Definitions of “Portfolio Reconciliation” and “Material Terms” for Purposes of Swap Portfolio Reconciliation, 27309-27314 [2016-10565]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 81, Number 88 (Friday, May 6, 2016)]
[Rules and Regulations]
[Pages 27309-27314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10565]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE17


Definitions of ``Portfolio Reconciliation'' and ``Material 
Terms'' for Purposes of Swap Portfolio Reconciliation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending its regulations in connection with the terms for 
which counterparties must exchange and resolve discrepancies when 
engaging in portfolio reconciliation.

DATES: The final rule is effective May 6, 2016.

FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Chief Counsel, 202-
418-5949, ffisanich@cftc.gov; KatherineS. Driscoll, Associate Chief 
Counsel, 202-418-5544, kdriscoll@cftc.gov; Gregory Scopino, Special 
Counsel, 202-418-5175, gscopino@cftc.gov, Division of Swap Dealer and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

[[Page 27310]]

I. Proposed Rule

    Under Sec.  23.502 of the Commission's regulations,\1\ swap dealers 
(``SD'') and major swap participants (``MSP''), as defined in Sec.  1.3 
of the Commission's regulations, must reconcile their swap portfolios 
with one another and provide non-SD and non-MSP counterparties with 
regular opportunities for portfolio reconciliation.\2\ Section 
23.500(i) \3\ defines the term ``portfolio reconciliation'' as any 
process by which the two parties to one or more swaps: (1) Exchange the 
terms of all swaps in the swap portfolio between the counterparties; 
(2) exchange each counterparty's valuation of each swap in the swap 
portfolio between the counterparties as of the close of business on the 
immediately preceding business day; and (3) resolve any discrepancy in 
material terms and valuations. Section 23.500(g) defines ``material 
terms'' to mean all terms of a swap required to be reported in 
accordance with part 45 of this chapter.\4\
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    \1\ 17 CFR 23.502.
    \2\ 17 CFR 23.502; see Confirmation, Portfolio Reconciliation, 
Portfolio Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 77 FR 
55904 (Sept. 11, 2012) (``Portfolio Reconciliation Final Rule'') at 
55926.
    \3\ 17 CFR 23.500(i).
    \4\ 17 CFR 23.500(g). Part 45 of the Commission regulations 
governs swap data recordkeeping and reporting requirements. The swap 
terms that must be reported under part 45 are found in appendix 1 to 
part 45. See 17 CFR part 45, App. 1; see also 17 CFR 45.1 (defining 
``primary economic terms'' as all of the terms of a swap matched or 
affirmed by the counterparties in verifying the swap, including at a 
minimum each of the terms included in the most recent Federal 
Register release by the Commission listing minimum primary economic 
terms for swaps in the swap asset class in question and stating that 
the current list of minimum primary economic terms is in appendix 
1); Swap Data Recordkeeping and Reporting Requirements, 77 FR 2197 
(Jan. 13, 2012) (promulgating the list of primary economic terms). 
Examples of primary economic terms include the price of the swap, 
payment frequency, type of contract (e.g., a ``vanilla option'' or 
``complex exotic option''), execution timestamp, and, if the swap is 
a multi-asset class swap, the primary and secondary asset classes. 
17 CFR part 45, App. 1.
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    On September 22, 2015, the Commission proposed to amend the 
definition of ``material terms'' in Sec.  23.500(g) to exclude nine 
specific data fields (the ``Proposal'').\5\ It was then--and remains so 
now--the intention of the Commission to alleviate the burden of 
resolving discrepancies with respect to a swap that are not relevant to 
