Clearing Exemption for Swaps Between Certain Affiliated Entities, 50425-50443 [2012-20508]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 77, Number 162 (Tuesday, August 21, 2012)]
[Proposed Rules]
[Pages 50425-50443]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20508]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AD47


Clearing Exemption for Swaps Between Certain Affiliated Entities

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing a rule to exempt swaps between certain 
affiliated entities within a corporate group from the clearing 
requirement (the ``inter-affiliate clearing exemption'' or the 
``proposed exemption'') under Section 2(h)(1)(A) of the Commodity 
Exchange Act (``CEA''). The Commission also is proposing rules that 
detail specific conditions counterparties must satisfy to elect the 
proposed inter-affiliate clearing exemption, as well as reporting 
requirements for affiliated entities that avail themselves of the 
proposed exemption. The Commission has finalized a rule that addresses 
swaps that are subject to the end-user exception. Counterparties to 
inter-affiliate swaps that qualify for the end-user exception would be 
able to elect to not clear swaps pursuant to the end-user exception or 
the proposed rule. The proposed rule does not address swaps that an 
affiliate enters into with a third party that are related to inter-
affiliate swaps that are subject to the end-user exception. The 
Commission intends separately to propose a rule addressing swaps 
between an affiliate and a third party where the swaps are used to 
hedge or mitigate commercial risk arising from inter-affiliate swaps 
for which the end-user exception has been elected.

DATES: Comments must be received on or before September 20, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD47, 
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. ``Inter-affiliate Clearing Exemption'' must 
be in the subject field of responses submitted via email, and clearly 
indicated on written submissions. Comments will be posted as received 
to https://www.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that 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 established procedures in 
CFTC regulation 145.9.\1\
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    \1\ 17 CFR 145.9. Commission regulations may be accessed through 
the Commission's Web site, https://www.cftc.gov.
_____________________________________-

    Throughout this proposed rulemaking, the Commission requests 
comment in response to specific questions. For convenience, the 
Commission has numbered each of these comment requests. The Commission 
asks that, in submitting responses to these requests, commenters 
identify the specific number of each request to which their comments 
are responsive.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of a 
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: Gloria Clement, Assistant General 
Counsel, (202) 418-5122, gclement@cftc.gov, Office of General Counsel; 
Jonathan Lave, Associate Director, Exchange & Data Repository, (202) 
418-5983, jlave@cftc.gov, and Alexis Hall-Bugg, Attorney-Advisor, (202) 
418-6711, ahallbugg@cftc.gov, Division of Market Oversight; Warren 
Gorlick, Supervisory Attorney-Advisor, (202) 418-5195, 
wgorlick@cftc.gov, and Anuradha Banerjee, Attorney-Advisor, (202) 418-
5661, abanerjee@cftc.gov, Office of International Affairs; Theodore 
Kneller, Attorney-Advisor, (202) 418-5727, tkneller@cftc.gov, Division 
of Enforcement; Elizabeth Miller, Attorney-Advisor, (202) 418-5985, 
emiller@cftc.gov, Division of Swap Dealer and Intermediary Oversight; 
Esen Onur, Research Economist, (202) 418-6146, eonur@cftc.gov, Office 
of the Chief Economist; and Jolanta Sterbenz, Counsel, (202) 418-6639, 
jsterbenz@cftc.gov, Office of General Counsel, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.

I. Background

A. Clearing Requirement for Swaps

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'' or ``DFA'').\2\ 
Title VII of the Dodd-Frank Act amended the CEA,\3\ and established a 
new regulatory framework for swaps. The legislation was enacted to 
reduce systemic risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Imposing clearing and trade execution requirements on standardized 
derivative products; (2) creating rigorous recordkeeping and data 
reporting regimes with respect to swaps, including real-time public 
reporting; and (3) enhancing the Commission's rulemaking and 
enforcement authorities over all registered entities, intermediaries, 
and swap counterparties subject to the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \3\ 7 U.S.C. 1 et seq. (2006).
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    Section 723 of the Dodd-Frank Act added section 2(h) to the CEA, 
which establishes a clearing requirement for swaps.\4\ The new section 
makes it unlawful for any person to engage in a swap, if the Commission 
determines such swap is required to be cleared, unless the person 
submits the swap for clearing to a registered derivatives clearing 
organization (``DCO'') (or a DCO that is exempt from registration).\5\ 
The

[[Page 50426]]

CEA, however, permits exceptions and exemptions to the clearing 
requirement.
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    \4\ CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A).
    \5\ See CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A). The CEA's 
clearing requirement states that, ``[i]t shall be unlawful for any 
person to engage in a swap unless that person submits such swap for 
clearing to a derivatives clearing organization that is registered 
under this Act or a derivatives clearing organization that is exempt 
from registration under this Act if the swap is required to be 
cleared.''
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    A person may elect not to clear certain swaps if such person 
qualifies for an exception under CEA section 2(h)(7) and the Commission 
regulations issued in connection therewith (the ``end-user 
exception'').\6\ To summarize the principal components of the end-user 
exception, for a swap to qualify, a counterparty to the swap electing 
the exception must (i) not be a ``financial entity,'' as defined in CEA 
section 2(h)(7)(C)(i) or qualify for an exemption from that defined 
term under section 2(h)(7)(D),\7\ or through a Commission-issued 
exemption under CEA sections 2(h)(7)(C)(ii) \8\ or 4(c) \9\ and (ii) be 
using the swap to hedge or mitigate commercial risk. The Commission has 
determined to exempt certain small banks, savings associations, farm 
credit institutions, and credit unions under section 2(h)(7)(C)(ii) of 
the CEA from the definition of ``financial entity.''\10\
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    \6\ CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A). CEA section 
2(h)(7)(A) provides an elective exception to the clearing 
requirement to any counterparty to a swap that is not a financial 
entity, is using the swap to hedge or mitigate commercial risk, and 
notifies the Commission how it generally meets the financial 
conditions associated with entering into non-cleared swaps. The 
Commission issued the end-user exception in a rulemaking entitled, 
``End-User Exception to the Clearing Requirement for Swaps,'' 77 FR 
42560, July 19, 2012 (final).
    \7\ CEA section 2(h)(7)(D), 7 U.S.C. 2(h)(7)(D).
    \8\ CEA section 2(h)(7)(C)(ii), 7 U.S.C. 2(h)(7)(C)(ii) (``The 
Commission shall consider whether to exempt small banks, savings 
associations, farm credit system institutions, and credit unions * * 
* '').
    \9\ CEA section 4(c), 7 U.S.C. 6(c).
    \10\ ``End-User Exception to the Clearing Requirement for 
Swaps,'' 77 FR 42560, July 19, 2012 (see Sec.  39.6(d)).
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    Importantly, a counterparty to an inter-affiliate swap that 
qualifies for both the end-user exception and the inter-affiliate 
exemption may elect not to clear the inter-affiliate swap under either 
the end-user exception or the inter-affiliate exemption. As such, the 
Commission believes that the rule proposed in this rulemaking may not 
be necessary for the vast majority of inter-affiliate swaps involving a 
non-financial entity or a small financial institution because the end-
user exception can be elected for those swaps. Accordingly, it is 
likely the proposed rule will be used for inter-affiliate swaps between 
two financial entities that do not qualify for the end-user exception 
or for swaps involving a non-financial entity that do not qualify for 
the end-user exception because the swaps do not hedge or mitigate 
commercial risk.
    Finally, CEA section 4(c)(1), described in more detail below, 
grants the Commission general exemptive powers.\11\ Pursuant to that 
authority, the Commission has proposed a rule that would allow 
cooperatives meeting certain conditions to elect not to submit for 
clearing certain swaps subject to a clearing requirement.\12\
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    \11\ Section 4(c)(1) of the CEA empowers the Commission to 
exempt any transaction or class of transactions, including swaps, 
from certain CEA provisions, such as the clearing requirement.
    \12\ ``Clearing Exemption for Certain Swaps Entered into by 
Cooperatives,'' 77 FR 41940, July 17, 2012.
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B. Swaps Between Affiliated Entities

    Except as provided with respect to certain financing affiliates as 
noted above, CEA section 2(h) does not provide any specific exception 
to swaps entered into by affiliates that are subject to a clearing 
requirement (``inter-affiliate swaps'').\13\ Inter-affiliate swaps that 
are hedged by back-to-back or matching book swaps entered into with 
third parties may pose risks to the financial system if the inter-
affiliate swaps are not properly risk managed thereby raising the 
likelihood of default on the outward facing swaps. Furthermore, there 
could be systemic risk implications if an affiliate used by the 
corporate group to trade outward facing swaps (commonly referred as 
centralized treasury or conduit affiliates) has large positions and 
defaulted on obligations arising from inter-affiliate swaps if such 
swaps are hedged with third-party swaps.\14\ Such a default could harm 
third-party swap counterparties, and potentially, financial markets as 
a whole, if the treasury/conduit affiliate was unable to satisfy third-
party obligations as a consequence of the default.
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    \13\ For the purposes of this proposed rulemaking, ``inter-
affiliate swaps'' refers to swaps between ``affiliates,'' as that 
term is defined in proposed Sec.  39.6(g)(1): ``[c]ounterparties to 
a swap * * * may elect not to clear a swap with an affiliate if one 
party directly or indirectly holds a majority ownership interest in 
the other, or if a third party directly or indirectly holds a 
majority interest in both, based on holding a majority of the equity 
securities of an entity, or the right to receive upon dissolution, 
or the contribution of, a majority of the capital of a 
partnership.'' See infra pt. II.B.1 for further discussion.
    \14\ There does not appear to be a common definition of a 
``treasury affiliate'' or a ``conduit affiliate.'' For purposes of 
this proposed rulemaking, a treasury/conduit affiliate (or 
structure) is an affiliate that enters into inter-affiliate swaps 
and enters into swaps with third parties that are related to such 
inter-affiliate swaps on a back-to-back or aggregate basis.
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    A number of commenters in a variety of Commission rulemakings have 
recommended that the Commission adopt an exemption to the clearing 
requirement for inter-affiliate swaps.\15\ Some commenters claimed that 
inter-affiliate swaps offer significant benefits with substantially 
less risk than swaps between unaffiliated entities. They contended that 
inter-affiliate swaps enable a corporate group to aggregate its risks 
on a global basis in one entity through risk transfers between 
affiliates. Commenters also described varying structures through which 
corporate groups entered into inter-affiliate swaps and manage risks.
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    \15\ The Commission notes that comment letters to other proposed 
rulemakings under Title VII of the Dodd-Frank Act are not part of 
the administrative record for this rulemaking unless specifically 
cited herein.
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    Prudential Financial, Inc. (``PFI''), stated that it employs a 
``conduit'' structure where separate legal entities are commonly owned 
by PFI.\16\ Under this structure, PFI uses one affiliate to directly 
face the market as a ``conduit'' to hedge the net commercial and 
financial risk of the various operating affiliates within PFI. PFI 
contended that the use of a conduit diminishes the demands on PFI's 
financial liquidity, operational assets, and management resources, 
because ``affiliates within PFI avoid having to establish independent 
relationships and unique infrastructure to face the market.'' Moreover, 
PFI explained that its conduit facilitates the netting of its 
affiliates' trades (e.g., where one affiliate hedges floating rates 
while another hedges fixed rates). PFI stated that this conduit 
structure effectively reduces the overall risk of PFI and its 
affiliates, and it allows PFI to manage fewer outstanding positions 
with external market participants.\17\
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    \16\ Prudential Financial, Inc. comment letter to the proposed 
rulemaking, ``Further Definition of `Swap Dealer,' `Security-Based 
Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap 
Participant' and `Eligible Contract Participant,' '' 75 FR 80147, 
Dec. 21, 2010.
    \17\ J.P. Morgan commented that the most efficient way to manage 
risk is often at one entity and on a portfolio level. This way all 
the risk for the corporate group resides in one entity. J.P. Morgan 
maintained that this reduces market risk at each legal entity and 
can reduce risk on a group level because offsetting positions held 
by different members of the group can be aggregated to mitigate the 
overall risk of the portfolio. J.P. Morgan asserted that portfolio 
risk management enables regulators to more easily assess the net 
risk position on a group level rather than piecing together data 
from separate affiliates to reconstruct the actual risk profile of 
the group. J.P. Morgan comment letter to the proposed rulemaking, 
``Process for Review of Swaps for Mandatory Clearing,'' 75 FR 67277, 
Nov. 2, 2010.
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    In a letter to Congress, the Coalition for Derivatives End-Users 
(``CDEU'') asserted that inter-affiliate swaps do not create external 
counterparty exposure and, therefore, pose none of the systemic or 
other risks that the clearing requirement is designed to protect 
against.\18\ Thus, in CDEU's view, the

[[Page 50427]]

imposition of required clearing on inter-affiliate swaps would not 
reduce systemic risk. CDEU also commented that a conduit or treasury 
structure is beneficial because it centralizes trade expertise and 
execution in a single or limited number of entities. Finally, CDEU 
claimed that a treasury or conduit structure benefits affiliates 
because they can enjoy their parents' corporate credit ratings and 
associated pricing benefits.
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    \18\ Coalition for Derivatives End-Users comment letter for H.R. 
2682, H.R. 2779, and H.R. 2586 (Mar. 23, 2012).
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    These comments suggest that swaps entered into between corporate 
affiliates, if properly risk-managed, may be beneficial to the 
operation of the corporate group as a whole. They indicate that inter-
affiliate swaps may improve a corporate group's risk management 
internally and allow the corporate group to use the most efficient 
means to effectuate swaps with third parties. While the Commission 
recognizes these potential benefits of inter-affiliate swaps, the 
Commission is also taking into account the systemic risk repercussions 
of inter-affiliate swaps as it considers and proposes an exemption to 
the CEA's clearing requirement applicable to those inter-affiliate 
swaps.

