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2012-792

  • Federal Register, Volume 77 Issue 12 (Thursday, January 19, 2012)[Federal Register Volume 77, Number 12 (Thursday, January 19, 2012)]

    [Rules and Regulations]

    [Pages 2613-2629]

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

    [FR Doc No: 2012-792]

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    Rules and Regulations

    Federal Register

    ________________________________________________________________________

    This section of the FEDERAL REGISTER contains regulatory documents

    having general applicability and legal effect, most of which are keyed

    to and codified in the Code of Federal Regulations, which is published

    under 50 titles pursuant to 44 U.S.C. 1510.

    The Code of Federal Regulations is sold by the Superintendent of Documents.

    Prices of new books are listed in the first FEDERAL REGISTER issue of each

    week.

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    Federal Register / Vol. 77, No. 12 / Thursday, January 19, 2012 /

    Rules and Regulations

    [[Page 2613]]

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 3, 23, and 170

    RIN 3038-AC95

    Registration of Swap Dealers and Major Swap Participants

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rules.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is adopting regulations under the Commodity Exchange Act (Act or CEA)

    that establish the process for the registration of swap dealers (SDs)

    and major swap participants (MSPs, and collectively with SDs, Swaps

    Entities) and that require Swaps Entities to become and remain members

    of a registered futures association (RFA). The Commission is also

    adopting regulations that define an ``associated person'' of an SD or

    MSP as a natural person and that implement the prohibition on a Swaps

    Entity permitting an associated person who is statutorily disqualified

    from registration from effecting or being involved in effecting swaps

    on behalf of the Swaps Entity. The Commission is adopting these

    regulations in accordance with section 4s of the CEA, which was

    recently added to the CEA by the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (Dodd-Frank Act).

    DATES: Effective March 19, 2012.

    FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,

    Christopher W. Cummings, Special Counsel, or Elizabeth Miller,

    Attorney-Advisor, Division of Swap Dealer and Intermediary Oversight,

    1155 21st Street NW., Washington, DC 20581. Telephone number: (202)

    418-6700 and electronic mail: bgold@cftc.gov, ccummings@cftc.gov or

    emiller@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    A. Background

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

    Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a

    comprehensive new regulatory framework for swaps and security-based

    swaps. The goal of this legislation was to reduce risk, increase

    transparency, and promote market integrity within the financial system

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

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

    trade execution requirements on standardized derivatives products; (3)

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

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the oversight of the Commission. The regulations the

    Commission is adopting today concern the registration of SDs and MSPs,

    as required by CEA section 4s(a). As is discussed below, these final

    regulations are based in large part on the Commission's proposed

    registration regulations for SDs and MSPs (Proposal).\4\

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

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed through the Commission's Web site,

    http://www.cftc.gov/.

    \2\ Pursuant to Dodd-Frank Act section 701, Title VII may be

    cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq. (2006). The CEA and Commission

    regulations issued thereunder similarly can be accessed through the

    Commission's Web site.

    \4\ 75 FR 71379 (Nov. 23, 2010).

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    In furtherance of the foregoing legislative goals, Dodd-Frank Act

    section 721(a) amended the definitions of various existing terms in the

    CEA and added definitions of numerous new terms to the CEA, including

    definitions of the new terms ``swap dealer,'' ``major swap

    participant,'' and ``associated person of a swap dealer or major swap

    participant.'' \5\ Section 712(d)(1) of the Dodd-Frank Act directed the

    Commission and the Securities and Exchange Commission (SEC), in

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

    to further define the terms ``swap dealer'' and ``major swap

    participant'' (Entities Definitional Regulations).\6\ The instant

    rulemaking will apply to SDs and MSPs as defined in the CEA and as

    further defined by the Commission.

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    \5\ See, respectively, CEA sections 1a(49), 1a(33) and 1a(4).

    \6\ See 75 FR 80174 (Dec. 21, 2010).

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    B. Statutory Registration Requirements for SDs and MSPs

    CEA sections 4s(a) and 4s(b) \7\ provide, in pertinent part, for

    the registration of SDs and MSPs as follows:

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    \7\ Sections 4s(a) and 4s(b) were added to the CEA by Dodd-Frank

    Act section 731.

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    (a) REGISTRATION.--

    (1) SWAP DEALERS.--It shall be unlawful for any person to act as a

    swap dealer unless the person is registered as a swap dealer with the

    Commission.

    (2) MAJOR SWAP PARTICIPANTS.--It shall be unlawful for any person

    to act as a major swap participant unless the person is registered as a

    major swap participant with the Commission.

    (b) REQUIREMENTS.--

    (1) IN GENERAL.--A person shall register as a swap dealer or major

    swap participant by filing a registration application with the

    Commission.

    (2) CONTENTS.--

    (A) IN GENERAL.--The application shall be made in such form and

    manner as prescribed by the Commission, and shall contain such

    information, as the Commission considers necessary concerning the

    business in which the applicant is or will be engaged.

    CEA section 4s does not direct the Commission to adopt rules that

    provide for the registration of associated persons of SDs or MSPs.

    However, CEA section 4s(b)(6) makes it unlawful for a Swaps Entity to

    permit a person to associate with it if the person is subject to a

    statutory disqualification, as follows:

    Except to the extent otherwise specifically provided by rule,

    regulation, or order, it shall be unlawful for a swap dealer or

    major swap participant to permit any person associated with a swap

    dealer or major swap participant who is subject to a statutory

    disqualification to effect or be involved in effecting swaps on

    behalf of the swap dealer or major swap participant, if the swap

    dealer or major swap participant knew, or in the exercise of

    reasonable care should have known, of the statutory

    disqualification.

    For the purpose of the regulations it is adopting today, and

    specifically Regulation 23.22, the Commission

    [[Page 2614]]

    intends that, as proposed, a statutory disqualification is a

    disqualification under CEA section 8a(2) or 8a(3).\8\ These CEA

    sections contain an extensive list of matters that constitute grounds

    pursuant to which the Commission may refuse to register a person,

    including, without limitation, felony convictions, commodities or

    securities law violations, and bars or other adverse actions taken by

    financial regulators.

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    \8\ See 75 FR 71379, 71380. The Commission did not receive any

    comments in response to this aspect of the Proposal. See Part II of

    this Federal Register release, which discusses the comments the

    Commission received on the Proposal.

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    CEA section 4s further directs the Commission to provide for the

    regulation of SDs and MSPs with respect to, among others, the following

    areas: Capital and margin, reporting and recordkeeping, daily trading

    records, business conduct standards, documentation standards, duties,

    designation of chief compliance officer,\9\ and, with respect to

    uncleared swaps, segregation \10\ (collectively, Section 4s

    Requirements). The Commission is addressing the Section 4s Requirements

    through other rulemakings (Section 4s Implementing Regulations)

    separate and apart from the instant rulemaking, which concerns the

    registration process for Swaps Entities.\11\ Certain issues relevant to

    the Section 4s Implementing Regulations--i.e., the timing of their

    adoption and the initial demonstration of compliance with them by SDs

    and MSPs--nonetheless have an impact on the registration process for

    Swaps Entities, which is discussed below in Part II of this Federal

    Register release.

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    \9\ CEA sections 4s(e) through (k), respectively, added to the

    CEA by Dodd-Frank Act section 731.

    \10\ CEA section 4s(l), added to the CEA by Dodd-Frank Act

    section 724(c).

    \11\ See 76 FR 23732 (Apr. 28, 2011), 76 FR 27802 (May 12, 2011)

    (section 4s(e)--Capital and Margin); 75 FR 76666 (Dec. 9, 2010)

    (section 4s(f)--Reporting and Recordkeeping, and section 4s(g)--

    Daily Trading Records); 75 FR 80638 (Dec. 22, 2010), 75 FR 71391

    (Nov. 23, 2010) (section 4s(h)--Business Conduct Standards); 75 FR

    81519 (Dec. 28, 2010), 76 FR 6708 (Feb. 8, 2011), 76 FR 6715 (Feb.

    8, 2011) (section 4s(i)--Documentation Standards); 75 FR 71397 (Nov.

    23, 2010) (section 4s(j)--Duties); 75 FR 70881 (Nov. 19, 2010)

    (section 4s(k)--Designation of Chief Compliance Officer); 75 FR

    75162 (Dec. 2, 2010), 75 FR 75432 (Dec. 2, 2010), (section 4s(l)--

    Segregation Requirements for Uncleared Swaps).

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    Additionally, Dodd-Frank Act section 716 prohibits an insured

    depository institution (IDI) from receiving Federal assistance if it is

    also an SD that engages in swaps activities that are not covered by the

    exclusion in section 716(d).\12\ Under Dodd-Frank Act section 716(c),

    an IDI can retain its access to Federal assistance if it transfers

    covered activities to a non-IDI affiliate (a Push-Out Affiliate) that

    is an SD or MSP, if the affiliate complies with the requirements of

    section 716(c), including such requirements as the Commission may

    establish.\13\ The Push-Out Affiliate, however, would not have access

    to Federal assistance. The Commission did not include in the Proposal

    any specific Push-Out Affiliate requirements, and as it stated in the

    Proposal, the Commission intends that any Push-Out Affiliate that comes

    within the statutory definition of an SD or an MSP be subject to

    registration and regulation as an SD or as an MSP, as the case may

    be.\14\

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    \12\ Specifically, the prohibition against Federal assistance to

    Swaps Entities is set forth in Dodd-Frank Act section 716(a), as

    follows:

    (a) PROHIBITION ON FEDERAL ASSISTANCE.--Notwithstanding any

    other provision of law (including regulations), no Federal

    assistance may be provided to any swaps entity with respect to any

    swap, security-based swap, or other activity of the swaps entity.

    Dodd-Frank Act section 716(d) carves out certain swaps

    activities of an IDI that is an SD, and therefore a ``swaps

    entity,'' from the prohibition against ``Federal assistance.'' In

    particular, the prohibition against Federal assistance does not

    apply to the extent the IDI SD engages in: (1) Hedging and other

    risk-mitigating activities of the IDI; or (2) acting as an SD for

    swaps and security-based swaps involving rates (e.g., interest rate

    swaps) or reference assets that are permissible investments.

    Engaging in non-cleared credit default swaps, however, would subject

    an IDI SD to the prohibition against Federal assistance.

    \13\ Section 716(c) provides for the Push-Out Affiliate

    exception as follows:

    (c) AFFILIATES OF INSURED DEPOSITORY INSTITUTIONS.--The

    prohibition on Federal assistance contained in subsection (a) does

    not apply to and shall not prevent an insured depository institution

    from having or establishing an affiliate which is a swaps entity, as

    long as such insured depository institution is part of a bank

    holding company, or savings and loan holding company, that is

    supervised by the Federal Reserve and such swaps entity affiliate

    complies with sections 23A and 23B of the Federal Reserve Act and

    such other requirements as the Commodity Futures Trading Commission

    * * * may determine to be necessary and appropriate.

    \14\ See 75 FR 71379, 71380-81. The Commission did not receive

    any comments on its statement in the Proposal.

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    C. The Proposal

    To fulfill the statutory mandates contained in CEA sections 4s(a)

    and 4s(b), the Commission proposed amendments to existing Regulations

    3.2, 3.4, 3.10, 3.21, 3.30, 3.31 and 3.33 \15\ and new Regulations

    23.21, 23.22 and 170.16, to, respectively, establish the registration

    process for SDs and MSPs; incorporate the statutory prohibition on SDs

    and MSPs permitting an associated person to effect or be involved in

    effecting swaps on their behalf; and require SDs and MSPs to become and

    remain members of an RFA.

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    \15\ Part 3 of the Commission's regulations governs the

    registration of intermediaries and certain market participants under

    the CEA.

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    In the section-by-section analysis of the regulations contained in

    the Proposal, the Commission specifically requested comment on whether

    it should restrict the definition of an associated person of a Swaps

    Entity to a natural person, and how to best implement the statutory

    disqualification prohibition in CEA section 4s(b)(6).\16\ Elsewhere,

    the Commission requested comment on the concept of a provisional

    registration process for SDs and MSPs that would be responsive to a

    phased implementation of the Entities Definitional Regulations and the

    section 4s Implementing Regulations,\17\ and on the allocation of

    responsibilities among the Commission and one or more RFAs attendant to

    the oversight of the activities of Swaps Entities generally.\18\

    Finally, the Commission requested comment on the application of

    extraterritorial issues to the registration requirements it proposed

    for Swaps Entities.\19\

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    \16\ See 75 FR at 71385.

    \17\ See 75 FR at 71381.

    \18\ See 75 FR at 71381-82.

    \19\ See 75 FR at 71382-71383.

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    II. Comments \20\ and Responses

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    \20\ The comments the Commission received on the Proposal are

    currently available on the Commission's Web site.

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    A. In General

    The Commission received numerous comments on the Proposal.

    Commenters include domestic banks, foreign banks, companies engaged in

    various energy businesses, trade and public interest associations

    (energy, international banking, securities, and swaps), the National

    Futures Association (NFA, currently the only RFA), and both United

    States (U.S.) and foreign citizens. The Commission received several

    requests for clarification on and enhancements to its contemplated

    registration process for Swaps Entities, and the final regulations

    adopted today do contain some revisions to the Proposal. In

    consideration of the comments received, the Commission is adopting the

    Proposal mainly in the form as issued, with specific changes as

    discussed below.

