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2012-31736

  • Federal Register, Volume 78 Issue 4 (Monday, January 7, 2013)[Federal Register Volume 78, Number 4 (Monday, January 7, 2013)]

    [Rules and Regulations]

    [Pages 858-882]

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

    [FR Doc No: 2012-31736]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    RIN 3038-AD85

    Final Exemptive Order Regarding Compliance With Certain Swap

    Regulations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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    SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission

    (``Commission'' or ``CFTC'') published for public comment, pursuant to

    section 4(c) of the Commodity Exchange Act (``CEA''), a proposed order

    (``Proposed Order'') that

    [[Page 859]]

    would grant market participants temporary conditional relief from

    certain provisions of the CEA, as amended by Title VII of the Dodd-

    Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank

    Act'' or ``Dodd-Frank''), and the Commission also published its

    proposed interpretive guidance and policy statement (``Proposed

    Guidance'') regarding the cross-border application of the swap

    provisions of the CEA as added by Title VII of the Dodd-Frank Act. The

    Commission has determined to finalize the Proposed Order, with certain

    modifications and clarifications to address public comments. Under this

    final order (``Final Order''), a non-U.S. person that registers as a

    swap dealer (``SD'') or major swap participant (``MSP'') may delay

    compliance with certain entity-level requirements of the CEA (and

    Commission regulations promulgated thereunder), and non-U.S. SDs and

    MSPs and foreign branches of U.S. SDs and MSPs may delay compliance

    with certain transaction-level requirements of the CEA (and Commission

    regulations promulgated thereunder), subject to specified conditions.

    In addition, the Commission is separately proposing further guidance on

    certain specific aspects of the Proposed Guidance (``Further Proposed

    Guidance'').

    DATES: The Final Order is effective on December 21, 2012 and will

    expire on July 12, 2013.

    FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Deputy General

    Counsel, (202) 418-5613, ckim@cftc.gov, Terry Arbit, Deputy General

    Counsel, (202) 418-5357, tarbit@cftc.gov, Mark Fajfar, Assistant

    General Counsel, (202) 418-6636, mfajfar@cftc.gov, Office of General

    Counsel; Gary Barnett, Director, Division of Swap Dealer and

    Intermediary Oversight, (202) 418-5977, gbarnett@cftc.gov; Jacqueline

    H. Mesa, Director, Office of International Affairs, (202) 418-5386,

    jmesa@cftc.gov; Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    which amended the CEA \2\ to establish a new regulatory framework for

    swaps. The legislation was enacted to reduce systemic risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things: (1) Providing for the registration and

    comprehensive regulation of SDs and MSPs; (2) imposing clearing and

    trade execution requirements on standardized derivative products; (3)

    creating rigorous recordkeeping and data reporting regimes with respect

    to swaps, including real-time public reporting; and (4) enhancing the

    Commission's rulemaking and enforcement authorities over all registered

    entities, intermediaries, and swap counterparties subject to the

    Commission's oversight. Section 722(d) of the Dodd-Frank Act also

    amended the CEA to add section 2(i), which provides that the swap

    provisions of the CEA apply to cross-border activities when certain

    conditions are met, namely, when such activities have a ``direct and

    significant connection with activities in, or effect on, commerce of

    the United States'' or when they contravene Commission rulemaking.\3\

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

    Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).

    \2\ 7 U.S.C. 1 et seq. (amended 2010).

    \3\ 7 U.S.C. 2(i)

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    In the two years since its enactment, the Commission has finalized

    41 rules to implement Title VII of the Dodd-Frank Act. The finalized

    rules include those promulgated under CEA section 4s,\4\ which address

    registration of SDs and MSPs and other substantive requirements

    applicable to SDs and MSPs. Notably, many section 4s requirements

    applicable to SDs and MSPs are tied to the date on which a person is

    required to register, unless a later compliance date is specified.\5\ A

    number of other rules specifically applicable to SDs and MSPs have been

    proposed but not finalized.\6\

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    \4\ 7 U.S.C 6s.

    \5\ Examples of section 4s implementing rules that become

    effective for SDs and MSPs at the time of their registration include

    requirements relating to swap data reporting (Commission regulation

    23.204) and conflicts of interest (Commission regulation 23.605(c)-

    (d)). The chief compliance officer requirement (Commission

    regulations 3.1 and 3.3) is an example of those rules that have

    specific compliance dates. The compliance dates are summarized on

    the Compliance Dates page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm).

    \6\ These include rules under CEA section 4s(e), 7 U.S.C. 6s(e)

    (governing capital and margin requirements for SDs and MSPs).

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    Further, the Commission published for public comment the Proposed

    Guidance,\7\ which set forth the manner in which it proposed to

    interpret section 2(i) of the CEA as it applies to the requirements

    under the Dodd-Frank Act and the Commission's regulations promulgated

    thereunder regarding cross-border swap activities. Specifically, in the

    Proposed Guidance, the Commission described the general manner in which

    it proposed to consider: (1) Whether a non-U.S. person's swap dealing

    activities are sufficient to require registration as a ``swap

    dealer'',\8\ as further defined in a joint release adopted by the

    Commission and the Securities and Exchange Commission (``SEC'')

    (collectively, the ``Commissions''); \9\ (2) whether a non-U.S.

    person's swap positions are sufficient to require registration as a

    ``major swap participant,'' \10\ as further defined in the Final

    Entities Rules; and (3) the treatment of foreign branches, agencies,

    affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-

    U.S. SDs. The Proposed Guidance also generally described the policy and

    procedural framework under which the Commission may permit compliance

    with a comparable regulatory requirement of a foreign jurisdiction to

    substitute for compliance with the requirements of the CEA. Last, the

    Proposed Guidance set forth the manner in which the Commission proposed

    to interpret section 2(i) of the CEA as it applies to the clearing,

    trading, and certain reporting requirements under the Dodd-Frank Act

    with respect to swaps between counterparties that are not SDs or MSPs.

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    \7\ ``Cross-Border Application of Certain Swaps Provisions of

    the Commodity Exchange Act,'' 77 FR 41214, Jul. 12, 2012.

    \8\ 7 U.S.C. 1a(49).

    \9\ 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 Entities Rules'').

    \10\ 7 U.S.C. 1a(33).

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    Contemporaneously with the Proposed Guidance, the Commission

    published the Proposed Order pursuant to section 4(c) of the CEA,\11\

    in order to foster an orderly transition to the new swaps regulatory

    regime and to provide market participants greater certainty regarding

    their obligations with respect to cross-border swap activities during

    the pendency of the Proposed Order. The Proposed Order would grant

    temporary relief from certain swap provisions of Title VII of the Dodd-

    Frank Act.

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    \11\ ``Exemptive Order Regarding Compliance With Certain Swap

    Regulations,'' 77 FR 41110 Jul. 12, 2012.

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    The public comment periods on the Proposed Order and the Proposed

    Guidance ended on August 13, 2012 and August 27, 2012, respectively.

    The Commission received approximately 26 letters on the Proposed Order

    and approximately 288 letters on the Proposed Guidance from a variety

    of market participants and other interested

    [[Page 860]]

    parties, including major U.S. and non-U.S. banks and financial

    institutions that conduct global swaps business, trade associations,

    clearing organizations, law firms (representing international banks and

    dealers), individual citizens, and foreign regulators.\12\ The

    Commission staff also held numerous meetings and discussions with

    various market participants, domestic bank regulators, and other

    interested parties to discuss the Proposed Order and the Proposed

    Guidance.\13\

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    \12\ Some of the commenters submitted a single comment letter

    addressing both the Proposed Order and the Proposed Guidance. The

    comment letters submitted in response to the Proposed Order and

    Proposed Guidance may be found on the Commission's Web site at

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.

    Approximately 200 individuals submitted substantially identical

    letters to the effect that oversight of the $700 trillion global

    derivatives market is the key to meaningful reform. The letters

    stated that because the market is inherently global, risks can be

    transferred around the world with the touch of a button. Further,

    according to these letters, loopholes in the Proposed Guidance could

    allow foreign affiliates of Wall Street banks to escape regulation.

    Lastly, the letters requested that the Proposed Guidance be

    strengthened to ensure that the Dodd-Frank derivatives protections

    will directly apply to the full global activities of all important

    participants in the U.S. derivatives markets.

    \13\ The records of these meetings and communications can be

    found on the Commission's Web site at: http://cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

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    Further, the Commission staff closely consulted with the staff of

    the SEC in an effort to increase understanding of each other's

    regulatory approaches and to harmonize the cross-border approaches of

    the two agencies to the greatest extent possible, consistent with their

    respective statutory mandates.\14\ The Commission expects that this

    consultative process will continue as each agency works towards

    implementing its respective cross-border policy.

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    \14\ In addition to differences in the applicable statutory

    provisions, there are also differences in the markets and products

    overseen by each agency, which may lead to divergent approaches to

    cross-border activities.

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    The Commission also recognizes the critical role of international

    cooperation and coordination in the regulation of derivatives in the

    highly interconnected global market, where risks are transmitted across

    national borders and market participants operate in multiple

    jurisdictions. Close cooperative relationships and coordination with

    other jurisdictions take on even greater importance given that, prior

    to the recent reforms, the swaps market has largely operated without

    regulatory oversight and many jurisdictions are in differing stages of

    implementing their regulatory reform. To this end, the Commission staff

    has actively engaged in discussions with their foreign counterparts in

    an effort to better understand and develop a more harmonized cross-

    border regulatory framework. The Commission expects that these

    discussions will continue as it finalizes the cross-border interpretive

    guidance and as other jurisdictions develop their own regulatory

    requirements for derivatives.\15\

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    \15\ This is one aspect of the Commission's on-going bilateral

    and multilateral efforts to promote international coordination of

    regulatory reform. The Commission staff is engaged in consultations

    with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada,

    Australia, Brazil, and Mexico on derivatives reform. In addition,

    the Commission staff is participating in several standard-setting

    initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and

    has created an informal working group of derivatives regulators to

    discuss implementation of derivatives reform. See also Joint Press

    Statement of Leaders on Operating Principles and Areas of

    Exploration in the Regulation of the Cross-border OTC Derivatives

    Market, included in CFTC Press Release 6439-12, Dec. 4, 2012.

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    The Commission has determined not to take further action on the

    Proposed Guidance at this time. The Commission believes it will be

    beneficial to have further consultations with other domestic and

    international regulators in an effort to harmonize cross-border

    regulatory approaches prior to taking action with respect to the

    Proposed Guidance. The Commission also believes that further

    consideration of public comments, including the comments that may be

    received on the Further Proposed Guidance regarding the Commission's

    interpretation of the term ``U.S. person,'' and its guidance regarding

    aggregation for purposes of SD registration, will be helpful to the

    Commission in issuing final interpretive guidance.

    Nonetheless, the Commission has determined to issue the Final Order

    as a time-limited exemptive order that is substantially similar to the

    Proposed Order, except for the addition of provisions regarding

    registration and certain modifications and clarifications addressing

    public comments. Recently, the Commission staff granted time-limited,

    no-action relief to promote continuity in the application of Dodd-Frank

    requirements and facilitate the transition to those requirements by

    enabling swap market participants to apply a uniform and readily

    ascertainable standard regarding which swaps must be included in the

    calculations under the SD and MSP definitions.\16\ The Final Order

    continues that process and furthers the same purposes.\17\

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    \16\ See CFTC Division of Swap Dealer and Intermediary

    Oversight, Re: Time-Limited No-Action Relief: Swaps Only With

    Certain Persons to be Included in Calculation of Aggregate Gross

    Notional Amount for Purposes of Swap Dealer De Minimis Exception and

    Calculation of Whether a Person is a Major Swap Participant, No-

    Action Letter No. 12-22, Oct. 12, 2012 (``CFTC Letter No. 12-22'').

    \17\ The Commission intends that the Final Order is in addition

    to any no-action relief issued or to be issued by the Commission

    staff. Unless specifically provided in any letter providing no-

    action relief, the Final Order does not limit the availability of

    any no-action relief.

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    In preparing the Final Order, the Commission has attempted to be

    responsive to commenters' concerns and recommendations, so that market

    practices will not be unnecessarily disrupted during the transition to

    the new swap regulatory regime. At the same time, the Commission also

    recognizes the importance of the new SD and MSP regulatory scheme to

    the Dodd-Frank swap reforms and, therefore, is mindful that its

    implementation should not be subject to undue delay. The Commission

    believes that the Final Order strikes the proper balance between

    promoting an orderly transition to the new regulatory regime, while

    appropriately tailoring relief to ensure that the Commission can

    responsibly discharge its statutory duties.

    This release is organized in seven sections. Section II provides a

    brief overview of the Commission's exemptive authority under section

    4(c) of the CEA and the Proposed Order; Section III provides a summary

    of the comments received on the Proposed Order and the Commission

    determinations regarding the Final Order; Section IV provides the

    Commission's findings pursuant to CEA section 4(c); Section V addresses

    the Paperwork Reduction Act; Section VI discusses cost benefit

    considerations; and Section VII contains the Final Order.

    II. Commission's Exemptive Authority and Proposed Order

    A. Section 4(c) of the CEA

    Section 4(c)(1) of the CEA authorizes the Commission to ``promote

    responsible economic or financial innovation and fair competition'' by

    exempting any transaction or class of transaction from any of the

    provisions of the CEA (subject to certain exceptions) where the

    Commission determines that the exemption would be consistent with the

    public interest and the purposes of the CEA.\18\ Under section 4(c)(2)

    of the CEA, the Commission may not grant exemptive relief unless it

    determines that: (1) The exemption is appropriate

    [[Page 861]]

    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''; 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.\19\ In enacting section 4(c), Congress noted that the purpose of

    the provision is to give the Commission a means of providing certainty

    and stability to existing and emerging markets so that financial

    innovation and market development can proceed in an effective and

    competitive manner.\20\

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    \18\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).

    \19\ CEA section 4(c)(2), 7 U.S.C. 6(c)(2).

    \20\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

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    B. Proposed Order

    Under the Proposed Order, the Commission would allow non-U.S. SDs

    and MSPs to delay compliance with certain Entity-Level Requirements of

    the Dodd-Frank Act (and the Commission's regulations thereunder),

    subject to specified conditions described therein.\21\ An exception to

    the foregoing relief from the Entity-Level Requirements related to the

    swap data repository (``SDR'') reporting requirement \22\ and part 20

    of the Commission's regulations relating to large-trader reporting

    (``LTR''). Specifically, non-U.S. SDs and MSPs would be required to

    comply with the SDR reporting and LTR requirements for all swaps with

    U.S. counterparties upon their compliance date. Further, for swaps with

    non-U.S. counterparties, the Commission proposed that only those non-

    U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-

    based SD would be permitted to delay compliance with the SDR reporting

    and LTR requirements.

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    \21\ The ``Entity-Level Requirements'' and ``Transaction-Level

    Requirements'' for purposes of the Proposed Order were the same as

    those defined for purposes of the Final Order. See section II.D.1.,

    below.

    \22\ See 7 U.S.C. 2(a)(13)(G). The Commission believes that the

    data reported to, and collected by, SDRs will be important to its

    ability to effectively monitor and address the risk exposures of

    individual market participants (including SDs and MSPs) and the

    concentration of risk within the swaps market more generally.

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    With respect to U.S. SDs and MSPs, the Commission proposed to

    permit such registrants \23\ to delay compliance with certain Entity-

    Level Requirements through January 1, 2013. This relief with respect to

    Entity-Level Requirements, however, would not extend to swap data

    recordkeeping, SDR reporting or LTR requirements. That is, U.S. SDs and

    MSPs would be required to comply with the swap data recordkeeping, SDR

    reporting and LTR requirements for all swaps.

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    \23\ For purposes of the Final Order, the term ``registrant''

    means a registered SD or MSP.

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    The Commission also proposed to grant, with respect to certain

    Transaction-Level Requirements of the Dodd-Frank Act (and the

    Commission's regulations thereunder), temporary relief to non-U.S. SDs

    and MSPs, as well as foreign branches of U.S. SDs and MSPs, for swaps

    with a non-U.S. counterparty so that they may comply only with the

    regulations as may be required in the home jurisdiction of the non-U.S.

    registrant (or in the case of a foreign branch of a U.S. registrant,

    the foreign location of the branch).\24\ With respect to swaps with any

    U.S. counterparty, however, these registrants (as well as foreign

    branches of U.S. SDs and MSPs) would be required to comply with all

    applicable Transaction-Level Requirements that are in effect. Finally,

    the Commission did not propose exemptive relief for swaps between

    market participants that are neither SDs nor MSPs.

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    \24\ Under the Proposed Guidance, a foreign branch of a U.S.

    person would be deemed a U.S. person. Accordingly, swaps entered

    into between a foreign branch of a U.S. person and another foreign

    branch of a U.S. person would be subject to the Transaction-Level

    Requirements.

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    The proposed temporary exemptive relief for non-U.S. registrants

    (and foreign branches of U.S. registrants with respect to Transaction-

    Level Requirements) would become effective on the compliance date for

    registration and expire 12 months following the publication of the

    Proposed Order in the Federal Register (i.e., July 12, 2013). In the

    Proposed Order, the Commission also stated that, in the interest of

    promoting an orderly transition to the new swap regulatory regime, it

    intends to consider extending the effectiveness of the exemptive relief

    at its expiration based on, among other things, whether and when

    substituted compliance with foreign regulatory requirements for non-

    U.S. persons is available.

    A non-U.S. registrant seeking relief under the Proposed Order would

    have to satisfy certain conditions. First, a non-U.S. person that is

    required to register as an SD or MSP would have to apply to become

    registered as such when registration is required. Second, within 60

    days of applying for registration, a non-U.S. registrant would have to

    submit to the National Futures Association (``NFA'') a compliance plan

    addressing how it plans to comply, in good faith, with all applicable

    requirements under the CEA and related rules and regulations upon the

    effective date of final cross-border interpretive guidance.

    The Commission further noted that the proposed relief would

    neither: (1) Limit the applicability of any CEA provision or Commission

    regulation to any person, entity or transaction except as provided in

    the Proposed Order; nor (2) affect any effective date or compliance

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

    Commission.

    III. Comments on the Proposed Order and Commission Determinations

    A. Comments Generally

    Many commenters expressed general support for the Proposed Order

    but urged the Commission to broaden the scope of the relief to give

    market participants adequate time to implement necessary operational

    and compliance changes and to reflect the fact that certain key aspects

    of the Proposed Guidance (particularly those relating to registration

    determinations) were not yet final as of the date of the comments.\25\

    Many of the commenters supporting temporary exemptive relief also

    suggested specific modifications or clarifications of the Proposed

    Order concerning the scope and/or timing of the exemptive relief.\26\

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    \25\ See e.g., Letters from Security Industry and Financial

    Markets Association (``SIFMA'') (Aug. 13, 2012); Institute of

    International Bankers (``IIB'') (Aug. 9, 2012); Cleary Gottlieb

    Steen & Hamilton LLP (``Cleary'') (Aug. 16, 2012); and Futures

    Options Association (``FOA'') (Aug. 13, 2012). Some of the

    commenters expressly stated that the Commission should finalize the

    exemptive relief as promptly as possible. See e.g., IIB Letter at 1

    and Cleary Letter at 3. For example, IIB stated that the proposed

    relief should be modified to address ``unrealistic and unwarranted''

    compliance burdens related to the Proposed Guidance and certain

    aspects of the Commission regulations adopted to date. IIB Letter

    (Aug. 9, 2012) at 2. Accordingly, IIB requested limited interim

    relief from certain aspects of the Commission's registration and

    definitional rules (in particular, the aggregation requirement for

    purposes of the de minimis calculation). Id. at 3-7. Similarly, The

    Clearing House Association LLC (``The Clearing House'') expressed

    concerns that the proposed relief will be ``ultimately ineffective''

    in accomplishing its objectives if concepts from the Proposed

    Guidance are required to be applied before they are finalized, and

    requested exemption from those rules or concepts that are not yet

    finalized. The Clearing House (Aug. 13, 2012) at 2.

    \26\ See, e.g., SIFMA (Aug. 13, 2012), at 3, 5-6, 10-13, A-50;

    Lloyds Banking Group (``Lloyds'') (Aug. 13, 2012) at 1-2; IIB (Aug.

    9, 2012), at 5; Canadian Bankers Association (Aug. 13, 2012), at 2;

    Credit Suisse (Aug. 27, 2012), at 7; Cleary (Aug. 16, 2012), at 4;

    Deutsche Bank AG (``Deutsche Bank'') (Aug. 13, 2012), at 3, 7;

    Societe Generale (Aug. 8, 2012), at 2.