II. Inter-Affiliate Clearing Exemption Under CEA Section 4(c)(1)

A. The Commission's Section 4(c)(1) Authority

    Section 4(c)(1) of the CEA empowers the Commission to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions, including swaps, 
from any of the provisions of the CEA (subject to exceptions not 
relevant here).\19\ In enacting CEA section 4(c)(1), Congress noted 
that the goal of the provision ``is to give the Commission a means of 
providing certainty and stability to existing and emerging markets so 
that financial innovation and market development can proceed in an 
effective and competitive manner.'' \20\ Observant of that objective, 
the Commission has determined preliminarily that it would be 
appropriate to exempt inter-affiliate swaps from the clearing 
requirement in CEA section 2(h) under certain terms and conditions. The 
proposed exemption, however, would not extend to swaps that affiliates 
entered into with third parties.
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    \19\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides, in 
pertinent part, that:
    In order to promote responsible economic or financial innovation 
and fair competition, the Commission by rule, regulation, or order, 
after notice and opportunity for hearing, may (on its own initiative 
or on application of any person * * * ) exempt any agreement, 
contract, or transaction (or class thereof) that is otherwise 
subject to subsection (a) of this section * * * either 
unconditionally or on stated terms or conditions or for stated 
periods and either retroactively or prospectively, or both, from any 
of the requirements of subsection (a) of this section, or from any 
other provision of this Act.
    By issuing a proposed exemptive rule, the Commission also is 
exercising its general rulemaking authority under CEA section 8a(5), 
7 U.S.C. 12a(5).
    \20\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213 (``4(c) Conf. Report'').
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    The primary benefit of clearing is the reduction of counterparty 
risk. The Commission notes commenters' assertions that there is less 
counterparty risk associated with inter-affiliate swaps than swaps with 
third parties to the extent that affiliated counterparties internalize 
each other's counterparty risk because they are members of the same 
corporate group. This internalization can be demonstrated by the 
example of a swap entered into between affiliates A and B that are 
majority owned by the same person.\21\ If affiliate A fails to perform, 
then affiliate B would be harmed. However, affiliate A also may be 
harmed if (1) B's harm adversely impacts the profits of A and B's 
corporate group \22\ or (2) A's failure to perform drives the group 
into bankruptcy, because, for instance, B has entered into a swap with 
a third party and B is unable to perform as a consequence of A's 
failure to perform. The potential harm to A for failing to perform is 
greater than the harm A would experience if B was not a majority-owned 
affiliate. Accordingly, A internalizes B's counterparty risk and A has 
a greater economic incentive to perform than if B were a third party.
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    \21\ The meaning of ``majority-owned'' is set forth and 
discussed in part B1.
    \22\ A's corporate group is the group that contains the person 
with a majority ownership interest of A. Similarly, B's corporate 
group is the group that contains the person with a majority 
ownership interest of B.
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    The Commission does not believe there is significantly reduced 
counterparty risk with respect to swaps between affiliates that are not 
majority-owned by the same person because there is less economic 
feedback. If A is a majority-owned affiliate and B is a minority-owned 
affiliate, then any harm that B experiences as a consequence of A's 
failure to perform is likely to have a less adverse impact on the 
profits of A's corporate group than if B was a majority-owned 
affiliate. In addition, the Commission believes that B's failure to 
perform would be significantly less likely to drive A's corporate group 
into bankruptcy than if B were majority-owned.
    On the basis of reduced counterparty risk, the Commission has 
determined preliminarily that inter-affiliate swap risk may not need to 
be mitigated through clearing, but can be reduced through other means. 
The Commission also believes at the proposal stage that exempting 
inter-affiliate swaps would enable corporations to structure their 
groups so that corporate risk is concentrated in one entity--whether it 
be at a treasury- or conduit-type affiliate, or at the parent 
company.\23\ The Commission recognizes there may be advantages for the 
corporate group and regulators if risk is appropriately managed and 
controlled on a consolidated basis and at a single affiliate. Based 
upon the comments received, the Commission understands that some 
corporate groups use this type of structure.
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    \23\ Treasury/conduit affiliates, for example, often enter into 
swaps with third parties that hedge aggregate inter-affiliate swap 
risk. The aggregation is based on risk correlations. If those 
correlations break down, then the treasury/conduit affiliate may no 
longer be able to satisfy its third-party swap obligations.
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    The Commission, nevertheless, believes that uncleared inter-
affiliate swaps could pose risk to corporate groups and market 
participants, generally. Uncleared inter-affiliate swaps also may pose 
risk to other market participants, and therefore the financial system, 
if the treasury/conduit affiliate enters into swaps with third parties 
that are related on a back-to-back or matched book basis with inter-
affiliate swaps. To continue the above example, if A's failure to 
perform (for whatever reason) makes it impossible for B to meet its 
third-party swap obligations, then those third parties would be harmed 
and risk could spread into the marketplace. However, A's risk of 
nonperformance is less than it would be if B were a third party to the 
extent A internalizes B's counterparty risk.
    To address these concerns, the Commission is proposing rules that 
would exempt inter-affiliate swaps from clearing if certain conditions 
are satisfied. First, the proposed exemption would be limited to swaps 
between majority-owned affiliates whose financial statements are 
reported on a consolidated basis. Second, the proposed rules would 
require the following: Centralized risk management, documentation of 
the swap agreement, variation margin payments (for financial entities), 
and satisfaction of reporting requirements. In addition, the exemption 
would be limited to swaps between U.S. affiliates, and swaps between a 
U.S. affiliate and a foreign affiliate located in a jurisdiction with a 
comparable and comprehensive clearing regime or the non-United States 
counterparty is otherwise required to clear the swaps it enters into 
with third

[[Page 50428]]

parties in compliance with United States law or does not enter into 
swaps with third parties. Additionally, the Commission notes that the 
proposed exemption does not limit the applicability of any CEA 
provision or Commission regulation to any person or transaction except 
as provided in the proposed rulemaking. These conditions will be 
discussed in further detail below.
Request for Comments
    Q1. The Commission requests comment on whether it should exercise 
its authority under CEA section 4(c).
    Q2. Do inter-affiliate swaps pose risk to the corporate group? If 
so, what risk is posed? In particular, do inter-affiliate swaps pose 
less risk to a corporate group than swaps with third parties? If so, 
why is that the case?
    Q3. Do inter-affiliate swaps pose risk to the third parties that 
have entered into swaps that are related to the inter-affiliate swaps? 
If so, what risk is posed?
    Q4. Would the proposed exemption promote responsible economic or 
financial innovation and fair competition?
    Q5. Would the proposed exemption promote the public interest?
    Q6. Inter-affiliate swaps that do not meet the conditions to the 
proposed exemption would be subject to the clearing requirement under 
CEA section 2(h)(1)(A) and, potentially, the trade execution 
requirement under CEA section 2(h)(8) as well. What would be the costs 
and benefits of imposing the trade execution requirement on these 
inter-affiliate swaps? Should the Commission exempt some or all inter-
affiliate swaps from the trade execution requirement regardless of 
whether the conditions to the proposed inter-affiliate clearing 
exemption are met?

B. Proposed Regulations

1. Proposed Sec.  39.6(g)(1): Definition of Affiliate Relationship
    Under proposed Sec.  39.6(g)(1), the inter-affiliate clearing 
exemption would only be available for swaps between majority-owned 
affiliates. As explained above, the Commission believes there is 
reduced counterparty risk with respect to such swaps. Under the 
proposed rule, affiliates would be majority-owned if one affiliate 
directly or indirectly holds a majority ownership interest in the other 
affiliate, or if a third party directly or indirectly holds a majority 
ownership interest in both affiliates and the financial statements of 
both affiliates are reported on a consolidated basis. A majority-
ownership interest would be based on holding a majority of the equity 
securities of an entity, or the right to receive upon dissolution, or 
the contribution of, a majority of the capital of a partnership.\24\
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    \24\ The affiliate status required by proposed Sec.  39.6(g)(1) 
to elect the proposed exemption is based on and functionally 
equivalent to the definition of majority-owned affiliates in 
recently adopted CFTC regulation 1.3(ggg)(6)(i).
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    The Commission is not proposing to extend the exemption to 
affiliates that are related on a minority-owned basis. As explained 
above, the Commission does not believe there is significantly reduced 
counterparty risk with respect to swaps between such affiliates. The 
Commission also believes it is important for the proposed inter-
affiliate clearing exemption to be harmonized with foreign 
jurisdictions that have or are developing comparable clearing regimes 
consistent with the 2009 G-20 Leaders' Statement.\25\ For example, the 
European Parliament and Council of the European Union have adopted the 
European Market Infrastructure Regulation (``EMIR'').\26\ Subject to 
the relevant provisions, technical standards, and regulations under 
EMIR, certain derivatives transactions between parent and subsidiary 
entities, could be exempt from its general clearing requirement.
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    \25\ In 2009, the G20 Leaders declared that, ``[a]ll 
standardized OTC derivative contracts should be traded on exchanges 
or electronic trading platforms, where appropriate, and cleared 
through central counterparties by end-2012 at the latest.'' G20 
Leaders' Final Statement at Pittsburgh Summit: Framework for Strong, 
Sustainable and Balanced Growth (Sept. 29, 2009).
    \26\ See Regulation (EU) No 648/2012 of the European Parliament 
and of the Council on OTC Derivatives, Central Counterparties and 
Trade Repositories, 2012 O.J. (L 201) available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF.
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Request for Comments
    Q7. The Commission requests comments on all aspects of the 
Commission's proposed requirement that the inter-affiliate clearing 
exemption be available to majority-owned affiliates.
    Q8a. Should the Commission consider requiring a percentage of 
ownership greater than majority ownership to qualify for the inter-
affiliate clearing exemption?
    Q8b. If so, what percentage should be used and what are the 
benefits and burdens of such ownership requirements?
    Q8b. Should the Commission require a 100% ownership threshold for 
the inter-affiliate clearing exemption? Would a 100% ownership 
threshold reduce counterparty risk and protect minority owners better 
than the proposed threshold. Are there other means to lessen risk to 
minority owners, such as consent?
    Q9. Should the Commission consider an 80% ownership threshold based 
on section 1504 of the Internal Revenue Code, which establishes an 80% 
voting and value test for an affiliate group.\27\ In light of the 
potential benefits from centralized risk management in an affiliated 
group, would an 80% threshold sufficiently reduce overall risk to 
financial system
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    \27\ The Internal Revenue Service allows a business conglomerate 
to file consolidated tax returns if the parent company and its 
subsidiaries meet a relationship test that is outlined in 26 U.S.C. 
1504(a)(2):
    (a) Affiliated group defined for purposes of this subtitle--
    (1) In general. The term ``affiliated group'' means--
    (A) 1 or more chains of corporations connected through stock 
ownership with a common parent corporation which is a corporation, 
but only if--
    (B) (i) the common parent owns directly stock meeting the 
requirements of paragraph (2) in at least 1 of the other 
corporations, and
    (ii) stock meeting the requirements of paragraph (2) in each of 
the includible corporations (except the common parent) is owned 
directly by 1 or more of the other includible corporations.
    (2) 80-percent voting and value test The ownership of stock of 
any corporation meets the requirements of this paragraph if it--
    (A) possesses at least 80 percent of the total voting power of 
the stock of such corporation, and
    (B) has a value equal to at least 80 percent of the total value 
of the stock of such corporation.
    (3) Stock not to include certain preferred stock
    For purposes of this subsection, the term ``stock'' does not 
include any stock which--(A) is not entitled to vote,
    (B) is limited and preferred as to dividends and does not 
participate in corporate growth to any significant extent,
    (C) has redemption and liquidation rights which do not exceed 
the issue price of such stock (except for a reasonable redemption or 
liquidation premium), and
    (D) is not convertible into another class of stock.
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2. Proposed Sec.  39.6(g)(2)(i): Both Counterparties Must Elect the 
Inter-Affiliate Clearing Exemption
    The Commission believes that affiliates within a corporate group 
may make independent determinations on whether to submit an inter-
affiliate swap for clearing. Ostensibly, each affiliate may reach 
different conclusions regarding the appropriateness of clearing. Given 
this possibility, proposed Sec.  39.6(g)(2)(i) would require that both 
counterparties elect the proposed inter-affiliate clearing exemption 
(each, an ``electing counterparty'').
Request for Comments
    Q10. Would this requirement create any operational issues?
3. Proposed Sec.  39.6(g)(2)(ii): Swap Documentation
    The Commission understands that affiliates may enter into swaps 
with

[[Page 50429]]

each other with little documentation about the terms and conditions of 
the swaps. The Commission is concerned that without proper 
documentation affiliates would be unable to effectively track and 
manage risks arising from inter-affiliate swaps or offer sufficient 
proof of claim in the event of bankruptcy. This could create challenges 
and uncertainty that could adversely affect affiliates, third party 
creditors, and potentially the financial system. The Commission also is 
concerned about transparency should there be a need for an audit or 
enforcement proceeding.
    Proposed Sec.  39.6(g)(2)(iii) would address these concerns by 
requiring affiliates to enter into swaps with a swap trading 
relationship document.\28\ The proposed rule would require the document 
to be in writing and to include all terms governing the trading 
relationship between the affiliates, including, without limitation, 
terms addressing payment obligations, netting of payments, events of 
default or other termination events, calculation and netting of 
obligations upon termination, transfer of rights and obligations, 
governing law, valuation, and dispute resolution procedures.\29\ The 
Commission believes this requirement would not be onerous because 
affiliates should be able to use a master agreement to document most of 
the terms of their inter-affiliate swaps.
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    \28\ For swap dealers and major swap participants, these issues 
are addressed in the swap trading relationship documentation rules 
proposed by the Commission in Sec.  23.504. See ``Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major 
Swap Participants,'' 76 FR 6715, Feb. 8, 2011. The proposed rule 
requires that if one or more of the parties to the swap for which 
the inter-affiliate exemption is elected is a swap dealer or major 
swap participant, then that party shall comply with Sec.  23.504 for 
that swap. Swap dealers and major swap participants that comply with 
that provision would also satisfy the proposed requirements.
    \29\ The requirements of the swap trading relationship document 
are informed by proposed CFTC regulation 23.504(b)(1). See ``Swap 
Trading Relationship Documentation Requirements for Swap Dealers and 
Major Swap Participants,'' 76 FR 6715, Feb. 8, 2011.
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Request for Comments
    Q11. The Commission requests comment as to the burden or cost of 
the proposed rule requiring documentation of inter-affiliate swaps.
    Q12. The Commission also requests comment as to whether its risk 
tracking and management and proof-of-claim concerns could be addressed 
by other means of documentation.
    Q13. The Commission requests comment as to whether the Commission 
should create a specific document template. Should the industry do so?
4. Proposed Sec.  39.6(g)(2)(iii): Centralized Risk Management
    Proposed Sec.  39.6(g)(2)(iii) would require inter-affiliate swaps 
to be subject to a centralized risk management program reasonably 
designed to monitor and manage the risks associated with the inter-
affiliate swaps. As noted in Part I.B. above, inter-affiliate swaps may 
pose risk to third parties if risks are not properly managed. 
Accordingly, to encourage prudent risk management, the proposed inter-
affiliate clearing exemption would be conditioned on a corporate 
group's evaluation, measurement and control of such risks. The 
Commission anticipates that the program would be implemented and run by 
the parent company or the treasury/conduit affiliate, but the rule 
provides flexibility to determine how best to satisfy this 
requirement.\30\
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    \30\ The Commission has adopted risk management rules for swap 
dealers and major swap participants in Sec.  23.600. See ``Swap 
Dealer and Major Swap Participant Recordkeeping, Reporting, and 
Duties Rules; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Rules; and Chief Compliance Officer Rules for 
Swap Dealers, Major Swap Participants, and Futures Commission 
Merchants,'' 77 FR 20128, 20173-75, April 3, 2012 (final rule). The 
rule requires that if one or more of the parties to the swap for 
which the inter-affiliate exemption is elected is a swap dealer or 
major swap participant, then that party shall comply with Sec.  
23.600 for that swap. Swap dealers and major swap participants that 
comply with that provision will also satisfy the proposed 
requirements.
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    The Commission understands that some groups that use inter-
affiliate swaps, particularly large financial entities, already have a 
centralized risk management program.\31\ Indeed, several commenters--
e.g., SIFMA and ISDA--supported centralized risk management and claimed 
that centralized risk management for inter-affiliate swaps ``would be 
compromised'' by a clearing requirement.\32\ CDEU also commented that 
inter-affiliate swaps are beneficial because they allow swaps with 
third parties to be traded at a treasury-type structure which contains 
risk management expertise.\33\ Based on comments received, the 
Commission believes that the proposed rule is in line with industry 
practice. Proposed Sec.  39.6(g)(2)(iii) also is in harmony with 
similar requirements under EMIR, which would require under certain 
circumstances for both counterparties to intra-group transactions to be 
``subject to an appropriate centrali[z]ed risk evaluation, measurement 
and control procedures. * * *'' \34\
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    \31\ See, e.g., Letter from SIFMA and ISDA submitted to the 
Commission on their own initiative (May 14, 2012).
    \32\ Id.
    \33\ See 3/23/23 Letter from CDEU.
    \34\ See EMIR Article 3, paragraphs 1 and 2. EMIR identifies 
factors necessary to establish a transaction as an intra-group 
transaction.
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Request for Comments
    Q14. The Commission requests comments that explain how current 
centralized risk management programs operate.
    Q15. The Commission requests comment on whether it should 
promulgate additional regulations that set forth minimum standards for 
a centralized risk management program. If so, what should those 
standards be? Is there a consistent industry practice which could be 
observed?
    Q16. Is the proposed rule in line with industry practice?
5. Proposed Sec.  39.6(g)(2)(iv): Variation Margin
    Proposed Sec.  39.6(g)(2)(iv) would require that variation margin 
be collected for swaps between affiliates that are financial entities, 
as defined in CEA section 2(h)(7)(C), in compliance with the proposed 
variation margin requirements set forth in proposed Sec.  
39.6(g)(3).\35\ Variation margin is an essential risk-management tool. 
A well-designed variation margin system protects both parties to a 
trade. It serves both as a check on risk-taking that might exceed a 
party's financial capacity and as a limitation on losses when there is 
a failure. Variation margin entails marking open positions to their 
current market value each day and transferring funds between the 
parties to reflect any change in value since the previous time the 
positions were marked.\36\ This process prevents uncollateralized 
exposures from accumulating over time and thereby reduces the size of 
any loss resulting from a default should one occur. Required margining 
also might cause parties to more carefully consider the risks involved 
with swaps and manage those risks more closely over time. The 
Commission believes, at this stage, that inter-affiliate swap risk may 
be mitigated through variation margin and notes that requiring 
variation margin for inter-affiliate swaps is being discussed by 
international regulators working on harmonizing regulations governing 
swap clearing.
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    \35\ Discussed in pt. II.B.8., below.
    \36\ Variation margin is distinguished from initial margin, 
which is intended to serve as a performance bond against potential 
future losses. If a party defaults, the other party may use initial 
margin to cover most or all of any loss that may result between the 
time the default occurs and when the non-defaulting party replaces 
the open position.
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    The Commission understands that a number of financial entities 
currently

