the
Commodity Exchange Act (‘‘CEA’’ or
‘‘Act’’) 4 to establish a comprehensive,
new regulatory framework for swaps
and security-based swaps. This
legislation was enacted to reduce risk,
increase transparency and promote
market integrity within the financial
system by, inter alia: (1) Providing for
the registration and comprehensive
regulation of swap dealers (‘‘SDs’’) and
major swap participants (‘‘MSPs’’); (2)
imposing mandatory clearing and trade
execution requirements on standardized
derivative products; (3) creating robust
recordkeeping and real-time reporting
regimes; and (4) enhancing the
Commission’s rulemaking and
enforcement authorities with respect to,
among others, all registered entities and
intermediaries subject to the
Commission’s oversight.
Section 727 of the Dodd-Frank Act
enacted section 2(a)(13) of the CEA,
which authorizes and requires the
Commission to promulgate regulations
for the real-time public reporting of
swap transaction and pricing data.5
Among other things, sections
2(a)(13)(E)(ii) and (iii) of the CEA
respectively require the Commission to
prescribe regulations specifying ‘‘the
criteria for determining what constitutes
a large notional swap transaction (block
trade) for particular markets and
contracts’’ and ‘‘the appropriate time
delay for reporting large notional swap
transactions (block trades) to the
public.’’ 6
B. The Initial Proposal
In order to implement the various
statutory requirements imposed under
section 2(a)(13) of the CEA, the
Commission published an initial notice
of proposed rulemaking on December 7,
2 See
Public Law 111–203, 124 Stat. 1376 (2010).
short title of Title VII of the Dodd-Frank Act
is the ‘‘Wall Street Transparency and
Accountability Act of 2010.’’
4 See 7 U.S.C. 1 et seq.
5 See generally CEA section 2(a)(13), 7 U.S.C.
2(a)(13).
6 See CEA sections 2(a)(13)(E)(ii) and (iii).
3 The
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2010 (the ‘‘Initial Proposal’’).7 As
relevant to this notice of proposed
rulemaking, the Initial Proposal
proposed: (1) Definitions for the terms
‘‘large notional off-facility swap’’ and
‘‘block trade’’; 8 (2) a method for
determining the appropriate minimum
block sizes for large notional off-facility
swaps and block trades; 9 and (3) a
framework for timely reporting of such
transactions and trades.10
Among other requirements contained
in the Initial Proposal, proposed
§ 43.5(b)(1) provided that eligible parties
to a block trade (or large notional swap)
must be ECPs,11 except that a designated
contract market (‘‘DCM’’) may allow a
CTA acting in an asset managerial
capacity and registered pursuant to
Section 4n of the Act, or a principal
thereof, including any investment
7 See Real-Time Public Reporting of Swap
Transaction Data, 75 FR 76,139 (Dec. 7, 2010), as
corrected in Real-Time Public Reporting of Swap
Transaction Data Correction, 75 FR 76,930 (Dec. 10,
2010) (‘‘Initial Proposal’’).
8 The Initial Proposal defined the term ‘‘large
notional swap’’. See proposed § 43.2(l), 75 FR
76,171. The Adopting Release finalized the term as
‘‘large notional off-facility swap’’, to denote, in
relevant part, that the swap is not executed
pursuant to SEF or DCM rules and procedures. See
§ 43.2, 77 FR 1182, 1244 (Jan. 9, 2012) (‘‘Adopting
Release’’). Specifically, the Adopting Release
defined the term as an ‘‘off-facility swap that has
a notional or principal amount at or above the
appropriate minimum block size applicable to such
publicly reportable swap transaction and is not a
block trade as defined in § 43.2 of the Commission’s
regulations.’’ Id.
The final definition of ‘‘block trade’’ in the
Adopting Release is similar to how that term was
defined in the Initial Proposal. See proposed
§ 43.2(f), 75 FR 76,171. The Adopting Release
defines the term ‘‘block trade’’ as a publicly
reportable swap transaction that: ‘‘(1) [i]nvolves a
swap that is listed on a [SEF or DCM]; (2) [o]ccurs
away from the [SEF’s or DCM’s] trading system or
platform and is executed pursuant to the [SEF’s or
DCM’s] rules and procedures; (3) has a notional or
principal amount at or above the appropriate
minimum block size applicable to such swap; and
(4) [i]s reported subject to the rules and procedures
of the [SEF or DCM] and the rules described in [part
43], including the appropriate time delay
requirements set forth in § 43.5.’’ See § 43.2, 77 FR
1,243.
9 See proposed § 43.5, 75 FR 76174–76.
10 Proposed § 43.5(k)(1) in the Initial Proposal
provided that the time delay for the public
dissemination of data for a block trade or large
notional off-facility swap shall commence at the
time of execution of such trade or swap. See 75 FR
76,176. Proposed § 43.5(k)(2) provided that the time
delay for standardized block trades and large
notional off-facility swaps (i.e., swaps that fall
under CEA Section 2(a)(13)(C)(i) and (iv)) would be
15 minutes from the time of execution. Id. The
Initial Proposal did not provide specific time delays
for large notional off-facility swaps (i.e., swaps that
fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,
proposed § 43.5(k)(3) provided that such swaps
shall be reported subject to a time delay that may
be prescribed by the Commission. Id.
The Adopting Release established time delays for
the public dissemination of block trades and large
notional off-facility swaps in § 43.5. See 77 FR
1247–49.
11 See CEA Section 1a(18).
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adviser who satisfies the criteria of
§ 4.7(a)(2)(v), or a foreign person
performing a similar role or function
and subject as such to foreign
regulation, to transact block trades for
customers who are not eligible contract
participants (‘‘non-ECPS’’), if such CTA,
investment adviser or foreign person has
more than $25,000,000 in total AUM.
The proposed rule further required that
a person transacting a block trade on
behalf of a customer must receive
written instruction or prior consent
from the customer to do so.
Furthermore, proposed § 43.5(m) of
the Initial Proposal prohibited the
aggregation of orders for different
trading accounts in order to satisfy the
minimum block size requirement,
except if done on a DCM by a CTA
acting in an asset managerial capacity
and registered pursuant to Section 4n of
the Act, or a principal thereof, including
any investment adviser who satisfies the
criteria of § 4.7(a)(2)(v), or a foreign
person performing a similar role or
function and subject as such to foreign
regulation, if such CTA, investment
adviser or foreign person has more than
$25,000,000 in total AUM.
The Commission issued the Initial
Proposal for public comment for a
period of 60 days, but later reopened the
comment period for an additional 45
days.12
1. Comments in Response to the Initial
Proposal
The Commission received four
comment letters in response to the
proposed aggregation rule. The
American Benefits Council and the
Committee on the Investment of
Employee Benefit Assets stated that
qualified investment advisers who are
not CTAs should be able to aggregate
block trade orders for different trading
accounts.13 Tradeweb commented that
the CTAs that trade on SEFs should also
be permitted to aggregate trades of
behalf of their customers for purposes of
block trades.14 J.P. Morgan commented
that the proposed rule appears to reflect
a concern that private negotiation offers
less protection to unsophisticated
12 The initial comment period for the Initial
Proposal closed on February 7, 2011. The comment
periods for most proposed rulemakings
implementing the Dodd-Frank Act—including the
proposed part 43 rules—subsequently were
reopened for the period of April 27 through June
2, 2011.
13 The American Benefits Council and the
Committee on the Investment of Employee Benefit
Assets comment letter at 3 (Feb. 7, 2011). The
comment letter specifically requested that the rule
be revised such that the words ‘‘including any’’
from the second sentence are deleted and replaced
with the word ‘‘an.’’
14 Tradeweb comment letter at 5 (Feb. 7, 2011).
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investors than trading through the
central market, and that since all
entities that transact in the OTC market
already must be ECPs, the analogous
concern about customer protection in
the swaps market is already
addressed.15 In related comments, the
Wholesale Market Brokers Association
(Americas) (‘‘WMBA’’) commented that
‘‘work-up’’ or ‘‘join-the-trade’’ periods
be permitted and recognized to satisfy
the block trade requirement.16
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C. The Adopting Release and Further
Proposal
On January 9, 2012, the Commission
issued a notice of final rulemaking 17
(‘‘Adopting Release’’) that finalized
several provisions that were proposed in
the Initial Proposal pertaining to, among
other things, the reporting, public
dissemination and recordkeeping
requirements applicable to certain swap
transactions.18
Based on the public comments
received in response to the Initial
Proposal, in the Adopting Release the
Commission agreed that additional
analysis was necessary prior to issuance
of final rules for appropriate minimum
block sizes, and accordingly determined
not to make final its proposed § 43.5
rules specifying the criteria for
determining block trade sizes. Instead,
the Commission intended to issue a
separate notice of proposed rulemaking
that would specifically address the
appropriate criteria for determining
appropriate minimum block trade sizes
in light of data and comments
received.19 On March 15, 2012, the
Commission decided to further propose
(‘‘Further Proposal’’) certain other block
trade provisions that were included
with the Initial Proposal.20
After it issued the Further Proposal,
the Commission determined that the
aggregation provision and the provision
that specified the eligible parties to a
block trade, including the proposed
15 J.P. Morgan comment letter at 9, n. 13 (Jan. 12,
2011).
16 WMBA comment letter at 4–5 (Feb. 7, 2011)
(commenting that ‘‘the public dissemination of
incremental activity that would otherwise
constitute a block trade could jeopardize
identification of counterparties and materially
reduce market liquidity.’’)
17 Real-Time Public Reporting of Swap
Transaction Data, 77 FR 1,182 (Jan. 9, 2012).
18 Commenters are directed to the Adopting
Release for a discussion of the issues addressed
therein. See id.
19 See id. at 1,185.
20 Commenters are directed to the Further
Proposal for a discussion of the issues addressed
therein. See ‘‘Procedures to Establish Appropriate
Minimum Block Sizes for Large Notional OffFacility Swaps and Block Trades,’’ 77 FR 15,460
(Mar. 15, 2012). The comment period for the
Further Proposal ended on May 14, 2012.
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requirement that persons transacting
block trades on behalf of customers
must receive prior written instruction or
consent from the customer to do so,
were inadvertently omitted from the
Further Proposal. These provisions are
the subject of this notice of proposed
rulemaking.
II. Notice of Proposed Rulemaking
A. Proposed § 43.6(h)(6)—Aggregation
Proposed § 43.6(h)(6) would prohibit
the aggregation of orders for different
trading accounts in order to satisfy the
minimum block size or cap size
requirements, except that aggregation is
permissible if done on a DCM or SEF by
a person who: (i)(A) is a CTA registered
pursuant to Section 4n of the Act or
exempt from such registration under the
Act, or a principal thereof, and who has
discretionary trading authority or
directs client accounts, (B) is an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of this chapter,
or (C) is a foreign person who performs
a similar role or function as the persons
described in (A) or (B) and is subject as
such to foreign regulation, and (ii) has
more than $25,000,000 in total AUM.
