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2012-16987

  • Federal Register, Volume 77 Issue 135 (Friday, July 13, 2012)[Federal Register Volume 77, Number 135 (Friday, July 13, 2012)]

    [Rules and Regulations]

    [Pages 41260-41266]

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

    [FR Doc No: 2012-16987]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    Second Amendment to July 14, 2011 Order for Swap Regulation

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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    SUMMARY: On May 16, 2012, the Commodity Futures Trading Commission

    (``CFTC'' or the ``Commission'') published in the Federal Register a

    Notice of Proposed Amendment (``Notice'') to extend the temporary

    exemptive relief the Commission granted on July 14, 2011 (``July 14

    Order'') from certain provisions of the Commodity Exchange Act

    (``CEA'') that otherwise would have taken effect on the general

    effective date of title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (``the Dodd-Frank Act'')--July 16, 2011. This

    final order extends the July 14 Order with certain modifications.

    Specifically, it removes references to the entities terms, including

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

    participant'' in light of the final joint rulemaking of the CFTC and

    Securities and Exchange Commission (``SEC'') further defining those

    terms issued on April 18, 2012; extends the potential latest expiration

    date of the July 14 Order to December 31, 2012, or, depending on the

    nature of the relief, such other compliance date as may be determined

    by the Commission; allows the clearing of agricultural swaps, as

    described herein; and removes any reference to the exempt commercial

    market (``ECM'') and exempt board of trade (``EBOT'') grandfather

    relief previously issued by the Commission.

    DATES: This final order is effective July 3, 2012.

    FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, (202) 418-

    5864, mhiggins@cftc.gov, Office of the General Counsel; David Aron,

    Counsel, (202) 418-6621, daron@cftc.gov, Office of the General Counsel;

    David Van Wagner, Chief Counsel, (202) 418-5481, dvanwagner@cftc.gov,

    Division of Market Oversight; Ali Hosseini, Special Counsel, (202) 418-

    6144, ahosseini@cftc.gov, Division of Market Oversight, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1155 21st Street

    NW., Washington, DC 20581; or Anne Polaski, Special Counsel, (312) 596-

    0575, apolaski@cftc.gov, Division of Clearing and Risk; Commodity

    Futures Trading Commission, 525 West Monroe, Chicago, Illinois 60661.

    SUPPLEMENTARY INFORMATION:

    Background

    On July 14, 2011, the Commission exercised its exemptive authority

    under CEA section 4(c) \1\ and its authority under section 712(f) of

    the Dodd-Frank Act by issuing the July 14 Order that addressed the

    potential that the final, joint CFTC-SEC rulemakings further defining

    the terms in sections 712(d) \2\ and 721(c) \3\ would not be in effect

    as of July 16, 2011 (i.e., the general effective date set forth in

    section 754 of the Dodd-Frank Act).\4\ In so doing, the Commission

    sought to address concerns that had been raised about the applicability

    of various regulatory requirements to certain agreements, contracts,

    and transactions after July 16, 2011, and thereby ensure that current

    practices would not be unduly disrupted during the transition to the

    new regulatory regime.\5\ The July 14 Order provided that the relief

    granted thereunder would expire no later than December 31, 2011.\6\

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    \1\ 7 U.S.C. 6(c).

    \2\ 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)).''

    \3\ 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'.''

    \4\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

    made effective by the Commission on July 14, 2011; published in the

    Federal Register on July 19, 2011). 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).

    \5\ Concurrent with the July 14 Order, the Commission's Division

    of Clearing and Intermediary Oversight (which is now two divisions--

    the Division of Clearing and Risk (``DCR'') and the Division of Swap

    Dealer and Intermediary Oversight (``DSIO'')) and the Division of

    Market Oversight (``DMO'') (together ``the Divisions'') identified

    certain provisions of the Dodd-Frank Act and CEA as amended that

    would take effect on July 16, 2011, but that may not be eligible for

    the exemptive relief provided by the Commission in its July 14

    Order--specifically, the amendments made to the CEA by Dodd-Frank

    Act sections 724(c), 725(a), and 731. On July 14, 2011, the

    Divisions issued Staff No-Action Relief addressing the application

    of these provisions after July 16, 2011. Available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/11-04.pdf.

    \6\ 76 FR at 42522 (July 19, 2011).