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    On the other hand, other commenters--namely, public interest groups

    such as Americans for Financial Reform (``AFR'') and Public Citizen's

    Congress Watch--expressed concerns

    [[Page 862]]

    about delaying the implementation of the Dodd-Frank Act to overseas

    activities.\27\ AFR stated that the Proposed Order would significantly

    extend the period where markets lack critical protections against

    derivatives risks and expressed concern about taxpayer exposure to

    foreign banks, particularly ``foreign affiliates of U.S. banks whose

    liabilities are guaranteed (implicitly or explicitly) by the parent

    company.'' \28\ Similarly, Public Citizen's Congress Watch expressed

    the concern that the Proposed Order would unnecessarily delay

    compliance with most entity requirements and transaction requirements

    for foreign subsidiaries and affiliates of U.S. financial institutions

    and for U.S. subsidiaries and affiliates of foreign banks, further

    prolonging exposure of U.S. taxpayers to unnecessary systemic

    risks.\29\

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    \27\ See AFR (Aug. 13, 2012), at 1-4. AFR stated that, while it

    recognized the complexities and challenges the industry faces, ``the

    large swap entities designated under the Dodd-Frank Act have been

    aware of the general contours of these requirements for several

    years, and there have already been significant delays in

    implementation.'' AFR Letter at 2. Public Citizen's Congress Watch

    expressed concerns that delayed compliance would unnecessarily

    prolong American taxpayers' exposure to the systemic risks of U.S.

    institutions and interests. See Public Citizen's Congress Watch

    (submitted by Professor I. Michael Greenberger) (``Public Citizen's

    Congress Watch'') (Aug. 14, 2012) at 1-13.

    \28\ AFR (Aug. 13, 2012) at 2.

    \29\ See Public Citizen's Congress Watch (Aug. 14, 2012) at 1-2.

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    B. Definition of ``U.S. Person''

    Although at this time the Commission is not making any

    determinations as to the scope of the final interpretive guidance, the

    Commission believes that the comments received on the definition of

    U.S. person set forth in the Proposed Guidance are nonetheless relevant

    and helpful in determining the appropriate scope of exemptive relief in

    the Final Order. Taken together, these comments generally support, as

    an interim measure, the approach taken by the Commission staff in CFTC

    Letter No. 12-22 regarding the initial scope of the application of the

    CEA to swaps activities. Accordingly, in light of the Commission's

    experience to date with CFTC Letter No. 12-22 and these comments, it is

    taking a similar approach to the definition of U.S. person to that set

    forth in the staff no-action letter and supported by many commenters.

    To be clear, the Commission wishes to emphasize that the discussion

    here is not, and should not be construed as, an indication of, or a

    limitation on, the definition of the term ``U.S. person'' that the

    Commission may adopt in final cross-border interpretive guidance. As

    discussed further below, the Commission is seeking further comment on

    this issue. However, the Commission is aware that the terms ``U.S.

    person'' and ``non-U.S. person'' are commonly used in the discussion of

    these issues. For ease of reference, therefore, this release and the

    Final Order use the term ``U.S. person'' to refer to a person that is

    described by the criteria discussed below, and the term ``non-U.S.

    person'' to refer to any other person.\30\

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    \30\ A number of commenters voiced concerns regarding potential

    expansion of the term ``U.S. person'' that they thought could result

    from the prefatory phrase ``includes, but is not limited to'' that

    appeared in the Proposed Guidance. These commenters requested that

    the Commission affirmatively state that non-U.S. persons are any

    persons that do not meet the definition of ``U.S. person.'' See

    SIFMA (Aug. 27, 2012) at A-15; IIB (Aug. 27, 2012) at 11-12;

    European Commission (``EC'') (Aug. 24, 2012) at 1-2; and Australian

    Bankers Association Inc. (``Australian Bankers'') (Aug. 27, 2012) at

    4.

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    1. Proposed Definition in the Proposed Guidance

    Under the Proposed Guidance, the term ``U.S. person'' would be

    defined by reference to the extent to which swap activities or

    transactions involving one or more such persons have the relevant

    connection with activities in, or effect on, U.S. commerce.\31\ As

    proposed, the term ``U.S. person'' would encompass both: (1) Persons

    (or classes of persons) located within the United States; as well as

    (2) persons that may be domiciled or operating outside the United

    States, but whose swap activities have a ``direct and significant

    connection with activities in, or effect on, commerce of the United

    States'' within the meaning of CEA section 2(i).\32\ That is, the term

    ``U.S. person'' identifies those persons whose swap activities--either

    individually or in the aggregate--satisfy the jurisdictional nexus

    under section 2(i) of the CEA.

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    \31\ See Proposed Guidance, 77 FR at 41218.

    \32\ Specifically, as set forth in the Proposed Guidance, the

    definition of the term ``U.S. person'' would include, but not be

    limited to:

    (i) Any natural person who is a resident of the United States;

    (ii) Any corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or

    any form of enterprise similar to any of the foregoing, in each case

    that is either (A) organized or incorporated under the laws of the

    United States or having its principal place of business in the

    United States (legal entity) or (B) in which the direct or indirect

    owners thereof are responsible for the liabilities of such entity

    and one or more of such owners is a U.S. person;

    (iii) Any individual account (discretionary or not) where the

    beneficial owner is a U.S. person;

    (iv) Any commodity pool, pooled account or collective investment

    vehicle (whether or not it is organized or incorporated in the

    United States) of which a majority ownership is held, directly or

    indirectly, by a U.S. person(s);

    (v) Any commodity pool, pooled account or collective investment

    vehicle the operator of which would be required to register as a

    commodity pool operator under the CEA;

    (vi) A pension plan for the employees, officers or principals of

    a legal entity with its principal place of business inside the

    United States; and

    (vii) An estate or trust, the income of which is subject to U.S.

    income tax regardless of source.

    Under the proposal, a ``U.S. person'' would include a foreign

    branch of a U.S. person; on the other hand, a non-U.S. affiliate or

    subsidiary guaranteed by a U.S. person would not be deemed a ``U.S.

    person.''

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

    2. Comments

    In general, commenters stated that the proposed ``U.S. person''

    definition presented significant interpretive issues and implementation

    challenges.\33\ The commenters contended that it would be difficult to

    determine U.S. person status because the proposed definition was, they

    said, overly broad, contained ambiguities, and would require collection

    of information not readily accessible at this time. The commenters,

    therefore, urged the Commission to provide market participants with

    sufficient time to implement a final definition of the term ``U.S.

    person'' and to reconsider the proposed definition in favor of ``a

    simpler, more easily applied'' definition of ``U.S. person.'' \34\

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

    \33\ See SIFMA (Aug. 27, 2012) at 5; Societe Generale (Aug. 8,

    2012) at 4; IIB (Aug. 27, 2012), at 4-14; Deutsche Bank (Aug. 27,

    2012), at 1-4; Goldman Sachs Group, Inc. (``Goldman'') (Aug. 27,

    2012), at 3; The Hong Kong Association of Banks (``Hong Kong

    Banks'') (Aug. 27, 2012), at 4; Australian Bankers (Aug. 27, 2012)

    at 4.

    \34\ See SIFMA (August 27, 2012) at A-10.

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

    A number of commenters requested that the Commission adopt an

    interim definition of ``U.S. person'' that would allow firms to rely on

    their existing systems and classifications and avoid the need to

    develop systems to achieve temporary compliance with standards that may

    change when a definition of the term ``U.S. person'' is finalized.\35\

    IIB explained that applying any definition of ``U.S. person'' that

    departs from status based on residence or jurisdiction of organization,

    and in some cases principal place of business, will require time to

    implement relevant documentation conventions and diligence

    procedures.\36\ IIB, therefore, requested that the Commission implement

    a phased-in interim approach to the ``U.S. person'' definition that

    would encompass, in general, (1) a natural person who is a U.S.

    resident; and (2) a corporate entity

    [[Page 863]]

    that is organized or incorporated under the laws of the United States

    or has its place of business in the United States.\37\

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

    \35\ See e.g., Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27,

    2012) at A-8-A9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13,

    2012) at 2; State Street Corporation (``State Street'') (Aug. 27,

    2012) at 2; and Goldman (Aug. 27. 2012) at 3.

    \36\ See IIB (Aug. 9, 2012) at 4.

    \37\ Id. For purposes of IIB's suggested definition, a foreign

    branch of a U.S. SD would be considered a non-U.S. person. IIB added

    that it believed that the Commission should adopt a final definition

    of ``U.S. person'' that is consistent with IIB's proposed interim

    definition.

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

    SIFMA also urged the Commission to phase in the ``U.S. person''

    definition, citing the implementation difficulties identified by IIB.

    Specifically, SIFMA recommended that the Commission allow market

    participants to apply an interim definition of ``U.S. person'' until 90

    days after the final definition of ``U.S. person'' is published.\38\

    SIFMA stated that its interim definition--which was identical to IIB's

    interim definition--should identify ``core'' U.S. persons and allow its

    members to phase in compliance with the Dodd-Frank requirements without

    building new systems that might have to be changed when a final

    definition is adopted.

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

    \38\ See SIFMA (Aug. 25, 2012) at A-8.

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

    3. Commission Determination on Definition of ``U.S. Person''

    The Commission finds merit in the comments suggesting that it

    should adopt a phased approach to cross-border activities. The

    Commission understands, from the comments, that market participants may

    need additional time to assess their businesses in light of the Final

    Order and to institute necessary changes to their systems and

    operations. Therefore, for purposes of the Final Order, the Commission

    will apply a definition of the term ``U.S. person'' based upon the

    counterparty criteria set forth in CFTC Letter No. 12-22 \39\ with

    certain modifications as described below. With respect to the other

    issues raised by commenters regarding the definition of ``U.S.

    person,'' the Commission believes that further public comment and

    consideration during the effectiveness of the Final Order will be

    helpful.

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

    \39\ The counterparty criteria set forth in CFTC Letter No. 12-

    22 are:

    (i) A natural person who is a resident of the United States;

    (ii) A corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or

    any form of enterprise similar to any of the foregoing, in each case

    that is organized or incorporated under the laws of the United

    States;

    (iii) A pension plan for the employees, officers, or principals

    of a legal entity described in (ii) above, unless the pension plan

    is exclusively for foreign employees of such entity;

    (iv) An estate or trust, the income of which is subject to U.S.

    income tax, regardless of source; or

    (v) An individual account (discretionary or not) where the

    beneficial owner is a person described in (i) through (iv) above.

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

    For purposes of the Final Order, the Commission will treat as a

    ``U.S. person'' any person identified by the following five criteria:

    \40\

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

    \40\ The Commission understands that persons may currently be

    relying upon the counterparty criteria set forth in CFTC Letter No.

    12-22. Thus, until December 31, 2012, persons may continue to apply

    those criteria for purposes of the Final Order. In effect, until

    December 31, 2012, a person may apply either the counterparty

    criteria in CFTC Letter No. 12-22, or the definition set forth

    herein for purposes of the Final Order. Beginning on January 1, 2013

    (i.e., following the expiration of CFTC Letter No. 12-22), a person

    must apply the definition set forth in the Final Order for purposes

    of swaps entered into on or after that date.

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

    (i) A natural person who is a resident of the United States;

    (ii) A corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or any

    form of enterprise similar to any of the foregoing, in each case that

    is (A) organized or incorporated under the laws of a state or other

    jurisdiction in the United States or (B) effective as of April 1, 2013

    for all such entities other than funds or collective investment

    vehicles, having its principal place of business in the United States;

    (iii) A pension plan for the employees, officers or principals of a

    legal entity described in (ii) above, unless the pension plan is

    primarily for foreign employees of such entity;

    (iv) An estate of a decedent who was a resident of the United

    States at the time of death, or a trust governed by the laws of a state

    or other jurisdiction in the United States if a court within the United

    States is able to exercise primary supervision over the administration

    of the trust; or

    (v) An individual account or joint account (discretionary or not)

    where the beneficial owner (or one of the beneficial owners in the case

    of a joint account) is a person described in (i) through (iv) above.

    The modifications made by the Commission to the counterparty

    criteria set forth in CFTC Letter No. 12-22 relate to (1) the location

    of an entity's principal place of business, (2) the treatment of

    pension plans for foreign employees, (3) the treatment of estates and

    trusts, and (4) the treatment of joint accounts.\41\

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

    \41\ Also, the Commission is clarifying that language in the

    second counterparty criterion in CFTC Letter No. 12-22 referring to

    an entity ``incorporated under the laws of the United States''

    includes an entity incorporated under the laws of a state or other

    jurisdiction in the United States.

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

    First, regarding the location of an entity's principal place of

    business, the Commission considered that the second counterparty

    criterion in CFTC Letter No. 12-22 is generally intended to cover legal

    entities that are physically located or incorporated within U.S.

    territory. For purposes of the Final Order, the Commission believes it

    is appropriate to treat as a ``U.S. person'' a legal entity that is not

    incorporated in the United States but that nonetheless has its

    ``principal place of business'' in the United States.\42\ The

    Commission believes that it is appropriate to consider an entity that

    is organized outside the United States but nonetheless has its

    ``principal place of business'' within the United States in the same

    manner as an entity organized or incorporated under the laws of the

    United States, because the center of direction, control and

    coordination of its business activities is located in the United

    States.\43\ However, the Commission understands from commenters that

    market participants will need a short period of time to implement the

    treatment of entities with a principal place of business in the United

    States as ``U.S. persons.'' \44\ Therefore, the Commission will not

    treat

    [[Page 864]]

    entities incorporated or organized outside the United States and with a

    principal place of business in the United States as U.S. persons until

    April 1, 2013 (i.e., approximately 90 days after effectiveness of the

    Final Order). The Commission also understands from commenters that the

    application of the principal place of business element may be complex

    for funds and collective investment vehicles and require further

    guidance in this regard; therefore, at this time for purposes of the

    Final Order, the Commission has determined that this element will not

    apply to funds or collective investment vehicles.\45\

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

    \42\ For purposes of the Final Order, the Commission will

    construe the term ``principal place of business'' as referring to

    the single place where a corporation's officers direct, control, and

    coordinate the corporation's activities. Typically, the principal

    place of business will be where the corporation maintains its

    headquarters. See Hertz v Friend, 559 U.S. ----, 130 S.Ct. 1181,

    1192, 175 L.Ed. 2d 1029 (2010) (``[I]n practice [a company's

    principal place of business] should normally be the place where the

    corporation maintains its headquarters--provided that the

    headquarters is the actual center of direction, control and

    coordination, i.e., the `nerve center' '').

    \43\ Commenters supported inclusion of the principal place of

    business element in the interim definition. See Cleary (Aug. 16,

    2012) at 6 (``the Firms respectfully request that the Commission

    adopt an interim `U.S. person' definition based on factors such as

    residence, place of organization or incorporation and principal

    place of business''); see also IIB (Aug. 27, 2012) at 13 (suggested

    definition of ``U.S. person'' that includes ``Any corporation,

    partnership, limited liability company, business or other trust,

    association, joint stock company or any form of enterprise similar

    to the foregoing (other than a collective investment vehicle,

    employee benefit plan, estate or trust) that is organized or

    incorporated under the laws of the United States or having its

    principal place of business in the United States.''); SIFMA (Aug.

    13, 2012) at 4 (``The Commission should include as part of the Final

    Exemptive Order a workable, uniform definition of U.S. person for

    this transitional time period* * *. For most [of our members] this

    would consist of Any natural person who is a resident of the U.S.;

    and Any corporation, partnership, LLC, business or other trust,

    association, joint-stock company, fund, or any form of enterprise

    similar to any of the foregoing that is organized or incorporated

    under the laws of the United States or has its principal place of

    business in the United States* * *. [S]uch a definition would allow

    most of our members to identify those counterparties that are U.S.

    persons during the Interim Period without the necessity of building

    new, interim systems that might have to be changed when a Final

    Definition is adopted.'').

    \44\ See, e.g., SIFMA (Aug. 25, 2012) at A-8 (suggesting 90-day

    period to transition to definition including principal place of

    business element).

    \45\ See, e.g., Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012

    at 6-7. The Commission is separately proposing further guidance

    regarding the treatment of funds and other collective investment

    vehicles for purposes of the definition of the term ``U.S. person.''

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

    Second, regarding the treatment of pension plans, the Commission is

    refining the third counterparty criterion in CFTC Letter No. 12-22 to

    indicate that a pension plan that is ``primarily'' (rather than

    exclusively) for the foreign employees of an entity is also a ``U.S.

    person'' for purposes of the Final Order.\46\

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

    \46\ In a letter to the Commissioners dated November 30, 2012

    requesting transition relief under Title VII of the Dodd-Frank Act,

    the Futures Industry Association (``FIA''), IIB and SIFMA suggested

    that this criterion be modified to replace the word ``exclusively''

    with ``primarily.'' See joint letter from FIA, IIB and SIFMA (Nov.

    30, 2012) at 14, fn. 14.

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

    Third, regarding the treatment of estates and trusts, the

    Commission is refining the fourth counterparty criterion in CFTC Letter

    No. 12-22 so that the treatment of an estate or trust for purposes of

    this relief does not depend on whether the income of the estate or

    trust is subject to U.S. income tax.\47\ The Commission understands

    that whether income is subject to U.S. tax can depend on a variety of

    factors, including the source of the income, which may not be relevant

    for purposes of the Dodd-Frank Act. Accordingly, for purposes of the

    Final Order, the Commission is of the view that an estate should be

    treated as a ``U.S. person'' if the decedent was a resident of the

    United States at the time of death, and a trust should be treated as a

    ``U.S. person'' if it is governed by the law of a state or other

    jurisdiction in the United States and a court within the United States

    is able to exercise primary supervision over the administration of the

    trust.

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

    \47\ See, e.g., IIB Letter (Aug. 27, 2012) at 12 (market

    participants do not typically identify an estate's or trust's

    regulatory status on the basis of its tax status); see also joint

    letter from FIA, IIB and SIFMA at 14, fn. 14 (suggesting that the

    fourth criterion from CFTC Letter No. 12-22 be limited to estates

    and trusts organized under the laws of the United States).

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

    The Commission believes that this approach is appropriate in view

    of how estates and trusts use swaps, and is consistent with how they

    are treated for other purposes under law. For estates, if the decedent

    was a party to any swaps at the time of death, then those swaps would

    continue to be treated in the same way after the decedent's death, when

    the swaps would most likely pass to the decedent's estate. Also, this

    test will be predictable and easy to apply for natural persons planning

    for how their swaps will be treated after death, for executors and

    administrators of estates, and for the swap counterparties to natural

    persons and estates.

    With respect to trusts, the Commission considered that each trust

    is governed by the laws of a particular jurisdiction, which may depend

    on steps taken when the trust was created or other circumstances

    surrounding the trust. The Commission believes that if a trust is

    governed by U.S. law (i.e., the law of a state or other jurisdiction in

    the United States), then it is reasonable to treat the trust as a U.S.

    person for purposes of the Final Order. The definition also requires

    that a court within the United States be able to exercise primary

    supervision over the administration of the trust.\48\ Including this

    element of the definition will ensure that the treatment of the trust

    for purposes of the Final Order will be in line with how the trust is

    treated for other legal purposes.

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

    \48\ The Commission is aware that one element of the test

    applied by the Internal Revenue Service to determine if a trust is a

    U.S. person for tax purposes depends on whether a court within the

    United States is able to exercise primary supervision over the

    administration of the trust. See 26 CFR 301.7701-7(a)(1)(ii).

    However, the Commission does not intend to formally adopt the

    Internal Revenue Service test for this purpose.

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

    Finally, regarding the treatment of joint accounts, the Commission

    is refining the fifth counterparty criterion in CFTC Letter No. 12-22

    to include not only individual accounts where the beneficial owner is a

    person described in the preceding counterparty criteria, but also joint

    accounts where any of the beneficial owners is such a person.

    Due Diligence. As described above, many commenters said that the

    information necessary to accurately assess the status of their

    counterparties as U.S. persons may not be available, or may be

    available only through overly burdensome due diligence. For this

    reason, these commenters requested that the Commission allow for

    reasonable reliance on counterparty representations as to their ``U.S.

    person'' status.\49\

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

    \49\ For example, SIFMA stated that a swap counterparty should

    be responsible for determining its own U.S.-person status but in the

    alternative, recommended that the Commission allow for reasonable

    reliance on counterparty representations. See SIFMA (Aug. 27, 2012)

    at A-16-18. SIFMA and Cleary further pointed out that the Commission

    has accepted reasonable reliance on counterparty representations in

    the context of the external business conduct rules. See SIFMA/AMG

    (Aug. 27, 2012) at 4-5; and Cleary (Aug. 16, 2012) at 6.

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

    The Commission agrees with the commenters that a party to a swap,

    in order to rely upon the exemptive relief provided in the Final Order,

    should be able to reasonably rely on its counterparty's representation

    in determining whether the counterparty is a ``U.S. person.'' In this

    context, the Commission interprets the ``reasonable'' standard to mean

    that a party to a swap should conduct reasonable due diligence on its

    counterparties, with what is reasonable in a particular situation to

    depend on the relevant facts and circumstances. The Commission notes

    that under its external business conduct rules, an SD or MSP generally

    meets its due diligence obligations if it reasonably relies on

    counterparty representations, absent indications to the contrary.\50\

    Similarly here, the Commission believes that allowing for reasonable

    reliance on counterparty representations provides for an objective

    standard and avoids subjective evaluations. This, in turn, facilitates

    a more consistent and foreseeable determination of whether a person is

    a ``U.S. person'' for purposes of relying on temporary exemptive

    relief.

