MATERIAL Y BIBLIOGRAFÍA

Proposed § 23.601 required SDs and MSPs to establish policies and procedures to monitor, detect, and prevent violations of applicable position limits established by the Commission, a designated contract market (DCM), or a swap execution facility (SEF), and to monitor for and prevent improper reliance upon any exemptions or exclusions from such position limits.

One commenter presented a report prepared by NERA stating that compliance with proposed § 23.601 for certain entities would entail average incremental start-up costs of $245,000 and average incremental ongoing annual costs of $228,000.99 _The

Commission observes that the incremental average costs provided by NERA do not differentiate between the costs of compliance with proposed § 23.601 and the costs of compliance with section 4s(j)(1) of the CEA, which requires each SD and MSP to “monitor its trading in swaps to prevent violations of applicable position limits.”

Accordingly, the Commission believes that the cost estimates presented by NERA exceed the incremental costs attributable to Commission rulemaking. The NERA report,

99 _{NERA Economic Consulting, Cost-Benefit Analysis of the CFTC’s Proposed Swap Dealer Definition}

Prepared for the Working Group of Commercial Energy Firms, December 20, 2011. In this late-filed comment supplement, NERA argues that cost-benefit considerations compel excluding entities “engaged in production, physical distribution or marketing of natural gas, power, or oil that also engage in active trading of energy derivatives”—termed “nonfinancial energy companies” in the report—from regulation as swap dealers, including § 23.601.

however, provides insufficient information to allow the Commission to assess the magnitude of the excess.

As discussed in more detail below, the Commission has also quantified certain costs of a monitoring regime based on the assumption that a firm could choose to implement a particular monitoring regime from a wide range of compliance systems, based on the specific, individual needs of the firm. Several other commenters requested that the rule be modified to lessen the cost burden on registrants.100 The Commission is reducing the burden on SDs and MSPs by modifying the rule as follows: (1) require policies and procedures reasonably designed to monitor for and prevent violations of applicable position limits; (2) require only notification to relevant personnel of changes to applicable position limits (rather than training); (3) except on-exchange violations of position limits from the Commission reporting requirement; (4) require testing of position limit procedures only if the registrant has transactions in instruments for which position limits have been established; and (5) require testing of position limit procedures quarterly (rather than monthly).

With respect to quarterly reporting of compliance with position limits to the chief compliance officer, senior management, and governing body under proposed § 23.601(g),

100 _{SIFMA recommended that testing of Position Limit Procedures be required only annually and not be}

required to be done all at the same time, The Working Group recommended that testing only be required on a semi-annual basis, and MetLife requested that the Commission permit the frequency of testing to be determined by an MSP based on the extent of its swap activities. MetLife also recommended that there be a clear exemption from testing requirements for MSPs that do not trade in swaps for which position limits have been established. BGA recommended that the Commission clarify that as long as an SD or MSP provides training on the position limits and establishes and enforces policies for monitoring, detecting, and curing violations, they will have met the obligation to “prevent violations.” SIFMA recommended that the Commission revise § 23.601(c) to provide that a change in position limit levels will not trigger “training,” but only require effective notification. The Working Group and MetLife recommended that the Commission require alerting the governing body only when a violation is material. The Working Group argued that the reporting of on-exchange violations of position limits to the Commission is already done by DCMs and will likely be the responsibility of SEFs as well, so SDs and MSPs should not be required to report on-exchange violations.

The Working Group recommended that the proposed rule should be revised to require only annual reports to the entity’s senior management and governing body, but did not quantify the cost burden of quarterly reporting. The Commission recognizes that generating such reports will entail costs in the form of preparing and transmitting the reports as required by the rule, but is unable to quantify the cost because the reports will vary greatly depending on the trading volume of individual SDs and MSPs in products for which position limits have been established. As discussed above with respect to Risk Exposure Reports, the Commission believes that the benefit of such reporting will be timely notification to decision makers within the SD and MSP of the entity’s record of compliance with applicable position limits, thus providing a timely opportunity to adjust or revise Position Limit Procedures to prevent future violations, if necessary, and

avoiding the costs to the public of excessive speculation. 6. Diligent supervision

Proposed § 23.602 required SDs and MSPs to: (1) establish a system to supervise all activities relating to its business performed by its partners, members, officers,

employees, and agents; (2) have that system be reasonably designed to achieve

compliance with the CEA and Commission regulations; (3) have that system designate a person with authority to carry out the supervisory responsibilities of the SD or MSP; and (4) have all such supervisors meet qualification standards that the Commission finds necessary or appropriate.

The benefits of diligent supervision result from increased compliance with the regulatory standards of the CEA and the rules of the Commission. The standards that SDs and MSPs follow (or fail to follow) in transacting their swaps may have

repercussions for financial system stability more broadly. Effective systemic risk management for swaps depends upon effective internal risk management protocols of individual SDs and MSPs and effective internal risk management in turn depends not just on appropriate policies and procedures, but on diligent supervision by the registrant to ensure that such policies and procedures are actually followed.

No commenters provided quantitative data on the cost of complying with the diligent supervision rule, but several commenters requested changes to the rule to lessen the compliance costs of SDs and MSPs.

The Working Group recommended that the Commission not require designation of a single individual with responsibility for supervision. The Commission considered whether permitting SDs and MSPs to designate more than a single individual for supervisory responsibilities would lessen the benefits of the rule and determined that it would not. Accordingly, the Commission is modifying the rule to require SDs and MSPs to designate “at least one person” (rather than “a person”) with authority to carry out supervisory responsibilities.

The Working Group also recommended that SDs and MSPs be given discretion to determine supervisor qualifications, presumably because such a standard would entail fewer compliance costs then the standard proposed (i.e., “training, experience,

competence, and such other qualification standards as the Commission finds necessary or appropriate”). The Commission considered whether the benefits of the rule could be maintained with this change, and determined they could not. Accordingly, the Commission is declining to modify the rule on this point because it believes that full

accountability for compliance with the CEA and Commission regulations is best served by requiring designation of individuals with objective qualifications.