    B. Restricting Associated Persons to Natural Persons

    As stated in the Proposal:

    The term ``associated person'' in the context of existing

    Commission registrants is not defined in the CEA. That term is

    defined in the Commission's regulations. Specifically, Regulation

    1.3(aa) provides that ``[T]his term [i.e., associated person] means

    any natural person who is associated with'', e.g., [a futures

    commission merchant] * * * in any capacity that involves

    solicitation or the supervision of any person or persons so engaged

    (emphasis added). ``Associated

    [[Page 2615]]

    person'' has typically referred to a salesperson of a registrant.

    Thus, a corporation, partnership or other legal entity has never

    been considered an associated person. The use of the term ``natural

    person'' in the current associated person definition is intended to

    distinguish between the rights and responsibilities of persons

    acting as associated persons of a registrant and persons acting as

    IBs. However, in the absence of any language in the Dodd-Frank Act

    restricting associated persons of swaps entities to natural persons,

    the Commission is not proposing such a definition. The Commission

    nonetheless requests comment on whether it should by regulation in

    fact restrict associated persons of swaps entities to natural

    persons.\21\

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    \21\ 75 FR at 71385 (footnote omitted).

    The comments the Commission received in response to this request

    were unanimous in their support of such a restriction. The Commission

    is amending Regulation 1.3(aa) to include in the ``associated person''

    definition provided for thereunder a natural person associated with an

    SD or MSP as a partner, officer, employee or agent (or functionally

    similar role) in a capacity that involves the solicitation or

    acceptance of swaps, or the supervision of persons so engaged.

    Specifically, this definition is now found in new Regulation

    1.3(aa)(6).\22\

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    \22\ This action supersedes the prior proposal of the Commission

    to define the term ``associated person of a swap dealer or major

    swap participant'' in a new Regulation 1.3(zz). See 76 FR 33066,

    33067 (June 7, 2011). However, for the purpose of adding the

    ``Exemption from fingerprinting requirement in certain cases''

    provided for in Regulation 3.21(c) with respect to outside directors

    of an applicant for registration as an SD or MSP, the Commission has

    employed the term ``transactions involving `commodity interests,' as

    that term is defined in Sec. 1.3(yy)''--which regulation the

    Commission has proposed to revise to include ``[a]ny swap as defined

    in the Act, the Commission's regulations, a Commission order or

    interpretation, or a joint interpretation or order issued by the

    Commission and the Securities and Exchange Commission.'' See 76 FR

    at 33069, 33086.

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    C. Effect of Statutory Disqualification

    The Commission proposed the adoption of new Regulation 23.22 to

    implement the statutory prohibition in CEA section 4s(b)(6) against an

    SD or MSP permitting a person associated with it who is subject to a

    statutory disqualification to effect or be involved in effecting swaps

    on behalf of the SD or MSP, if the SD or MSP ``knows, or in the

    exercise of reasonable care should know, of the statutory

    disqualification.'' In the proposed regulation, paragraph (a) defined

    the term ``person'' as a shorthand substitute for the statutory term

    ``associated person of a swap dealer or major swap participant,'' and

    paragraph (b) restated the statutory prohibition without exception. The

    Commission proposed that an SD or MSP would be responsible for ensuring

    that its associated persons are not subject to a statutory

    disqualification. The Commission also requested comment on implementing

    the statutory prohibition.

    The Commission in its request focused on how an SD or MSP could

    conduct background checks or otherwise fulfill the requirement to

    ensure that persons subject to a statutory disqualification would not

    effect or be involved in effecting swaps on its behalf. The sole

    comment that the Commission received on this issue expressed the view

    that the Commission allow, but not require, Swaps Entities to use NFA

    for this vetting purpose.\23\ The Commission agrees with this comment.

    It believes that Swaps Entities should be free to work with and through

    the service provider of their choice to obtain information as to

    whether a prospective associated person is subject to a statutory

    disqualification--and NFA could qualify to be such a service provider.

    Accordingly, the Commission has not adopted any requirement that Swaps

    Entities must, and may only, employ NFA to fulfill their obligation

    under CEA section 4s(b)(6). This same commenter suggested that if NFA

    performed the background check, ``then it would constitute a safe

    harbor for the firm if the individual is subject to a statutory

    disqualification but NFA previously notified the firm that the person

    is not subject to one.'' The Commission is not authorizing such a safe

    harbor.

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    \23\ Comment letter from the National Futures Association (Jan.

    24, 2011) (NFA Comment Letter).

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

    One commenter on the implementation of the statutory prohibition

    \24\ recommended that, contrary to the Proposal, the Commission adopt

    an exception to the association prohibition in Regulation 23.22(b) for

    any person listed as a principal or registered as an associated person

    of a futures commission merchant (FCM), retail foreign exchange dealer

    (RFED), introducing broker (IB), commodity pool operator (CPO), or

    commodity trading advisor (CTA)--notwithstanding that such person may

    be subject to a statutory disqualification under CEA section 8a(2) or

    8a(3).\25\ This commenter noted that, pursuant to the authority the

    Commission has delegated to NFA to exercise its registration

    responsibilities in the futures markets, NFA has permitted a person to

    be listed as a principal or registered as an associated person where

    NFA, in its discretion, has determined that the incident giving rise to

    a statutory disqualification is insufficiently serious, recent, or

    otherwise relevant to evaluating the person's fitness. Where this has

    occurred and the person now finds himself to be an associated person of

    an SD or MSP, the commenter explained that absent an exception as

    provided for in the introductory text of CEA section 4s(b)(6), an

    anomalous result would ensue.

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    \24\ Id.

    \25\ See, e.g., CEA section 4k, which requires the registration

    of associated persons of FCMs, IBs, CPOs, and CTAs, and Regulation

    3.10(a)(2), which requires each natural person who is a principal of

    an applicant for registration to file a fingerprint card.

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    The statutory prohibition in CEA section 4s(b)(6) applies ``except

    to the extent otherwise specifically provided by rule, regulation, or

    order.'' The Commission recognizes that if it did not provide an

    exception as suggested, a person could be permitted to direct futures-

    related activities or solicit futures-related business with members of

    the retail public--e.g., as, respectively, a principal or associated

    person of an FCM or CPO--but that same person would be barred from

    soliciting, accepting, or otherwise effecting or being involved in

    effecting swaps transactions with significantly more sophisticated

    clients as an associated person of an SD or MSP. On the other hand,

    adopting the requested exception could result in persons to whom the

    Dodd-Frank Act affords heightened protections engaging in transactions

    marketed by associated persons of an SD or MSP subject to a statutory

    disqualification. Even though the Commission did not propose such an

    exception, it believes that the commenter's recommendation has merit.

    The Commission therefore is adopting the commenter's recommendation

    that Regulation 23.22(b) include both the general prohibition against

    an SD or MSP permitting any person associated with it who is subject to

    a statutory disqualification to effect or be involved in effecting

    swaps on behalf of the SD or MSP and an exception to the prohibition

    for any person subject to a statutory disqualification who is already

    listed as a principal, registered as an associated person of another

    registrant (i.e., an FCM, RFED, IB, CPO, CTA, or leverage transaction

    merchant (LTM)), or registered as a floor broker (FB) or floor trader

    (FT).\26\

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    \26\ In addition to the registration categories included in the

    comment, the Commission has included in this exception any person

    listed as a principal or registered as an associated person of an

    LTM. Although there currently is no registered LTM, the CEA and

    Commission regulations issued thereunder provide for an LTM

    registration category. The Commission also has included in this

    exception any person registered as an FB or FT because, as a natural

    person and like an associated person of a registrant other than an

    SD or MSP, it must submit a Form 8-R in connection with applying for

    registration.

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    [[Page 2616]]

    The same commenter also recommended that the Commission expand

    Regulation 3.12(f), or adopt a new regulation, ``to address the

    situations in which an individual conducts swaps-related activity on

    behalf of more than one Swap Entity or conducts swaps activity on

    behalf of a Swap Entity and is also registered as an AP of a different

    firm.'' \27\ Regulation 3.12(f) currently provides for the reporting of

    dual and multiple associations of a person registered as an associated

    person with, and sponsored by, two or more Commission registrants. It

    provides, among other things, that each sponsor registrant is jointly

    and severally liable for the conduct of that associated person in

    specified circumstances. While the Commission agrees with the

    commenter's recommendation, it anticipates promptly addressing this

    issue in a future rulemaking.

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    \27\ NFA Comment Letter.

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    D. Phased Implementation \28\

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    \28\ See generally 75 FR at 71379, 71381.

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    The Commission proposed a provisional registration process for SDs

    and MSPs that would take into account, through phased implementation,

    the strong likelihood that the Commission would adopt the Section 4s

    Implementing Regulations subsequent to issuing the registration process

    regulations for SDs and MSPs. As the Commission explained in the

    Proposal, phased implementation is aimed at preserving the ``continuity

    of the business operations of existing swaps entities, and to avoid

    undue market disruption,'' by permitting applicants to continue swaps

    activities pending confirmation of initial compliance with the Section

    4s Implementing Regulations and notification of registration. In

    addition, the final regulations make clear that provisional

    registration will be granted upon filing of the application and any

    documentation required under the applicable Section 4s Implementing

    Regulation--and not upon NFA's review and approval of the

    documentation.

    Several commenters stressed the need for phased implementation over

    extended periods of time so that SDs and MSPs can come into compliance

    after evaluating the need, e.g., to restructure operations, re-document

    client agreements as a result of new organizational structures or new

    regulatory requirements, or upgrade systems. One commenter recommended

    that the Commission postpone the effective date of the registration

    process rulemaking until sometime after the Commission had adopted all

    of the Section 4s Implementing Regulations.\29\ Another commenter

    opined that, owing to business continuity concerns, a reasonable

    transition period for a firm not previously subject to regulation would

    be ``a one year period for such firm to (i) determine whether it is [an

    SD or MSP] and (ii) register with the Commission.'' \30\ It suggested a

    ``roll off'' period that would enable a putative Swaps Entity to fall

    outside the SD or MSP definition and thus not be subject to the

    requirement to register as an SD or MSP if enough of the Swaps Entity's

    legacy swaps expired. The commenter also estimated ``that it might take

    up to as much as two years in addition to the suggested one year

    registration period for such firms to complete the steps necessary to

    comply with all of the requirements necessary for registration as [an

    SD or MSP].''

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    \29\ Comment letter from the International Swaps and Derivatives

    Association, Inc. (Jan. 24, 2011) (ISDA Comment Letter). Another

    commenter advocated delaying effectiveness of the Section 4s

    Implementing Regulations until at least 60 days after the

    registration process regulations and the Entities Definitional

    Regulations became effective. Comment letter from the Securities

    Industry and Financial Markets Association (Jan. 18, 2011) (SIFMA

    Comment Letter).

    \30\ Comment letter from Hunton and Williams, LLP, on behalf of

    the Working Group of Commercial Energy Firms (Jan. 24, 2011) (WGCEF

    Comment Letter).

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    The Commission believes that the provisional registration process

    adopted today is consistent with the incremental staging requested by

    commenters. Thus, the Commission is declining to extend the

    effectiveness of any Section 4s Implementing Regulation today.

    Moreover, to provide the maximum amount of processing time, so that

    applicants for SD or MSP registration can be registered at the earliest

    possible date, and in the absence of any comments to the contrary, the

    Commission has adopted, as proposed, Regulation 3.10(a)(1)(v), which

    permits applicants to begin the registration process in advance of the

    effective date of the requirement to register as an SD or MSP.\31\

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    \31\ In response to a comment received, the Commission has

    clarified in Regulation 3.10(a)(1)(v)(C)(1) when a person may apply

    to be registered as an SD or MSP and in Regulations

    3.10(a)(1)(v)(C)(2) and 3.10(a)(1)(v)(C)(3) when a person must apply

    to be registered as an SM or MSP. See NFA Comment Letter.

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    In the Proposal, the Commission provided for provisional

    registration with reference to the Dodd-Frank Act's general statutory

    effective date of July 16, 2011, and CEA section 4s(b), which requires

    the Commission to issue regulations providing for the registration of

    Swaps Entities not later than one year after the enactment of the Dodd-

    Frank Act, or July 21, 2011. After issuing the Proposal, the Commission

    issued effective date clarification of, as well as specific exemptive

    relief from compliance with, numerous provisions of the Dodd-Frank Act

    (Effective Date Release).\32\ The Effective Date Release explained that

    many Dodd-Frank Act provisions require rulemakings to implement them,

    including the registration mandate in CEA section 4s(a) and other

    Section 4s Requirements, and that pursuant to Dodd-Frank Act section

    754, those provisions would not be effective until 60 days after the

    publication of those implementing final regulations (e.g., for the

    registration mandate, this Federal Register release). Dates

    notwithstanding, for the reasons stated in the Proposal and above, the

    Commission continues to believe that provisional registration is

    appropriate and consistent with the Effective Date Release.\33\

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

    \32\ See 76 FR 42508, 42509 and 42524 (July 19, 2011).

    \33\ So that the text of the registration regulations accurately

    reflects the impact of the Effective Date Release on phased

    implementation and the provisional registration process, the

    Commission is adopting certain definitions, and is incorporating

    those definitions into the registration process regulations it is

    adopting today. Specifically, new Regulation 3.1(f) defines the term

    ``Section 4s Implementing Regulation'' to mean ``a regulation the

    Commission issues pursuant to section 4s(e), 4s(f), 4s(h), 4s(i),

    4s(j), 4s(k), or 4s(l) of the Act,'' and new Regulation 3.1(g)

    defines the term ``Swap Definitional Regulation'' to mean ``a

    regulation the Commission issues to further define the term `swap

    dealer,' `major swap participant' or `swap' in section 1a(49),

    1a(33) or 1a(47) of the Act, respectively, pursuant to the Dodd-

    Frank Wall Street Reform and Consumer Protection Act.'' These terms

    are employed in such registration process regulations as Regulation

    3.2(c)(3)(i) (pertaining to provisional registration) and

    3.10(a)(1)(v) (pertaining to applying for registration as an SD or

    MSP).