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

    \50\ See 77 FR 9734, Feb. 17, 2012. Consistent with the

    ``reasonable reliance'' standard in the external business conduct

    rules, an SD or MSP may rely on the written representations of a

    counterparty in performing its due diligence. However, an SD or MSP

    cannot rely on a written representation and continue to claim the

    exemptive relief if it has information that would cause a reasonable

    person to question the accuracy of the representation. In other

    words, an SD or MSP cannot ignore red flags when relying on written

    representations in performing its due diligence. Further, if agreed

    to by the counterparty, the written representations may be included

    in counterparty relationship documentation. However, an SD or MSP

    may only rely on such representations in the counterparty

    relationship documentation if the counterparty agrees to timely

    update any material changes to the representations. In addition, the

    Commission expects SDs and MSPs to review the written

    representations on a periodic basis to ensure that they remain

    appropriate for their intended purpose.

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

    Finally, the Commission confirms that this definition of ``U.S.

    person'' applies only for purposes of the Final Order. Further, the

    Commission confirms that the definition of ``U.S. person'' applies only

    to Commission regulations promulgated under Title VII's swap

    provisions. Thus, for example, it would

    [[Page 865]]

    not apply to the CEA provisions (and Commission regulations promulgated

    thereunder) relating to the futures markets.

    Foreign Branch of U.S. Person. The Commission views as a ``U.S.

    person'' the foreign branch of a U.S. person. As the Commission

    explained in the Proposed Guidance, a branch does not have a legal

    identity separate from that of its principal entity. In this respect,

    the Commission notes that branches are neither separately incorporated

    nor separately capitalized and, more generally, the rights and

    obligations of a branch are the rights and obligations of its principal

    entity (and vice versa). Under these circumstances, the Commission

    views the activities of a foreign branch as the activities of the

    principal entity. \51\

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

    \51\ In the Proposed Guidance, the Commission asked whether a

    foreign branch of a U.S. SD should be defined as a ``U.S. person.''

    Some commenters recommended that a foreign branch of a U.S. SD be

    excluded from the definition of ``U.S. person.'' Sullivan & Cromwell

    on behalf of Bank of America, Citigroup, and J.P. Morgan (``S&C'')

    argued that a foreign branch should not be considered a U.S. person

    solely on the basis that it is a part of a U.S. bank. See S&C (Aug.

    13, 2012) at 6-7. Citigroup Inc. (``Citi'') recommended that the

    Commission define a foreign branch of a U.S. SD as a non-U.S.

    person, so long as the branch remains subject to Entity-Level

    Requirements and obtains substituted compliance for Transaction-

    Level Requirements for transactions with non-U.S. persons. See Citi

    (Aug. 27, 2012) at 2-4. In Citi's view, this would address comments

    by the foreign branch's non-U.S. clients that they would have to

    register as SDs or MSPs, while assuring that such non-U.S. clients'

    swaps with the foreign branch are covered by the Transaction-Level

    Requirements or substituted compliance. See also State Street (Aug.

    27, 2012) at 3; and IIB (Aug. 27, 2012) at 8.

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

    Accordingly, the Commission declines to recognize foreign branches

    of U.S. persons separately from their U.S. principals for purposes of

    the Dodd-Frank swap provisions, including registration and Entity-Level

    and Transaction-Level Requirements. Therefore, if a foreign branch were

    to be an SD or MSP, as discussed further below, its U.S. principal

    would be required to register, and that registration would encompass

    the foreign branch. Based on the same rationale, the Dodd-Frank Act

    fully applies to a swap between a foreign branch of a U.S. person and a

    foreign branch of another U.S. person. Nevertheless, for purposes of

    the Final Order, as discussed further below, foreign branches of U.S.

    persons may comply only with transaction-level requirements as may be

    required in the location of the foreign branch with respect to swaps

    with foreign counterparties. Further, non-U.S. persons may exclude

    swaps with foreign branches of registered SDs for purposes of

    determining whether they have exceeded the de minimis level of swap

    dealing activity under the SD definition. Finally, for purposes of the

    Final Order, as further discussed below, the Transaction-Level

    Requirements will not apply to a swap transaction between foreign

    branches of U.S. SDs or foreign branches of U.S. MSPs. The Commission

    believes that it is appropriate to extend the foregoing relief on a

    temporary basis while the Commission continues to consider, and works

    with foreign regulators regarding, the treatment of foreign branches of

    U.S. registrants.

    C. Registration

    1. Timing of Registration for All Prospective SDs and MSPs

    i. Comments

    The Proposed Order did not include any delay in the timing of the

    registration requirement for either U.S. or non-U.S. prospective

    registrants. A number of commenters urged the Commission to delay

    registration of SDs and MSPs.\52\ Some of these commenters noted that

    final regulatory determinations essential to the implementation of

    Commission regulations are either still in proposed form or have only

    recently been finalized.\53\ As a result, commenters said, firms will

    need additional time to assess whether they will be required to

    register as an SD or MSP and the consequences of doing so.\54\

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

    \52\ See e.g., SIFMA (Aug. 13, 2012) at 3, 5; IIB (Aug. 9, 2012)

    at 5; Societe Generale (Aug. 9, 2012) at 2, Citi (Aug. 13, 2012) at

    2; Goldman (Aug. 27, 2012) at 8-9; and Lloyds (Aug. 13, 2012) at 1-

    2.

    \53\ See e.g., Goldman (Aug. 27, 2012) at 9 (citing the

    Commission's proposed rule on the treatment of inter-affiliate

    transactions for purposes of mandatory clearing and the anticipated

    Commission action on the status of guarantees of swaps); Societe

    Generale (Aug. 9, 2012) at 2; and IIB (Aug. 9, 2012) at 2.

    \54\ Without such relief, commenters are concerned that they

    will be required to register based on requirements that are subject

    to change at a later date. See Cleary (Aug. 16, 2012) at 6; SIFMA

    (Aug. 27, 2012) at A1-8; IIB (Aug. 9, 2012) at 4-5).

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

    SIFMA recommended a delay of at least 90 days following the

    publication of final interpretive guidance; \55\ Societe Generale

    recommended delaying registration at least until the Proposed Guidance

    has been finalized.\56\ Cleary recommended a delay of at least 90 days

    after a final exemptive order is issued, explaining that firms will

    need additional time to assess and comply with the determinations

    therein.\57\ Lloyds suggested that registration be delayed for non-U.S.

    SDs for at least 12 months after the publication of final guidance,

    with computation of the de minimis threshold starting from that

    date.\58\

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

    \55\ See also Goldman (Aug. 27, 2012) at 9.

    \56\ See Societe Generale (Aug. 9, 2012) at 2.

    \57\ See Cleary (Aug. 16, 2012) at 4. IIB suggested a delay

    until a ``reasonable'' period after the final exemptive order is

    issued. See IIB (Aug. 9, 2012) at 9. IIB also noted that this is

    particularly important for non-U.S. firms that are required to

    coordinate their registration plans with their home country

    regulators.

    \58\ See Lloyds (Aug. 13, 2012) at 1-2.

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

    ii. Commission Determination on Timing of Registration

    Throughout the Dodd-Frank rulemaking process, the Commission

    consistently has strived to strike the proper balance between the need

    to implement the new regulatory framework for swaps without undue

    delay, and the need to minimize disruption and hardships for market

    participants. Consistent with that goal, the Commission has taken steps

    to provide greater certainty to market participants regarding

    registration determinations and their compliance obligations. The

    Commission is also mindful that more than two years have passed since

    the Dodd-Frank Act--a comprehensive reform of the swaps market--was

    enacted as a direct response to the financial crisis of 2008. A central

    element of this reform is the registration and regulation of SDs and

    MSPs. For example, registered SDs and MSPs are required to clear swaps

    with certain counterparties, are subject to detailed reporting and

    recordkeeping requirements and must comply (when final) with new

    capital and margin requirements--all of which are designed to enhance

    market transparency and protections against systemic risk.

    In the Commission's view, any further delay in the registration of

    SDs and MSPs would effectively postpone Dodd-Frank's comprehensive new

    regulatory regime for swaps, frustrating the congressional mandate

    embodied in the Dodd-Frank Act. Further, given the global nature of the

    swaps market, an SD or MSP--whether operating in or outside the United

    States--plays an important role in the U.S. swaps market. Under these

    circumstances, the Commission believes that a further delay in the

    compliance date for registration as an SD or MSP would adversely affect

    the Commission's ability to discharge its responsibilities under the

    CEA and would be contrary to the public interest. Therefore, the

    Commission declines to delay the registration requirement for non-U.S.

    SDs and MSPs.

    However, the Commission believes it is appropriate to provide

    targeted, time-limited exemptive relief with respect to the swap

    dealing transactions to be

    [[Page 866]]

    included in the de minimis threshold calculation that applies for

    purposes of the SD definition. The Commission expects that this step,

    and the other relief provided in the Final Order, will substantially

    address commenters' concerns regarding the complexity of implementing

    the swap requirements for the interim period during which the Final

    Order is in effect.

    2. Scope of Transactions To Be Included in Registration Calculations

    The Commission has adopted final rules and interpretive guidance

    implementing the statutory definitions of the terms ``swap dealer'' and

    ``major swap participant'' in CEA sections 1a(49) and 1a(33).\59\ The

    Final Entities Rules delineate the activities that cause a person to be

    an SD and the level of swap positions that cause a person to be an MSP.

    In addition, the Commission has adopted rules concerning the statutory

    exceptions from the definition of an SD, including the de minimis

    exception.\60\ Commission regulation 1.3(ggg)(4) sets forth a de

    minimis threshold of swap dealing, which takes into account the

    notional amount of a person's swap dealing activity over the prior 12

    months.\61\ When a person engages in swap dealing transactions above

    that threshold, the person meets the SD definition in section 1a(49) of

    the CEA.\62\ Commission regulations 1.3(jjj)(1) and 1.3(lll)(1) set

    forth swap position thresholds for the MSP definition in Commission

    regulation 1.3(hhh). When a person holds swap positions above those

    thresholds, such person meets the MSP definition in section 1a(39) of

    the CEA.

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

    \59\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.

    \60\ Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides

    that ``[t]he Commission shall exempt from designation as a swap

    dealer an entity that engages in a de minimis quantity of swap

    dealing in connection with transactions with or on behalf of its

    customers. The Commission shall promulgate regulations to establish

    factors with respect to the making of this determination to

    exempt.'' This provision is implemented in Commission regulation

    1.3(ggg)(4).

    \61\ As used in this release, the meaning of the term ``swap

    dealing'' is consistent with that used in the Final Entities Rules.

    \62\ Under Commission regulation 3.10(a)(1)(v)(C) and Commission

    regulation 23.21, a person is required to register as an SD when, on

    or after October 12, 2012, the person falls within the definition of

    an SD. However, the rule defining ``swap dealer'' includes a de

    minimis threshold so that an entity is not an SD if it, together

    with the entities controlling, controlled by, and under common

    control with it, engages in swap dealing activity during the prior

    12 months in an aggregate gross notional amount of less than the

    specified thresholds. The rule further specifies that swap dealing

    activity engaged in before the effective date of both the ``swap

    dealer'' and ``swap'' definition rules (i.e., before October 12,

    2012) does not count toward the de minimis threshold. The rule also

    provides that an entity that exceeds the de minimis threshold must

    register as an SD two months after the end of the month in which it

    exceeds the threshold. See Commission regulation 1.3(ggg)(4).

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

    i. Proposed Guidance

    In the Proposed Guidance, the Commission addressed the general

    manner in which a person's overseas swap dealing activities or

    positions may require registration as an SD or MSP, respectively.

    Specifically, under the Proposed Guidance, a non-U.S. person whose swap

    dealing transactions with U.S. persons exceed the de minimis threshold

    would be required to register as an SD.\63\ Likewise, under the

    Proposed Guidance, a non-U.S. person who holds swap positions with U.S.

    counterparties that are above the specified MSP thresholds would be

    required to register as an MSP.\64\ In determining whether a non-U.S.

    person is engaged in more than a de minimis level of swap dealing, the

    Proposed Guidance would include the notional value of any swap

    transactions between such non-U.S. person (or any of its non-U.S.

    affiliates under common control) and a U.S. person, other than foreign

    branches of registered SDs.\65\ Following a similar rationale, the

    Proposed Guidance stated that in calculating whether a non-U.S. person

    meets an MSP threshold, the non-U.S. person would include the notional

    value of any swaps entered into between such non-U.S. person and a U.S.

    person.\66\

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

    \63\ See Proposed Guidance, 77 FR at 41218-41219.

    \64\ Id. CFTC Letter 12-22 applied a similar approach for both

    SD and MSP purposes.

    \65\ Proposed Guidance, 77 FR at 41218-41220. Further, where the

    potential non-U.S. SD's swap obligations are guaranteed by a U.S.

    person, the non-U.S. person would be required to register with the

    Commission as an SD when the aggregate notional value of its swap

    dealing activities (along with the swap dealing activities of its

    non-U.S. affiliates that are under common control and also

    guaranteed by a U.S. person) with U.S. persons and non-U.S. persons

    exceeds the de minimis threshold. Additionally, the Proposed

    Guidance clarified that a non-U.S. person without a guarantee from a

    U.S. person would not be required to register as an SD if it does

    not engage in swap dealing with U.S. persons as part of ``a regular

    business'' with U.S. persons, even if the non-U.S. person engages in

    dealing with non-U.S. persons.

    \66\ Id. at 41221. The Proposed Guidance also provided that if

    the non-U.S. person's swaps are guaranteed by a U.S. person, then

    such swaps will be attributed to the U.S. guarantor and not the

    potential non-U.S. MSP. Further, the non-U.S. person would be

    required to include in its MSP calculation any swaps between another

    non-U.S. person and a U.S. person if the potential non-U.S. MSP

    guarantees the obligations of the other non-U.S. person thereunder.

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

    In general, commenters did not raise concerns or objections to the

    Commission's interpretation that non-U.S. persons who engage in more

    than a de minimis level of swap dealing with U.S. persons would be

    required to register as SDs.\67\ A number of commenters argued,

    however, that a non-U.S. person should not be required to register as

    an SD solely by reason of its swap obligations being guaranteed by a

    U.S. person.\68\ SIFMA stated that the ``connection between a non-U.S.

    swap dealing entity and its U.S. guarantor creates too tenuous a nexus

    to justify registration on the basis of this relationship alone.'' \69\

    Other commenters raised various other issues with respect to the

    treatment of guarantees.\70\

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

    \67\ One commenter, Japanese Bankers Association, stated that

    the cross-border application of Dodd-Frank is overbroad because it

    would capture even hedging transactions of a non-U.S. SD with a U.S.

    SD that is making a market. The definition of ``dealing activity''

    is ambiguous, this commenter asserted, and might require the non-

    U.S. SD to register. See Japanese Bankers Association (``Japanese

    Banks'') (Aug. 27, 2012) at 1.

    \68\ See e.g., Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10,

    2012) at 12 (in the typical case, an intra-group guarantee allocates

    risks and activities within the corporate group and is not a dealing

    activity of the non-U.S. person); Commercial Energy Working Group

    (``CEWG'') (submitted by Sutherland Asbill) (Aug. 27, 2012), at 6-7

    (Proposed Guidance should not include swap guarantees for

    aggregation purposes because it is contrary to the Final Entities

    Rules; jurisdiction should not be extended to transactions between

    two non-U.S. persons if the swap obligations of one party are

    guaranteed by a U.S. person because U.S. jurisdiction in these

    circumstances is not supported by law or existing international

    conventions).

    \69\ See SIFMA (Aug. 27, 2012) at A-29. As an alternative, SIFMA

    posited that only guarantees by a U.S. person for which there is a

    material likelihood of payment by the U.S. guarantor should be

    counted towards the de minimis calculation. To implement this

    recommendation, SIFMA suggested that the Commission establish a

    standard for determining that the likelihood of payment is remote,

    such as a comparison of the aggregate contingent liability of the

    U.S. person guarantor to the net equity of that guarantor. Id. at A-

    29--A-30.

    \70\ See Goldman (Aug 27, 2012) at 5 (inconsistent to require SD

    registration solely on the basis of guarantees by a U.S. parent,

    absent any showing of a ``direct and significant'' jurisdictional

    nexus; concerns can be addressed through anti-evasion authority).

    See also CEWG (Aug. 27, 2012) at 7 (because there is no legal basis

    under CEA section 2(i) for asserting jurisdiction based on a

    guaranty, Commission should clarify that a non-U.S. person is not

    subject to Commission regulation, even where a U.S. person

    guarantees either counterparty); The Hong Kong Association of Banks

    (``HKAB'') (Aug. 27, 2012) at 8 (swaps between non-U.S. persons

    should be excluded from the de minimis determination regardless of

    whether a counterparty is guaranteed); ISDA (Aug. 10, 2012) at 12

    (focus should be on whether a U.S. guarantor of a non-U.S. person

    should register); Investment Industry Association of Canada

    (``IIAC'') (Aug. 27, 2012) at 6 (seeking confirmation that indirect

    holding company ownership alone does not constitute a guarantee);

    and JP Morgan (Aug. 27, 2012) at 10 (term ``guarantee'' should not

    include keepwells and liquidity puts that do not create the same

    third-party rights and may be unenforceable by third parties). But

    see contra AFR (June 14, 2012) at 2 (failure to include guaranteed

    affiliates as U.S. persons and to capture the ``large grey area''

    between explicit and informal guarantees creates opportunities to

    escape Dodd-Frank regulations by shifting business overseas;

    Commission should clarify that it will ``follow through on properly

    implementing these principles and will not enable a `race to the

    bottom' in which incentives are created for derivatives affiliates

    of global banks that are able to relocate to areas of lax regulation

    to take advantage of an inadequate `substituted compliance'

    regime.'').

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

    [[Page 867]]

    ii. Commission Determination on Exemptive Relief Regarding Registration

    Registration Thresholds for Non-U.S. Persons. As noted above, the

    Commission is not, at this time, taking action on the Proposed

    Guidance. Under CEA sections 1a(49) and 1a(33) and Commission

    regulations 1.3(ggg)(4) and 1.3(hhh),\71\ a person is required to take

    account of the notional amount of all of its swap dealing activity over

    the prior 12 months for purposes of the SD determination, and all of

    its swap positions for purposes of the MSP determination. These CEA

    provisions and the Commission's regulations apply to activities within

    the United States and, as provided in section 2(i), to certain

    activities outside the United States.

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

    \71\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.

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

    However, while the Commission continues to consider the comments on

    its Proposed Guidance regarding section 2(i), the Commission believes

    it appropriate to provide, under the Final Order, relief for non-U.S.

    persons (regardless of whether the non-U.S. persons' swap obligations

    are guaranteed by U.S. persons) from the requirement that a person

    include all its swaps in its calculation of the aggregate gross

    notional amount of swaps connected with its swap dealing activity for

    SD purposes or in its calculations for MSP purposes. On the other hand,

    the Commission believes that it is not appropriate to provide a non-

    U.S. person with relief from the registration requirement when the

    aggregate level of its swap dealing with U.S. persons, as that term is

    defined above, exceeds the de minimis level of swap dealing, or when

    the level of its swap positions with U.S. persons, again as that term

    is defined above, exceeds one of the MSP thresholds. In the

    Commission's view, such relief from the registration requirement is

    inappropriate when a level of swap activities that is substantial

    enough to require registration as an SD or an MSP when conducted by a

    U.S. person, is conducted by a non-U.S. person with U.S. persons as

    counterparties.

    Therefore, the Final Order provides that a non-U.S. person

    (regardless of whether the non-U.S. persons' swap obligations are

    guaranteed by U.S. persons) does not need to include in its calculation

    of the aggregate gross notional amount of swaps connected with its swap

    dealing activity for purposes of Commission regulation 1.3(ggg)(4) or

    in its calculation of whether it is an MSP for purposes of Commission

    regulation 1.3(hhh), any swaps where the counterparty is a non-U.S.

    person.

    Exclusion for Swaps with Foreign Branches of U.S. Swap Dealers. The

    Proposed Guidance would exclude from a non-U.S. person's de minimis

    threshold calculation its swap transactions with foreign branches of

    U.S. SDs. This exclusion was intended to allow non-U.S. persons to

    continue their swap activities with foreign branches of U.S. SDs

    without exceeding the de minimis threshold, thereby triggering a

    requirement to register as an SD.

    In CFTC Letter 12-22, the Commission staff noted that because the

    proposed exclusion would be limited to registered U.S. SDs and many of

    the persons who expect to register as U.S. SDs may not do so until

    December 31, 2012, or later, market participants had expressed concern

    that a non-U.S. person could be required after October 12, 2012, to

    begin counting toward the de minimis threshold any swap dealing

    transactions with a foreign branch of any person that may meet the

    definition of ``U.S. person'' and that is not yet registered (and

    consequently be required to register as an SD) even though many U.S.

    persons with foreign branches intend to register as SDs later in 2012

    or in early 2013.\72\ The Commission staff noted that this potential

    outcome would not be consistent with the scope of relief intended to be

    provided in the Proposed Guidance.\73\

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

    \72\ Similarly, if a non-U.S. person must include swaps with

    such foreign branches in its calculation of whether it is within the

    definition of MSP in Commission regulation 1.3(hhh), it could be

    required to register with the Commission in that capacity. Although

    the Proposed Guidance did not provide for a similar exclusion with

    respect to the consideration of a non-U.S. person's swaps with

    foreign branches of U.S. SDs with respect to determining whether the

    non-U.S. person must register as an MSP, some commenters requested

    that the Commission provide a similar exclusion. See SIFMA (Aug. 27,

    2012) at 9, A-28, A-29; Citi (Aug. 27, 2012) at 2-3.