the ongoing rights and obligations of the parties and the valuation of 
the swap without impairing the Commission's regulatory mission.\6\ The 
nine excluded data fields from the Proposal (hereinafter referred to as 
the ``Proposed Excluded Data Fields'') are:
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    \5\ Proposal to Amend the Definition of ``Material Terms'' for 
Purposes of Swap Portfolio Reconciliation, 80 FR 57129, Sept. 22, 
2015. The Commission's Division of Swap Dealer and Intermediary 
Oversight had previously provided SDs and MSPs with no-action relief 
stating it would not recommend an enforcement action against an SD 
or MSP that omits eleven specific data fields from the portfolio 
reconciliation process required under Sec.  23.502. See CFTC Letter 
13-31 (June 26, 2013).5
    \6\ See the Proposal, 80 FR at 57131.
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    1. An indication that the swap will be allocated;
    2. If the swap will be allocated, or is a post-allocation swap, the 
legal entity identifier \7\ of the agent;
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    \7\ A legal entity identifier is a 20-digit, alpha-numeric code, 
to uniquely identify legally distinct entities that engage in 
financial transactions. See Legal Entity Identifier Regulatory 
Oversight Committee, https://www.leiroc.org/; 17 CFR 45.6.
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    3. An indication that the swap is a post-allocation swap;
    4. If the swap is a post-allocation swap, the unique swap 
identifier; \8\
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    \8\ A unique swap identifier is a unique identifier assigned to 
all swap transactions which identifies the transaction (the swap and 
its counterparties) uniquely throughout the duration of the swap's 
existence. See 17 CFR 45.5.
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    5. Block trade indicator;
    6. With respect to a cleared swap, the execution timestamp;
    7. With respect to a cleared swap, the timestamp for submission to 
swap data repository (``SDR'');
    8. Clearing indicator; and
    9. Clearing venue.\9\
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    \9\ The Proposed Excluded Data Fields modified the No-Action 
Excluded Data Fields by: (1) Amending the execution timestamp data 
field to be specific to cleared swaps; (2) amending the timestamp 
for submission to an SDR data field to be specific to cleared swaps; 
(3) removing the data field containing an indication of whether the 
clearing requirement exception in CEA section 2(h)(7) has been 
elected with respect to an uncleared swap; and (4) removing the data 
field containing the identity of the counterparty electing the 
clearing requirement exception in CEA section 2(h)(7). The 
Commission proposed to retain those data fields for uncleared swaps 
as ``material terms'' because a discrepancy in this information in 
the records of the counterparties could mean that the related 
information is erroneous in the records of an SDR, which could have 
an impact on the Commission's regulatory mission.
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    In the Proposal, the Commission asked for comments on a number of 
issues related to the appropriate scope of portfolio reconciliation. 
For example, the Commission asked for comment on whether counterparties 
should only have to exchange the ``material terms'' of swaps or whether 
counterparties should be required to exchange all terms of swaps 
(material or not).\10\ The Commission also sought comment concerning, 
among other things, whether additional data fields should be excluded 
from portfolio reconciliation exercises.\11\
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    \10\ Proposal, 80 FR at 57132.
    \11\ Id.
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II. Summary of Comments