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

    Moreover, in response to a commenter requesting clarification on

    provisional registration \34\ and as is reflected in the amended

    heading of Regulation 3.2--which now reads ``Registration processing by

    the National Futures Association; notification and duration of

    registration; provisional registration'' (emphasis supplied)--the

    Commission has adopted in new Regulation 3.2(c)(3) the exact terms

    pursuant to which NFA will notify an applicant for SD or MSP

    registration that it is provisionally registered, the continuing

    obligations of a provisional registrant with respect to providing

    documentation of compliance with each Section 4s Implementing

    [[Page 2617]]

    Regulation,\35\ and the terms pursuant to which a provisional

    registrant will become registered with the Commission. The Commission

    believes this clarification provides necessary specific details on

    provisional registration and the transition of a provisional registrant

    into a registered SD or MSP.

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

    \34\ NFA Comment Letter.

    \35\ See also Regulation 3.10(a)(1)(v)(D).

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

    The Commission proposed in Regulation 3.2(c)(3) to require NFA to

    notify the applicant for SD or MSP registration ``that it is

    provisionally registered pending completion of a fitness review by the

    National Futures Association.'' \36\ However, in light of the purpose

    of provisional registration, along with the authority the Commission

    today intends to delegate to NFA by notice and order (Notice and

    Order)--e.g., the authority to conduct proceedings to deny the

    registration of an applicant for registration as an SD or MSP--the

    Commission has determined not to adopt any such delay with respect to

    the notification by NFA to the applicant that it is provisionally

    registered.

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

    \36\ See 75 FR at 71387.

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

    As proposed and as adopted, Regulation 3.10(a)(1)(i) provides that

    application for registration as an SD or MSP will commence with the

    filing of a Form 7-R with NFA--which is also how, under Regulation

    3.10(a)(1)(i), the registration process commences for applicants for

    registration as an FCM, RFED, IB, CPO, CTA, or LTM.\37\ In this regard,

    the Commission notes that, as proposed, Regulation 3.10(a)(1)(v)(B)

    provides that the commencement of the registration process by an SD or

    MSP authorizes the Commission to conduct on-site inspection of the

    applicant to determine compliance with the Section 4s Implementing

    Regulations applicable to it. The Commission received no comment on the

    inspection authority proposed in Regulation 3.10(a)(1)(v)(B).

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

    \37\ The process for registration as an FB or FT commences with

    the filing of a Form 8-R, which reflects the fact that FBs and FTs

    are natural persons.

    Further with respect to Regulation 3.10, the Commission notes

    that paragraphs (a)(1)(iii) and (a)(1)(iv) were inadvertently

    dropped from the regulation in connection with the adoption of the

    regulatory program of the Commission for RFEDs. See 75 FR 55410,

    55424 (Sep. 10, 2010). By this Federal Register release, the

    Commission is returning paragraphs (a)(1)(iii) and (a)(1)(iv) to

    Regulation 3.10 in the form and text identical to that which existed

    prior to this unintentional deletion.

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

    The Commission also proposed to require applicants for registration

    as an SD or MSP ``to demonstrate compliance'' with such of the Section

    4s Implementing Regulations in effect at the time of their application.

    At the suggestion of a commenter, the Commission has adopted in

    Regulation 3.10(a)(1)(v)(A) the requirement that the Form 7-R must be

    accompanied by ``such documentation as may be required to demonstrate

    compliance'' with each applicable Section 4s Implementing

    Regulation.\38\ The Commission believes that the addition of this

    phrase brings the registration application requirement for SDs and MSPs

    in line with existing requirements for applicants for registration in

    other categories--such as applicants for registration as an FCM or IB,

    who must accompany their Form 7-R with specified documentation that

    demonstrates their compliance with the financial requirements they must

    meet to become registered.\39\ And, as proposed and as adopted,

    Regulation 3.10(a)(1)(v)(A) provides that for the purpose of this

    regulation, ``the term `compliance' includes the term `the ability to

    comply,' to the extent that a particular Section 4s Implementing

    Regulation may require demonstration of the ability to comply with a

    requirement thereunder.'' \40\

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

    \38\ NFA Comment Letter.

    \39\ See Regulation 3.10(a)(1)(ii), which requires applicants

    for registration as an FCM or IB to accompany their Form 7-R with a

    Form 1-FR-FCM or Form 1-FR-IB, respectively.

    \40\ As the Commission has stated previously, it ``will strive

    to ensure that current practices will not be unduly disrupted during

    the transition to the new regulatory regime.'' Effective Date for

    Swap Regulation, 76 FR 42508, 42513 (July 19, 2011). Further, the

    Commission has determined that ``the interdependencies of the

    various rulemakings will be a consideration in determining the

    implementation date for each final rule,'' and that such

    determinations will be informed by the Commission's further

    consideration of these issues, including public comments. Id.

    Thus, for example, to determine with which Section 4s

    Implementing Regulations an applicant must demonstrate compliance as

    part of the registration process, the applicant should look to the

    Section 4s Implementing Regulations themselves to determine

    precisely when compliance is required for each. For example, the

    Section 4s Implementing Regulations for External Business Conduct

    Standards require compliance on the later of 180 days after the

    effective date of those regulations or the date on which swap

    dealers or major swap participants are required to apply for

    registration pursuant to Regulation 3.10.

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

    Two commenters asked the Commission what documentation is required

    of an applicant for SD or MSP registration.\41\ One of these commenters

    suggested that the documentation required to demonstrate compliance

    with the regulations the Commission adopts to implement the business

    conduct standards required by CEA section 4s(h) might consist of

    written policies and procedures.\42\ Or, as the Commission notes, the

    documentation required to demonstrate compliance with the regulations

    the Commission adopts to implement the capital requirements of CEA

    section 4s(e) might be a financial form specifically designed for this

    purpose. The Commission anticipates that these questions will be

    considered in connection with its adoption of the relevant Section 4s

    Implementing Regulations.

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

    \41\ NFA and WGCEF Comment Letters.

    \42\ NFA Comment Letter.

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

    The regulations the Commission proposed and is adopting also

    address, in Regulation 3.10(a)(1)(v)(D)(1), the situation where an

    applicant for registration as an SD or MSP to whom NFA has provided

    notification of provisional registration subsequently fails to

    demonstrate compliance with a Section 4s Implementing Regulation--i.e.,

    that NFA ``will notify the applicant that its application is deficient,

    whereupon the applicant must withdraw its registration application, it

    must not engage in any new activity as a swap dealer or major swap

    participant, as the case may be, and the applicant shall cease to be

    provisionally registered.'' \43\ The Commission proposed a 30-day

    period--subject to extension at the discretion of the Commission--

    within which the applicant would be required to cure the deficiency.

    Upon further consideration, the Commission has adopted in the final

    regulation a 90-day cure period.\44\ Further, Regulation

    3.10(a)(1)(v)(D)(2) makes clear that the provisions of Regulation

    3.10(a)(1)(v)(D)(1) supplement, and are in addition to, the other

    activities in which NFA engages under the Act and Commission

    regulations in connection with processing an application for

    registration as an SD or MSP.\45\

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

    \43\ This provision was found in proposed Regulation

    3.10(a)(1)(v)(D)(2).

    \44\ New Regulation 3.10(a)(1)(v)(E), formerly proposed

    Regulation 3.10(a)(1)(v)(D)(3), addresses the effect on the

    applicable swap documentation of the SD or MSP. Broadly stated, as

    proposed and as adopted, this regulation provides that ``unless

    specifically reserved in the applicable swap documentation,'' any

    withdrawal, cessation or revocation of registration does not affect

    the terms of any swap transaction to which the applicant is a party

    entered into prior to receiving notice that it is deficient in its

    compliance with the applicable Section 4s Implementing Regulation.

    See CEA section 22(a)(5), added by Dodd-Frank Act section 739, which

    states:

    EFFECT ON SWAPS.--Unless specifically reserved in the applicable

    swap, neither the enactment of the Wall Street Transparency and

    Accountability Act of 2010, nor any requirement under that Act or an

    amendment made by that Act, shall constitute a termination event,

    force majeure, illegality, increased costs, regulatory change, or

    similar event under a swap (including any related credit support

    arrangement) that would permit a party to terminate, renegotiate,

    modify, amend, or supplement 1 or more transactions under the swap.

    \45\ See, e.g., CEA sections 8a(2) and 8a(3) and generally Part

    3 of the Commission's regulations.

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

    [[Page 2618]]

    To address comments requesting clarification of the effect of

    provisional registration on the general registration process for SDs

    and MSPs,\46\ the Commission notes that, as is stated in Part II.E

    below, the Commission intends to issue the Notice and Order that

    delegates to NFA the authority to perform the full range of

    registration functions with respect to applicants for registration, and

    persons registered, as an SD or MSP. Currently, persons who apply for

    registration must file a Form 7-R, and a Form 8-R and fingerprint card

    for each principal of the applicant who is a natural person,\47\

    accompanied by such documentation as may be required to demonstrate

    compliance with applicable regulatory requirements. NFA subsequently

    reviews these materials in advance of granting registration.\48\ This,

    then, is the course of action the Commission intends that NFA will

    follow upon notification to an applicant for registration as an SD or

    MSP that it is provisionally registered.

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

    \46\ NFA Comment Letter.

    \47\ Regulation 3.1 defines the term ``principal'' to mean, when

    referring to an applicant for registration, a registrant or a person

    required to be registered under the CEA or Commission regulations,

    to include officers, directors, and persons who own ten percent or

    more of the outstanding shares of the applicant or registrant.

    \48\ For example, this is the procedure that NFA follows with

    respect to applicants for registration as an FCM or IB, who must

    file a Form 7-R, a Form 8-R for each natural person principal, and

    specified financial documents.

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

    In this regard, the Commission expects that NFA will promptly

    perform these reviews and, as the Commission intends to state in the

    Notice and Order, NFA will be required to perform these registration

    processing functions in accordance with the standards established by

    the CEA and the Commission's regulations and to follow the same

    procedures with respect to recordkeeping, disclosure and tracking of

    fitness investigations and adverse action proceedings concerning SDs

    and MSPs as it must follow in cases involving other registrants. Thus,

    for example, notwithstanding that it has notified an applicant for

    registration as an SD or MSP that it is provisionally registered, NFA

    may subsequently take an action to deny the registration application

    based on the statutory disqualification of one of the applicant's

    principals.\49\ In this regard, the Commission notes that the Form 7-R

    specifies disclosures that must be made concerning an applicant's

    criminal, regulatory and disciplinary histories, and that Form 8-R

    additionally requires these disclosures for each of the applicant's

    principals.\50\

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

    \49\ See CEA sections 8a(2) and 8a(3).

    \50\ These forms can be accessed through NFA's Web site, http://www.nfa.futures.org/.

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

    Another commenter requested that the Commission consider separate

    sets of regulations for SDs and MSPs.\51\ The Commission has considered

    the reasons set forth in the comment and continues to believe that

    applicants for SD or MSP registration should be subject to the same

    registration requirements for the purpose of commencing the

    registration process--i.e., the filing of the Form 7-R by the

    applicant.

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

    \51\ SIFMA Comment Letter.

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

    E. Allocation of Responsibilities 52 and RFA Membership and

    Oversight 53

    As part of its efforts to bring SDs and MSPs into the existing

    regulatory framework for futures intermediaries, the Commission

    proposed Regulation 170.16, which would require each person registered

    as an SD or MSP to become and remain a member of an RFA. As the

    Commission noted, FCMs are subject to the RFA membership

    requirement.\54\ Currently, NFA is the sole RFA. The Commission

    received general comments in favor of the membership requirement, that

    claimed such a requirement would provide the Commission with

    flexibility in overseeing the operations and activities of Swaps

    Entities.\55\ After consideration of the foregoing, the Commission is

    adopting Regulation 170.16 as proposed.

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

    \52\ See generally 75 FR 71379 at 71381-82.

    \53\ See generally 75 FR at 71385.

    \54\ Id.

    \55\ Comment letter from the New England Fuel Institute and the

    Petroleum Marketers Association of America (Jan. 18, 2011) (NEFI/

    PMAA Comment Letter).

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

    The Commission also requested comment on who should be responsible

    for determining initial and ongoing compliance by Swaps Entities with

    respect to the Section 4s Implementing Regulations and all other

    applicable requirements. The Commission suggested three alternatives:

    no delegation to any person, full delegation to NFA (or any association

    that may be subsequently registered as a futures association), and

    partial delegation to NFA (or any subsequent RFA).\56\

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

    \56\ The Proposal specifically provided:

    Option number one would involve the Commission being directly

    responsible for ensuring compliance by swaps entities with all

    requirements applicable to them under the CEA and Commission

    regulations. Option number two would involve NFA (or any other

    association that may subsequently be registered as a futures

    association) being responsible for ensuring compliance, subject to

    Commission oversight. Option number three would involve certain

    compliance oversight activities being performed by the Commission

    and others being delegated to NFA (or a subsequently registered

    futures association). The Commission requests comment on these

    options. In the case of option number three, commenters should

    specify which oversight activities should be performed by the

    Commission and which should be delegated to, or performed by NFA (or

    another registered futures association).

