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2013-30974

  • Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]

    [Notices]

    [Pages 78864-78878]

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

    [FR Doc No: 2013-30974]

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    COMMODITY FUTURES TRADING COMMISSION

    Comparability Determination for Australia: Certain Entity-Level

    Requirements

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Comparability Determination for Certain Requirements

    under Australian Regulation.

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    SUMMARY: The following is the analysis and determination of the

    Commodity Futures Trading Commission (``Commission'') regarding certain

    parts of a request by the Australian Bankers Association (``ABA'') that

    the Commission determine that laws and regulations applicable in in the

    Commonwealth of Australia (``Australia'') provide a sufficient basis

    for an affirmative finding of comparability with respect to the

    following regulatory obligations applicable to swap dealers (``SDs'')

    and major swap participants (``MSPs'') registered with the Commission:

    (i) Chief compliance officer; (ii) risk management; and (iii) swap data

    recordkeeping (collectively, the ``Internal Business Conduct

    Requirements'').

    DATES: Effective Date: This determination will become effective

    immediately upon publication in the Federal Register.

    FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,

    gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949,

    ffisanich@cftc.gov, Adam Kezsbom, Special Counsel, 202-418-5372,

    akezsbom@cftc.gov, Israel Goodman, Special Counsel, 202-418-6715,

    igoodman@cftc.gov, Division of Swap Dealer and Intermediary Oversight,

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

    Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 26, 2013, the Commission published in the Federal Register

    its ``Interpretive Guidance and Policy Statement Regarding Compliance

    with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance,

    the Commission set forth its interpretation of the manner in which it

    believes that section 2(i) of the Commodity Exchange Act (``CEA'')

    applies Title VII's swap provisions to activities outside the U.S. and

    informed the public of some of the policies that it expects to follow,

    generally speaking, in applying Title VII and certain Commission

    regulations in contexts covered by section 2(i). Among other matters,

    the Guidance generally described the policy and procedural framework

    under which the Commission would consider a substituted compliance

    program with respect to Commission regulations applicable to entities

    located outside the U.S. Specifically, the Commission addressed a

    recognition program where compliance with a comparable regulatory

    requirement of a foreign jurisdiction would serve as a reasonable

    substitute for compliance with the attendant requirements of the CEA

    and the Commission's regulations promulgated thereunder.

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    \1\ 78 FR 45292 (July 26, 2013). The Commission originally

    published proposed and further proposed guidance on July 12, 2012

    and January 7, 2013, respectively. See Cross-Border Application of

    Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214

    (July 12, 2012) and Further Proposed Guidance Regarding Compliance

    with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).

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    In addition to the Guidance, on July 22, 2013, the Commission

    issued the Exemptive Order Regarding Compliance with Certain Swap

    Regulations (the

    [[Page 78865]]

    ``Exemptive Order'').\2\ Among other things, the Exemptive Order

    provided time for the Commission to consider substituted compliance

    with respect to six jurisdictions where non-U.S. SDs are currently

    organized. In this regard, the Exemptive Order generally provided non-

    U.S. SDs and MSPs in the six jurisdictions with conditional relief from

    certain requirements of Commission regulations (those referred to as

    ``Entity-Level Requirements'' in the Guidance) until the earlier of

    December 21, 2013, or 30 days following the issuance of a substituted

    compliance determination.\3\

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    \2\ 78 FR 43785 (July 22, 2013).

    \3\ The Entity-Level Requirements under the Exemptive Order

    consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,

    23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the

    Commission's regulations.

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    On April 22, 2013, the ABA (the ``applicant'') submitted a request

    that the Commission determine that laws and regulations applicable in

    Australia provide a sufficient basis for an affirmative finding of

    comparability with respect to certain Entity-Level Requirements,

    including the Internal Business Conduct Requirements.\4\ The applicant

    provided Commission staff with an updated submission on June 7, 2013.

    On November 8, 2013, the application was further supplemented with

    corrections and additional materials. The following is the Commission's

    analysis and determination regarding the Internal Business Conduct

    Requirements, as detailed below.\5\

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    \4\ For purposes of this notice, the Internal Business Conduct

    Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,

    23.602, 23.603, 23.605, and 23.606.

    \5\ This notice does not address swap data repository reporting

    (``SDR Reporting''). The Commission may provide a comparability

    determination with respect to the SDR Reporting requirement in a

    separate notice.

