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2011-18248

  • Federal Register, Volume 76 Issue 138 (Tuesday, July 19, 2011)[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]

    [Rules and Regulations]

    [Pages 42508-42534]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-18248]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter 1

    Effective Date for Swap Regulation

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final Order.

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    SUMMARY: On June 17, 2011, the Commodity Futures Trading Commission

    (``CFTC'' or the ``Commission'') published for public comment in the

    Federal Register a proposed order that would grant, pursuant to the

    Commission's exemptive authority pursuant to the Commodity Exchange Act

    (``CEA''), certain temporary relief from the provisions of the CEA

    added or amended by title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (``Dodd-Frank Act'') that reference one or more

    terms regarding entities or instruments that title VII requires be

    ``further defined,'' such as the terms ``swap,'' ``swap dealer,''

    ``major swap participant,'' or ``eligible contract participant,'' to

    the extent that requirements or portions of such provisions

    specifically relate to such referenced terms and do not require a

    rulemaking. The CFTC also proposed to grant temporary relief from

    certain provisions of the CEA that will or may apply to certain

    agreements, contracts, and transactions in exempt or excluded

    commodities as a result of the repeal of various CEA exemptions and

    exclusions as of the general effective date set forth in section 754 of

    the Dodd-Frank Act, July 16, 2011. Upon consideration of the full

    record, the Commission has determined to issue this final exemptive

    order (``Final Order'') essentially as proposed, with appropriate or

    necessary modification or clarification.

    DATES: Effective July 14, 2011.

    FOR FURTHER INFORMATION CONTACT: Terry Arbit, Deputy General Counsel,

    202-418-5120, tarbit@cftc.gov, or Harold Hardman, Deputy General

    Counsel, 202-418-5120, hhardman@cftc.gov, Office of the General

    Counsel, or Steven Kane, Consultant, 202-418-5911, skane@cftc.gov,

    Office of the Chief Economist, CFTC, Three Lafayette Centre, 1151 21st

    Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act amends the CEA \2\ to establish a

    comprehensive new regulatory framework for swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the rulemaking and enforcement authorities of the Commission

    with respect to, among others, all registered entities and

    intermediaries subject to the Commission's oversight. Title VII also

    includes amendments to the federal securities laws to establish a

    similar regulatory framework for security-based swaps under the

    authority of the Securities and Exchange Commission (``SEC'').

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law. 111-203, 124 Stat. 1376 (2010).

    \2\ 7 U.S.C. 1 et seq.

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    Section 754 of the Dodd-Frank Act states that, unless otherwise

    provided, the provisions of subtitle A of title VII of the Dodd-Frank

    Act (``Title VII'') \3\ ``shall take effect on the later of 360 days

    after the date of the enactment of this subtitle or, to the extent a

    provision of this subtitle requires a rulemaking, not less than 60 days

    after publication of the final rule or regulation implementing such

    provision of this subtitle.'' The date 360 days after the date of

    enactment is July 16, 2011.

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    \3\ Subtitle A of Title VII contains two parts. Part I, entitled

    ``Regulatory Authority,'' consists of sections 711-720; part II,

    entitled ``Regulation of Swap Markets,'' consists of sections 721-

    754. Subtitle B of Title VII is entitled ``Regulation of Security-

    Based Swap Markets,'' and consists of sections 761-774. References

    to ``Title VII'' in this Release shall include only subtitle A of

    Title VII.

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    To implement the Dodd-Frank Act, as of July 8, 2011, the Commission

    has issued 52 advance notices of proposed rulemaking or notices of

    proposed rulemaking, two interim final rules, six final rules, and one

    proposed interpretive order. The regulatory requirements that have been

    proposed by the Commission present a substantially complete mosaic of

    the Commission's proposed regulatory framework under Title VII. In

    light of

    [[Page 42509]]

    this substantially complete mosaic, the Commission reopened or extended

    the comment period of many of its proposed rulemakings in order to

    provide the public with an additional opportunity to comment on the

    proposed new regulatory framework for swaps, either in part or as a

    whole.\4\ The extended comment period closed on June 3, 2011. The

    Commission also has solicited public comments on the phasing of rule

    implementation (i.e., identifying which requirements can be met sooner

    and which ones will take more time).\5\

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    \4\ See Reopening and Extension of Comment Periods for

    Rulemakings Implementing the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, 76 FR 25274, May 4, 2011.

    \5\ The Commission has noted its ability to phase in

    implementation of the new requirements based on factors such as: The

    type of swap, including by asset class; the type of market

    participants that engage in such trades; the speed with which market

    infrastructures can meet the new requirements; and whether

    registered market infrastructures or participants might be required

    to have policies and procedures in place ahead of compliance with

    such policies and procedures by non-registrants. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/staffconcepts050211.pdf.

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    Section 712(d)(1) of the Dodd-Frank Act requires the Commission and

    the SEC to further define certain terms used in Title VII, including

    the terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and

    ``eligible contract participant.'' \6\ Section 721(c) requires the

    Commission to adopt a rule to further define the terms ``swap,'' ``swap

    dealer,'' ``major swap participant,'' and ``eligible contract

    participant'' to prevent evasion of statutory and regulatory

    obligations.\7\ The Commission has issued two notices of proposed

    rulemaking that address these further definitions.\8\

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    \6\ Section 712(d)(1) provides: ``Notwithstanding any other

    provision of this title and subsections (b) and (c), the Commodity

    Futures Trading Commission and the Securities and Exchange

    Commission, in consultation with the Board of Governors [of the

    Federal Reserve System], shall further define the terms `swap',

    `security-based swap', `swap dealer', `security-based swap dealer',

    `major swap participant', `major security-based swap participant',

    and `security-based swap agreement' in section 1a(47)(A)(v) of the

    Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)

    of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''

    \7\ Section 721(c) provides: ``To include transactions and

    entities that have been structured to evade this subtitle (or an

    amendment made by this subtitle), the Commodity Futures Trading

    Commission shall adopt a rule to further define the terms `swap',

    `swap dealer', `major swap participant', and `eligible contract

    participant'.''

    \8\ See Further Definition of ``Swap Dealer,'' ``Security-Based

    Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based

    Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

    80174, Dec. 21, 2010 (``Entity Definitions'') and Further Definition

    of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap

    Agreement''; Mixed Swaps; Security-Based Swap Agreement

    Recordkeeping, 76 FR 29818, May 23, 2011.

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    The Commission's final rulemakings further defining the terms in

    sections 712(d) and 721(c) will not be in place as of July 16, 2011.

    Consequently, concerns have been raised about effects upon the swaps

    market and the applicability of various regulatory requirements to

    certain agreements, contracts, and transactions during the period

    between July 16, 2011 and the date(s) that those rulemakings have been

    completed. To address these concerns, and to ``strive to ensure that

    current practices will not be unduly disrupted during the transition to

    the new regulatory regime,'' \9\ the Commission proposed to exercise

    its authority under CEA section 4(c) and section 712(f) of the Dodd-

    Frank Act.

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    \9\ See Notice Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Trading Activity Done in Reliance Upon

    Section 2(h)(1)-(2) of the Commodity Exchange Act, 75 FR 56512,

    56513, Sept. 16, 2010 (``Grandfather Notice'').

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    Section 4(c) of the CEA, as amended by the Dodd-Frank Act, provides

    the Commission with authority to exempt certain agreements, contracts,

    and transactions (referred to hereafter collectively as

    ``transactions'') that may otherwise be subject to the CEA from various

    provisions of the CEA.\10\ Section 712(f) of the Dodd-Frank Act states

    that ``in order to prepare for the effective dates of the provisions of

    this Act,'' including the general effective date set forth in section

    754, the Commission may ``exempt persons, agreements, contracts, or

    transactions from provisions of this Act, under the terms contained in

    this Act.'' Section 754 specifies that unless otherwise provided in

    Title VII, provisions requiring a rulemaking become effective ``not

    less than 60 days after publication of the final rule'' (but not before

    July 16, 2011).

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    \10\ 7 U.S.C. 6(c).

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    The provisions of Title VII can be grouped into four major

    categories: (1) Provisions that require a rulemaking (for which relief

    was not proposed); (2) self-effectuating provisions that reference

    terms that require further definition; (3) self-effectuating provisions

    that do not reference terms that require further definition and that

    repeal provisions of current law; and (4) self-effectuating provisions

    for which relief was not proposed.

    Category 1 provisions are not self-effectuating because they

    require a rulemaking. A significant number of the Title VII provisions

    fall into this category. Examples of Category 1 provisions include new

    CEA section 4s(a) (governing registration of swap dealers and major

    swap participants), new CEA section 4s(e) (governing capital and margin

    requirements for swap dealers and major swap participants), and new CEA

    section 4s(h) (external business conduct standards for swap dealers and

    major swap participants).\11\ Pursuant to section 754, the rulemakings

    to implement these provisions of the CEA will not become effective, at

    a minimum, until 60 days after publication of a final Commission rule

    (and not before July 16, 2011).

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    \11\ To be codified at 7 U.S.C. 6s(a), 6s(e) and 6s(h),

    respectively.

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    Because the Category 1 provisions are not self-effectuating as of

    July 16, 2011, it was not necessary for the Commission to propose

    relief with respect to the same. As noted above, the Category 1

    provisions will not go into effect until at least 60 days after

    publication of a final Commission rule in the Federal Register.\12\

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    \12\ As stated in footnote 5, supra, the Commission has

    discretion to phase-in implementation of new requirements in

    Category 1 rulemakings as well as rulemakings conducted with respect

    to Category 2 provisions. Accordingly, the Commission anticipates

    that it may establish compliance dates for the substantive

    requirements established in a rulemaking implementing Category 1

    provisions that differ from the effective date of the rulemaking.

    The effective date and compliance dates for each rulemaking will be

    determined in each rulemaking proceeding. Additionally, as stated in

    footnote 69, infra, the Commission has received and has solicited

    public comments with respect to the appropriate phase-in of the

    Dodd-Frank Act rulemaking requirements.

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    The Category 4 provisions also fell outside the scope of the

    proposed order. They are self-effectuating and do not require relief

    because, in the judgment of the Commission, compliance with these

    requirements upon the effective date will not cause undue disruption to

    affected transactions, markets, or entities, and a delay of the

    imposition of these statutory requirements would not be in the public

    interest.

    The proposed order, as well as lists of the Category 1 and Category

    4 provisions prepared by Commission staff, were published on the

    Commission's Web site (http://www.cftc.gov) on June 14, 2011. A list of

    the provisions in each of the four categories is provided in the

    Appendix to this Final Order.

    II. The Proposed Order

    On June 14, 2011, the Commission issued a proposed order to provide

    temporary exemptive relief in two parts, each addressing one of the

    remaining categories of provisions noted above: (1) Category 2--

    provisions that are self-effectuating (i.e., do not require rulemaking)

    and reference terms that require further definition (i.e., ``swap,''

    ``swap dealer,'' ``major swap participant,'' or ``eligible contract

    [[Page 42510]]

    participant''); and (2) Category 3--provisions that are self-

    effectuating (i.e., do not require rulemaking) and repeal provisions of

    current law, but that do not reference terms that require further

    definition. The Commission's proposed order was published in the

    Federal Register on June 17, 2011.\13\

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    \13\ See Effective Date for Swap Regulation, 76 FR 35372, June

    17, 2011.

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    With respect to part one of the proposed order addressing Category

    2 provisions, the Commission proposed to temporarily exempt persons and

    entities from the provisions of the CEA, as added or amended by the

    Dodd-Frank Act, that reference one or more of the terms regarding

    entities or instruments subject to further definition under sections

    712(d) and 721(c) of the Dodd-Frank Act, including the terms ``swap,''

    ``swap dealer,'' ``major swap participant,'' or ``eligible contract

    participant.'' \14\ CEA section 4d(f), as amended by section 724 of the

    Dodd-Frank Act, is an example of a Category 2 provision to which the

    exemption provided in the proposed order would extend.\15\

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    \14\ 76 FR at 35374. In footnote 15 of the proposed order, the

    Commission stated: ``The Commission's authority to provide exemptive

    relief under CEA section 4(c), as amended by section 721(d) of the

    Dodd-Frank Act, may not extend to certain Category 2 provisions of

    the Dodd-Frank Act and the CEA. These provisions include: new CEA

    section 4s(l), 7 U.S.C. 6s(l) (providing for swap dealer segregation

    requirements with respect to uncleared swaps); amended CEA section

    5b(a), 7 U.S.C. 7a-1(a) (prohibiting a DCO from performing the

    functions of a DCO with respect to swaps unless the DCO is

    registered with the Commission); and new CEA section 4s(k), 7 U.S.C.

    6s(k) (providing for the duties and designation of a chief

    compliance officer for swap dealers and major swap participants). As

    such, these provisions will take effect on July 16, 2011, and may

    not be subject to the exemptive relief noted above granted by the

    Commission. The Commission staff has informed the Commission that it

    is separately considering whether to issue a no-action letter in

    which the staff would state that it would not recommend that the

    Commission commence an enforcement action against markets or market

    participants for failure to comply with the above-referenced

    provisions over a similar time period.'' Subsequently, a draft staff

    no-action letter that would provide such relief was posted on the

    Commission's Web site. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/noaction061411.pdf.