    In response to the Proposal, the Commission received four 
comments.\12\ All of the commenters supported going further than the 
Proposal by, for example, allowing counterparties to avoid having to 
reconcile non-material terms. None of the commenters wanted the 
Commission to keep Sec.  23.500 as it was. Additionally, none of the 
commenters suggested that the Commission do less than was proposed to 
reduce the burdens associated with portfolio reconciliation exercises. 
All four commenters urged the Commission to further reduce the scope of 
terms that must be reconciled for discrepancies than what had been 
suggested in the Proposal.
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    \12\ These comment letters are on the Commission's Web site at 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1619.
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    In particular, Chris Barnard of Germany stated that he supported 
``amending the definition of `material terms' to not include terms that 
are not relevant to the valuation of swaps portfolios'' and amending 
``Sec.  23.500(i)(1) so that counterparties only have to exchange the 
`material terms' (which would not include the Proposed Excluded Data 
Fields) of swaps.'' \13\
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    \13\ See Letter from Chris Barnard (Nov. 17, 2015), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60560&SearchText=.
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    Likewise, the Japanese Bankers Association recommended that the 
Commission amend Sec.  23.500(i)(1) so that swap counterparties only 
have to exchange the ``material terms'' of swaps, consistent with the 
Proposed Excluded Data Fields.\14\ The Japanese Bankers Association 
further stated that ``[t]he removal of the data reconciliation 
requirement of the Proposed Excluded Data Fields will generate 
significant cost savings.'' \15\
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    \14\ Letter from the Japanese Bankers Association (Nov. 16, 
2015), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60556&SearchText=.
    \15\ Id.
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    Additionally, consistent with the Proposal, Freddie Mac stated that 
it ``believes that the Commission should continue to exclude the 
execution timestamp and [SDR] submission timestamp data fields with 
respect to non-cleared swap transactions from the definition of 
`material terms' under 23.500(g) for purposes of compliance with the 
portfolio reconciliation requirements of 23.502.'' \16\
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    \16\ Letter from FreddieMac (Nov. 23, 2015), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60563&SearchText=.
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    In addition, ISDA commented that it believes that ``[t]he data 
fields that need to be exchanged and those which need to be reconciled 
should be the same'' in