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    II. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act \6\ (``Dodd-Frank Act'' or ``Dodd-

    Frank''), which, in Title VII, established a new regulatory framework

    for swaps.

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    \6\ Public Law 111-203, 124 Stat. 1376 (2010).

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    Section 722(d) of the Dodd-Frank Act amended the CEA by adding

    section 2(i), which provides that the swap provisions of the CEA

    (including any CEA rules or regulations) apply to cross-border

    activities when certain conditions are met, namely, when such

    activities have a ``direct and significant connection with activities

    in, or effect on, commerce of the United States'' or when they

    contravene Commission rules or regulations as are necessary or

    appropriate to prevent evasion of the swap provisions of the CEA

    enacted under Title VII of the Dodd-Frank Act.\7\

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

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    In the three years since its enactment, the Commission has

    finalized 68 rules and orders to implement Title VII of the Dodd-Frank

    Act. The finalized rules include those promulgated under section 4s of

    the CEA, which address registration of SDs and MSPs and other

    substantive requirements applicable to SDs and MSPs. With few

    exceptions, the delayed compliance dates for the Commission's

    regulations implementing such section 4s requirements applicable to SDs

    and MSPs have passed and new SDs and MSPs are now required to be in

    full compliance with such regulations upon registration with the

    Commission.\8\ Notably, the requirements under Title VII of the Dodd-

    Frank Act related to SDs and MSPs by their terms apply to all

    registered SDs and MSPs, irrespective of where they are located, albeit

    subject to the limitations of CEA section 2(i).

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    \8\ The compliance dates are summarized on the Compliance Dates

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

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    To provide guidance as to the Commission's views regarding the

    scope of the cross-border application of Title VII of the Dodd-Frank

    Act, the Commission set forth in the Guidance its interpretation of the

    manner in which it believes that Title VII's swap provisions apply to

    activities outside the U.S. pursuant to section 2(i) of the CEA. Among

    other matters, the Guidance generally described the policy and

    procedural framework under which the Commission would consider a

    substituted compliance program with respect to Commission regulations

    applicable to entities located outside the U.S. Specifically, the

    Commission addressed a recognition program where compliance with a

    comparable regulatory requirement of a foreign jurisdiction would serve

    as a reasonable substitute for compliance with the attendant

    requirements of the CEA and the Commission's regulations. With respect

    to the standards forming the basis for any determination of

    comparability (``comparability determination'' or ``comparability

    finding''), the Commission stated:

    In evaluating whether a particular category of foreign

    regulatory requirement(s) is comparable and comprehensive to the

    applicable requirement(s) under the CEA and Commission regulations,

    the Commission will take into consideration all relevant factors,

    including but not limited to, the comprehensiveness of those

    requirement(s), the scope and objectives of the relevant regulatory

    requirement(s), the comprehensiveness of the foreign regulator's

    supervisory compliance program, as well as the home jurisdiction's

    authority to support and enforce its oversight of the registrant. In

    this context, comparable does not necessarily mean identical.

    Rather, the Commission would evaluate whether the home

    jurisdiction's regulatory requirement is comparable to and as

    comprehensive as the corresponding U.S. regulatory

    requirement(s).\9\

    \9\ 78 FR 45342-45.

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    Upon a comparability finding, consistent with CEA section 2(i) and

    comity principles, the Commission's policy generally is that eligible

    entities may comply with a substituted compliance regime, subject to

    any conditions the Commission places on its finding, and subject to the

    Commission's retention of its examination authority and its enforcement

    authority.\10\

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    \10\ See the Guidance, 78 FR 45342-44.

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    In this regard, the Commission notes that a comparability

    determination cannot be premised on whether an SD or MSP must disclose

    comprehensive information to its regulator in its home jurisdiction,

    but rather on whether information relevant to the Commission's

    oversight of an SD or MSP would be directly available to the Commission

    and any U.S. prudential regulator of the SD or MSP.\11\ The

    Commission's direct access to the books and records required to be

    maintained

    [[Page 78866]]

    by an SD or MSP registered with the Commission is a core requirement of

    the CEA \12\ and the Commission's regulations,\13\ and is a condition

    to registration.\14\

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    \11\ Under Sec. Sec. 23.203 and 23.606, all records required by

    the CEA and the Commission's regulations to be maintained by a

    registered SD or MSP shall be maintained in accordance with

    Commission regulation 1.31 and shall be open for inspection by

    representatives of the Commission, the United States Department of

    Justice, or any applicable U.S. prudential regulator.