    \15\ To be codified at 7 U.S.C. 6d(f). Thus, for example,

    persons who accept money, securities or property (or extend credit

    in lieu thereof) from, for, or on behalf of a swaps customer to

    margin, guarantee, or secure a swap cleared by or through a

    derivatives clearing organization would not be required to register

    as futures commission merchants as otherwise required by section

    4d(f)(1) until the expiration of the exemption in part one of the

    proposed order.

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    The Commission made clear that the proposed exemptive relief from

    such provisions would apply only with respect to those requirements or

    portions of such provisions that specifically relate to such referenced

    terms. Further, the Commission stressed that the proposed relief

    ``would not in any way limit the Commission's authority with respect to

    any person, entity, or transaction pursuant to CEA sections 2(a)(1)(B),

    4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the

    Commission promulgated pursuant to such authorities, including

    regulations pursuant to CEA section 4c(b) proscribing fraud.'' \16\

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    \16\ 76 FR at 35374. In footnote 16 of the proposed order, the

    Commission stated, ``The Dodd-Frank Act amended the CEA's anti-fraud

    and anti-manipulation provisions to cover `swaps.''' Examples of

    such provisions include the amendments to the antifraud provisions

    in CEA section 4b, 7 U.S.C. 6b, as well as the amendments set forth

    in section 746 of the Dodd-Frank Act, which enacted certain insider

    trading prohibitions that apply to, among other things, futures

    contracts and swaps. The Commission stated: ``Although these

    provisions therefore would, under the proposed relief, not apply to

    `swaps' under the Dodd-Frank Act because that term is subject to

    further definition, nevertheless, they will apply to all

    transactions other than `swaps' (including, but not limited to,

    futures contracts, options on futures contracts, transactions with

    retail customers in foreign currency or other commodities pursuant

    to CEA section 2(c)(2) (7 U.S.C. 2(c)(2)), and transactions subject

    to exemptive relief pursuant to part two of the proposed order).''

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    The Commission also placed other limitations on the relief in part

    one of the proposed order. First, the Commission stated that the relief

    would not apply to any provisions of Title VII and the CEA that have

    become effective prior to July 16, 2011 or to Commission regulations

    already issued.\17\ Further, the relief would not affect any effective

    date set out in any specific Dodd-Frank Act rulemaking by the

    Commission.\18\ In addition, the proposed order would not limit the

    Commission's authority under section 712(f) of the Dodd-Frank Act to

    issue rules, orders, or exemptions prior to the effective date of any

    provision, in order to prepare for the effective date of such

    provision, provided that such rule, order, or exemption shall not

    become effective prior to the effective date of the provision.\19\

    Finally, the Commission stated that the proposed order would not affect

    the applicability of any provision of the CEA to futures contracts or

    options on futures contracts.\20\

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    \17\ 76 FR at 35374. In footnote 17 of the proposed order, the

    Commission included the following citation: ``See, e.g., section

    737(d) of the Dodd-Frank Act (amendments regarding position limits

    effective on the date of enactment). Similarly, this relief would

    not affect the effective date of any provision that may become

    effective after July 16, 2011, such as section 716 of the Dodd-Frank

    Act.''

    \18\ 76 FR at 35374.

    \19\ Id.

    \20\ Id. In footnote 18 of the proposed order, the Commission

    stated: ``Accordingly and by way of non-exclusive example, where a

    provision references both swaps and futures, this relief does not

    affect in any way the application of the provision (and any

    implementing Commission regulations thereunder) insofar as it refers

    to futures.''

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    The Commission proposed that the temporary exemptive relief would

    expire upon the earlier of: (1) The effective date of the applicable

    final rule further defining the relevant term; or (2) December 31,

    2011.\21\ In proposing to limit the relief to no more than a fixed

    period (i.e., December 31, 2011), the Commission provided the following

    reasons:

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    \21\ 76 FR at 35374.

    First, the Commission believes it appropriate and prudent to

    periodically review the extent and scope of any relief provided from

    the CEA, as amended by the Dodd-Frank Act. The Commission

    anticipates that additional rulemakings to implement the Dodd-Frank

    Act will be completed during this period of transitional relief.

    During this period the Commission also will be considering the

    appropriate phase-in of the various regulatory requirements under

    the Dodd-Frank rulemakings. Accordingly, the Commission believes it

    would be appropriate to periodically re-examine the scope and extent

    of the proposed exemptive relief in order to ensure that the scope

    of relief is appropriately tailored to the schedule of

    implementation of the Dodd-Frank Act requirements.

    Second, the limitation of this exemptive relief to no more than

    a fixed period of time is consistent with similar limitations on

    transitional relief provided by the Congress elsewhere in Title VII.

    Section 723(c) of the Dodd-Frank Act allows persons to submit

    petitions to the Commission ``to remain subject to section 2(h) of

    the [CEA].'' In acting upon such petitions, the Commission may allow

    persons to ``continue operating subject to section 2(h) [of the CEA]

    for not longer than a 1-year period.'' Similarly, section 734

    authorizes the Commission to grant petitions for persons to remain

    subject to the provisions of section 5d of the CEA governing the

    operation of exempt boards of trade (``EBOTs'') ``for up to 1 year

    after the effective date of this subtitle.'' In light of these

    provisions authorizing the Commission to provide transitional relief

    for no longer than a fixed period of time, the Commission believes

    it would be appropriate to provide transitional relief consistent

    with section 712(f) of the Dodd-Frank Act and CEA section 4(c) under

    this proposed order for no longer than a fixed time period.\22\

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    \22\ 76 FR at 35375 (footnotes omitted).

    In the proposed order, the Commission reiterated its intent: (1)

    That existing practices should not be unduly disrupted during any

    transition period; and (2) to deliberatively and efficiently proceed to

    complete the rulemakings to implement the Dodd-Frank Act.\23\ As to

    timing, the Commission proposed that in the event that a further

    definitions rulemaking is completed prior to December 31, 2011, the

    Commission will at the time of such

    [[Page 42511]]

    rulemaking address the appropriate phase-in and implementation dates of

    the resulting regulatory requirements. Alternatively, the Commission

    stated, should the proposed order expire at the end of the fixed time

    period--December 31, 2011--such expiration will not affect the

    Commission's ability to provide further relief, as appropriate, to

    avoid undue disruption or costs to market participants.\24\

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    \23\ Id.

    \24\ Id.

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    With respect to part two of the proposed order addressing Category

    3 provisions, the Commission's proposed order identified the existing

    provisions of the CEA that currently exclude or exempt, in whole or in

    part, certain transactions from Commission oversight under the CEA.\25\

    These are as follows:

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    \25\ Id.

    i. Section 2(d)(1),\26\ transactions in excluded commodities

    \27\ between eligible contract participants and not executed or

    traded on a trading facility;

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    \26\ 7 U.S.C. 2(d)(1).

    \27\ The term ``excluded commodity'' is defined in CEA section

    1a(13), 7 U.S.C. 1a(13), to include, among other things, financial

    instruments such as a currency, interest rate, or exchange rate, or

    any economic or commercial index based on prices, rates, values, or

    levels that are not within the control of any party to the

    transaction.

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    ii. Section 2(d)(2),\28\ principal-to-principal transactions in

    excluded commodities between certain eligible contract participants

    and executed or traded on an electronic trading facility;

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    \28\ 7 U.S.C. 2(d)(2).

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    iii. Section 2(g),\29\ transactions subject to individual

    negotiation between eligible contract participants in commodities

    other than agricultural commodities and not executed or traded on a

    trading facility;

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    \29\ 7 U.S.C. 2(g).

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    iv. Sections 2(h)(1)-(2),\30\ transactions in exempt commodities

    \31\ between eligible contract participants and not entered into on

    a trading facility;

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    \30\ 7 U.S.C. 2(h)(1)-(2).

    \31\ The term ``exempt commodity'' is defined in CEA section

    1a(14), 7 U.S.C. 1a(14), as a commodity other than an excluded or

    agricultural commodity, and includes energy and metals commodities.

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    v. Sections 2(h)(3)-(7),\32\ principal-to-principal transactions

    in exempt commodities between eligible commercial entities \33\ and

    executed or traded on an electronic trading facility (called exempt

    commercial markets, or ``ECMs'');

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    \32\ 7 U.S.C. 2(h)(3)-(7).

    \33\ The term ``eligible commercial entity'' is defined in CEA

    section 1a(11), 7 U.S.C. 1a(11).

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    vi. Section 5d,\34\ transactions in commodities, among other

    things, having a nearly inexhaustible deliverable supply or no cash

    market, between eligible contract participants and traded on an

    exempt board of trade (``EBOT''); and

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    \34\ 7 U.S.C. 7a-3.

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    vii. Section 2(e),\35\ which generally provides that nothing in

    the CEA governs or is applicable to an electronic trading facility

    that limits transactions authorized to be conducted on its

    facilities to those satisfying the requirements of sections 2(d)(2),

    2(g) or 2(h)(3).

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    \35\ 7 U.S.C. 2(e).

    Under the Dodd-Frank Act, these provisions will be removed from the

    CEA as of July 16, 2011. However, the Commission noted that part 35 of

    the Commission's regulations,\36\ and part 32 with respect to

    options,\37\ will continue to be available with respect to transactions

    that meet the conditions therein, until such time as they may be

    withdrawn, amended, or replaced by the Commission.\38\

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    \36\ 17 CFR 35.1 et seq.

    \37\ 17 CFR 32.1 et seq.

    \38\ 76 FR at 35375 and 35376 n.36.

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    As the Commission stated in the proposed order, part 35 originally

    was promulgated in 1993 pursuant to, among others, the Commission's

    general exemptive authority in CEA section 4(c) and authority under

    section 4c(b), and provides a broad-based exemption from the CEA for

    ``swap agreements'' in any commodity.\39\ Specifically, part 35 exempts

    ``swap agreements,'' as defined therein, from most of the provisions of

    the CEA if: (1) They are entered into by ``eligible swap participants''

    (``ESPs''); \40\ (2) they are not part of a fungible class of

    agreements standardized as to their material economic terms; \41\ (3)

    the creditworthiness of any party having an actual or potential

    obligation under the swap agreement would be a material consideration

    in entering into or determining the terms of the swap agreement,

    including pricing, cost, or credit enhancement terms; \42\ and (4) they

    are not entered into or traded on a multilateral transaction execution

    facility.\43\ The Commission stated that transactions fully meeting the

    conditions of part 35 are outside the scope of the proposed order.\44\

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    \39\ The Commission notes, as discussed infra, that part 35 was

    originally promulgated in part pursuant to the Commission's plenary

    options authority in CEA section 4c(b), 7 U.S.C. 6c(b).

    \40\ The parties covered under the ESP definition, while very

    broad, are not coextensive with those covered by the terms

    ``eligible commercial entity'' or ``eligible contract participant.''

    Therefore, it is possible that a small segment of persons or

    entities that are currently relying on one or more of the CEA

    exclusions or exemptions cited above might not qualify as an ESP and

    consequently would not be eligible for exemptive relief under part

    35.

    \41\ This condition was designed so that the exemption would not

    establish ``a market in swap agreements, the terms of which are

    fixed and are not subject to negotiation that functions essentially

    in the same manner as an exchange but for the bilateral execution of

    transactions.'' See Exemption for Certain Swap Agreements, 58 FR

    5587, 5590, Jan. 22, 1993.

    \42\ By this condition, the exemption does not extend to

    transactions that are subject to a clearing system where the credit

    risk of individual members of the system to each other in a

    transaction to which each is a counterparty is effectively

    eliminated and replaced by a system of mutualized risk of loss that

    binds members generally, whether or not they are counterparties to

    the original transaction. Id. at 5591.

    \43\ In this context, a multilateral transaction execution

    facility is a physical or electronic facility in which all market

    makers and other participants that are members simultaneously have

    the ability to execute transactions and bind both parties by

    accepting offers which are made by one member and open to all

    members of the facility. Id.

    \44\ 76 FR at 35376. In footnote 36, the proposed order also

    stated that ``part 32 of the Commission's regulations will continue

    to be available with respect to commodity option transactions that

    meet the conditions therein, until such time as part 32 may be

    withdrawn, amended, or replaced by the Commission.'' See Commodity

    Options and Agricultural Swaps, 76 FR 6095, Feb. 3, 2011.

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

    However, because part 35 covers essentially non-standardized, non-

    cleared, non-exchange traded transactions, certain persons or entities

    that currently rely on the CEA exclusions or exemptions cited above may

    not qualify for part 35. Therefore, and in response to requests from

    market participants for greater clarity regarding the applicability of

    various statutory and regulatory requirements to certain transactions

    following the general effective date, the Commission, pursuant to its

    authority under CEA section 4(c), proposed to grant relief for those

    transactions that satisfy certain criteria specified below.\45\

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

    \45\ 76 FR at 35376.