    75 FR at 71382.

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

    One commenter favored no delegation, arguing that ``[t]he

    fundamental duty to determine initial and continuing compliance to

    qualify for registration is entrusted to and must remain with the

    CFTC.'' \57\ This commenter nevertheless acknowledged that confirmation

    and oversight of compliance with functions involving reporting and

    recordkeeping, daily trading records, swap documentation structure,

    designation of chief compliance officer, and filing of annual

    compliance reports could be delegated to NFA if the Commission

    determined that ``material efficiencies'' could be achieved. But,

    confirmation and oversight of compliance with requirements relating to,

    among other functions, capital and margin requirements, business

    conduct standards and monitoring of trading and risk management were

    viewed by this commenter as requiring ``involvement that is focused,

    decisive and utterly free from even the appearance of influence brought

    to bear by SDs and MSPs''--and therefore, this commenter claimed,

    should be retained by the Commission.\58\ Another commenter observed

    that until the enactment of the Dodd-Frank Act, NFA had been the self-

    regulatory organization (SRO) for the futures industry exclusively, and

    advanced that NFA would need to develop new capabilities to serve as an

    effective SRO for the swaps industry.\59\ Other commenters favored full

    delegation to NFA, based on NFA's historical performance of the

    registration and fitness review functions, as well as confirming its

    members' compliance with regulatory requirements.\60\

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

    \57\ Comment letter from Better Markets, Inc. (Jan. 24, 2011)

    (Better Markets Comment Letter).

    \58\ Id. (emphasis in original).

    \59\ ISDA Comment Letter.

    \60\ NFA and WGCEF Comment Letters.

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

    Another commenter requested that if the Commission adopted the

    partial delegation model, it clearly define the responsibilities

    delegated to NFA, and, in this regard, asked that the Commission

    clarify certain of its registration process proposals.\61\ It

    recommended that ``the Commission delegate to NFA not only the

    authority to process Swap[s] Entity registration applications and

    conduct background checks but also to conduct adverse registration

    proceedings.'' This

    [[Page 2619]]

    commenter further requested that, in delegating ``to NFA the

    responsibility to maintain records associated with processing Swap

    Entity registration applications * * * the Commission specify whether

    records filed with and maintained by NFA in connection with any

    background check * * * are considered Commission records.''

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

    \61\ NFA Comment Letter.

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

    In response to these comments, in recognition of NFA's proven track

    record in performing analogous functions for all other Commission

    registrants, and consistent with past practice,\62\ including with

    respect to the newest registrant category of RFED, the Commission

    intends to delegate its full registration authority under the CEA and

    its regulations to NFA with respect to applicants for registration, and

    registrants, as an SD or MSP. Specifically, by the Notice and Order,

    the Commission intends to delegate to NFA the authority to take the

    following actions: (1) To process and grant applications for

    registration and withdrawals from registration of SDs and MSPs, and to

    notify applicants for registration as an SD or MSP of provisional

    registration; (2) in connection with processing and granting

    applications for registration of SDs and MSPs, to confirm initial

    compliance with applicable Section 4s Implementing Regulations; \63\

    (3) to conduct proceedings to deny, condition, suspend, restrict or

    revoke the registration of any SD or MSP or of any applicant for

    registration in either category; and (4) to maintain records regarding

    SDs and MSPs, and to serve as the official custodian of those

    Commission records.\64\ The Commission intends that the Notice and

    Order will further provide that nothing contained therein ``shall

    affect the Commission's authority to review the performance by NFA of

    Commission registration functions, to adopt and enforce regulations

    applicable to SDs and MSPs as Commission registrants, and to conduct

    on-site examinations of the operations and activities of SDs and MSPs

    as Commission registrants.''

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

    \62\ The Commission previously has authorized NFA to perform the

    full range of registration functions with regard to persons who must

    register under the CEA, including granting applications for

    registration; enabling withdrawals; and conducting proceedings to

    deny, condition, suspend, restrict or revoke the registration of

    existing registrants or applicants for registration in each

    category. See 48 FR 15940 (Apr. 13, 1983); 48 FR 35158 (Aug. 3,

    1983); 48 FR 51809 (Nov. 14, 1983); 49 FR 8226 (Mar. 5, 1984); 49 FR

    39593 (Oct. 9, 1984); 50 FR 34885 (Aug. 28, 1985); and 75 FR 55310

    (Sep. 10, 2010).

    \63\ The Commission intends that applicants for registration may

    seek confidential treatment of documentation submitted to

    demonstrate initial compliance with the Section 4s Implementing

    Regulations in accordance with the procedures set out in Regulation

    145.9. This approach is consistent with that taken in other Dodd-

    Frank Act rulemakings. See, e.g., Process for Review of Swaps for

    Mandatory Clearing, 76 FR 44464, 44474 (July 26, 2011) (adopting

    Regulation 39.5(b)(5) which allows a derivatives clearing

    organization to request confidential treatment under Regulation

    145.9 for portions of its submissions to the Commission).

    \64\ The Commission has adopted as proposed an amendment to

    Regulation 3.10(d) that subjects SD and MSP registrants to the

    requirement applicable to all other persons registered in accordance

    with Regulation 3.10 to annually review and update registration

    information with NFA. However, in light of its intent to delegate

    its full registration authority to NFA, the Commission has not

    adopted as proposed a further amendment to Regulation 3.10(d) that

    would have required SD and MSP registrants to also file this

    updating registration information with the Commission.

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

    The Commission recognizes that the operations, activities and

    transactions engaged in by SDs and MSPs have not previously been

    subject to an extensive regulatory framework. Ideally, and as one

    commenter suggested, the Commission would retain direct responsibility,

    at least initially, for confirming compliance with the Section 4s

    Implementing Regulations.\65\ However, in order to best allocate its

    resources, the Commission has determined to delegate to NFA the

    responsibility for the initial determination that an applicant for

    registration as an SD or MSP is in compliance with the Section 4s

    Implementing Regulations.

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

    \65\ Better Markets Comment Letter.

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

    Going forward, the Commission expects that NFA, as it has for its

    other members in connection with the discharge of its RFA

    responsibilities under CEA section 17, will adopt rules for its SD and

    MSP members that are the same as, or more stringent than, the Section

    4s Implementing Regulations, and that NFA will engage in active

    oversight of its SD and MSP members to monitor and ensure compliance

    with those rules.\66\ In this regard, the Commission notes that CEA

    section 17(j) requires an RFA--such as NFA--to submit to the Commission

    any new change in or addition to its rules and that the RFA--

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

    \66\ See, e.g., NFA Compliance Rule 2-13 for its member CPOs and

    CTAs, wherein NFA has adopted in large part the Part 4 regulations

    of the Commission, which govern the operations and activities of

    these categories of registrant. See also NFA Financial Requirements

    Rules for its member FCMs, RFEDs and IBs, whereby NFA has adopted

    rules that are the same as, or more stringent than, the financial

    requirements the Commission has adopted for these categories of

    registrant.

    may make such rules effective ten days after receipt of such

    submission by the Commission unless, within the ten-day period, the

    registered futures association requests review and approval thereof

    by the Commission or the Commission notifies such registered futures

    association in writing of its determination to review such rules for

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

    approval.

    As for the standard of review to which RFA rules are subject,

    section 17(j) further provides that:

    The Commission shall approve such rules if such rules are

    determined by the Commission to be consistent with the requirements

    of this section and not otherwise in violation of this Act or the

    regulations issued pursuant to this Act, and the Commission shall

    disapprove, after appropriate notice and opportunity for hearing,

    any such rule which the Commission determines at any time to be

    inconsistent with the requirements of this section or in violation

    of this Act or the regulations issued pursuant to this Act.\67\

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

    \67\ Section 17(j) further provides:

    If the Commission does not approve or institute disapproval

    proceedings with respect to any rule within one hundred and eighty

    days after receipt or within such longer period of time as the [RFA]

    may agree to, or if the Commission does not conclude a disapproval

    proceeding with respect to any rule within one year after receipt or

    within such longer period as the [RFA] may agree to, such rule may

    be made effective by the [RFA] until such time as the Commission

    disapproves such rule * * *.

    However, and consistent with the Notice and Order the Commission

    intends to issue, adoption by the Commission of Regulation 170.16

    requiring membership in an RFA by SD and MSP registrants and adoption

    by NFA of rules for its SD and MSP members does not affect the

    authority of the Commission to adopt and enforce regulations applicable

    to SDs and MSPs as Commission registrants and to conduct on-site

    examinations of the operations and activities of SDs and MSPs as

    Commission registrants.

    The Commission has, in the past, issued written guidance to NFA

    regarding the exercise of delegated authority.\68\ To the extent that a

    Section 4s Implementing Regulation is not specific in this regard, the

    Commission anticipates providing written guidance to NFA on the

    criteria for, and manner of, determining that an applicant for SD or

    MSP registration has demonstrated its initial compliance with the

    regulation.

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

    \68\ See Letter to Robert K. Wilmouth, President, NFA, from Jean

    A. Webb, Secretary of the Commission, dated Dec. 4, 1997; Letter to

    Robert K. Wilmouth, President, NFA, from Jean A. Webb, Secretary of

    the Commission, dated Apr. 13, 2000. These letters are included in

    Appendix A to Part 3 of the Commission's regulations.

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

    F. Extraterritoriality

    As is noted above, in the Proposal, the Commission requested

    comment on the extraterritorial application of the SD and MSP

    registration requirements. The Commission has determined to limit this

    final rulemaking to the process of registration. Issues relating to

    which

    [[Page 2620]]

    entities are SDs or MSPs and the substantive requirements applicable to

    them, including the extraterritorial application of such substantive

    requirements, are beyond the scope of this rulemaking.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (Reg Flex Act) requires federal

    agencies to consider the impact of its rules on ``small entities.''

    \69\ A regulatory flexibility analysis or certification typically is

    required for ``any rule for which the agency publishes a general notice

    of proposed rulemaking pursuant to'' the notice-and-comment provisions

    of the Administrative Procedure Act, 5 U.S.C. 553(b).\70\ As the

    Commission stated in the Proposal, it previously has established that

    certain entities subject to its jurisdiction are not small entities for

    purposes of complying with the Reg Flex Act. However, as the Commission

    also noted in the Proposal, SDs and MSPs are new categories of

    registrant for which the Commission had not previously addressed the

    question of whether such persons are small entities.\71\

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

    \69\ 5 U.S.C. 601 et seq.

    \70\ 5 U.S.C. 601(2), 603, 604 and 605.

    \71\ 75 FR 71379, 71385.

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

    In this regard, the Commission explained in the Proposal that it

    previously had determined that FCMs should not be considered to be

    small entities for purposes of the Reg Flex Act, based, in part, upon

    FCMs' obligation to meet the minimum financial requirements established

    by the Commission to enhance the protection of customers' segregated

    funds and protect the financial condition of FCMs generally.\72\ Like

    FCMs, SDs will be subject to minimum capital requirements, and are

    expected to be comprised of large firms. The Commission is statutorily

    required to exempt from designation as an SD those entities that engage

    in a de minimis quantity of swap dealing in connection with

    transactions with or on behalf of customers.\73\ Accordingly, for

    purposes of the Reg Flex Act for the Proposal and future rulemakings,

    the Commission proposed that SDs should not be considered small

    entities for essentially the same reasons that it had previously

    determined FCMs not to be small entities.\74\

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

    \72\ 47 FR 18618 (Apr. 30, 1982).

    \73\ See CEA section 1a(49)(D).

    \74\ 75 FR at 71385.

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

    The Commission further explained that it had also previously

    determined that large traders are not small entities for Reg Flex Act

    purposes, with the Commission considering the size of a trader's

    position to be the only appropriate test for the purpose of large

    trader reporting.\75\ The Commission then noted that ``MSPs maintain

    substantial positions in swaps, creating substantial counterparty

    exposure that could have serious adverse effects on the financial

    stability of the United States banking system or financial markets.''

    \76\ Accordingly, for purposes of the Reg Flex Act for the Proposal and

    future rulemakings, the Commission also proposed that MSPs should not

    be considered to be small entities for essentially the same reasons

    that it previously had determined large traders not to be small

    entities.\77\

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

    \75\ Id.

    \76\ Id.

    \77\ Id. at 71385-86.

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

    In response to the Proposal, one commenter, representing a number

    of market participants, submitted a comment related to the Reg Flex

    Act, stating that ``[e]ach of the complex and interrelated regulations

    currently being proposed by the Commission has both an individual, and

    a cumulative, effect on [certain] small entities,'' and that ``the vast

    majority of [our] members meet the definition of `small entities' under

    the Small Business Regulatory Enforcement Fairness Act.''.\78\ Thus,

    the commenter concluded that the Commission should conduct a regulatory

    flexibility analysis for each of its rulemakings under the Dodd-Frank

    Act, including this rulemaking applicable to the registration process

    for Swaps Entities.

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

    \78\ Comment letter from the National Rural Electric Cooperative

    Association, American Public Power Association, Large Public Power

    Council, Edison Electric Institute, and Electric Power Supply

    Association (June 3, 2011).

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

    This commenter did not provide any information on how the Proposal

    may have a significant economic effect on a substantial number of small

    entities. Nonetheless, the Commission has reevaluated this rulemaking

    in light of the statements made to it by this commenter. After further

    consideration of those statements, the Commission has again determined

    that this final rulemaking, which is applicable to SDs and MSPs, will

    not have a significant economic effect on a substantial number of small

    businesses.