    \73\ Commenters, such as Goldman, argued that the rationale for

    this exclusion is equally applicable to non-U.S. persons that are

    banks or broker-dealers when dealing with U.S. SDs that do not

    conduct overseas business through foreign branches. Absent a similar

    interpretation in these circumstances, they argued, U.S. SDs would

    be at a competitive disadvantage vis-[agrave]-vis foreign branches

    of U.S. SDs since non-U.S. persons will limit their dealing

    activities to foreign branches of U.S. SDs. See Goldman (Aug. 27,

    2012) at 5-6. The Commission does not believe that it would be

    appropriate for a non-U.S. person to exclude from the de minimis

    calculation swap dealing transactions with U.S. SDs (other than

    their foreign branches). By way of comparison, however, for purposes

    of the Final Order, a swap that a non-U.S. person enters into with a

    non-U.S. affiliate of a U.S. SD (whether guaranteed by a U.S. person

    or not) is not a swap with a U.S. person and, thus, need not be

    counted towards the de minimis calculation. The Commission proposed

    to interpret section 2(i) so as to exclude swap dealing transactions

    with a foreign branch of a U.S. SD in order to avoid the otherwise

    potential result that foreign entities would cease doing swap

    dealing business with foreign branches of U.S. SDs in order to avoid

    SD status, while continuing to do business with foreign affiliates

    of U.S. SDs located in the same jurisdiction. The Commission does

    not believe relief should be provided in a manner that would lead to

    such disparate treatment of entities located outside the United

    States, i.e., foreign branches and foreign affiliates of U.S. SDs

    that are located in the same jurisdiction but that happen to bear a

    different legal structure. Similar considerations of potentially

    discriminatory results do not apply, however, with respect to swaps

    directly with U.S. SDs. Such U.S. SDs are different in kind from a

    foreign affiliate of a U.S. SD, and the rationale for the foreign

    branch exclusion is inapposite in these circumstances.

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

    The Commission believes it appropriate to provide, in this Final

    Order, the scope of relief afforded in CFTC Letter No. 12-22 while it

    considers action on the Proposed Guidance. Accordingly, for purposes of

    the Final Order, swap transactions by a non-U.S. person with a foreign

    branch of a registered U.S. SD, or with a foreign branch of a U.S.

    person that is not yet registered as a U.S. SD but that does intend to

    register as such when required, are not required to be included in the

    calculations for SD and MSP registration purposes.

    Therefore, the Final Order provides that a non-U.S. person does not

    need to include in its calculation of the aggregate gross notional

    amount of swaps connected with its swap dealing activity for purposes

    of Commission regulation 1.3(ggg)(4) or in its calculation of whether

    it is an MSP for purposes of Commission regulation 1.3(hhh), any swap

    where the counterparty is a foreign branch of a U.S. person that is

    registered as an SD or that represents that it intends to register with

    the Commission as an SD by March 31, 2013.\74\

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

    \74\ The representation of the intention to register with the

    Commission as a swap dealer need not be obtained prior to execution

    of a swap.

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

    Aggregation for the De Minimis Calculation. Commission regulation

    1.3(ggg)(4) requires that a person include, in determining whether its

    swap dealing activities exceed the de minimis threshold, the aggregate

    notional value of swap dealing transactions entered by its affiliates

    under common control. Additionally, under the Proposed Guidance, a non-

    U.S. person, in determining whether its swap dealing transactions

    exceed the de minimis threshold, would include the

    [[Page 868]]

    aggregate notional value of swap dealing transactions entered into by

    its non-U.S. affiliates under common control but would not include the

    aggregate notional value of swap dealing transactions entered into by

    its U.S. affiliates.

    Numerous comments on the Proposed Guidance discussed considerations

    relating to when the swap dealing activities of affiliates should be

    aggregated for purposes of determining if a non-U.S. person is required

    to register as an SD. The Commission is considering these comments, and

    intends to address them in preparing final guidance on this issue.

    However, the Commission believes it is appropriate to provide, in the

    Final Order, temporary relief from the requirement in Commission

    regulation 1.3(ggg)(4) to include the swap dealing activities of

    certain affiliates in the de minimis calculation.

    For purposes of the Final Order, the Commission believes that a

    non-U.S. person that is engaged in swap dealing activities with U.S.

    persons as of the effective date of the Final Order should not be

    required to include, in its determination of whether it exceeds the de

    minimis threshold, the swap dealing transactions of any of its U.S.

    affiliates.\75\ In addition, the Commission believes it is appropriate

    that if the non-U.S. person is an affiliate of a person that is

    registered as an SD, it should not be required to include, in its

    determination of whether it exceeds the de minimis threshold, the swap

    dealing transactions of any of its non-U.S. affiliates that engage in

    swap dealing activities, so long as each such excluded affiliate is

    either (i) engaged in swap dealing activities with U.S. persons as of

    the effective date of the Final Order or (ii) registered as an SD.\76\

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

    \75\ For this purpose, the Commission construes ``affiliates''

    to include persons under common control as stated in the Final

    Entities Rules with respect to the term ``swap dealer,'' which

    defines control as ``the possession, direct or indirect, of the

    power to direct or cause the direction of the management and

    policies of a person, whether through the ownership of voting

    securities, by contract or otherwise.'' See Final Entities Rules, 77

    FR at 30631, fn. 437.

    \76\ The Commission notes that, in any case, the swap dealing

    transactions of a non-U.S. person's non-U.S. affiliates that may

    have to be included in the de minimis determination are the

    transactions between the non-U.S. affiliates and U.S. person

    counterparties. In no case would swap dealing transactions between

    the non-U.S. person's non-U.S. affiliates and other non-U.S. person

    counterparties need to be included in the determination.

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

    Where at least one of the entities in the affiliated group

    registers as an SD, the Commission believes that during the transition

    period covered by the Final Order, it is not necessary to aggregate the

    swap dealing transactions of the various affiliates, even if the

    aggregate amount of such swap dealing transactions among all the

    unregistered non-U.S. affiliates is above the de minimis threshold.

    Thus, where at least one of the entities in the affiliated group

    registers as an SD, another entity in the affiliated group would have

    to register as an SD only if its own swap dealing transactions with

    U.S. persons, considered individually, were above the de minimis

    threshold.\77\

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

    \77\ The Commission wishes to make clear that relief from the

    registration requirement is not available to any person or entity

    that engages in swap dealing transactions with U.S. persons above

    the de minimis threshold. The discussion in this section relates

    only to whether and when non-U.S. persons must aggregate their own

    swap dealing transactions with the swap dealing of their non-U.S.

    affiliates.

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

    As noted above, however, this limited transitional relief is not

    applicable if a non-U.S. affiliate begins to engage in swap dealing

    transactions with U.S. persons after the effective date of the Final

    Order. The Commission believes that this limitation is appropriate for

    the relatively short time period that the Final Order will be in

    effect, in order to prevent evasion and abuse of this relief. Without

    this limitation, new non-U.S. affiliates could be created simply in

    order to engage in further swap dealing activity with U.S. persons.

    Moreover, most commenters were clear that limited transitional relief

    from the aggregation requirement is necessary with respect to their

    existing swap dealing activities, but is not necessary in order to

    expand their swap dealing activities in the short term.\78\

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

    \78\ See, e.g., Cleary (Aug 16, 2012) at 5-6; SIFMA (Aug 13,

    2012) at 4-5.

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

    Central Booking Entity. In the event an entity operates a ``central

    booking system'' where swaps are booked into a single legal entity,

    whether or not such entity is a counterparty to the swap, the Proposed

    Guidance stated that the entity that books the swaps would be subject

    to any applicable SD registration requirement, as if it had entered

    into such swaps directly, regardless of whether such entity is a U.S.

    person or whether the booking entity is a counterparty to a swap (has

    booked the swap directly) or has booked a swap indirectly by way of a

    back-to-back swap or other arrangement with an affiliate. The

    Commission noted that a non-U.S. affiliate or subsidiary may also be

    required to register as an SD if it independently meets the definition

    of an SD.\79\ A number of commenters sought clarification of the

    Commission's interpretation with respect to the central booking

    model.\80\

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

    \79\ Section 1.3 (ggg)(3) of the Commission's regulations

    permits a person to apply for a limited purpose designation based on

    a particular type, class, or category of a swap, or to a particular

    business unit within an entity. See Commission regulation

    1.3(ggg)(3); Final Entities Rules, 77 FR at 30645-46. Cleary urged

    the Commission to recognize limited designation for non-agricultural

    firms. Specifically, it argued that limited designation should be

    available to an entity that registers as a firm, and not merely a

    branch, division, or office. See Cleary (Aug. 16, 2012) at 14.

    Regarding the two points raised by Cleary, the Commission clarifies

    that a limited designation is available to any registrant that can

    demonstrate its ability to comply with applicable requirements; it

    is not limited to only agricultural firms, and it could be available

    to an entity that registers as a firm. The Commission believes that

    further relief at this time regarding limited designations is not

    justified under the criteria of CEA section 4(c). As noted in the

    Final Entities Rules, the Commission believes that limited

    designation is appropriately addressed on a case-by case basis in

    the context of individual applications for registration. See Final

    Entities Rules, 77 FR at 30646 (``Any particular limited purpose

    application will be analyzed in light of the unique circumstances

    presented by the applicant.'').

    \80\ See e.g., Goldman (Aug. 27, 2012) at 6-7; Credit Suisse

    (Aug. 27, 2012) at 9; IIB (Aug. 27, 2012) at 26 (stating that,

    although it is not entirely clear, in a central booking arrangement

    under which a non-U.S. person dealing in swaps with other non-U.S.

    persons ``books'' those swaps to a U.S. affiliate (which either

    directly becomes a party to the swap or indirectly enters a back-to-

    back arrangement), the Proposed Guidance could be interpreted as

    requiring the non-U.S. affiliate to separately register as an SD if

    its activities with non-U.S. persons meet the definition of an SD);

    and Lloyd's (Aug. 24, 2012) at 2-3 (requesting clarification as to

    whether or not non-U.S. institutions (not acting as principal to

    swaps with U.S. persons) employing central booking models, would be

    required to register as SDs when they centrally manage market risk

    for swaps with an affiliated non-U.S. SD and other non-U.S. related

    swaps activities).

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

    In this situation, the Commission clarifies that a non-U.S. person

    should not be required to include in its calculation of the aggregate

    gross notional amount of swaps connected with its swap dealing activity

    for purposes of Commission regulation 1.3(ggg)(4), any swap to which it

    is not a party because the swap is entered into by an affiliated

    central booking entity.

    Summary. For purposes of the transitional relief under this Final

    Order, in determining whether a non-U.S. person is engaged in more than

    a de minimis level of swap dealing \81\ or

    [[Page 869]]

    holds swap positions above any of the MSP thresholds, the non-U.S.

    person--whether guaranteed or not by a U.S. person--may exclude and not

    consider the aggregate notional value of:

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

    \81\ Cleary and SIFMA have asked the Commission to confirm that

    swap activities that are limited to unwinding ``legacy'' swap

    portfolios do not constitute swap dealing. See Cleary (Aug. 16,

    2012) at 11-12; SIFMA (Aug. 27, 2012) at A-31. See also The Clearing

    House (Aug. 13, 2012) at 11. In a related vein, IIB requested that

    the Proposed Order be modified to allow certain less active

    ``Transition Affiliates'' additional time to transfer swap positions

    to their principal swap dealing affiliate, see IIB (Aug. 9, 2012) at

    7, and Cleary separately asked the Commission to consider whether

    the aggregation rule should apply to non-U.S. affiliates whose swap

    dealing activity is already subject to local regulation by a G-20

    supervisor, see Cleary (Aug. 16, 2012) at 9-10. In general, the

    Commission previously concluded that bright-line tests and

    categorical exclusions from the term ``swap dealer'' based on the

    general nature of a person's business are unwarranted. See Final

    Entities Rules, 77 FR at 30615. The Commission believes that this

    approach is equally appropriate here, with regard to the exemptive

    relief requested in the cross-border context. As noted above, the

    Commission believes that registration of non-U.S. persons that are

    within the definition of the term ``swap dealer'' is a key element

    of the Dodd-Frank swaps reforms. Therefore the Commission believes,

    at this time, that blanket relief in this area along the lines

    suggested by commenters is not in the public interest, and that the

    determination of whether particular activities constitute swap

    dealing or otherwise bring a person within the definition of the

    term ``swap dealer,'' should proceed along the lines that the

    Commission adopted in the Final Entities Rules. Under these

    circumstances, the Commission has determined that it would be

    inappropriate to provide further relief in this regard under CEA

    section 4(c). However, the Commission does not intend to preclude

    its staff from considering appropriate relief in this regard on a

    case-by-case basis.

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

    Any swap where the counterparty is a non-U.S. person; and

    Any swap where the counterparty is a foreign branch of a

    U.S. person that is registered as an SD or that represents that it

    intends to register with the Commission as an SD by March 31, 2013; and

    For purposes of SD registration only, any swap to which it

    is not a party because the swap is entered into by an affiliated

    central booking entity.

    Further, for purposes of the transitional relief under this Final

    Order, in determining whether a non-U.S. person is engaged in more than

    a de minimis level of swap dealing, the non-U.S. person may exclude and

    not consider the aggregate notional value of: \82\

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

    \82\ As noted above, this further relief is available only where

    the non-U.S. person is engaged in swap dealing activities with U.S.

    persons as of the effective date of the Final Order.

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

    Any swap dealing transaction of its U.S. affiliates under

    common control; and

    If any of its affiliates under common control is

    registered as an SD, any swap dealing transaction of any of its non-

    U.S. affiliates that (i) is engaged in swap dealing activities with

    U.S. persons as of the effective date of the Final Order or (ii) is

    registered as an SD.\83\

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

    \83\ The foregoing summary is based on the term ``U.S. person''

    as it is defined above.

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

    D. Entity-Level and Transaction-Level Requirements

    1. Categorization of Entity- and Transaction-Level Requirements

    Title VII of the Dodd-Frank Act establishes a comprehensive new

    regulatory framework for SDs and MSPs. This framework is an important

    element of the ``improve[d] financial architecture'' that Congress

    established in the Dodd-Frank Act to reduce systemic risk and enhance

    market transparency.\84\ Among other things, a registered SD or MSP

    must comport with certain statutory requirements (and regulations the

    Commission may promulgate thereunder) governing risk management,

    internal and external business conduct standards, and reporting.

    Further, U.S. SDs and MSPs, once registered, are required to comply

    with all of the requirements applicable to SDs and MSPs for all their

    swaps, not just the swaps that make them an SD or MSP.

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

    \84\ S. Rep. No. 111-176, at 228 (2010).

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

    For purposes of the Proposed Order, the Dodd-Frank swap provisions

    were divided into two categories: (1) Entity-Level Requirements, which

    apply to all the firm's activities or transactions; and (2)

    Transactional-Level Requirements, which apply on a transaction-by-

    transaction basis. For purposes of the Final Order, the Commission will

    apply the Entity-Level and Transaction-Level Requirements as

    proposed.\85\

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

    \85\ To date, the Commission has not adopted final rules

    relating to the Entity-Level Requirement of capital adequacy, nor

    the Transaction-Level Requirements of margining (and segregation)

    for uncleared swaps, and trade execution. See sections 2(h)(8),

    4s(e) and 4s(l) of the CEA, 7 U.S.C. 2(h)(8), 6s(e) and 6s(l). No

    exemptive relief is necessary with respect to Requirements that are

    not yet in effect and, therefore, the Final Order does not apply to

    these Requirements. In the event that final rules with respect to

    any of these Requirements that are issued by the Commission come

    into effect prior to the expiration of this Final Order, the

    Commission will consider extending the Final Order to such

    Requirements at that time. For further details regarding the Entity-

    Level Requirements and the Transaction-Level Requirements, see the

    appendices to the Proposed Order.

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

    The Entity-Level Requirements consist of: (1) Capital adequacy; (2)

    chief compliance officer; (3) risk management; (4) swap data

    recordkeeping; (5) SDR reporting; and (6) LTR.\86\ The Entity-Level

    Requirements apply to registered SDs and MSPs across all their swaps

    without distinctions as to the counterparty or the location of the

    swap.\87\

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

    \86\ Specifically, the Entity-Level Requirements are those set

    forth in Commission regulations 1.31, 3.3, 23.201, 23.203, 23.600,

    23.601, 23.602, 23.603, 23.605, 23.606, 23.607, 23.608 and 23.609

    and parts 20, 45 and 46.

    \87\ IIB and The Clearing House noted that the Proposed Order

    did not address Commission regulation 1.31, which sets forth certain

    recordkeeping obligations that apply to all books and records

    required to be kept under the Commission's regulations. See IIB

    (Aug. 9, 2012) at 10; and The Clearing House (Aug. 16, 2012) at 14.

    In the Proposed Order, the Commission proposed generally that

    recordkeeping requirements would be Entity-Level Requirements but

    did not explicitly list Commission regulation 1.31 as an Entity-

    Level Requirement. The Commission clarifies that for purposes of the

    Final Order, Commission regulation 1.31 is an Entity-Level

    Requirement and, therefore, subject to the exemptive relief under

    the Final Order

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

    The Transaction-Level Requirements consist of: (1) Clearing and

    swap processing; (2) margining and segregation for uncleared swaps; (3)

    trade execution; (4) swap trading relationship documentation; (5)

    portfolio reconciliation and compression; (6) real-time public

    reporting; (7) trade confirmation; (8) daily trading records; and (9)

    external business conduct standards.\88\

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

    \88\ Specifically, the Transaction-Level Requirements are those

    set forth in CEA section 2(h)(8) and Commission regulations 23.202,

    23.400 to 23.451, 23.501, 23.502, 23.503, 23.504(a), 23.504(b)(1),

    (b)(2), (b)(3) and (b)(4), 23.506 and 23.610 and part 43. The

    Proposed Guidance placed one of the Transaction-Level Requirements--

    external business conduct standards--into a ``Subcategory B,'' as

    distinguished from the remaining Transaction-Level Requirements in

    ``Subcategory A.'' This distinction is not relevant for purposes of

    the Final Order, in which all Transaction-Level Requirements are

    provided the same exemptive relief.

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

    The Commission intends to consider any reclassification of Entity-

    Level and Transaction-Level requirements, including for the reasons

    raised by various commenters, in connection with further guidance on

    cross-border issues. As described below, however, the Commission has

    considered issues raised by commenters regarding the scope of the

    proposed exemptive relief from such Requirements--apart from their

    ultimate classification.

    2. General Comments on the Proposed Order

    In response to the Proposed Order, a number of commenters addressed

    the proposed exemptive relief from the Entity-Level and Transaction-

    Level Requirements. The Clearing House stated that appropriate phase-in

    relief requires the Commission to ``provide greater flexibility'' with

    respect to the application of the Dodd-Frank requirements to overseas

    operations and non-U.S. counterparties.\89\ Several other commenters--

    including IIB, Citigroup and Cleary--recommended that the Commission

    either delay the compliance date for certain requirements or expand the

    scope of relief (particularly as to transactions with non-U.S.

    counterparties) to address certain compliance and operational burdens

    associated with applying the Dodd-Frank requirements to

    [[Page 870]]

    transactions outside the United States.\90\ These comments and the

    Commission determinations in response thereto are discussed below.

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

    \89\ See The Clearing House (Aug. 13, 2012) at 13-14. To that

    end, The Clearing House recommended that certain rules currently

    categorized as entity-level be changed to transaction-level.

    \90\ See e.g., IIB (Aug. 13, 2012) at 9-10, Cleary (Aug. 16,

    2012) at 14-16; and Citigroup (Aug. 13, 2012) at 4.

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

    3. SDR Reporting (Part 45 and Part 46) and LTR Requirements

    i. Comments

    As discussed above, in the Proposed Order, the Commission proposed

    to allow non-U.S. SDs and MSPs to delay compliance with Entity-Level

    Requirements subject to specified conditions--except for the Entity-

    Level Requirements of SDR reporting and LTR requirements. Under the

    Proposed Order, non-U.S. SDs and MSPs would be required to comply with

    SDR reporting and LTR requirements for all swaps with U.S.

    counterparties upon their compliance date. And, with respect to swaps

    with non-U.S. counterparties, the Commission proposed that only those

    non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a

    U.S.-based SD would be permitted to delay compliance with the SDR

    reporting and LTR requirements. The Commission is adopting this

    temporary exemptive relief generally as proposed, with certain

    modifications in response to comments received.