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

    Specifically, the Commission proposed to temporarily exempt a

    transaction in exempt or excluded commodities (and any person or entity

    offering or entering into such transaction) from the CEA (other than

    the anti-fraud and anti-manipulation enforcement provisions identified

    below) following the general effective date if the transaction

    otherwise would comply with part 35, notwithstanding that: (1) The

    transaction may be executed on a multilateral transaction execution

    facility; (2) the transaction may be cleared; (3) persons offering or

    entering into the transaction may be eligible contract participants as

    defined in the CEA (prior to July 16, 2011); (4) the transaction may be

    part of a fungible class of agreements that are standardized as to

    their material economic terms; and/or (5) no more than one of the

    parties to the transaction is entering into the transaction in

    conjunction with its line of business, but is neither an eligible

    contract participant nor an ESP, and the transaction was not and is not

    marketed to the public (the ``line of business provision'').\46\

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

    \46\ Id. In footnote 37, the proposed order stated that

    commenters responding to the Commission's proposed Entity

    Definitions have suggested that the Commission should exercise its

    authority to further define the term ``eligible contract

    participant'' to encompass the ``line of business'' provision that

    was a part of the Commission's Policy Statement Concerning Swap

    Transactions, 54 FR 30694, 30696-30697, July 21, 1989. The staff is

    evaluating these comments in the context of the Commission's

    rulemaking to further define the term ``eligible contract

    participant.''

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    [[Page 42512]]

    As the Commission noted, the proposed temporary exemptive relief

    would not affect the availability of either parts 35 or 32 with respect

    to transactions that fully meet the conditions therein.\47\ For

    transactions that fall outside of existing parts 35 or 32, the

    Commission made clear that the proposed relief would only be available

    to the extent those transactions (and persons offering or entering into

    such transactions) fall within the scope of any of the existing CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d as in effect prior to July 16,

    2011 or the line of business provision.\48\

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

    \47\ 76 FR at 35376. In addition, in September 2010, the

    Commission published an order in the Federal Register providing that

    it would extend grandfather relief, as provided in sections 723(c)

    and 734(c) of the Dodd-Frank Act, to ECMs and EBOTs provided that

    certain conditions are met. See Order Regarding the Treatment of

    Petitions Seeking Grandfather Relief for Exempt Commercial Markets

    and Exempt Boards of Trade, 75 FR 56513, Sept. 16, 2010

    (``grandfather relief orders''). The Commission stated that nothing

    in the proposed order was intended to impact the availability of the

    independent grandfather relief provided in the grandfather relief

    orders. Id. at n.38.

    \48\ 76 FR at 35376. The Commission stated in footnote 39 of the

    proposed order that the exemptive relief would not be available to

    an electronic trading facility that, as of July 15, 2011, is not

    already operating as an ECM pursuant to CEA sections 2(h)(3)-(7), or

    to an EBOT that, as of July 15, 2011, is not already operating

    pursuant to CEA section 5d, or not compliant with the conditions set

    forth in such provisions.

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

    With respect to any transaction within the scope of part two of the

    proposed order, the Commission stated that the proposed exemptive

    relief ``would not in any way limit the Commission's authority with

    respect to any person, entity, or transaction pursuant to CEA sections

    2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2) or 13, or the

    regulations of the Commission promulgated pursuant to such authorities,

    including regulations pursuant to CEA section 4c(b) proscribing

    fraud.'' \49\ Additionally, the Commission stated that the proposed

    relief would not affect any Dodd-Frank Act implementing regulations

    (and any implementation period contained therein) that the Commission

    promulgates and applies to the subject transactions, market

    participants, or markets.\50\ With respect to timing, the Commission

    proposed that this temporary exemptive relief would expire upon the

    earlier of: (1) December 31, 2011; or (2) the repeal or replacement of

    parts 35 or 32, as applicable.\51\ The Commission also specified that

    the exemptive relief in part two of the proposed order would operate

    for no longer than a fixed period of time for the same reasons as

    described above with respect to part one of the proposed order.\52\

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

    \49\ 76 FR at 35376. In so doing, the Commission noted that

    ``the addition of the term `swap' to some of these provisions would

    not in any way affect the applicability of these anti-fraud and

    anti-manipulation enforcement provisions to transactions subject to

    relief pursuant to part two of the proposed order.'' Id. at n.40.

    \50\ 76 FR at 35376. The Commission noted that the proposed

    order would not affect any Commission rulemaking authority over

    agreements, contracts, or transactions that may not depend on the

    terms subject to further definition under sections 712(d) or 721(c)

    of the Dodd-Frank Act. This relief also would not affect any

    provisions of the Dodd-Frank Act or the CEA that have become

    effective prior to July 16, 2011 or regulations already issued. Id.

    at n.41.

    \51\ 76 FR at 35376.

    \52\ Id.

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

    III. Comments on the Proposed Relief and Commission Determinations

    A. Comments Generally

    The Commission requested comment on all aspects of the proposed

    order, including whether the proposed temporary exemptions are

    consistent with the public interest and other requirements of CEA

    section 4(c).\53\ The Commission received 19 comment letters from a

    variety of interested parties, including market participants and trade

    associations, trading platforms and clearing organizations, futures and

    derivatives committees of bar associations, a law firm, and a non-

    governmental public interest organization.\54\

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

    \53\ 76 FR at 35377.

    \54\ Comments unrelated to the proposed order will not be

    evaluated here, but will inform the Commission as it proceeds with

    its Dodd-Frank Act rulemakings.

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

    The majority of commenters generally supported the Commission

    taking action to provide clarity and exemptive relief with respect to

    the July 16 effective date. For example, the American Feed Industry

    Association (``AFIA'') described the proposed order as ``a prudent

    move'' to ``ensure current practices for bona fide hedgers and end-

    users of agricultural commodities are not unduly disrupted during the

    transition.'' \55\ Better Markets, Inc. (``Better Markets'') described

    the proposed relief as ``appropriate and reasonable,'' and said that a

    limited delay is ``consistent with the Dodd-Frank Act, informed

    rulemaking and the goal of financial reform.'' \56\ The Alternative

    Investment Management Association (``AIMA'') commented that the

    proposed order was ``clear and provide[s] sufficient guidance for

    persons and entities to know which rules fall within the order and

    which do not.'' \57\ The National Grain and Feed Association (``NGFA'')

    commended the agency ``for taking steps to ensure the continued

    availability of important risk management tools used by hedgers in the

    grain, feed and processing industry.'' \58\

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

    \55\ See letter dated June 28, 2011, from Joel G. Newman,

    President and Chief Executive Officer, AFIA, at p. 1.

    \56\ See letter dated July 1, 2011, from Dennis M. Kelleher,

    President and Chief Executive Officer and Wallace C. Turbeville,

    Derivatives Specialist, Better Markets, at pp. 1, 2.

    \57\ See letter dated July 1, 2011, from Jiri Krol, Director of

    Government & Regulatory Affairs, AIMA, at page 2.

    \58\ See letter dated July 1, 2011, from Matt Bruns, Chair, Risk

    Management Committee, NGFA, at p. 1.

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

    Commenters also suggested various modifications or clarifications

    of the proposed order to address specific issues related to the scope

    or basis for the proposed exemptive relief. These issues, which are

    discussed in the remainder of this section below, include: (1) The

    scope of temporary relief; (2) the expiration date; (3) coverage of

    commodity options and agricultural swaps; (4) coverage of eligible

    contract participants; (5) private rights of action; (6) preemption;

    (7) market issues; (8) core principles; (9) intermediary issues; and

    (10) the scope of ``appropriate persons'' under CEA section 4(c). After

    considering the complete record in this matter, the Commission has

    determined that the requirements of CEA section 4(c) have been met. For

    the reasons discussed below, the Commission deems it in the public

    interest to issue this Final Order substantially as proposed, except

    for certain clarifications set forth in the discussion in this section

    below, which the Commission deems appropriate or necessary upon due

    consideration of the comments received.

    B. Scope of Temporary Relief

    1. Comments

    Several commenters expressed general support for the Commission's

    effort to provide exemptive relief but urged the Commission to use what

    they stated to be the Commission's broad authority to grant a more

    comprehensive relief. For example, the Committee on Futures and

    Derivatives Regulation of the New York City Bar Association (``NYCBA'')

    stated that the Commission has ``ample'' authority, either based solely

    on CEA Section 4(c) or as supplemented by section 754 and section

    712(f) of the Dodd-Frank Act, to

    [[Page 42513]]

    delay the effective date of the Dodd-Frank Act provisions until the

    effective date of the related implementing regulations.\59\ Similarly,

    the Derivatives and Futures Law Committee of the Business Law Section

    of the American Bar Association (``ABA Derivatives Committee'') stated

    that sections 754 and 712(f), as well as CEA section 4(c), authorize

    the Commission to temporarily grant relief from the Dodd-Frank Act

    until all necessary final rulemakings, including rulemakings as to

    definitions, are in place.\60\ Finally, BG Americas & Global LNG

    (``BGA'') contends that section 721(f) of the Dodd-Frank Act authorizes

    the Commission to extend exemptive relief with respect to CEA sections

    4s(l) (collateral segregation requirements for uncleared swaps) and

    4s(k) (duties and designation of a chief compliance officer).\61\

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

    \59\ See letter dated June 30, 2011, from Timothy P. Selby,

    Chair, NYCBA, at p. 3. NYCBA asserted that the requirement in

    section 712(f)(4) that exemptions be made ``under the terms of the

    Act'' is intended to require that they be made under the provisions

    establishing or limiting regulatory authority under the Dodd-Frank

    Act as a whole, rather than referring to the substance of the

    exemptive authority available under provisions of the CEA. Id. at p.

    4.

    \60\ See ABA Derivatives Committee at pp. 2-3. The ABA

    Derivatives Committee stated that the Commission's exemptive

    authority under the Dodd-Frank Act is broader than the exemptive

    authority specifically conferred by the CEA, especially in light of

    the different language of section 712(e) as compared to section

    712(f). Id. at p. 5.

    \61\ See letter dated July 1, 2011, from Lisa Yoho, Director,

    Regulatory Affairs and Matt Schatzman, Senior Vice President, Energy

    Marketing, BGA, at pp. 9-10. As discussed in footnote 14, supra, the

    Commission believes that its authority to provide exemptive relief

    under section 4(c), as amended by section 721(d) of the Dodd-Frank

    Act, may not extend to certain Category 2 provisions, such as CEA

    sections 4s(l) and 4s(k), though the Commission is informed that

    staff is separately considering a no-action letter with respect to

    these provisions.

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

    The Commission also received comments requesting modification or

    clarification regarding the categorization of certain provisions of the

    Dodd-Frank Act.\62\ Specifically, seven trade associations

    (collectively, the ``Associations'') filed a joint comment letter

    contending that many provisions in Categories 1 and 2 are

    interdependent with related rulemakings (including those relating to

    definitions) and, thus, should be extended exemptive relief until all

    of the mutually-interdependent rulemakings have been completed.\63\ The

    ABA Derivatives Committee believes that Category 2 provisions also are

    Category 1 provisions because they require the definitional rulemakings

    to be completed.\64\

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

    \62\ See generally letter dated July 1, 2011, from David M.

    Perlman, Bracewell & Giuliani LLP, on behalf of the Coalition of

    Physical Energy Companies, at p. 3 (requesting statement that the

    Commission intends to preserve the legal status quo for the swaps

    market unless and until it affirmatively and systematically makes

    changes).

    \63\ See letter dated July 1, 2011, from American Bankers

    Association, ABA Securities Association, Futures Industry

    Association, Institute of International Bankers, International Swaps

    and Derivatives Association, Investment Company Institute, and

    Securities Industry and Financial Markets Association, at p. 4.

    \64\ See ABA Derivatives Committee at p. 3.

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

    Commenters addressing the proposed relief for Category 3 provisions

    urged that the Commission use its broad authority under CEA section

    4(c) and section 712(f) of the Dodd-Frank Act to amend part 35 of the

    Commission's regulations to provide blanket exemptive relief.\65\ The

    NYCBA recommended that the Commission preserve the current ``safe

    harbors'' in CEA sections 2(d), 2(e), 2(g), 2(h) and 5d until the

    effective date of the applicable final rules with certain

    clarifications, and that such ``safe harbors'' should be available even

    if the subject transaction is cleared.\66\

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

    \65\ See, e.g., letter dated July 1, 2011, from R. Michael

    Sweeney, Jr., Hunton & Williams, on behalf of the Working Group of

    Commercial Energy Firms (``CEF''), at pp. 3-4. In the alternative,

    CEF recommends that at a minimum, the Commission use its authority

    under sections 723(c)(l)-(2) to provide grandfather relief to all

    persons who transact, operate, or otherwise rely on current CEA

    section 2(h) as well as all transactions subject to this provision,

    for a six-month period commencing on July 16, 2011. CEF states that

    the Commission may rely on section 712(f) as well as sections

    723(c)(l)-(2) to exempt persons relying on current CEA sections

    2(h)(l)-(2) in carrying out their bilateral exempt commodity

    transactions, for up to a one year period, following the effective

    date. CEF at p. 4.