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    On December 23, 2011, the Commission published in the Federal

    Register a final order (the ``First Amended July 14 Order'') amending

    the July 14 Order in two ways.\7\ First, the Commission extended the

    potential latest expiry date from December 31, 2011 to July 16, 2012

    or, depending on the nature of the relief, such other compliance date

    as may be determined by the Commission, to address the potential that,

    as of December 31, 2011, the aforementioned joint CFTC-SEC joint

    rulemakings would not be effective. Second, the Commission included

    within the relief set forth in the First Amended July 14 Order any

    agreement, contract or transaction that fully meets the conditions in

    part 35 as in effect prior to December 31, 2011. This amendment

    addressed the fact that such transactions, which were not included

    within the scope of the original July 14 Order because the exemptive

    rules in part 35 covered them

    [[Page 41261]]

    at that time, required temporary relief because part 35 would not be

    available as of December 31, 2011.\8\ In so doing, the Commission

    clarified that new part 35 and the exemptive relief issued in the First

    Amended July 14 Order, and any interaction of the two, do not operate

    to expand the pre-Dodd-Frank Act scope of transactions eligible to be

    transacted on either an ECM or EBOT to include transactions in

    agricultural commodities.

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    \7\ Amendment to July 14, 2011 Order for Swap Regulation, 76 FR

    80233 (Dec. 23, 2011).

    \8\ The Commission promulgated a rule pursuant to section

    723(c)(3) of the Dodd-Frank Act, and CEA sections 4(c) and 4c(b),

    that, effective December 31, 2011, repealed the existing part 35

    relief and replaced it with new Sec. 35.1 of the Commission's

    regulations. See Agricultural Swaps, 76 FR 49291 (Aug. 10, 2011).

    Rule 35.1 generally provides that ``agricultural swaps may be

    transacted subject to all provisions of the CEA, and any Commission

    rule, regulation or order thereunder, that is otherwise applicable

    to swaps. [It] also clarifies that by issuing a rule allowing

    agricultural swaps to transact subject to the laws and rules

    applicable to all other swaps, the Commission is allowing

    agricultural swaps to transact on [designated contract markets

    (``DCMs''), swap execution facilities (``SEFs'')], or otherwise to

    the same extent that all other swaps are allowed to trade on DCMs,

    SEFs, or otherwise.'' Id. at 49296.

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    Discussion of the Notice of Proposed Amendment

    On May 16, 2012, the Commission published in the Federal Register a

    Notice of Proposed Amendment (``Notice'') that would further amend the

    First Amended July 14 Order in the following four ways. First, in light

    of the final, joint CFTC-SEC rulemaking further defining the entities

    terms in sections 712(d), including ``swap dealer,'' ``major swap

    participant,'' and ``eligible contract participant,'' issued on April

    18, 2012,\9\ the Notice proposed to remove references to those terms.

    Second, the Notice proposed to extend the latest potential expiry date

    from July 16, 2012 to December 31, 2012 or, depending on the nature of

    the relief, such other compliance date as may be determined by the

    Commission. The Notice stated that the extension would ensure that

    market practices will not be unduly disrupted during the transition to

    the new regulatory regime.

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    \9\ CFTC-SEC, Further Definition of ``Swap Dealer'', ``Security-

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

    Based Swap Participant'', and ``Eligible Contract Participant''

    (issued Apr. 18, 2012) (to be codified at 17 CFR pt. 1), 77 FR 30596

    (May 23, 2012), available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister041812b.pdf.

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    Third, the Notice proposed to further amend the First Amended July

    14 Order to provide that agricultural swaps, whether entered into

    bilaterally, on a DCM, or a SEF, may be cleared in the same manner that

    any other swap may be cleared and without the need for the Commission

    to issue any further exemption under section 4(c) of the CEA. The

    Notice stated that this amendment is intended to harmonize the First

    Amended July 14 Order and the final rules amending part 35 of the

    Commission's regulations, to the extent that the July 14 Order, as

    amended, maintained the pre-Dodd-Frank Act part 35 prohibition against

    the clearing of agricultural swaps. The Notice clarified that while the

    proposed Second Amended July 14 Order would remove the clearing

    prohibition for agricultural swaps, it would not permit agricultural

    swaps to be entered into or executed on an ECM or EBOT.

    The Commission noted that ECMs and EBOTs both operate some form of

    trading facility without any self-regulatory responsibilities. The

    Commission stated its general belief that any form of exchange trading

    in agricultural swaps should only be permitted in a self-regulated

    environment. In other words, unlike exempt and excluded commodities,

    which were generally allowed to be transacted on a trading facility

    (i.e., platform-traded) in an unregulated environment under the CEA

    prior to the Dodd-Frank Act \10\ and now during the transition to the

    Dodd-Frank Act regulatory regime, agricultural swaps, which were not

    allowed to be platform-traded on an ECM or EBOT under the CEA prior to

    Dodd-Frank Act, may not be platform-traded during the transition to the

    Dodd-Frank Act regulatory regime. Accordingly, under the Notice and in

    conjunction with 17 CFR part 35, as effective on and after December 31,

    2011, the Notice stated that agricultural swaps may only be entered

    into or executed bilaterally, on a DCM,\11\ or on a SEF.\12\

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    \10\ One notable exception to this general approach was the

    heightened regulatory requirements for ECM-listed contracts that

    served a significant price discovery function under the pre-Dodd-

    Frank CEA. It is generally recognized, however, that the regulatory

    regime for ECM significant price discovery function contracts, which

    included nine core principles, was less rigorous than those

    applicable to either DCMs (pre- or post-Dodd-Frank) or SEFs. See CEA

    Section 2(h)(7)(C)(ii)(I)-(IX) (2008) amended by the Dodd-Frank Act.