The prohibition of aggregation of
orders for different trading accounts in
order to meet the minimum block size
or cap size requirements is an integral
element in ensuring the integrity of
block trading principles, and in
preserving the basis for the anonymity
associated with cap sizes. As defined in
the Adopting Release, a block trade is a
publicly reportable transaction that: (1)
Involves a swap that is listed on a
registered SEF or DCM; (2) occurs away
from the registered SEF’s or DCM’s
trading system or platform (and is
executed pursuant to the rules of such
SEF or DCM); (3) has a notional or
principal amount at or above the
appropriate minimum block size
applicable to such swap; and (4) is
reported subject to the rules and
procedures of the SEF or DCM and
Commission regulations, including the
appropriate time delay requirements.21
While block transactions are conducted
pursuant to the rules of a SEF or DCM,
by definition these transactions occur
away from the SEF’s or DCM’s trading
system or platform, where there is no
pre-trade transparency. If too many
trades were permitted to be aggregated
and thus executable as blocks, the CEA
objectives of increased transparency and
price discovery for swaps trading could
21 See
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38231
be undermined.22 By prohibiting
aggregation of orders for different
accounts to meet the minimum block
size requirement, the proposed rule
would protect the principles of block
trading, and would help to prevent
potential circumvention of exchangetrading and of the real-time reporting
obligations associated with non-block
transactions. By presumption, the
aggregation of orders for different
accounts to meet the minimum block
size threshold would be prohibited.
Indeed, in the futures market, all
block trade rules approved by the
Commission have included an
aggregation prohibition (with the
discrete exception of block trades done
through certain CTAs). Accordingly, in
the futures market, where market
participants have engaged in block
transactions for years, DCMs that permit
block trading have rules that prohibit
the aggregation of orders for different
trading accounts to meet the minimum
block size requirement.23
As proposed in this release, the rule
also would prohibit aggregation in order
to meet the cap size requirements. A cap
size is defined in the Further Proposal
as the maximum notional or principal
amount of a publicly reportable swap
transaction that is publicly
disseminated.24 A transaction that
meets the cap size requirement would
be eligible to mask the total size of the
transaction if it equals or exceeds the
cap size for a given swap category.25
The Commission adopted cap sizes in
order to help to protect the anonymity
of counterparties’ market positions and
business transactions, and to mitigate
the potential impact that real-time
public reporting of extraordinarily large
positions could have in reducing market
22 J.P.
Morgan Comment letter at 5 (Jan. 12, 2011).
following DCMs have rules permitting
block trading: Cantor Futures Exchange, L.P. (rule
IV–16); CBOE Futures Exchange LLC (rule 415);
Chicago Board of Trade (rule 526); CME (rule 526);
ELX Futures, L.P. (rule IV–16); Eris Exchange, LLC
(rule 601); Green Exchange, LLC (rule 602); ICE
Futures (rule 4.31); Nasdaq OMX Futures Exchange,
Inc. (rule E23); New York Mercantile Exchange, Inc.
(rule 526); NYSE Liffe US, LLC (rule 423); and
OneChicago LLC Futures Exchange (rule 417). Each
of the aforementioned DCMs also have rules
prohibiting aggregation of orders to meet minimum
block transaction size: Cantor Futures Exchange,
L.P. (rule IV–16(K)); CBOE Futures Exchange LLC
(rule 415(a)(i)); Chicago Board of Trade (rule 526A);
CME (rule 526A); ELX Futures, L.P. (rule IV–16(a));
Eris Exchange, LLC (rule 601(b)(1)); Green
Exchange, LLC (rule 602(a)); ICE Futures (rule
4.31(a)(ii)(B)); Nasdaq OMX Futures Exchange, Inc.
(rule E23(d)); New York Mercantile Exchange, Inc.
(rule 526A); NYSE Liffe US, LLC (rule 423(a)(1));
and OneChicago LLC Futures Exchange (rule
418(a)(i)).
24 77 FR 15,516.
25 77 FR 15,489–90.
23 The
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liquidity.26 By preventing aggregation of
orders to meet the cap size requirement,
the proposed rule will help to ensure
that cap sizes are used for the specific
purpose for which they are intended
(extraordinarily large positions), and
will help to prevent potential
circumvention of the real-time reporting
obligations.
The proposed rule further provides
that aggregation of orders for different
trading accounts for purposes of the
block size or cap size requirements may
be permitted on a DCM or SEF if done
by a person who: (i)(A) Is a CTA who
is registered pursuant to Section 4n of
the Act or is exempt from registration
under the Act, or a principal thereof,
and has discretionary trading authority
or directs client accounts, (B) is an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (C) is a
foreign person who performs a similar
role or function to the persons described
in (A) or (B) and is subject as such to
foreign regulation, and (ii) has more
than $25,000,000 in total AUM. As
noted above, DCMs that permit block
trading in connection with futures
contracts currently prohibit aggregation
of orders to meet the block size
requirement, and a majority of these
DCMs have substantially similar rules
that allow aggregation in such context if
done by certain CTAs, investment
advisers and foreign persons.27
The Commission is seeking comments
on whether this exception to the
prohibition of aggregation of orders is
appropriate in the context of the swaps
market. The Commission seeks
comments on whether such an
exception should be available to other
categories of Commission registrants,
and if so, why? Additionally, the
Commission seeks comments on
whether the $25 million AUM
emcdonald on DSK67QTVN1PROD with PROPOSALS
26 Id.
27 A majority of DCMs currently maintain similar
rules permitting certain CTAs, investment advisors
and foreign persons to aggregate. See, e.g., CME
Rulebook, rule 526 (providing an exception for
block transactions by permitting aggregation if done
by a CTA registered or exempt from registration
under the Act, including without limitation, any
investment adviser registered or exempt from
registration under the Investment Adviser’s Act of
1940 * * * provided that such advisers have total
AUM exceeding $25 million and the block trade is
suitable for the customers of such advisors. See
also, CBOE Futures Exchange LLC (rule 415(a(i));
Chicago Board of Trade (rule 526I); CME (rule 526I);
ELX Futures, L.P. (rule IV–16(a)); Eris Exchange,
LLC (rule 601(b)(10)); Green Exchange, LLC (rule
602(j)); ICE Futures ((rule 4.31(a)(ii)(B)); Nasdaq
OMX Futures Exchange, Inc., (rule E23); New York
Mercantile Exchange, Inc. (rule 526I); NYSE Liffe
US, LLC (rule 423(a)(i)); and OneChicago LLC
Futures Exchange (rule 417(a)(i)).
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requirement for the specified account
controllers is appropriate in the context
of block transactions for swaps? Further,
the Commission seeks comments on
whether the $25 million AUM
requirement should include only swaps
assets, or be based per asset class, or be
different for the five asset classes of
swaps? In addition to these specific
questions, the Commission requests
comments on all aspects of this notice
of proposed rulemaking.
B. Proposed § 43.6(i)—Eligible Block
Trade Parties
The Commission is also proposing
under new § 43.6(i)(1) a provision that
describes the eligible parties to a block
trade. The proposed provision provides
that parties to a block trade must be
‘‘eligible contract participants,’’ as that
term is defined under Section 1a(18) of
the CEA and the Commission’s
regulations. The proposed rule includes
an exception to the ECP requirement by
providing that a DCM may allow: (i) A
CTA registered pursuant to Section 4n
of the Act, or exempt from registration
under the Act, or a principal thereof,
who has discretionary trading authority
or directs client accounts, (ii) an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (iii) a
foreign person who performs a similar
role or function to the persons described
in (i) or (ii) and is subject as such to
foreign regulation, to transact block
trades for customers who are not ECPs,
if such CTA, investment adviser or
foreign person has more than
$25,000,000 in total AUM.28
In the current futures market, all
DCMs require that parties to block
trades must be ECPs. A majority of these
DCMs permit certain CTAs, investment
advisers and foreign persons to transact
a block trade on behalf of their non-ECP
customers. The proposed rule, including
the limited exception, is currently
reflected in the rulebooks of numerous
DCMs that permit block trading in the
futures market.29
28 Parties that are non-ECPs may not enter into
any swap transactions, including blocks, except on
or subject to the rules of a DCM. Specifically,
section 2(e) of the CEA provides that ‘‘[i]t shall be
unlawful for any person, other than an eligible
contract participant, to enter into a swap unless the
swap is entered into on, or subject to the rules of,
a board of trade designated as a contract market
under section 5.’’ 7 U.S.C. 2(e).
29 Most DCMs that permit block trading require
that parties to the block trade must be ECPs with
a limited exception for CTAs. The following DCMs
have rules excepting CTAs from the requirement
that parties to a block trade must be ECPs: CBOE
Futures Exchange LLC (rule 415(a)(ii)); Chicago
Board of Trade (rule 526I); CME (rule 526I); ELX
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Proposed § 43.6(i)(2) further provides
that a person transacting a block trade
on behalf of a customer must receive
prior written instruction or consent
from the customer to do so. Such
instruction or consent may be provided
in a power of attorney or similar
document by which the customer
provides the person with discretionary
trading authority or the authority to
direct the trading in its account. This
rule also is substantially similar to the
block trading rules maintained by
existing DCMs.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.30 The RFA focuses on direct
impact to small businesses and not on
indirect impacts on these businesses,
which may be tenuous and difficult to
discern.31 The CFTC believes that this
proposal would not have a significant
economic impact on a substantial
number of small entities.
1. Effect of the Proposed Rulemaking
This release proposes a rule that
would prohibit the aggregation of orders
for different trading accounts in order to
satisfy the minimum block size, or cap
size requirement. The proposed rule
further provides that aggregation is
permissible if done on a DCM or SEF by
a person who: (i)(A) Is a CTA who is
registered pursuant to Section 4n of the
Act, or is exempt from registration
under the Act, or a principal thereof,
and has discretionary trading authority
or directs client accounts, (B) is an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (C) is a
foreign person who performs a similar
role or function to the persons described
in (A) or (B) and is subject as such to
foreign regulation, and (ii) has more
than $ 25,000,000 in total AUM.
Futures, L.P. (rule IV–16(c)); Eris Exchange, LLC
(rule 601(b)(10)); Green Exchange, LLC (rule 602(a)
and (j)); ICE Futures (rule 4.31(a)(i)); Nasdaq OMX
Futures Exchange, Inc., (rule E23(d)); New York
Mercantile Exchange, Inc. (rule 526I); NYSE Liffe
US, LLC (rule 423(a)(ii)); and OneChicago LLC
Futures Exchange (rule 417(a)(ii)).
30 See 5 U.S.C. 601 et seq.
31 See Whitman v. Am. Trucking Ass’ns, 531 U.S.
457 (2001); Am. Trucking Assns. v. EPA, 175 F.3d
1027, 1043 (D.C. Cir. 1985); Mid-Tex Elec. Coop.,
Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).
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This release also proposes under new
§ 43.6(i)(1) a provision that describes the
eligible parties to a block trade. The
proposed rule provides that parties to a
block trade must be ‘‘eligible contract
participants,’’ as that term is defined
under Section 1a(18) of the CEA and the
Commission’s regulations. The
proposed rule further provides that a
DCM may allow: (i) A CTA who is
registered pursuant to Section 4n of the
Act, or exempt from registration under
the Act, or a principal thereof, who has
discretionary trading authority or
directs client accounts, (ii) an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (iii) a
foreign person who performs a similar
role or function to the persons described
in (i) or (ii) and is subject as such to
foreign regulation, to transact block
trades on behalf of their customers who
are not eligible contract participants, if
such CTA, investment adviser or foreign
person has more than $25,000,000 in
total AUM.
The CFTC is of the view that this
proposal may affect primarily the
following entities: DCMs, futures
commission merchants (‘‘FCMs’’), ECPs,
swap dealers, major swap participants,
certain CTAs, SEFs and certain
investment advisers. The majority of
entities impacted by this proposed
rulemaking have been determined by
the Commission not to be small entities.