[[Page 27311]]

that ``[t]hese should only include data fields which were agreed upon 
between the parties as a term of the swap and [are] relevant to the 
mutual obligations of a swap.'' \17\ ISDA agreed with the exclusion of 
the Proposed Excluded Data Fields for purposes of portfolio 
reconciliation but believes that the Commission should further expand 
the list of excluded items. ISDA suggests that the Commission define, 
``material terms,'' such that it would be limited to the primary 
economic terms of a swap, minus 25 specific data elements referenced in 
Appendix A to ISDA's comment letter.\18\ The data elements in question 
are otherwise required to be reported under Part 45, but are not, 
according to ISDA, relevant to the mutual obligations and valuation of 
swaps.\19\
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    \17\ Letter from ISDA, at 4 (Nov. 20, 2015), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60561&SearchText=.
    \18\ Id. at 2.
    \19\ Id.
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    ISDA's 25 recommended excluded terms are the following:
    1. An indication of whether the reporting counterparty is a SD with 
respect to the swap;
    2. An indication of whether the reporting party is an MSP with 
respect to the swap;
    3. If the reporting counterparty is not an SD or a MSP with respect 
to the swap, an indication of whether the reporting counterparty is a 
financial entity as defined in section 2(h)(7)(c) of the Commodity 
Exchange Act (``Act'');
    4. An indication of whether the reporting counterparty is a U.S. 
person;
    5. An indication that the swap will be allocated;
    6. If the swap will be allocated, or is a post-allocation swap, the 
legal entity identifier of the agent;
    7. An indication of whether the swap is a post-allocation swap;
    8. If the swap is a post-allocation swap, the unique swap 
identifier of the original transaction between the reporting 
counterparty and the agent;
    9. An indication of whether the non-reporting counterparty is an SD 
with respect to the swap;
    10. An indication of whether the non-reporting counterparty is an 
MSP with respect to the swap;
    11. If the non-reporting counterparty is not an SD or an MSP with 
respect to the swap, an indication of whether the reporting 
counterparty is a financial entity as defined in section 2(h)(7)(c) of 
the Act;
    12. An indication of whether the non-reporting counterparty is a 
U.S. person;
    13. An indication that the swap is a multi-asset swap;
    14. For a multi-asset swap, an indication of the primary asset 
class;
    15. For a multi-asset swap, an indication of the secondary asset 
class(es);
    16. An indication that the swap is a mixed swap;
    17. For a mixed swap reported to two non-dually-registered swap 
data repositories, the identity of the other SDR (if any) to which the 
swap is or will be reported;
    18. Block trade indicator;
    19. Execution timestamp;
    20. Timestamp for submission to SDR;
    21. Clearing indicator;
    22. Clearing venue;
    23. If the swap will not be cleared, an indication of whether the 
clearing requirement exception in section 2(h)(7) of the Act was 
elected;
    24. The identity of the counterparty electing the clearing 
requirement exception in section 2(h)(7) of the Act; and
    25. Any other term(s) of the swap matched or affirmed by the 
counterparties in verifying the swap.\20\
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    \20\ Id.
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    With respect to the twenty-fifth term, ISDA stated that such term 
was ``[n]ot suitable for material terms reconciliation'' because 
``[u]ndefined data fields cannot be reconciled between parties or 
supported by portfolio reconciliation.'' \21\
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    \21\ Id.
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III. Final Rule