    \66\ NYCBA at pp. 6-8.

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

    2. Commission Determination

    As stated in the proposed order, a significant number of Dodd-Frank

    Act provisions are not self-effectuating and, thus, it is not necessary

    to provide relief with respect to such provisions (i.e., Category 1).

    With respect to the provisions of the Dodd-Frank Act in Categories 2 or

    3, the Commission has determined to use its authority to issue this

    exemptive relief under section 712(f) of the Dodd-Frank Act co-

    extensively with its exemptive authority under the CEA.\67\ The

    exemptive relief will allow markets and market participants to continue

    to operate under the regulatory regime as in effect prior to July 16,

    2011, but subject to various implementing regulations that the

    Commission promulgates and applies to the subject transactions, market

    participants, or markets.

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

    \67\ See CEA sections 4(c) and 4c(b).

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

    This temporary relief, in the Commission's judgment, is

    appropriately tailored to enable the Commission to continue to

    implement the Dodd-Frank Act in an expeditious manner, while minimizing

    undue disruption and uncertainty for the markets and market

    participants during the transition period. In this regard, the

    Commission reiterates that, in considering the appropriate phase-in of

    its various Dodd-Frank Act implementing regulations, it intends to

    continue to ``strive to ensure that current practices will not be

    unduly disrupted during the transition to the new regulatory

    regime.''\68\ While the sequencing of the final rules is beyond the

    scope of this Final Order, the interdependencies of the various

    rulemakings will be a consideration in determining the implementation

    date for each final rule.\69\

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

    \68\ See Grandfather Notice, supra, n.9.

    \69\ During the Dodd-Frank Act rulemaking process the Commission

    has received a number of comments recommending that the Commission

    appropriately sequence the effective dates and compliance dates

    under the various Dodd-Frank Act rulemakings. As noted in footnote

    5, supra, the Commission already has held a roundtable and solicited

    public comments with respect to the appropriate phase-in of the

    Dodd-Frank Act rulemaking requirements. Prior to the roundtable, on

    April 29, 2011, CFTC staff released a document that set forth

    concepts that the Commission may consider with regard to the

    effective dates of final rules for swaps under the Dodd-Frank Act.

    The Commission therefore anticipates that the determinations

    regarding the phase-in of compliance dates for and within the

    various rulemakings will continue to be informed by the Commission's

    further consideration of this issue, including public comments.

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

    C. Expiration Date

    1. Comments

    The proposed order included an outermost, fixed expiration date for

    parts one and two of the exemptive relief. Part one would expire on the

    earlier of: (1) The effective date of the applicable final rule further

    defining the relevant term; or (2) December 31, 2011. Part two of the

    proposed order would expire on the earlier of: (1) December 31, 2011;

    or (2) the repeal or replacement of part 35 of the Commission's

    regulations. In the proposed order, the Commission explained that

    setting an expiration date was ``appropriate to periodically re-examine

    the scope and extent of the proposed exemptive relief'' and that ``the

    limitation of this exemptive relief to no more than a fixed period of

    time is consistent with similar limitations on transitional relief

    provided by the Congress'' in section 723(c) and section 734 of the

    Dodd-Frank Act.\70\

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

    \70\ 76 FR at 35375.

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

    Better Markets generally supported the expiration date because it

    believes that it is extremely important for the

    [[Page 42514]]

    Commission to have the ability to assess conditions related to

    implementation as they evolve over the next six months.\71\ Conversely,

    the ABA Derivatives Committee, AIMA, the Associations, CME Group Inc.

    (``CME''), and MarketAxess Holdings Inc. (``MarketAxess'') argued that

    a predetermined global expiration date was not necessary and the

    Commission should provide that the temporary relief will expire for a

    given rule only upon the effective date (or compliance date, if later)

    of the applicable final rule.\72\

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

    \71\ See Better Markets at p. 2.

    \72\ See ABA Derivatives Committee at p. 6; AIMA at p. 2;

    Associations at p. 6; letter dated July 1, 2011, from Craig S.

    Donohue, Chief Executive Officer, CME, at p. 2; letter dated June

    29, 2011, from Richard McVey, Chairman and Chief Executive Officer,

    MarketAxess, at p. 2.

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

    In the event the Commission decides to include an expiration date,

    the NYCBA and ABA Derivatives Committee believe that the Commission

    should revise the proposed order to trigger the effectiveness of the

    relevant provision only when both the definitional rulemaking and the

    substantive rulemaking for the relevant provision become effective.\73\

    Similarly, the Associations and CME urged the Commission, at a minimum,

    to extend the expiration date to July 2012, consistent with the

    transitional period specified in sections 723(c) and 734 of the Dodd-

    Frank Act.\74\ Finally, to address a perceived ``potential gap

    period,'' the NYCBA and ABA Derivatives Committee believe that the

    order should contain language specifically addressing situations where

    final rules are adopted within 60 days before December 31, 2011, or

    where a final rule otherwise has a prescribed effective date after

    December 31, 2011.\75\

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

    \73\ See NYCBA at p. 4; ABA Derivatives Committee at p. 7.

    \74\ See Associations at p. 6, n.11; CME at p. 2.

    \75\ See NYCBA at p. 5; ABA Derivatives Committee at pp. 7-8.

    NYCBA and the ABA Derivatives Committee proposed the following

    language: ``This order shall expire on (1) December 31, 2011, with

    respect to any provision for which final rules (including final

    definitional rules) were not adopted on or before December 31, 2011,

    or (2) with respect to any provision for which final rules

    (including final definitional rules) were adopted on or before

    December 31, 2011, on the later of the effective date of all final

    definitional rules used in the provision and the effective date of

    the provision as set forth in the final rules adopting such

    provision.''

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

    2. Commission Determination

    The Commission has determined, for the reasons discussed in the

    proposed order, not to alter the expiration date(s) contained in the

    proposed order. An automatic expiration date of no later than December

    31, 2011, will allow the Commission to review the extent and scope of

    relief provided from the CEA on a measured basis. Should the Commission

    deem it appropriate to extend any exemptive relief, the Commission will

    be in a better position to tailor any exemption at that time. Further,

    as noted in the proposed order, limiting exemptive relief to a fixed

    period is consistent with the approach to transitional relief provided

    in sections 723(c) and 734 of the Dodd-Frank Act. With regard to any

    concerns over a potential ``gap period'' before or after the expiration

    date of December 31, 2011, the Commission notes that it can address

    compliance date concerns within the context of each individual

    rulemaking. Once again, the Commission will be able to act in a

    measured manner tailored to the particular statutory and regulatory

    provisions.

    D. Commodity Options and Agricultural Swaps

    1. Comments

    Several commenters requested that the Commission clarify that the

    relief based on part 35 in part two of the proposed order, which

    applies to certain transactions in exempt and excluded commodities,

    covers commodity options.\76\ The ABA Derivatives Committee also

    requested that the Commission expand the relief based on part 35 in

    part two of the proposed order to include swaps and options in

    agricultural commodities.\77\ Finally, commenters including various

    energy companies urged the Commission to rely, in part, upon CEA

    section 4c(b) as authority to issue the elements of the relief related

    to options, stating that the Commission retains its plenary authority

    to regulate commodity options under CEA section 4c(b) \78\ and that

    section 4c(b) was unaltered by the Dodd-Frank Act.\79\ The NGFA,

    though, noted that the proposed order addressed concerns it had

    regarding the availability of certain option-based transactions until

    final rules authorizing their continued use are published.\80\

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

    \76\ See CEF at p. 5; ABA Derivatives Committee at p. 12; BGA at

    p. 8.

    \77\ See ABA Derivatives Committee at pp. 9, 11-13; letter dated

    June 29, 2011, from Paul J. Pantano, Jr., and Athena Eastwood,

    Cadwalader, Wickersham & Taft LLP, on behalf of the Commodity

    Options and Agricultural Swaps Working Group, at p. 2.

    \78\ See CEF at p. 5, n.12.

    \79\ See ABA Derivatives Committee at pp. 10-11; BGA at p. 8,

    n.22.

    \80\ See NGFA at p. 1.

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

    2. Commission Determination

    With respect to options, the Commission is clarifying that the

    relief in part two of the Final Order that is based on part 35 applies

    to commodity options on excluded and exempt commodities to the extent

    they were permitted by the applicable statutory exemptions and

    exclusions in effect prior to July 16, 2011. As reflected in the

    commenters' citations to Sec. 35.1 of the Commission's regulations,

    the text of paragraph (b)(1) of the ``swap agreement'' definition in

    the rule lists several types of options, including, but not limited to,

    currency options, interest rate options, and rate caps and collars, and

    includes the following text: ``any other similar agreement (including

    any option to enter into any of the foregoing).'' \81\

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

    \81\ 17 CFR 35.1(b)(1)(i). In addition to the options

    specifically identified in the swap agreement definition, in the

    part 35 adopting release, the Commission stated that ``[t]he words

    `any similar agreement' in the definition includes any agreement

    with a similar structure to those transactions expressly included in

    the definition (e.g., a cap, collar, or floor) without regard to the

    nature of the underlying commodity interest involved.'' Exemption

    for Certain Swap Agreements, 58 FR 5587, 5589 n.16, Jan. 22, 1993.

    The Commission also said that ``[i]n enacting this exemptive rule,

    the Commission is also acting under its plenary authority under

    section 4c(b) of the Act with respect to swap agreements that may be

    regarded as commodity options.'' Id. at 5589.

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

    Under part two of the Final Order, transactions in exempt or

    excluded commodities (and persons offering, entering into, or rendering

    advice or rendering other services with respect to such transactions)

    will be temporarily exempt from the CEA if such transactions comply

    with part 35 notwithstanding that: (1) The transaction may be executed

    on a multilateral transaction execution facility; (2) the transaction

    may be cleared; (3) persons offering or entering into the transaction

    may be eligible contract participants as defined in the CEA (prior to

    the enactment of the Dodd-Frank Act); (4) the transaction may be part

    of a fungible class of agreements that are standardized as to their

    material economic terms; and/or (5) no more than one of the parties to

    the transaction is entering into the transaction in conjunction with

    its line of business, but is neither an eligible contract participant

    nor an ESP, and the transaction was not and is not marketed to the

    public. The options identified in the swap agreement definition and any

    options captured by the concluding catch-all language, as well as any

    options described in paragraphs (b)(1)(ii) \82\ and/or (iii) \83\ of

    Sec. 35.1 of the

    [[Page 42515]]

    Commission's regulations, involving excluded or exempt commodities are,

    therefore, within the scope of the Final Order.\84\

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

    \82\ Paragraph (b)(1)(ii) of Sec. 35.1 defines ``any

    combination of the foregoing [list of identified swap agreements]''

    as a swap agreement.

    \83\ Paragraph (b)(1)(iii) of Sec. 35.1 defines ``[a] master

    agreement for any of the foregoing [list of identified swap

    agreements] together with all supplements thereto'' as a swap

    agreement.

    \84\ In addition to CEA section 4(c) and section 712(f) of the

    Dodd-Frank Act, CEA section 4c(b), 7 U.S.C. 6c(b) also provides the

    Commission with authority to issue the temporary exemptive Order

    with respect to commodity options. Section 4c(b), which was

    unaltered by the Dodd-Frank Act, provides the Commission plenary

    authority to regulate commodity options. Parts 32 and 35 were

    issued, in part, based on the Commission's authority under CEA

    section 4c(b).

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

    With respect to agricultural commodities, part 35 is not currently

    available for option transactions on the agricultural commodities

    enumerated in either CEA section 1a(4) \85\ or Sec. 32.2 of the

    Commission's regulations \86\ (the ``Enumerated Agricultural

    Commodities''). Such option transactions may occur only pursuant to the

    agricultural trade option exemption in Sec. 32.13 of the Commission's

    regulations.\87\ As the Commission noted when it adopted Sec. 32.13 as

    an interim final rule, which it later adopted as a final rule:

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

    \85\ 7 U.S.C. 1a(4).

    \86\ 17 CFR 32.2.

    \87\ 17 CFR 32.13. The Commission notes that the NGFA comment

    letter generally supported the Commission's approach ``to preserve

    the availability of certain option-based transactions such as * * *

    OTC options until final rules authorizing their continued use are

    published.'' See NGFA at p. 1.

    [o]ne commenter representing swaps dealers requested that the

    Commission clarify that the part 35 exemption applies to off-

    exchange agricultural options rather than this exemption [17 CFR

    Sec. 32.13(g)]. The Commission disagrees. Any off-exchange option

    on an enumerated agricultural commodity must comply with Commission

    rule 32.13(g) for exemption from the Act and Commission rules, and

    no other exemptive provision is available.'' \88\

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

    \88\ See Trade Options on the Enumerated Agricultural

    Commodities, 63 FR 18821, 18829, Apr. 16, 1998. Sec. 32.13(a)

    technically also would be available to persons satisfying its terms.