To the extent that a small number of
small entities may be affected by the
proposed rules, the Commission
believes, as described below, that the
proposed rules would not have a
significant economic impact on a
substantial number of such entities.
2. Specific Entities That May Be Small
Entities
As noted above, the Commission has
previously determined that DCMs,
FCMs, and ECPs are not small entities
for purposes of the Regulatory
Flexibility Act.32 Certain other entities
that may be affected by this rulemaking,
including SDs, MSPs and SEFs, have
been certified by the Commission not to
be small entities in other recent
rulemakings implementing the
requirements of the Dodd-Frank Act.33
32 See, respectively and as indicated, 47 FR
18618, 18619, Apr. 30, 1982 (DCMs, CPOs, FCMs,
and large traders); and, 66 FR 20740, 20743,
Apr. 25, 2001 (ECPs).
33 See respectively, Registration of Swap Dealers
and Major Swap Participants, 77 FR 2613, 2620
(Jan. 19, 2012) (swap dealers and major swap
participants); Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and
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a. Entities affected under § 43.6(h)(6):
FCMs, CTAs, and investment advisers.
As noted above, the CFTC previously
has determined that registered FCMs are
not small entities for purposes of the
RFA based upon, among other things,
the registration requirements that FCMs
must meet, including certain minimum
financial requirements that enhance the
protection of customers’ segregated
funds and protect the financial
condition of FCMs generally.34 With
respect to certain CTAs 35 and
investment advisers who would not be
permitted to aggregate under the
proposed rule, the Commission notes
that the same provisions embodied in
the proposed rule are currently required
by DCM rules (under rules accepted by
the Commission) and thus, such entities
currently must comply with the same
aggregation prohibition. Thus, all DCMs
that permit aggregation for purposes of
the block size requirement, only permit
aggregation by CTAs, investment
advisers and foreign persons that have
more than $25,000,000 in total AUM.
Accordingly, the Commission believes
that this rule does not impact entities
that heretofore have not been able to
aggregate. To the extent that certain
CTAs and investment advisers with less
than $25,000,000 AUM are not currently
permitted to aggregate, the
Commission’s codification of these rules
would not have any significant
economic impact on a substantial
number of small entities.
b. Entities affected under § 43.6(i)(1):
Certain non-ECP participants on DCMs,
certain investment advisors, and FCMs.
New § 43.6(i)(1) provides that parties
to a block trade must be ‘‘eligible
contract participants,’’ 36 as that term is
defined under Section 1a(18) of the CEA
and § 1.3 of the Commission’s
regulations, except for certain CTAs,
investment advisers or foreign persons
performing a similar role or function
having more than $25,000,000 in total
AUM, which may transact block trades
for customers who are not ECPs. As
indicated above, certain CTAs and
investment advisers that have less than
$25,000,000 in AUM would not be
Swap Execution Facilities Regarding the Mitigation
of Conflicts of Interest, 75 FR 63732, 63746
(Oct. 18, 2010) (SEFs); Further Definition of
‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, 76 FR
29818, 29868 (May 23, 2011) (Products).
34 See supra note 32.
35 The Commission may determine on a case-bycase basis whether CTAs are not small entities for
the purpose of the RFA based upon a case by case
determination. See 47 FR 18618, 18620 (Apr. 30,
1982).
36 ECPs have been determined not to be small
entities. See 66 FR 20740, 20743 (Apr. 25, 2001).
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covered under the proposed rule
because the provision embodied in the
proposed rule is substantially the same
as is currently required by DCM rules
(under rules accepted by the
Commission). Similarly, any non-ECP
participants who trade on DCMs also
would be prohibited under current DCM
rules from directly entering into a block
transaction unless their qualifying CTA,
investment adviser, or foreign person
acts on their behalf. To the extent that
these entities are not currently
permitted to aggregate, the
Commission’s codification of these rules
would not have any significant
economic impact on a substantial
number of small entities. Accordingly,
the Chairman, on behalf of the
Commission, hereby certifies pursuant
to 5 U.S.C. 605(b) that the proposed
rules will not have a significant
economic impact on a substantial
number of small businesses.
Nonetheless, the Commission
specifically requests comment on the
economic impact that this notice of
proposed rulemaking may have on small
entities.
B. Paperwork Reduction Act
The purposes of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501
et seq. (‘‘PRA’’) are, among other things,
to minimize the paperwork burden to
the private sector, ensure that any
collection of information by a
government agency is put to the greatest
possible uses, and minimize duplicative
information collections across the
government.37 The PRA applies to all
information, ‘‘regardless of form or
format,’’ that a government is
‘‘obtaining, causing to be obtained, [or]
soliciting’’ and requires ‘‘disclosure to
third parties or the public, of facts or
opinions,’’ when the information
collection calls for ‘‘answers to identical
reporting or recordkeeping requirements
imposed, on ten or more persons[.]’’ 38
The PRA requirements have been
determined to include not only
mandatory but also voluntary
information collections, and include
both written and oral
communications.39
The proposed rules would not impose
any new recordkeeping or information
collection requirements, or other
collections of information that require
approval of the Office of Management
and Budget (‘‘OMB’’) under the PRA.
The proposed rules are covered by
existing collection requirements and
would not change existing collection
37 See
44 U.S.C. 3501.
U.S.C. 3502.3(A)(i).
39 See 5 CFR 1320.3(c)(1).
38 44
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requirements.40 The Commission invites
public comment on the accuracy of its
estimate that no additional
recordkeeping or information collection
requirements or changes to existing
collection requirements would result
from the rules proposed herein.
C. Cost-Benefit Considerations
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Section 15(a) of the CEA 41 requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation or issuing an
order under the CEA. Section 15(a)
further specifies that the costs and
benefits shall be evaluated in light of the
following 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.
The baseline for the Commission’s
assessment of costs and benefits
attributable to its discretionary actions
in this rulemaking is the costs and
benefits that would otherwise exist
today (i.e., post-Dodd-Frank Act
enactment) absent this Commission
action. The Commission recognizes that
before the Dodd-Frank Act, swap
transactions were executed over-thecounter and were not publicly reported.
One of the implications of the DoddFrank Act is that most swap transactions
are required to be publicly disseminated
by SDRs as soon as technologically
practicable, unless the notional value of
the swap transaction meets the
minimum block trade threshold.42 That
is the baseline for the Commission’s
proposed assessment of costs and
benefits in this release. The Commission
proposes that costs and benefits with
respect to block trade thresholds are
already accounted for in the Further
Proposal and that this rule only
considers the additional costs and
benefits relevant to proposed
§ 43.6(h)(6) and proposed § 43.6(i).
40 See 77 FR 1182 (Jan. 9, 2012), as amended by
the Further Proposal. OMB has assigned control
number 3038–0070 to the existing collection of
information, which is titled ‘‘Part 43—Real-Time
Public Reporting.’’
41 7 U.S.C. 19(a).
42 The Commission notes that for an initial
interim period, as outlined in § 43.5 of the Adopting
Release, all transactions will be treated as block
trades and will enjoy delayed reporting temporarily.
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1. Costs and Benefits Relevant to
Proposed § 43.6(h)(6)—Aggregation
The Commission is proposing
§ 43.6(h)(6) to specify that, except as
otherwise provided, it is impermissible
to aggregate orders for different accounts
in order to satisfy minimum block trade
or cap size requirements. The proposed
rule further provides that aggregation
may be permitted on a DCM or SEF if
done by a person who: (i)(A) Is a CTA
who is registered pursuant to Section 4n
of the Act or is exempt from registration
under the Act, or a principal thereof,
and has discretionary trading authority
or directs client accounts, (B) is an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (C) is a
foreign person who performs a role or
function similar to the persons
described in (A) or (B) and is subject as
such to foreign regulation, and (ii) has
more than $25,000,000 in total AUM.
Costs
The Commission expects that there
will be some incremental cost attendant
to compliance with proposed
§ 43.6(h)(6), and seeks data from the
public in order to quantify the same.
The Commission believes that the
overall benefits to the market of
allowing for the aggregation of orders
under certain circumstances (i.e., if
done on a designated contract market or
a swap execution facility by certain
CTAs, investment advisers or foreign
persons) will mitigate costs of reduced
market liquidity that could result from
execution of such transactions away
from the centralized marketplace. The
Commission also expects there to be
some advisors who will be prohibited
from aggregating orders for different
trading accounts in order to satisfy the
minimum block size, or cap size
requirements. The Commission also
proposes that as a result of some
advisors not being allowed to aggregate,
there might be some minimal
unquantifiable cost associated with a
decrease in competition among such
traders in the market. The Commission
seeks comment on these and any other
costs that may result from this proposal.
In particular, and as noted above, the
WMBA claimed in its comment letter
that ‘‘work-up’’ or ‘‘join-the-trade’’
periods be permitted to satisfy the block
trade requirements, and that ‘‘the public
dissemination of incremental activity
that would otherwise constitute a block
trade could jeopardize identification of
counterparties and materially reduce
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market liquidity.’’ 43 The Commission
seeks comment on the costs and benefits
of the rules proposed in this release
with respect to the specific implications
claimed by WMBA.
Benefits
The proposed rule is designed, in
large part, to prevent circumvention of
the exchange trading requirements and
of the real-time reporting obligations
associated with non-block transactions.
Absent this prohibition, the goals of the
Commission’s regulations regarding
block trading, namely increased
transaction transparency, better price
discovery and improved
competitiveness in the markets as well
as better risk management, could be
frustrated by those whose trades
individually fail to meet the minimum
block trade threshold (and cap size
threshold as a result), but nevertheless
achieve the benefits intended for
extraordinarily large positions by
aggregating those individual trades. In
other words, such entities would be able
to evade the exchange-trading and
reporting obligations that are integral to
price transparency. The Commission
seeks comment on these and any other
benefits that may result from this
proposal.
Section 15(a) Factors
(1) Protection of market participants
and the public.
The Commission believes that the
proposed rule would protect market
participants from unfair practices by
preventing trades that do not meet the
minimum block trade threshold from
enjoying extended reporting times. This
requirement would mean that trades
that are not extraordinarily large, and
hence, that do not need extra reporting
time would not qualify as block trades
and would be made public as soon as
technologically practicable. Hence, the
proposed rule would increase
transparency of non-block transactions,
and thus, would protect market
participants by informing their trading
determinations through increased
transparency and price discovery.
(2) Efficiency, competitiveness, and
financial integrity of the futures
markets.
The Commission expects the
prohibition of aggregation of trades to
improve efficiency and competitiveness
in the markets by allowing more trades
to be reported without the time delay
that is applied to qualifying block
trades. This requirement would mean
that a higher number of trades would be
eligible for real time reporting, and that
43 WMBA
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would increase market transparency as
well as promote competition in the
swap markets. The rule also would
protect the integrity of the derivatives
market by ensuring that smaller trades,
which do not qualify as block
transactions, are executed on the trading
system where there is pre-trade and
post-trade transparency.
The Commission also recognizes that
advisors who are prohibited from
aggregating orders in order to satisfy the
minimum block size or cap size
requirements might not trade at the
most favorable prices in the market,
which might have a negative effect on
the number of such traders in the
market. While the Commission expects
that competition in the market may be
negatively affected as a result of
prohibiting aggregation, the Commission
anticipates that the positive effects of
the proposed rule on competition
outweigh its negative effects.