    After careful consideration, the Commission has decided to finalize 
the rule by: (1) Modifying Sec.  23.500(i)(1) to define ``portfolio 
reconciliation'' as, inter alia, any process by which the two parties 
to one or more swaps exchange the material terms of all swaps in the 
swap portfolio between the counterparties, and (2) modifying Sec.  
23.500(g) to define ``material terms'' to mean the minimum primary 
economic terms of a swap, as defined in appendix 1 of part 45 of the 
Commission's regulations, other than the first 24 terms listed above.
    After analyzing and considering the materiality of such terms, the 
Commission believes that the terms are not material for purposes of 
portfolio reconciliation exercises. Specifically, the Commission has 
determined that these 24 data fields: (i) Pertain to static items about 
entering into the swap; (ii) pertain to static data fields about a 
party's status; (iii) are only relevant to cleared transactions; (iv) 
are data which is not agreed, exchanged, or confirmed between the 
parties; or (v) are not relevant to the swap's daily valuation. The 
Commission also believes that the removal of these terms from 
reconciliations would alleviate the burden of resolving discrepancies 
in terms of a swap that are not relevant to the ongoing rights and 
obligations of the parties and the valuation of the swap without 
impairing the Commission's regulatory mission. The Commission's view of 
these ``Excluded Data Fields'' only applies to the ``portfolio 
reconciliation'' process and has no bearing on other obligations that 
counterparties must adhere to, such as, but not limited to, 
recordkeeping and reporting obligations. Thus the final rule would make 
the portfolio reconciliation process more efficient without harming the 
Commission's ability to regulate the market. Accordingly, the 
Commission has decided to adopt the 24 terms as the ``Excluded Data 
Fields'' to be listed in Sec.  23.500(g)'s definition of material 
terms.
    The twenty-fifth data field listed above--``[a]ny other term(s) of 
the swap matched or affirmed by the counterparties in verifying the 
swap''--is a provision that could include terms, unlike the 24 excluded 
terms above, that would be relevant to or affect the valuation of the 
swap or the ongoing rights and obligations of the counterparties.\22\ 
Additionally, reconciling terms captured by this data field only covers 
terms that are matched or affirmed by the counterparties in verifying 
the swap, and terms that are matched or affirmed by the counterparties 
must, in any event, be memorialized and recorded, thereby providing a 
basis for counterparties to know which data fields must be included in 
portfolio reconciliation exercises. Accordingly, the Commission is not 
persuaded that the twenty-fifth data field is ambiguous and has 
determined not to exclude it from the definition of material terms.
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    \22\ For example, the Commission has stated that this field 
could include terms such as an ``early termination option clause'' 
in an interest-rate swap. See Exhibit C in appendix 1 to part 45; 
see also Exhibit C to appendix 1 to part 45 (listing the minimum 
primary economic terms data for foreign exchange transactions other 
than cross-currency swaps, and stating that the field for any other 
term(s) of the swap matched or affirmed by the counterparties in 
verifying the trade would include, for options, premium, premium 
currency, premium payment date; for non-deliverable trades, 
settlement currency, valuation (fixing) date; indication of the 
economic obligations of the counterparties).
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    The Commission will, however, provide an additional measure of 
certainty to swap counterparties in the final rule by modifying the 
definition of ``material terms'' in Sec.  23.500(g) to mean the minimum 
primary economic terms as defined in appendix 1 of part 45 of