    \11\ See December 23 Order, 76 FR at 80236, note 11 (Dec. 23,

    2011).

    \12\ See 17 CFR 35.1(b).

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    In connection with swaps executed on a DCM (whether agricultural

    swaps or otherwise), the Commission clarified that a DCM may list such

    swaps for trading under the DCM's rules related to futures contracts

    without exemptive relief.\13\ As required for futures, a DCM must

    submit such swaps to the Commission under either Sec. 40.2 (listing

    products for trading by certification) \14\ or Sec. 40.3 (voluntary

    submission of new products for Commission review and approval) \15\ of

    the Commission's regulations. Swaps that are traded on a DCM are

    required to be cleared by a DCO.\16\ In order for a DCO to be able to

    clear a swap listed for trading on a DCM, the DCO must be eligible to

    clear such swap pursuant to Sec. 39.5(a)(1) or (2),\17\ and must

    submit the swap to the Commission pursuant to Sec. 39.5(b).\18\

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    \13\ See 76 FR at 80236, note 22 (Dec. 23, 2011).

    \14\ 17 CFR 40.2.

    \15\ 17 CFR 40.3.

    \16\ See 7 U.S.C. 5(d)(11)(A).

    \17\ 17 CFR 39.5(a).

    \18\ 17 CFR 39.5(b).

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    Fourth, the Notice proposed to further amend the First Amended July

    14 Order to remove any reference to the ECM/EBOT Grandfather Order,

    which expires on July 16, 2012.\19\ The Notice stated that after July

    16, 2012, ECMs and EBOTs, as well as markets that rely on pre-Dodd-

    Frank CEA section 2(d)(2) (``2(d)(2) Markets''), would only be able to

    rely on the Second Amended July 14 Order, as proposed therein. The

    Notice proposed that the relief for ECMs and EBOTs, as well as for

    2(d)(2) Markets, granted under the proposed Second Amended July 14

    Order shall expire upon the effective date of the DCM or SEF final

    rules, whichever is later, unless the ECM or EBOT, or 2(d)(2) Markets,

    files a DCM or SEF application on or before the effective date of the

    DCM or SEF final rules, in which case the relief shall remain in place

    during the pendency of the application. The Notice clarified that for

    these purposes, an application will be considered no longer pending

    upon the application being approved, provisionally approved,\20\

    withdrawn, or denied.

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    \19\ The Commission issued the ECM/EBOT Grandfather Order

    pursuant to sections 723(c) and 734(c) of the Dodd-Frank Act which

    authorized the Commission to permit ECMs and EBOTs, respectively, to

    continue to operate pursuant to CEA sections 2(h)(3) and 5d for no

    more than one year after the general effective date of the Dodd-

    Frank Act's amendments to the CEA.

    \20\ For these purposes, an application is ``provisionally

    approved'' on the date that such provisional approval becomes

    effective such that the ECM, EBOT, or 2(d)(2) Market may then rely

    on such provisional approval to operate as a DCM or SEF, as

    applicable.

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    The Commission sought comment on all aspects of the Notice.

    Discussion of the Final Order

    The Commission received five comments that related to the

    Notice.\21\

    [[Page 41262]]

    While generally supportive of the Notice, the comments raised two

    issues for the Commission's consideration in this final order: (1) The

    expiry date applicable to ECMs currently operating pursuant to

    grandfather relief authorized by section 723(c)(l)-(2) of the Dodd-

    Frank Act and their market participants and clearing organizations; and

    (2) the effectiveness of CEA section 2(e) in light of the further

    definition of the term ``eligible contract participant'' (``ECP''). In

    addition, one commenter specifically supported the Commission's

    proposal to permit the clearing of agricultural swaps without further

    exemption.\22\ The Coalition of Physical Energy Companies also

    supported the Proposed Amendment and believed that the Commission

    should undertake its implementation of the Dodd-Frank Act in a

    deliberative manner that carefully establishes necessary regulations

    and avoids inadvertent impacts and over-broad application of the

    statute.\23\

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    \21\ Letter from Diana L. Preston, Vice President and Senior

    Counsel, Center for Securities, Trust & Investments, American

    Bankers Association, to David Stawick, Secretary, Commodity Futures

    Trading Commission (May 30, 2012); Letter from Kathleen Cronin,

    Senior Managing Director, General Counsel and Corporate Secretary,

    CME Group Inc., to David Stawick, Secretary, Commodity Futures

    Trading Commission (May 30, 2012); Letter from David M. Perlman,

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

    Physical Energy Companies, to David Stawick, Secretary, Commodity

    Futures Trading Commission (May 30, 2012); Letter from Richard W.