    In its Final Exemptive Order Regarding Compliance with Certain

    Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted

    that an applicant for registration as an SD or MSP must file a Form

    7-R with the National Futures Association and that Form 7-R was

    being modified at that time to address existing blocking, privacy,

    or secrecy laws of foreign jurisdictions that applied to the books

    and records of SDs and MSPs acting in those jurisdictions. See id.

    at 871-72 n. 107. The modifications to Form 7-R were a temporary

    measure intended to allow SDs and MSPs to apply for registration in

    a timely manner in recognition of the existence of the blocking,

    privacy, and secrecy laws. In the Guidance, the Commission clarified

    that the change to Form 7-R impacts the registration application

    only and does not modify the Commission's authority under the CEA

    and its regulations to access records held by registered SDs and

    MSPs. Commission access to a registrant's books and records is a

    fundamental regulatory tool necessary to properly monitor and

    examine each registrant's compliance with the CEA and the

    regulations adopted pursuant thereto. The Commission has maintained

    an ongoing dialogue on a bilateral and multilateral basis with

    foreign regulators and with registrants to address books and records

    access issues and may consider appropriate measures where requested

    to do so.

    \12\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the

    CEA.

    \13\ See e.g., Sec. Sec. 23.203(b) and 23.606.

    \14\ See supra note 10.

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    III. Regulation of SDs and MSPs in Australia

    On April 22, 2013, the applicant submitted a request that the

    Commission assess the comparability of laws and regulations applicable

    in Australia with the CEA and the Commission's regulations promulgated

    thereunder. The applicant provided Commission staff with an updated

    submission on June 7, 2013. On November 8, 2013, the application was

    further supplemented with corrections and additional materials.

    As represented to the Commission by the applicant, currently all

    five Australian registered SDs are Australian authorized deposit-taking

    institutions (``ADIs'') and holders of an Australian financial services

    license (``AFSL''). Thus, for the purposes of the Commission's

    comparability determination, the Commission will consider the laws and

    regulations applicable to the five SD ADIs with respect to their swap

    activities. The relevant laws and regulations are administered by two

    agencies; the Australian Prudential Regulatory Authority (``APRA'') and

    the Australian Securities and Investments Commission (``ASIC'').\15\

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    \15\ Because the applicant's request and the Commissions

    determinations herein are based on the comparability of Australian

    requirements applicable to ADIs and AFSL holders, an SD or MSP that

    is not an ADI or AFSL holder, or is otherwise not subject to the

    requirements applicable to ADIs and AFSL holders upon which the

    Commission bases its determinations, may not be able to rely on the

    Commission's comparability determinations herein.

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    APRA is the prudential regulator of the Australian financial

    services industry and oversees the banking industry. It has developed a

    regulatory framework for Australian ADIs under the Banking Act 1959

    (the ``Banking Act'') that is based on the banking supervision

    principles published by the Basel Committee on Banking Supervision.

    This regulatory framework is set out in a number of different

    prudential standards that govern the activities of ADIs.

    ASIC is Australia's corporate, markets, and financial services

    regulator. ASIC licenses and monitors financial services businesses to

    ensure they operate efficiently, honestly, and fairly. ASIC

    administers, among other things, the following legislation and

    regulations: the Corporations Act 2001 (the ``Corporations Act''), the

    Corporations Regulations 2001, and the Australian Securities and

    Investments Commission Act 2001 (the ``ASIC Act''). Under the

    Corporations Act, an Australian entity that undertakes specified

    activities, including dealing or market making in derivatives

    (including swaps) is required to hold an AFSL. The AFSL regime

    establishes a number of general licensing obligations that all

    licensees must comply with. ASIC has also issued regulatory guidance

    which sets out its expectations of how licensees may comply with their

    licensing obligations in a range of situations and taking into account

    the nature, size, and complexity of their financial services business.