(3) Price discovery.
The Commission expects the
proposed rule to improve price
discovery in the swap markets by
preventing aggregation of trades and as
a result promoting more trades to be
publicly reported as soon as
technologically practicable. This would
result in enhanced swap market price
discovery, since market participants and
the public would be able to observe realtime pricing information for a higher
percentage of transactions in the market.
In addition, the Commission expects
that the rule would enhance price
discovery by ensuring that smaller
trades, which do not qualify as block
transactions, are executed on the trading
system where there is pre-trade and
post-trade transparency and where
buyers and sellers may make informed
trading decisions based on the market’s
transparency.
(4) Sound risk management practices.
The Commission anticipates that the
proposed criteria, if adopted, would
likely result in enhanced price
discovery as discussed above. With
better and more accurate data, swap
market participants would likely be
better able to measure and manage risk.
The Commission proposes that if the
prohibition of aggregation of trades was
not adopted, swap transactions may not
be reported to an SDR ‘‘as soon as
technologically practicable.’’ The
Commission also proposes that by
preventing this delay in the reporting
period of a swap transaction to an SDR,
the Commission will possess the
information it needs to monitor the
transfer and positions of risk among
counterparties in the swaps market.
(5) Other public interest
considerations.
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The Commission has not identified
any other public interest considerations
regarding the proposed rule.
2. Costs and Benefits Relevant to
Proposed § 43.6(i)—Eligible Block Trade
Parties
Costs
Proposed § 43.6(i)(1) requires that
parties to a block trade must be eligible
contract participants, as defined under
the CEA and Commission regulations,
except that a DCM may allow: (i) A CTA
registered pursuant to Section 4n of the
Act or exempt from registration under
the Act, or a principal thereof, and who
has discretionary trading authority or
directs client accounts, (ii) an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of the
Commission’s regulations, or (iii) a
foreign person who performs a similar
role or function to the persons described
in (i) or (ii) and is subject as such to
foreign regulation, to transact block
trades for customers who are not eligible
contract participants, if such CTA,
investment adviser or foreign person has
more than $25,000,000 in total AUM.
This proposed rule codifies, in part, the
requirement under Section 2(e) of the
CEA, which requires that ‘‘[i]t shall be
unlawful for any person, other than an
eligible contract participant, to enter
into a swap unless the swap is entered
into on, or subject to the rules of * * *
a designated contract market.’’ In
addition, the provisions allowing
certain entities (as described in this
release) to enter into block trades on
behalf of their non-ECP customers on
DCMs is substantially similar to the
existing DCM rules that allow block
trading in the futures market.
Proposed § 43.6(i)(2) further provides
that no person may conduct a block
trade on behalf of a customer unless the
person receives prior written instruction
or consent to do so. The proposed rule
further provides that such instruction or
consent may be provided in the power
of attorney or similar document by
which the customer provides the person
with discretionary trading authority or
the authority to direct the trading in its
account. The Commission is of the view
that the cost associated with the written
instruction or consent is minimal. The
Commission estimates that a prior
written instruction or consent
requirement would impose an initial
non-recurring burden of approximately
2 personnel hours at an approximate
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cost of $155.54 for each CTA,
investment adviser or foreign person.44
Benefits
The Commission has determined that
the benefits of proposed § 43.6(i) are
significant. The proposed rule, if
adopted, would allow customers who
are not ECPs to engage in block trade
transactions through certain entities as
outlined in the rule. By permitting
certain CTAs, investment advisers and
foreign persons to transact swaps on
behalf of non-ECP customers, the rule
provides important safeguards for nonECPs when entering into block
transactions in swaps. The Commission
believes that access to block trades
would allow customers who are not
ECPs to diversify their risk or improve
their investment strategies. In addition,
the Commission also anticipates the
access to block trades for non-ECPs to
increase their participation in swap
markets, increasing liquidity in the
markets for everyone.
Section 15(a) Factors
(1) Protection of market participants
and the public.
The Commission does not anticipate
the proposed rule to have any
significant effect on the protection of
market participants and the public.
(2) Efficiency, competitiveness, and
financial integrity of the futures
markets.
The Commission expects the
proposed rule to improve
competitiveness in the markets by
allowing customers who are not ECPs to
have access to block trades through
certain CTAs, investment advisers and
44 Using wage rate estimates based on salary
information for the securities industry compiled by
the Securities Industry and Financial Markets
Association (‘‘SIFMA’’), the estimate is calculated
as follows: Compliance manager at 2 hours. A
senior programmer’s adjusted hourly wage is
$77.77, estimated using the following calculations:
(1) [(2009 salary + bonus) * (salary growth per
professional type, 2009–2010)] = Estimated 2010
total annual compensation. The most recent data
provided by the SIFMA report describe the 2009
total compensation (salary + bonus) by professional
type, the growth in base salary from 2009 to 2010
for each professional type, and the 2010 base salary
for each professional type; thus, the Commission
estimated the 2010 total compensation for each
professional type, but, in the absence of similarly
granular data on salary growth or compensation
from 2010 to 2011 and beyond, did not estimate
dollar costs beyond 2010.
(2) [(Estimated 2010 total annual compensation)/
(1,800 annual work hours)] = Hourly wage per
professional type.
(3) [(Hourly wage) * (Adjustment factor for
overhead and other benefits, which the Commission
has estimated to be 1.3)] = Adjusted hourly wage
per professional type.
(4) [(Adjusted hourly wage) * (Estimated hour
burden for compliance)] = Dollar cost of compliance
for each hour burden estimate per professional type.
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foreign persons. The Commission
anticipates an increase in
competitiveness due to the fact that
more customers would use the swap
markets as a result of this rule. An
increased participation in a market
would also serve to increase liquidity,
as well as competition, in that market.
(3) Price discovery.
The Commission does not anticipate
the proposed rule to have any
significant effect on price discovery in
the market.
(4) Sound risk management practices.
The Commission does not anticipate
the proposed rule to have any
significant effect on risk management
practices.
(5) Other public interest
considerations.
The Commission has not identified
any other public interest considerations
regarding the proposed rule.
The Commission requests comments
on its cost and benefit considerations
with respect to the proposed rule, and
any alternatives. The Commission
specifically requests that commenters
provide data from which the
Commission may quantify the costs or
benefits of the proposed rule.
IV. Rule Text
List of Subjects in 17 CFR Part 43
Large notional off-facility trades,
Block trades, Appropriate minimum
block sizes, Real-time public reporting,
Public dissemination, Cap size,
Anonymity, Swap category.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR part 43 as set forth below:
PART 43—[AMENDED]
1. The authority citation for part 43
shall continue to read as follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a,
amended by Pub. L. 111–203, 124 Stat. 1376
(2010).
2. Add section 43.6(h)(6) to part 43 to
read as follows:
emcdonald on DSK67QTVN1PROD with PROPOSALS
§ 43.6(h)(6)
Aggregation.
Except as otherwise stated in this
paragraph, the aggregation of orders for
different accounts in order to satisfy the
minimum block trade size or the cap
size requirement is prohibited.
Aggregation is permissible on a
designated contract market or swap
execution facility if done by a person
who:
(i)(A) Is a commodity trading advisor
registered pursuant to Section 4n of the
Act, or exempt from registration under
the Act, or a principal thereof, who has
VerDate Mar<15>2010
14:15 Jun 26, 2012
Jkt 226001
discretionary trading authority or
directs client accounts,
(B) Is an investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of this chapter,
or
(C) Is a foreign person who performs
a similar role or function as the persons
described in subparagraphs (A) or (B)
and is subject as such to foreign
regulation; and,
(ii) Has more than $25,000,000 in total
assets under management.
3. Add Section 43.6(i) to part 43 to
read as follows:
§ 43.6(i)
Eligible Block Trade Parties.
(1) Parties to a block trade must be
‘‘eligible contract participants,’’ as
defined in Section 1a(18) of the Act and
the Commission’s regulations. However,
a designated contract market may allow:
(i) A commodity trading advisor
registered pursuant to Section 4n of the
Act, or exempt from registration under
the Act, or a principal thereof, who has
discretionary trading authority or
directs client accounts, (ii) an
investment adviser who has
discretionary trading authority or
directs client accounts and satisfies the
criteria of § 4.7(a)(2)(v) of this chapter,
or (iii) a foreign person who performs a
similar role or function as the persons
described in (i) or (ii) of this paragraph
and is subject as such to foreign
regulation, to transact block trades for
customers who are not eligible contract
participants if such commodity trading
advisor, investment adviser or foreign
person has more than $25,000,000 in
total assets under management.
(2) A person transacting a block trade
on behalf of a customer must receive
prior written instruction or consent
from the customer to do so. Such
instruction or consent may be provided
in the power of attorney or similar
document by which the customer
provides the person with discretionary
trading authority or the authority to
direct the trading in its account.
On this matter, Chairman Gensler and
Commissioners Sommers, Chilton, O’Malia
and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
[FR Doc. 2012–15481 Filed 6–26–12; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2012–0215]
RIN 1625–AA08
Special Local Regulation, Underwater
Music Festival, Carr Inlet, Cutts Island,
WA
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
Appendix to Rules Prohibiting the
Aggregation of Orders To Satisfy
Minimum Block Sizes or Cap Size
Requirements, and Establishing
Eligibility Requirements for Parties to
Block Trades
The Coast Guard proposes to
establish a Special Local Regulation
(SLR) around Cutts Island located in
Carr Inlet, WA. This SLR is necessary to
ensure the safety of the maritime public
during the Underwater Music Festival
and would do so by establishing speed
and towing restrictions, limiting the
number of vessels permitted to raft
together and limiting the distance
persons are permitted to swim from
vessels or shore.
DATES: Comments and related material
must be received by the Coast Guard on
or before July 17, 2012.
ADDRESSES: You may submit comments
identified by docket number USCG–
2012–0215 using any one of the
following methods:
(1) Federal eRulemaking Portal:
https://www.regulations.gov.
(2) Fax: 202–493–2251.
(3) Mail: Docket Management Facility
(M–30), U.S. Department of
Transportation, West Building Ground
Floor, Room W12–140, 1200 New Jersey
Avenue SE., Washington, DC 20590–
0001.
(4) Hand delivery: Same as mail
address above, between 9 a.m. and
5 p.m., Monday through Friday, except
Federal holidays. The telephone number
is 202–366–9329.
To avoid duplication, please use only
one of these four methods. See the
‘‘Public Participation and Request for
Comments’’ portion of the
SUPPLEMENTARY INFORMATION section
below for instructions on submitting
comments.
Commission Voting Summary
FOR FURTHER INFORMATION CONTACT:
Issued in Washington, DC, on June 20,
2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not
appear in the Code of Federal Regulations.
PO 00000
Frm 00019
Fmt 4702
Sfmt 4702
SUMMARY:
If
you have questions on this proposed
rule, call or email ENS Anthony P.