    Holmes, Jr., Vice President and Counsel, Fifth Third Bank, to David

    Stawick, Secretary, Commodity Futures Trading Commission (May 30,

    2012); Letter from Paul Cusenza, Chief Executive Officer, Nodal

    Exchange, LLC, to David Stawick, Secretary, Commodity Futures

    Trading Commission (May 30, 2012). The comment letters are on file

    with the CFTC and are available via the Commission's Web site at:

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1201.

    \22\ See CME Group Letter at 2. In discussing this aspect of the

    proposed Second Amended July 14 Order, CME Group noted that for

    agricultural swaps listed on a DCM, ``a DCM will have the

    flexibility either to self-certify a new agricultural swap contract

    under Rule 40.2, or to submit the contract for CFTC approval

    pursuant to Rule 40.3.'' Id. In adopting, as proposed, the

    provisions relating to agricultural swaps, the Commission is

    affirming the discussion of agricultural swaps contained in the

    Notice, which included the explanation that in addition to a DCM

    submitting swaps to the Commission under either Sec. 40.2 or Sec.

    40.3, ``In order for a DCO to be able to clear a swap listed for

    trading on a DCM, the DCO must be able to clear such swap pursuant

    to Sec. 39.5(a)(1) or (2), [footnote omitted] and must submit the

    swap to the Commission pursuant to Sec. 39.5(b).'' See 77 FR at

    28820-21.

    \23\ COPE Letter at 1-2.

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    The comments and Commission determinations regarding the two

    substantive issues raised by commenters are discussed in the sections

    that follow.

    1. Duration of Relief Available to ECM/EBOTs

    a. Comments

    While supportive of the Notice, CME Group, on behalf of its four

    DCMs, requested that the Commission clarify one ambiguity it perceived

    with the Notice--that is, the provision of the Notice stating that the

    relief proposed shall expire on the earlier of (1) December 31, 2012 or

    (2) ``the effective date of the DCM or SEF final rules, whichever is

    later,'' unless the ECM or EBOT files a DCM or SEF application ``on or

    before the effective date of the DCM or SEF final rules, in which case

    the relief shall remain in place during the pendency of the

    application.'' \24\ According to CME Group, the second part of the

    proposed expiration date is ambiguous because it fails to specify which

    of the numerous rule proposals concerning SEFs and DCMs must be

    finalized before relief will terminate.\25\

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    \24\ CME Group Letter at 2.

    \25\ Id.

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    CME Group stated that one way to remove this perceived ambiguity

    would be for the Commission to list each rulemaking that must take

    effect before the relief will terminate. CME Group also stated that, at

    a minimum, the ECM and EBOT relief should remain in place until at

    least the effective date of CFTC implementing rules concerning: (1) All

    DCM and SEF core principles and (2) block trade size requirements for

    swaps. Alternatively, CME Group stated that the Commission could

    address the concern by stating in a final order that the relief remains

    in effect until a future date the Commission will specify in a future

    order that will provide at least 60 days notice to market participants

    and other affected parties.\26\

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    \26\ Id.

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    Nodal Exchange, which is currently operating as an ECM, sought

    assurance that the proposed relief would remain in place if an ECM

    applies to be a DCM after the effective date of the DCM rules, yet

    still on or before the effective date of the SEF rules.\27\ To that

    end, Nodal Exchange offered a change to the operative language of the

    draft order. Specifically, Nodal Exchange recommended that the phrase

    at the end of Section (3) of the proposed order be modified to include

    a second ``whichever is later'' clause, as emphasized below:

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    \27\ Nodal Exchange Letter at 1-2.

    or (ii) the effective date of the designated contract market

    (``DCM'') or swap execution facility (``SEF'') final rules,

    whichever is later, unless the ECM, EBOT, or 2(d)(2) Market files a

    DCM or SEF registration application on or before the effective date

    of the DCM or SEF final rules, whichever is later, in which case the

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    relief shall remain in place during the pendency of the application.

    Nodal Exchange explained that this change is necessary because it

    must file a DCM or SEF registration application on or before the

    effective date of the DCM or SEF final rules, but to date, the final

    rules for DCMs that defer implementation of Core Principle 9 and the

    proposed rules for SEFs would significantly impact Nodal Exchange such

    that a determination of which registration will be most appropriate is

    not possible until both the DCM and SEF final rules are published.\28\

    Before submitting the appropriate application, Nodal Exchange stated

    that it will need to assess (1) how the final regulations implement DCM

    Core Principle 9 and (2) the finalized rules for SEFs, especially with

    regard to how the Commission addresses the SEF rules regarding ``pre-

    trade price transparency.'' \29\

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    \28\ Id.