    IV. Comparable and Comprehensiveness Standard

    The Commission's comparability analysis will be based on a

    comparison of specific foreign requirements against the specific

    related CEA provisions and Commission regulations as categorized and

    described in the Guidance. As explained in the Guidance, within the

    framework of CEA section 2(i) and principles of international comity,

    the Commission may make a comparability determination on a requirement-

    by-requirement basis, rather than on the basis of the foreign regime as

    a whole.\16\ In making its comparability determinations, the Commission

    may include conditions that take into account timing and other issues

    related to coordinating the implementation of reform efforts across

    jurisdictions.\17\

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    \16\ 78 FR 45343.

    \17\ 78 FR 45343.

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    In evaluating whether a particular category of foreign regulatory

    requirement(s) is comparable and comprehensive to the corollary

    requirement(s) under the CEA and Commission regulations, the Commission

    will take into consideration all relevant factors, including, but not

    limited to:

    The comprehensiveness of those requirement(s),

    The scope and objectives of the relevant regulatory

    requirement(s),

    The comprehensiveness of the foreign regulator's

    supervisory compliance program, and

    The home jurisdiction's authority to support and enforce

    its oversight of the registrant.\18\

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    \18\ 78 FR 45343.

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    In making a comparability determination, the Commission takes an

    ``outcome-based'' approach. An ``outcome-based'' approach means that

    when evaluating whether a foreign jurisdiction's regulatory

    requirements are comparable to, and as comprehensive as, the corollary

    areas of the CEA and Commission regulations, the Commission ultimately

    focuses on regulatory outcomes (i.e., the home jurisdiction's

    requirements do not have to be identical).\19\ This approach recognizes

    that foreign regulatory systems differ and their approaches vary and

    may differ from how the Commission chose to address an issue, but that

    the foreign jurisdiction's regulatory requirements nonetheless achieve

    the regulatory outcome sought to be achieved by a certain provision of

    the CEA or Commission regulation.

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    \19\ 78 FR 45343. The Commission's substituted compliance

    program would generally be available for SDR Reporting, as outlined

    in the Guidance, only if the Commission has direct access to all of

    the data elements that are reported to a foreign trade repository

    pursuant to the substituted compliance program. Thus, direct access

    to swap data is a threshold matter to be addressed in a

    comparability evaluation for SDR Reporting. Moreover, the Commission

    explains in the Guidance that, due to its technical nature, a

    comparability evaluation for SDR Reporting ``will generally entail a

    detailed comparison and technical analysis.'' A more particularized

    analysis will generally be necessary to determine whether data

    stored in a foreign trade repository provides for effective

    Commission use, in furtherance of the regulatory purposes of the

    Dodd-Frank Act. See 78 FR 45345.

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    In doing its comparability analysis the Commission may determine

    that no comparability determination can be made \20\ and that the non-

    U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to

    its foreign branches, or non-registrant, to the extent applicable under

    the Guidance, may be required to comply with the CEA and Commission

    regulations.

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    \20\ A finding of comparability may not be possible for a number

    of reasons, including the fact that the foreign jurisdiction has not

    yet implemented or finalized particular requirements.

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    The starting point in the Commission's analysis is a consideration

    of the regulatory objectives of the foreign jurisdiction's regulation

    of swaps and swap market participants. As stated in the Guidance,

    jurisdictions may not have swap specific regulations in some areas, and

    instead have regulatory or supervisory regimes that achieve comparable

    and comprehensive regulation to the Dodd-Frank Act requirements, but on

    a more general, entity-wide, or prudential, basis.\21\ In addition,

    portions of a foreign regulatory regime may have similar regulatory

    objectives, but the means by which these objectives are achieved with

    respect to swaps market activities may not be clearly defined, or may

    not

    [[Page 78867]]

    expressly include specific regulatory elements that the Commission

    concludes are critical to achieving the regulatory objectives or

    outcomes required under the CEA and the Commission's regulations. In

    these circumstances, the Commission will work with the regulators and

    registrants in these jurisdictions to consider alternative approaches

    that may result in a determination that substituted compliance

    applies.\22\

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    \21\ 78 FR 45343.

    \22\ As explained in the Guidance, such ``approaches used will

    vary depending on the circumstances relevant to each jurisdiction.

    One example would include coordinating with the foreign regulators

    in developing appropriate regulatory changes or new regulations,

    particularly where changes or new regulations already are being

    considered or proposed by the foreign regulators or legislative

    bodies. As another example, the Commission may, after consultation

    with the appropriate regulators and market participants, include in

    its substituted compliance determination a description of the means

    by which certain swaps market participants can achieve substituted

    compliance within the construct of the foreign regulatory regime.