[[Page 27312]]

the Commission's regulations (as opposed to meaning the primary 
economic terms more generally, without reference to the minimum terms 
enumerated in appendix (1), minus the Excluded Data Fields. Under this 
approach, market participants looking for the list of terms or data 
fields that must be exchanged during portfolio reconciliation exercises 
can look to the tables in appendix 1 to part 45 (minus the 24 Excluded 
Data Fields), which primarily feature concrete terms.
    With these modifications to the existing regulations, the final 
rule will make it such that the terms that must be exchanged during 
portfolio reconciliation exercises will be identical to the terms that 
have to be resolved for discrepancies, both of which will be reduced 
from what was required under the regulations as originally promulgated. 
The Commission is finalizing the rule as such because the Commission 
believes that modifying the rule in this manner will provide for a 
streamlined and efficient portfolio reconciliation process that will 
continue to provide counterparties (and the Commission) with sufficient 
information about swap transactions. Accordingly, the Commission 
believes that the Final Rule will result in fewer ``false positives'' 
and provide for an overall more effective portfolio reconciliation 
process.

IV. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \23\ requires that agencies consider 
whether the rules they propose will have a significant economic impact 
on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis reflecting the impact. For purposes of 
resolving any discrepancy in material terms and valuations, the final 
rule amends the definition in Sec.  23.500(g) of the Commission 
regulations so that the term ``material terms'' is defined as the 
minimum primary economic terms of a swap other than the 24 Excluded 
Data Fields. In connection with portfolio reconciliation, Sec.  
23.500(i)(1) requires counterparties to exchange the material terms of 
all swaps, which is now consistent with Sec.  23.500(i)(3), which 
requires counterparties to resolve any discrepancy in ``material 
terms'' and valuations. As a result of the change to the definition of 
``material terms'' in Sec.  23.500(g) of the Commission regulations, 
SDs and MSPs will not be required to include the 24 Excluded Data 
Fields in portfolio reconciliations. Accordingly, counterparties also 
will not have to resolve discrepancies of material terms or valuations 
in connection with the 24 Excluded Data Fields. The Commission has 
previously determined that SDs and MSPs are not small entities for 
purposes of the Regulatory Flexibility Act.\24\
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    \23\ 5 U.S.C. 601 et seq.
    \24\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982). The Regulatory Flexibility Act 
is limited to direct impact to small entities and not on indirect 
impacts on these businesses, which may be tenuous and difficult to 
discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 
(D.C. Cir. 1985); Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 
(D.C. Cir. 1985). Nonetheless, the Commission notes that any 
financial end-users that may be indirectly impacted by the proposed 
rule are likely to be eligible contract participants, and, as such, 
they would not be small entities. See Opting Out of Segregation, 66 
FR 20740, 20743 (Apr. 25, 2001).
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    Thus, for the reasons stated above, the Commission believes that 
the amendments to the definitions of ``material terms'' and ``portfolio 
reconciliation'' will not have a significant economic impact on a 
substantial number of small entities. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the regulations in this Federal Register release will not 
have a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \25\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. 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.
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    \25\ 44 U.S.C. 3501 et seq.
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    In connection with the proposal, the Commission anticipated that, 
if adopted the Final Rule would require an amendment to existing 
collection of information OMB Control Number 3038-0068 with respect to 
the collection of information entitled ``Confirmation, Portfolio 
Reconciliation, and Portfolio Compression Requirements for Swap Dealers 
and Major Swap Participants.'' \26\ The Commission therefore submitted 
this proposal to the Office of Management and Budget (OMB) for review. 
The Commission previously had discussed, for purposes of the PRA, the 
burden \27\ that the regulation mandating, inter alia, portfolio 
reconciliation would impose on market participants.\28\ In particular, 
the Commission estimated the burden to be 1,282.5 hours for each SD and 
MSP, and the aggregate burden for SDs and MSPs--based on a then-
projected 125 SDs and MSPs--was 160,312.5 burden hours.\29\
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    \26\ See OMB Control No. 3038-0068, https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0068.
    \27\ ``For purposes of the PRA, the term `burden' means the 
`time, effort, or financial resources expended by persons to 
generate, maintain, or provide information to or for a Federal 
Agency.' '' Portfolio Reconciliation Final Rule, 77 FR at 55959.
    \28\ Portfolio Reconciliation Final Rule, 77 FR at 55958-60.
    \29\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
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    The final rule amends the definition in Sec.  23.500(g) of the 
Commission regulations so that the term ``material terms'' means the 
minimum primary economic terms of a swap other than the 24 Excluded 
Data Fields.\30\ As noted above, under the final rule, clause (1) of 
the definition of ``portfolio reconciliation'' in Sec.  23.500(i) 
requires the parties to exchange the material terms of all swaps 
between them and clause (3) of Sec.  23.500(i) requires parties to 
resolve any discrepancy in ``material terms'' and valuations. The 
change will clarify that SDs and MSPs are not required to include the 
24 Excluded Data Fields in portfolio reconciliations or in any 
resolution of discrepancies of material terms or valuations.
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    \30\ As noted earlier, the final rule is amending the definition 
of the term, ``material terms,'' at Sec.  23.500(g) to exclude 24 
data fields that will not be considered ``material terms'' for the 
purposes of ``portfolio reconciliation'' as that term is defined in 
Sec.  23.500(i)(3).
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    As discussed above, the final rule reduces the number of ``material 
terms'' that counterparties are required to exchange and resolve for 
discrepancies during portfolio reconciliations, but will not eliminate 
the overall portfolio reconciliation requirement itself. The Commission 
stated that it believed that the Proposal would reduce the time burden 
for portfolio reconciliation by one burden hour for each SD and MSP, 
which would reduce the annual burden to 1,281.5 hours per SD and MSP. 
The Commission stated that it believed that the Proposal would result 
in one hour of less work for computer programmers for SDs and MSPs 
because the programmers who have to match the needed data fields from 
two different databases would have fewer data fields to obtain and 
resolve for discrepancies. In the Proposal, the Commission estimated 
that, given that there are 106 provisionally registered SDs and MSPs, 
the proposed amendment would result in an aggregate burden of 135,839