[[Page 50430]]

post variation margin for their inter-affiliate swaps. According to 
SIFMA and ISDA, ``[t]he posting of variation margin limiting the impact 
of market movements upon the respective positions of the affiliated 
parties now occurs routinely in financial groups and its imposition on 
affiliates who transact directly with affiliated swap dealers (SDs) or 
major swap participants (MSPs) should not be unduly disruptive.'' \37\ 
The Commission has proposed rules requiring certain financial entities 
to pay and collect variation and initial margin for uncleared swaps 
entered into with other financial entities.\38\
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    \37\ See, e.g., 5/14/12 Letter from SIFMA and ISDA.
    \38\ The Commission does not propose that variation margin 
posted in respect of inter-affiliate swaps be required to be held in 
a segregated account or be otherwise unavailable for use and 
rehypothecation by the counterparty holding such variation margin.
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    The proposed requirement would not apply to 100% commonly-owned and 
commonly-guaranteed affiliates, provided that the common guarantor is 
also under 100% common ownership. As discussed above, the risk of an 
inter-affiliate swap may be mitigated through the posting of variation 
margin. The Commission believes that when the economic interests of two 
affiliates are both (i) fully aligned and (ii) a common guarantor bears 
the ultimate risk associated swaps entered into with a third party, 
non-affiliated counterparty, the posting of variation margin does not 
substantially mitigate the risk of an inter-affiliate swap. This 
exception is intended to apply to swaps between two wholly-owned 
subsidiaries of a common parent or in instances where one affiliate is 
wholly owned by the other.
    The first of the conditions required to claim the exception to the 
requirement under proposed regulation 39.6(g)(2)(iv) to post variation 
margin relates to complete common ownership. When two affiliates are 
owned by the same owner or one is wholly owned by the other, the 
underlying owners are the same and the economic interests of the two 
affiliates are aligned.\39\ In such circumstances, the two affiliates 
are subject to the control of a common owner or common set of 
owners.\40\
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    \39\ In contrast, if two affiliates do not have the same owners, 
the potential exists that the two affiliates may have differing 
economic interests. See also Copperweld v. Independence Tube--467 
U.S. 752 (1984) at 771 (``The coordinated activity of a parent and 
its wholly owned subsidiary must be viewed as that of a single 
enterprise for purposes of Sec.  1 of the Sherman Act. A parent and 
its wholly owned subsidiary have a complete unity of interest. Their 
objectives are common, not disparate, and their general corporate 
objectives are guided or determined not by two separate corporate 
consciousnesses, but one.'').
    \40\ Under such circumstances, the two affiliates are subject to 
common control, in actuality or potentially--i.e., the common owner 
could assert full control when one or both affiliates cease to act 
in the common owner's best interest.
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    A person would not be able to claim 100 percent ownership for the 
purposes of this provision based on a contingent right or obligation, 
by contract or otherwise, to take ownership of the equity interest in 
the affiliate by purchase or otherwise.\41\ Conversely, structures in 
which a person owns 100 percent of the equity but has an obligation or 
right, by contract or otherwise, to give up, by sale or otherwise, all 
or a portion of that equity interest would not meet the 100 percent 
ownership test. Such contingent or residual rights evidence a less than 
complete responsibility for the affiliate, including its swap 
obligations, that the 100 percent ownership and guaranty provision is 
intended to require. Under such circumstances, the interests of the 
owner and the affiliate are not fully aligned. The second condition 
requires the existence of a common guarantor. When two affiliates share 
a common guarantor that is under the same common ownership, the 
Commission believes that the risk created by a swap with a non-
affiliated third party is ultimately borne by the enterprise (which is 
defined by an alignment of economic interests). To provide an example, 
assume that A and B are guaranteed wholly-owned subsidiaries of X. B 
enters into a swap with non-affiliated third party T. B then enters 
into a back-to-back swap (mirroring the risk created in the swap with 
T) with A (i.e., an inter-affiliate swap). In this scenario, the risk 
associated with the swap with T is effectively borne by X and therefore 
ultimately borne by the enterprise. In such circumstances therefore the 
inter-affiliate swap does not create new risks for the enterprise, 
rather, it allocates the risk from one wholly-owned subsidiary to 
another. The posting of variation margin here would not substantially 
mitigate the risk of the inter-affiliate swap because the inter-
affiliate swap itself does not create new risks for the enterprise.
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    \41\ For example, if a financial entity established a trust, 
partnership, corporation or other type of entity, and sells the 
equity interests therein to investors, but retains the right to 
call, repurchase, or otherwise take control of the equity interest, 
or has a contingent obligation to call, repurchase or otherwise take 
control of the equity interest, such right or obligation would not 
be sufficient to constitute ownership of the affiliate for purposes 
of this provision.
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Request for Comments
    Q17a. The Commission requests comment as to whether it should 
promulgate regulations that set forth minimum standards for variation 
margin. If so, what should those standards be?
    Q17b. The Commission requests comment as to whether it should 
promulgate regulations that set forth minimum standards for initial 
margin. If so, what should those standards be?
    Q17c. The Commission requests comment as to whether it should 
promulgate regulations that set forth minimum standards for both 
initial and variation margin for inter-affiliate swaps. If so, what 
should those standards be?
    Q17d. The Commission's proposed rule ``Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants''--17 CFR 
Part 23--would require initial and variation margin for certain swaps 
that are not cleared by a registered designated clearing organization. 
Should inter-affiliate swaps that are not subject to the clearing 
requirement of CEA section 2(h)(1)(A) be subject to the margin 
requirements as set out in proposed Part 23 or otherwise?
    Q18. The Commission requests comment on the costs and benefits of 
requiring variation margin for inter-affiliate swaps, both in general 
and specifically, regarding corporate groups that do not currently 
transfer variation margin in respect of inter-affiliate swaps.
    Q19. The Commission requests comment on whether 100% commonly-owned 
affiliates sharing a common guarantor--that is, a guarantor that is 
also 100% commonly owned--should be exempt from the requirement to 
transfer variation margin. Please explain the impact on the corporate 
group, if any, if the described affiliates are required to transfer 
variation margin.
    Q20a. Should any other categories of entities or corporate groups, 
such as non-swap dealers and non-major swap participants, be exempt 
from the variation margin requirement for their inter-affiliate swaps? 
If so, which categories and why?
    Q20b. Should the Commission limit the variation margin requirements 
to those inter-affiliate swaps for which at least one counterparty is a 
swap dealer, major swap participant, or financial entity, as defined in 
paragraph (g)(6) of the proposed rule text, that is subject to 
prudential regulation?
    Q21. The Commission requests comment as to whether it should 
eliminate the proposed exemption's variation margin condition for swaps 
between 100% owned affiliates.
    Q22. The Commission requests comment as to whether it should 
eliminate the proposed exemption's

[[Page 50431]]

variation margin condition for swaps between 80% owned affiliates.
    Q23. The Commission requests comment on whether all types of 
financial entities identified in CEA section 2(h)(7)(C) should be 
subject to the variation margin requirement. Should entities that are 
part of a commercial corporate group and are financial entities solely 
because of CEA section 2(h)(7)(C)(i)(VIII) be excluded from such 
requirement? Why?
6. Proposed Sec.  39.6(g)(2)(v): Both Affiliates Must Be Located in the 
United States or in a Country With a Comparable and Comprehensive 
Clearing Regime or the Non-United States Counterparty Is Otherwise 
Required To Clear Swaps With Third Parties in Compliance With United 
States Law or Does Not Enter Into Swaps With Third Parties
    The Commission is proposing to limit the inter-affiliate clearing 
exemption to inter-affiliate swaps between two U.S.-based affiliates or 
swaps where one affiliate is located abroad in a jurisdiction with a 
comparable and comprehensive clearing regime or the non-United States 
counterparty is otherwise required to clear swaps with third parties in 
compliance with United States law or does not enter into swaps with 
third parties. The limitation in Sec.  39.6(g)(2)(v) is designed to 
address the Commission's concerns about risk and to deter evasion as 
directed by CEA section 2(h)(4)(A).
    Under section 2(h)(4)(A), the Commission must prescribe rules 
necessary to prevent evasion of the clearing requirement.\42\ The 
Commission is concerned that an inter-affiliate clearing exemption 
could enable entities to evade the clearing requirement through trades, 
for example, with affiliates that are located in foreign jurisdictions 
that do not have a comparable and comprehensive clearing regime. 
Informed in part by certain relevant intra-group transactions 
provisions under EMIR,\43\ proposed Sec.  39.6(g)(2)(v) would require 
that both affiliates be U.S. persons or one of the affiliates is a U.S. 
person and the other affiliate is domiciled in a non-U.S. jurisdiction 
with a comparable and comprehensive regulatory regime for swap clearing 
or the non-United States counterparty is otherwise required to clear 
swaps with third parties in compliance with United States Law or does 
not enter into swaps with third parties.\44\
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    \42\ See CEA section 2(h)(4)(A), 7 U.S.C. 2(h)(4)(A). 
Additionally, CEA section 6(e)(4)-(5) states that any DCO, SD, or 
MSP may be subject to double civil monetary penalties should they 
evade the clearing requirement, among other things. The relevant CEA 
sections state, ``that knowingly or recklessly evades or 
participates in or facilitates an evasion of the requirements of 
section 2(h) shall be liable for a civil monetary penalty twice the 
amount otherwise available for a violation of section 2(h).'' See 
CEA section 6(e)(4)-(5), 7 U.S.C. 9a(4)-(5).
    \43\ See, generally, EMIR Articles 3, 4, 11, 13.
    \44\ For example, a counterparty located in a country that does 
not have a comparable clearing regime may be required to clear swaps 
with third parties in compliance with United States law if it meets 
the definition of a ``conduit'' as described in the Commission's 
proposed interpretive guidance and policy statement entitled, 
``Cross-Border Application of Certain Swaps Provisions of the 
Commodity Exchange Act,'' 77 FR 41214, July 12, 2012.
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    The Commission recognizes that there may be a legitimate reason for 
an inter-affiliate swap where one affiliate is located in a country 
that does not have a comparable clearing regime. However, the 
Commission believes that financial markets may be at risk if the 
foreign affiliate enters into a related third-party swap that would be 
subject to clearing were it entered into in the United States, but is 
not cleared. On balance, the Commission believes that the risk of 
evasion and the systemic risk associated with uncleared swaps 
necessitates that the exemption be limited to swaps between affiliates 
located in the United States or in foreign countries with comparable 
clearing regimes or the non-United States counterparty is otherwise 
required to clear swaps with third parties in compliance with United 
States law or does not enter into swaps with third parties.
Request for Comments
    Q24a. The Commission requests comment on proposed Sec.  
39.6(g)(2)(v). Is the proposed condition that both affiliates must be 
located in the United States or in a country with a comparable and 
comprehensive clearing jurisdiction or the non-United States 
counterparty is otherwise required to clear swaps with third parties or 
does not enter into swaps with third parties a necessary and 
appropriate means of reducing risk and evasion concerns related to 
inter-affiliate swaps? If not, how should these concerns be addressed?
    Q24b. Should the Commission limit the inter-affiliate clearing 
exemption to foreign affiliates that only enter into inter-affiliate 
swaps if such foreign affiliates are not located in a jurisdiction with 
a comparable and comprehensive clearing requirement or are otherwise 
required to clear swaps with third parties in compliance with United 
States?
    Q24c. Should the Commission limit the inter-affiliate clearing 
exemption to foreign affiliates that enter into swaps with third 
parties on an occasional basis if such foreign affiliates are not 
located in a jurisdiction with a comparable and comprehensive clearing 
requirement or are otherwise required to clear swaps with third parties 
in compliance with United States. What would constitute an occasional 
basis? For example, would once a year be an appropriate time frame?
    Q25. The Commission requests comment on (1) the prevalence of 
cross-border inter-affiliate swaps and the mechanics of moving swap-
related risks between U.S. and non-U.S. affiliates for risk management 
and other purposes (including an identification of such purposes); (2) 
the risk implications of cross-border inter-affiliate swaps for the 
U.S. markets; and (3) specific means to address the risk issues 
potentially presented by cross-border inter-affiliate swaps.
    Q26. The Commission recently adopted anti-evasion provisions 
relating to cross-border swap activities in its new rule 1.6.\45\ To 
what extent are the risk issues potentially presented by cross-border 
inter-affiliate swaps addressed by the anti-evasion provisions in rule 
1.6?
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    \45\ Rule 1.6 was included in the Commission's ``Product 
Definitions'' rulemaking, which was adopted jointly with the SEC. 
See ``Further Definition of `Swap,' `Security-Based Swap,' and 
`Security-Based Swap Agreement;' Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping,'' 77 FR 39626 (July 23, 2012).
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    Q27. The Commission also is considering an alternative condition to 
address evasion. That condition would require non-U.S. affiliates to 
clear all swap transactions with non-U.S. persons, provided that such 
transactions are related to inter-affiliate swaps which would be 
subject to a clearing requirement if entered into by two U.S. 
persons.\46\ Should the Commission adopt such a condition? Would such a 
condition help enable the Commission to ensure that the proposed inter-
affiliate clearing exemption is not abused or used to evade the 
clearing requirement? Are there any other means to prevent evasion of 
the clearing requirement or abuse of the proposed inter-affiliate 
clearing exemption that the Commission should adopt?
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    \46\ The Commission has proposed separately interpretative 
guidance on certain entity-level and transaction-level requirements 
imposed by Title VII of Dodd-Frank for cross-border swaps. See 
Proposed Interpretive Guidance and Policy Statement entitled, 
``Cross-Border Application of Certain Swaps Provisions of the 
Commodity Exchange Act,'' 77 FR 41214 (July 12, 2012).
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7. Proposed Sec.  39.6(g)(2)(vi): Notification to the Commission
    As explained in more detail below, the Commission has preliminarily 
determined that it must receive certain