    \29\ Id.

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    b. Commission Determination

    The Commission has determined to amend the draft order to include a

    ``whichever is later'' clause in provision (b) of section 3 of the

    Second Amended July 14 Order. That qualifying provision will read as

    follows: ``or (ii) the effective date of the designated contract market

    (``DCM'') or swap execution facility (``SEF'') final rules, whichever

    is later, unless the ECM, EBOT, or 2(d)(2) Market files a DCM or SEF

    registration application on or before the effective date of the DCM or

    SEF final rules, whichever is later, in which case the relief shall

    remain in place during the pendency of the application.'' \30\ To be

    clear, the phrase ``DCM or SEF final rules'' in that provision refers

    to the following rulemakings: (1) Core Principles and Other

    Requirements for

    [[Page 41263]]

    Designated Contract Markets; \31\ (2) Core Principles and Other

    Requirements for Swap Execution Facilities; \32\ and (3) a rulemaking

    on DCM Core Principle 9.\33\ The Commission believes that these changes

    and clarifications are necessary and in the public interest because

    finalization of the aforementioned rules is integral to the business

    decision of whether entities currently operating as ECMs, EBOTs, or

    2(d)(2) Markets will transition to DCM or SEF status.

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    \30\ The Commission currently receives notice filings from ECMs

    and EBOTs, and thus has a general familiarity with the nature and

    number of markets operating pursuant to ECM and EBOT exemptive

    relief. See 17 CFR 36.2(b) and 17 CFR 36.3(a). In order for the

    Commission to gain a similar familiarity with 2(d)(2) Markets, and

    to facilitate their eventual transition to registered DCM or

    registered SEF status, 2(d)(2) Markets operating or intending to

    operate pursuant to the exemptive relief in this Second Amended

    Order must provide the Commission with notice of their operations

    (or intent to so operate) on or before July 16, 2012, or as

    reasonably soon thereafter as is practicable. Notices should be sent

    to the Commission's Division of Market Oversight, 1155 21st St. NW.,

    Washington, DC 20581 (or electronically, to DMOLetters@cftc.gov),

    and should include the name and address of the 2(d)(2) Market, and

    the name and telephone number of a contact person. Such notice will

    assist the Commission in preparing to review any subsequent

    application for registration, or provisional registration, as a SEF

    or DCM submitted by such 2(d)(2) Market. Notwithstanding the

    provision of such notice, the Commission notes that any subsequent

    SEF or DCM registration application by a 2(d)(2) Market will still

    undergo a separate, complete, and independent evaluation by the

    Commission, just as will every SEF and/or DCM application submitted

    by an ECM and/or EBOT.

    \31\ Core Principles and Other Requirements for Designated

    Contract Markets, 77 FR 36612 (June 19, 2012) (``Final DCM Core

    Principles Release'').

    \32\ 76 FR 1214 (January 7, 2011).

    \33\ In the Final DCM Core Principles Release, the Commission

    stated that additional time is appropriate before finalizing the

    proposed rules for DCM Core Principle 9 and that the Commission

    plans and expects to consider the final rule for DCM Core Principle

    9 when it considers the final rule for the SEF Core Principles.

    The phrase ``DCM or SEF final rules'' does not include the

    Commission's rulemaking on block trade size requirements for swaps

    or its rulemaking on the process for a DCM or SEF to make a swap

    available to trade. See Procedures To Establish Appropriate Minimum

    Block Sizes for Large Notional Off-Facility Swaps and Block Trades,

    77 FR 15460 (March 15, 2012); Process for a Designated Contract

    Market or Swap Execution Facility to Make a Swap Available to Trade,

    76 FR 77728 (December 14, 2011). Those rules will be uniformly

    applied to both DCM- and SEF-traded swaps and, accordingly, their

    respective requirements should not have a bearing on whether an ECM,

    EBOT, or 2(d)(2) Market chooses to apply to become a DCM or a SEF.