    However, that would require such persons to register as agricultural

    trade option merchants (``ATOMs'') and comply with the ATOM

    regulatory regime. Only one firm has ever registered as an ATOM, and

    it later withdrew its registration. Currently, no firm is registered

    as an ATOM. The Commission recently proposed to repeal Sec. 32.13.

    See Commodity Options and Agricultural Swaps, 76 FR 6095, Feb. 3,

    2011.

    Accordingly, part 35 may not be relied upon for options in the

    Enumerated Agricultural Commodities. As the Commission noted in the

    proposed order, though, part 32 of the Commission's regulations will

    continue to be available with respect to commodity option transactions

    that meet the conditions therein, until such time as part 32 may be

    withdrawn, amended, or replaced by the Commission.\89\ The Commission

    further stated in the proposed order that the purpose of the proposed

    relief is to ``strive to ensure that current practices will not be

    unduly disrupted during the transition to the new regulatory regime.''

    \90\ Accordingly, the Commission is clarifying that part two of this

    Final Order does not apply to options on Enumerated Agricultural

    Commodities.

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

    \89\ 76 FR at 35376 n.36.

    \90\ 76 FR at 35373, quoting Grandfather Notice, supra, n. 9

    (emphasis added).

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

    Part 35, however, always has covered swap agreements (other than

    options) on the Enumerated Agricultural Commodities and swap agreements

    (including options) \91\ on non-enumerated agricultural commodities

    (e.g., coffee, sugar, cocoa). As the Commission noted in the proposed

    order, part 35 will continue to be available with respect to

    transactions that meet the conditions therein, until such time as it

    may be withdrawn, amended, or repealed by the Commission.\92\

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

    \91\ Options on non-enumerated agricultural commodities may be

    conducted pursuant to part 35, as the agricultural trade option

    rules in Sec. 32.13 apply only to options on the Enumerated

    Agricultural Commodities.

    \92\ 76 FR at 35375.

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

    For certain transactions, part two of this Final Order provides

    relief notwithstanding that the transaction may not satisfy certain

    part 35 requirements (e.g., cleared, executed on a multilateral trade

    execution facility, entered into by certain persons that are not

    eligible contract participants, etc.).\93\ This relief is limited to

    transactions in exempt and excluded commodities, and does not extend to

    transactions in agricultural commodities (enumerated or non-

    enumerated). As stated in the proposed order, the purpose of part two

    of the Final Order is to provide relief with respect to CEA provisions

    that will be repealed as of July 16, 2011--specifically, current CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d. These provisions apply only to

    transactions in exempt and excluded commodities, and do not encompass

    agricultural commodities. Thus, because transactions in agricultural

    commodities cannot today be executed in reliance on one or more of

    these provisions to be repealed on July 16, extending part two of the

    Final Order to transactions in agricultural commodities is not

    necessary to ``strive to ensure that current practices will not be

    unduly disrupted during the transition to the new regulatory regime.''

    \94\

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

    \93\ Id. at 35376.

    \94\ See supra, n.9. The Commission has in the past granted

    exemptive relief pursuant to CEA section 4(c) from the requirements

    of part 35 to permit the clearing of certain agricultural basis and

    calendar swaps. See orders granted to ICE Clear US, Inc., 73 FR

    77015, Dec. 18, 2008; Chicago Mercantile Exchange, 74 FR 12316, Mar.

    24, 2009; and Kansas City Board of Trade, 75 FR 34983, June 21,

    2010. Part two of this Final Order does not apply; however, parties

    may continue to rely on these prior orders to the extent their

    transactions fully comply with them.

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

    In sum, the Commission is clarifying that the temporary exemptive

    relief in part two of the Final Order that is based on part 35 applies

    to commodity options on excluded and exempt commodities to the extent

    that these transactions were permitted by the applicable statutory

    exclusions and exemptions in effect prior to July 16, 2011. It does not

    apply, however, with respect to swaps and commodity options on

    agricultural commodities (enumerated or non-enumerated). Market

    participants may continue to rely on part 35 with respect to swaps and

    commodity options on non-enumerated agricultural commodities, as well

    as swaps (other than commodity options) on Enumerated Agricultural

    Commodities, to the extent these transactions fully comply with part

    35. Market participants also may continue to rely on part 32 for

    options on Enumerated Agricultural Commodities to the extent these

    transactions are conducted in accordance with Sec. 32.13(g) of the

    Commission's regulations.

    E. Eligible Contract Participants

    1. Comments

    First, with respect to the amendments that the Dodd-Frank Act made

    to the existing definition of the term ``eligible contract

    participant'' in the CEA, the NYCBA asked the Commission to confirm

    that these changes are subject to exemptive relief under the Final

    Order.\95\ The ABA Derivatives Committee believes that because the term

    ``eligible contract participant'' expressly requires rulemaking, the

    amendments to the existing CEA definition would not take effect even in

    the absence of exemptive relief; it asked that the Final Order confirm

    this.\96\ Comment letters from various energy companies supported the

    request of the ABA Derivatives Committee in this regard.\97\

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

    \95\ See NYCBA at p. 5.

    \96\ See ABA Derivatives Committee at p. 8.

    \97\ See CEF at p. 8; BGA at p. 6.

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

    The Associations requested that the Commission confirm that

    amendments to CEA sections 2(c)(2)(B), 2(c)(2)(C), and 2(c)(2)(E)

    regarding off-exchange foreign currency (``forex'') transactions with

    retail customers will not become effective until relevant required

    [[Page 42516]]

    rulemakings have been completed.\98\ The Associations requested that

    the Commission confirm that, notwithstanding its general classification

    of the Dodd-Frank Act's retail forex amendments as Category 4

    provisions, it will regard the specific provisions that relate to the

    definition of the term ``eligible contract participant'' as Category 1

    provisions.\99\ The Associations believe that CEA Section 2(c)(2)(E)

    also should be treated as a Category 1 provision because it explicitly

    requires rulemakings by other financial regulatory agencies.

    Alternatively, the Associations stated, these provisions fall in

    Category 2 because they depend on the definition of the term ``eligible

    contract participant,'' and thus should be subject to section 4(c)

    exemptive relief.\100\ The Associations requested, if the Commission

    declines to adopt either of these categorizations, a non-enforcement

    position until the rule further defining the term ``eligible contract

    participant'' and the federal regulatory agency rules applicable to

    retail forex transactions have been finalized, along with a

    corresponding section 4(c) order exempting affected persons from

    private rights of action.\101\

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

    \98\ See Associations at p. 3.

    \99\ Id. at p. 16.

    \100\ Id.

    \101\ See Associations at p. 16, n.38.

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

    2. Commission Determination

    With respect to the first issue, the term ``eligible contract

    participant'' is currently defined in the CEA.\102\ The Dodd-Frank Act

    amended the existing CEA definition by, among other things, raising the

    monetary thresholds for certain persons and entities to qualify as

    eligible contract participants. As noted, the term ``eligible contract

    participant'' is one of the terms that Congress, in sections 712(d) and

    721(c), required the Commission (jointly with the SEC, and in

    consultation with the Board of Governors of the Federal Reserve System)

    to further define. Sections 712(d) and 721(c) are included in the list

    of Category 1 provisions in the Appendix. Accordingly, the Commission

    confirms that pending the effective date of the required rulemaking to

    further define the term ``eligible contract participant,'' that term

    shall continue to mean an eligible contract participant as defined by

    the CEA prior to the enactment of the Dodd-Frank Act.

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

    \102\ See CEA section 1a(12), 7 U.S.C. 1a(12).

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

    With respect to the second issue, sections 741 and 742 of the Dodd-

    Frank Act enacted various amendments to CEA sections 2(c)(2)(B) and

    (C), which address certain types of forex transactions with retail

    customers. These amendments do not themselves require a rulemaking, nor

    do they reference the term ``eligible contract participant'' or any

    other term requiring further definition. Therefore, they are

    appropriately placed in Category 4, outside the scope of the Final

    Order granting temporary exemptive relief from the July 16 effective

    date.

    To be sure, both of these provisions, in text that was not amended

    by the Dodd-Frank Act, define the ``retail'' customers to which they

    apply as persons that are not eligible contract participants. Yet, the

    amendments in sections 741 and 742 of the Dodd-Frank Act contain

    important protections for non-eligible contract participants engaging

    in off-exchange forex transactions, which represent an area that

    historically has been fraught with customer fraud and other abusive

    sales practices. As one example, they clarify that an account or pooled

    investment vehicle that is offered for the purpose of trading, or that

    trades, a covered off-exchange forex transaction with a non-eligible

    contract participant--in addition to the transaction itself--is subject

    to the Commission's jurisdiction, including its anti-fraud authority.

    Unlike new statutory terms required to be further defined (e.g.,

    ``swap,'' ``swap dealer,'' and ``major swap participant''), the CEA

    prior to enactment of the Dodd-Frank Act already contains a definition

    of the term ``eligible contract participant'' that has been in place

    for over a decade.\103\ The Commission does not believe that it is

    necessary or appropriate to delay the effective date of the important

    customer protections in amended CEA sections 2(c)(2)(B) and (C) until

    such time as it issues the final joint rulemaking further defining the

    term ``eligible contract participant'' for purposes of the new swap

    regulatory regime.\104\ Accordingly, the Commission, as proposed,

    considers the amendments to CEA sections 2(c)(2)(B) and (C) to be

    Category 4 provisions in their entirety and is not providing exemptive

    relief from the July 16 effective date of these provisions. As

    discussed above, though, pending the effective date of the required

    rulemaking to further define the term ``eligible contract

    participant,'' for purposes of CEA sections 2(c)(2)(B) and (C) that

    term shall continue to mean an eligible contract participant as defined

    by the CEA prior to the enactment of the Dodd-Frank Act.

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

    \103\ The amendments to the definition of the term ``eligible

    contract participant'' in the Dodd-Frank Act were motivated largely

    by concerns regarding the marketing of over-the-counter derivatives

    that the Dodd-Frank Act defines as ``swaps.'' See generally

    Department of the Treasury, Financial Regulatory Reform: A New

    Foundation; Rebuilding Financial Supervision and Regulation, at pp.

    45-46, June 17, 2009.

    \104\ Even if these provisions were placed in Category 2,

    section 742 of the Dodd-Frank Act is listed in section 721(d), which

    places limits on the Commission's exemptive authority under CEA

    section 4(c).

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

    With respect to new CEA section 2(c)(2)(E) enacted as part of

    section 742 of the Dodd-Frank Act,\105\ it generally prohibits a

    financial institution for which there is a Federal regulatory agency

    \106\ from entering into certain off-exchange forex transactions \107\

    with retail customers (i.e., non-eligible contract participants) except

    pursuant to a rule or regulation of the Federal regulatory agency

    allowing the transaction under such terms and conditions as the Federal

    regulatory agency shall prescribe. The Commission does not agree that

    CEA section 2(c)(2)(E) should be treated as a Category 1 provision on

    the basis that it requires rulemakings by other financial regulatory

    agencies.\108\ Although section 2(c)(2)(E) prohibits a financial

    institution from entering into certain forex transactions with non-

    eligible contract participants unless its Federal regulatory agency

    adopts rules allowing such transactions, it does not require Federal

    regulatory agencies to adopt such rules.

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

    \105\ To be codified at 7 U.S.C. 2(c)(2)(E).

    \106\ Section 2(c)(2)(E) defines a ``Federal regulatory agency''

    to include the Commission, the SEC, the National Credit Union

    Administration, the Farm Credit Administration, and an ``appropriate

    Federal banking agency.'' Section 721(a)(2) of the Dodd-Frank Act,

    in turn, adds a new definition of the term ``appropriate Federal

    banking agency'' in CEA section 1a(2), to be codified at 7 U.S.C.

    1a(2), that includes the Office of the Comptroller of the Currency,

    the Federal Deposit Insurance Corporation, and the Board of

    Governors of the Federal Reserve System.

    \107\ The prohibition applies to forex transactions of the type

    described in CEA section 2(c)(2)(B), as well as all forex

    transactions ``that are functionally or economically similar'' to

    such transactions.

    \108\ See Associations at p. 16.

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

    Granting relief from the July 16 effective date with respect to

    section 2(c)(2)(E) would treat this provision differently from the

    Commission's treatment of the similar provisions in sections 2(c)(2)(B)

    and (C) as Category 4 provisions, as discussed above.\109\ In light of

    the important customer protection interests served by section

    2(c)(2)(E), the Commission does not believe that such different

    treatment is necessary or appropriate. Accordingly, the Commission, as

    proposed, considers new CEA section 2(c)(2)(E) to be a Category 4

    provision and is not

    [[Page 42517]]

    providing exemptive relief from the July 16 effective date of this

    provision.\110\ As discussed above, though, pending the effective date

    of the required rulemaking to further define the term ``eligible

    contract participant,'' for purposes of CEA section 2(c)(2)(E) that

    term shall mean an eligible contract participant as defined by the CEA

    prior to the enactment of the Dodd-Frank Act.\111\

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

    \109\ See also supra, n.104.