E:\FR\FM\27JNP1.SGM
27JNP1
]]>Agencies
[Federal Register Volume 77, Number 124 (Wednesday, June 27, 2012)]
[Proposed Rules]
[Pages 38229-38236]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15481]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 43
RIN 3038-AD84
Rules Prohibiting the Aggregation of Orders To Satisfy Minimum
Block Sizes or Cap Size Requirements, and Establishing Eligibility
Requirements for Parties to Block Trades
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
issuing a notice of proposed rulemaking to add certain provisions to
part 43 of the Commission's regulations pertaining to block trades in
swap contracts. The provisions would: (i) Prohibit the aggregation of
orders for different trading accounts in order to satisfy the minimum
block size or cap size requirements, except for orders aggregated by
certain commodity trading advisors (``CTAs''), investment advisers and
foreign persons (as described in this release), if such person has more
than $25,000,000 in total assets under management (``AUM''); (ii)
provide that parties to a block trade must individually qualify as
eligible contract participants (``ECPs''), except where a designated
contract market allows certain CTAs, investment advisers and foreign
persons (as described in this release), to transact block trades for
customers who are not ECPs, if such CTA, investment adviser or foreign
person has more than $25,000,000 in total AUM; and (iii) require that
persons transacting block trades on behalf of customers must receive
prior written instruction or consent from the customer to do so.
DATES: Comments must be received on or before July 27, 2012.
ADDRESSES: You may submit comments, identified by RIN number [TBD], by
any of the following methods:
The agency's Web site: at https://comments.cftc.gov. Follow
the instructions for submitting comments through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that you believe is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec. 145.9 of the Commission's regulations.\1\
---------------------------------------------------------------------------
\1\ See 17 CFR 145.9.
---------------------------------------------------------------------------
Commenters to this notice of proposed rulemaking are requested to
refrain from providing comments with respect to the provisions in part
43 of the Commission's regulations that are beyond the scope of this
notice of proposed rulemaking. The Commission only plans to address
those comments that are responsive to the policies, merits and
substance of the proposed provisions set forth in this notice of
proposed rulemaking.
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 www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director,
Division of Market Oversight, 202-418-5453, nmarkowitz@cftc.gov; Nadia
Zakir, Special Counsel, Division of Market Oversight, 202-418-5720,
nzakir@cftc.gov; Laurie Gussow, Attorney-Advisor, 202-418-7623,
lgussow@cftc.gov; George Pullen, Economist, Division of Market
Oversight, 202-418-6709, gpullen@cftc.gov; Esen Onur, Economist, Office
of the Chief Economist, 202-418-6146, eonur@cftc.gov; or Herminio
Castro,
[[Page 38230]]
Counsel, Office of General Counsel, 202-418-6705, hcastro@cftc.gov,
Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA''
or ``Act'') \4\ to establish a comprehensive, new regulatory framework
for swaps and security-based swaps. This legislation was enacted to
reduce risk, increase transparency and promote market integrity within
the financial system by, inter alia: (1) Providing for the registration
and comprehensive regulation of swap dealers (``SDs'') and major swap
participants (``MSPs''); (2) imposing mandatory clearing and trade
execution requirements on standardized derivative products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the Commission's rulemaking and enforcement authorities with
respect to, among others, all registered entities and intermediaries
subject to the Commission's oversight.
---------------------------------------------------------------------------
\2\ See Public Law 111-203, 124 Stat. 1376 (2010).
\3\ The short title of Title VII of the Dodd-Frank Act is the
``Wall Street Transparency and Accountability Act of 2010.''
\4\ See 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Section 727 of the Dodd-Frank Act enacted section 2(a)(13) of the
CEA, which authorizes and requires the Commission to promulgate
regulations for the real-time public reporting of swap transaction and
pricing data.\5\ Among other things, sections 2(a)(13)(E)(ii) and (iii)
of the CEA respectively require the Commission to prescribe regulations
specifying ``the criteria for determining what constitutes a large
notional swap transaction (block trade) for particular markets and
contracts'' and ``the appropriate time delay for reporting large
notional swap transactions (block trades) to the public.'' \6\
---------------------------------------------------------------------------
\5\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).
\6\ See CEA sections 2(a)(13)(E)(ii) and (iii).
---------------------------------------------------------------------------
B. The Initial Proposal
In order to implement the various statutory requirements imposed
under section 2(a)(13) of the CEA, the Commission published an initial
notice of proposed rulemaking on December 7, 2010 (the ``Initial
Proposal'').\7\ As relevant to this notice of proposed rulemaking, the
Initial Proposal proposed: (1) Definitions for the terms ``large
notional off-facility swap'' and ``block trade''; \8\ (2) a method for
determining the appropriate minimum block sizes for large notional off-
facility swaps and block trades; \9\ and (3) a framework for timely
reporting of such transactions and trades.\10\
---------------------------------------------------------------------------
\7\ See Real-Time Public Reporting of Swap Transaction Data, 75
FR 76,139 (Dec. 7, 2010), as corrected in Real-Time Public Reporting
of Swap Transaction Data Correction, 75 FR 76,930 (Dec. 10, 2010)
(``Initial Proposal'').
\8\ The Initial Proposal defined the term ``large notional
swap''. See proposed Sec. 43.2(l), 75 FR 76,171. The Adopting
Release finalized the term as ``large notional off-facility swap'',
to denote, in relevant part, that the swap is not executed pursuant
to SEF or DCM rules and procedures. See Sec. 43.2, 77 FR 1182, 1244
(Jan. 9, 2012) (``Adopting Release''). Specifically, the Adopting
Release defined the term as an ``off-facility swap that has a
notional or principal amount at or above the appropriate minimum
block size applicable to such publicly reportable swap transaction
and is not a block trade as defined in Sec. 43.2 of the
Commission's regulations.'' Id.
The final definition of ``block trade'' in the Adopting Release
is similar to how that term was defined in the Initial Proposal. See
proposed Sec. 43.2(f), 75 FR 76,171. The Adopting Release defines
the term ``block trade'' as a publicly reportable swap transaction
that: ``(1) [i]nvolves a swap that is listed on a [SEF or DCM]; (2)
[o]ccurs away from the [SEF's or DCM's] trading system or platform
and is executed pursuant to the [SEF's or DCM's] rules and
procedures; (3) has a notional or principal amount at or above the
appropriate minimum block size applicable to such swap; and (4) [i]s
reported subject to the rules and procedures of the [SEF or DCM] and
the rules described in [part 43], including the appropriate time
delay requirements set forth in Sec. 43.5.'' See Sec. 43.2, 77 FR
1,243.
\9\ See proposed Sec. 43.5, 75 FR 76174-76.
\10\ Proposed Sec. 43.5(k)(1) in the Initial Proposal provided
that the time delay for the public dissemination of data for a block
trade or large notional off-facility swap shall commence at the time
of execution of such trade or swap. See 75 FR 76,176. Proposed Sec.
43.5(k)(2) provided that the time delay for standardized block
trades and large notional off-facility swaps (i.e., swaps that fall
under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from
the time of execution. Id. The Initial Proposal did not provide
specific time delays for large notional off-facility swaps (i.e.,
swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,
proposed Sec. 43.5(k)(3) provided that such swaps shall be reported
subject to a time delay that may be prescribed by the Commission.
Id.
The Adopting Release established time delays for the public
dissemination of block trades and large notional off-facility swaps
in Sec. 43.5. See 77 FR 1247-49.
---------------------------------------------------------------------------
Among other requirements contained in the Initial Proposal,
proposed Sec. 43.5(b)(1) provided that eligible parties to a block
trade (or large notional swap) must be ECPs,\11\ except that a
designated contract market (``DCM'') may allow a CTA acting in an asset
managerial capacity and registered pursuant to Section 4n of the Act,
or a principal thereof, including any investment adviser who satisfies
the criteria of Sec. 4.7(a)(2)(v), or a foreign person performing a
similar role or function and subject as such to foreign regulation, to
transact block trades for customers who are not eligible contract
participants (``non-ECPS''), if such CTA, investment adviser or foreign
person has more than $25,000,000 in total AUM. The proposed rule
further required that a person transacting a block trade on behalf of a
customer must receive written instruction or prior consent from the
customer to do so.
---------------------------------------------------------------------------
\11\ See CEA Section 1a(18).
---------------------------------------------------------------------------
Furthermore, proposed Sec. 43.5(m) of the Initial Proposal
prohibited the aggregation of orders for different trading accounts in
order to satisfy the minimum block size requirement, except if done on
a DCM by a CTA acting in an asset managerial capacity and registered
pursuant to Section 4n of the Act, or a principal thereof, including
any investment adviser who satisfies the criteria of Sec.
4.7(a)(2)(v), or a foreign person performing a similar role or function
and subject as such to foreign regulation, if such CTA, investment
adviser or foreign person has more than $25,000,000 in total AUM.
The Commission issued the Initial Proposal for public comment for a
period of 60 days, but later reopened the comment period for an
additional 45 days.\12\
---------------------------------------------------------------------------
\12\ The initial comment period for the Initial Proposal closed
on February 7, 2011. The comment periods for most proposed
rulemakings implementing the Dodd-Frank Act--including the proposed
part 43 rules--subsequently were reopened for the period of April 27
through June 2, 2011.
---------------------------------------------------------------------------
1. Comments in Response to the Initial Proposal
The Commission received four comment letters in response to the
proposed aggregation rule. The American Benefits Council and the
Committee on the Investment of Employee Benefit Assets stated that
qualified investment advisers who are not CTAs should be able to
aggregate block trade orders for different trading accounts.\13\
Tradeweb commented that the CTAs that trade on SEFs should also be
permitted to aggregate trades of behalf of their customers for purposes
of block trades.\14\ J.P. Morgan commented that the proposed rule
appears to reflect a concern that private negotiation offers less
protection to unsophisticated
[[Page 38231]]
investors than trading through the central market, and that since all
entities that transact in the OTC market already must be ECPs, the
analogous concern about customer protection in the swaps market is
already addressed.\15\ In related comments, the Wholesale Market
Brokers Association (Americas) (``WMBA'') commented that ``work-up'' or
``join-the-trade'' periods be permitted and recognized to satisfy the
block trade requirement.\16\
---------------------------------------------------------------------------
\13\ The American Benefits Council and the Committee on the
Investment of Employee Benefit Assets comment letter at 3 (Feb. 7,
2011). The comment letter specifically requested that the rule be
revised such that the words ``including any'' from the second
sentence are deleted and replaced with the word ``an.''
\14\ Tradeweb comment letter at 5 (Feb. 7, 2011).
\15\ J.P. Morgan comment letter at 9, n. 13 (Jan. 12, 2011).
\16\ WMBA comment letter at 4-5 (Feb. 7, 2011) (commenting that
``the public dissemination of incremental activity that would
otherwise constitute a block trade could jeopardize identification
of counterparties and materially reduce market liquidity.'')
---------------------------------------------------------------------------
C. The Adopting Release and Further Proposal
On January 9, 2012, the Commission issued a notice of final
rulemaking \17\ (``Adopting Release'') that finalized several
provisions that were proposed in the Initial Proposal pertaining to,
among other things, the reporting, public dissemination and
recordkeeping requirements applicable to certain swap transactions.\18\
---------------------------------------------------------------------------
\17\ Real-Time Public Reporting of Swap Transaction Data, 77 FR
1,182 (Jan. 9, 2012).
\18\ Commenters are directed to the Adopting Release for a
discussion of the issues addressed therein. See id.