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    2. Status of CEA Section 2(e) and ECPs

    a. Comments

    According to Fifth Third Bank, compliance with the Dodd-Frank Act

    requirements should not become mandatory until the CFTC and SEC provide

    further guidance as to the meaning of the ``revised definition of

    ECP.'' \34\ Fifth Third Bank stated that section 2(e) of the CEA, as

    amended by the Dodd-Frank Act, which makes it unlawful for non-ECPs to

    enter into over-the-counter swaps, together with the rescission of the

    Commission's 1989 Policy Statement Concerning Swap Transactions,

    represent a major change in the rules under which banks have been

    operating for many years.\35\ Fifth Third Bank contended that banks

    (and other swap counterparties) will need to know how to determine

    whether or not a person is an ECP with a considerable degree of

    certainty well before the mandatory compliance date for CEA section

    2(e) so that they can (1) prepare compliance procedures,

    questionnaires, and other forms, and (2) train their personnel how to

    determine whether a person is or is not an ECP. Fifth Third Bank

    expressed particular concern regarding how to interpret the phrase

    ``amounts invested on a discretionary basis'' in the context of CEA

    section 1a(18)(A)(xi).\36\ For these reasons, Fifth Third Bank stated

    that the proposed Second Amended July 14 Order should not assume that

    the term ``ECP'' has been adequately defined. In its view, compliance

    with CEA section 2(e) should not become mandatory until at least 60

    days after the CFTC and SEC have provided further guidance regarding

    the meaning of the term ``ECP.'' \37\

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    \34\ Fifth Third Bank Letter at 2.

    \35\ Id.

    \36\ Id. at 4-5.

    \37\ Id. at 5.

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    Similarly, citing some of the same issues as Fifth Third Bank, the

    American Bankers Association urged the Commission to amend the proposed

    order to provide for a continuation of the existing temporary exemption

    ``solely with respect to Section 2(e) until the later of (i) the

    Proposed Revised Effective Date, or (ii) no less than 60 days after a

    substantive rule or interpretive guidance on Section 2(e) becomes

    effective for such purpose (issued either by the Commission or jointly

    with the SEC).'' \38\

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    \38\ American Bankers Association Letter at 1-2.

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    b. Commission Determination

    On April 18, 2012, the Commission and the SEC adopted final rules

    jointly further defining, among other terms, ``eligible contract

    participant.'' \39\ In those rules, the Commissions provided both new

    categories of ECPs, including a new category based in part on the line

    of business element of the Commission's Policy Statement Concerning

    Swap Transactions,\40\ and interpretations regarding the further

    definition of the term ``ECP.'' The Commission and the SEC also delayed

    compliance with certain aspects of the ECP definition until December

    31, 2012.\41\

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    \39\ See Further Definition of ``Swap Dealer,'' Security-Based

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

    Swap Participant'' and ``Eligible Contract Participant'', 77 FR

    30596 (May 23, 2012) (``Final ECP Definition Release'').

    \40\ See 17 CFR 1.3(m)(7).

    \41\ See Final ECP Definition Release at 30596, 30700 (setting

    forth the compliance dates for Commission regulations 1.3(m)(5), (6)

    and (8)(iii)).

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    While the Commissions or their staff may, from time to time, issue

    additional guidance regarding the definition of the term ``ECP,'' the

    Commission and the SEC jointly have further defined the term ``eligible

    contract participant,'' fulfilling their mandate under Dodd-Frank Act

    section 712(d)(1) to jointly further define the term ``ECP.'' In light

    of the foregoing, the Commission declines requests to modify this final

    order to delay the effectiveness of section 2(e) beyond the relief

    already provided.

    Nevertheless, because the Commission and the SEC may issue

    additional guidance concerning, among other issues of concern to

    commenters, the term ``amounts invested on a discretionary basis'' in

    the context of CEA section 1a(18)(A)(xi) after the effective date of

    section 2(e), the Commission provides the following guidance as to how

    it intends to exercise its enforcement discretion with respect to

    certain unintentional violations of section 2(e) by swap counterparties

    who are making good faith efforts to comply with section 2(e).\42\ More

    specifically, where a person finds that it has entered into a swap with

    a counterparty that the Commission and SEC later further define or

    interpret as not an ECP, absent other material factors, the Commission

    will not bring an enforcement action for violation of section 2(e) if

    the person has implemented and followed reasonably designed policies

    and procedures to verify the ECP status of a swap counterparty \43\

    and, notwithstanding good faith compliance with such policies and

    procedures,\44\ the person enters into a swap with a non-ECP

    counterparty.

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    \42\ Because CEA section 2(e) refers both to ECPs and swaps,

    both of which, per Dodd-Frank Act section 754, must be further

    defined before CEA section 2(e) could take effect, now that ECP has

    been further defined, the further definition of the term ``swap'' is

    the sole remaining trigger for the effectiveness of CEA section

    2(e).

    \43\ In that regard, see generally Business Conduct Standards

    for Swap Dealers and Major Swap Participants With Counterparties, 77

    FR 9734 (Feb. 17, 2012) (``External Business Conduct Standards Final

    Release''). See also Final ECP Definition Release at 30646 n. 585

    (noting that ``market participants must make the determination of

    ECP status with respect to the parties to transactions in security-

    based swaps and mixed swaps prior to the offer to sell or the offer

    to buy or purchase the security-based swap or mixed swap''), 30652

    (with respect to determining the ECP status of Forex Pools and

    referring to the External Business Conduct Standards Final Release),

    and 30653 n. 656 (with respect to determining the ECP status of

    Forex Pools)

    \44\ For example, an entity could demonstrate good-faith

    compliance by first seeking, including in connection with the design

    of its policies and procedures, additional guidance from counsel or

    from Commission staff, which could address questions on a case-by-

    case basis with the benefit of specific facts and circumstances.