    \110\ Although none of the comment letters discussed new CEA

    section 2(c)(2)(D) enacted in section 742 of the Dodd-Frank Act, to

    be codified at 7 U.S.C. 2(c)(2)(D), it provides protections to

    retail customers, which it defines as persons that are not eligible

    contract participants, in transactions in commodities other than

    foreign currency. Thus, it raises similar issues. Fraud and abusive

    practices also have been a frequent problem in off-exchange

    transactions with retail customers in commodities such as precious

    metals. In light of these important customer protection concerns,

    and the fact that the CEA prior to enactment of the Dodd-Frank Act

    already contains a settled definition of the term ``eligible

    contract participant,'' the Commission is clarifying that new CEA

    section 2(c)(2)(D) similarly is a Category 4 provision for which no

    relief from the July 16 effective date is being provided. Pending

    the effective date of the required rulemaking to further define the

    term ``eligible contract participant,'' for purposes of CEA section

    2(c)(2)(D) that term shall mean an eligible contract participant as

    defined by the CEA prior to the enactment of the Dodd-Frank Act.

    \111\ AIMA submitted a comment letter that expressed ``support

    [for] exemptive relief from any rule that relies on the amended

    definition'' of the term ``eligible contract participant.'' See AIMA

    at p. 2. The exemptive relief being issued by the Commission applies

    to various provisions of the Dodd-Frank Act and the CEA that

    otherwise would become effective on July 16, 2011. The Commission

    will consider the appropriate effective date and compliance date of

    the rules implementing the Dodd-Frank Act in its final rulemakings

    adopting such rules.

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

    F. Private Right of Action

    1. Comments

    Section 749 of the Dodd-Frank Act amends CEA section 22(a)(1)(B)

    \112\ to apply the CEA's private right of action to violations

    involving swaps. The Associations requested that the Commission confirm

    that it is granting a temporary exemption pursuant to CEA section 4(c)

    with respect to the Dodd-Frank Act's expansion of the private right of

    action to violations involving swaps, and to provide a specific section

    4(c) exemption with respect to the application of CEA section

    22(a)(1)(B) to any provision that is the subject of a Commission or

    staff no-action position.\113\ The Associations noted that ``under the

    Commission's proposed categorization, it is clear that section 749's

    amendment to CEA Section 22(a)(1)(B) should logically fall under

    Category 2, and accordingly be the subject of a temporary exemption

    under CEA Section 4(c).'' \114\

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

    \112\ 7 U.S.C. 25(a)(1)(B).

    \113\ See Associations at p. 12.

    \114\ Id. at 11.

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

    2. Commission Determination

    As noted in the proposed order, amended CEA section 22(a) (private

    right of action with respect to swaps) is a provision that amends the

    CEA and that references a term that requires further definition, but

    nevertheless, the Commission does not believe that it is appropriate to

    include the provision within the scope of the exemptive relief.\115\ To

    the extent that the Final Order provides exemptive relief under CEA

    section 4(c) with respect to Category 2 and Category 3 provisions, such

    exemptive relief would, in effect, preclude a person from succeeding in

    a private right of action under CEA section 22(a) for violation of such

    provisions. Accordingly, the Commission believes that the requested

    relief is not necessary to achieve the purposes of the Final

    Order.\116\

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

    \115\ 76 FR at 35374, n.13.

    \116\ The Commission also declines to provide a section 4(c)

    exemption with respect to the application of CEA section 22(a)(1)(B)

    to any provision that is the subject of a no-action letter, as such

    relief would be the functional equivalent of exemptive relief which

    may be restricted under the limitations on CEA section 4(c) set

    forth in section 721(d) of the Dodd-Frank Act. In the absence of

    clear authority to provide such relief in this manner, the

    Commission does not believe that granting such relief in this Final

    Order would provide the requested legal clarity.

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

    Nevertheless, the staff's Category 4 list that was posted on the

    CFTC Web site identified only CEA sections 22(a)(4) and (5)--not

    section 22(a)(1), which is the provision that provides for a private

    right of action for violation of the swap provisions. To address this

    inadvertent omission, the Category 4 list in the appendix to this Final

    Order includes CEA section 22(a)(1)(B).\117\

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

    \117\ In addition, the lists of Category 1 and Category 4

    provisions set forth in the Appendix include other changes as

    compared to the staff lists that were posted on the Commission's Web

    site on June 14, 2011. Specifically with respect to Category 1: (i)

    section 711 of the Dodd-Frank Act has been added to the ``Required

    Rulemaking'' column for Teams II and XXI; (ii) section 741(b)(10) of

    the Dodd-Frank Act has been added to the ``Required Rulemaking''

    column for Team II; (iii) the reference to ``section 2(h)(7)'' of

    the CEA for Team XI has been modified to read ``section 2(h)(7)(A)-

    (D);'' and (iv) the separate rows with respect to swap data

    recordkeeping and reporting requirements have been combined. And

    with respect to Category 4: (i) sections 722(a) and (c) of the Dodd-

    Frank Act have been added; (ii) new CEA section 5b(h), to be

    codified at 7 U.S.C. 7a-1(h), has been added; (iii) section 741(a)

    of the Dodd-Frank Act has been added; (iv) the reference to

    ``section 741(b)'' of the Dodd-Frank Act has been modified to read

    ``section 741(b)(8)-(9);'' (v) wording changes to the ``Summary

    Description'' of sections 742(a) and (c) of the Dodd-Frank Act have

    been made; (vi) new CEA sections 23(g) and (m), to be codified at 7

    U.S.C. 26(g) and (m), have been added with respect to section 748 of

    the Dodd-Frank Act; and (vii) a technical correction in the

    reference to CEA section 6(b) has been made with respect to section

    749 of the Dodd-Frank Act.

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

    NYCBA requested the Commission to ``explicitly provide that section

    22(a)(4)(B) of the CEA as amended by the Dodd-Frank Act will become

    effective July 16, 2011.'' \118\ The Commission notes that the Category

    4 list in the Appendix includes amended sections 22(a)(4)-(5) under the

    Dodd-Frank Act section 739 provisions governing legal certainty for

    swaps. As such, sections 22(a)(4)-(5) become effective on July 16,

    2011.

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

    \118\ See NYCBA at p. 8.

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

    G. Preemption

    1. Comments

    The Commission also received comments addressing questions of the

    preemption of state gaming and bucket shop laws. NYCBA requested that

    the Final Order clarify that any agreement, contract or transaction

    subject to the Final Order ``will benefit from the preemption of any

    state or local laws provided by Section 12(e)(2) of the CEA because the

    relief is granted under Section 4(c) of the CEA.'' \119\

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

    \119\ Id.

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

    The Associations noted that because the Dodd-Frank Act repealed the

    application of CEA section 12(e)(2)(B) \120\ to certain previously

    exempted swap transactions, ``market participants are concerned that

    transactions conducted in accordance with the federal statutory

    provisions and rules applicable to swaps could potentially be subject

    to challenges for invalidity under state law prohibitions against

    gaming and bucket shops that in many cases pre-date even federal

    regulation of futures contracts.'' \121\ To address these concerns, the

    Associations suggested the adoption of a permanent exemption under

    section 4(c) for such transactions. They noted that ``[i]f the

    Commission extends permanent exemptive relief to such transactions,

    this risk would be eliminated, since CEA section 12(e)(2)(B) explicitly

    states that the CEA supersedes state gaming and bucket shop laws in the

    case of `an agreement, contract or transaction * * *

    [[Page 42518]]

    exempted under section 4(c) of [the CEA] * * *' '' \122\

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

    \120\ CEA section 12(e)(2)(B), as amended by section 749 of the

    Dodd-Frank Act, provides that:

    (2) This Act shall supersede and preempt the application of any

    State or local law that prohibits or regulates gaming or the

    operation of bucket shops (other than antifraud provisions of

    general applicability) in the case of--

    * * *

    (B) An agreement, contract, or transaction that is excluded from

    this Act under section 2(c) or 2(f) of this Act * * * or exempted

    under section 4(c) of this Act (regardless of whether any such

    agreement, contract, or transaction is otherwise subject to this

    Act.)

    \121\ See Associations at p. 14.

    \122\ Id.; see also ABA Derivatives Committee at p. 13.

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

    2. Commission Determination

    The Commission notes that the Final Order does not affect the

    applicability of CEA section 12(e)(2)(B) to any exemptive relief under

    section 4(c) that is provided by the Final Order. CEA section

    12(e)(2)(B) as amended by section 749 of the Dodd-Frank Act provides

    that the CEA supersedes state gaming and bucket shop laws in the case

    of ``an agreement, contract or transaction * * * exempted under section

    4(c)'' of the CEA. To the extent that the Final Order provides

    temporary exemptive relief under CEA section 4(c), CEA section

    12(e)(2)(B) will apply to such transactions that are within the scope

    of such exemptive relief.

    As the Commission explained in its proposed order, the purpose of

    the relief is to address concerns that were raised about the effects

    upon the swaps market during the period between July 16, 2011 and the

    date(s) that the definitional rulemakings have been completed.\123\

    Indeed, the Commission reaffirmed in its proposed order that it intends

    to ``strive to ensure that current practices will not be unduly

    disrupted during the transition to the new regulatory regime.'' \124\

    Insofar as these comments seek a permanent exemption under section

    4(c), the requested relief is outside the scope of the Final Order.

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

    \123\ 76 FR at 35373.

    \124\ See n.9, supra.

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

    H. Market Issues

    1. Comments

    State Street Corporation (``State Street'') expressed concern that

    ``limiting exemptive relief under the Commission's Order and

    grandfather relief under the [swap execution facility] rules to the

    small number of firms that are already operating an electronic trading

    platform or system for the trading of exempt commodities (in the case

    of ECMs) or the trading of futures contracts on excluded commodities

    (in the case of EBOTs) would have the effect of making it impossible

    for new entrants--who would have to wait for the [swap execution

    facility] rules to be adopted and their applications to be approved''

    to enter the swaps market and compete.\125\ State Street also requested

    that the Commission clarify that electronic trading facilities that

    operate, either currently or at any point during the relief period,

    under CEA sections 2(d)(2) and 2(e), as in effect prior to July 16,

    2011, will be permitted to conduct business operations on a temporary

    basis during the relief period, without regard to whether the

    electronic trading facility is currently operating or instead commences

    operations at some point during the relief period.\126\

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

    \125\ See letter dated June 28, 2011, from David C. Phelan,

    Executive Vice President and General Counsel, State Street, at p. 3.

    \126\ Id. at pp. 2-3.

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

    CME requested that the Commission confirm that exemptive relief is

    not needed for a designated contract market (``DCM'') to list swaps for

    trading on or after July 16, so long as those products are regulated as

    futures products and market participants trading those products are

    regulated as futures market participants. Alternatively, if the

    Commission views it differently, CME asks the Commission to issue such

    exemptive relief.\127\

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

    \127\ See CME at pp. 4-5.

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

    2. Commission Determination

    In response to the comments, the Commission would like to clarify

    the conditions that apply to the grandfather relief orders for ECMs and

    EBOTs that were issued by the Commission in September 2010.\128\ Both

    of those orders have three basic conditions. First, the ECM or EBOT

    must file an appropriate and timely petition with the Commission. In

    the case of ECMs, the filing deadline was September 20, 2010 and for

    EBOTs, the deadline is July 15, 2011. Second, the ECM or EBOT must file

    a DCM or swap execution facility (``SEF'') application with the

    Commission within 60 days of the effective date of final regulations

    regarding the DCM or SEF provisions. Third, the ECM's or EBOT's DCM or

    SEF application must remain pending before the Commission.

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

    \128\ See supra, n.47.

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

    The Commission is clarifying the second and third conditions, in

    that the Commission has not yet issued any final DCM or SEF rulemakings

    since enactment of the Dodd-Frank Act. The Commission notes that the

    list of conditions for the ECM and EBOT grandfather relief orders are

    premised on the ECM or EBOT ``meet[ing] all of the following applicable

    conditions.'' \129\ Given that the Commission has not yet adopted

    either final DCM or final SEF regulations, the ECM and EBOT grandfather

    relief order conditions premised on DCM or SEF applications are not yet

    applicable. Accordingly, at this point in time, all that an ECM or EBOT

    must do to receive relief pursuant to the grandfather relief orders is

    to have satisfied the orders' petition condition in a timely manner.

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

    \129\ Id. at 56515.

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

    The Commission also is clarifying the relationship between the

    grandfather relief orders and this Final Order. For ECMs that filed

    their petitions with the Commission by September 20, 2010, the

    grandfather relief order operates independently and those ECMs may rely

    on either the grandfather relief order or this Final Order, or both.

    For those ECMs that did not file a petition for grandfather relief by

    September 20, 2010, they may qualify for relief under this temporary

    Final Order if they satisfy the requisite terms and conditions

    herein.\130\ Similarly, for EBOTs that file or have filed their

    petitions for grandfather relief by July 15, 2011, that grandfather

    relief operates independently and those EBOTs may rely on either the

    grandfather relief order or this Final Order, or both. Likewise, for

    those EBOTs that have not filed their petitions for grandfather relief

    by July 15, 2011, they may qualify for relief under this Final Order if

    they, too, satisfy the requisite terms and conditions herein.