---------------------------------------------------------------------------
Based on the public comments received in response to the Initial
Proposal, in the Adopting Release the Commission agreed that additional
analysis was necessary prior to issuance of final rules for appropriate
minimum block sizes, and accordingly determined not to make final its
proposed Sec. 43.5 rules specifying the criteria for determining block
trade sizes. Instead, the Commission intended to issue a separate
notice of proposed rulemaking that would specifically address the
appropriate criteria for determining appropriate minimum block trade
sizes in light of data and comments received.\19\ On March 15, 2012,
the Commission decided to further propose (``Further Proposal'')
certain other block trade provisions that were included with the
Initial Proposal.\20\
---------------------------------------------------------------------------
\19\ See id. at 1,185.
\20\ Commenters are directed to the Further Proposal for a
discussion of the issues addressed therein. See ``Procedures to
Establish Appropriate Minimum Block Sizes for Large Notional Off-
Facility Swaps and Block Trades,'' 77 FR 15,460 (Mar. 15, 2012). The
comment period for the Further Proposal ended on May 14, 2012.
---------------------------------------------------------------------------
After it issued the Further Proposal, the Commission determined
that the aggregation provision and the provision that specified the
eligible parties to a block trade, including the proposed requirement
that persons transacting block trades on behalf of customers must
receive prior written instruction or consent from the customer to do
so, were inadvertently omitted from the Further Proposal. These
provisions are the subject of this notice of proposed rulemaking.
II. Notice of Proposed Rulemaking
A. Proposed Sec. 43.6(h)(6)--Aggregation
Proposed Sec. 43.6(h)(6) would prohibit the aggregation of orders
for different trading accounts in order to satisfy the minimum block
size or cap size requirements, except that aggregation is permissible
if done on a DCM or SEF by a person who: (i)(A) is a CTA registered
pursuant to Section 4n of the Act or exempt from such registration
under the Act, or a principal thereof, and who has discretionary
trading authority or directs client accounts, (B) is an investment
adviser who has discretionary trading authority or directs client
accounts and satisfies the criteria of Sec. 4.7(a)(2)(v) of this
chapter, or (C) is a foreign person who performs a similar role or
function as the persons described in (A) or (B) and is subject as such
to foreign regulation, and (ii) has more than $25,000,000 in total AUM.
The prohibition of aggregation of orders for different trading
accounts in order to meet the minimum block size or cap size
requirements is an integral element in ensuring the integrity of block
trading principles, and in preserving the basis for the anonymity
associated with cap sizes. As defined in the Adopting Release, a block
trade is a publicly reportable transaction that: (1) Involves a swap
that is listed on a registered SEF or DCM; (2) occurs away from the
registered SEF's or DCM's trading system or platform (and is executed
pursuant to the rules of such SEF or DCM); (3) has a notional or
principal amount at or above the appropriate minimum block size
applicable to such swap; and (4) is reported subject to the rules and
procedures of the SEF or DCM and Commission regulations, including the
appropriate time delay requirements.\21\ While block transactions are
conducted pursuant to the rules of a SEF or DCM, by definition these
transactions occur away from the SEF's or DCM's trading system or
platform, where there is no pre-trade transparency. If too many trades
were permitted to be aggregated and thus executable as blocks, the CEA
objectives of increased transparency and price discovery for swaps
trading could be undermined.\22\ By prohibiting aggregation of orders
for different accounts to meet the minimum block size requirement, the
proposed rule would protect the principles of block trading, and would
help to prevent potential circumvention of exchange-trading and of the
real-time reporting obligations associated with non-block transactions.
By presumption, the aggregation of orders for different accounts to
meet the minimum block size threshold would be prohibited.
---------------------------------------------------------------------------
\21\ See 77 FR 1,243.
\22\ J.P. Morgan Comment letter at 5 (Jan. 12, 2011).
---------------------------------------------------------------------------
Indeed, in the futures market, all block trade rules approved by
the Commission have included an aggregation prohibition (with the
discrete exception of block trades done through certain CTAs).
Accordingly, in the futures market, where market participants have
engaged in block transactions for years, DCMs that permit block trading
have rules that prohibit the aggregation of orders for different
trading accounts to meet the minimum block size requirement.\23\
---------------------------------------------------------------------------
\23\ The following DCMs have rules permitting block trading:
Cantor Futures Exchange, L.P. (rule IV-16); CBOE Futures Exchange
LLC (rule 415); Chicago Board of Trade (rule 526); CME (rule 526);
ELX Futures, L.P. (rule IV-16); Eris Exchange, LLC (rule 601); Green
Exchange, LLC (rule 602); ICE Futures (rule 4.31); Nasdaq OMX
Futures Exchange, Inc. (rule E23); New York Mercantile Exchange,
Inc. (rule 526); NYSE Liffe US, LLC (rule 423); and OneChicago LLC
Futures Exchange (rule 417). Each of the aforementioned DCMs also
have rules prohibiting aggregation of orders to meet minimum block
transaction size: Cantor Futures Exchange, L.P. (rule IV-16(K));
CBOE Futures Exchange LLC (rule 415(a)(i)); Chicago Board of Trade
(rule 526A); CME (rule 526A); ELX Futures, L.P. (rule IV-16(a));
Eris Exchange, LLC (rule 601(b)(1)); Green Exchange, LLC (rule
602(a)); ICE Futures (rule 4.31(a)(ii)(B)); Nasdaq OMX Futures
Exchange, Inc. (rule E23(d)); New York Mercantile Exchange, Inc.
(rule 526A); NYSE Liffe US, LLC (rule 423(a)(1)); and OneChicago LLC
Futures Exchange (rule 418(a)(i)).
---------------------------------------------------------------------------
As proposed in this release, the rule also would prohibit
aggregation in order to meet the cap size requirements. A cap size is
defined in the Further Proposal as the maximum notional or principal
amount of a publicly reportable swap transaction that is publicly
disseminated.\24\ A transaction that meets the cap size requirement
would be eligible to mask the total size of the transaction if it
equals or exceeds the cap size for a given swap category.\25\ The
Commission adopted cap sizes in order to help to protect the anonymity
of counterparties' market positions and business transactions, and to
mitigate the potential impact that real-time public reporting of
extraordinarily large positions could have in reducing market
[[Page 38232]]
liquidity.\26\ By preventing aggregation of orders to meet the cap size
requirement, the proposed rule will help to ensure that cap sizes are
used for the specific purpose for which they are intended
(extraordinarily large positions), and will help to prevent potential
circumvention of the real-time reporting obligations.
---------------------------------------------------------------------------
\24\ 77 FR 15,516.
\25\ 77 FR 15,489-90.
\26\ Id.
---------------------------------------------------------------------------
The proposed rule further provides that aggregation of orders for
different trading accounts for purposes of the block size or cap size
requirements may be permitted on a DCM or SEF if done by a person who:
(i)(A) Is a CTA who is registered pursuant to Section 4n of the Act or
is exempt from registration under the Act, or a principal thereof, and
has discretionary trading authority or directs client accounts, (B) is
an investment adviser who has discretionary trading authority or
directs client accounts and satisfies the criteria of Sec.
4.7(a)(2)(v) of the Commission's regulations, or (C) is a foreign
person who performs a similar role or function to the persons described
in (A) or (B) and is subject as such to foreign regulation, and (ii)
has more than $25,000,000 in total AUM. As noted above, DCMs that
permit block trading in connection with futures contracts currently
prohibit aggregation of orders to meet the block size requirement, and
a majority of these DCMs have substantially similar rules that allow
aggregation in such context if done by certain CTAs, investment
advisers and foreign persons.\27\
---------------------------------------------------------------------------
\27\ A majority of DCMs currently maintain similar rules
permitting certain CTAs, investment advisors and foreign persons to
aggregate. See, e.g., CME Rulebook, rule 526 (providing an exception
for block transactions by permitting aggregation if done by a CTA
registered or exempt from registration under the Act, including
without limitation, any investment adviser registered or exempt from
registration under the Investment Adviser's Act of 1940 * * *
provided that such advisers have total AUM exceeding $25 million and
the block trade is suitable for the customers of such advisors. See
also, CBOE Futures Exchange LLC (rule 415(a(i)); Chicago Board of
Trade (rule 526I); CME (rule 526I); ELX Futures, L.P. (rule IV-
16(a)); Eris Exchange, LLC (rule 601(b)(10)); Green Exchange, LLC
(rule 602(j)); ICE Futures ((rule 4.31(a)(ii)(B)); Nasdaq OMX
Futures Exchange, Inc., (rule E23); New York Mercantile Exchange,
Inc. (rule 526I); NYSE Liffe US, LLC (rule 423(a)(i)); and
OneChicago LLC Futures Exchange (rule 417(a)(i)).
---------------------------------------------------------------------------
The Commission is seeking comments on whether this exception to the
prohibition of aggregation of orders is appropriate in the context of
the swaps market. The Commission seeks comments on whether such an
exception should be available to other categories of Commission
registrants, and if so, why? Additionally, the Commission seeks
comments on whether the $25 million AUM requirement for the specified
account controllers is appropriate in the context of block transactions
for swaps? Further, the Commission seeks comments on whether the $25
million AUM requirement should include only swaps assets, or be based
per asset class, or be different for the five asset classes of swaps?
In addition to these specific questions, the Commission requests
comments on all aspects of this notice of proposed rulemaking.
B. Proposed Sec. 43.6(i)--Eligible Block Trade Parties
The Commission is also proposing under new Sec. 43.6(i)(1) a
provision that describes the eligible parties to a block trade. The
proposed provision provides that parties to a block trade must be
``eligible contract participants,'' as that term is defined under
Section 1a(18) of the CEA and the Commission's regulations. The
proposed rule includes an exception to the ECP requirement by providing
that a DCM may allow: (i) A CTA registered pursuant to Section 4n of
the Act, or exempt from registration under the Act, or a principal
thereof, who has discretionary trading authority or directs client
accounts, (ii) an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(2)(v) of the Commission's regulations, or (iii) a foreign
person who performs a similar role or function to the persons described
in (i) or (ii) and is subject as such to foreign regulation, to
transact block trades for customers who are not ECPs, if such CTA,
investment adviser or foreign person has more than $25,000,000 in total
AUM.\28\
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\28\ Parties that are non-ECPs may not enter into any swap
transactions, including blocks, except on or subject to the rules of
a DCM. Specifically, section 2(e) of the CEA provides that ``[i]t
shall be unlawful for any person, other than an eligible contract
participant, to enter into a swap unless the swap is entered into
on, or subject to the rules of, a board of trade designated as a
contract market under section 5.'' 7 U.S.C. 2(e).
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In the current futures market, all DCMs require that parties to
block trades must be ECPs. A majority of these DCMs permit certain
CTAs, investment advisers and foreign persons to transact a block trade
on behalf of their non-ECP customers. The proposed rule, including the
limited exception, is currently reflected in the rulebooks of numerous
DCMs that permit block trading in the futures market.\29\
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\29\ Most DCMs that permit block trading require that parties to
the block trade must be ECPs with a limited exception for CTAs. The
following DCMs have rules excepting CTAs from the requirement that
parties to a block trade must be ECPs: CBOE Futures Exchange LLC
(rule 415(a)(ii)); Chicago Board of Trade (rule 526I); CME (rule
526I); ELX Futures, L.P. (rule IV-16(c)); Eris Exchange, LLC (rule
601(b)(10)); Green Exchange, LLC (rule 602(a) and (j)); ICE Futures
(rule 4.31(a)(i)); Nasdaq OMX Futures Exchange, Inc., (rule E23(d));
New York Mercantile Exchange, Inc. (rule 526I); NYSE Liffe US, LLC
(rule 423(a)(ii)); and OneChicago LLC Futures Exchange (rule
417(a)(ii)).