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

    One example of a fact pattern that the Commission does not believe

    would exhibit good faith compliance would be treating as an ECP an

    individual who has total assets, excluding personal property (which the

    Commission does not expect to treat as ``assets invested on a

    discretionary basis''), that are less than the relevant CEA section

    1a(18)(A)(xi) dollar threshold. Conversely, if the individual swap

    counterparty could be

    [[Page 41264]]

    an ECP if the Commission and the SEC further define or interpret some

    or all of the individual's assets, other than personal property, to be

    ``assets invested on a discretionary basis,'' absent other material

    factors, the CFTC would not expect to bring an enforcement action

    against the counterparty for entering into a swap in contravention of

    CEA section 2(e). Of course, once the Commission and the SEC further

    define or interpret a counterparty to be a non-ECP, CEA section 2(e)

    would prohibit entering into new swaps with such ineligible

    counterparties. This compliance guidance does not apply to any aspect

    of the ECP definition that was: (1) Not amended by the Dodd-Frank Act;

    (2) covered by a regulation promulgated in the Final ECP Definition

    Release; or (3) the subject of an interpretation or other guidance set

    forth in the Final ECP Definition Release.

    Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \45\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with conducting or sponsoring any collection of information

    as defined by the PRA. These amendments to the July 14 Order will not

    require a new collection of information from any persons or entities

    that will be subject to the final order.

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

    \45\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Considerations

    Section 15(a) of the CEA\46\ 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 considers the costs and

    benefits resulting from its discretionary determinations with respect

    to the section 15(a) factors.

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

    \46\ 7 U.S.C. 19(a).

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

    The Commission requested comments on the consideration of costs and

    benefits of the proposed amendments discussed in the Notice. One

    commenter, the American Bankers Association, stated that the

    Commission's consideration of costs and benefits in the July 14 Order

    did not take into account the costs that would result if CEA section

    2(e) were made effective in the absence of further interpretive or

    regulatory guidance from the Commission.\47\ American Bankers

    Association states that these costs include the chilling effect on

    legitimate hedging activity and reduced credit availability,

    particularly for end users. American Bankers Association further stated

    that this chilling effect would be compounded by another major concern

    of its member banks--whether swaps could potentially be subject to

    challenges for invalidity under state laws. According to the American

    Bankers Association, a significant benefit of providing temporary

    relief under section 2(e) in the manner suggested would be the legal

    certainty this would create under state law for swaps that currently

    qualify for the line of business provision, and the provision of such

    temporary relief would be consistent with the Commission's goal of

    striving to ``ensure that current practices will not be unduly

    disrupted during the transition to the new regulatory regime,'' and

    allow additional time for its member banks to find solutions to their

    CEA section 2(e) concerns.\48\

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

    \47\ American Bankers Association Letter at 4.

    \48\ Id.

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

    As stated above, the rules further defining the term ``ECP'' were

    finalized by the Commissions on April 18, 2012. In those rules, the

    Commissions considered the costs and benefits of the further

    definitions and guidance regarding the same, including the costs and

    benefits of legal certainty. Further, the American Bankers Association

    comment regarding the costs and benefits of the amendments to CEA

    section 2(e) made by the Dodd-Frank Act are beyond the scope of this

    final order, which is limited to amending the temporary exemptive

    relief first granted by the Commission in the July 14 Order.

    Regarding benefits, this final order continues the primary benefit

    described in the July 14 Order, which is to facilitate an orderly

    transition to the comprehensive regulatory framework for swaps

    regulation set out in Title VII of the Dodd-Frank Act. More

    specifically, this final order temporarily extends the time market

    participants and the public have to comply with certain provisions of

    the CEA that reference one or more of the terms to be further defined,

    and provides guidance with respect to the same in response to various

    comments. Accordingly, as this final order is an amendment to the July

    14 Order, the Commission's consideration of costs and benefits, as set

    forth in the July 14 Order, may be incorporated here by reference.

    Second Amended July 14 Order

    The Second Amended July 14 Order shall read as follows:

    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 consistent with the determinations set forth

    above, which are incorporated in this final Order, as amended, by

    reference, and:

    (1) Exempts, subject to the conditions set forth in paragraph (4),

    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 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. With respect to any such provision of the CEA, 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, 2012.