    The identification of the means by which substituted compliance is

    achieved would be designed to address the regulatory objectives and

    outcomes of the relevant Dodd-Frank Act requirements in a manner

    that does not conflict with a foreign regulatory regime and reduces

    the likelihood of inconsistent regulatory obligations. For example,

    the Commission may specify that [SDs] and MSPs in the jurisdiction

    undertake certain recordkeeping and documentation for swap

    activities that otherwise is only addressed by the foreign

    regulatory regime with respect to financial activities generally. In

    addition, the substituted compliance determination may include

    provisions for summary compliance and risk reporting to the

    Commission to allow the Commission to monitor whether the regulatory

    outcomes are being achieved. By using these approaches, in the

    interest of comity, the Commission would seek to achieve its

    regulatory objectives with respect to the Commission's registrants

    that are operating in foreign jurisdictions in a manner that works

    in harmony with the regulatory interests of those jurisdictions.''

    78 FR 45343-44.

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    Finally, the Commission will generally rely on an applicant's

    description of the laws and regulations of the foreign jurisdiction in

    making its comparability determination. The Commission considers an

    application to be a representation by the applicant that the laws and

    regulations submitted are in full force and effect, that the

    description of such laws and regulations is accurate and complete, and

    that, unless otherwise noted, the scope of such laws and regulations

    encompasses the swaps activities\23 \ of SDs and MSPs \24\ in the

    relevant jurisdictions.\25\ Further, as stated in the Guidance, the

    Commission expects that an applicant would notify the Commission of any

    material changes to information submitted in support of a comparability

    determination (including, but not limited to, changes in the relevant

    supervisory or regulatory regime) as, depending on the nature of the

    change, the Commission's comparability determination may no longer be

    valid.\26\

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    \23\ ``Swaps activities'' is defined in Commission regulation

    23.600(a)(7) to mean, ``with respect to a registrant, such

    registrant's activities related to swaps and any product used to

    hedge such swaps, including, but not limited to, futures, options,

    other swaps or security-based swaps, debt or equity securities,

    foreign currency, physical commodities, and other derivatives.'' The

    Commission's regulations under 17 CFR Part 23 are limited in scope

    to the swaps activities of SDs and MSPs.

    \24\ No SD or MSP that is not legally required to comply with a

    law or regulation determined to be comparable may voluntarily comply

    with such law or regulation in lieu of compliance with the CEA and

    the relevant Commission regulation. Each SD or MSP that seeks to

    rely on a comparability determination is responsible for determining

    whether it is subject to the laws and regulations found comparable.

    Currently, there are no MSPs organized outside the U.S. and the

    Commission therefore cautions any non-financial entity organized

    outside the U.S. and applying for registration as an MSP to

    carefully consider whether the laws and regulations determined to be

    comparable herein are applicable to such entity.

    \25\ The Commission has provided the relevant foreign

    regulator(s) with opportunities to review and correct the

    applicant's description of such laws and regulations on which the

    Commission will base its comparability determination. The Commission

    relies on the accuracy and completeness of such review and any

    corrections received in making its comparability determinations. A

    comparability determination based on an inaccurate description of

    foreign laws and regulations may not be valid.

    \26\ 78 FR 45345.

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    The Guidance provided a detailed discussion of the Commission's

    policy regarding the availability of substituted compliance \27\ for

    the Internal Business Conduct Requirements.\28\

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    \27\ See 78 FR 45348-50. The Commission notes that registrants

    and other market participants are responsible for determining

    whether substituted compliance is available pursuant to the Guidance

    based on the comparability determination contained herein (including

    any conditions or exceptions), and its particular status and

    circumstances.

    \28\ This notice does not address Sec. 23.608 (Restrictions on

    counterparty clearing relationships). The Commission declines to

    take up the request for a comparability determination with respect

    to this regulation due to the Commission's view that there are not

    laws or regulations applicable in Australia to compare with the

    prohibitions and requirements of Sec. 23.608. The Commission may

    provide a comparability determination with respect to this

    regulation at a later date in consequence of further developments in

    the law and regulations applicable in Australia.

    This notice also does not address capital adequacy because the

    Commission has not yet finalized rules for SDs and MSPs in this

    area, nor SDR Reporting. The Commission may provide a comparability

    determination with respect to these requirements at a later date or

    in a separate notice.