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Proposed Sec. 43.6(i)(2) further provides that a person
transacting a block trade on behalf of a customer must receive prior
written instruction or consent from the customer to do so. Such
instruction or consent may be provided in a power of attorney or
similar document by which the customer provides the person with
discretionary trading authority or the authority to direct the trading
in its account. This rule also is substantially similar to the block
trading rules maintained by existing DCMs.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\30\
The RFA focuses on direct impact to small businesses and not on
indirect impacts on these businesses, which may be tenuous and
difficult to discern.\31\ The CFTC believes that this proposal would
not have a significant economic impact on a substantial number of small
entities.
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\30\ See 5 U.S.C. 601 et seq.
\31\ See Whitman v. Am. Trucking Ass'ns, 531 U.S. 457 (2001);
Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985);
Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).
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1. Effect of the Proposed Rulemaking
This release proposes a rule that would prohibit the aggregation of
orders for different trading accounts in order to satisfy the minimum
block size, or cap size requirement. The proposed rule further provides
that aggregation is permissible if done on a DCM or SEF by a person
who: (i)(A) Is a CTA who is registered pursuant to Section 4n of the
Act, or is exempt from registration under the Act, or a principal
thereof, and has discretionary trading authority or directs client
accounts, (B) is an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(2)(v) of the Commission's regulations, or (C) is a foreign
person who performs a similar role or function to the persons described
in (A) or (B) and is subject as such to foreign regulation, and (ii)
has more than $ 25,000,000 in total AUM.
[[Page 38233]]
This release also proposes under new Sec. 43.6(i)(1) a provision
that describes the eligible parties to a block trade. The proposed rule
provides that parties to a block trade must be ``eligible contract
participants,'' as that term is defined under Section 1a(18) of the CEA
and the Commission's regulations. The proposed rule further provides
that a DCM may allow: (i) A CTA who is registered pursuant to Section
4n of the Act, or exempt from registration under the Act, or a
principal thereof, who has discretionary trading authority or directs
client accounts, (ii) an investment adviser who has discretionary
trading authority or directs client accounts and satisfies the criteria
of Sec. 4.7(a)(2)(v) of the Commission's regulations, or (iii) a
foreign person who performs a similar role or function to the persons
described in (i) or (ii) and is subject as such to foreign regulation,
to transact block trades on behalf of their customers who are not
eligible contract participants, if such CTA, investment adviser or
foreign person has more than $25,000,000 in total AUM.
The CFTC is of the view that this proposal may affect primarily the
following entities: DCMs, futures commission merchants (``FCMs''),
ECPs, swap dealers, major swap participants, certain CTAs, SEFs and
certain investment advisers. The majority of entities impacted by this
proposed rulemaking have been determined by the Commission not to be
small entities. To the extent that a small number of small entities may
be affected by the proposed rules, the Commission believes, as
described below, that the proposed rules would not have a significant
economic impact on a substantial number of such entities.
2. Specific Entities That May Be Small Entities
As noted above, the Commission has previously determined that DCMs,
FCMs, and ECPs are not small entities for purposes of the Regulatory
Flexibility Act.\32\ Certain other entities that may be affected by
this rulemaking, including SDs, MSPs and SEFs, have been certified by
the Commission not to be small entities in other recent rulemakings
implementing the requirements of the Dodd-Frank Act.\33\
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\32\ See, respectively and as indicated, 47 FR 18618, 18619,
Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); and, 66 FR
20740, 20743, Apr. 25, 2001 (ECPs).
\33\ See respectively, Registration of Swap Dealers and Major
Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers
and major swap participants); Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR
63732, 63746 (Oct. 18, 2010) (SEFs); Further Definition of ``Swap,''
``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 76 FR
29818, 29868 (May 23, 2011) (Products).
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a. Entities affected under Sec. 43.6(h)(6): FCMs, CTAs, and
investment advisers.
As noted above, the CFTC previously has determined that registered
FCMs are not small entities for purposes of the RFA based upon, among
other things, the registration requirements that FCMs must meet,
including certain minimum financial requirements that enhance the
protection of customers' segregated funds and protect the financial
condition of FCMs generally.\34\ With respect to certain CTAs \35\ and
investment advisers who would not be permitted to aggregate under the
proposed rule, the Commission notes that the same provisions embodied
in the proposed rule are currently required by DCM rules (under rules
accepted by the Commission) and thus, such entities currently must
comply with the same aggregation prohibition. Thus, all DCMs that
permit aggregation for purposes of the block size requirement, only
permit aggregation by CTAs, investment advisers and foreign persons
that have more than $25,000,000 in total AUM. Accordingly, the
Commission believes that this rule does not impact entities that
heretofore have not been able to aggregate. To the extent that certain
CTAs and investment advisers with less than $25,000,000 AUM are not
currently permitted to aggregate, the Commission's codification of
these rules would not have any significant economic impact on a
substantial number of small entities.
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\34\ See supra note 32.
\35\ The Commission may determine on a case-by-case basis
whether CTAs are not small entities for the purpose of the RFA based
upon a case by case determination. See 47 FR 18618, 18620 (Apr. 30,
1982).
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b. Entities affected under Sec. 43.6(i)(1): Certain non-ECP
participants on DCMs, certain investment advisors, and FCMs.
New Sec. 43.6(i)(1) provides that parties to a block trade must be
``eligible contract participants,'' \36\ as that term is defined under
Section 1a(18) of the CEA and Sec. 1.3 of the Commission's
regulations, except for certain CTAs, investment advisers or foreign
persons performing a similar role or function having more than
$25,000,000 in total AUM, which may transact block trades for customers
who are not ECPs. As indicated above, certain CTAs and investment
advisers that have less than $25,000,000 in AUM would not be covered
under the proposed rule because the provision embodied in the proposed
rule is substantially the same as is currently required by DCM rules
(under rules accepted by the Commission). Similarly, any non-ECP
participants who trade on DCMs also would be prohibited under current
DCM rules from directly entering into a block transaction unless their
qualifying CTA, investment adviser, or foreign person acts on their
behalf. To the extent that these entities are not currently permitted
to aggregate, the Commission's codification of these rules would not
have any significant economic impact on a substantial number of small
entities. Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed rules
will not have a significant economic impact on a substantial number of
small businesses. Nonetheless, the Commission specifically requests
comment on the economic impact that this notice of proposed rulemaking
may have on small entities.
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\36\ ECPs have been determined not to be small entities. See 66
FR 20740, 20743 (Apr. 25, 2001).
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B. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501
et seq. (``PRA'') are, among other things, to minimize the paperwork
burden to the private sector, ensure that any collection of information
by a government agency is put to the greatest possible uses, and
minimize duplicative information collections across the government.\37\
The PRA applies to all information, ``regardless of form or format,''
that a government is ``obtaining, causing to be obtained, [or]
soliciting'' and requires ``disclosure to third parties or the public,
of facts or opinions,'' when the information collection calls for
``answers to identical reporting or recordkeeping requirements imposed,
on ten or more persons[.]'' \38\ The PRA requirements have been
determined to include not only mandatory but also voluntary information
collections, and include both written and oral communications.\39\
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\37\ See 44 U.S.C. 3501.
\38\ 44 U.S.C. 3502.3(A)(i).
\39\ See 5 CFR 1320.3(c)(1).
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The proposed rules would not impose any new recordkeeping or
information collection requirements, or other collections of
information that require approval of the Office of Management and
Budget (``OMB'') under the PRA. The proposed rules are covered by
existing collection requirements and would not change existing
collection
[[Page 38234]]
requirements.\40\ The Commission invites public comment on the accuracy
of its estimate that no additional recordkeeping or information
collection requirements or changes to existing collection requirements
would result from the rules proposed herein.
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\40\ See 77 FR 1182 (Jan. 9, 2012), as amended by the Further
Proposal. OMB has assigned control number 3038-0070 to the existing
collection of information, which is titled ``Part 43--Real-Time
Public Reporting.''
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C. Cost-Benefit Considerations
Section 15(a) of the CEA \41\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
or issuing an order under the CEA. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
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.
---------------------------------------------------------------------------
\41\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The baseline for the Commission's assessment of costs and benefits
attributable to its discretionary actions in this rulemaking is the
costs and benefits that would otherwise exist today (i.e., post-Dodd-
Frank Act enactment) absent this Commission action. The Commission
recognizes that before the Dodd-Frank Act, swap transactions were
executed over-the-counter and were not publicly reported. One of the
implications of the Dodd-Frank Act is that most swap transactions are
required to be publicly disseminated by SDRs as soon as technologically
practicable, unless the notional value of the swap transaction meets
the minimum block trade threshold.\42\ That is the baseline for the
Commission's proposed assessment of costs and benefits in this release.
The Commission proposes that costs and benefits with respect to block
trade thresholds are already accounted for in the Further Proposal and
that this rule only considers the additional costs and benefits
relevant to proposed Sec. 43.6(h)(6) and proposed Sec. 43.6(i).
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\42\ The Commission notes that for an initial interim period, as
outlined in Sec. 43.5 of the Adopting Release, all transactions
will be treated as block trades and will enjoy delayed reporting
temporarily.
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1. Costs and Benefits Relevant to Proposed Sec. 43.6(h)(6)--
Aggregation
The Commission is proposing Sec. 43.6(h)(6) to specify that,
except as otherwise provided, it is impermissible to aggregate orders
for different accounts in order to satisfy minimum block trade or cap
size requirements. The proposed rule further provides that aggregation
may be permitted on a DCM or SEF if done by a person who: (i)(A) Is a
CTA who is registered pursuant to Section 4n of the Act or is exempt
from registration under the Act, or a principal thereof, and has
discretionary trading authority or directs client accounts, (B) is an
investment adviser who has discretionary trading authority or directs
client accounts and satisfies the criteria of Sec. 4.7(a)(2)(v) of the
Commission's regulations, or (C) is a foreign person who performs a
role or function similar to the persons described in (A) or (B) and is
subject as such to foreign regulation, and (ii) has more than
$25,000,000 in total AUM.
Costs
The Commission expects that there will be some incremental cost
attendant to compliance with proposed Sec. 43.6(h)(6), and seeks data
from the public in order to quantify the same. The Commission believes
that the overall benefits to the market of allowing for the aggregation
of orders under certain circumstances (i.e., if done on a designated
contract market or a swap execution facility by certain CTAs,
investment advisers or foreign persons) will mitigate costs of reduced
market liquidity that could result from execution of such transactions
away from the centralized marketplace. The Commission also expects
there to be some advisors who will be prohibited from aggregating
orders for different trading accounts in order to satisfy the minimum
block size, or cap size requirements. The Commission also proposes that
as a result of some advisors not being allowed to aggregate, there
might be some minimal unquantifiable cost associated with a decrease in
competition among such traders in the market. The Commission seeks
comment on these and any other costs that may result from this
proposal. In particular, and as noted above, the WMBA claimed in its
comment letter that ``work-up'' or ``join-the-trade'' periods be
permitted to satisfy the block trade requirements, and that ``the
public dissemination of incremental activity that would otherwise
constitute a block trade could jeopardize identification of
counterparties and materially reduce market liquidity.'' \43\ The
Commission seeks comment on the costs and benefits of the rules
proposed in this release with respect to the specific implications
claimed by WMBA.