    In terms of affecting a substantial number of small entities, as is

    noted above, the Commission is statutorily required to exempt from

    designation as an SD those entities that engage in a de minimis

    quantity of swaps dealing. Thus, these exempted entities will not be

    required to register as an SD. Moreover, the Commission does not expect

    that the small entities identified by the commenter will be subject to

    registration with the Commission as an MSP.

    In terms of having a significant economic effect, in the experience

    of the Commission, complying with the registration process regulations

    has not had a significant economic effect on a substantial number of

    small entities. Notably, Regulation 3.10, containing the same

    registration requirements as those being issued today for SDs and MSPs,

    has been applicable to IBs and CTAs \79\ without any known significant

    economic effects since 1983.\80\ Most recently, in connection with its

    adoption of substantively similar registration regulations for RFEDs,

    the Commission stated that, in light of Congressionally-mandated

    capital requirements, it would not define RFEDs as small entities for

    Reg Flex Act purposes.\81\ There is no indication, from the

    Commission's experience or the information presented by the commenter,

    that the registration process requirements for Swaps Entities would

    have an effect on small entities that would be subject to those

    requirements, if any, that would be different than the effect the same

    registration process requirements have had historically on other

    Commission registrants that also may be small.

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

    \79\ The Commission historically has evaluated on a case-by-case

    basis the economic impact of a particular regulatory proposal on IBs

    and CTAs to determine whether the regulatory proposal will have a

    significant economic effect on a substantial number of small

    entities. See, e.g., 76 FR 33066, 33079 (June 7, 2011) (initial

    regulatory flexibility analysis conducted with respect to the

    possible economic effects of a proposal to require IBs, among

    others, to maintain records of certain oral communications).

    \80\ See 48 FR 35248 (Aug. 3, 1983).

    \81\ See 75 FR 55410, 55416 (Sep. 10, 2010). CEA section 2(c)(2)

    generally requires an RFED to maintain adjusted net capital equal to

    or in excess of $20,000.000.

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

    Accordingly, for the reasons stated in the Proposal and the

    additional rationale provided above, the Commission continues to

    believe that the SD and MSP registration process rulemaking will not

    have a significant economic impact on a substantial number of small

    entities. Therefore, the Chairman, on behalf of the Commission, hereby

    certifies, pursuant to 5 U.S.C. 605(b), that the regulations being

    published today by this Federal Register release will not have a

    significant economic impact on a substantial number of small entities.

    [[Page 2621]]

    B. PaperworkReduction Act

    1. Introduction

    The Paperwork Reduction Act (PRA) \82\ imposes certain requirements

    on federal agencies in connection with their conducting or sponsoring

    any collection of information as defined by the PRA. Certain provisions

    of these regulations will result in new collection of information

    requirements within the meaning of 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.

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

    \82\ 44 U.S.C. 3501 et seq.

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

    The Commission submitted the Proposal to the Office of Management

    and Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5

    CFR 1320.11. The Commission requested that OMB approve and assign a new

    control number for the collection of information covered by the

    Proposal. The title for this collection of information is

    ``Registration of Swap Dealers and Major Swap Participants.'' OMB has

    assigned OMB control number 3038-0072 to the Information Collection

    Request (ICR) in connection with the Proposal, but OMB has not yet

    approved the ICR. The OMB control number will not appear in the active

    inventory until OMB grants approval.

    Under the regulations that the Commission is adopting today, Swaps

    Entities that must register with the Commission will be obligated to

    file, periodically review and update certain registration forms.

    Responses to the collection of information contained within these final

    regulations are mandatory, and the Commission will protect proprietary

    information according to the Freedom of Information Act \83\ and Part

    145 of the Commission's regulations, ``Commission Records and

    Information.'' In addition, the Commission emphasizes that CEA section

    8(a)(1) strictly prohibits the Commission, unless specifically

    authorized by the CEA, from ``publish[ing] data and information that

    would separately disclose the business transactions or market positions

    of any person and trade secrets or names of customers.'' The Commission

    also is required to protect certain information contained in a

    government system of records pursuant to the Privacy Act of 1974.\84\

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

    \83\ 5 U.S.C. 552.

    \84\ 5 U.S.C. 552a.

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

    In the Proposal, the Commission estimated that there would be 300

    ``Respondents/Affected Entities'' (respondents) and that the

    ``respondent burden for this collection is estimated to average 0.5

    hours per response for the Form 7-R; 0.4 hours per response for the

    Form 8-R; 3 minutes per response for the Form 7-W; 6 minutes per

    response for the Form 8-T; and 3 minutes per response for the Form 3-

    R.'' \85\ As is discussed previously in this Federal Register release,

    the Commission has modified from the Proposal certain of the

    regulations it is adopting today. The Commission believes that none of

    these modifications affect the burden estimates associated with the

    information collection that the Commission proposed. In response to

    comments received, the Commission has determined to increase the

    respondent burden hours estimated for Swaps Entities for each of the

    forms referenced above. The Commission is also decreasing the number of

    respondents to 125 from the Proposal's estimate of 300. The following

    sections address and respond to comments received on the proposed

    burden estimates, explain the Commission's reduction of the estimated

    number of respondents to this collection, discuss the registration fees

    included in this rulemaking, and list the revised burden hour estimates

    associated with this information collection and the final regulations

    adopted today.

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

    \85\ 75 FR at 71386.

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

    2. Responses to Comments Received

    The Commission invited the public and other federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicited comments in order to: (1) Evaluate whether the proposed

    collection of information is necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (2) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collection of information; (3)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information to be collected; and (4) minimize the burden

    of the collection of information on those who are able to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    OMB commented on the ICR in accordance with 5 CFR 1320.11(c),

    questioning the burden hours estimated, which appeared to OMB to be

    low. OMB stated that the Commission should consider the comments it

    received on the Proposal, if any, to determine if the burden hours

    estimated should be revised.

    The Commission received one other comment on its PRA discussion in

    the Proposal. This commenter stated in its letter that, ``[a]lthough

    the Paperwork Reduction Act section of the release accompanying the

    Proposed Regulations (the `Release') suggests that it will merely take

    a matter of minutes for Swaps Entities to complete the forms required

    by the Proposed Regulations, we are dubious that this is accurate.''

    \86\ This commenter did not explain why it doubted the accuracy of the

    estimates, nor did it suggest alternative burden estimates.

    Nonetheless, the Commission has reviewed its PRA estimates in light of

    this comment, as well as the comment provided by OMB. For the following

    reasons, the Commission has determined to revise the burden hour

    estimates in the Proposal.

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

    \86\ ISDA Comment Letter.

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

    Generally, these forms request only the information about an

    applicant and its principals necessary for the Commission to

    appropriately exercise its statutory registration and compliance

    oversight functions with respect to them. This information generally

    includes the names, addresses, location of records, regulatory and

    disciplinary histories, and other similarly straightforward matters--

    all of which should be in the possession of the applicant and readily

    available for the applicant to provide. However, some Swaps Entities

    may be unfamiliar with the current registration process and the Forms

    7-R and 8-R that they must complete in order to apply for registration

    as an SD or MSP.

    The PRA estimates provided for these forms are averages that do not

    necessarily reflect the actual time to be expended by each and every

    person to complete the forms. The Commission's estimates do not account

    significantly for the amount of time it would take to complete the

    regulatory and disciplinary history sections of Forms 7-R and 8-R,

    which impose the greatest burden on persons completing the forms where

    the applicant SD or MSP (including a principal thereof) has an

    extensive criminal or disciplinary history. The Commission believes

    such SDs and MSPs will generally not be applying for registration in

    the first place because they will likely be disqualified from

    registration pursuant to CEA section 8a(2) or 8a(3). In addition, these

    forms will be completed in an online, user-friendly process developed

    by NFA, the Commission's delegee pursuant to CEA section 8a(10), which

    process currently is used by all

    [[Page 2622]]

    other applicants for registration with the Commission.

    Moreover, in proposing and adopting regulations applicable to the

    registration of Swaps Entities, the Commission has made every effort to

    establish a process that is minimally disruptive to the swap markets

    and minimally burdensome to Swaps Entities. In so doing, and as it

    proposed, the Commission is incorporating the registration process for

    Swaps Entities into the existing regulatory scheme for all other

    Commission registrants under Part 3--as opposed to constructing a

    fundamentally new registration structure for Swaps Entities. While

    current registrants may be familiar with this scheme, some Swaps

    Entities will not have previously applied for registration with the

    Commission, and the revised burden estimates take the potential

    unfamiliarity of new applicants for registration into account.

    The forms that Swaps Entities will be required to complete are

    virtually identical to those forms that other Commission registrants

    must currently complete, including RFEDs, who became subject to the

    Commission's registration requirements in 2010. There is, however, an

    additional requirement to which Swaps Entities will be subject in

    connection with completing the Form 7-R. CEA section 4s(b)(6) prohibits

    a Swaps Entity, except to the extent otherwise provided by rule,

    regulation or order,\87\ from permitting a person associated with it

    who is subject to a statutory disqualification to effect or be involved

    in effecting swaps on the Swaps Entity's behalf, if the Swaps Entity

    ``knew, or in the exercise of reasonable care should have known, of the

    statutory disqualification.'' \88\ Form 7-R incorporates CEA section

    4s(b)(6) into the application for registration as an SD or MSP by

    explicitly quoting the statutory language and requiring the applicant

    to certify that ``the applicant is and shall remain in compliance with

    section 4s(b)(6) of the Act.'' Because of the additional time required

    to gather such background information on a Swaps Entity's associated

    persons as is necessary to make that certification, the Commission

    believes an increase in the time required for the Swaps Entity to

    complete the Form 7-R is warranted.

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

    \87\ See, e.g., infra Regulation 23.22(b).

    \88\ See supra pt. II.C for a detailed discussion of the

    prohibition in CEA section 4s(b)(6).

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

    As part of the registration process, the regulations being adopted

    today require Swaps Entities to demonstrate initial compliance with the

    Section 4s Implementing Regulations as the Commission adopts these

    regulations in order to obtain registration. However, because the

    Section 4s Implementing Regulations are not yet final, and because they

    will be phased in over time after the Commission adopts the

    registration process regulations today, the Commission is unable to

    estimate burden hours in connection with producing or collecting the

    documentation required to demonstrate compliance with the Section 4s

    Implementing Regulations. Consequently, the PRA estimates for this

    registration process rulemaking only include time to be expended by

    applicants' and registrants' personnel to complete the forms, and do

    not include time to be expended to collect, produce or otherwise

    develop the documentation required to demonstrate compliance with the

    Section 4s Implementing Regulations. The Commission has estimated the

    burden hours associated with information collections in connection with

    the Section 4s Implementing Regulations in the rulemakings proposing

    those regulations, and those burden hours need not be replicated here.

    3. Reduction of the Estimated Number of Respondents

    In the Proposal, the Commission took ``a conservative approach'' to

    calculating the burden hours of this information collection by

    estimating that as many as 300 persons would come within the SD or MSP

    definition and, thus, would be subject to registration with the

    Commission.\89\ Since the Proposal's publication in November 2010, the

    Commission has met with industry participants and trade groups,

    discussed extensively the universe of potential registrants with NFA,

    and reviewed public information about potential SDs active in the

    market and certain trade groups. Over time, and as the Commission has

    gathered more information on the swap market and its participants, the

    estimate of the number of SDs and MSPs has decreased. In its FY 2012

    budget drafted in February 2011, the Commission estimated that 140 SDs

    might register with the Commission.\90\ After recently receiving

    additional specific information from NFA on the regulatory program it

    is developing for SDs and MSPs,\91\ however, the Commission now

    believes that approximately 125 persons will come within the SD or MSP

    definition and, thus, be subject to registration with the

    Commission.\92\

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

    \89\ 75 FR at 71386.

    \90\ CFTC, President's Budget and Performance Plan Fiscal Year

    2010, p. 13-14 (Feb. 2011), available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcbudget2012.pdf. The

    estimated 140 SDs includes ``[a]pproximately 80 global and regional

    banks currently known to offer swaps in the United States;''

    ``[a]pproximately 40 non-bank swap dealers currently offering

    commodity and other swaps;'' and ``[a]pproximately 20 new potential

    market makers that wish to become swap dealers.'' Id.

    \91\ Letter from Thomas W. Sexton, Senior Vice President and

    General Counsel, NFA, to Gary Barnett, Director, Division of Swap

    Dealer and Intermediary Oversight, CFTC (Oct. 20, 2011) (NFA Cost

    Estimates Letter).

    \92\ The number of MSPs is estimated to be quite small, at six

    or fewer.

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

    4. Registration Fees

    The Commission is permitted to collect registration fees under CEA

    section 8a(1). These registration fees are established by NFA as the

    Commission's delegee under CEA section 8a(10). NFA has not yet adopted,

    and the Commission has not yet approved, an NFA rule setting forth

    registration fees for SDs and MSPs, although NFA currently estimates

    that such Swaps Entity registration fee will be $15,000.\93\ At such

    time as the Section 4s Implementing Regulations are finalized and the

    NFA registration fees established under CEA section 8a(1) are approved,

    the Commission will revise the information collection for which it has

    sought approval.

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

    \93\ See infra pt. III.C (discussing the costs and benefits of

    this rulemaking).