[[Page 50432]]

information to effectively regulate inter-affiliate swaps. Proposed 
Sec.  39.6(g)(2)(vi) would require one of the counterparties to an 
inter-affiliate swap to comply with the reporting requirements set 
forth in Sec.  39.6(g)(4.).
8. Proposed Sec.  39.6(g)(3): Variation Margin Requirements
    Proposed Sec.  39.6(g)(3) would set forth the requirements for 
transferring variation margin. Proposed Sec.  39.6(g)(3)(i) would 
require that if both counterparties to the swap are financial entities, 
each counterparty shall pay and collect variation margin for each 
inter-affiliate swap for which the proposed exemption is elected. 
Proposed Sec.  39.6(g)(3)(ii) would require that the swap trading 
relationship document set forth and describe the methodology to be used 
to calculate variation margin with sufficient specificity to allow the 
counterparties, the Commission, and any appropriate prudential 
regulator to calculate the margin requirement independently. The 
Commission believes that the proposed rule would help ensure that 
affiliates have a written methodology. The proposed rule also would 
allow affiliates to manage their risks more effectively throughout the 
life of the swap and to avoid disputes regarding issues such as 
valuation.\47\
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    \47\ For further discussion on the concept of variation margin 
for uncleared swaps, see proposed rulemaking, ``Margin Requirements 
for Uncleared Swaps for Swap Dealers and Major Swap Participants,'' 
76 FR 27621, Feb. 12, 2011.
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9. Proposed Sec.  39.6(g)(4): Reporting Requirements
    Pursuant to CEA section 4r,\48\ uncleared swaps must be reported to 
a Swap Data Repository (``SDR''), or to the Commission if no repository 
will accept such information, by one of the counterparties (the 
``reporting counterparty'').\49\ In addition to any general reporting 
requirements applicable under other applicable rules to a particular 
type of entity that is an affiliate or to the inter-affiliate swap, 
proposed Sec.  39.6(g)(4) would implement reporting requirements 
specifically for uncleared inter-affiliate swaps.\50\ Proposed Sec.  
39.6(g)(4)(i) would require the reporting counterparty to affirm that 
both counterparties to the inter-affiliate swap are electing not to 
clear the swap and that both counterparties meet the requirements in 
proposed Sec.  39.6(g)(1)-(2). Besides alerting the Commission of the 
election, the information would help ensure that each counterparty is 
aware of, and satisfies the definitions and conditions set forth in 
proposed Sec.  39.6(g)(1)-(2).
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    \48\ CEA section 4r; 7 U.S.C. 6r.
    \49\ See CEA sections 2(a)(13) (reporting of swaps to SDRs) and 
4r (reporting alternatives for uncleared swaps); 7 U.S.C. 2(a)(13) 
and 7 U.S.C. 6r.
    \50\ See ``Swap Data Recordkeeping and Reporting Requirements,'' 
77 FR 2136, Jan. 13, 2012 (``Swap Data Recordkeeping and 
Reporting''). Regulation 45.11 contemplates that this information 
may be delivered to the Commission directly in limited circumstances 
when a SDR is not available. 77 FR at 2168. When permitted, such 
delivery would also meet the proposed inter-affiliate clearing 
exemption reporting requirement.
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    Proposed Sec.  39.6(g)(4)(ii)-(iii) would require the reporting 
counterparty to provide certain information, unless such information 
had been provided in a current annual filing pursuant to proposed Sec.  
39.6(g)(5). Proposed Sec.  39.6(g)(4)(ii) would require the reporting 
counterparty to submit information regarding how the financial 
obligations of both counterparties are generally satisfied with respect 
to uncleared swaps. The information is valuable because it would 
provide the Commission a more complete view of the risk characteristics 
of uncleared swaps. The information also would enhance the Commission's 
efforts to identify and reduce potential systemic risk.
    Proposed Sec.  39.6(g)(4)(iii) would implement CEA section 2(j) for 
purposes of the inter-affiliate exemption.\51\ That CEA section places 
a prerequisite on issuers of securities registered under section 12 of 
the Securities Exchange Act of 1934 (``Exchange Act'') \52\ or required 
to file reports under Exchange Act section 15(g) \53\ (``electing SEC 
Filer'') that elect exemptions from the CEA's clearing requirement 
under section 2(h)(1)(A). CEA section 2(j) requires that an appropriate 
committee of the electing SEC Filer's board or governing body review 
and approve its decision to enter into swaps subject to the clearing 
exemption.
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    \51\ 7 U.S.C. 2(j), in pertinent part:
    Exemptions from the requirements of subsection (h)(1) to clear a 
swap and subsection (h)(8) to execute a swap through a board of 
trade or swap execution facility shall be available to a 
counterparty that is an issuer of securities that are registered 
under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 
78l) or that is required to file reports pursuant to section 15(d) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78o) only if an 
appropriate committee of the issuer's board or governing body has 
reviewed and approved its decision to enter into swaps that are 
subject to such exemptions.
    \52\ 15 U.S.C. 78l.
    \53\ 15 U.S.C. 78o.
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    Proposed Sec.  39.6(g)(4)(iii)(A) would require an electing SEC 
Filer to notify the Commission of its SEC Filer status by submitting 
its SEC Central Index Key number. This information would enable the 
Commission to cross-reference materials filed with the relevant SDR 
with information in periodic reports and other materials filed by the 
electing SEC Filer with the U.S. Securities and Exchange Commission 
(``SEC''). In addition, proposed Sec.  39.6(g)(4)(iii)(B) would require 
the counterparty to report whether an appropriate committee of its 
board of directors (or equivalent governing body) has reviewed and 
approved the decision to enter into the inter-affiliate swaps that are 
exempt from clearing.\54\ If both affiliates/counterparties are 
electing SEC Filers, both counterparties would have to report the 
additional information in proposed Sec.  39.6(g)(4)(iii).
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    \54\ For example, a board resolution or an amendment to a board 
committee's charter could expressly authorize such committee to 
review and approve decisions of the electing person not to clear the 
swap being reported. In turn, such board committee could adopt 
policies and procedures to review and approve decisions not to clear 
swaps, on a periodic basis or subject to other conditions determined 
to be satisfactory to the board committee.
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    Finally, proposed Sec.  39.16(g)(5) would permit counterparties to 
provide the information listed in proposed (g)(4)(ii)-(iii) on an 
annual basis in anticipation of electing the inter-affiliate clearing 
exemption for one or more swaps. Any such reporting under this 
paragraph would be effective for inter-affiliate swaps entered into 
within 365 days following the date of such reporting. During the 365-
day period, the affiliate would be required to amend the information as 
necessary to reflect any material changes to the reported information. 
In addition, the Commission anticipates that for most corporate groups, 
affiliates would submit identical annual reports.
Request for Comments
    Q28. The Commission requests comment on whether affiliates would 
submit identical annual reports for most corporate groups.
    Q29a. The Commission requests comment as to whether reporting 
counterparties that would not report to an SDR should be subject to 
swap-by-swap reporting requirements? Should the Commission allow such 
entities to report all information on an annual basis? Please provide 
any information as to the number of reporting counterparties that would 
be affected by such a rule change.
    Q29b. The Commission requests comment as to whether different sized 
entities should be subject to the proposed reporting requirements or 
the reporting requirements for affiliates that elect the end-user 
exception, as applicable. If different sized entities should not be 
subject to such reporting requirements, please explain why. 
Alternatively, should the Commission

[[Page 50433]]

allow phased compliance for different sized entities?

III. Consideration of Costs and Benefits

A. Introduction

    Section 15(a) of the CEA \55\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
Section 15(a) factors.
---------------------------------------------------------------------------

    \55\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Prior to the passage of the Dodd-Frank Act, swaps were not required 
to be cleared. In the wake of the financial crisis of 2008, Congress 
adopted the Dodd-Frank Act, which, among other things, amends the CEA 
to impose a clearing requirement for swaps.\56\ This clearing 
requirement is designed to reduce counterparty risk associated with 
swaps and, in turn, mitigate the potential systemic impact of such risk 
and reduce the risk that such swaps could cause or exacerbate 
instability in the financial system.\57\ In amending the CEA, however, 
the Dodd-Frank Act preserved the Commission's authority to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions, including swaps, 
from select provisions of the CEA.\58\ For reasons explained above,\59\ 
the Commission proposes to exercise its authority under CEA section 
4(c)(1) to exempt inter-affiliate swaps--that is, swaps between 
majority-owned affiliates--from the Section 2(h)(1)(A) clearing 
requirement.
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    \56\ See Section 2(h)(1) of the CEA, 7 U.S.C. 2(h)(1).
    \57\ When a bilateral swap is moved into clearing, the 
clearinghouse becomes the counterparty to each of the original 
participants in the swap. This standardizes counterparty risk for 
the original swap participants in that they each bear the same risk 
attributable to facing the clearinghouse as counterparty. In 
addition, clearing mitigates counterparty risk to the extent that 
the clearinghouse is a more creditworthy counterparty relative to 
those that each participant in the trade might have otherwise faced. 
Clearinghouses have demonstrated resilience in the face of past 
market stress. Most recently, they remained financially sound and 
effectively settled positions in the midst of turbulent events in 
2007-2008 that threatened the financial health and stability of many 
other types of entities.
    \58\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1). CEA section 
4(c)(1) is discussed in greater detail above in part II.A.
    \59\ See pt.II.A.
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    In the discussion that follows, the Commission considers the costs 
and benefits of the proposed inter-affiliate exemption to the public 
and market participants generally. The Commission also separately 
considers the costs and benefits of the conditions placed on affiliates 
that would elect the proposed exemption: (1) Swap trading relationship 
documentation, which would require affiliates to document in writing 
all terms governing the trading relationship; (2) centralized risk 
management and variation-margin requirements, which would require 
affiliates to subject the swap to centralized risk management and to 
post variation margin; and (3) reporting requirements, which would 
require counterparties to advise an SDR, or the Commission if no SDR is 
available, that both counterparties elect the inter-affiliate clearing 
exemption and to identify the types of collateral used to meet 
financial obligations. In addition to the foregoing reporting 
requirements, counterparties that are issuers of securities registered 
under Section 12 of the Securities Exchange Act of 1934 or those that 
are required to file reports under Section 15(d) of that Act, would be 
required to identify the SEC central index key number and confirm that 
an appropriate committee of board of directors has approved of the 
affiliates' decision not to clear a swap. The rule also would permit 
affiliates to report certain information on an annual basis, rather 
than swap-by-swap.
    Finally, the inter-affiliate clearing exemption would require one 
of the following four conditions be satisfied for each affiliate: The 
affiliate is located in the United States; the affiliate is located in 
a jurisdiction with a comparable and comprehensive clearing 
requirement; the affiliate is required to clear all swaps it enters 
into with non-affiliated counterparties; or the affiliate does not 
enter into swaps with non-affiliated counterparties.

B. Proposed Baseline

    The Commission's proposed baseline for consideration of the costs 
and benefits of this proposed exemption are the costs and benefits that 
the public and market participants (including potentially eligible 
affiliates) would experience in the absence of this regulatory action. 
In other words, the proposed baseline is an alternative situation in 
which the Commission takes no action, meaning that potentially eligible 
affiliates would be required to comply with the clearing requirement. 
More specifically, under the CEA, as amended by the Dodd-Frank Act, and 
Commission regulations (finalized or future) inter-affiliate swaps will 
be subject to a clearing requirement and, depending on whether the 
affiliate is an SD, MSP, or eligible contract participant, a variety of 
record-keeping and reporting requirements. In such a scenario, the 
public and market participants, including corporate affiliates 
transacting swaps with each other, would experience the costs and 
benefits related to clearing and complying with Commission regulations 
under parts 23, 45, and 46.\60\ The proposed exemption would alter 
these costs and benefits. For example, among other things, the public 
and market participants would not experience the full benefits related 
to clearing or satisfying all the requirements under parts 23, 45, and 
46. At the same time, affiliates electing the exemption would likely 
incur lower costs for two reasons. First, the cost of variation margin 
is significantly less than the cost of clearing.\61\ Second, the costs 
of satisfying the reporting requirements under the proposed exemption 
would be less than the costs associated with satisfying all of the 
requirements under parts 23, 45, and 46.
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    \60\ See, e.g., costs and benefits discussion in the following 
rulemakings: ``Swap Dealer and Major Swap Participant Recordkeeping, 
Reporting, and Duties Rules; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Rules; and Chief Compliance 
Officer Rules for Swap Dealers, Major Swap Participants, and Futures 
Commission Merchants,'' 77 FR 20128, 20194, Apr. 3, 2012; ``Business 
Conduct Standards for Swap Dealers and Major Swap Participants with 
Counterparties,'' 77 FR 9803, 9804, Feb. 17, 2012; ``Swap Data 
Record Keeping and Reporting Requirements,'' 77 FR 2136, 2171, Jan. 
13, 2012; ``Opting Out of Segregation,'' 66 FR 20740, 20743, Apr. 
25, 2001; ``Swap Data Recordingkeeping and Reporting Requirements: 
Pre-Enactment and Transition Swaps,'' 77 FR 35200, Jun. 12, 2012.
    \61\ The cost of clearing includes posting initial and variation 
margin.
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    The Commission also considers the regulatory landscape as it 
existed before the Dodd-Frank Act's enactment. Entities that transacted 
inter-affiliate swaps within a corporate group were neither subject to 
a clearing requirement nor compelled to comply with regulatory 
requirements, including requirements to record and report inter-
affiliate swaps. Thus, measured against a pre-Dodd-Frank Act reference 
point, affiliates that avail themselves of the proposed exemption would 
experience incremental costs and benefits occasioned by compliance with 
the conditions for exercising the proposed exemption.

[[Page 50434]]

    In the discussion that follows, where reasonably feasible, the 
Commission endeavors to estimate quantifiable dollar costs. The 
benefits of the proposed exemption, as well as certain costs, however, 
are not presently susceptible to meaningful quantification. Where it is 
unable to quantify, the Commission discusses proposed costs and 
benefits in qualitative terms.