    Some commenters requested an extension of the compliance date for

    SDR reporting and LTR requirements. IIB stated that due to the

    ``expansive'' proposed aggregation rule and ambiguities in the proposed

    U.S. person definition, non-U.S. registrants may not have their systems

    ready to report their U.S.-facing swaps, which they expect to be

    relatively few in number.\91\ As an initial step, IIB requested that

    the Commission further extend the compliance date for SDR reporting and

    LTR requirements with respect to swaps between non-U.S. registrants and

    other non-U.S. counterparties (including foreign branches of U.S.

    persons) under the exemptive relief, pending final interpretive

    guidance and for a ``reasonable'' time thereafter.\92\ Similarly,

    cleary stated that compliance with part 45 swap data reporting

    requirements would require U.S. operations overseas (i.e., affiliates

    and foreign branches) to develop new reporting infrastructures, which

    requires additional time for implementation. It requested that

    registrants be permitted to comply with SDR reporting with non-U.S.

    counterparties by reporting to the Global Trade Repository

    (``GTR'').\93\

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

    \91\ See IIB (Aug. 13, 2012) at 10.

    \92\ Id. IIB also said that there may be jurisdictions that

    restrict the disclosure of even swaps with U.S. persons, and

    additional relief may be necessary for those jurisdictions.

    \93\ See Cleary (Aug. 16, 2012) at 15-16.

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

    Other commenters requested broader relief from the reporting

    requirements. SIFMA argued that non-U.S. registrants should be relieved

    from complying with SDR reporting for all of their swaps.\94\ SIFMA

    explained that because the proposed reporting relief is not available

    for swaps with U.S. counterparties, non-U.S. registrants are

    effectively required to comply with the full extent of SDR reporting

    and LTR requirements upon the effectiveness of the rules, nullifying

    the benefit of any transition period. Therefore, SIFMA urged that the

    proposed relief for non-U.S. registrants should apply to swaps with all

    counterparties.

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

    \94\ See SIFMA (Aug. 13, 2012) at 8-9.

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

    The Clearing House stated that potential registrants--whether U.S.

    or non-U.S. and irrespective of affiliation or branch status--should

    not be required to apply SDR reporting rules or LTR requirements to

    transactions with non-U.S. counterparties.\95\ It explained that for

    swaps with non-U.S. counterparties, these rules are transaction-

    specific and further, the cost of developing the necessary reporting

    infrastructure during the exemptive period would create disadvantages

    vis-[agrave]-vis those potential registrants for which delayed

    implementation of these requirements would be granted under the Final

    Order. The Clearing House, like IIB, also cited the fact that under the

    Proposed Guidance, many non-U.S. entities may be unexpectedly required

    to register as SDs but lack the operational infrastructure to comply

    with the reporting requirements.

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

    \95\ See The Clearing House (Aug. 13, 2012) at 13-14. This

    commenter also stated that where the foreign jurisdiction lacks any

    parallel transaction-level rules, the registrant should not be

    required to apply any Dodd-Frank Transaction-Level Requirements with

    respect to any swap with a non-U.S. counterparty. For jurisdictions

    with transaction-level requirements, all registrants should be

    allowed to comply with the local requirements during the exemptive

    period.

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

    Several commenters also requested additional time for compliance

    with part 46 reporting of historical and transition swaps. For example,

    Citi stated that data for many historical swaps is not available in the

    format necessary, and that many of the relevant swaps have expired or

    were terminated.\96\ SIFMA said that allowing additional time for

    compliance would not materially hinder the Commission's ability to

    assess systemic risk.\97\ SIFMA requested that the Commission delay for

    all market participants part 46 historical swap reporting for a

    particular counterparty and asset class until 120 days after SDR

    reporting under part 45 is effective for that reporting counterparty

    and asset class in order to alleviate the difficulties associated with

    compliance with both reporting requirements.

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

    \96\ See Citi (Aug. 13, 2012) at 9.

    \97\ See SIFMA (Aug. 13, 2012) at 11.

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

    Finally, as noted above, the Proposed Order stated that the

    exemptive relief for SDR reporting and LTR requirements for non-U.S.

    registrants in their swaps with non-U.S. counterparties would not

    extend to non-U.S. registrants that are affiliates or subsidiaries of

    U.S. registrants. A number of commenters, including Deutsche Bank,

    recommended that the Commission eliminate the term ``affiliate'' and

    exempt non-U.S. registrants from reporting swaps with non-U.S.

    counterparties, except where the non-U.S. registrant is a direct

    subsidiary of a U.S. registrant.\98\ Commenters expressed the concern

    that this proposed exemptive relief from SDR reporting and LTR

    requirements was too narrow in that it would not extend to a non-U.S.

    registrant by virtue of its affiliation with a U.S. SD under the common

    ownership of a non-U.S. person that is neither an SD nor an MSP.\99\

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

    \98\ See Deutsche Bank (Aug. 13, 2012) at 3; see also Cleary

    (Aug. 16, 2012) at 14-15.

    \99\ See id.

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

    ii. Commission Determination on SDR Reporting and LTR Requirements

    SDR reporting is a fundamental component of Dodd-Frank's objective

    to reduce risk, increase transparency, and promote market integrity

    within the financial system generally, and the swaps market in

    particular.\100\ SDR reporting achieves the statutory objectives of

    transparency and enhanced price discovery by, among other things,

    requiring that market participants report swap transaction and pricing

    data to an SDR. SDR reporting also serves as a valuable regulatory

    tool. In particular, timely reporting of comprehensive swap transaction

    data to SDRs will be important to the Commission's ability to

    effectively monitor and address the risk exposures of individual market

    participants (including SDs and MSPs) and the concentration of risk

    within the swaps market more generally. Similarly, LTR enables the

    Commission to promptly and efficiently identify significant traders and

    collect data on their trading activity so that the Commission can

    reconstruct market events, conduct investigations, and bring

    enforcement actions as

    [[Page 871]]

    appropriate. In short, SDR reporting and LTR requirements are vital to

    ensuring that the Commission has a comprehensive and accurate picture

    of market activities in order to fulfill its regulatory mandate,

    including systemic risk mitigation, market monitoring, and market abuse

    prevention.

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

    \100\ See 7 U.S.C. 2(a)(13)(G).

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

    The Commission notes that Commission staff has recently granted no-

    action relief with respect to certain of these reporting requirements.

    In CFTC Letter No. 12-32, Commission staff provided time-limited no-

    action relief to SDs ``from certain requirements of the Commission's

    swap data reporting rules, in order to allow for a common monthly

    compliance date for swap dealers newly falling within the scope of

    these rules, and to extend the compliance date for reporting historical

    swap transaction data pursuant to Part 46 of the Commission's

    regulations.'' \101\ In CFTC Letter No. 12-39, Commission staff granted

    time-limited no-action relief to reporting parties from certain

    reporting requirements in part 43 and part 45 with respect to bespoke

    or complex products.\102\ The no-action relief granted in these letters

    is available to both U.S. and non-U.S. persons who may be subject to

    these reporting obligations.

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

    \101\ CFTC Division of Swap Dealer and Intermediary Oversight

    and Division of Market Oversight, Time-Limited No-Action Relief for

    Swap Dealers from Certain Swap Data Reporting Requirements of Part

    43, Part 45, and Part 46 of the Commission's Regulations, No-Action

    Letter No. 12-32, dated Nov. 19, 2012.

    \102\ CFTC Division of Market Oversight, Time-Limited No-Action

    Relief for Bespoke or Complex Swaps from Certain Swap Data Reporting

    Requirements of Parts 43 and 45 of the Commission's Regulations, No-

    Action Letter No. 12-39, dated Nov. 19, 2012.

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

    The Commission believes that it is necessary to implement these

    reporting requirements as expeditiously as possible, and in a manner

    intended to achieve their underlying statutory objectives. Therefore,

    in light of the relief provided by the Commission staff, the Commission

    has determined that it would not further the public interest or the

    purposes of the CEA to further delay compliance with the SDR reporting

    or LTR requirements for non-U.S. registrants. For similar reasons, the

    Commission has determined to not extend exemptive relief from the SDR

    reporting or LTR requirements to U.S. registrants for their

    transactions with non-U.S. counterparties. Thus, the Commission has

    determined not to provide relief under CEA section 4(c) in this regard.

    Finally, the Commission is clarifying its proposal that only those

    non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a

    U.S.-based SD would be permitted to delay compliance with the SDR

    reporting and LTR requirements with respect to swaps with non-U.S.

    counterparties. As explained in the preamble of the Proposed Order,

    this condition was intended to limit the relief to non-U.S. registrants

    that are not ``part of a U.S-based affiliated group.'' \103\

    Accordingly, in response to comments received, the Commission is

    clarifying that the relief from the SDR reporting and LTR requirements

    is reserved for swaps with non-U.S. counterparties that are entered

    into by non-U.S. registrants that are not part of an affiliated group

    in which the ultimate parent entity is a U.S. registrant, bank,

    financial holding company, or bank holding company.\104\ The Commission

    believes that this modification strikes the appropriate balance between

    facilitating such non-U.S. registrants' phasing in of their reporting

    obligations and achieving the critical statutory and regulatory

    objectives of the SDR reporting and LTR requirements as discussed

    above. Therefore, the Commission has determined that this provision of

    the Final Order, as modified, is consistent with the public interest

    and the purposes of the CEA and, therefore, is appropriate for

    temporary exemptive relief pursuant to CEA section 4(c).

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

    \103\ 77 FR at 41112.

    \104\ Accordingly, swaps with non-U.S. counterparties that are

    entered into by non-U.S. registrants that are part of an affiliated

    group in which the ultimate parent entity is a U.S. registrant,

    bank, financial holding company, or bank holding company, are

    subject to the SDR reporting and LTR requirements.

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

    4. Privacy and Confidentiality Laws

    i. Comments

    A number of commenters, both market participants and foreign

    regulators, stated that certain Dodd-Frank requirements--namely, SDR

    reporting and LTR requirements, and U.S. regulators' access to books

    and records--may conflict with local privacy and data protection

    laws.\105\ They further noted that potential solutions to such blocking

    statutes, such as mutual assistance agreements and/or client consents,

    may be available but will require time to implement. Certain

    commenters, including UBS, Citi, and Societe Generale, specifically

    requested that compliance with the reporting requirements for non-U.S.

    persons with non-U.S. counterparties, including foreign branches of

    U.S. persons, be delayed pending final interpretive guidance (and for a

    reasonable time thereafter). As an alternative, SIFMA suggested that at

    least during the term of the exemptive relief, all market participants

    (including futures commission merchants) should be permitted to mask

    client information from any reporting requirements, including SDR

    reporting and LTR, where the failure to do so would violate applicable

    foreign laws and regulations.

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

    \105\ See e.g., SIFMA (Aug. 13, 2012) at 14; Citi (Aug. 13,

    2012) at 7; UBS AG (``UBS'') (June 13, 2012) at 1; IIB (Aug. 9,

    2012) at 10; Societe Generale (Aug. 9, 2012) at 8; ISDA (Aug. 10,

    2012) at 7; Swiss Financial Market Supervisory Authority (``FINMA'')

    (July 16, 2012) at 2; Hong Kong Banks (Aug. 27, 2012) at 2-3.

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

    ii. Commission Determination on Privacy and Confidentiality Laws

    The Commission believes that, given the importance of the subject

    reporting requirements to market transparency and integrity, it is

    critical to apply these requirements to all registered SDs and

    MSPs.\106\ However, the Commission recognizes the potential challenges

    that non-U.S. firms may face in jurisdictions with conflicting privacy

    and confidentiality laws. As a result of these challenges, the

    Commission staff recently granted time-limited no-action relief from

    provisions of parts 20, 45, and 46 of the Commission's regulations that

    require the reporting of certain information revealing the identity of

    a counterparty or affiliated group where reporting such information

    would violate the privacy laws of a non-U.S. jurisdiction.\107\ In

    light of the

    [[Page 872]]

    Commission staff's decision to provide no-action relief with respect to

    this issue, the Commission has determined that it would not further the

    public interest or the purposes of the CEA to grant further relief with

    respect to the reporting requirements solely on the basis of

    potentially conflicting privacy and data protection laws. Therefore,

    the Commission declines to provide relief under CEA section 4(c) in

    this regard.

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

    \106\ See also the discussion of the importance of SDR reporting

    in section III.D.3.ii., above

    \107\ See CFTC Division of Market Oversight, Re: Time-Limited

    No-Action Relief for Part 20 Reporting Entities Regarding

    Identifying Information and Time-Limited No-Action Relief for Part

    45 and Part 46 Reporting Counterparties Regarding Legal Entity

    Identifiers, Other Enumerated Identifiers, or Other Identifying

    Terms, No-Action Letter No.12-46, Dec. 7, 2012. Further, in response

    to comments, the Commission is revising Form 7-R. This is the

    Commission form that a firm uses to apply for registration with the

    Commission. By signing Form 7-R, the firm makes a set of

    certifications, acknowledgments and undertakings. In addition, if

    the applicant is a foreign firm, the firm agrees to provide its

    books and records for inspection by the Commission, NFA, or the U.S.

    Department of Justice (``DOJ'') upon request and in a specified

    manner. Included is a statement that the foreign firm is not subject

    to any blocking, privacy or secrecy laws, and that failure to

    provide the books and records in the manner specified could result

    in enforcement action, denial or revocation of registration, or

    other consequences.

    Certain foreign firms that will be required to register with the

    Commission as SDs by a date certain may be subject to blocking,

    privacy, or secrecy laws in their home jurisdictions that could

    limit or prevent production by those firms of their books and

    records in accordance with the procedures they would be agreeing to

    by signing Form 7-R. In order to permit these firms to register as

    required by U.S. law, without violating their home country laws, the

    Commission is making the terms of the agreement in Form 7-R that a

    firm produce its books and records upon request of the Commission,

    NFA, or DOJ, subject to the provisions of any applicable blocking,

    privacy or secrecy laws. See Form 7-R at page 42, which may be found

    on NFA's Web site at http://www.nfa.futures.org/NFA-registration/templates-and-forms/Form7-R-entire.pdf.

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

    Similarly, the Commission views its access to a registrant's books

    and records as a fundamental regulatory tool necessary to properly

    monitor and examine the registrant's compliance with the CEA.

    Consistent with existing practice, the Commission intends to exercise

    its right to access a registrant's books and records and maintain its

    right to examine a registrant, regardless of the registrant's

    location.\108\ In this regard, the Commission believes that mutual

    cooperation with other regulators is equally important to achieve the

    effective and efficient supervision of cross-border activities. In

    recognition of the importance of such mutual cooperation, the

    Commission will endeavor to achieve an understanding with each relevant

    regulator and memorialize such understanding in a supervisory

    arrangement. In the Commission's view, this is a balanced and flexible

    approach that will ensure that the agency has access to information

    critical to fulfilling its statutory responsibilities, but achieved in

    a manner designed to ensure continuing cooperative relationships with

    its counterparts overseas.

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

    \108\ Under Commission regulation 23.603(i), a registered SD or

    MSP must make all records required to be maintained in accordance

    with Commission regulation 1.31 available promptly upon request to

    representatives of the Commission. Under the Final Order, the

    Commission reserves this right to access records held by registered

    SDs and MSPs, regardless of the registrant's location.

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

    5. Exemptive Relief for U.S. Swap Dealers

    i. Comments

    The Proposed Order would permit non-U.S. registrants and foreign

    branches of U.S. registrants to delay compliance with Transaction-Level

    Requirements with respect to swaps with non-U.S. persons.\109\ The

    relief would not be available to U.S. SDs (with the exception of

    foreign branches). SIFMA requested that the Commission extend the

    relief from compliance with the Entity-Level Requirements (including

    SDR reporting) to U.S. registrants transacting with non-U.S. persons

    since it will be difficult, if not impossible, to collect the

    counterparty information that is necessary to effect compliance with

    certain of these requirements.\110\ SIFMA also supported granting U.S.

    SDs relief from swap data recordkeeping and internal conflicts

    requirements for swaps with non-U.S. persons.\111\ ISDA similarly

    argued that the rationale for exemptive relief applies equally to a

    U.S. SD transacting directly with non-U.S. persons.\112\ Cleary raised

    concerns about the disparate treatment extended to U.S. SDs and non-

    U.S.-SDs under the Proposed Order in respect to Transaction-Level

    Requirements as applied to transactions with non-U.S. persons.\113\

    Cleary requested that in the interim, for the duration of the exemptive

    relief, the Commission should exempt all SDs from Transaction-Level

    Requirements for transactions with non-U.S. persons.

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

    \109\ The Proposed Order provided that non-U.S. registrants may

    comply with Transaction-Level Requirements for transactions with

    non-U.S. counterparties only as required by the home jurisdiction

    (or in the case of foreign branches of a U.S. registrant, the

    foreign location of the branch). Cleary requested that compliance

    with the host jurisdiction also be permitted. See Cleary (Aug. 16,

    2012) at 16. In response, the Commission is clarifying the Final

    Order to allow the non-U.S. registrant (or branch of a U.S.

    registrant) to comply with only the applicable requirements of the

    local jurisdiction.

    \110\ See SIFMA (Aug. 13, 2012) at 10 (arguing that, otherwise,

    U.S. SDs would be at a competitive disadvantage and that U.S. SDs

    face the same operational difficulties as non-U.S. SDs when

    transacting in the U.S. with non-U.S. counterparties).

    \111\ Id. at 9.

    \112\ See ISDA (Aug. 10, 2012) at 7 (``in the interest of

    competitive parity between U.S. and non-U.S. entities, ISDA

    recommends that the Commission align the domestic and

    extraterritorial compliance dates of all requirements'').

    \113\ See Cleary (Aug. 16, 2012) at 11 (``during the exemption's

    phase-in period * * * the CFTC should ensure competitive parity by

    exempting all [SDs] from transaction-level requirements in

    connection with transactions with non-U.S. counterparties'').

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

    ii. Commission Determination on Relief for U.S. Swap Dealers

    The Commission believes that extension of this relief to U.S. SDs'

    activities would not only be contrary to the directive in CEA section

    2(i), but also detrimental to the Commission's strong supervisory

    interests in swap activities occurring inside the United States.

    Nevertheless, the Commission has carefully considered the potential

    consequences of disparate treatment of U.S. and non-U.S. registrants

    and, where possible, has attempted to minimize the disparity between

    these registrants. A notable example of this is the relief from the

    Transactional-Level Requirements, which applies equally to both non-

    U.S. persons and the overseas operations of U.S. persons (i.e., foreign

    branches or non-U.S. affiliates).

    In the Commission's view, it would be contrary to the public

    interest and the purposes of the CEA to address commenters' concerns

    about regulatory disparity by diminishing the regulatory requirements

    that apply to swap activities inside the United States. Rather, the

    Commission believes that this issue is more appropriately addressed by

    working closely with its overseas counterparts, including continued

    participation in international groups to adopt and enforce robust and

    consistent standards across jurisdictions.\114\

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

    \114\ Where appropriate, however, the Commission has provided

    relief to both U.S. and non-U.S. registrants. For example, the

    Commission recently approved interim final rules for SDs and MSPs

    that would otherwise be required to comply with certain business

    conduct and documentation requirements in provisions of subpart F,

    subpart H, and subpart I to part 23 of the Commission's Regulations.

    Specifically, the compliance date for Commission regulations 23.502

    and 23.504 is deferred until July 1, 2013. Additionally, the

    compliance date for Commission regulations 23.201(b)(3)(ii); 23.402;

    23.401(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and

    (c); 23.440; 23.450; and 23.505 is deferred until May 1, 2013. The

    compliance dates for all other provisions of subpart F, subpart H,

    and subpart I of part 23 remain unchanged. See Business Conduct and

    Documentation Requirements for Swap Dealers and Major Swap

    Participants, Interim Final Rules, Dec. 18, 2012, available at

    http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister121812.pdf.

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

    6. Relief for Transactions Involving Non-Registrants

    i. Comments

    As noted above, the Proposed Order would not extend relief to swap

    counterparties that are neither SDs nor MSPs. Certain commenters, such

    as SIFMA and Deutsche Bank, asserted that this would lead to an

    anomalous result. By way of illustration, they noted that a swap

    between a non-U.S. person and a foreign branch of an SD would be exempt

    from applicable Transaction-Level Requirements, but a swap between the

    same non-U.S. person and a foreign branch of a U.S. bank that is not a

    registered SD would not be eligible for the relief.\115\ They asked

    that the Commission extend exemptive relief to non-U.S. persons who

    enter into swaps with foreign branches of U.S. persons, regardless of

    whether the U.S. person is a registered SD or MSP.

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

    \115\ See SIFMA (Aug. 13, 2012) at 12; Deutsche Bank (Aug. 13,

    2012) at 3-4 (citing SDR reporting as an example of such

    disparities).

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

    [[Page 873]]

    ii. Commission Determination on Transactions Involving Non-Registrants

    The Commission believes that it would not be appropriate to extend

    temporary exemptive relief to swaps by a non-U.S. person with a foreign

    branch of a U.S. person that is not a registrant. As explained above,

    in crafting the scope of relief to be granted under CEA section 4(c),

    the Commission carefully balanced the need to implement the Dodd-Frank

    swap provisions as expeditiously as possible and the need to mitigate

    undue disruptions to market practices. Consistent with that objective,

    the Commission's determination to exclude swaps between non-U.S.

    persons and foreign branches of U.S. registrants from certain

    requirements was based on the fact that the U.S. registrant (of which

    the foreign branch is an integral part, not a separate entity) would be

    subject to various prudential requirements as part of the overall

    requirements applicable to registrants. In the Commission's view, these

    requirements provide a sufficient level of regulatory safeguards with

    respect to the U.S. registrants to allow for temporary relief from the

    Transactional-Level Requirements with respect to the foreign branches

    of those U.S. registrants.