    (2) Agricultural Commodity Swaps. Exempts, subject to the

    conditions set forth in paragraph (4), all agreements, contracts, and

    transactions in an agricultural commodity, 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 as in

    effect prior to December 31, 2011, including any agreement, contract,

    or transaction that complies with such provisions then in effect

    notwithstanding that:

    a. 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

    b. The creditworthiness of any party having an actual or potential

    obligation under the agreement, contract, or transaction would not be a

    material

    [[Page 41265]]

    consideration in entering into or determining the terms of the

    agreement, contract, or transaction i.e., the agreement, contract, or

    transaction may be cleared.

    This exemption shall expire upon the earlier of (i) December 31,

    2012; or (ii) such other compliance date as may be determined by the

    Commission.

    (3) Exempt and Excluded Commodity Swaps. Exempts, subject to the

    conditions set forth in paragraph (4), 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, if

    the agreement, contract, or transaction complies with part 35 of the

    Commission's regulations as in effect prior to December 31, 2011,

    including any agreement, contract, or transaction in an exempt or

    excluded (but not agricultural) commodity that complies with such

    provisions then in effect 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:

    a. Such agreements, contracts, and transactions in exempt or

    excluded commodities (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 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

    b. This exemption shall expire upon the earlier of: (i) December

    31, 2012; or (ii) such other compliance date as may be determined by

    the Commission; except that, for agreements, contracts, and

    transactions executed on an exempt commercial market (``ECM''), exempt

    board of trade (``EBOT''), or pursuant to CEA section 2(d)(2) as in

    effect prior to July 16, 2011 (``2(d)(2) Market''), this exemption

    shall expire upon the earlier of (i) December 31, 2012; or (ii) the

    effective date of the designated contract market (``DCM'') or swap

    execution facility (``SEF'') final rules, whichever is later, unless

    the ECM, EBOT, or 2(d)(2) Market files a DCM or SEF registration

    application on or before the effective date of the DCM or SEF final

    rules, whichever is later, in which case the relief shall remain in

    place during the pendency of the application. For these purposes, an

    application will be considered no longer pending when the application

    has been approved, provisionally approved, withdrawn, or denied.

    (4) Provided that the foregoing exemptions in paragraphs (1), (2),

    and (3) 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

    became 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, as amended, shall be effective immediately.

    Issued in Washington, DC, on July 3, 2012 by the Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Note: The following appendix will not be published in the Code

    of Federal Regulations.

    Appendix 1--Statement of Chairman Gary Gensler

    I support the exemptive order regarding the effective dates of

    certain Dodd-Frank Wall Street Reform and Consumer Protection Act

    (Dodd-Frank Act) provisions.

    Today's exemptive order makes five changes to the exemptive

    order issued on December 19, 2011.

    First, the proposed exemptive order extends the sunset date from

    July 16, 2012, to December 31, 2012.

    Second, the Commodity Futures Trading Commission (CFTC) and the

    Securities and Exchange Commission (SEC) have now completed the rule

    further defining the term ``swap dealer'' and ``securities-based

    swap dealer.'' Thus, the exemptive order no longer provides relief

    as it once did until those terms were further defined.

    The Commissions are also mandated by the Dodd-Frank Act to

    further define the term ``swap'' and ``securities-based swap.'' The

    staffs are making great progress, and I anticipate the Commissions

    will take up this final definitions rule in the near term. Until

    that rule is finalized, the exemptive order appropriately provides

    relief from the effective dates of certain Dodd-Frank provisions.

    Third, in advance of the completion of the definitions rule,

    market participants requested clarity regarding transacting in

    agricultural swaps. The exemptive order allows agricultural swaps

    cleared through a derivatives clearing organization or traded on a

    designated contract market to be transacted and cleared as any other

    swap. This is consistent with the agricultural swaps rule the

    Commission already finalized, which allows farmers, ranchers,

    packers, processors and other end-users to manage their risk.

    Fourth, unregistered trading facilities that offer swaps for

    trading were required under Dodd-Frank to register as swap execution

    facilities (SEFs) or designated contract markets (DCM) by July of

    this year. These facilities include exempt boards of trade, exempt

    commercial markets and markets excluded from regulation under

    section 2(d)(2). Given the Commission has yet to finalize rules on

    SEFs, this order gives these platforms additional time for such a

    transition.

    Fifth, the Commission is providing guidance regarding

    enforcement of rules that require that certain off-exchange swap

    transactions only be entered into by eligible contract participants

    (ECPs). The guidance provides that if a person takes reasonable

    steps to verify that its counterparty is an ECP, but the

    counterparty turns out not to be an ECP based on subsequent

    Commission guidance, absent other material factors, the

    [[Page 41266]]

    CFTC will not bring an enforcement action against the person.

    [FR Doc. 2012-16987 Filed 7-12-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 13, 2012