[[Page 27313]]

burden hours if adopted. The final rule, however, will reduce the time 
burden on SDs and MSPs even more than what was included in the 
proposal, and there is one less provisionally registered MSP. In light 
of the fact that the final rule will remove 24 data fields entirely 
from portfolio reconciliations, and based on a total of 105 (as opposed 
to 106) provisionally registered SDs and MSPs, the Commission believes 
that the final rule will reduce the time burden for portfolio 
reconciliation by approximately eight burden hours for each SD and MSP, 
which would reduce the annual burden to 1,274.5 hours per SD and MSP, 
with an aggregate burden of 133,822.5. In the Proposal, the Commission 
invited the public and other Federal agencies to comment on any aspect 
of the reporting burdens discussed above, but did not receive any such 
comments.

C. Considerations of Costs and Benefits

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the Act or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
1. Background
    The Commission believes that, while portfolio reconciliation 
generally helps counterparties to manage risk, commentators were 
persuasive in their arguments that portfolio reconciliation should only 
involve exchanging and resolving discrepancies in material terms, and 
that material terms should not include the 24 Excluded Data Fields 
mentioned above. The Commission has been convinced that exchanging the 
24 Excluded Data Fields does not improve the management of risks in 
swaps portfolios. By eliminating the requirement to exchange data 
fields that do not impact the valuation of the swap or the payment 
obligations of the counterparties and thereby reducing the number of 
data fields that parties must resolve for differences in portfolio 
reconciliation exercises, the Commission believes the final rule will 
decrease the costs that its current regulations impose on SDs and MSPs 
(and their counterparties) without a concomitant reduction in the 
benefits obtained from portfolio reconciliation exercises under the 
existing regulatory framework, as described below.
    For purposes of considering the costs and benefits of the final 
rule, the Commission has used its current rules as the baseline. 
Currently, counterparties to swap transactions must exchange certain 
data elements for each swap, and then compare these and validate each 
element, even where the element is not relevant to the valuation of the 
swap or the payment obligations of the counterparties. The final rule 
circumscribes this process to include only those data elements that are 
relevant on an ongoing basis to the valuation of the swap or the 
payment obligations of the counterparties. Accordingly, the Commission 
does not believe the final rule will impose any new costs on SDs, MSPs, 
or their counterparties.
2. Costs
    Rather, as described below, the Commission believes that, in the 
aggregate, the final rule will decrease the costs that its regulations 
impose on SDs and MSPs (and their counterparties) because it would 
eliminate the requirement to exchange and resolve discrepancies in swap 
terms that remain constant (or that do not impact the valuation of 
swaps or the payment obligations of the counterparties) and thereby 
reduce the number of data fields requiring particular attention in 
portfolio reconciliation exercises.
    The Commission does not believe the final rule will impair the 
Commission's ability to oversee and regulate the swaps markets. 
Portfolio reconciliation is designed to enable counterparties to 
understand the current status or value of swap terms. Because the 
Commission's proposal only is removing terms from the general portfolio 
reconciliation process that are not critical to the valuation of the 
swap or to the ongoing obligations of the counterparties, it will not 
negatively impact the amount of information available to the Commission 
about swaps. The Commission believes that this final rule will reduce 
SDs,' MSPs,' or their counterparties' costs of complying with 
Commission regulations because it will reduce the number of terms that 
counterparties must exchange during portfolio reconciliations.
3. Benefits
    The Commission believes that the final rule will reduce the annual 
burden hours for each SD and MSP by four hours, resulting in a total of 
1,278.5 hours, which leads to an aggregate number, based on 105 
registrants, of 134,242.5 burden hours. The Commission previously 
estimated that, assuming 1,282.5 annual burden hours per SD and MSP, 
the financial cost of its regulations on each SD and MSP would be 
$128,250.\31\ Therefore, based on those prior estimates, an eight-hour 
reduction in the annual burden hours for each SD and MSP would result 
in a financial cost of $127,450 per registrant. Accordingly, the 
Commission estimates that the aggregate financial burden of its 
regulations on the 105 provisionally registered SDs and MSPs would be 
$13,382,250.\32\
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    \31\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
    \32\ Previously, the Commission had estimated that, if 125 
entities had registered as SDs and MSPs, the aggregate burden would 
be $16,031,250. Id.
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    In addition, the Commission believes that the final rule benefits 
SDs, MSPs, and their counterparties because it will enable them to 
focus on reconciling data fields that actually impact the valuations of 
swaps and the obligations of the counterparties. Potentially, this 
change will enable the portfolio reconciliation process to be more 
efficient without reducing its usefulness as a risk management tool.
4. Section 15(a)
    Section 15(a) of the Act requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    For the reasons discussed above, the Commission believes that, 
notwithstanding its decision to remove the 24 Excluded Data Fields from 
the list of material terms that counterparties must exchange during 
portfolio reconciliations, its regulations will continue to protect 
market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    For the reasons discussed above, the Commission believes that the 
final rule will increase resource allocation efficiency of market 
participants engaging in reconciliation exercises without increasing 
the risk of harm to the financial integrity of markets.
c. Price Discovery
    For the reasons discussed above, the Commission did not identify 
any impact on price discovery as a result of the proposed regulation, 
and did not believe there would be one, but sought

[[Page 27314]]

comment as to any potential impact. The Commission did not receive any 
comments on this issue. Accordingly, the Commission continues to 
believe the final rule will not impact price discovery.
d. Sound Risk Management
    For the reasons discussed above, the Commission believes that the 
final rule is consistent with sound risk management practices because 
the regulatory change will not impair an entity's ability to conduct 
portfolio reconciliations.
e. Other Public Interest Considerations
    The Commission did not identify any other public interest 
considerations, but welcomed comment on whether the proposal would 
promote public confidence in the integrity of derivatives markets by 
ensuring meaningful regulation and oversight of all SDs and MSPs. The 
Commission did not receive any comments about this issue.

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

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

0
2. In Sec.  23.500, revise paragraphs (g) and (i)(1) to read as 
follows:

Sec.  23.500  Definitions.