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

    \130\ EBOTs and ECMs that rely on this exemptive relief also

    must comply with part 36 of the Commission's regulations and, in

    particular, its various reporting requirements.

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

    The Commission stated in footnote 39 of the proposed order that the

    proposed exemptive relief would not be available to an electronic

    trading facility that, as of July 15, 2011, was not already operating

    as an ECM pursuant to CEA sections 2(h)(3)-(7), or to an EBOT that, as

    of July 15, 2011, was not already operating pursuant to CEA section 5d,

    or not compliant with the conditions set forth in such provisions. The

    Commission, however, has determined not to limit the Final Order herein

    to those ECMs and EBOTs that already are operating as of July 15, 2011.

    Further, the Commission also clarifies that the relief under this Final

    Order is available to an electronic trading facility that currently

    operates or commences operations during the pendency of this relief

    pursuant to CEA sections 2(d)(2) and 2(e), as in effect prior to July

    16, 2011.

    The Commission also confirms that a DCM may list and trade swaps on

    or after July 16 under the DCM's rules related to futures contracts,

    without exemptive relief.\131\

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

    \131\ The Commission notes that if a DCM intends to trade swaps

    pursuant to the rules, processes, and procedures currently

    regulating trading on its DCM, the DCM may need to amend or

    otherwise update applicable rules, processes, and procedures, in

    order to address the trading of swaps, depending upon the

    composition of the DCM's rules.

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    [[Page 42519]]

    I. Core Principles

    1. Comments

    The Commission received a number of comments on the application of

    the Proposed Order to the DCM and derivatives clearing organization

    (``DCO'') core principles. On the one hand, CME agreed that the core

    principles for DCMs and DCOs are appropriately categorized as Category

    4 provisions for which the Commission is not issuing exemptive

    relief.\132\

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

    \132\ CME at p. 4.

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

    On the other hand, some commenters believe that the core principles

    for DCMs and DCOs in CEA sections 5(d) and 5b(c)(2), respectively,\133\

    should be treated as either Category 1 or 2 provisions. The Minneapolis

    Grain Exchange, Inc. (``MGEX'') stated that the Commission should grant

    temporary relief from the new core principles of the Dodd-Frank Act for

    DCOs and DCMs.\134\ The Natural Gas Exchange (``NGX'') expressed

    concern that DCOs will have to make modifications to come into

    compliance with amended core principles by July 16, 2011, and then may

    be required to again make modifications when final rules are issued.

    NGX requested that the Commission or its staff adopt a non-enforcement

    policy against any DCO or DCO member or participant with respect to

    compliance with the DCO core principles until the implementation of

    final Commission rules governing the operation of DCOs or,

    alternatively, that the Commission provide at least a 60-day period

    following July 16, 2011, before it takes any enforcement action.\135\

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

    \133\ 7 U.S.C. 7(d) and 7a-1(c)(2).

    \134\ See letter dated July 1, 2011, from Layne G. Carlson,

    Corporate Secretary, MGEX, at pp. 1-2.

    \135\ See letter dated June 30, 2011, from Peter Krenkel,

    President and Chief Executive Officer, NGX, at pp. 2-3.

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

    Nodal Exchange cautioned that placing the DCM core principles in

    section 735 of the Dodd-Frank Act into Category 4, while the core

    principles for SEFs in section 733 are in Category 1, may lead to their

    respective regulations being issued and finalized at different

    times.\136\ Nodal Exchange recommended that the Commission issue final

    rules regarding the DCM and SEF core principles simultaneously.\137\

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

    \136\ See letter dated June 30, 2011, from Paul Cusenza, Chief

    Executive Officer, Nodal Exchange, at pp. 1, 4.

    \137\ Id. at p. 4.

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

    2. Commission Determination

    The Commission has considered these comments and believes that the

    DCO and DCM core principles are properly treated as Category 4

    provisions outside the scope of relief of this Final Order. These

    amended core principles apply to the trading and clearing of

    instruments on DCMs and DCOs, regardless of whether the instrument is a

    futures contract or a swap. The Commission sees no need to delay the

    application of these amended core principles to DCMs that trade futures

    contracts or to DCOs that clear futures, a term which does not require

    further definition under the Dodd-Frank Act. Moreover, the amended core

    principles provide that, absent a rule or regulation prescribed by the

    Commission, DCMs and DCOs shall have reasonable discretion in

    developing their rules and programs to comply with the core

    principles.\138\

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

    \138\ See, e.g., CEA section 5(d)(1)(B) and section

    5b(c)(2)(A)(ii), 7 U.S.C. 7(d)(1)(B) and 7a-1(c)(2)(A)(ii).

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

    To the extent that the Commission has issued proposed rulemakings

    with regard to these core principles, any requirements or guidance in

    such rulemakings will not become effective until the effective or

    compliance date of a final rulemaking. The Commission, in its

    discretion, will, where appropriate, establish separate compliance

    dates to address issues arising from the impact of compliance with any

    new requirements.

    J. Intermediary Issues

    1. Comments

    The Commission received a comment on part two of its proposed order

    relating to whether the exemption provided under part 35 applies to

    agency transactions. Specifically, State Street requested that the

    Commission ``make clear that eligible swap participants and eligible

    contract participants may continue to rely on the Part 35 exemption to

    effect transactions in excluded or exempt commodities, either directly

    or through brokers and other agents, as currently permitted by Part

    35.'' \139\

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

    \139\ See State Street at p. 4.

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

    The Commission also received a comment on part two of the Proposed

    Order relating to registration requirements for futures commission

    merchants (``FCMs''), introducing brokers (``IBs''), and commodity

    trading advisors (``CTAs''). The law firm of Covington & Burling noted

    that many participants exclusively in the ``OTC'' swaps market are not

    currently registered with the Commission in any capacity, but may have

    to register with the Commission as FCMs, IBs or CTAs after the

    Commission's Dodd-Frank Act rules are made effective. The commenter

    requested that the Commission clarify that these entities will not be

    required to register in those capacities based solely on their swaps

    activity until after the last adopted final product definition rules

    become effective.\140\

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

    \140\ See letter dated July 1, 2011 from Bruce C. Bennett,

    Covington & Burling LLP, at p. 5.

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

    2. Commission Determination

    The purpose of this exemptive relief is to maintain the status quo

    during the implementation process for the Dodd-Frank Act. As noted in

    the proposed order, the temporary exemptive relief would not affect the

    availability of part 35 with respect to transactions that fully meet

    the requirements of part 35.\141\ Thus, the Commission confirms that to

    the extent that agency transactions are permitted under part 35, that

    relief is unaffected by the temporary exemptive relief provided

    herein.\142\ However, for transactions that exclusively qualify for the

    temporary exemptive relief in part two of this Final Order (i.e., do

    not comply fully with the requirements of part 35), such agency

    transactions would only be permitted to the extent they were permitted

    by the applicable statutory exclusions and exemptions in effect prior

    to July 16, 2011 (i.e., current CEA sections 2(d), 2(e), 2(g), 2(h),

    and 5d).

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

    \141\ 76 FR at 35376.

    \142\ See Exemption for Bilateral Transactions, 65 FR 78030,

    78033, Dec. 13, 2000.

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

    The Dodd-Frank Act amended various intermediary definitions to

    cover swaps activity as well as futures transactions.\143\ The

    Commission confirms that if an entity is exclusively participating in

    the swaps market, it would not have to register as an FCM, IB or CTA

    prior to the completion of the rulemaking further defining the term

    ``swap.'' In sum, the Commission will not require registration in an

    intermediary capacity in this situation until the further definition of

    the term ``swap'' becomes effective.

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

    \143\ See, e.g., 76 FR at 35374 n.16.

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

    IV. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA \144\ authorizes the CFTC to exempt any

    [[Page 42520]]

    transaction or class of transactions (including any person or class of

    persons offering, entering into, rendering advice or rendering other

    services with respect to, the transaction) from any of the provisions

    of the CEA (subject to certain exceptions). Pursuant to CEA section

    4(c)(2), the Commission must determine that: (1) The exemption is

    appropriate for the transaction and consistent with the public

    interest; (2) the exemption is consistent with the purposes of the CEA;

    (3) the transaction will be entered into solely between ``appropriate

    persons;'' \145\ and (4) the exemption will not have a material adverse

    effect on the ability of the Commission or any contract market to

    discharge its regulatory or self-regulatory responsibilities under the

    CEA.\146\

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

    \144\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1), provides in full

    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, including any board of trade

    designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 5 of this Act) exempt any agreement,

    contract, or transaction (or class thereof) that is otherwise

    subject to subsection (a) (including any person or class of persons

    offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    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), or from any other

    provision of this Act (except subparagraphs (C)(ii) and (D) of

    section 2(a)(1), except that the Commission and the Securities and

    Exchange Commission may by rule, regulation, or order jointly

    exclude any agreement, contract, or transaction from section

    2(a)(1)(D)), if the Commission determines that the exemption would

    be consistent with the public interest.

    \145\ CEA section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the

    term ``appropriate person'' a number of specified categories of

    persons deemed appropriate under the CEA for entering into

    transactions exempted by the Commission under section 4(c). This

    includes persons the Commission determines to be appropriate in

    light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections. See CEA section

    4(c)(3)(K), 7 U.S.C 6(c)(3)(K).

    \146\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2), provides in full

    that:

    The Commission shall not grant any exemption under paragraph (1)

    from any of the requirements of subsection (a) unless the Commission

    determines that--

    (A) The requirement should not be applied to the agreement,

    contract, or transaction for which the exemption is sought and that

    the exemption would be consistent with the public interest and the

    purposes of this Act; and

    (B) The agreement, contract, or transaction--

    (i) Will be entered into solely between appropriate persons; and

    (ii) Will not have a material adverse effect on the ability of

    the Commission or any contract market or derivatives transaction

    execution facility to discharge its regulatory or self-regulatory

    duties under this Act.

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

    The Commission may grant such an exemption by rule, regulation or

    order, after notice and opportunity for hearing, and may do so on

    application of any person or on its own initiative. Further, the

    Commission may grant such an exemption either conditionally or

    unconditionally, or for stated periods within the Commission's

    discretion. Finally, section 712(f) of the Dodd-Frank Act authorizes

    the Commission to ``exempt persons, agreements, contracts, or

    transactions from provisions of the Act, under the terms contained in''

    the Act, in order to prepare for the effective dates of the provisions

    of Title VII.

    A. The Proposed Order

    In enacting section 4(c), 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.'' \147\ In proposing the temporary relief, the

    Commission stated its intention to provide clarity and stability to the

    markets and market participants concerning the applicability of the

    provisions of the CEA, as added or amended by the Dodd-Frank Act (in

    part one), and the current provisions of the CEA as repealed by the

    Dodd-Frank Act (in part two), upon the general effective date of Title

    VII, thereby avoiding or minimizing undue and unwarranted disruptions

    to the markets.\148\

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

    \147\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

    \148\ 76 FR at 35377.

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

    The Commission also noted the limited duration of the proposed

    order and that it reserved the Commission's anti-fraud and anti-

    manipulation enforcement authority.\149\ As such, the Commission stated

    its belief that the proposed order would be consistent with the public

    interest and purposes of the CEA.\150\ The Commission proposed to limit

    the relief to appropriate persons, including persons in current

    registration categories for which the Dodd-Frank Act expanded the

    definition to include activities relating to swaps (e.g., IBs,

    commodity pool operators (``CPOs''), CTAs, and associated persons

    thereof).\151\ The Commission stated its belief that the proposed order

    would not have a material adverse effect on the ability of the

    Commission or any contract market to discharge its regulatory or self-

    regulatory duties under the CEA.\152\

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

    \149\ Id.

    \150\ Id.

    \151\ 76 FR at 35377 n.46, citing CEA section 4(c)(3)(K), 7

    U.S.C. 6(c)(3)(K) (appropriate persons may include such ``other

    persons that the Commission determines to be appropriate in light of

    their financial or other qualifications, or the applicability of

    appropriate regulatory protections'').

    \152\ 76 FR at 35377.

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

    B. Comments

    The ABA Derivatives Committee commented that the Commission should

    exercise its authority under CEA section 4(c)(3)(K) to make it clear

    that the ``appropriate persons'' who qualify for relief under its

    exemptive order include individuals whose total assets exceed $10

    million and ``persons relying on the `line of business' exemption to

    engage in swaps without ECP status.'' \153\

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

    \153\ See ABA Derivatives Committee at p. 9. See also CEF at p.

    7 n.21. The ``line of business'' provision was a part of the

    Commission's Policy Statement Concerning Swap Transactions, 54 FR

    30694, 30696-30697, July 21, 1989.