    In contrast, where the foreign branch is not part of a U.S.

    registrant, the Dodd-Frank requirements applicable to that foreign

    branch are greatly reduced and may, in some cases, be absent.

    Accordingly, the Commission believes that it would not further the

    public interest to grant relief from applicable Transaction-Level

    Requirements with respect to foreign branches of other classes of U.S.

    persons, and therefore declines to issue such exemptive relief under

    CEA section 4(c).

    7. Expiration Date for the Relief

    i. Comments

    A number of commenters, including ISDA and SIFMA, stated that the

    expiration of the Final Order should be tied to the publication of the

    final guidance, and not simply one year after the publication of the

    Proposed Order.\116\ According to SIFMA, any transition period is

    meaningful only if measured from the date that the full scope of the

    exemptive relief is disclosed, i.e., the date of the publication of the

    final guidance.\117\ Cleary recommended that the Commission align the

    duration of the exemptive relief with implementation in other G-20

    jurisdictions.\118\

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

    \116\ See ISDA (Aug. 10, 2012) at 17; SIFMA (Aug. 13, 2012) at

    14-15.

    \117\ See SIFMA (Aug. 13, 2012) at 14-15.

    \118\ See Cleary (Aug. 16, 2012) at 17. Cleary suggested, for

    example that the Commission consider a jurisdiction-by-jurisdiction

    approach under which the relief would expire for non-U.S.

    registrants as their home (or host) jurisdictions implement

    comparable requirements.

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

    ii. Commission Determination on Expiration Date for the Relief

    The Commission declines to adopt the commenters' suggestion. The

    Final Order maintains the expiration date in the Proposed Order.

    However, as noted in the Proposed Order, the Commission is committed to

    an orderly transition to the Dodd-Frank Act's regulatory regime.\119\

    Consistent with this commitment to an orderly phase-in of the cross-

    border application of Dodd-Frank requirements, ``[s]hould 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.'' \120\

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

    \119\ See Proposed Order, 77 FR at 41112. The Commission's

    commitment in this regard also was recently reflected in the Joint

    Press Statement of Leaders on Operating Principles and Areas of

    Exploration in the Regulation of the Cross-border OTC Derivatives

    Market, included in CFTC Press Release 6439-12, Dec. 4, 2012, which

    is signed by CFTC Chairman Gensler and the leaders of 11 other

    regulatory authorities (``We will consider providing appropriate

    transitional implementation periods for entities in jurisdictions

    that are implementing comparable regulations, supervision, and

    comprehensive oversight. In order to facilitate an orderly

    transition with respect to new OTC derivatives regulatory

    requirements when promulgating regulations with cross-border

    applicability, we agree to a reasonable, limited transition period

    to facilitate the implementation of such cross-border regulatory

    requirements in appropriate circumstances and in consultation with

    other jurisdictions.'').

    \120\ ``Effective Date for Swap Regulation,'' 76 FR 42508,

    42514, Jul. 19, 2011.

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    8. Foreign Branches of a U.S. Swap Dealer

    i. Comments

    SIFMA commented that the Commission should clarify that relief from

    the Transaction-Level Requirements is available to a foreign branch of

    a U.S. SD that enters into a swap with a non-U.S. SD.\121\ Citi

    requested that the Commission extend relief to swaps between foreign

    branches of U.S. SDs.\122\

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

    \121\ See SIFMA (Aug., 13, 2012) at 10 (noting that the Proposed

    Order makes clear that a foreign branch of a U.S. SD is eligible for

    such relief with respect to swaps with a non-U.S. counterparty, but

    the definition of U.S. person (which includes branches) makes the

    treatment of swaps between a foreign branch of a U.S. SD and a non-

    U.S. SD unclear).

    \122\ See Citi (Aug. 13, 2012) at 2-3 (noting that, under the

    Proposed Order, relief from the Transaction-Level Requirements would

    not be available in this scenario because a branch is deemed a U.S.

    person, and arguing that this result would make it difficult for

    such branches to hedge risk in local markets, and reduce liquidity

    for non-U.S. SDs, because U.S. SDs would be limited in their ability

    to make markets abroad via their overseas branches).

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

    ii. Commission Determination on Foreign Branches of a U.S. Swap Dealer

    The Commission clarifies that relief from the Transaction-Level

    Requirements is available to a swap between a foreign branch of a U.S.

    registrant and a non-U.S. SD. That is, for purposes of this relief, the

    non-U.S. SD may treat the foreign branch as a non-U.S. person.

    On the other hand, as discussed above, the Commission believes that

    a swap between two foreign branches of U.S. registrants is a swap

    between two U.S. persons, and such transactions are fully subject to

    the Transaction-Level Requirements. Nevertheless, the Commission has

    determined that it would be appropriate to provide relief during the

    effectiveness of the Final Order so that foreign branches of U.S.

    registrants\123\ may comply only with transaction-level requirements as

    may be required in the location of the foreign branch while the

    Commission further considers, and works with international regulators

    regarding, the treatment of foreign branches of U.S. registrants.

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

    \123\ For purposes of this relief from Transactional-Level

    Requirements for a swap between foreign branches of U.S.

    registrants, a swap is with the foreign branch of a U.S. person when

    (i) the personnel negotiating and agreeing to the terms of the swap

    are located in the jurisdiction of such foreign branch; (ii) the

    documentation of the swap specifies that the counterparty or

    ``office'' for the U.S. person is such foreign branch and (iii) the

    swap is entered into by such foreign branch in its normal course of

    business. If the swap does not meet these three criteria, it will be

    treated as a swap of the U.S. person and not as a swap of the

    foreign branch of the U.S. person, and the swap will not be eligible

    for this relief from Transaction-Level Requirements.

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

    As part of its further consideration of this issue, the Commission

    is considering additional requirements to determine if a swap is with

    the foreign branch of a U.S. person. These requirements could include,

    for example, that the foreign branch is the location of employment of

    the employees negotiating the swap for the U.S. person or, if the swap

    is executed electronically, the employees managing the execution of the

    swap, that the U.S. person treats the swap as a swap of the foreign

    branch for tax purposes, that the foreign branch operates for valid

    business reasons and is not only a representative office if the U.S.

    person, and that the branch is engaged in the business of banking or

    financing and is subject to substantive regulation in the jurisdiction

    where it is located. The Commission seeks comment from

    [[Page 874]]

    market participants and other interested parties regarding whether it

    is appropriate to include these or other requirements in the

    determination of when a swap is with the foreign branch of a U.S.

    person.

    9. Compliance Plans and Good-Faith Compliance

    The Proposed Order required that a person seeking relief under the

    order would submit to the NFA a compliance plan addressing how it plans

    to comply with applicable requirements under the CEA and related

    regulations. Commenters on this aspect of the Proposed Order questioned

    the value of the compliance plan and requested clarifications of the

    Commission's expectations concerning compliance plans.\124\ Upon

    further consideration of the regulatory implementation process, the

    Commission has determined that the submission of a compliance plan

    should not be necessary in connection with phasing in compliance with

    the Dodd-Frank requirements in the cross-border context during the

    limited time frame in which the Final Order will be in effect.

    Therefore, the Final Order does not require submission of a compliance

    plan.

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

    \124\ See, e.g., SIFMA (Aug. 27, 2012), at A-52--A-53; IIB (Aug.

    9, 2012) at 9.

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

    Market participants have raised the concern that, despite their

    best efforts at compliance, there could be ``practical or technical

    limitation or interpretive uncertainty'' that might need to be resolved

    before an SD's or MSP's full compliance with the Dodd-Frank

    requirements is practically feasible.\125\ In light of these concerns,

    the Commission believes it is appropriate to provide market

    participants guidance regarding its intentions concerning its

    enforcement authority when an SD or MSP is making diligent, good faith

    implementation efforts in this period of transition. The Commission

    does not intend to bring an enforcement action against an SD or MSP for

    failing to fully comply with applicable Dodd-Frank requirements prior

    to July 12, 2013, provided that there is a practical or technical

    impediment to compliance that results in an inability to comply with

    relevant compliance deadlines, or uncertainty in interpreting,

    particular Dodd-Frank requirement(s) and the SD or MSP is acting

    reasonably and in good faith to fully comply with the applicable Dodd-

    Frank requirements, which would include, at a minimum, (i) material

    progress toward timely implementation and compliance; (ii)

    identification of any implementation or interpretive issue as soon as

    reasonably possible; (iii) timely elevation of such issue(s) to the

    SD's or MSP's senior management for consideration and resolution; and

    (iv) timely consultation with other industry participants and the

    Commission as necessary to seek resolution of any such issue(s).\126\

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

    \125\ See joint letter from FIA, IIB and SIFMA (Nov. 30, 2012)

    at 11; see also SIFMA (Aug. 27, 2012) at A-25, A-44; Cleary (Aug.

    16, 2012) at 4.

    \126\ This expression of intent does not confer upon any party

    any rights or defenses in any investigation or in any action that

    may be brought by the Commission. As always, the Commission will

    weigh all facts and circumstances in determining whether to commence

    an enforcement action.

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

    10. Relief for Principals/Associated Persons

    i. Comments

    Under Commission regulation 3.10(a)(2), each applicant for SD or

    MSP registration must file, together with Form 7-R, a Form 8-R executed

    by each natural person that qualifies as a ``principal'' of the

    applicant. As part of this process, each principal is required to

    submit a fingerprint card, as well as submit to a detailed background

    check. Commission regulation 23.22 prohibits an SD or MSP from

    permitting an associated person subject to statutory disqualification

    (as defined by the CEA) from being involved in effecting swaps on

    behalf of such registrant. Citing difficulties associated with

    differences in the standards for statutory disqualification among

    jurisdictions and privacy issues associated with collecting information

    about individuals, commenters requested that only those individuals

    directly involved in the solicitation or acceptance of swaps (or

    supervising such individuals) be regarded as ``associated persons.''

    \127\

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

    \127\ See e.g., Cleary (Aug. 16, 2012) at 13.

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

    Commenters, such as IIB and Societe Generale, urged the Commission

    to exclude directors and senior officers (but not those in charge of

    the business unit subject to regulation by the Commission) from

    principal status.\128\ Cleary contended that globally active banks

    operate under a paradigm that differs from traditional Commission

    registrants and noted the differences in governance structures and the

    roles of boards of directors in foreign jurisdictions.\129\ Under these

    circumstances, Cleary requested that the Commission grant relief, on an

    interim basis, from registration for associated persons, and from

    requirements applicable to principals, of non-U.S. registrants.

    Specifically, Cleary said, the Commission should treat as principals

    only those individuals directly engaged in the activities giving rise

    to registration.\130\

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

    \128\ See IIB (Aug. 9, 2012) at 7-8; and Societe Generale (Aug.

    9, 2012) at 11.

    \129\ See Cleary (Aug. 16, 2012) at 13. Cleary stated that, in

    this connection, the Commission may wish to consider recognizing

    comparable foreign requirements for principal and associated person

    registration and obligations.

    \130\ See id.

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

    ii. Commission Determination on Relief for Principals/Associated

    Persons

    The Commission does not believe, at this time, that blanket relief

    from requirements applicable to principals or from associated person

    registration to address these concerns is appropriate pursuant to the

    standards required for exemptive relief under CEA section 4(c). Rather,

    the Commission believes that any relief from these requirements is

    appropriately addressed through staff action.\131\ The Commission views

    the registration of individuals to be an important facet of ensuring

    the integrity of the firm itself, and a staff process will permit

    Commission staff to tailor relief as appropriate and necessary.

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

    \131\ See CFTC Division of Swap Dealer and Intermediary

    Oversight, Re: Relief for Swap Dealers and Major Swap Participants

    from Compliance with Regulation 23.22(b) with Respect to: (1) Non-

    Domestic Associated Persons who Deal only with Non-Domestic Swap

    Counterparties; and (2) Persons Employed in a Clerical or

    Ministerial Capacity, No-Action Letter No. 12-43, Dec. 7, 2012.

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

    IV. Section 4(c) of the CEA

    After considering the complete record in this matter, the

    Commission has determined that the requirements of CEA section 4(c)

    have been met with respect to the exemptive relief described above.

    First, in enacting section 4(c), Congress noted that the purpose 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.'' \132\ As noted in the Proposed Order, the

    Commission is issuing this relief in order to ensure an orderly

    transition to the Dodd-Frank regulatory regime and to provide greater

    legal certainty to market participants regarding their obligations

    under the CEA with respect to their cross-border swap activities.

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

    \132\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

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

    This exemptive relief also will advance the congressional mandate

    concerning harmonization of international standards with respect to

    swaps, consistent with section 752(a) of the Dodd-Frank Act. In that

    section, Congress directed that, in order to ``promote effective and

    consistent global regulation of swaps and security-based swaps,'' the

    Commission, ``as appropriate, shall consult and coordinate with foreign

    regulatory

    [[Page 875]]

    authorities on the establishment of consistent international standards

    with respect to the regulation'' of swaps and security-based

    swaps.\133\ This relief, by providing non-U.S. registrants the latitude

    necessary to develop and modify their compliance plans as the

    regulatory structure in their respective home jurisdiction changes,

    will promote the adoption and enforcement of robust and consistent

    standards across jurisdictions.

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

    \133\ See section 752(a) of the Dodd-Frank Act.

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

    The Commission emphasizes that the Final Order is temporary in

    duration and reserves the Commission's enforcement authority, including

    its anti-fraud and anti-manipulation authority. As such, the Commission

    has determined that the Final Order is consistent with the public

    interest and purposes of the CEA. For similar reasons, the Commission

    has determined that the Final Order will 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.

    Finally, the Commission has determined that the Final Order is limited

    to appropriate persons within the meaning of CEA section 4c(3), since

    the SDs and MSPs eligible for the relief are likely to be the types of

    entities enumerated in that section and active in the swaps market.

    Therefore, upon due consideration, pursuant to its authority under

    section 4(c) of the CEA, the Commission hereby issues the Final Order.

    V. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \134\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. An

    agency may not conduct or sponsor, and a person is not required to

    respond to, a collection of information unless it displays a currently

    valid control number.

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

    \134\ 44 U.S.C. 3501 et seq.

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

    In connection with the Proposed Order, the Commission requested

    review and approval by OMB of a new collection of information titled

    ``Exemptive Order Regarding Compliance with Certain Swap Regulations.''

    \135\ This collection of information would have related to the

    compliance plans to be submitted to the NFA by persons seeking relief

    under the exemptive order. No comments were received on the paperwork

    burden associated with this information collection request. Because the

    Final Order does not require the submission of a compliance plan, it

    does not require a collection of information from any persons or

    entities.\136\

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

    \135\ The Commission's notice was published in the Federal

    Register. See 77 FR 43271, Jul. 24, 2012. On August 13, 2012, OMB

    approved the Commission's initial information collection request

    until February 28, 2013, and assigned OMB control number 3038-0098.

    \136\ On November 7, 2012, the Commission, by separate notice in

    the Federal Register, announced an opportunity for public comment on

    the proposed extension of OMB approval of the prior information

    collection request, with a 60-day comment period that expires on

    January 7, 2013. See 77 FR 66819 Nov. 7, 2012. Because the Final

    Order does not require submission of a compliance plan, this

    extension is no longer relevant.

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

    VI. Cost-Benefit Considerations Relating to the Final Order

    Section 15(a) of the CEA \137\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    five broad areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness and

    financial integrity of futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations. The Commission considers the costs and benefits

    resulting from its discretionary determinations with respect to the

    section 15(a) factors.

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

    \137\ 7 U.S.C. 19(a).

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

    A. Background

    Throughout the Dodd-Frank rulemaking process, the Commission has

    strived to ensure that new regulations designed to achieve Dodd-Frank's

    protections be implemented in a manner that is both timely and also

    minimizes unnecessary market disruption. In its effort to implement the

    Dodd-Frank regulations on a cross-border basis, the Commission's

    approach has not been different. In this respect, the Commission has

    attempted to be responsive to industry's concerns regarding

    implementation and the timing of new compliance obligations, and

    thereby ensure that market practices would not be unnecessarily

    disrupted during the transition to the new swap regulatory regime. At

    the same time, however, the Commission has endeavored to comply with

    the Congressional mandate to implement the new SD and MSP regulatory

    scheme in a timely manner. The Commission, therefore, also seeks to

    ensure that the implementation of these requirements is not subject to

    undue delay. The Commission believes that the Final Order strikes the

    proper balance between promoting an orderly transition to the new

    regulatory regime under the Dodd-Frank Act, while appropriately

    tailoring relief to ensure that market practices are not unnecessarily

    disrupted during such transition.

    The Final Order also reflects the Commission's recognition that

    international coordination is essential in this highly interconnected

    global market, where risks are transmitted across national borders and

    market participants operate in multiple jurisdictions.\138\ The Final

    Order would allow market participants to implement the calculations

    related to SD and MSP registration on a uniform basis and to delay

    compliance with certain Dodd-Frank requirements while the Commission

    continues to work closely with other domestic financial regulatory

    agencies and its foreign counterparts in an effort to further harmonize

    the cross-border regulatory framework.

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

    \138\ See generally CFTC-SEC Joint Report on International Swap

    Regulation Required by Section 719(c) of the Dodd Frank Act (Jan.

    31, 2012) at 105-09.

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

    B. Summary of Proposed Consideration of the Costs and Benefits of the

    Exemptive Order

    In terms of costs, in the Proposed Order the Commission considered

    the potential costs incurred by swap entities to submit a compliance

    plan in order to obtain exemptive relief. As noted above, the Final

    Order does not require submission of a compliance plan and therefore

    these potential costs are no longer relevant to the Final Order.

    Apart from the direct costs of submitting a compliance plan, the

    Commission noted in the Proposed Order that it may result in indirect

    costs to the public, including the costs of continuing systemic risk to

    U.S. taxpayers due to delayed compliance with the Entity-Level

    Requirements and, to a more limited extent, Transaction-Level

    Requirements of the Dodd-Frank Act. The Commission proposed that these

    costs are not, however, susceptible to meaningful quantification due to

    a lack of data regarding several key variables.

    In terms of benefits, the proposal stated that the exemptive order

    would provide a benefit in that it would allow affected entities

    additional time to transition into the new regulatory regime in a more

    orderly manner, which promotes stability in the markets as that

    transition occurs. Another benefit proposed was the increase in

    international harmonization because the

    [[Page 876]]

    proposed relief provided U.S. and non-U.S. registrants the latitude

    necessary to develop and modify their compliance plans as the

    regulatory structure in their home jurisdiction changes, which would

    promote greater regulatory consistency and coordination with

    international regulators.

    The Commission explained that one of the key benefits of the

    proposed compliance plan condition is that it would ensure that non-

    U.S. persons claiming the exemption would be actively and demonstrably

    considering and planning for compliance with the Entity-Level and

    Transaction-Level Requirements under the CEA, as may be applicable. In

    addition, the Commission stated that relief as proposed would allow

    foreign branches of U.S. SDs and MSPs to comply only with those

    requirements as may be required in the jurisdiction where the foreign

    branch is located for swaps with non-U.S. counterparties, effective

    concurrently with the date upon which such SDs and MSPs must first

    apply for registration until 6 months following the publication of the

    proposed order in the Federal Register.

    C. Comments

    The Commission requested comments on all aspects of its proposed

    consideration of costs and benefits and any alternatives to the same.

    As discussed and considered throughout this release, the Commission

    received 26 comments on the Proposed Order, many addressing the

    potential economic and competitive effects of the proposed exemption in

    qualitative terms. None, however, provided additional data or

    information from which the Commission could modify and/or expand upon

    its dollar cost estimates of the conditions to the exemption.

    In the paragraphs that follow, the Commission summarizes and

    responds to the comments received that relate to the enumerated cost

    and benefit considerations set forth in CEA section 15(a), most notably

    considerations of protection of the market participants and the public,

    and considerations of competitiveness. The Commission believes that,

    while it is possible that the estimated dollar costs will increase or

    decrease as a result of the modifications to the proposal in this final

    order, the Commission does not expect any such changes to be

    significant.

    While most commenters expressed support for the Commission's

    objective in the Proposed Order--that is, ensuring an orderly

    transition to Dodd-Frank's regulatory framework and providing greater

    legal certainty for market participants by providing a phase-in of

    certain requirements, other commenters expressed caution that delayed

    implementation could leave the public unprotected from the types of

    risk the Dodd-Frank Act and the Commission's implementing regulations

    are intended to address.

    Public interest groups including Americans for Financial Reform,

    Public Citizen's Congress Watch, and Better Markets stated that the

    proposed delayed implementation of the Dodd-Frank derivatives regime,

    where there is a clear and direct U.S. taxpayer exposure, would deprive

    taxpayers of the protections required by the statute, such as clearing

    and margin, which these commenters believe should go into effect as

    rapidly as possible. AFR further states that although the risk to U.S.

    taxpayers related to European banks is somewhat less direct, it is real

    and has been significant, as shown by the U.S. taxpayer bailouts that

    benefitted foreign counterparties to AIG Financial Products during the

    2008 crisis.\139\

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

    \139\ See AFR (Aug. 13, 2012) at 2. See also Better Markets

    (Aug. 16, 2012) at 1.