C. Costs

1. To Market Participants and the Public
    As discussed above, inter-affiliate swaps--though possessing a 
lesser degree of counterparty risk than swaps transacted between non-
affiliated counterparties--are not risk-free. As evidenced in the 2008 
financial crisis, counterparty swap risk, transmitted systemically, can 
exact a heavy cost on market participants as well as the public. Thus, 
unconditionally exempting inter-affiliate swaps from the clearing 
requirement would come with a cost of increased risk that clearing is 
intended to contain. This includes the risk that the failure of one 
party to perform under the terms of a swap transaction would cause the 
counterparty to be unable to perform under the terms of swaps it had 
entered into with other counterparties, thereby causing a cascading 
series of non-performance throughout the financial system. Clearing 
both reduces this risk of non-performance and promotes confidence 
throughout the financial system that the failure of one firm will not 
lead to a systemic crisis, thereby lessening the chance of such a 
crisis or the need for the federal government to intervene to prevent 
any such failures. Accordingly, the Commission does not propose an 
unconditional, blanket exemption. Rather, the Commission proposes an 
exemption with conditions carefully tailored to offset the narrower, 
counterparty-risk profile that inter-affiliate swaps present relative 
to all swaps generally. Based on the expectation that for the subset of 
inter-affiliate swaps covered by this proposed exemption these 
conditions are capable of closely approximating the risk protections 
that clearing provides to swaps more generally, the Commission foresees 
no significant additional risk cost from the proposed exemption.
2. To Potentially Eligible Entities
    The proposed rule is exemptive and would provide potentially 
eligible affiliates with relief from the clearing requirement and 
attendant Commission regulations. As with any exemptive rule or order, 
the proposed rule is permissive, meaning that potentially eligible 
affiliates are not required to elect it. Accordingly, the Commission 
assumes that an entity would rely on the proposed exemption only if the 
anticipated benefits warrant the costs. Here, the proposed inter-
affiliate clearing exemption identifies three categories of conditions 
that an eligible affiliate must satisfy to elect the proposed 
exemption: documentation, risk management, and reporting. The 
Commission believes that a person would have to incur costs to satisfy 
these conditions. The Commission also believes that an affiliate would 
elect the exemption only if these costs are less than the costs that an 
affiliate would incur should it decide not to elect the exemption.
    Regarding the documentation condition, the Commission believes that 
affiliates electing the exemption (other than SDs/MSPs satisfying the 
swap documentation condition and risk-management conditions by 
satisfying the requirements of regulations 23.504 and 23.600, 
respectively) would likely incur costs to develop a standardized 
document to comply with the proposed Sec.  39.6(g)(2)(ii) requirement 
that all terms governing the trading relationship be in writing.\62\ 
The Commission estimates that affiliates could pay a law firm for up to 
30 hours of work at $495 per hour to modify an ISDA master agreement, 
resulting in a one-time cost of $15,000, and there may be additional 
costs related to revising documentation to address a particular swap. 
All salaries in these calculations are taken from the 2011 SIFMA Report 
on Management and Professional Earnings in the Securities Industry. 
Annual wages were converted to hourly wages assuming 1,800 work hours 
per year and then multiplying by 5.35 to account for bonuses, firm 
size, employee benefits and overhead. Unless otherwise stated, the 
remaining wage calculations used in this proposed rule also are derived 
from this source and modified in the same manner. The Commission, 
however, is unable to estimate such costs with greater specificity 
because it is unable to estimate the frequency of, and costs associated 
with modifying a swap agreement.
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    \62\ For a discussion of the costs and benefits incurred by swap 
dealers and major swap participants that must satisfy requirements 
under Sec.  23.504, see ``Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants,'' 76 FR 
6715, 6724-25, Feb. 8, 2011 (proposed rule).
---------------------------------------------------------------------------

    Affiliates also would incur costs related to signing swap documents 
and retaining copies. The Commission believes that affiliates would 
incur less than $1,000 per year for such activities. The Commission 
notes, however, that these estimates may overstate the actual costs 
because it expects that affiliates within a corporate group would be 
able to share legal-drafting and record-retention costs, as well as 
labor costs.
    The second category of conditions concerns risk management. 
Affiliates electing the proposed exemption would have to subject inter-
affiliate swaps to centralized risk management, which would include 
variation margin.\63\ To meet the centralized-risk-management condition 
under Sec.  39.16(g)(2)(iii), some affiliates may have to create a risk 
management system.\64\ To do so, affiliates would have to purchase 
equipment and software to adequately evaluate and measure inter-
affiliate swap risk. The Commission believes that such costs could be 
possibly as high as $150,000. For example, these costs might include 
purchasing a computer network at approximately $20,000; purchasing 
personal computers and monitors for 15 staff members at approximately 
$30,000; purchasing software at approximately $20,000; purchasing other 
office equipment, such as printers, at approximately $5,000. The total 
would amount to $75,000. There also might be installation and 
unexpected costs that could increase up-front costs to approximately 
$150,000. In addition to these start-up costs, there could be ongoing 
costs. The Commission estimates that centralized risk management could 
require up to ten full-time staff at an average salary of $150,000 per 
year.\65\ Finally, a data subscription for price and other market data 
may have to be purchased at cost of up to $100,000 per year.
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    \63\ For a discussion of the costs and benefits incurred by swap 
dealers and major swap participants that must satisfy requirements 
under Sec.  23.600, see ``Swap Dealer and Major Swap Participant 
Recordkeeping, Reporting, and Duties Rules; Futures Commission 
Merchant and Introducing Broker Conflicts of Interest Rules; and 
Chief Compliance Officer Rules for Swap Dealers, Major Swap 
Participants, and Futures Commission Merchants,'' 77 FR 20128, 
20173-75, April 3, 2012 (final rule).
    \64\ As pointed out above, industry commenters underscored the 
fact that many corporate groups that currently use inter-affiliate 
swaps have centralized-risk-management procedures in place.
    \65\ This average annual salary is based on 15 senior credit 
risk analysts only. The Commission appreciates that an affiliate 
would likely choose to employ different positions as well, such as 
risk management specialists at $130,000 per year, and computer 
supervisors at $140,000. But for the purposes of this estimate, the 
Commission has assumed salaries at the high end for risk management 
professionals.
---------------------------------------------------------------------------

    Proposed Sec.  39.6(g)(2)(iv) would require counterparties to post 
variation margin in compliance with proposed Sec.  39.6(g)(3)'s 
documentation and other

[[Page 50435]]

requirements. The Commission believes that companies may have to hire 
attorneys and financial analysts to develop and document the variation 
margin methodology to comply with this rule, resulting in a one-time 
cost of $29,000 per entity electing the proposed exemption. This 
estimate assumes up to 100 hours of financial analyst time at an 
average cost of $208 per hour, and up to 20 hours of compliance 
attorney time at an average cost of $390 per hour.
    The Commission also believes that affiliates would incur certain 
costs to comply with the proposed Sec.  39.16(g)(2)(iv) condition to 
post variation margin. The Commission anticipates that affiliates would 
have to hire up to three people at an average salary of $150,000 per 
year to estimate the price of inter-affiliate swaps and to manage 
variation margin payments between affiliates. In addition, the 
Commission expects that companies would have to purchase equipment and 
software to estimate the price of inter-affiliate swaps and to 
subscribe to a data service. However, the Commission anticipates that 
such costs also would be incurred to satisfy the centralized risk 
management condition in proposed Sec.  39.6(g)(2)(iii). Finally, 
affiliates would have to incur the opportunity costs associated with 
posting collateral to cover variation margin.\66\
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    \66\ The opportunity cost of posting collateral is the highest 
return an affiliate would have earned by investing that collateral 
instead of using it to cover variation margin under similar 
conditions.
---------------------------------------------------------------------------

    The third category of conditions involves reporting requirements. 
Proposed Sec.  39.6(g)(4) would require affiliates to report specific 
information to an SDR or to the Commission if no SDR would accept such 
information. Proposed Sec.  39.16(g)(4)(i) would require notice 
reporting on a swap-by-swap basis that two affiliates are electing the 
exemption and that they both meet the requirements in proposed Sec.  
39.6(g)(1)-(2). The Commission believes that each counterparty may 
spend 15 seconds to two minutes per swap entering a notice of election 
of the exemption into the reporting system. The hourly wage for a 
compliance attorney is $390, resulting in a per transaction cost of 
$1.63-$13.00.
    Affiliates would incur costs to satisfy the conditions that the 
reporting party (1) identify how the affiliates expect to meet the 
financial obligations associated with their uncleared swap as required 
under proposed Sec.  39.6(g)(4)(ii), and (2) provide the information 
required under proposed Sec.  39.6(g)(4)(iii) if either electing 
affiliate is an SEC Filer. Affiliates may decide to report this 
information on either a swap-by-swap or annual basis, and the costs 
would vary depending on the reporting frequency. Regarding the 
financial information in proposed Sec.  39.6(g)(4)(ii)-(iii), the 
Commission believes that it may take the reporting counterparty up to 
10 minutes to collect and submit the information for the first 
transaction, and one to five minutes to collect and submit the 
information for subsequent transactions with that same counterparty. 
The hourly wage for a compliance attorney is $390 resulting in a cost 
of $65.00 for complying with proposed Sec.  39.6(g)(4)(ii)-(iii) for 
the first inter-affiliate swap, and a cost range of $6.50-$32.50 for 
complying with proposed Sec.  39.6(g)(4)(ii)-(iii) for subsequent 
inter-affiliate swaps.
    The Commission anticipates that companies electing not to clear 
would have established reporting systems to comply with other 
Commission rules regarding swap reporting. However, all reporting 
counterparties likely would need to modify their reporting systems to 
accommodate the additional data fields required by this rule. The 
Commission estimates that those modifications would create a one-time 
programming expense of approximately one to ten burden hours per 
affiliate. The Commission estimates that the hourly wage for a senior 
programmer is $341, which means that the one-time, per entity cost for 
modifying reporting systems would likely be between $341 and $3,410.
    An affiliate that does not function as the reporting counterparty 
may need to communicate information to the reporting counterparty after 
the swap is entered. That information could include, among other 
things, whether the affiliate has filed an annual report pursuant to 
proposed Sec.  39.6(g)(5) and information to facilitate any due 
diligence that the reporting counterparty may conduct. These costs 
would likely vary substantially depending on how frequently the 
affiliate enters into swaps, whether the affiliate undertakes an annual 
filing, and the due diligence that the reporting counterparty chooses 
to conduct. The Commission estimates that a non-reporting affiliate 
would incur annually between five minutes and ten hours of compliance 
attorney time to communicate information to the reporting counterparty. 
The hourly wage for a compliance attorney is $390, translating to an 
aggregate annual cost for communicating information to the reporting 
counterparty of between $33 to $3,900.
    The Commission expects a proportion of affiliates would choose to 
file an annual report pursuant to proposed Sec.  39.6(g)(5). The annual 
filing option may be less costly than swap-by-swap reporting. The 
Commission estimates that it would take an average of 30 to 90 minutes 
to complete and submit this filing. The average hourly wage for a 
compliance attorney is $390, translating to an aggregate annual cost 
for submitting the annual report of between $195 to $585.
    The Commission anticipates that SDRs and the Commission also would 
bear costs associated with the proposed reporting conditions. SDRs 
would be required to add or edit reporting data fields to accommodate 
information reported by affiliates electing the inter-affiliate 
clearing exemption.\67\ Similarly, the Commission would need to create 
a reporting system for affiliates electing the exemption should there 
be no available SDR.
---------------------------------------------------------------------------

    \67\ See generally, ``Swap Data Recordkeeping and Reporting 
Requirements,'' 77 FR 2137 at 2176-2193, Jan. 13, 2012 (for costs 
and benefits incurred by SDRs).
---------------------------------------------------------------------------

    Finally, the rule would impose a limitation on those affiliates 
electing the inter-affiliate clearing exemption. Namely, the inter-
affiliate clearing exemption would require one of the following four 
conditions be satisfied for each affiliate: the affiliate is located in 
the United States; the affiliate is located in a jurisdiction with a 
comparable and comprehensive clearing requirement; the affiliate is 
required to clear all swaps it enters into with non-affiliated 
counterparties; or the affiliate does not enter into swaps with non-
affiliated counterparties. This limitation would impose no additional 
cost over not providing the exemption. However, as compared to the 
state of regulation that existed pre-Dodd-Frank Act, this condition 
would impose the costs of clearing for those inter-affiliate swaps that 
occur in countries without a clearing regime comparable to the United 
States.

D. Benefits

    The CEA does not require the Commission to issue an exemption to 
the clearing requirement for inter-affiliate swaps. Section 4(c)(1) of 
the CEA, however, provides the Commission with authority to exempt 
certain entities and types of transactions from CEA obligations. The 
statutory section requires that the Commission consider two objectives 
when it decides to issue an exemption: (1) The promotion of responsible 
economic or financial innovation, and (2) the promotion of fair 
competition.
    The Commission believes there are benefits to exempting swaps 
between certain affiliated entities. For example,

[[Page 50436]]

as explained above,\68\ a number of commenters stated that clearing 
swaps through treasury or conduit affiliates enables entities to more 
efficiently and effectively manage corporate risk.
---------------------------------------------------------------------------

    \68\ See pt. I.B. for in-depth discussion of relevant comments 
regarding inter-affiliate swaps and the advantages of such treasury 
or conduit structures.
---------------------------------------------------------------------------

    The Commission also is considering the previously-discussed 
comments that an exemption is appropriate because inter-affiliate swaps 
pose reduced counterparty risk relative to swaps with third 
parties.\69\ The Commission remarks that this proposition is more 
likely to hold true provided that the terms and conditions of the swaps 
are the same. The Commission believes that inter-affiliate swap risk 
may be appropriately managed, in lieu of clearing, through the proposed 
conditions that affiliates would be required to satisfy to elect the 
proposed exemption. It has considered the benefits of each of these 
conditions. The Commission believes that the first category--
documentation of the swap trading relationship between affiliates--
would benefit affiliates and the overall financial system. 
Specifically, the Commission believes that requiring documentation of 
inter-affiliate swaps in a swap confirmation would help ensure that 
affiliates have proof of claim in the event of bankruptcy. As explained 
earlier, insufficient proof of claim could create challenges and 
uncertainty at bankruptcy that could adversely affect affiliates and 
third party creditors. Also, though not a documentation condition, the 
proposed exemption would require that the affiliates would be able to 
elect this exemption for their inter-affiliate swaps if one of the 
following four conditions is satisfied for each affiliate: The 
affiliate is located in the United States; the affiliate is located in 
a jurisdiction with a comparable and comprehensive clearing 
requirement; the affiliate is required to clear all swaps it enters 
into with non-affiliate counterparties; or the affiliate does not enter 
into swaps with non-affiliate counterparties. This limitation should 
help mitigate systemic risk attributable to affiliates who, subsequent 
to conducting inter-affiliate swaps, transact uncleared, market-facing 
(i.e., not inter-affiliate) swaps in a jurisdiction without a clearing 
regime comparable to the United States.
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    \69\ See pt. II.A.
---------------------------------------------------------------------------

    The Commission recognizes that there may be a legitimate reason for 
inter-affiliate swaps where one affiliate is located in a country that 
does not have a comparable clearing regime or the non-United States 
counterparty is otherwise required to clear swaps with third parties. 
However, the Commission believes that the corporate group and financial 
markets may be at risk if the foreign affiliate is free to enter into a 
related, uncleared swap with a third party that would be subject to 
clearing were it entered into in the United States. On balance, the 
Commission believes that the risk associated with uncleared swaps 
necessitates that the proposed exemption be limited to swaps between 
affiliates located in the United States or in foreign countries with 
comparable clearing regimes or the non-United States counterparty is 
otherwise required to clear swaps with third parties or the affiliates 
do not enter into swaps with third parties.
    Centralized-risk management and variation margin are also 
beneficial conditions. The requirement that an inter-affiliate swap be 
subject to centralized-risk management is beneficial because it is 
intimately connected to the variation-margin condition. Centralized-
risk management establishes appropriate measurements and procedures so 
that affiliates can mitigate the amount being concentrated in a single 
treasury or conduit-type affiliate. Moreover, the Commission believes 
that proper risk management benefits the public by reducing risk and 
the losses related to defaults.
    The requirement that affiliates post variation margin should 
protect both parties to a trade by ensuring that each party to the swap 
has the financial wherewithal to meet the obligations of the swap. 
Variation margin also would serve as a resource that could reduce 
losses to a counterparty when there is a default. Overall, the 
variation-margin condition would benefit each affiliate and the 
financial system, at large, by increasing the security of affiliate 
positions.
    The final category of conditions, reporting certain information 
about inter-affiliate swaps, should enhance the level of transparency 
associated with inter-affiliate swaps activity, afford the Commission 
new insights into the practices of affiliates that engage in inter-
affiliate swaps, and help the Commission and other appropriate 
regulators identify emerging or potential risks. In short, the overall 
benefit of reporting would be a greater body of information for the 
Commission to analyze with the goal of identifying and reducing 
systemic risk.