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

    C. Commission Determination

    For the purpose of making the requisite findings under section 4(c)

    for part two of the Final Order, the Commission confirms that

    individuals whose total assets exceed $10 million are appropriate

    persons. Likewise, for purposes of part two of this Final Order,

    persons relying on the ``line of business'' exemption as described in

    the proposed order are appropriate persons. It should be noted that the

    explicit reference in the proposed order to IBs, CPOs, and CTAs (and

    associated persons thereof) as appropriate persons was not intended to

    restrict the scope of appropriate persons to only those persons. The

    Commission confirms that for the purpose of this temporary Final Order,

    the Commission has found the various persons and entities subject to

    this temporary relief to be appropriate persons.

    For the reasons provided in the proposed order and mentioned above,

    the Commission has determined that: (1) The exemption provided by this

    Final Order is appropriate for the subject transactions and consistent

    with the public interest; (2) the exemption is consistent with the

    purposes of the CEA; (3) the transactions will be entered into solely

    between appropriate persons; and (4) the exemption will not have a

    material adverse effect on the ability of the Commission or any

    contract market to discharge its regulatory or self-regulatory

    responsibilities under the CEA.

    V. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \154\ imposes certain

    requirements on federal agencies (including the Commission) in

    connection with conducting or sponsoring any collection of information

    as defined by the PRA. This Final Order does not require a new

    collection of information from any persons or entities that would be

    subject to the Final Order.

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

    \154\ 44 U.S.C. 3507(d).

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

    [[Page 42521]]

    VI. Cost-Benefit Considerations

    Section 15(a) of the CEA \155\ requires the Commission to consider

    the costs and benefits of its action before issuing an order under the

    CEA. CEA section 15(a) further specifies that 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 may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the CEA.

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

    \155\ 7 U.S.C. 19(a).

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

    The Commission has decided to issue, pursuant to its authority

    under CEA sections 4(c) and 4c(b), certain temporary relief from the

    provisions of the CEA added or amended by Title VII of the Dodd-Frank

    Act that reference one or more terms regarding entities or instruments

    that Title VII requires be ``further defined,'' such as the terms

    ``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible

    contract participant,'' to the extent that requirements or portions of

    such provisions specifically relate to such referenced terms and do not

    require a rulemaking. The Commission also is granting temporary relief

    from certain provisions of the CEA that will or may apply to certain

    agreements, contracts, and transactions as a result of the repeal of

    various CEA exemptions and exclusions as of the general effective date

    of Title VII of the Dodd-Frank Act set forth in section 754--July 16,

    2011.

    The Commission received no comments on the cost and benefit

    considerations section of the proposed order. Nevertheless, the

    Commission did receive two specific comments requesting additional

    exemptive relief due to potential costs.

    NGX is concerned that DCOs will have to make modifications to come

    into compliance with amended core principles by July 16, 2011, and then

    may be required to again make modifications when final rules are issued

    by the Commission.\156\ Similarly, MGEX states that the Commission

    should grant temporary relief from the new core principles of the Dodd-

    Frank Act for DCOs and DCMs in sections 725 and 735.\157\

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

    \156\ See NGX at p. 2.

    \157\ See MGEX at p. 2.

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

    The Commission has decided not to grant more relief to DCOs and

    DCMs. The Commission recognizes that DCOs and DCMs have discretion in

    how to comply with the core principles unless and until the CFTC issues

    rules in this area.

    An analysis of the specific areas of concern identified in section

    15(a) is set out immediately below:

    1. Protection of Market Participants and the Public

    As discussed above, the scope of this temporary exemptive relief is

    limited to persons who are ``appropriate persons'' as set forth in

    section 4(c) of the CEA and in this Final Order. Further, this Final

    Order does not affect the Commission's existing and future anti-fraud

    and anti-manipulation authorities, including CEA sections 2(a)(1)(B),

    4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the

    Commission promulgated pursuant to such authorities, including

    regulations pursuant to CEA section 4c(b) proscribing fraud. The

    Commission believes that market participants and the public will

    benefit from the clarity offered by the temporary exemptive relief,

    while maintaining the Commission's authorities regarding the prevention

    and deterrence of fraud and manipulation. With respect to costs, the

    Commission believes that the exemptive relief imposes no affirmative

    duties or obligations on market participants and the public. The

    temporary exemptive relief does not contain any requirement to create,

    retain, submit, or disclose any information. Furthermore, the exemptive

    relief imposes no recordkeeping or related data retention or disclosure

    requirements on any person, including small businesses. Consequently,

    the Commission finds it unlikely that the exemptive relief will impose

    any additional costs beyond the existing costs associated with ongoing

    operations, including those that ensure that behavior and statements

    are not fraudulent or manipulative.

    2. Efficiency, Competition, and Financial Integrity

    Although the Dodd-Frank Act establishes a comprehensive new

    regulatory framework for swaps, the Commission's work to implement that

    framework will not be complete as of July 16, 2011. Accordingly, this

    relief offers the benefit of greater clarity in the swaps market that

    is in the interest of both the markets and the public. The Commission

    believes that this temporary exemptive relief is an appropriate measure

    to facilitate a transition to the comprehensive new regulatory

    framework for swaps set out in Title VII of the Dodd-Frank Act. Such an

    orderly transition will promote market efficiency, competition, and

    financial integrity.

    3. Price Discovery

    As stated above, the temporary relief provided here is designed to

    maintain the functioning of the markets until such time as the

    comprehensive new regulatory framework for swaps set forth in the Dodd-

    Frank Act is in place. With the clarity offered by the exemptive

    relief, markets will function better as venues for price discovery.

    4. Sound Risk Management Practices

    Appropriate persons covered by this exemptive relief will be

    subject to the Commission's full array of existing anti-fraud and anti-

    manipulation provisions and certain new authorities provided under the

    Dodd-Frank Act. Market participants and the public will benefit

    substantially from the continuing protection through the prevention and

    deterrence of fraud and manipulation. Markets protected from fraud and

    manipulation function better as venues for price discovery and risk

    management.

    5. Other Public Interest Considerations

    This Final Order is temporary and limited. It will not affect the

    applicability of any provision of the CEA to futures contracts, options

    on futures contracts, or transactions with retail customers in foreign

    currency or other commodities pursuant to CEA section 2(c)(2). Further,

    it will expire at an appropriate date, as discussed above. The

    expiration provision will permit the Commission to ensure that the

    scope and extent of exemptive relief is appropriately tailored to the

    schedule of implementation of the Dodd-Frank Act requirements.

    After considering the costs and benefits, the Commission has

    determined to issue this Final Order.

    VII. Order

    The Commission, to provide for the orderly implementation of the

    requirements of Title VII of the Dodd-Frank Act, pursuant to sections

    4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,

    hereby issues this Order essentially as proposed, consistent with the

    determinations set forth above, which are incorporated in this Final

    Order by reference, and:

    [[Page 42522]]

    (1) Exempts, subject to the conditions set forth in paragraph (3),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    from the provisions of the CEA, as added or amended by the Dodd-Frank

    Act, that reference one or more of the terms regarding entities or

    instruments subject to further definition under sections 712(d) and

    721(c) of the Dodd-Frank Act, which provisions are listed in Category 2

    of the Appendix to this Order; provided, however, that the foregoing

    exemption:

    a. Applies only with respect to those requirements or portions of

    such provisions that specifically relate to such referenced terms; and

    b. Shall expire upon the earlier of: (i) the effective date of the

    applicable final rule further defining the relevant term referenced in

    the provision; or (ii) December 31, 2011;

    (2) Exempts, subject to the conditions set forth in paragraph (3),

    all agreements, contracts, and transactions in exempt and excluded (but

    not agricultural) commodities, and any person or entity offering,

    entering into, or rendering advice or rendering other services with

    respect to, any such agreement, contract, or transaction, from the

    provisions of the CEA, if the agreement, contract, or transaction

    complies with part 35 of the Commission's regulations, notwithstanding

    that:

    a. The agreement, contract, or transaction may be executed on a

    multilateral transaction execution facility;

    b. The agreement, contract, or transaction may be cleared;

    c. Persons offering or entering into the agreement, contract or

    transaction may not be eligible swap participants, provided that all

    parties are eligible contract participants as defined in the CEA prior

    to the date of enactment of the Dodd-Frank Act;

    d. The agreement, contract, or transaction may be part of a

    fungible class of agreements that are standardized as to their material

    economic terms; and/or

    e. No more than one of the parties to the agreement, contract, or

    transaction is entering into the agreement, contract, or transaction in

    conjunction with its line of business, but is neither an eligible

    contract participant nor an eligible swap participant, and the

    agreement, contract, or transaction was not and is not marketed to the

    public;

    Provided, however, that: (i) such agreements, contracts, and

    transactions (and persons offering, entering into, or rendering advice

    or rendering other services with respect to, any such agreement,

    contract, or transaction) fall within the scope of any of the existing

    CEA sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of

    business provision as in effect prior to July 16, 2011; and (ii) the

    foregoing exemption shall expire upon the earlier of: (I) the repeal,

    withdrawal or replacement of part 35 of the Commission's regulations;

    or (II) December 31, 2011;

    (3) Provides that the foregoing exemptions in paragraphs (1) and

    (2) above shall not:

    a. Limit in any way the Commission's authority with respect to any

    person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b,

    4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the

    Commission promulgated pursuant to such authorities, including

    regulations pursuant to CEA section 4c(b) proscribing fraud;

    b. Apply to any provision of the Dodd-Frank Act or the CEA that has

    become effective prior to July 16, 2011;

    c. Affect any effective or compliance date set forth in any

    rulemaking issued by the Commission to implement provisions of the

    Dodd-Frank Act;

    d. Limit in any way the Commission's authority under section 712(f)

    of the Dodd-Frank Act to issue rules, orders, or exemptions prior to

    the effective date of any provision of the Dodd-Frank Act and the CEA,

    in order to prepare for the effective date of such provision, provided

    that such rule, order, or exemption shall not become effective prior to

    the effective date of the provision; and

    e. Affect the applicability of any provision of the CEA to futures

    contracts or options on futures contracts, or to cash markets.

    In its discretion, the Commission may condition, suspend,

    terminate, or otherwise modify this Order, as appropriate, on its own

    motion. This Final Order shall be effective immediately.

    Issued in Washington, DC, on July 14, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following Commissioner's statement will not appear in

    the Code of Federal Regulations.

    Concurrence of Commissioner Scott D. O'Malia on the Order Regarding the

    Effective Date for Swap Regulation

    I concur with the Commission's decision to use its exemptive

    authority under section 4(c) of the Commodity Exchange Act (CEA) to

    provide temporary relief from certain provisions of the Dodd-Frank Act.

    This order will provide much needed legal certainty to the market, at

    least until December 31, 2011, while the Commission continues its

    efforts to adopt final rules under the Dodd-Frank Act. Whereas I

    support the Commission in providing legal certainty, albeit limited, I

    am disappointed in the lack of harmonization between our order and the

    exemptive relief that the Securities and Exchange Commission (SEC)

    provided. I am also disappointed that the final order ignored a number

    of comments from market participants, those that have most at stake in

    each of the Commission's decisions. I hope that this order does not

    foreshadow the direction of final rulemakings to come.

    Lack of Harmonization

    In general, the SEC's order provides exemptive relief until the

    relevant final rulemaking is implemented. The Commission's order

    provides such relief only until December 31, 2011. I proposed an

    amendment that would have conformed the two orders that the Commission

    rejected. The SEC is a full partner in many of our rulemakings; it only

    makes sense to develop identical relief policies. The CFTC's sunset

    provision is based on an arbitrary date and cuts short the very legal

    certainty that this order purports to provide. Moreover, participants

    from every aspect of our market--including investor advocates, a

    designated contract market and derivatives clearing organization, a

    potential swap execution facility, and multiple trade associations

    representing intermediaries--commented that the December 31, 2011,

    expiration date is unnecessary. In contrast, only one commenter

    supported the expiration date.

    Comments From Market Participants

    In addition to not heeding market participants with respect to the

    expiration date, the Commission has also not addressed the public's

    requests for an implementation plan. I have repeatedly asked the

    Commission to set forth an implementation plan for public notice and

    comment. SEC Chairman Shapiro indicated, in her prepared remarks before

    the House Financial Services Committee, that the SEC is working on an

    implementation plan that will include opportunity for public comment.

    This Commission has already begun voting on final rules, but we have

    yet to see a proposed implementation plan.

    Market participants bear the burden of implementing the multitude

    of reforms that the Commission is proposing. We

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    cannot pretend that Dodd-Frank has any chance of meeting its goals if

    we do not work with the public to implement the regulatory

    requirements.

    The Commission is currently planning to meet on August 4th to

    consider several final rules. I strongly urge the Commission to put

    forward an implementation plan for public comment during the month of

    August. This provides a perfect opportunity to receive comment on rule

    order and implementation, without delaying the Commission schedule this

    fall. If we wait until September, we will only have ourselves to blame.

    BILLING CODE 6351-01-P

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    [FR Doc. 2011-18248 Filed 7-18-11; 8:45 am]

    BILLING CODE 6351-01-C

    Last Updated: July 19, 2011