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

    Industry commenters urged the Commission to avoid potential undue

    disruption and market dislocation by carefully phasing in

    implementation in a manner that ``appropriately balances the competing

    objectives and obstacles facing the Commission and the private sector

    and that avoids adverse market and economic impacts.'' \140\ IIB, for

    example, said that requiring non-U.S. SDs and MSPs to comply with all

    applicable Dodd Frank requirements at the time of registration or

    shortly thereafter would ``create unrealistic and unwarranted

    compliance burdens'' and therefore the Commission should provide

    additional time for compliance.\141\ Commenters also said that if the

    Commission adopts interim requirements that would apply for only a

    short time, it should take care that market participants would not be

    unnecessarily required to incur costs to comply with requirements that

    are subject to change.\142\

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

    \140\ Cleary (Aug.16, 2012) at 3.

    \141\ IIB (Aug. 9, 2012) at 2.

    \142\ See SIFMA (Aug. 13, 2012) at 5. See also letter to

    Chairman Gensler from Reps. Scott Garrett and Randy Neugebauer (June

    20, 2012) at 2 (requesting that the Commission formalize any cross

    border guidance through a rule making that includes the appropriate

    cost-benefit analysis that the law requires).

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

    Commenters also addressed the perceived competitive effects of the

    Proposed Order. Better Markets stated that, as a general matter, it

    would be inappropriate and contrary to law for the Commission to delay

    implementation of the Dodd-Frank Act to allow ``the rest of the world

    to catch up'' to the U.S.\143\ In contrast, ISDA believes that the

    Commission should align the compliance dates for U.S. and non-U.S. SDs

    and MSPs in order to avoid the ``profound effect[s] on transactional

    relationships'' that may result from ``a framework under which the

    Commission imposes on [U.S. SDs and MSPs] a substantially earlier

    rollout of Entity-level requirements and Transaction level requirements

    with non-U.S. persons in certain cases.'' \144\ This view was shared by

    other industry commenters, which recommended that ``during the

    exemption's phase-in period, while transaction-level requirements have

    not yet come into effect outside the U.S., the Commission should ensure

    competitive parity by exempting all SDs from transaction level

    requirements in connection with transactions with non-U.S.

    counterparties.'' \145\

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

    \143\ Better Markets (Aug. 16, 2012) at 2.

    \144\ ISDA (Aug. 10, 2012) at 7.

    \145\ Cleary (Aug 16, 2012) at 11.

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

    Regarding the Proposed Order's treatment of SDR Reporting and LTR

    requirements, The Clearing House stated that differential treatment

    between foreign SDs and non-U.S. affiliates or subsidiaries of U.S. SDs

    would create a competitive disadvantage for overseas branches and

    affiliates of U.S. entities and would not serve the Commission's

    purpose of mitigating risk to the U.S.\146\ Deutsche Bank pointed out

    that because the Proposed Order would not provide relief to non-U.S.

    SDs and MSPs that are affiliates of U.S. SDs, members of an affiliated

    group that is based outside the U.S. but in which one of the members is

    a U.S. SD (such as, potentially, the Deutsche Bank group) would not

    benefit from the Proposed Order.\147\ In this context, Deutsche Bank

    stated that affiliates, particularly in different countries, frequently

    use different and unrelated technology systems, and therefore a non-

    U.S. SD or MSP with a U.S. SD affiliate may not be able to easily use

    the reporting systems of its U.S. SD affiliate.\148\

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

    \146\ See The Clearing House (Aug. 13, 2012) at 16.

    \147\ See Deutsche Bank (Aug. 13, 2012) at 3.

    \148\ Id.

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

    D. Consideration of Costs and Benefits of the Final Order

    The Final Order permits, subject to the conditions specified

    therein, market participants outside the United States (i) to apply a

    limited, interim definition of the term ``U.S. person'' for a period of

    six months, (ii) to determine SD and

    [[Page 877]]

    MSP registration requirements in a uniform manner, (iii) to apply the

    SD de minimis aggregation requirements in a limited manner, an (iv) to

    delay compliance with certain Dodd Frank requirements specified in the

    Final Order until July 12, 2013. The Final Order reflects the

    Commission's determination to protect U.S. persons and markets through

    the cross-border application of the provisions of the Dodd-Frank Act

    and the Commission's regulations in a manner consistent with section

    2(i) of the CEA and longstanding principles of international comity. By

    carefully tailoring the scope and extent of the phasing-in provided by

    the Final Order, the Commission believes that it achieves an

    appropriately balanced approach to implementation that mitigates the

    costs of compliance while avoiding open-ended delay in protecting the

    American public from swaps activities overseas. To be sure, the

    conditions attached to the Final Order are not without cost, but the

    Commission believes that phasing-in of certain Dodd-Frank requirements

    as permitted by the Final Order will reduce overall costs to market

    participants.

    In the absence of the Final Order, non-U.S. SDs or MSPs would be

    required to be fully compliant with the Dodd-Frank regulatory regime

    without further delay. The Final Order delays compliance with a number

    of these requirements until July 12, 2013. With respect to these

    entities, therefore, the benefits include not only the avoided costs of

    compliance with certain requirements during the time that the Final

    Order is in effect, but also increased efficiency because the

    additional time allowed to phase in compliance will allow market

    participants more flexibility to implement compliance in a way that is

    compatible with their systems and practices. The additional time

    provided by the Final Order will also give foreign regulators more time

    to adopt regulations covering similar topics, which could increase the

    likelihood that substituted compliance will be an option for market

    participants. Thus, the Final Order is expected to help reduce the

    costs to market participants of implementing compliance with certain

    Dodd Frank requirements. These and other costs and benefits are

    considered below.

    1. Costs

    A potential cost of the Final Order, albeit one that is difficult

    to quantify, is the potential that the relief from certain SD de

    minimis aggregation requirements and the delay in compliance permitted

    by the Final Order will leave market participants without certain

    protections flowing from the Dodd Frank Act for the period during which

    the Final Order applies. The Final Order may also, as discussed above,

    leave U.S. taxpayers exposed to systemic risks during that time

    period.\149\ The Commission believes that these costs are mitigated,

    however, by the relatively short time period of the Final Order's

    application, by the fact that certain key Dodd Frank requirements will

    apply during this time, and by the limitation of the Final Order's

    scope to non-U.S. persons. The Commission notes, however, that concerns

    about these costs are one of the bases for the limited nature of the

    Final Order, and that adoption of many of the modifications suggested

    by commenters to expand the order would potentially increase such

    costs.

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

    \149\ In this context, the Commission considered whether

    additional costs could result from the provisions of the exemptive

    order that provide additional time for historical swap reporting.

    The Commission does not believe that providing additional time for

    historical swap reporting will result in any significant costs

    because the required data will still be provided within a relatively

    short period of time.

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

    The Commission has also considered the possibility, raised by

    commenters, that competitive disparities will result from the delay in

    compliance permitted to non-U.S. market participants during the

    effectiveness of the Final Order. In general, the effect of the Final

    Order is that while U.S. SDs and MSPs will begin to comply with certain

    Dodd Frank requirements when they apply to be registered (which will

    begin at the end of 2012 and continue through the first part of

    2013),\150\ non-U.S. market participants will not have to comply with

    such requirements, to the extent provided under the Final Order, until

    July 12, 2013. This delay raises the potential that the earlier

    imposition of certain requirements on U.S. SDs and MSPs could also

    impose a competitive disadvantage on them. The Commission believes,

    however, that any potential competitive disadvantage from the Final

    Order is uncertain, and there are factors indicating it is unlikely to

    be significant. Moreover, the Commission's staff is minimizing, through

    a variety of no-action letters and staff guidance, the potential for

    competitive disparities by affording U.S. and non-U.S. market

    participants time-limited relief to achieve compliance with certain

    regulatory requirements before staff would recommend enforcement action

    by the Commission.\151\ For example, CFTC Letter No. 12-32 provides

    relief regarding compliance with certain requirements of the

    Commission's swap data reporting rules. In so doing, Commission staff

    allows for a common monthly compliance date for SDs newly within the

    scope of those rules, and to extend the compliance date for reporting

    historical swap transaction data pursuant to Part 46 of the

    Commission's regulations.\152\

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

    \150\ See CFTC Staff Responds to Questions on Timing of Swap

    Dealer Registration Rules, CFTC Press Release 6348-12, September 10,

    2012.

    \151\ For a listing of all relevant no-action letters and staff

    guidance, see: http://www.cftc.gov/LawRegulation/DoddFrankAct/GuidanceQandA/index.htm.

    \152\ See CFTC Letter No. 12-32.

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

    The potential disadvantage is uncertain because it is unknown

    whether the Dodd Frank requirements imposed on U.S. SDs and MSPs in the

    first half of 2013 will discourage potential counterparties from

    engaging in swaps with them.\153\ Specifically, it is unknown whether

    the compliance expenses incurred during that time will directly affect

    swap terms in a manner that would impose a significant

    disadvantage.\154\ Also, the Commission cannot estimate with certainty

    the likelihood that potential competitive disadvantages arising from

    the Final Order will be significant for U.S. SDs and MSPs. A variety of

    factors influence a person's choice of potential swap counterparties,

    and therefore whether the earlier imposition of certain Dodd Frank

    requirements on U.S. SDs and MSPs will cause a significant shift of

    swap business away from them is uncertain. It may be that a person

    seeking to enter into relatively few swaps would perceive a transitory

    advantage in dealing with a more lightly regulated non-U.S. person

    while the exemptive order is in effect. The Commission also considered

    that if a person has in place relationships with multiple

    counterparties (both U.S. and non-U.S.), the person may be more likely

    to enter into swaps with the non-U.S. counterparties while the Final

    Order is in effect, and the higher level of swap activity with non-U.S.

    counterparties may continue after the order expires. Also, U.S. SDs and

    MSPs

    [[Page 878]]

    may be driven to accept lower profit margins on swaps in order to

    prevent such shifts to non-U.S. counterparties.

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

    \153\ The Commission notes, for example, that certain Dodd Frank

    requirements, such as margin and capital rules, have not been

    finalized and are unlikely to apply to U.S. SDs and MSPs in the

    first half of 2013. Also, other requirements, such as the clearing

    requirement, will be phased in during that time.

    \154\ For example, while the Commission acknowledges that the

    requirement to have a chief compliance officer in place does impose

    costs, it is unknown whether shifting the time that this requirement

    will go into effect by approximately six months will significantly

    alter the financial terms at which SDs and MSPs subject to that

    requirement would enter into swaps.

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

    These negative competitive effects on U.S. SDs and MSPs would be

    more likely if compliance expenses incurred by U.S. SDs and MSPs in the

    first half of 2013 negatively affect the swap terms they offer, and if

    swap users are more sensitive to such changes in swap terms. On the

    other hand, many relationships between SDs and their counterparties are

    connected with other financial arrangements that are reflected in

    complex documentation and are difficult to modify quickly.\155\ This

    difficulty would attenuate the likelihood of a significant shift of

    swap counterparties away from U.S. SDs and MSPs during the relatively

    short period that the Final Order is in effect.

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

    \155\ In fact, the complexity of these arrangements and

    documentation is one of the reasons that foreign potential

    registrants have requested more time to come into compliance with

    the Dodd Frank requirements.

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

    The Commission has considered the potential negative competitive

    effects of the Final Order on U.S. SDs and MSPs. However, since it is

    difficult to isolate the effects of the Final Order from all other

    factors that may affect how swap users choose counterparties and the

    terms at which they enter into swaps, it is difficult to estimate on a

    quantitative basis the potential costs that could result for U.S. SDs

    and MSPs from the potential negative competitive effects of the Final

    Order. Thus, the Commission cannot reach a definitive conclusion about

    the effect of the Final Order on competition. In any event, commenters

    who raised the potential competitive effect of the Proposed Order did

    not provide any specific facts, examples or analysis to facilitate a

    detailed consideration of these concerns.

    Regarding the comments on the Proposed Order's treatment of the SDR

    reporting and LTR requirements, the Commission believes that allowing

    non-U.S. SDs and MSPs that are not part of an affiliated group in which

    the ultimate parent entity is a U.S. registrant, bank, or financial or

    bank holding company to forego reporting of swaps with non-U.S.

    counterparties during the effectiveness of the Final Order is not

    likely to impose a significant competitive disadvantage on those SDs

    and MSPs that are required to report such swaps with non-U.S.

    counterparties. Although it is possible that some non-U.S.

    counterparties may have concerns about reporting of their swap

    activities and may therefore prefer to enter into swaps with SDs and

    MSPs that are not subject to these requirements, any resulting

    advantage to those SDs and MSPs will last only until the Final Order

    expires on July 12, 2013, and as noted above the likelihood of

    significant customer shifts during that time is uncertain. As for the

    point that the relief in the Final Order should be available to members

    of an affiliated group that is based outside the U.S. but in which one

    of the members is a U.S. SD, the Final Order has been modified to

    provide this availability. Last, the commenter's point that affiliates

    in different countries may use different and unrelated technology

    systems illustrates one of the reasons that the Commission is providing

    the relief in the Final Order--i.e., to give affiliates in different

    countries time to mitigate any incompatibilities in their systems.

    In connection with the interim definition of the term ``U.S.

    person'' which may be applied by non-U.S. market participants covered

    by the Final Order, the Commission has considered the potential that

    costs could arise from applying this interim definition and then

    transitioning to a different definition at expiration of the Final

    Order. To mitigate transition costs, the Commission intends that during

    the transitional period during which the Final Order is in effect,

    market participants will make the system and operational changes

    necessary to implement any final definition of U.S. person.

    2. Benefits

    The primary benefit of this Final Order is that it affords entities

    additional time to come into compliance with certain of the

    Commission's regulations. The Commission has considered the comments

    regarding the complex issues faced by non-U.S. SDs and MSPs in

    complying with the applicable Dodd-Frank requirements, and it believes

    that this additional time will be of benefit to market participants

    beyond simply delaying the time at which they will have to incur the

    costs of complying with the regulations. More importantly, this

    additional time will permit market participants to implement the

    Commission's regulations more flexibly, so that each market

    participant's implementation activities can be more closely coordinated

    with its particular situation, including factors such as the type of

    swaps it uses, the characteristics of its counterparties, and the

    nature of its internal swap processes and systems. Reduced costs may

    occur as the result of phasing in new systems, operational patterns,

    legal agreements, or other business arrangements over a longer period

    of time, particularly for SDs and MSPs outside the U.S. For example,

    different jurisdictions may have varying documentation requirements or

    business practices that would lengthen the time needed to come into

    compliance. The Final Order provides time for this.

    The Commission understands that if all market participants world-

    wide were required to comply with all applicable requirements upon

    applying to register as SDs and MSPs (which will begin at the end of

    2012), some market participants would have to rush to implement

    compliance. The Commission is cognizant that compliance costs may be

    increased simply by the need to implement compliance quickly, which

    could entail, for example, retaining outside consultants rather than

    having in-house employees effect the necessary implementation steps.

    Thus, the Commission believes that by giving non-U.S. market

    participants additional time to come into compliance with certain of

    its regulations, the overall cost of compliance implementation will be

    reduced, not just delayed.

    The Final Order also benefits entities by providing categories of

    entities the same relief, which eliminates the need for entities to

    seek individualized determinations by the Commission's staff regarding

    their particular transactions or operations. Providing additional time

    to all the non-U.S. market participants covered by the Final Order may

    facilitate action by industry groups to assist in compliance efforts

    and encourage cooperation among market participants.

    In addition, the Commission believes that the delay provided by the

    Final Order may permit some non-U.S. jurisdictions to adopt regulatory

    requirements that are similar to certain of the Commission regulations

    and therefore may potentially be the basis for substituted compliance

    by market participants in those jurisdictions. Based on discussions

    with market participants, the Commission expects that substituted

    compliance would in some circumstances be less costly than compliance

    with Commission regulations, and therefore the Final Order has the

    potential to reduce costs by providing a greater opportunity for

    substituted compliance.

    E. Section 15(a) Factors

    1. Protection of Market Participants and the Public

    The exemptive relief provided in this Final Order will protect

    market participants and the public by facilitating a more orderly

    transition to the new regulatory regime than might

    [[Page 879]]

    otherwise occur in the absence of this order. In particular, non-U.S.

    persons are afforded additional time to come into compliance than would

    otherwise be the case, which contributes to greater stability and

    reliability of the swap markets during the transition process.

    2. Efficiency, Competitiveness, and Financial Integrity of the Markets

    The Commission believes that the efficiency and integrity of the

    markets will be furthered by the additional compliance time provided in

    this order and the condition that entities submit a compliance plan. As

    discussed above, the Commission is mindful of the claims that the final

    order could potentially cause competitive disparities, and has taken

    steps to mitigate those potential costs where doing so would be

    consistent with the Dodd-Frank Act and the Commission's policy

    objectives.

    3. Price Discovery

    The Commission has not identified any costs or benefits of the

    proposed order with respect to price discovery.

    4. Risk Management

    Entity level risk-management and capital requirements could be

    delayed by operation of the Final Order, which could weaken risk

    management. However, such potential risk is limited by the fact that

    the exemptive order is applicable for a finite time.

    5. Other Public Interest Considerations

    The Commission has not identified any other public interest costs

    or benefits of the proposed order.

    VII. Final Order

    The Commission, in order to provide for an orderly implementation

    of Title VII of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (``Dodd-Frank Act''), and consistent with the

    determinations set forth above, which are incorporated in this Final

    Order by reference, hereby grants, pursuant to section 4(c) of the

    Commodity Exchange Act (``CEA''), time-limited relief to non-U.S. swap

    dealers (``SDs'') and major swaps participants (``MSPs'') and to

    foreign branches of U.S. SDs and MSPs, from certain swap provisions of

    the CEA, subject to the terms and conditions below.\156\

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

    \156\ As used in this Order, the terms ``Entity-Level

    Requirements'' refer to the requirements set forth in Commission

    regulations 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,

    23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 and parts 20, 45

    and 46 and ``Transaction-Level Requirements'' refer to the

    requirements set forth in CEA section 2(h)(8) and Commission

    regulations 23.202, 23.400 to 23.451, 23.501, 23.502, 23.503,

    23.504(a), 23.504(b)(1), (b)(2), (b)(3) and (b)(4), 23.506 and

    23.610 and part 43. To date, the Commission has not adopted final

    rules relating to the Entity-Level Requirements of capital adequacy,

    nor the Transaction-Level Requirements of margining (and

    segregation) for uncleared swaps. See sections 4s(e) and 4s(l) of

    the CEA, 7 U.S.C. 6s(e), 6s(l).

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

    (1) Phase-in of ``U.S. Person'' Definition: All market

    participants, including a prospective or registered SD or MSP, must

    apply for purposes of this Final Order a ``U.S. person'' definition

    which would define the term as:

    (i) A natural person who is a resident of the United States;

    (ii) A corporation, partnership, limited liability company,

    business or other trust, association, joint-stock company, fund or any

    form of enterprise similar to any of the foregoing, in each case that

    is (A) organized or incorporated under the laws of a state or other

    jurisdiction in the United States or (B) effective as of April 1, 2013

    for all such entities other than funds or collective investment

    vehicles, having its principal place of business in the United States;

    (iii) A pension plan for the employees, officers or principals of a

    legal entity described in (ii) above, unless the pension plan is

    primarily for foreign employees of such entity;

    (iv) An estate of a decedent who was a resident of the United

    States at the time of death, or a trust governed by the laws of a state

    or other jurisdiction in the United States if a court within the United

    States is able to exercise primary supervision over the administration

    of the trust; or

    (v) An individual account or joint account (discretionary or not)

    where the beneficial owner (or one of the beneficial owners in the case

    of a joint account) is a person described in (i) through (iv) above.

    Any person not listed in (i) to (v) above is a ``non-U.S. person''

    for purposes of this Final Order.

    (2) De Minimis and MSP Threshold Calculations. A non-U.S. person is

    not required to include, in its calculation of the aggregate gross

    notional amount of swaps connected with its swap dealing activity for

    purposes of Commission regulation 1.3(ggg)(4), or in its calculation of

    whether it is an MSP for purposes of Commission regulation 1.3(hhh),

    (i) any swap where the counterparty is not a U.S. person, or (ii) any

    swap where the counterparty is a foreign branch of a U.S. person that

    is registered as an SD or that represents that it intends to register

    with the Commission as an SD by March 31, 2013. A non-U.S. person is

    not required to include, in its calculation of the aggregate gross

    notional amount of swaps connected with its swap dealing activity for

    purposes of Commission regulation 1.3(ggg)(4), any swap to which it is

    not a party because the swap is entered into by an affiliated central

    booking entity.