E. Costs and Benefits as Compared to Alternatives

    The Commission considered several alternatives to the proposed 
rulemaking. For instance, the Commission could have: (1) Chosen not to 
propose an inter-affiliate clearing exemption; (2) proposed an 
alternative definition of affiliate; or (3) decided not to place 
certain conditions on those electing the inter-affiliate clearing 
exemption. The Commission, however, has proposed what it considers a 
measured approach--in terms of the implicated costs and benefits of the 
exemption--given its current understanding of inter-affiliate swaps.
    First, the Commission considered not exempting inter-affiliate 
swaps from the clearing requirement. Without an exemption, inter-
affiliate swaps subject to a clearing requirement would have to be 
cleared. This alternative was not favored by the Commission because the 
Commission believes that there are considerable benefits of exempting 
inter-affiliate swaps from clearing to the market, as discussed in 
detail above. In addition, while the Commission does not believe inter-
affiliate swaps are riskless, the Commission is considering comments 
that inter-affiliate swaps pose less risk than swaps with third parties 
because of reduced counterparty risk and therefore risk-reducing 
conditions may be a satisfactory alternative to clearing for these 
swaps. Commenters in other rulemakings as discussed above recognized 
implicitly risk concerns by sharing that some corporate groups manage 
inter-affiliate risk via centralized risk management programs that 
include variation-margin calculations. Consequently, it would not be 
prudent to exempt inter-affiliate swaps categorically from the CEA's 
clearing requirement without conditions that address inter-affiliate 
swap risk.
    Second, the Commission also considered ownership requirements of 
greater than, and lesser than majority ownership.\70\ Increasing the 
ownership requirement would reduce the number of affiliates that could 
benefit from the exemption.\71\ At the same time, a higher ownership 
threshold for affiliates could help protect minority owners and reduce 
counterparty risk and risk to third parties who have entered into swaps 
that are related to inter-affiliate swaps.
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    \70\ See pt. II.B.1 for further discussion and other requests 
for comment on this issue.
    \71\ In the Paperwork Reduction Act, the Commission points out 
that it does not possess sufficient information to estimate the 
number of affiliates, even majority-owned, that might avail 
themselves of the proposed inter-affiliate clearing exemption.
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    Nevertheless, the Commission believes that any benefit from an 
ownership requirement of greater than majority ownership, in the form 
of reduced counterparty risk, would not be

[[Page 50437]]

substantial due to the risk mitigation conditions such as centralized 
risk management programs that are being proposed with majority 
ownership. The Commission welcomes comments as to the costs and 
benefits of an increased ownership requirement.
    Similarly, the Commission considered an ownership requirement of 
less than majority ownership. While a reduction in the ownership 
requirement would allow more affiliates to benefit from the exemption, 
it would also considerably increase the counterparty risk in the 
market. The Commission welcomes comments as to the costs and benefits 
of a decreased ownership requirement.
    Finally, the Commission considered not requiring each condition--
i.e., swap trading relationship documentation; centralized risk 
management that includes variation margin; or reporting. In other 
words, the Commission could have proposed an inter-affiliate clearing 
exemption with fewer or no conditions. Because there is no indication 
at this stage that inter-affiliate swaps are riskless, the Commission 
proposed conditions. The Commission's views on the costs and benefits 
of each condition are discussed above. The Commission invites comments 
as to the costs and benefit of each condition.

F. Consideration of CEA Section 15(a) Factors

1. Protection of Market Participants and the Public
    In deciding to propose the inter-affiliate clearing exemption, the 
Commission assessed how to protect affiliated entities, third parties 
in the swaps market, and the public. The Commission sought to ensure 
that in the absence of a clearing requirement the risks presented by 
uncleared inter-affiliate swaps would be minimized should there be 
significant losses to one affiliate counterparty or a default of one of 
the affiliate counterparties. Toward that end, the Commission proposed 
that affiliates eligible to elect the proposed exemption must execute 
swap trading relationship documentation; post variation margin as part 
of a centralized-risk management process; and report specific 
information to an SDR, or to the Commission if no SDR would accept the 
information. As explained in this cost-benefit section, these 
conditions serve multiple objectives that ultimately protect market 
participants and the public.
    For instance, the documentation requirement would reduce 
uncertainties where affiliates incur significant swaps-related losses 
or where there is a defaulting affiliate. Because the documentation 
would be in writing, the Commission expects that there would be less 
contractual ambiguity should disagreements between affiliates arise. 
The proposed condition that an inter-affiliate swap be subject to a 
centralized risk management program reasonably designed to monitor and 
manage risk would help mitigate the risks associated with inter-
affiliate swaps. As noted throughout this proposed rulemaking, inter-
affiliate swap risk could adversely impact third parties who enter into 
swaps that are related to an inter-affiliate swap. In addition, if 
inter-affiliate swap risk is not carefully monitored, there could be 
greater probability that an adverse financial event could lead to 
bankruptcy, which could harm market participants and the public 
overall. Similarly, the proposed condition that affiliated 
counterparties post variation margin should help to prevent unrealized 
losses from accumulating over time and thereby reduce both the chance 
of default and the size of any default should one occur. In turn, this 
should lessen the likelihood and extent of harm to third parties that 
enter into swaps that are related to inter-affiliate swaps.
    The proposed reporting obligations would help the Commission 
monitor compliance with the proposed inter-affiliate clearing 
exemption. For example, an affiliate that also is an SEC Filer must 
receive a governing board's approval for electing the proposed 
exemption. It cannot act independently. In the Commission's opinion, 
the reporting conditions promote accountability and transparency, 
offering another public safeguard by keeping the Commission informed.
2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Exempting swaps between majority-owned affiliates within a 
corporate group from the clearing requirement would promote efficiency 
by reducing overall clearing costs for eligible counterparties. The 
Commission is also considering comments that the proposed exemption 
would increase the efficiency and financial integrity of markets 
because it would enable corporate groups to clear swaps through their 
treasury or conduit affiliates. As explained above,\72\ commenters in 
other rulemakings have stated that clearing swaps through treasury or 
conduit affiliates enables affiliates and corporate groups to more 
efficiently and effectively manage corporate risk.
---------------------------------------------------------------------------

    \72\ See pt. I.B. for in-depth discussion of relevant comments 
regarding inter-affiliate swaps and the advantages of such treasury 
or conduit structures.
---------------------------------------------------------------------------

    Certain provisions of the proposed rule, such as the requirements 
that inter-affiliate swaps be subject to centralized risk management, 
that affiliates post variation margin, and that certain information be 
reported, also would discourage abuse of the exemption. Together, these 
conditions would promote the financial integrity of swap markets and 
financial markets as a whole.
3. Price Discovery
    Under Commission regulation 43.2, a ``publicly reportable swap 
transaction,'' means, among other things, ``any executed swap that is 
an arm's length transaction between two parties that results in a 
corresponding change in the market risk position between the two 
parties.'' \73\ The Commission does not consider non-arms-length swaps 
as contributing to price discovery in the markets.\74\ Given that 
inter-affiliate swaps as defined in this proposed rulemaking are 
generally not arm's length transactions, the Commission does not 
anticipate the proposed inter-affiliate clearing exemption would have 
any effect on price discovery.\75\
---------------------------------------------------------------------------

    \73\ 17 CFR 43.2. See also ``Real-Time Public Reporting of Swap 
Transaction Data,'' 77 FR 1182, Jan. 9, 2012 (Real-Time Reporting).
    \74\ Transactions that fall outside the definition of ``publicly 
reportable swap transaction''--that is, they are not arms-length--
``do not serve the price discovery objective of CEA section 
2(a)(13)(B).'' Real-Time Reporting, 77 FR at 1195. See also Id. at 
1187 (discussion entitled ``Swaps Between Affiliates and Portfolio 
Compression Exercises'').
    \75\ The definition of ``publicly reportable swap transaction'' 
identifies two examples of transactions that fall outside 
definition, including ``internal swaps between one-hundred percent 
owned subsidiaries of the same parent entity.'' 17 CFR 43.2 (adopted 
by Real-Time Reporting, 77 FR at 1244). The Commission remarks that 
the list of examples is not exhaustive.
---------------------------------------------------------------------------

4. Sound Risk Management Practices
    As a general rule, the Commission believes that clearing swaps is a 
sound risk management practice. But, in proposing the inter-affiliate 
clearing exemption, the Commission has assessed the risks of inter-
affiliate swaps, and proposes that it can impose alternative, sound 
risk-management practices for these particular swaps in the form of 
conditions. In other words, a prudent use of the Commission's exemptive 
authority would include proposing an exemption that requires affiliates 
to manage risks appropriately.\76\ In this case, the specific

[[Page 50438]]

risk-management conditions include: documentation of swap terms; 
establishment of centralized risk management, and the posting of 
variation margin. The Commission also believes that SEC Filer reporting 
is a prudent practice. As detailed in this preamble and the proposed 
rule text,\77\ SEC Filers are affiliates that meet certain SEC-related 
qualifications, and their governing boards or equivalent bodies are 
directly responsible to shareholders for the financial condition and 
performance of the affiliate. The boards also have access to 
information that would give them a comprehensive picture of the 
company's financial condition and risk management strategies. 
Therefore, any oversight they provide to the affiliate's risk 
management strategies would likely encourage sound risk management 
practices. In addition, the condition that affiliates electing the 
inter-affiliate clearing exemption must report their boards' knowledge 
of the election is a sound risk management practice.
---------------------------------------------------------------------------

    \76\ Furthermore, CEA section 8a(5) states that ``in the 
judgment of the Commission,'' it is authorized to make and 
promulgate rules ``necessary to effectuate any'' CEA provisions or 
to accomplish any CEA purpose. 7 U.S.C. 12a(5).
    \77\ See pt. II.B.9 and proposed Sec.  39.6(g)(4)(iii).
---------------------------------------------------------------------------

5. Other Public Interest Considerations
    The Commission believes that the proposed exemptive rulemaking 
would reduce the costs of transacting swaps between majority-owned 
affiliates. At the same time, the proposed rulemaking would foster the 
financial integrity of swap markets by mandating that certain 
conditions be satisfied by affiliates electing the inter-affiliate 
clearing exemption. The Commission believes that the financial savings 
by affiliates, and, ultimately, corporate groups would serve public-
interest considerations. For example, affiliates and corporate groups 
could use the cost-savings to provide new services or products for the 
public. They could also pass-on some or all of the cost-savings through 
prices they charge the public for their services and products.

G. Request for Public Comment on Costs and Benefits

    Q30. The Commission invites public comment on its cost-benefit 
considerations, including the consideration of reasonable alternatives.
    Q31. If the Commission were to propose a clearing exemption limited 
to 100% owned affiliates, what costs and benefits would affect market 
participants and the public?
    Q32. If the Commission were to propose a clearing exemption with an 
ownership requirement of greater or less than majority ownership what 
costs and benefits would affect market participants and the public?
    Q33. If the Commission were to issue a proposed clearing exemption 
limited to those affiliates that file consolidated tax returns, what 
costs and benefits would affect market participants and the public?
    Q34. Do inter-affiliate swaps affect price discovery? To what 
extent would the inter-affiliate clearing exemption affect price 
discovery?
    Q35. Besides variation margin, is there a less costly risk-
management tool that would serve the same risk-management objectives as 
variation margin?
    Q36. Besides affiliates, SDRs, and the Commission, are there any 
other entities that might bear a direct cost as a result of the 
proposed inter-affiliate clearing exemption? If so, who and to what 
extent?
    Q37. Commenters are invited to submit any data or other information 
that they may have quantifying or qualifying the costs and benefits of 
the proposal with their comment letters.
    Q38. Commenters are invited to submit any data or other information 
that they may have quantifying or qualifying start-up and on-going 
costs and benefits associated with establishing a centralized risk 
management program.

IV. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the proposed rules will have a significant economic 
impact on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis respecting the impact.
    Consistent with other Commission rulemakings, the proposed rules 
will not have a significant economic impact on a substantial number of 
small entities. The proposed rules would affect the electing and 
reporting parties, which could be SDs, MSPs, and Eligible Contract 
Participants (``ECPs''). The Commission has certified previously that 
neither category involves small entities for purposes of the RFA in 
other Commission rulemakings, including those implementing requirements 
of the Dodd-Frank Act.\78\ The Commission is making a similar 
determination for purposes of this proposal. 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 entities with respect to SDs, 
MSPs, and ECPs.
---------------------------------------------------------------------------

    \78\ For SDs and MSPs, see, e.g., ``Swap Dealer and Major Swap 
Participant Recordkeeping, Reporting, and Duties Rules; Futures 
Commission Merchant and Introducing Broker Conflicts of Interest 
Rules; and Chief Compliance Officer Rules for Swap Dealers, Major 
Swap Participants, and Futures Commission Merchants,'' 77 FR 20128, 
20194, Apr. 3, 2012 (SDs and MSPs); ``Business Conduct Standards for 
Swap Dealers and Major Swap Participants with Counterparties,'' 77 
FR 9803, 9804, Feb. 17, 2012 (SDs and MSPs); ``Policy Statement and 
Establishment of Definitions of `Small Entities' for Purposes of the 
Regulatory Flexibility Act,'' 47 FR 18618, Apr. 30, 1982 (MSPs). For 
ECPs, see, e.g., ``Commodity Options,'' 77 FR 25320, 25334, Apr. 27, 
2012; ``Swap Data Record Keeping and Reporting Requirements,'' 77 FR 
2136, 2171, Jan. 13, 2012; ``Opting Out of Segregation,'' 66 FR 
20740, 20743, Apr. 25, 2001.
---------------------------------------------------------------------------

    The proposed rules also would affect SDRs, which the Commission has 
similarly determined not to be small entities for purposes of the 
RFA.\79\ The Commission is making the same determination with respect 
to the proposed rules. Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed regulation would not have a significant economic impact on a 
substantial number of small entities with respect to SDRs.
---------------------------------------------------------------------------

    \79\ See Swap Data Repositories, 75 FR 80898, 80926, Dec. 23, 
2010; Registration of Swap Dealers and Major Swap Participants, 75 
FR 71379, 71385, Nov. 23, 2010.
---------------------------------------------------------------------------

Request for Comments
    Q39. The Commission invites comments on the impact of this proposed 
regulation on small entities.

B. Paperwork Reduction Act

1. Overview
    The Paperwork Reduction Act (``PRA'') \80\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number issued by the Office of Management and Budget 
(``OMB''). Certain provisions of proposed Sec.  39.6(g) would result in 
new collection of information requirements within the meaning of the 
PRA. These new reporting requirements are not currently covered by any 
existing OMB control number and OMB has not yet assigned a control 
number for this new collection. The Commission therefore is submitting 
this proposal to the OMB for review in accordance with 44 U.S.C. 
3507(g) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    \80\ 44 U.S.C. 3501 et seq.