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    V. Supervisory Arrangement

    In the Guidance, the Commission stated that, in connection with a

    determination that substituted compliance is appropriate, it would

    expect to enter into an appropriate memorandum of understanding

    (``MOU'') or similar arrangement \29\ with the relevant foreign

    regulator(s). Although existing arrangements would indicate a foreign

    regulator's ability to cooperate and share information, ``going

    forward, the Commission and relevant foreign supervisor(s) would need

    to establish supervisory MOUs or other arrangements that provide for

    information sharing and cooperation in the context of supervising [SDs]

    and MSPs.'' \30\

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    \29\ An MOU is one type of arrangement between or among

    regulators. Supervisory arrangements could include, as appropriate,

    cooperative arrangements that are memorialized and executed as

    addenda to existing MOUs or, for example, as independent bilateral

    arrangements, statements of intent, declarations, or letters.

    \30\ 78 FR 45344.

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    The Commission is in the process of developing its registration and

    supervision regime for provisionally-registered SDs and MSPs. This new

    initiative includes setting forth supervisory arrangements with

    authorities that have joint jurisdiction over SDs and MSPs that are

    registered with the Commission and subject to U.S. law. Given the

    developing nature of the Commission's regime and the fact that the

    Commission has not negotiated prior supervisory arrangements with

    certain authorities, the negotiation of supervisory arrangements

    presents a unique opportunity to develop close working relationships

    between and among authorities, as well as highlight any potential

    issues related to cooperation and information sharing.

    Accordingly, the Commission is negotiating such a supervisory

    arrangement with each applicable foreign regulator of an SD or MSP. The

    Commission expects that the arrangement will establish expectations for

    ongoing cooperation, address direct access to information,\31\ provide

    for notification upon the occurrence of specified events, memorialize

    understandings related to on-site visits,\32\ and include protections

    related

    [[Page 78868]]

    to the use and confidentiality of non-public information shared

    pursuant to the arrangement.

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    \31\ Section 4s(j)(3) and (4) of the CEA and Commission

    regulation 23.606 require a registered SD or MSP to make all records

    required to be maintained in accordance with Commission regulation

    1.31 available promptly upon request to, among others,

    representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR

    23.203. In the Guidance, the Commission states that it ``reserves

    this right to access records held by registered [SDs] and MSPs,

    including those that are non-U.S. persons who may comply with the

    Dodd-Frank recordkeeping requirement through substituted

    compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461

    (affirming the Commission's authority under the CEA and its

    regulations to access books and records held by registered SDs and

    MSPs as ``a fundamental regulatory tool necessary to properly

    monitor and examine each registrant's compliance with the CEA and

    the regulations adopted pursuant thereto'').

    \32\ The Commission retains its examination authority, both

    during the application process as well as upon and after

    registration of an SD or MSP. See 78 FR 45342 (stating Commission

    policy that ``eligible entities may comply with a substituted

    compliance regime under certain circumstances, subject, however, to

    the Commission's retention of its examination authority'') and 45344

    n. 471 (stating that the ``Commission may, as it deems appropriate

    and necessary, conduct an on-site examination of the applicant'').

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    These arrangements will establish a roadmap for how authorities

    will consult, cooperate, and share information. As with any such

    arrangement, however, nothing in these arrangements will supersede

    domestic laws or resolve potential conflicts of law, such as the

    application of domestic secrecy or blocking laws to regulated entities.

    VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by

    specific sections of the CEA and the Commission's regulations for the

    Internal Business Conduct Requirements that are the subject of this

    comparability determination, and the Commission's regulatory objectives

    with respect to such requirements. Immediately following a description

    of the requirement(s) and regulatory objective(s) of the specific

    Internal Business Conduct Requirements that the requestor submitted for

    a comparability determination, the Commission provides a description of

    the foreign jurisdiction's comparable laws, regulations, or rules and

    whether such laws, regulations, or rules meet the applicable regulatory

    objective.

    The Commission's determinations in this regard and the discussion

    in this section are intended to inform the public of the Commission's

    views regarding whether the foreign jurisdiction's laws, regulations,

    or rules may be comparable and comprehensive as those requirements in

    the Dodd-Frank Act (and Commission regulations promulgated thereunder)

    and therefore, may form the basis of substituted compliance. In turn,

    the public (in the foreign jurisdiction, in the United States, and

    elsewhere) retains its ability to present facts and circumstances that

    would inform the determinations set forth in this notice.