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

    5. Revised Burden Hour Estimates for the Information Collection

    For the reasons outlined above, the Commission has determined to

    revise the burden hour estimates for this information collection as

    follows. The burden associated with the new regulations implementing

    the registration process for SDs and MSPs is estimated to be 629 hours,

    assuming 125 respondents, which will result from: (1) Application for

    registration by SDs and MSPs and submission of required information on

    behalf of their respective principals; (2) initially, no withdrawals

    from registration by SDs or MSPs and a relatively small decrease in the

    number of their respective principals; and (3) initially, no reported

    corrections. Burden means the total time, effort, or financial

    resources expended by persons to generate, maintain, retain, disclose

    or provide information to or for a federal agency.

    The respondent burden for this collection is estimated to average 1

    hour per response for the Form 7-R; 0.8 hours per response for the Form

    8-R; 0.1 hours per response for the Form 7-W; 0.2 hours per response

    for the Form 8-T; and 0.1 hours per response for the Form 3-R. These

    estimates include the time needed: To review instructions; to

    [[Page 2623]]

    develop, acquire, install, and utilize technology and systems for the

    purposes of collecting, validating, and verifying information,

    processing and maintaining information, and disclosing and providing

    information; to adjust the existing ways to comply with any previously

    applicable instructions and requirements; to train personnel to be able

    to respond to a collection of information; and to transmit or otherwise

    disclose the information.

    Form 7-R

    Respondents/Affected Entities: 125.

    Estimated number of responses: 125.

    Estimated total annual burden on respondents: 1 hour.

    Frequency of collection: On occasion and annually.

    Burden statement: 125 respondents x 1 hour = 125 Burden Hours.

    Form 8-R

    Respondents/Affected Entities: 5 principals per each of 125 SDs and

    MSPs.

    Estimated number of responses: 625.

    Estimated total annual burden on respondents: 0.8 hours.

    Frequency of collection: On occasion.

    Burden statement: 625 respondents x 0.8 hours = 500 Burden Hours.

    Form 8-T

    Respondents/Affected Entities: 1 principal per each of 20 SDs and

    MSPs.

    Estimated number of responses: 20.

    Estimated total annual burden on respondents: 0.2 hours.

    Frequency of collection: On occasion.

    Burden statement: 20 respondents x 0.2 hours = 4 Burden Hours.

    C. Considerations of Costs and Benefits of the Rulemaking

    This final rulemaking implements provisions of the CEA, as amended

    by the Dodd-Frank Act, mandating the registration of Swaps Entities.

    CEA section 4s(a) makes it unlawful for a person to act as an SD or MSP

    unless it is registered with the Commission. CEA section 4s(b) requires

    an SD or MSP to apply for registration in accordance with such form and

    manner as the Commission may prescribe. To effectuate the Congressional

    directive, this final rulemaking: Details the registration process for

    SDs and MSPs; requires Swaps Entities to become and remain members of

    an RFA; and implements the prohibition against a Swaps Entity

    permitting a statutorily disqualified associated person from effecting

    or being involved in effecting swaps on behalf of the Swaps Entity.

    CEA section 15(a) requires the Commission to consider the costs and

    benefits of its actions before promulgating regulations. The Commission

    must evaluate costs and benefits 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.

    Before adopting these registration process regulations for Swaps

    Entities, the Commission sought public comment on the Proposal,

    including comment on the costs and benefits of the Proposal.\94\ The

    Commission has considered all comments, and, in particular, reasonable

    alternatives suggested by commenters. In some instances, for the

    reasons discussed above, the Commission has adopted such alternatives

    or modifications to the proposed regulations where, in the Commission's

    judgment, the alternative or modification accomplishes the same

    regulatory objective in a more effective manner. The Commission also

    specifically invited commenters to submit ``any data or other

    information that they may have quantifying or qualifying the costs and

    benefits of the proposal with their comment letters.'' \95\ Other than

    estimates of registration fees and annual membership dues from NFA

    (currently the only RFA),\96\ the Commission did not receive any

    information quantifying or qualifying the costs or benefits of the

    proposed regulations relating to the registration process for Swaps

    Entities. The Commission did, however, receive general comments on the

    cost-benefit considerations of the rulemaking. These are addressed in

    the discussion below.

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

    \94\ See 75 FR 71379 at 71386-87.

    \95\ Id.

    \96\ NFA Cost Estimates Letter.

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

    1. Benefits of SD and MSP Registration Regulations

    The Commission believes that the benefits of this final rulemaking

    are considerable even if not quantifiable. Registration, as mandated by

    Congress in the Dodd-Frank Act, will enable the Commission to increase

    market integrity and protect market participants and the public by

    identifying the universe of SDs and MSPs subject to heightened

    regulatory requirements and oversight in connection with their swaps

    activities. This rulemaking identifies the process to commence

    registration by an SD or MSP, specifies the applicable registration

    forms, and explains how SDs and MSPs should apply for registration. The

    Commission believes that this final rulemaking's specification of a

    registration process for SDs and MSPs administered by an RFA leverages

    the RFA's existing expertise and economies of scale and scope.

    Further, and as is discussed above,\97\ the Commission is

    exercising its discretion under the Dodd-Frank Act to provide for an

    exception in Regulation 23.22 from the prohibition against an SD or MSP

    permitting a person associated with it who is subject to a statutory

    disqualification to effect or be involved in effecting swaps on its

    behalf. In taking this action, the Commission is limiting the burden on

    SDs and MSPs with respect to their vetting of potential associated

    persons.

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

    \97\ See supra pt. II.C.

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

    2. Costs of SD and MSP Registration Regulations

    The Commission has identified and considered several costs

    associated with this rulemaking. First, an SD or MSP must pay fees to

    register with the Commission through NFA. Second, because this

    rulemaking requires a registrant to become and remain a member of an

    RFA--and NFA is currently the only RFA--Swaps Entities will incur the

    costs of annual NFA membership dues. Third, NFA is expected to incur

    expenses for executing the anticipated delegated registration process

    function on the Commission's behalf and for monitoring compliance by

    its SD and MSP members with NFA rules.\98\ Fourth, Swaps Entities will

    incur costs when completing various CFTC registration forms that must

    be filed with NFA.

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

    \98\ The NFA Cost Estimates Letter explains that NFA will incur

    direct and indirect costs associated with employing staff to perform

    this review and confirmation, and that the registration fee estimate

    of $15,000 has been designed to offset a portion of the costs that

    NFA will incur in this regard.

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

    The Commission is obligated to estimate the burden of and provide

    supporting statements for any collection of information it seeks to

    establish under considerations contained in the PRA, and seek approval

    of those requirements from OMB. Therefore, the estimated burden and

    support of the collection of information in this rulemaking, as well as

    consideration of the comments thereto, are discussed in the PRA section

    of this rulemaking as required by that statute.\99\ Registrants are

    required to update these forms when the information provided therein

    changes and to confirm these changes annually.

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

    \99\ See supra pt. III.B.

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

    [[Page 2624]]

    a. Fees and Dues

    Based on current estimates from NFA, the Commission believes that

    SDs and MSPs will incur the following registration fees: (a) $15,000

    per SD or MSP registration application, which will include the initial

    determination by NFA of compliance with the Section 4s Implementing

    Regulations; \100\ and (b) $85 per person for processing fingerprints

    and background information for principals.\101\

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

    \100\ The Commission estimated $500 for the SD/MSP registration

    application fee in the Proposal, based on information NFA provided

    to staff upon request in connection with the development of the

    Proposal. See 75 FR at 71387. Since then, NFA significantly altered

    the registration fees it estimates it will be charging SD and MSP

    applicants, due to NFA's expected review and confirmation of an SD

    or MSP's initial compliance with each Section 4s Implementing

    Regulation prior to the SD or MSP becoming registered. NFA Cost

    Estimates Letter.

    \101\ This amount is unchanged from the Proposal. See 75 FR at

    71387.

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

    Based on current estimates from NFA, the Commission believes that

    SDs and MSPs will incur annual NFA membership dues ranging from

    $125,000 to $1,000,000 per member, based upon the size and complexity

    of the firm's swap business.\102\ The increase in the estimate of NFA

    membership dues is driven by two factors: First, the decision by NFA to

    recover costs for oversight of its SD and MSP members primarily through

    a membership dues structure, rather than assessing a fee on swap

    transactions similar to the fee NFA imposes on futures transactions;

    and second, NFA's estimate of the annual cost of its regulatory program

    for Swaps Entities when that program is fully staffed and operational.

    It is possible that NFA's estimates will change over time.

    Additionally, rules relating to membership dues must be approved by

    various NFA authorities, and, in accordance with CEA section 17(j),

    must be approved by the Commission. The Commission expects that NFA

    will submit these rules for full review and approval.\103\

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

    \102\ NFA Cost Estimates Letter.

    \103\ Id. (stating that NFA will submit these proposed initial

    registration fees, and membership dues to the Commission for full

    review and approval).

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

    b. NFA Expenses

    Concurrently with the adoption of these regulations, the Commission

    intends to issue the Notice and Order, whereby it will delegate to an

    RFA--i.e., NFA--its authority to register SDs and MSPs. Included in

    this delegation will be the authority to determine an applicant's

    fitness for registration and initial compliance with the Section 4s

    Implementing Regulations as they relate to the applicant. Also, the

    Commission is adopting proposed Regulation 170.16 to require that SDs

    and MSPs become and remain members of an RFA. As is stated above, NFA

    currently is the sole RFA.

    Consistent with the current regulatory practice for Commission

    registrants who are NFA members, NFA will be responsible for monitoring

    compliance with NFA rules applicable to its members who are SDs and

    MSPs.\104\ NFA therefore will incur overhead and direct costs on a

    continuing basis attributable to oversight activities to confirm SD and

    MSP compliance with applicable NFA rules in addition to performing

    registration processing functions.\105\ NFA's currently estimated

    $15,000 application fee for registering SDs and MSPs does not include

    charges related to ongoing NFA oversight of its SD and MSP members for

    compliance with NFA rules--which, as is stated above, NFA expects to

    recover through the dues it will charge its SD and MSP members.

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

    \104\ These NFA requirements will be as strict as or stricter

    than the Section 4s Implementing Regulations, and like registration

    fees and membership dues, will be subject to Commission review and

    approval pursuant to CEA section 17(j). See supra pt. II.E.

    \105\ For futures transactions, NFA collects a fee per

    transaction. Initially, NFA expected to collect a fee per

    transaction from its SD and MSP members to defray the costs of

    overseeing their operations and activities, an approach it is no

    longer pursuing. NFA Cost Estimates Letter.

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

    NFA's regulatory program for the oversight of Swaps Entities will

    entail significant costs. Based on an assumption of 125 SD and MSP

    members, NFA estimates that the annual cost of this regulatory program

    when it is fully staffed and operational in approximately three years

    will be approximately $35-$45 million.\106\ NFA has stated that ``[i]n

    order to generate at least $35 million in revenue, [NFA has]

    preliminarily calculated that membership dues for SDs and MSPs could

    range between $125,000-$1 million per Member firm based upon the size

    and complexity of the firm's swaps business.''\107\

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

    \106\ NFA Cost Estimates Letter. In the Proposal, the Commission

    estimated for PRA purposes that as many as 250 SDs and 50 MSPs may

    register. See 75 FR at 71386. Should there be more than 125 Swaps

    Entities, NFA's total annual costs for the regulatory program may

    exceed this estimate. NFA Cost Estimates Letter.

    \107\ NFA Cost Estimates Letter.

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

    By delegating the authority to perform the registration functions

    for SDs and MSPs to an RFA, the Commission will avoid the expense of

    establishing a new registration program within the agency and will

    provide a familiar and efficient means of implementing the statutory

    requirements for the registration of SDs and MSPs.\108\ Some SDs and

    MSPs will have previous experience with the registration process for

    futures intermediaries. The Commission believes that by delegating the

    registration process to an established RFA that already has similar

    oversight responsibilities for other persons registered with the

    Commission, the regulatory objectives of the Dodd-Frank Act can be

    achieved in a more cost-effective manner. The Commission anticipates

    that delegating the authority to perform registration functions for SDs

    and MSPs to an RFA will avoid the costs associated with duplicating the

    systems, processes, and personnel of the RFA.\109\

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

    \108\ One commenter wrote that ``given the budgetary uncertainty

    faced by the Commission'' the delegation to RFA-registration model

    provides the Commission with ``flexibility'' in its oversight of SDs

    and MSPs. NEFI/PMAA Comment Letter.

    \109\ One commenter stated that SROs reduce the costs of

    regulation to the government and the taxpayer. ISDA Comment Letter.

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

    Thus, the Commission believes that it will be more cost-effective

    for NFA to augment its current systems and processes to accommodate the

    new SD and MSP registrants than it would be for the Commission to build

    the same capabilities. The Commission further believes that the

    delegation of the authority to process SD and MSP registration

    applications to an RFA, with the imposition of fees on those persons

    who must register, is a prudent and effective approach. This model,

    currently employed in the futures context, has worked successfully for

    Commission registrants and the Commission for many years. While one of

    the commenters on the Proposal expressed concern about NFA's current

    lack of swaps expertise, the Commission notes NFA's recent efforts to

    develop expertise in this area (e.g., forming a Swap Dealer Advisory

    Committee in May 2010 \110\) and, accordingly, does not believe this

    concern merits a different conclusion.

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

    \110\ NFA Cost Estimates Letter.