* * * * *
    (g) Material terms means the minimum primary economic terms (as 
defined in Appendix 1 of part 45 of this chapter) of a swap other than 
the following:
    (1) An indication of whether the reporting counterparty is a swap 
dealer with respect to the swap;
    (2) An indication of whether the reporting party is a major swap 
participant with respect to the swap;
    (3) If the reporting counterparty is not a swap dealer or a major 
swap participant with respect to the swap, an indication of whether the 
reporting counterparty is a financial entity as defined in section 
2(h)(7)(c) of the Act;
    (4) An indication of whether the reporting counterparty is a U.S. 
person;
    (5) An indication that the swap will be allocated;
    (6) If the swap will be allocated, or is a post-allocation swap, 
the legal entity identifier of the agent;
    (7) An indication of whether the swap is a post-allocation swap;
    (8) If the swap is a post-allocation swap, the unique swap 
identifier of the original transaction between the reporting 
counterparty and the agent;
    (9) An indication of whether the non-reporting counterparty is a 
swap dealer with respect to the swap;
    (10) An indication of whether the non-reporting counterparty is a 
major swap participant with respect to the swap;
    (11) If the non-reporting counterparty is not a swap dealer or a 
major swap participant with respect to the swap, an indication of 
whether the reporting counterparty is a financial entity as defined in 
section 2(h)(7)(c) of the Act;
    (12) An indication of whether the non-reporting counterparty is a 
U.S. person;
    (13) An indication that the swap is a multi-asset swap;
    (14) For a multi-asset swap, an indication of the primary asset 
class;
    (15) For a multi-asset swap, an indication of the secondary asset 
class(es);
    (16) An indication that the swap is a mixed swap;
    (17) For a mixed swap reported to two non-dually-registered swap 
data repositories, the identity of the other swap data repository (if 
any to which the swap is or will be reported;
    (18) Block trade indicator;
    (19) Execution timestamp;
    (20) Timestamp for submission to swap data repository;
    (21) Clearing indicator;
    (22) Clearing venue;
    (23) If the swap will not be cleared, an indication of whether the 
clearing requirement exception in section 2(h)(7) of the Act was 
elected; and
    (24) The identity of the counterparty electing the clearing 
requirement exception in section 2(h)(7) of the Act.
* * * * *
    (i) * * *
    (1) Exchange the material terms of all swaps in the swap portfolio 
between the counterparties;
* * * * *

    Issued in Washington, DC, on May 2, 2016, by the Commission.
Robert N. Sidman,
Deputy Secretary of the Commission.

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

Amendments to the Definitions of ``Portfolio Reconciliation'' and 
``Material Terms'' for Purposes of Swap Portfolio Reconciliation--
Commission Voting Summary and Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Commissioner J. Christopher Giancarlo

    I support the final rule amending the definitions of portfolio 
reconciliation and material terms for purposes of swap portfolio 
reconciliation. I commend the Commission and Division of Swap Dealer 
& Intermediary Oversight staff for replacing no-action relief with a 
rulemaking subject to a cost-benefit analysis and the notice and 
comment requirements of the Administrative Procedure Act.
    In the proposal I raised two concerns. First, I questioned the 
logic of the proposed rule to require the exchange of all terms 
throughout the life of a swap as part of a portfolio reconciliation 
exercise, but then require reconciliation of only the material 
terms. I am pleased that the Commission has amended the definition 
of portfolio reconciliation to require the exchange of material 
terms so that the terms that must be exchanged are the same as those 
that must be reconciled.
    Second, I questioned the logic of the proposed rule to treat as 
material terms, and thus require the reconciliation of, data fields 
that will not change over time, such as execution timestamp and 
timestamp for submission to a swap data repository. I am also 
pleased that the Commission has revised the definition of material 
terms to mean the minimum primary economic terms as defined in 
appendix 1 of part 45 of the Commission's regulations and to exclude 
several additional data fields that are not relevant to the ongoing 
rights and obligations of the parties and the valuation of the swap.
    The final rule streamlines the portfolio reconciliation process 
and reduces costs for market participants without undermining the 
Commission's objectives for portfolio reconciliation. The final rule 
is much improved from the proposal so I am pleased to support it.

[FR Doc. 2016-10565 Filed 5-5-16; 8:45 am]
 BILLING CODE 6351-01-P