    (3) Aggregation for Purposes of the De Minimis Calculation. A non-

    U.S. person that is engaged in swap dealing activities with U.S.

    persons as of the effective date of this Order is not required to

    include, in its calculation of the aggregate gross notional amount of

    swaps connected with its swap dealing activity for purposes of

    Commission regulation 1.3(ggg)(4), the aggregate gross notional amount

    of swaps connected with the swap dealing activity of its U.S.

    affiliates under common control.\157\ Further, a non-U.S. person that

    is engaged in swap dealing activities with U.S. persons as of the

    effective date of this Order and is an affiliate under common control

    with a person that is registered as an SD is also not required to

    include, in its calculation of the aggregate gross notional amount of

    swaps connected with its swap dealing activity for purposes of

    Commission regulation 1.3(ggg)(4), the aggregate gross notional amount

    of swaps connected with the swap dealing activity of any non-U.S.

    affiliate under common control that is either (i) engaged in swap

    dealing activities with U.S. persons as of the effective date of this

    Order or (ii) registered as an SD. Also, a non-U.S. person is not

    required to include, in its calculation of the aggregate gross notional

    amount of swaps connected with its swap dealing activity for purposes

    of Commission regulation 1.3(ggg)(4), the aggregate gross notional

    amount of swaps connected with the swap dealing activity of its non-

    U.S. affiliates under common control with other non-U.S. persons as

    counterparties.

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

    \157\ For this purpose, the Commission construes ``affiliates''

    to include persons under common control as stated in the

    Commission's final rule further defining the term ``swap dealer,''

    which defines control as ``the possession, direct or indirect, of

    the power to direct or cause the direction of the management and

    policies of a person, whether through the ownership of voting

    securities, by contract or otherwise.'' See Final Entities Rules, 77

    FR at 30631, fn. 437.

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

    (4) Non-U.S. SDs and MSPs: A non-U.S. SD or non-U.S. MSP may delay

    compliance with respect to Entity-Level Requirements that are in effect

    as of the effective date of this Order (subject to the condition in

    paragraph (5) below).

    (5) Notwithstanding paragraph (4), (i) non-U.S. SDs and non-U.S.

    MSPs shall be required to comply with the swap data repository

    (``SDR'') reporting and LTR requirements for all swaps with

    [[Page 880]]

    U.S. counterparties, upon their respective compliance dates; and (ii)

    non-U.S. SDs and Non-U.S. MSPs that are part of an affiliated group in

    which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank,

    U.S. financial holding company, or U.S. bank holding company shall be

    required to comply with the SDR reporting and Large Trader Reporting

    requirements for swaps with non-U.S. counterparties, upon their

    respective compliance dates. However, during the pendency of this Final

    Order, non-U.S. SDs and non-U.S. MSPs that are not part of an

    affiliated group in which the ultimate parent entity is a U.S. SD, U.S.

    MSP, U.S. bank, U.S. financial holding company or U.S. bank holding

    company may delay compliance with the SDR reporting and LTR

    requirements for swaps with non-U.S. counterparties in accordance with

    paragraph (4).

    (6) With respect to Transaction-Level Requirements as applied to

    transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S.

    MSPs may comply with such Requirements only as may be required by the

    local jurisdiction of such registrants; provided, however, that such

    registrants shall comply with such requirements that are in effect for

    all swaps with U.S. counterparties.

    (7) U.S Registrant: A U.S. person shall apply to register as an SD

    or MSP by the date such registration is required and shall comply with

    all applicable Entity-Level and Transaction-Level Requirements that are

    in effect, except that: (A) with respect to Transaction-Level

    Requirements as applied to swaps with a non-U.S. counterparty

    (including a non-U.S. SD or non-U.S. MSP), a foreign branch of a U.S.

    SD or U.S. MSP may comply with those requirements only as may be

    required by the local jurisdiction of such branches and (B) with

    respect to Transaction-Level Requirements as applied to swaps between

    foreign branches of U.S. SDs or foreign branches of U.S. MSPs,\158\

    such foreign branches may comply with those requirements only as may be

    required by the local jurisdiction of such foreign branches.

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

    \158\ For purposes of this relief from Transactional-Level

    Requirements with respect to a swap between foreign branches of U.S.

    registrants, a swap is with the foreign branch of a U.S. person when

    (i) the personnel negotiating and agreeing to the terms of the swap

    are located in the jurisdiction of such foreign branch; (ii) the

    documentation of the swap specifies that the counterparty or

    ``office'' for the U.S. person is such foreign branch and (iii) the

    swap is entered into by such foreign branch in its normal course of

    business.

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

    (8) Expiration of Relief: The relief provided to non-U.S. SDs and

    non-U.S. MSPs (and foreign branches of a U.S. SD or MSP) in this order

    shall be effective upon approval by the Commission and expire on July

    12, 2013.

    (9) Scope of Relief: The time-limited relief provided in this

    Order: (A) Shall not affect, with respect to any swap within the scope

    of this Order, the applicability of any other CEA provision or

    Commission regulation (i.e., those outside the Entity-Level and

    Transaction-Level Requirements); (B) shall not limit the applicability

    of any CEA provision or Commission regulation to any person, entity or

    transaction except as provided in this Order; (C) shall not affect the

    applicability of any provision of the CEA or Commission regulations to

    futures contracts, or options on future contracts; and (D) shall not

    affect any effective or compliance date set forth in any Dodd-Frank Act

    rulemaking by the Commission.

    Finally, the Commission may, in its discretion, condition, suspend,

    terminate, or otherwise modify this Final Order, as appropriate, on its

    own motion.

    Issued in Washington, DC on December 21, 2012, by the

    Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Appendices to Final Exemptive Order Regarding Compliance With Certain

    Swap Regulations--Commission Voting Summary and Statements of

    Commissioners

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

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia and Wetjen voted in the affirmative; Commissioner Sommers

    voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the Final Exemptive Order Regarding Compliance with

    Certain Swap Regulations (Final Order). With this Commission action

    another important step has been taken to make swaps market reform a

    reality.

    Starting at the end of this month, domestic and foreign swap

    dealers will register. Once registered, swap dealers will report

    their trades to both regulators and the public. Foreign swap dealers

    will report their trades with U.S. persons. With these steps, the

    bright lights of transparency will, for the first time, shine on the

    swaps market. Swap dealers also will be required to implement sales

    practice standards that prohibit fraud, treat customers fairly and

    improve transparency. The public and our economy will benefit.

    The Final Order provides phased compliance for foreign swap

    dealers (including overseas affiliates of U.S. persons) and overseas

    branches of U.S. swap dealers with respect to certain requirements

    of the Dodd-Frank Wall Street Reform and Consumer Protection Act

    (Dodd-Frank Act).

    Since the enactment of the Dodd-Frank Act, the Commission has

    worked steadfastly toward a transition from an opaque unregulated

    marketplace to a transparent, regulated swaps marketplace and has

    phased in the timing for compliance to give market participants time

    to adjust to the new regulatory regime and smooth the transition.

    Today's Order is a continuation of the Commission's commitment

    to this phasing of compliance--in this case for foreign market

    participants--and is consistent with the phase-in order proposed in

    July 2012.

    The Order will remain in effect until July, 2013, as proposed in

    the July 12 order, and is intended to complement other Commission

    and staff actions that facilitate an orderly transition.

    During this transition period, a foreign swap dealer may phase

    in compliance with certain entity-level requirements. In addition,

    those entities (as well as foreign branches of U.S. swap dealers)

    are provided time-limited relief from specified transaction-level

    requirements when transacting with overseas affiliates guaranteed by

    U.S. entities (as well as with foreign branches of U.S. swap

    dealers).

    The relief period provides time for the Commission to work with

    foreign regulators as they implement comparable requirements and as

    the Commission develops a substituted compliance program.

    Substituted compliance, where appropriate, would allow for foreign

    swap dealers to meet the reform requirements of the Dodd Frank Act

    by complying with comparable and comprehensive foreign regulatory

    requirements.

    With respect to any transaction with a U.S. person, though,

    compliance will be required in accordance with previously issued

    rules and staff guidance.

    The Order incorporates a definition of ``U.S. person,'' that

    benefits from helpful comments of market participants to our initial

    proposal and continuing discussions with the international

    regulatory community.

    Under the Order, a foreign person will not be required to

    include in its calculation of swap dealing activities any swap with

    a non-U.S. person, as well as with foreign branches of U.S. swap

    dealers.

    In addition, based upon comments received on the cross-border

    interpretive guidance proposed last July, the Final Order also

    provides time-limited relief from aggregation requirements with

    respect to the de-minimis calculation for swap dealer registration.

    Specifically, the Final Order provides time-limited relief from the

    requirement that a non-U.S. person include the swap dealing

    transactions of its U.S. affiliates under common control (or any of

    its foreign affiliates that are currently dealing) in its

    calculation for determining whether or not it has exceeded the de

    minimis threshold.

    The Commission is separately seeking additional public comment

    on cross-border issues related to the term ``U.S. person,'' the

    aggregation requirements for foreign persons,

    [[Page 881]]

    as well as the definition of a ``foreign branch''.

    Today's Commission action assists foreign swap dealers to comply

    with the Dodd-Frank Act in an orderly fashion.

    Earlier this week in a separate action, the Commission issued an

    interim final rule allowing for more time to come into compliance on

    specific documentation requirements, providing swap dealers an

    additional four months with respect to sales practice documentation

    and six months with respect to relationship documentation.

    The Commission recognizes the importance of international

    cooperation and coordination in the regulation of this highly

    interconnected global market. To this end, the Commission staff has

    actively engaged in substantive discussions with foreign

    counterparts in an effort to better understand and develop a more

    harmonized cross-border regulatory framework.

    The Final Order also reflects comments from foreign market

    participants. For example, foreign banks requested a phase-in for

    the application of entity-level requirements. At the same time,

    foreign banks stated that the transaction-level requirements would

    apply to their transactions with U.S. persons.

    This Final Order reflects this on-going consultation with

    foreign regulatory counterparts who provided comments on the

    proposed exemptive order issued in July 2012. During this period of

    phased compliance, the Commission will continue to engage with

    foreign counterparts. As set forth in a December 4 joint press

    statement of market regulators, the Commission will meet regularly

    with foreign regulators to consult on, among other topics, the basis

    for substituted compliance, timing and sequencing of rules, clearing

    determinations, and options to address potential conflicting,

    inconsistent, and duplicative rules.

    As the Commission and the international regulatory community

    move forward, we all recognize that risk has no geographic boundary

    and money can move in and out of markets and jurisdictions in

    milliseconds. For the public to be protected, swaps market reform

    must cover transactions of overseas branches and overseas affiliates

    guaranteed by U.S. entities.

    The 2008 financial crisis demonstrated this when financial

    aftershocks spread throughout the globe and swaps executed offshore

    by U.S. financial institutions sent risk straight back to our

    shores. As a result of the crisis, eight million Americans lost

    their jobs, millions of families lost their homes, and small

    businesses across the country folded.

    Congress and the President responded with the Dodd-Frank Act,

    including the cross-border provisions of the law. Section 722(d) of

    the Dodd-Frank Act states that swaps reforms shall not apply to

    activities outside the United States unless those activities have

    ``a direct and significant connection with activities in, or effect

    on, commerce of the United States.'' Congress provided that reforms

    should account for risks that may come from abroad.

    Failing to bring swaps market reform to transactions with

    overseas branches and overseas affiliates guaranteed by U.S.

    entities would mean American jobs and markets would likely move

    offshore, but, particularly in times of crisis, risk would come

    crashing back to our economy.

    The nature of modern finance is that large financial

    institutions set up hundreds, if not thousands of ``legal entities''

    around the globe.

    They do so in an effort to respond to customer needs, funding

    opportunities, risk management and compliance with local laws. They

    do so as well, though, to lower their taxes, manage their reported

    accounting, and to minimize regulatory, capital and other

    requirements, so-called ``regulatory arbitrage.'' Many of these far-

    flung legal entities, however, are still directly connected back to

    their U.S. affiliates.

    During a default or crisis, the risk that builds up offshore

    inevitably comes crashing back onto U.S. shores. When an affiliate

    of a large, international financial group has problems, the markets

    accept this will infect the rest of the group.

    This was true with AIG. Its subsidiary, AIG Financial Products,

    brought down the company and nearly toppled the U.S. economy. It was

    run out of London as a branch of a French-registered bank, though

    technically was organized in the United States.

    Lehman Brothers was another example. Among its complex web of

    affiliates was Lehman Brothers International (Europe) in London.

    When Lehman failed, the London affiliate had more than 130,000

    outstanding swaps contracts, many of them guaranteed by Lehman

    Brothers Holdings back in the United States.

    Yet another example was Citigroup, which set up numerous

    structured investment vehicles (SIVs) to move positions off its

    balance sheet for accounting purposes, as well as to lower its

    regulatory capital requirements. Yet, Citigroup had guaranteed the

    funding of these SIVs through a mechanism called a liquidity put.

    When the SIVs were about to fail, Citigroup in the United States

    assumed the huge debt, and taxpayers later bore the brunt with two

    multi-billion dollar infusions. The SIVs were launched out of London

    and incorporated in the Cayman Islands.

    Bear Stearns is another case. Bear Stearns' two sinking hedge

    funds it bailed out in 2007 were incorporated in the Cayman Islands.

    Yet again, the public assumed part of the burden when Bear Stearns

    itself collapsed nine months later.

    A decade earlier, the same was true for Long-Term Capital

    Management. When the hedge fund failed in 1998, its swaps book

    totaled in excess of $1.2 trillion notional. The vast majority were

    booked in its affiliated partnership in the Cayman Islands.

    This year's events of JPMorgan Chase, where it executed swaps

    through its London branch, are a stark reminder of this reality of

    modern finance.

    As there have been these and other financial institution

    failures in the past, in our free markets, we must be prepared for

    when other firms fail in the future. Dodd-Frank reform is about

    protecting the public from such failures in the future.

    It's my firm belief that if reforms were not to cover the

    branches and overseas affiliates of U.S. entities, either directly

    or through substituted compliance, the public will be left without

    the benefits and protections that Congress intended with Dodd-Frank.

    Foreign governments and their taxpayers also will be concerned

    about the risks engendered by the cross-border activities of

    financial institutions.

    The Final Order approved today benefitted from consultation with

    foreign regulatory counterparts. The Commission also received

    constructive comment from the public and Members of Congress.

    I am grateful to the staff of the Commission for their tireless

    work on this Order and the Commission's broader effort to implement

    swaps market reform. In accordance the directives of Congress and

    the Commission's final rules, swaps market reform is taking shape. I

    look forward to working with my colleagues to complete this

    important task.

    Appendix 3--Statement of Commissioner Jill E. Sommers

    Although I am very supportive of granting temporary relief from

    certain provisions of the Dodd-Frank Act, I disagree with the

    approach and am concerned that the Commission continues to insert

    unnecessary complexities into the cross-border determinations. As I

    have said a number of times, the Commission has worked for decades

    to establish relationships with our foreign counterparts based on

    respect, trust and information sharing, which has resulted in a long

    and successful history of mutual recognition. All G20 nations have

    agreed to a comprehensive set of principles for regulating the over-

    the-counter derivatives markets. Instead of recognizing these

    commitments and resolving to work towards mutual recognition of

    comparable regulatory regimes, keeping in mind the core policy

    objectives of the G20 commitments, the Commission has embarked on a

    cross-border analysis that I fear is taking us down a path of

    regulatory detail that is overly burdensome, complicated, and

    unnecessary.

    Moreover, it is a mistake to require registration and compliance

    with certain regulations before our final guidance has been issued.

    Foreign entities will not have the basic information they need to

    make informed decisions regarding the ultimate obligations of

    engaging in swaps activities with U.S. persons (the definition of

    which continues to shift) prior to having to make the decision to

    register. There is no reason why the Commission could not have

    issued broader relief until these issues are settled. We have simply

    chosen not to.

    I have consistently supported harmonization with both foreign

    and domestic regulators. Over the past few months we have received

    invaluable input from many global regulators, who have agreed to

    meet in early 2013 to inform each other on the progress made in

    finalizing reforms in their respective jurisdictions and to consult

    on possible transition periods. Future meetings will explore options

    for addressing conflicts, inconsistencies, and duplicative rules and

    examine ways in which comparability assessments and appropriate

    [[Page 882]]

    cross-border supervisory and enforcement arrangements may be made.

    It is my hope that these meetings will lead the Commission to listen

    to the concerns being raised by regulators around the world and to

    adopt a more reasonable approach when it finalizes the cross-border

    guidance.

    Appendix 4--Statement of Commissioner Bart Chilton

    As we have set out to do from the beginning of the Dodd-Frank

    rulemaking process, we are cognizant of the need for regulators

    around the globe to harmonize rules to the extent possible in order

    to avoid market disruption and regulatory arbitrage.

    In responding to a letter from Members of the House Agriculture

    Committee's Subcommittee on General Farm Commodities and Risk

    Management, I pointed out that I expect the Commission will act

    imminently to ensure the following three broad objectives:

    Narrow the definition of U.S. person so that our

    extraterritorial reach is not too broad;

    Provide sensible aggregation requirements so that

    foreign banks won't automatically have to become U.S. swaps dealers

    just because they do business with foreign affiliates of U.S. banks;

    Provide for a phased-in compliance to July 2013 to

    allow time for other jurisdictions to implement derivative market

    reforms.

    In addition, we must ensure that, in this interim period, U.S.

    swap dealers and major swap participants can avoid a Dodd-Frank

    compliance-related enforcement action by working to comply

    reasonably and in good faith.

    Derivatives reform in the U.S. isn't taking place in a vacuum.

    And, regulators on several continents are moving at different

    speeds. Like an orchestra playing holiday music, not all sections of

    instruments necessarily start a number at the same time. Yet, they

    wind up in harmony. So too it must be in global financial reform.

    Ending up in harmony is critical to achieving our overarching

    purpose: making global financial markets safer, more transparent,

    and more effective.

    Appendix 5--Statement of Commissioner Scott D. O'Malia

    I respectfully concur with the Commission's approval of this

    Order. The relief provided in the Order is timely and helps provide

    some level of clarity in the short term to market participants as

    they transition to the Commission's new swap regulatory regime.

    Crucially, it also provides time for the Commission to engage with

    foreign regulators in order to develop a coordinated, harmonized

    approach to regulating the global swap markets in the long term.

    While I generally support the relief provided, the Order should

    have done much more to provide clarity and consistency and to ensure

    a level playing field for market participants. In particular, I

    would like to note that the definition of ``U.S. Person'' contained

    in this Order is the third different definition articulated by the

    Commission within the past six months: The expansive definition in

    the Commission's July proposed guidance,\159\ the narrower

    ``territorial'' definition in an October staff no-action

    letter,\160\ and now this modified territorial definition. The

    industry cannot get too used to this definition either, as there

    will be, remarkably, a fourth definition next year when the

    Commission finalizes its cross-border guidance. This is a

    regrettable lack of consistency for a concept that is so central to

    foreign swap market participants' ability to determine their

    compliance obligations.

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

    \159\ Cross-Border Application of Certain Swaps Provisions of

    the Commodity Exchange Act, 77 FR 41214 (July 12, 2012).

    \160\ CFTC Division of Swap Dealer and Intermediary Oversight,

    Re: Time-Limited No-Action Relief: Swaps Only With Certain Persons

    to be Included in Calculation of Aggregate Gross Notional Amount for

    Purposes of Swap Dealer De Minimis Exception and Calculation of

    Whether a Person is a Major Swap Participant, No-Action Letter No.

    12-22, Oct. 12, 2012.

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

    This Order expires July 12, 2013. The Commission should use the

    time between now and then to do two things. First, as mentioned

    above, it should actively engage with other regulators. I was

    encouraged by the joint statement released earlier this month by a

    group of international derivatives regulators (including the

    Commission),\161\ which emphasized the importance of coordination

    and committed the signatories to consult one another with regard to

    the timing and sequencing of regulation; comparability

    determinations; clearing determinations; and conflicting,

    inconsistent and duplicative rules. But these consultations over the

    next several months cannot merely be an exercise in going through

    the motions. Rather, they must be substantive, and they should

    ultimately lead to a final Commission cross-border guidance that

    addresses the strong concerns raised by fellow regulators about the

    Commission's July proposal. For their part, fellow regulators can

    make this engagement process more effective by providing detailed

    plans of their existing and upcoming regulations as well as

    concrete, specific blueprints for potential comparability and

    substituted compliance determinations.

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

    \161\ Joint Press Statement of Leaders on Operating Principles

    and Areas of Exploration in the Regulation of the Cross-border OTC

    Derivatives Market, December 4, 2012.

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

    Second, the Commission should use the next several months to

    revisit and revise the grossly overbroad conception of

    extraterritorial reach that it argued for in the July proposed

    guidance. Most important, the Commission needs to articulate a

    clear, logical interpretation of the ``direct and significant''

    connection required by the statute as a prerequisite to applying our

    regulations to entities and activities abroad.\162\ As I have noted

    before, the statutory language is a limitation on the Commission's

    authority, but the proposed guidance interpreted it as the opposite.

    If the Commission develops a sufficient rationale for the ``direct

    and significant'' standard, it will have gone a long way toward

    appropriately determining the scope of its extraterritorial reach.

    \162\ 7 U.S.C. 2(i).

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

    [FR Doc. 2012-31736 Filed 1-4-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 7, 2013



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