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

    c. Registration of Foreign Swaps Entities

    The Commission received many comments on the Proposal from entities

    such as foreign banks and derivatives dealers arguing that several of

    the Commission's proposed regulations, taken together, would require

    massive and potentially expensive internal reorganizations to comply

    with the new swaps regulatory regime. Some commenters predicted adverse

    consequences to the U.S. swaps markets if foreign entities were

    required to register as SDs or MSPs, such as

    [[Page 2625]]

    decreased competition, reduced liquidity, an exodus of foreign-based

    market participants from the U.S. markets, rising costs for their U.S.

    customers, and increased systemic risk. Some argued that the Commission

    should defer to regulators in the home jurisdiction lest participants

    be subject to multiple and inconsistent regulatory burdens.\111\ Most

    of these comments address the question of which entities are SDs or

    MSPs, and the consequences of being required to register as such,

    rather than the costs of the registration process per se.

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

    \111\ These commenters did not quantify these costs. Further,

    the Commission is unable to estimate these costs, which it views as

    not directly related to the costs of the registration process

    regulations for SDs and MSPs. These costs are more costs of

    compliance with the Section 4s Implementing Regulations, which the

    Commission intends to address as it finalizes those regulations.

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

    The Commission generally does not believe that foreign-based Swaps

    Entities will bear higher costs associated with the registration

    process than U.S.-based Swaps Entities. The identified costs are fees

    to become registered under the CEA with the Commission and annual NFA

    membership dues. Many of these foreign-based commenters are already

    familiar with navigating various U.S. federal and state regulatory

    regimes in connection with their other lines of business, such as

    banking and insurance. Moreover, many of the commenters already have

    operations and capable personnel physically located in the U.S. To the

    extent that an SD or MSP has neither familiarity with other U.S.

    regulatory regimes nor personnel physically located in the U.S., the

    Commission believes that any potentially higher costs that may be

    incurred in connection with the registration process regulations by a

    foreign-based Swaps Entity are a necessary consequence of adequately

    regulating the U.S. swaps markets and ensuring a level playing field

    for all intermediaries involved in the U.S. swaps markets.

    3. Evaluation of Market and Public Interest Considerations in Light of

    CEA Section 15(a)

    (1) Protection of Market Participants and the Public

    The registration of Swaps Entities is a critical component of the

    comprehensive regulation of these persons. It is a statutory

    requirement that SDs and MSPs be registered. Notably, the registration

    process will serve to confirm initial compliance by an SD or MSP with

    the Section 4s Implementing Regulations. Moreover, attendant to

    applying for registration, SDs and MSPs, along with their principals,

    will be vetted, and those deemed unfit will be barred from

    registration. As a result, registration and the related requirements

    \112\ of this final rulemaking will help protect the public by

    preventing those unfit to intermediate and participate in the swaps

    markets from registering in the first instance.

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

    \112\ E.g., as a prerequisite to granting registration, NFA will

    confirm initial compliance by an applicant for registration as an SD

    or MSP with each Section 4s Implementing Regulation, and a Swaps

    Entity may not, subject to certain limited exceptions, permit a

    statutorily disqualified associated person to effect or be involved

    in effecting swaps on its behalf.

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

    Also, NFA provides an on-line, public database, the Background

    Affiliation Status Information Center (BASIC), with information on each

    registrant's status and the status of the registrant's principals.

    BASIC also provides additional information, such as regulatory actions

    taken by NFA or the Commission, with respect to a registrant or its

    principals. Access to this database provides all persons with important

    information about Commission registrants with whom they may seek to

    transact business.

    (2) Efficiency, Competitiveness, and the Financial Integrity of the

    Market

    Utilizing NFA's existing registration expertise and resources

    promotes efficiency in that it employs NFA's existing capabilities

    rather than requiring Commission investment (e.g., hiring staff and

    building a technological infrastructure to process applications) to

    build a new registration system. Similarly, because NFA is building

    upon its existing oversight infrastructure, it should incur fewer costs

    to oversee compliance relative to direct Commission oversight. While

    the Commission will continue to oversee the registration process,

    delegation of the performance of registration functions to an RFA will

    avoid the unnecessary diversion of limited agency resources from the

    Commission's other responsibilities to protect the public.

    (3) Price Discovery

    The Commission has not identified any impact on price discovery

    through the registration provisions of this rulemaking.

    (4) Sound Risk Management Practices

    As is explained above, registration is a critical component within

    the Dodd-Frank Act regulatory regime to ensure the fitness of SDs and

    MSPs. In addition to disqualifying ineligible persons, it enhances

    market participants' ability to make more informed counterparty

    selection decisions. In this way, it is consistent with sound risk

    management practices.

    (5) Other Public Interest Considerations

    CEA section 15 directs the Commission to consider in its cost-

    benefit evaluation ``other public interest considerations.'' One such

    consideration is public confidence. As an element of a regulatory

    regime that establishes minimum participation standards, the Commission

    believes that the registration process will promote public confidence

    in swaps market integrity.

    List of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Definitions, Major swap participants,

    Swap dealers.

    17 CFR Part 3

    Customer protection, Licensing, Major swap participants,

    Registration, Swap dealers.

    17 CFR Part 23

    Associated persons, Major swap participants, Registration, Swap

    dealers.

    17 CFR Part 170

    Membership, Registered futures associations.

    For the reasons presented above, the Commission hereby amends

    Chapter I of Title 17 of the Code of Federal Regulations as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,

    9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as

    amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21,

    2010).

    0

    2. In Sec. 1.3, paragraph (aa)(6) is added to read as follows:

    Sec. 1.3 Definitions.

    * * * * *

    (aa) * * *

    (6) A swap dealer or major swap participant as a partner, officer,

    employee, agent (or any natural person occupying a similar status or

    performing similar functions), in any capacity that involves:

    (i) The solicitation or acceptance of swaps (other than in a

    clerical or ministerial capacity); or

    [[Page 2626]]

    (ii) The supervision of any person or persons so engaged.

    * * * * *

    PART 3--REGISTRATION

    0

    3. The authority citation for part 3 is revised to read as follows:

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,

    6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,

    13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.

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

    0

    4. Section 3.1 is amended by adding paragraphs (f) and (g) to read as

    follows:

    Sec. 3.1 Definitions.

    * * * * *

    (f) Section 4s Implementing Regulation. Section 4s Implementing

    Regulation means a regulation the Commission issues pursuant to section

    4s(e), 4s(f), 4s(h), 4s(i), 4s(j), 4s(k), or 4s(l) of the Act.

    (g) Swap Definitional Regulation. Swap Definitional Regulation

    means a regulation the Commission issues to further define the term

    ``swap dealer,'' ``major swap participant'' or ``swap'' in section

    1a(49), 1a(33) or 1a(47) of the Act, respectively, pursuant to the

    Dodd-Frank Wall Street Reform and Consumer Protection Act.

    0

    5. Section 3.2 is amended by:

    0

    a. Revising the section heading; and

    0

    b. Adding paragraph (c)(3).

    The revision and addition read as follows:

    Sec. 3.2 Registration processing by the National Futures Association;

    notification and duration of registration; provisional registration.

    * * * * *

    (c) * * *

    (3)(i) If an applicant for registration as a swap dealer or major

    swap participant pursuant to Sec. 3.10(a)(1)(v) files a Form 7-R and a

    Form 8-R and fingerprint card for each natural person who is a

    principal of the applicant, accompanied by such documentation as may be

    required to demonstrate compliance with each of the Section 4s

    Implementing Regulations, as defined in Sec. 3.1(f), as are applicable

    to it, in accordance with the terms of the Section 4s Implementing

    Regulations, the National Futures Association shall notify the swap

    dealer or major swap participant, as the case may be, that it is

    provisionally registered.

    (ii) Subsequent to providing notice of provisional registration to

    an applicant for registration as a swap dealer or major swap

    participant, the National Futures Association shall determine whether

    the documentation submitted pursuant to Sec. 3.10(a)(1)(v) by the

    applicant demonstrates compliance with the Section 4s Implementing

    Regulation to which it pertains; Provided, that where the National

    Futures Association has notified the applicant that it is provisionally

    registered, the applicant must supplement its registration application

    by providing such documentation as may be required to demonstrate

    compliance with each Section 4s Implementing Regulation that the

    Commission issues subsequent to the date the National Futures

    Association notifies the applicant that it is provisionally registered.

    (iii) On and after the date on which the National Futures

    Association confirms that the applicant for registration as a swap

    dealer or major swap participant has demonstrated its initial

    compliance with the applicable requirements of each of the Section 4s

    Implementing Regulations and all other applicable registration

    requirements under the Act and Commission regulations, the provisional

    registration of the applicant shall cease and it shall be registered as

    a swap dealer or major swap participant, as the case may be.

    * * * * *

    0

    6. Section 3.4 is amended by revising paragraph (a) to read as follows:

    Sec. 3.4 Registration in one capacity not included in registration in

    any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule,

    regulation, or order of the Commission, each futures commission

    merchant, retail foreign exchange dealer, swap dealer, major swap

    participant, introducing broker, commodity pool operator, commodity

    trading advisor, leverage transaction merchant, floor broker, floor

    trader, and associated person (other than an associated person of a

    swap dealer or major swap participant) must register as such under the

    Act. Registration in one capacity under the Act shall not include

    registration in any other capacity; Provided, however, That a

    registered floor broker need not also register as a floor trader in

    order to engage in activity as a floor trader.

    * * * * *

    0

    7. Section 3.10 is amended by:

    0

    a. Revising the section heading;

    0

    b. Revising paragraph (a)(1)(i);

    0

    c. Adding paragraphs (a)(1)(iii), (iv), and (v); and

    0

    d. Revising paragraphs (b)(1) and (d).

    The additions and revisons read as follows:

    Sec. 3.10 Registration of futures commission merchants, retail

    foreign exchange dealers, introducing brokers, commodity trading

    advisors, commodity pool operators, swap dealers, major swap

    participants and leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in

    paragraph (a)(3) of this section, application for registration as a

    futures commission merchant, retail foreign exchange dealer, swap

    dealer, major swap participant, introducing broker, commodity pool

    operator, commodity trading advisor, or leverage transaction merchant

    must be on Form 7-R, completed and filed with the National Futures

    Association in accordance with the instructions thereto.

    * * * * *

    (iii) Applicants for registration as a commodity pool operator must

    accompany their Form 7-R with the financial statements described in

    Sec. 4.13(c) of this chapter.

    (iv) Applicants for registration as a leverage transaction merchant

    must accompany their Form 7-R with a Form 2-FR in accordance with the

    provisions of Sec. 31.13 of this chapter.

    (v)(A) Applicants for registration as a swap dealer or major swap

    participant must accompany their Form 7-R with such documentation as

    may be required to demonstrate compliance with each Section 4s

    Implementing Regulation, as defined in Sec. 3.1(f), applicable to

    them, in accordance with the terms of the Section 4s Implementing

    Regulation; Provided, however, that for the purposes of this paragraph

    (a)(1)(v) the term ``compliance'' includes the term ``the ability to

    comply,'' to the extent that a particular Section 4s Implementing

    Regulation may require demonstration of the ability to comply with a

    requirement thereunder.

    (B) The filing of the Form 7-R and accompanying documentation by

    the applicant swap dealer or major swap participant authorizes the

    Commission to conduct on-site inspection of the applicant to determine

    compliance with the Section 4s Implementing Regulations applicable to

    it.

    (C)(1) At any time prior to the latest effective date of the Swap

    Definitional Regulations, defined in Sec. 3.1(g), any person may apply

    to be registered as a swap dealer or major swap participant.

    (2) By no later than the latest effective date of the Swap

    Definitional Regulations, each person who is a swap dealer or major

    swap participant on that date must apply to be registered as a swap

    dealer or major swap participant, as the case may be.

    (3) From and after the latest effective date of the Swap

    Definitional

    [[Page 2627]]

    Regulations, each person who intends to engage in business as a swap

    dealer or major swap participant must apply to be registered as a swap

    dealer or major swap participant, as the case may be.

    (D)(1) Where an applicant for registration as a swap dealer or

    major swap participant to whom the National Futures Association has

    provided notice of provisional registration under Sec. 3.2(c)(3) fails

    to demonstrate compliance with a Section 4s Implementing Regulation,

    the National Futures Association will notify the applicant that its

    application is deficient, whereupon the applicant must withdraw its

    registration application, it must not engage in any new activity as a

    swap dealer or major swap participant, as the case may be, and the

    applicant shall cease to be provisionally registered; Provided, that in

    the event the applicant fails to withdraw its registration application

    or cure the deficiency within 90 days following receipt of notice from

    the National Futures Association that its application is deficient, the

    application will be deemed withdrawn and thereupon its provisional

    registration shall cease; Provided further, that upon written request

    by the applicant submitted to the Commission, the Commission may in its

    discretion extend the time by which the applicant must cure the

    deficiency.

    (2) The provisions of the foregoing paragraph (a)(1)(v)(D)(1) of

    this section shall supplement and be in addition to any other

    activities in which the National Futures Association engages under the

    Act and Commission regulations in connection with processing an

    application for registration as a swap dealer or major swap

    participant.

    (E) Unless specifically reserved in the applicable swap

    documentation, no withdrawal, deemed withdrawal, cessation or

    revocation of registration as a swap dealer or major swap participant

    pursuant to paragraph (a)(1)(v), (b), or (d) of this section shall

    constitute a termination event, force majeure, an illegality, increased

    costs, a regulatory change, or a similar event under a swap (including

    any related credit support arrangement) that would permit a party to

    terminate, renegotiate, modify, amend or supplement one or more

    transactions under the swap.