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\43\ WMBA comment letter at 4-5 (Feb. 7, 2011).
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Benefits
The proposed rule is designed, in large part, to prevent
circumvention of the exchange trading requirements and of the real-time
reporting obligations associated with non-block transactions. Absent
this prohibition, the goals of the Commission's regulations regarding
block trading, namely increased transaction transparency, better price
discovery and improved competitiveness in the markets as well as better
risk management, could be frustrated by those whose trades individually
fail to meet the minimum block trade threshold (and cap size threshold
as a result), but nevertheless achieve the benefits intended for
extraordinarily large positions by aggregating those individual trades.
In other words, such entities would be able to evade the exchange-
trading and reporting obligations that are integral to price
transparency. The Commission seeks comment on these and any other
benefits that may result from this proposal.
Section 15(a) Factors
(1) Protection of market participants and the public.
The Commission believes that the proposed rule would protect market
participants from unfair practices by preventing trades that do not
meet the minimum block trade threshold from enjoying extended reporting
times. This requirement would mean that trades that are not
extraordinarily large, and hence, that do not need extra reporting time
would not qualify as block trades and would be made public as soon as
technologically practicable. Hence, the proposed rule would increase
transparency of non-block transactions, and thus, would protect market
participants by informing their trading determinations through
increased transparency and price discovery.
(2) Efficiency, competitiveness, and financial integrity of the
futures markets.
The Commission expects the prohibition of aggregation of trades to
improve efficiency and competitiveness in the markets by allowing more
trades to be reported without the time delay that is applied to
qualifying block trades. This requirement would mean that a higher
number of trades would be eligible for real time reporting, and that
[[Page 38235]]
would increase market transparency as well as promote competition in
the swap markets. The rule also would protect the integrity of the
derivatives market by ensuring that smaller trades, which do not
qualify as block transactions, are executed on the trading system where
there is pre-trade and post-trade transparency.
The Commission also recognizes that advisors who are prohibited
from aggregating orders in order to satisfy the minimum block size or
cap size requirements might not trade at the most favorable prices in
the market, which might have a negative effect on the number of such
traders in the market. While the Commission expects that competition in
the market may be negatively affected as a result of prohibiting
aggregation, the Commission anticipates that the positive effects of
the proposed rule on competition outweigh its negative effects.
(3) Price discovery.
The Commission expects the proposed rule to improve price discovery
in the swap markets by preventing aggregation of trades and as a result
promoting more trades to be publicly reported as soon as
technologically practicable. This would result in enhanced swap market
price discovery, since market participants and the public would be able
to observe real-time pricing information for a higher percentage of
transactions in the market. In addition, the Commission expects that
the rule would enhance price discovery by ensuring that smaller trades,
which do not qualify as block transactions, are executed on the trading
system where there is pre-trade and post-trade transparency and where
buyers and sellers may make informed trading decisions based on the
market's transparency.
(4) Sound risk management practices.
The Commission anticipates that the proposed criteria, if adopted,
would likely result in enhanced price discovery as discussed above.
With better and more accurate data, swap market participants would
likely be better able to measure and manage risk. The Commission
proposes that if the prohibition of aggregation of trades was not
adopted, swap transactions may not be reported to an SDR ``as soon as
technologically practicable.'' The Commission also proposes that by
preventing this delay in the reporting period of a swap transaction to
an SDR, the Commission will possess the information it needs to monitor
the transfer and positions of risk among counterparties in the swaps
market.
(5) Other public interest considerations.
The Commission has not identified any other public interest
considerations regarding the proposed rule.
2. Costs and Benefits Relevant to Proposed Sec. 43.6(i)--Eligible
Block Trade Parties
Costs
Proposed Sec. 43.6(i)(1) requires that parties to a block trade
must be eligible contract participants, as defined under the CEA and
Commission regulations, except that a DCM may allow: (i) A CTA
registered pursuant to Section 4n of the Act or exempt from
registration under the Act, or a principal thereof, and who has
discretionary trading authority or directs client accounts, (ii) an
investment adviser who has discretionary trading authority or directs
client accounts and satisfies the criteria of Sec. 4.7(a)(2)(v) of the
Commission's regulations, or (iii) a foreign person who performs a
similar role or function to the persons described in (i) or (ii) and is
subject as such to foreign regulation, to transact block trades for
customers who are not eligible contract participants, if such CTA,
investment adviser or foreign person has more than $25,000,000 in total
AUM. This proposed rule codifies, in part, the requirement under
Section 2(e) of the CEA, which requires that ``[i]t shall be unlawful
for any person, other than an eligible contract participant, to enter
into a swap unless the swap is entered into on, or subject to the rules
of * * * a designated contract market.'' In addition, the provisions
allowing certain entities (as described in this release) to enter into
block trades on behalf of their non-ECP customers on DCMs is
substantially similar to the existing DCM rules that allow block
trading in the futures market.
Proposed Sec. 43.6(i)(2) further provides that no person may
conduct a block trade on behalf of a customer unless the person
receives prior written instruction or consent to do so. The proposed
rule further provides that such instruction or consent may be provided
in the power of attorney or similar document by which the customer
provides the person with discretionary trading authority or the
authority to direct the trading in its account. The Commission is of
the view that the cost associated with the written instruction or
consent is minimal. The Commission estimates that a prior written
instruction or consent requirement would impose an initial non-
recurring burden of approximately 2 personnel hours at an approximate
cost of $155.54 for each CTA, investment adviser or foreign person.\44\
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\44\ Using wage rate estimates based on salary information for
the securities industry compiled by the Securities Industry and
Financial Markets Association (``SIFMA''), the estimate is
calculated as follows: Compliance manager at 2 hours. A senior
programmer's adjusted hourly wage is $77.77, estimated using the
following calculations:
(1) [(2009 salary + bonus) * (salary growth per professional
type, 2009-2010)] = Estimated 2010 total annual compensation. The
most recent data provided by the SIFMA report describe the 2009
total compensation (salary + bonus) by professional type, the growth
in base salary from 2009 to 2010 for each professional type, and the
2010 base salary for each professional type; thus, the Commission
estimated the 2010 total compensation for each professional type,
but, in the absence of similarly granular data on salary growth or
compensation from 2010 to 2011 and beyond, did not estimate dollar
costs beyond 2010.
(2) [(Estimated 2010 total annual compensation)/(1,800 annual
work hours)] = Hourly wage per professional type.
(3) [(Hourly wage) * (Adjustment factor for overhead and other
benefits, which the Commission has estimated to be 1.3)] = Adjusted
hourly wage per professional type.
(4) [(Adjusted hourly wage) * (Estimated hour burden for
compliance)] = Dollar cost of compliance for each hour burden
estimate per professional type.
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Benefits
The Commission has determined that the benefits of proposed Sec.
43.6(i) are significant. The proposed rule, if adopted, would allow
customers who are not ECPs to engage in block trade transactions
through certain entities as outlined in the rule. By permitting certain
CTAs, investment advisers and foreign persons to transact swaps on
behalf of non-ECP customers, the rule provides important safeguards for
non-ECPs when entering into block transactions in swaps. The Commission
believes that access to block trades would allow customers who are not
ECPs to diversify their risk or improve their investment strategies. In
addition, the Commission also anticipates the access to block trades
for non-ECPs to increase their participation in swap markets,
increasing liquidity in the markets for everyone.
Section 15(a) Factors
(1) Protection of market participants and the public.
The Commission does not anticipate the proposed rule to have any
significant effect on the protection of market participants and the
public.
(2) Efficiency, competitiveness, and financial integrity of the
futures markets.
The Commission expects the proposed rule to improve competitiveness
in the markets by allowing customers who are not ECPs to have access to
block trades through certain CTAs, investment advisers and
[[Page 38236]]
foreign persons. The Commission anticipates an increase in
competitiveness due to the fact that more customers would use the swap
markets as a result of this rule. An increased participation in a
market would also serve to increase liquidity, as well as competition,
in that market.
(3) Price discovery.
The Commission does not anticipate the proposed rule to have any
significant effect on price discovery in the market.
(4) Sound risk management practices.
The Commission does not anticipate the proposed rule to have any
significant effect on risk management practices.
(5) Other public interest considerations.
The Commission has not identified any other public interest
considerations regarding the proposed rule.
The Commission requests comments on its cost and benefit
considerations with respect to the proposed rule, and any alternatives.
The Commission specifically requests that commenters provide data from
which the Commission may quantify the costs or benefits of the proposed
rule.
IV. Rule Text
List of Subjects in 17 CFR Part 43
Large notional off-facility trades, Block trades, Appropriate
minimum block sizes, Real-time public reporting, Public dissemination,
Cap size, Anonymity, Swap category.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 43 as set forth below:
PART 43--[AMENDED]
1. The authority citation for part 43 shall continue to read as
follows:
Authority: 7 U.S.C. 2(a), 12a(5) and 24a, amended by Pub. L.
111-203, 124 Stat. 1376 (2010).
2. Add section 43.6(h)(6) to part 43 to read as follows:
Sec. 43.6(h)(6) Aggregation.
Except as otherwise stated in this paragraph, the aggregation of
orders for different accounts in order to satisfy the minimum block
trade size or the cap size requirement is prohibited. Aggregation is
permissible on a designated contract market or swap execution facility
if done by a person who:
(i)(A) Is a commodity trading advisor registered pursuant to
Section 4n of the Act, or exempt from registration under the Act, or a
principal thereof, who has discretionary trading authority or directs
client accounts,
(B) Is an investment adviser who has discretionary trading
authority or directs client accounts and satisfies the criteria of
Sec. 4.7(a)(2)(v) of this chapter, or
(C) Is a foreign person who performs a similar role or function as
the persons described in subparagraphs (A) or (B) and is subject as
such to foreign regulation; and,
(ii) Has more than $25,000,000 in total assets under management.
3. Add Section 43.6(i) to part 43 to read as follows:
Sec. 43.6(i) Eligible Block Trade Parties.
(1) Parties to a block trade must be ``eligible contract
participants,'' as defined in Section 1a(18) of the Act and the
Commission's regulations. However, a designated contract market may
allow: (i) A commodity trading advisor registered pursuant to Section
4n of the Act, or exempt from registration under the Act, or a
principal thereof, who has discretionary trading authority or directs
client accounts, (ii) an investment adviser who has discretionary
trading authority or directs client accounts and satisfies the criteria
of Sec. 4.7(a)(2)(v) of this chapter, or (iii) a foreign person who
performs a similar role or function as the persons described in (i) or
(ii) of this paragraph and is subject as such to foreign regulation, to
transact block trades for customers who are not eligible contract
participants if such commodity trading advisor, investment adviser or
foreign person has more than $25,000,000 in total assets under
management.
(2) A person transacting a block trade on behalf of a customer must
receive prior written instruction or consent from the customer to do
so. Such instruction or consent may be provided in the power of
attorney or similar document by which the customer provides the person
with discretionary trading authority or the authority to direct the
trading in its account.
Issued in Washington, DC, on June 20, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendix to Rules Prohibiting the Aggregation of Orders To Satisfy
Minimum Block Sizes or Cap Size Requirements, and Establishing
Eligibility Requirements for Parties to Block Trades
Commission Voting Summary
Note: The following appendix will not appear in the Code of
Federal Regulations.
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
[FR Doc. 2012-15481 Filed 6-26-12; 8:45 am]
BILLING CODE 6351-01-P