---------------------------------------------------------------------------

[[Page 50439]]

    The title for this collection of information is ``Rule 39.6(g) 
Affiliate Transaction Uncleared Swap Notification.'' If adopted, 
responses to this collection of information would be mandatory. The 
Commission will protect proprietary information according to the 
Freedom of Information Act and 17 CFR part 145, ``Commission Records 
and Information.'' In addition, section 8(a)(1) of the CEA strictly 
prohibits the Commission, unless specifically authorized by the CEA, 
from making public ``data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' The Commission is also 
required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
2. Information Provided by Reporting Entities
    Proposed Sec.  39.6(g) would set forth certain reporting conditions 
that must be satisfied for affiliates to elect the inter-affiliate 
clearing exemption. As described above, these conditions are designed 
to address Commission concerns regarding inter-affiliate swap risk and 
to provide the Commission with information necessary to regulate swaps 
markets. In particular, the reporting conditions in proposed Sec.  
39.6(g)(4) and the optional annual report set forth in proposed Sec.  
39.6(g)(5) would establish new collection of information requirements 
within the meaning of the PRA. Additionally, affiliates may be required 
to update their reporting systems for purposes of complying with the 
proposed reporting requirement, and non-reporting affiliates electing 
the proposed exemption may incur costs in transmitting information to 
their reporting counterparties.
    The Commission has estimated the time burden required for entities 
to comply with the proposed requirements.\81\ The Commission has 
estimated quantifiable costs, including one-time and annual costs per 
affiliate and costs that are incurred on a swap-by-swap basis. The 
dollar estimates are offered as ranges with upper and lower bounds, 
which is necessary to accommodate uncertainty regarding the estimates. 
The Commission notes that the most likely outcome with respect to each 
estimate is the average cost. With that in mind, the Commission has 
included tables that provide the average burden hour and average cost 
for each of the PRA requirements in the proposed exemption.
---------------------------------------------------------------------------

    \81\ See 5 CFR 1320.3(b) for the definition of the term 
``burden.''
---------------------------------------------------------------------------

    The total cost of the inter-affiliate clearing exemption would 
depend on the number of affiliates electing the proposed exemption, as 
well as the number of inter-affiliate swaps for which affiliates would 
elect to use the proposed exemption. To identify the number of 
affiliates that could elect the proposed exemption, the Commission is 
relying upon the most recent data collected by the U.S. Bureau of 
Economic Analysis (``BEA'').\82\ The BEA has determined that there are 
2,347 U.S. multinational parent companies (``MNCs''),\83\ and 25,424 
foreign subsidiaries that are majority-owned by such MNCs.\84\ Because 
the BEA does not provide the number of majority-owned U.S. 
subsidiaries, the Commission has decided to double BEA's foreign-
subsidiary total to identify the number of potential U.S. subsidiaries 
that might elect the proposed inter-affiliate clearing exemption. The 
result is that there are an estimated 50,848 U.S. and foreign 
subsidiaries [25,424 x 2], or approximately 22 subsidiaries per MNC 
[50,848 / 2,347], that is, 11 U.S. subsidiaries and 11 foreign 
subsidiaries. This total number of U.S. and foreign subsidiaries 
combined with the total U.S. parent companies equals 53,195 [2,347 + 
50,848] affiliates that might elect the inter-affiliate clearing 
exemption.
---------------------------------------------------------------------------

    \82\ The BEA's Web site is located at https://www.bea.gov/. BEA's 
most recent data on the number of U.S. parent companies of 
multinational corporations and their affiliates is listed in the 
``U.S. Direct Investment Abroad: Preliminary Results from the 2009 
Benchmark Survey,'' located at https://www.bea.gov/international/usdia2009p.htm.
    \83\ See Table I.A 2., ``Selected Data for Foreign Affiliates 
and U.S. Parents in All Industries,'' located at https://www.bea.gov/international/pdf/usdia_2009p/Group%20I%20tables.pdf . The BEA 
defines a U.S. Parent of an MNC as a person that is a resident in 
the United States and owns or controls 10 percent or more of the 
voting securities, or the equivalent, of a foreign business 
enterprise. A Guide to BEA Statistics on U.S. Multinational 
Companies, located at https://www.bea.gov/scb/pdf/internat/usinvest/1995/0395iid.pdf.
    \84\ See Table II.A 1., ``Selected Data for Foreign Affiliates 
in All Countries in Which Investment Was Reported,'' located at 
https://www.bea.gov/international/pdf/usdia_2009p/Group%20II%20tables.pdf. The BEA limited foreign affiliates to those 
with total assets, sales, or net income of more than $25 million.
---------------------------------------------------------------------------

    To obtain information on the average number of inter-affiliate 
swaps, the Commission surveyed five corporations.\85\ Two corporations 
were large financial companies and the other three were manufacturing 
companies. Recognizing that most MNCs are manufacturers as opposed to 
financial companies, the Commission decided to take a weighted average 
of the sample and assumed that 95% of MNCs are manufacturers and 5% are 
financial companies. Based on this weighted average, the Commission 
estimates that affiliates enter into 2,230 inter-affiliate swaps 
annually on average.\86\
---------------------------------------------------------------------------

    \85\ The Commission is unable to provide additional information 
regarding the survey because information was submitted on a 
confidential basis.
    \86\ Due to the small sample size and data inconsistencies, this 
estimate may not provide a complete representation of the affiliate 
corporate structure or inter-affiliate swaps. For instance, 
responses were not consistent in format (quarterly figures versus 
six-month or annual figures) and also provided data for different 
time periods in 2010 or 2011. To generate its estimates, the 
Commission had to extrapolate this data by assuming that the amount 
of inter-affiliate swaps transacted during one quarter would be the 
same for the remaining three quarters of the year, or that inter-
affiliate swap data from 2010 and 2011 are comparable and can be 
combined for averaging purposes. The Commission also notes that 
responses regarding the number of inter-affiliate swap transactions 
varied widely and a much larger sample size would be required to 
generate a more accurate estimate. The Commission requests comment 
on the typical annual inter-affiliate swap activity within corporate 
groups and the total number of affiliates that would potentially 
elect the proposed inter-affiliate clearing exemption.
---------------------------------------------------------------------------

    Using the figures above, namely 2,347 MNCs with 22 subsidiaries 
each and each affiliate transacting an average of 2,230 swaps, the 
Commission has estimated that there are approximately 64,768,399 inter-
affiliate swaps entered into annually. To make this calculation, the 
Commission assumed that all U.S. inter-affiliate swaps and most foreign 
inter-affiliate swaps are with a single U.S. treasury/conduit 
affiliate. The Commission also assumed that 75% of treasury/conduit 
affiliates would be subsidiaries and would therefore be subject to this 
rulemaking. The remaining 25% of treasury/conduit affiliates would be 
the parent MNC and would not be the subject of this rulemaking because 
in general such swaps would qualify for the end-user exception.\87\ 
Finally, the Commission assumed that 50% of the inter-affiliate swaps 
entered into by foreign affiliates would be entered into with a U.S. 
treasury/conduit affiliate while the remaining swaps would be entered 
into with foreign affiliates and would not be

[[Page 50440]]

subject to this rulemaking. Table A summarizes the Commission's 
estimates of the number of MNCs, subsidiaries, affiliates, and annual 
inter-affiliate swaps.
---------------------------------------------------------------------------

    \87\ As noted above, the Commission assumes that 95% of MNCs are 
commercial entities and 5% are financial companies. Based on these 
numbers, the Commission believes that most of the swaps between 
affiliates are likely to qualify for the end-user exception because 
in most cases one of the affiliates will be a manufacturer and the 
inter-affiliate swap will hedge or mitigate the commercial risk of 
that affiliate. The Commission, however, does not have information 
as to how many inter-affiliate swaps would qualify for the end-user 
exception. Accordingly, the Commission has taken a conservative 
approach and assumed that none of the inter-affiliate swaps would 
qualify for the end-user exception.

       Table A--MNC, Affiliate, and Inter-Affiliate Swap Estimates
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Number of MNCs.......................................              2,347
Number of Subsidiaries per MNC.......................            22 \88\
Total Number of Subsidiaries.........................             50,848
Total Number of Affiliates Potentially Electing the               53,195
 Proposed Exemption..................................   [50,848 + 2,347]
Estimated Number of MNCs Subject to Proposed                       1,760
 Reporting Requirements..............................      [2,347 x 75%]
Estimated Number of Reporting MNCs that Would File                 1,584
 Annual Reports \89\.................................      [1,760 x 90%]
Average Annual Number of Inter-Affiliate Swaps per                 2,230
 Affiliate...........................................
Total Annual Number of Inter-Affiliate Swaps \90\....         64,768,399
------------------------------------------------------------------------

Request for Comments
    Q40. As discussed above, the Commission does not have information 
as to how many inter-affiliate swaps would qualify for the end-user 
exception. The Commission invites comments on whether most inter-
affiliate swaps would qualify for the end-user exception because one of 
the affiliates is a commercial entity and the swap hedges or mitigates 
the commercial risk of that affiliate. The Commission also requests any 
information that would help to quantify the number of inter-affiliate 
swaps or the share of inter-affiliate swaps that would qualify for the 
end-user exception.
---------------------------------------------------------------------------

    \88\ Eleven of the 22 affiliates are assumed to be U.S. 
affiliates.
    \89\ The Commission assumed that at least 90% of MNCs would 
elect to file annual reports, see further discussion below.
    \90\ The Total Annual Number of Inter-Affiliate Swaps is the 
total number of inter-affiliate swaps that MNCs, U.S. subsidiaries, 
and foreign subsidiaries entered into that would be subject to this 
rule. The total number of inter-affiliate swaps that MNC's entered 
into that would be subject to this rule is the number of MNCs 
(2,347) times the number of swaps per MNC (2,230) times 75%, or 0.75 
x 2,347 x 2,230. The total number of inter-affiliate swaps that U.S. 
subsidiaries entered into that would be subject to this rule is 10 x 
(0.75 x 2,230 x 2,347). There are 11 U.S. subsidiaries per MNC and 
each subsidiary enters into as many as swaps as each MNC, on 
average. However, 1 of the U.S. subsidiaries is the treasury/conduit 
affiliate and it enters into swaps with every other affiliate, 
including foreign affiliates. To avoid double counting, that 
subsidiary is removed from the equation and the number of U.S. 
subsidiaries is 10. Finally, the total number of inter-affiliate 
swaps that foreign subsidiaries entered into that would be subject 
to this rule is 0.5 x (11 x 0.75 x 2,230 x 2,347). Each foreign 
subsidiary enters into as many swaps as each U.S. subsidiary, but 
only 50% of foreign subsidiary swaps would be subject to this rule.
---------------------------------------------------------------------------

a. Proposed Sec.  39.6(g)(4) Reporting Requirements
    Proposed Sec.  39.6(g)(4) would require electing entities that are 
reporting counterparties to notify the Commission each time the inter-
affiliate clearing exemption is elected by delivering specified 
information to a registered SDR or, if no registered SDR is available, 
the Commission. Except as noted below, the notification would occur 
only once at the beginning of the swap life cycle.
    The reporting counterparty would have to report the information 
required in proposed Sec.  39.6(g)(4)(i) for each swap. It would also 
have to report the information required in proposed Sec. Sec.  
39.6(g)(4)(ii)-(iii) for each swap if no annual report had been filed. 
To comply with proposed Sec.  39.6(g)(4)(i), each reporting 
counterparty would be required to check one box indicating that both 
counterparties to the swap are electing not to clear the swap. The 
Commission expects that each reporting counterparty would likely spend 
15 seconds to two minutes per transaction entering this information 
into the reporting system. Regarding the proposed Sec. Sec.  
39.6(g)(4)(ii)-(iii) information, the Commission expects that it would 
take the reporting counterparty up to 10 minutes to collect and submit 
the information for the first transaction and one to five minutes to 
collect and submit the information for subsequent transactions with 
that same counterparty. The Commission expects a compliance attorney 
may be responsible for the collection at $390 per hour, resulting in 
the following per transaction costs to reporting counterparties: A 
range of $1.63-$13.00 for proposed Sec.  39.6(g)(4)(i); a cost of 
$65.00 for complying with proposed Sec. Sec.  39.6(g)(4)(ii)-(iii) for 
the first inter-affiliate swap; and range of $6.50-$32.50 for complying 
with proposed Sec. Sec.  39.6(g)(4)(ii)-(iii) for subsequent inter-
affiliate swaps with the same counterparty. Table B summarizes the 
estimated average burden hours and costs per reporting entity under 
proposed Sec.  39.6(g)(4), as follows:

                        Table B--Burden and Cost Estimates of Proposed Sec.   39.6(g)(4)
----------------------------------------------------------------------------------------------------------------
                                     Average burden     Average cost
 Proposed regulation/requirement       hours per             per       Total average annual     Total average
           description                transaction        transaction       burden hours          annual cost
----------------------------------------------------------------------------------------------------------------
Sec.   39.6(g)(4)(i)............  0.019 hours (1.14             $7.41  1,230,600             $479,933,837
                                   minutes).                            [64,768,399 x .019]   [64,768,399 x
                                                                                              $7.41] \91\
Sec.  Sec.   39.6(g)(4)(ii)-      First Transaction:            65.00  648 [(50,848 x 75% x  $247,884 [(50,848 x
 (iii) (costs incurred if no       0.17 hours (10                       10% x 0.17]           75%) x 10% x $65]
 annual report filed under Sec.    minutes).                                                  \93\
  39.6(g)(5) \92\).
                                  Subsequent                    19.50  323,651 [(64,768,399  $126,224,013
                                   Transactions: 0.05                   - 50,848 x 75%) x     [(64,768,399 -
                                   hours (3 minutes).                   10% x .05]            50,848 x 75%) x
                                                                                              10% x $19.50]\94\
----------------------------------------------------------------------------------------------------------------


[[Page 50441]]

b. Other Costs
i. Updating Reporting Procedures
    The Commission believes that companies subject to this rule would 
have established reporting systems to comply with other Commission 
rules regarding swap reporting. However, reporting counterparties may 
need to modify their reporting systems in order to accommodate the 
additional data fields required by this rule. The Commission estimates 
that those modifications would create a one-time expense of 
approximately one to ten burden hours per reporting counterparty. The 
Commission estimates that the hourly wage for a senior programmer is 
$341, which means that the one-time, per entity cost for modifying 
reporting systems to comply with proposed Sec.  39.6(g)(4) would likely 
be between $341 and $3,410.
---------------------------------------------------------------------------

    \91\ To derive the annual burden hours and cost for this row, 
the Commission calculated the following: the average burden hours or 
cost per transaction times total number of inter-affiliate swaps 
annually.
    \92\ The Commission assumes that at least 90% of corporations 
would elect to file an annual report to supply the information 
required by proposed Sec.  39.6(g)(4)(ii)-(iii) rather than report 
the information on a swap-by-swap basis; 10% of affiliates would 
report the required information on a swap-by-swap basis.
    \93\ To derive the annual burden hours and cost for this row, 
the Commission calculated the following: (A) The total number of 
subsidiaries (see Table A) times 75% to determine the number of 
affiliates involved in a first transaction subject to reporting; (B) 
then multiplied that number--38,136--with 10% to determine the 
number of affiliates that would report swap-by-swap, i.e., 3,813.6, 
and (C) then multiplied that number by 0.16667, to obtain the 
average burden hours to report, or $65, to obtain the average cost 
to report.
    \94\ To derive the annual burden hours and cost for this row, 
the Commission calculated following: (A) The total number of 
subsequent transactions, which is the total number of transactions 
(64,768,399) minus the total number of first time transactions (0.75 
x 50,848); (B) then multiplied that number--64,730,263--by 10% to 
determine the number of affiliates that would report swap-by-swap, 
i.e., 6,473,26.3, and (C) then multiplied that number by 0.05, to 
obtain the average burden hours to report, or $19.50, to obtain the 
average cost to report.
---------------------------------------------------------------------------

ii. Burden on Non-Reporting Affiliates
    An affiliate who does not function as the reporting counterparty 
may need to communicate information to the reporting counterparty after 
the swap is entered. That information could include, among other 
things, information to facilitate any due diligence that the reporting 
counterparty may conduct. These costs would likely vary substantially 
depending on how frequently the affiliate enters into swaps and the due 
diligence that the reporting counterparty chooses to conduct. The 
Commission estimates that a non-reporting affiliate would incur a 
burden of between five minutes and ten hours annually. The hourly wage 
for a compliance attorney is $390, which means that the aggregate 
annual cost for an electing counterparty communicating information to 
the reporting counterparty would likely be between $33 and $3,900.
iii. Annual Reporting Under Proposed Sec.  39.6(g)(5)
    The Commission expects at least 90% of MNCs would choose to file an 
annual report pursuant to proposed Sec.  39.6(g)(5). This assumption is 
based on feedback in comment letters submitted in response to other 
proposed rulemakings, in which commenters proposed an annual reporting 
requirement in lieu of swap-by-swap reporting. Additionally, the 
Commission believes that there is an economic incentive for corporate 
groups to file an annual report because filing annually is less costly 
and operationally simpler than swap-by-swap reporting. The Commission 
estimates that it would take an average of 30 minutes to 90 minutes to 
complete and submit this filing, resulting in 0.5 to 1.5 burden hours 
per MNC that elects to file the annual report. The average hourly wage 
for a compliance attorney is $390, which means that the aggregate 
annual cost for submitting the annual report would likely be 
approximately $195 to $585. Table C summarizes the estimated average 
burden hours and costs for modifying the reporting system, for non-
reporting affiliates to communicate information to the reporting 
counterparty after the swap is entered into, and for providing the 
annual report under proposed Sec.  39.6(g)(5), as follows:

                   Table C--Other Burdens and Costs to Reporting and Non-Reporting Affiliates
----------------------------------------------------------------------------------------------------------------
                                     Average burden
 Proposed regulation/requirement       hours per        Average  cost      Total average        Total average
           description                 affiliate       per  affiliate  annual burden  hours      annual cost
----------------------------------------------------------------------------------------------------------------
Modifying Reporting System (One-  5.5 hours..........       $1,875.50  9,680 [5.5 x 1,760]   $3,300,880
 time cost).\95\                                                                              [$1,875.50 x
                                                                                              1,760] \96\
Burden on Non-Reporting           5.04 hours.........        1,966.25  192,205 [5.04 x       $74,984,910
 Affiliates.                                                            38,136]               [$1,966.25 x
                                                                                              38,136] \97\
Sec.   39.6(g)(5) Annual Report.  1 hour.............          390.00  1,584 [(1,760 x 90%)  $617,760 [$390 x
                                                                        x 1] \98\             1,760 * 90%]
----------------------------------------------------------------------------------------------------------------

     
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    \95\ The Commission assumes that there is only one reporting 
counterparty at each MNC.
    \96\ 1,760 represents the 75% of 2,347 MNCs that the Commission 
estimates would be reporting parties.
    \97\ 38,136 represents 75% of 50,848, the total number of 
affiliates potentially electing the proposed exemption.
    \98\ This calculation represents the total burden hours for the 
estimated 90% of MNCs--1,584.2--that would file annual reports.
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c. Total Burden Hours
    The Commission estimates that the proposed exemption could result 
in an average total annual burden of 1,758,369 hours and average total 
annual costs of $685,309,281.\99\ The burden and cost estimates are 
approximately 1.8 minutes and $10.48 per inter-affiliate swap. Table D 
provides the total burden hours and costs of the proposed exemption and 
breaks down the totals into burden hours and costs per MNC, per 
affiliate, and per inter-affiliate swap.
---------------------------------------------------------------------------

    \99\ These numbers are obtained by adding all of the burden 
hours or costs in Tables B and C.

    Table D--Average Annual Burden and Cost Estimates of the Proposed
                                Exemption
------------------------------------------------------------------------
                                                               Cost of
                                                   Burden      proposed
                                                   hours      exemption
------------------------------------------------------------------------
Total.........................................    1,758,369  685,309,281
Total Average Annual per MNC \100\............          999      389,380

[[Page 50442]]

 
Total Average Annual per Affiliate \101\......           46       17,970
Total Average per Inter-Affiliate Swap \102\..       * 0.03  \103\ 10.58
------------------------------------------------------------------------
* (1.8 minutes).

     
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    \100\ Total Hours or Costs divided by 1,760 MNCs, which is equal 
to 75% x 2,347.
    \101\ Total Hours or Costs divided by 38,136 affiliates, which 
is equal to 75% x 50,848.
    \102\ Total Hours or Costs per Affiliate divided by 64,768,399 
inter-affiliate swaps.
    \103\ The ``Total Average per Inter-Affiliate Swap'' of $10.58 
is less than the average transaction costs listed in Table B (i.e., 
$65 and $19.50) for two reasons. First, $10.58 is the average cost 
for over 64 million inter-affiliate swaps. Second, the ``average 
total transaction costs'' in Table B apply only to the assumed ten 
percent (10%) of reporting counterparties that might choose to 
report swap-by-swap under Sec. Sec.  39.6(g)(4)(ii)-(iii).
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3. Information Collection Comments
    The Commission invites public comment on any aspect of the 
reporting burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission solicits comments in order to: (i) Evaluate whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility; (ii) evaluate the accuracy of 
the Commission's estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs (``OIRA'') in OMB, by fax at (202) 395-6566, or by 
email at OIRAsubmissions@omb.eop.gov. Please provide the Commission 
with a copy of submitted comments so that they can be considered in 
connection with a final rule. Refer to the Addresses section of this 
release for comment submission instructions to the Commission. A copy 
of the supporting statements for the collections of information 
discussed above may be obtained by visiting www.RegInfo.gov. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release in the Federal 
Register. Consequently, a comment to OMB is most assured of being fully 
effective if received by OMB (and the Commission) within 30 days after 
publication.

V. Text of Proposed Rules

List of Subjects in 17 CFR Part 39

    Business and industry, Clearing, Cooperatives, Reporting 
requirements, Swaps.

    For the reasons stated in the preamble, the Commission proposes to 
amend 17 CFR part 39 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    1. The authority citation for part 39 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 6, 12a, and 24a, 7a-1 as amended by Pub. 
L. 111-203, 124 Stat. 1376 (2010).

    2. In Sec.  39.6, add paragraph (g) to read as follows:


Sec.  39.6  Exceptions to the clearing requirement.

* * * * *
    (g) Exemption for swaps between affiliates.
    (1) Affiliate Status. Counterparties to a swap may elect not to 
clear a swap subject to the clearing requirement of section 2(h)(1)(A) 
of the Act if one counterparty directly or indirectly holds a majority 
ownership interest in the other, or if a third party directly or 
indirectly holds a majority ownership interest in both counterparties, 
and the financial statements of both counterparties are reported on a 
consolidated basis (``eligible affiliate counterparties''). A 
counterparty or third party directly or indirectly holds a majority 
ownership interest if it directly or indirectly holds a majority of the 
equity securities of an entity, or the right to receive upon 
dissolution, or the contribution of, a majority of the capital of a 
partnership.
    (2) Conditions. Eligible affiliate counterparties to a swap may 
elect the exemption described in paragraph (g)(1) of this section if:
    (i) Both counterparties elect not to clear the swap;
    (ii)(A) A swap dealer or major swap participant that is an eligible 
affiliate counterparty to the swap satisfies the requirements of Sec.  
23.504; or (B) the swap is, if neither eligible affiliate counterparty 
is a swap dealer or major swap participant, documented in a swap 
trading relationship document that shall be in writing and shall 
include all terms governing the trading relationship between the 
affiliates, including, without limitation, payment obligations, netting 
of payments, events of default or other termination events, calculation 
and netting of obligations upon termination, transfer of rights and 
obligations, governing law, valuation, and dispute resolution 
procedures;
    (iii) The swap is subject to a centralized risk management program 
that is reasonably designed to monitor and manage the risks associated 
with the swap. If at least one of the eligible affiliate counterparties 
is a swap dealer or major swap participant, this centralized risk 
management requirement shall be satisfied by complying with the 
requirements of Sec.  23.600;
    (iv) With the exception of 100% commonly-owned and commonly-
guaranteed affiliates where the common guarantor is also 100% commonly-
owned, for a swap for which both counterparties are financial entities, 
as defined in paragraph (g)(6), both parties shall pay and collect 
variation margin and comply with paragraph (g)(3) of this section;
    (v) Each counterparty either:
    (A) Is located in the United States;
    (B) Is located in a jurisdiction that has a clearing requirement 
that is comparable and comprehensive to the clearing requirement in the 
United States;
    (C) Is required to clear swaps with non-affiliated parties in 
compliance with United States law; or
    (D) Does not enter into swaps with non-affiliated parties; and
    (vi) The reporting counterparty for the swap, as determined in 
accordance with Sec.  45.8 of this chapter, complies with paragraph 
(g)(4) of this section with respect to each of the counterparties.
    (3) Variation Margin. When both counterparties are financial 
entities each counterparty shall pay and collect any variation margin 
as calculated pursuant to paragraph (g)(3)(i) for each uncleared swap 
for which the exemption described in paragraph (1) is elected.
    (i) The swap trading relationship documentation required in 
paragraph (g)(2)(ii) of this section must set forth the methodology to 
be used to calculate variation margin and describe it with sufficient 
specificity to allow the counterparties, the Commission, and any 
appropriate prudential regulator to calculate the margin requirement 
independently.
    (ii) Variation margin calculations and payments shall start on the 
business day after the swap is executed and continue

[[Page 50443]]

each business day until the swap is terminated.
    (iii) Each counterparty shall pay the entire variation margin 
amount as calculated pursuant to paragraph (g)(3)(i) when due.
    (iv) The swap trading relationship documentation required in 
paragraph (g)(2)(ii) of this section shall specify for each 
counterparty where margin assets will be held and under what terms.
    (4) Reporting Requirements. When the exemption described in 
paragraph (g)(1) of this section is elected, the reporting counterparty 
shall provide or cause to be provided the following information to a 
registered swap data repository or, if no registered swap data 
repository is available to receive the information from the reporting 
counterparty, to the Commission, in the form and manner specified by 
the Commission:
    (i) Confirmation that both counterparties to the swap are electing 
not to clear the swap and that each of the counterparties satisfies the 
requirements in paragraphs (g)(1) and (2) of this section applicable to 
it;
    (ii) For each counterparty, how the counterparty generally meets 
its financial obligations associated with entering into non-cleared 
swaps by identifying one or more of the following categories, as 
applicable:
    (A) A written credit support agreement;
    (B) Pledged or segregated assets (including posting or receiving 
margin pursuant to a credit support agreement or otherwise);
    (C) A written guarantee from another party;
    (D) The counterparty's available financial resources; or
    (E) Means other than those described in subparagraphs (A), (B), (C) 
or (D); and
    (iii) If a counterparty is an entity that is an issuer of 
securities registered under section 12 of, or is required to file 
reports under section 15(d) of, the Securities Exchange Act of 1934:
    (A) The relevant SEC Central Index Key number for that 
counterparty; and
    (B) Acknowledgment that an appropriate committee of the board of 
directors (or equivalent body) of the counterparty has reviewed and 
approved the decision not to clear the swap.
    (5) Annual Reporting. An affiliate that qualifies for the exemption 
described in paragraph (g)(1) of this section may report the 
information listed in paragraphs (g)(4)(ii) and (iii) of this section 
annually in anticipation of electing the exemption for one or more 
swaps. Any such reporting under this paragraph will be effective for 
purposes of paragraphs (g)(4)(ii) and (iii) of this section for 365 
days following the date of such reporting. During the 365-day period, 
the affiliate shall amend the report as necessary to reflect any 
material changes to the information reported.
    Each reporting counterparty shall have a reasonable basis to 
believe that the eligible affiliate counterparties meet the 
requirements for the exemption under this Sec.  39.6(g).
    (6) Financial Entity. For purposes of this Sec.  39.6(g), the term 
``financial entity'' shall have the meaning given such term in section 
2(h)(7)(C) of the Act.

    Issued in Washington, DC, on August 15, 2012, by the Commission.
Sauntia Warfield,
Assistant Secretary of the Commission.

Appendices to Clearing Exemption for Swaps Between Certain Affiliated 
Entities--Commission Voting Summary and Statements of Commissioners

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and 
Wetjen voted in the affirmative; Commissioner Sommers and O'Malia 
voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rules to exempt swaps between certain 
affiliated entities within a corporate group, known as inter-
affiliates, from the clearing requirement in the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    One of the primary benefits of swaps market reform is that 
standard swaps between financial firms will move into central 
clearing, which will significantly lower the risks of the highly 
interconnected financial system.
    Transactions between affiliates, however, pose less risk to the 
financial system because the risks are internalized within the 
financial institution.
    The proposed rule would allow for an exemption from clearing for 
swaps between affiliates under the following limitations.
    First, the proposed exemption would be limited to swaps between 
majority-owned affiliates whose financial statements are reported on 
a consolidated basis.
    Second, the proposed rules would require centralized risk 
management, documentation of the swap agreement, payment of 
variation margin and completion of reporting requirements.
    Third, the exemption would be limited to swaps between U.S. 
affiliates and swaps between a U.S. affiliate and a foreign 
affiliate located in a jurisdiction with a comparable and 
comprehensive clearing regime.
    This approach largely aligns with the Europeans' approach to an 
exemption for inter-affiliate clearing.
    I look forward to the public's comments on this proposal.

Appendix 2--Joint Statement of Commissioners Jill Sommers and Scott 
O'Malia

    We respectfully dissent from the notice of proposed rulemaking 
to exempt swaps between certain affiliated entities from the 
clearing requirement. While we wholly support a clearing exemption 
for swaps between affiliated entities within a corporate group, we 
cannot support the proposal before the Commission today because in 
certain instances it imposes an unnecessary requirement for 
variation margin on corporate entities that engage in inter-
affiliate trades.
    Inter-affiliate swaps enable a corporate group to aggregate risk 
on a global basis in one entity through risk transfers between 
affiliates. Once aggregated, commercial risk of various affiliates 
is netted, thereby reducing overall commercial and financial risk. 
This practice allows for more comprehensive risk management within a 
single corporate structure.
    Another benefit to this practice is that it allows one affiliate 
to face the market and hedge the risk of various operating 
affiliates within the group. Notably, inter-affiliate swaps between 
majority owned affiliates do not create external counterparty 
exposure and therefore do not pose the systemic risks that the 
clearing requirement is designed to protect against. The practice 
actually reduces risk and simply allows for more efficient business 
management of the entire group.
    We believe it is entirely appropriate that the Commission exempt 
inter-affiliate swaps from the clearing mandate. Unfortunately, this 
proposal inserts a requirement that most financial entities engaging 
in inter-affiliate swaps post variation margin to one another. It is 
not clear that this requirement will do anything other than create 
administrative burdens and operational risk while unnecessarily 
tying up capital that could otherwise be used for investment.
    The variation margin requirement is also largely inconsistent 
with the requirements included in the European Market Infrastructure 
Regulation. As we have both made clear during the implementation 
process, we believe coordination with our global counterparts is 
critical to the success of this new framework.
    Finally, the legislative history on this issue is clear. During 
the passage of the Dodd-Frank Act many Members' statements directly 
addressed the concerns regarding inter-affiliate swaps. 
Additionally, Members of the U.S. House of Representatives passed, 
by an overwhelming bi-partisan majority, an inter-affiliate swap 
exemption that does not include a variation margin requirement.
    We believe this proposal may have the unintended consequence of 
imposing substantial costs on the economy and consumers. With this 
in mind, we welcome comments from the public as to the costs and 
benefits of the variation margin requirement and hope that we 
incorporate those views in adopting the final rule.

[FR Doc. 2012-20508 Filed 8-20-12; 8:45 am]
BILLING CODE P