    * * * * *

    (b) Duration of registration. (1) A person registered as a futures

    commission merchant, retail foreign exchange dealer, swap dealer, major

    swap participant, introducing broker, commodity pool operator,

    commodity trading advisor, or leverage transaction merchant in

    accordance with paragraph (a) of this section will continue to be so

    registered until the effective date of any revocation or withdrawal of

    such registration. Upon effectiveness of any revocation or withdrawal

    of registration, such person will immediately be prohibited from

    engaging in new activities requiring registration under the Act or from

    representing himself to be a registrant under the Act or the

    representative or agent of any registrant during the pendency of any

    suspension of such registration.

    * * * * *

    (d) On a date to be established by the National Futures

    Association, and in accordance with procedures established by the

    National Futures Association, each registrant as a futures commission

    merchant, retail foreign exchange dealer, swap dealer, major swap

    participant, introducing broker, commodity pool operator, commodity

    trading advisor, or leverage transaction merchant shall, on an annual

    basis, review and update registration information maintained with the

    National Futures Association. The failure to complete the review and

    update within thirty days following the date established by the

    National Futures Association shall be deemed to be a request for

    withdrawal from registration, which shall be processed in accordance

    with the provisions of Sec. 3.33(f).

    * * * * *

    0

    8. Section 3.21 is amended by:

    0

    a. Revising paragraph (c) introductory text and paragraph (c)(1)(iv);

    0

    b. Adding paragraph (c)(1)(v);

    0

    c. Revising paragraph (c)(2)(i); and

    0

    d. Revising paragraph (c)(4)(i).

    The revisions and addition read as follows:

    Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

    * * * * *

    (c) Outside directors. Any futures commission merchant, retail

    foreign exchange dealer, swap dealer, major swap participant,

    introducing broker, commodity pool operator, commodity trading advisor,

    or leverage transaction merchant that has a principal who is a director

    but is not also an officer or employee of the firm may, in lieu of

    submitting a fingerprint card in accordance with the provisions of

    Sec. Sec. 3.10(a)(2) and 3.31(a)(3), file a ``Notice Pursuant to Rule

    3.21(c)'' with the National Futures Association. Such notice shall

    state, if true, that such outside director:

    (1) * * *

    (iv) The solicitation of leverage customers' orders for leverage

    transactions,

    (v) The solicitation or acceptance of a swap agreement;

    (2) * * *

    (i) Transactions involving ``commodity interests,'' as that term is

    defined in Sec. 1.3(yy);

    * * * * *

    (4) * * *

    (i) The name of the futures commission merchant, retail foreign

    exchange dealer, swap dealer, major swap participant, introducing

    broker, commodity pool operator, commodity trading advisor, leverage

    transaction merchant, or applicant for registration in any of these

    capacities of which the person is an outside director;

    * * * * *

    0

    9. Section 3.30 is amended by revising paragraph (a) to read as

    follows:

    Sec. 3.30 Current address for purpose of delivery of communications

    from the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration, and

    principal, as submitted on the application for registration (Form 7-R

    or Form 8-R) or as submitted on the biographical supplement (Form 8-R)

    shall be deemed to be the address for delivery to the registrant,

    applicant or principal for any communications from the Commission or

    the National Futures Association, including any summons, complaint,

    reparation claim, order, subpoena, special call, request for

    information, notice, and other written documents or correspondence,

    unless the registrant, applicant or principal specifies another address

    for this purpose: Provided, that the Commission or the National Futures

    Association may address any correspondence relating to a biographical

    supplement submitted for or on behalf of a principal to the futures

    commission merchant, retail foreign exchange dealer, swap dealer, major

    swap participant, introducing broker, commodity pool operator,

    commodity trading advisor, or leverage transaction merchant with which

    the principal is affiliated and may address any correspondence relating

    to an associated person to the futures commission merchant, retail

    foreign exchange dealer, swap dealer, major swap participant,

    introducing broker, commodity pool operator, commodity trading advisor,

    or leverage transaction merchant with which the associated person or

    the applicant for registration is or will be associated as an

    associated person.

    * * * * *

    [[Page 2628]]

    0

    10. Section 3.31 is amended by revising paragraphs (a)(1), (b), and

    (c)(2) to read as follows:

    Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission

    merchant, retail foreign exchange dealer, swap dealer, major swap

    participant, introducing broker, commodity pool operator, commodity

    trading advisor, or leverage transaction merchant shall, in accordance

    with the instructions thereto, promptly correct any deficiency or

    inaccuracy in Form 7-R or Form 8-R which no longer renders accurate and

    current the information contained therein. Each such correction shall

    be made on Form 3-R and shall be prepared and filed in accordance with

    the instructions thereto. Provided, however, that where a registrant is

    reporting a change in the form of organization from or to a sole

    proprietorship, the registrant must file a Form 7-W regarding the pre-

    existing organization and a Form 7-R regarding the newly formed

    organization.

    * * * * *

    (b)(1) Each applicant for registration or registrant as a floor

    broker, floor trader or associated person, and each principal of a

    futures commission merchant, retail foreign exchange dealer,

    introducing broker, commodity pool operator, commodity trading advisor,

    or leverage transaction merchant must, in accordance with the

    instructions thereto, promptly correct any deficiency or inaccuracy in

    the Form 8-R or supplemental statement thereto which renders no longer

    accurate and current the information contained in the Form 8-R or

    supplemental statement. Each such correction must be made on Form 3-R

    and must be prepared and filed in accordance with the instructions

    thereto.

    (2) Each applicant for registration or registrant as a swap dealer

    or major swap participant and each principal of a swap dealer or major

    swap participant, must, in accordance with the instructions thereto,

    promptly correct any deficiency or inaccuracy in the Form 8-R or

    supplemental statement thereto which renders no longer accurate and

    current the information contained in the Form 8-R or supplemental

    statement. Each such correction must be made on Form 3-R and must be

    prepared and filed in accordance with the instructions thereto.

    (c) * * *

    (2) Each person registered as, or applying for registration as, a

    futures commission merchant, retail foreign exchange dealer, swap

    dealer, major swap participant, introducing broker, commodity pool

    operator, commodity trading advisor, or leverage transaction merchant

    must, within thirty days after the termination of the affiliation of a

    principal with the registrant or applicant, file a notice thereof with

    the National Futures Association.

    * * * * *

    0

    11. Section 3.33 is amended by:

    0

    a. Revising paragraph (a) introductory text;

    0

    b. Revising paragraph (b) introductory text and paragraphs (b)(6)(vi)

    and (vii);

    0

    c. Adding paragraphs (b)(6)(viii) and (ix); and

    0

    d. Revising paragraph (e).

    The revisions and additions to read as follows:

    Sec. 3.33 Withdrawal from registration.

    (a) A futures commission merchant, retail foreign exchange dealer,

    swap dealer, major swap participant, introducing broker, commodity pool

    operator, commodity trading advisor, leverage transaction merchant,

    floor broker or floor trader may request that its registration be

    withdrawn in accordance with the requirements of this section if:

    * * * * *

    (b) A request for withdrawal from registration as a futures

    commission merchant, retail foreign exchange dealer, swap dealer, major

    swap participant, introducing broker, commodity pool operator,

    commodity trading advisor, or leverage transaction merchant must be

    made on Form 7-W, and a request for withdrawal from registration as a

    floor broker or floor trader must be made on Form 8-W, completed and

    filed with the National Futures Association in accordance with the

    instructions thereto. The request for withdrawal must be made by a

    person duly authorized by the registrant and must specify:

    * * * * *

    (6) * * *

    (vi) The nature and extent of any pending customer, retail forex

    customer, option customer, leverage customer, swap counterparty or

    commodity pool participant claims against the registrant, and, to the

    best of the registrant's knowledge and belief, the nature and extent of

    any anticipated or threatened customer, option customer, leverage

    customer, swap counterparty or commodity pool participant claims

    against the registrant;

    (vii) In the case of a futures commission merchant or a retail

    foreign exchange dealer which is a party to a guarantee agreement, that

    all such agreements have been or will be terminated in accordance with

    the provisions of Sec. 1.10(j) of this chapter not more than thirty

    days after the filing of the request for withdrawal from registration;

    (viii) In the case of a swap dealer, that the person will not

    engage in any new activity described in the definition of the term

    ``swap dealer'' in section 1a(49) of the Act, as such term may be

    further defined by the Commission; and

    (ix) In the case of a major swap participant, that the person will

    not engage in any new activity described in the definition of the term

    ``major swap participant'' in section 1a(33) of the Act, as such term

    may be further defined by the Commission.

    * * * * *

    (e) A request for withdrawal from registration as a futures

    commission merchant, retail foreign exchange dealer, swap dealer, major

    swap participant, introducing broker, commodity pool operator,

    commodity trading advisor, or leverage transaction merchant on Form 7-

    W, and a request for withdrawal from registration as a floor broker or

    floor trader on Form 8-W, must be filed with the National Futures

    Association and a copy of such request must be sent by the National

    Futures Association within three business days of the receipt of such

    withdrawal request to the Commodity Futures Trading Commission,

    Division of Swap Dealer and Intermediary Oversight, Three Lafayette

    Centre, 1155 21st Street NW., Washington, DC 20581. In addition, any

    floor broker or floor trader requesting withdrawal from registration

    must file a copy of his Form 8-W with each contract market that has

    granted him trading privileges. Within three business days of any

    determination by the National Futures Association under Sec. 3.10(d)

    to treat the failure by a registrant to file an annual Form 7-R as a

    request for withdrawal, the National Futures Association shall send the

    Commission notice of that determination.

    * * * * *

    0

    12. Part 23 is added to read as follows:

    PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    Subpart A--[Reserved]

    Sec.

    23.1-23.20 [Reserved]

    Subpart B--Registration

    23.21 Registration of swap dealers and major swap participants.

    23.22 Associated persons of swap dealers and major swap

    participants.

    [[Page 2629]]

    23.23-23.40 [Reserved]

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6p, 6s, 9, 9a, 13b,

    13c, 16a, 18, 19, 21 as amended by Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376 (July 21, 2010).

    Subpart A--Definitions

    Sec. Sec. 23.1-23.20 [Reserved]

    Subpart B--Registration

    Sec. 23.21 Registration of swap dealers and major swap participants.

    (a) Each person who comes within the definition of the term ``swap

    dealer'' in section 1a(49) of the Act, as such term may be further

    defined by the Commission, is subject to the registration provisions

    under the Act and to part 3 of this chapter.

    (b) Each person who comes within the definition of the term ``major

    swap participant'' in section 1a(33) of the Act, as such term may be

    further defined by the Commission, is subject to the registration

    provisions under the Act and to part 3 of this chapter.

    (c) Each affiliate of an insured depository institution described

    in section 716(c) of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (Pub. L. 111-203 section 716(c), 124 Stat. 1376 (2010))

    is required to be registered as a swap dealer if the affiliate is a

    swap dealer or as a major swap participant if the affiliate is a major

    swap participant.

    Sec. 23.22 Associated persons of swap dealers and major swap

    participants.

    (a) Definition. For the purpose of this section, the term

    ``person'' means an ``associated person of a swap dealer or major swap

    participant'' as defined in section 1a(4) of the Act and Sec.

    1.3(aa)(6).

    (b) Fitness. No swap dealer or major swap participant may permit a

    person who is subject to a statutory disqualification under section

    8a(2) or 8a(3) of the Act to effect or be involved in effecting swaps

    on behalf of the swap dealer or major swap participant, if the swap

    dealer or major swap participant knows, or in the exercise of

    reasonable care should know, of the statutory disqualification;

    Provided, however, that the prohibition set forth in this paragraph (b)

    shall not apply to any person listed as a principal or registered as an

    associated person of a futures commission merchant, retail foreign

    exchange dealer, introducing broker, commodity pool operator, commodity

    trading advisor, or leverage transaction merchant, or any person

    registered as a floor broker or floor trader, notwithstanding that the

    person is subject to a disqualification from registration under section

    8a(2) or 8a(3) of the Act.

    Sec. Sec. 23.23-23.40 [Reserved]

    PART 170--REGISTERED FUTURES ASSOCIATIONS

    0

    13. The authority citation for part 170 continues to read as follows:

    Authority: 7 U.S.C. 6p, 12a and 21.

    0

    14. Section 170.16 is added to read as follows:

    Sec. 170.16 Swap dealers and major swap participants.

    Each person registered as a swap dealer or major swap participant

    must become and remain a member of at least one futures association

    that is registered under section 17 of the Act and that provides for

    the membership therein of such swap dealer or major swap participant,

    as the case may be, unless no such futures association is so

    registered.

    Issued in Washington, DC, on January 11, 2012, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

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

    Federal Regulations.

    Appendices to Registration of Swap Dealers and Major Swap

    Participants--Commission Voting Summary and Statements of Commissioners

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers,

    Chilton, O'Malia and Wetjen voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to establish a process for the

    registration of swap dealers and major swap participants. The rule

    implements the Dodd-Frank Wall Street Reform and Consumer Protection

    Act (Dodd-Frank Act) mandate that these entities be subject to

    registration and regulation for their swaps business. Registration

    will enable the Commodity Futures Trading Commission to monitor swap

    dealers and major swap participants for compliance with the Dodd-

    Frank Act and Commission rulemakings. Through regulation of dealers,

    the Commission will be able to protect market participants and the

    public, as well as promote sound risk management practices. The

    final rule includes a requirement that swap dealers and major swap

    participants become members of a registered futures association,

    such as the National Futures Association (NFA).

    In addition, I support the order delegating to the NFA the

    authority to register swap dealers and major swap participants. This

    will help efficiently allocate resources and provide the Commission

    with flexibility.

    [FR Doc. 2012-792 Filed 1-18-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 19, 2012