    As was stated in the Guidance, the Commission recognizes the

    complex and dynamic nature of the global swap market and the need to

    take an adaptable approach to cross-border issues, particularly as it

    continues to work closely with foreign regulators to address potential

    conflicts with respect to each country's respective regulatory regime.

    In this regard, the Commission may review, modify, or expand the

    determinations herein in light of comments received and future

    developments.

    A. Chief Compliance Officer (Sec. 3.3)

    Commission Requirement: Implementing section 4s(k) of the CEA,

    Commission regulation 3.3 generally sets forth the following

    requirements for SDs and MSPs:

    An SD or MSP must designate an individual as Chief

    Compliance Officer (``CCO'');

    The CCO must have the responsibility and authority to

    develop the regulatory compliance policies and procedures of the SD or

    MSP;

    The CCO must report to the board of directors or the

    senior officer of the SD or MSP;

    Only the board of directors or a senior officer may remove

    the CCO;

    The CCO and the board of directors must meet at least once

    per year;

    The CCO must have the background and skills appropriate

    for the responsibilities of the position;

    The CCO must not be subject to disqualification from

    registration under sections 8a(2) or (3) of the CEA;

    Each SD and MSP must include a designation of a CCO in its

    registration application;

    The CCO must administer the regulatory compliance policies

    of the SD or MSP;

    The CCO must take reasonable steps to ensure compliance

    with the CEA and Commission regulations, and resolve conflicts of

    interest;

    The CCO must establish procedures for detecting and

    remediating non-compliance issues;

    The CCO must annually prepare and sign an ``annual

    compliance report'' containing: (i) A description of policies and

    procedures reasonably designed to ensure compliance; (ii) an assessment

    of the effectiveness of such policies and procedures; (iii) a

    description of material non-compliance issues and the action taken;

    (iv) recommendations of improvements in compliance policies; and (v) a

    certification by the CCO or CEO that, to the best of such officer's

    knowledge and belief, the annual report is accurate and complete under

    penalty of law; and

    The annual compliance report must be furnished to the CFTC

    within 90 days after the end of the fiscal year of the SD or MSP,

    simultaneously with its annual financial condition report.

    Regulatory Objective: The Commission believes that compliance by

    SDs and MSPs with the CEA and the Commission's rules greatly

    contributes to the protection of customers, orderly and fair markets,

    and the stability and integrity of the market intermediaries registered

    with the Commission. The Commission expects SDs and MSPs to strictly

    comply with the CEA and the Commission's rules and to devote sufficient

    resources to ensuring such compliance. Thus, through its CCO rule, the

    Commission seeks to ensure firms have designated a qualified individual

    as CCO that reports directly to the board of directors or the senior

    officer of the firm and that has the independence, responsibility, and

    authority to develop and administer compliance policies and procedures

    reasonably designed to ensure compliance with the CEA and Commission

    regulations, resolve conflicts of interest, remediate noncompliance

    issues, and report annually to the Commission and the board or senior

    officer on compliance of the firm.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as section 4s(k) of

    the CEA and Commission regulation 3.3.

    APRA prudential standard CPS 520--Fit and Proper (``CPS

    520'') requires the appointment of ``responsible persons.'' CPS 520

    states that responsible persons must be fit and proper, and that the

    ultimate responsibility for ensuring that an institution's responsible

    persons are fit and proper remains with the board of directors.

    ASIC Regulatory Guide 105 Licensing: Organisational

    competence requires AFSL licensees to appoint ``responsible managers''

    who have direct responsibility for significant day-to-day decisions

    about the financial services provided, and for maintaining

    organizational competence of the entity. Such responsible managers must

    have the relevant skill and experience and be of good fame and

    character.

    ASIC Regulatory Guide 104 Licensing: Meeting the general

    obligations (``RG 104'') also requires AFSL holders to allocate to a

    director or senior manager responsibility for overseeing the AFSL

    holder's compliance measures, and reporting to the governing body

    (including having ready access to the governing body).

    When ASIC assesses an application for an AFSL, ASIC

    requires applicants to describe whether their compliance arrangements

    are generally consistent with ``Australian Standard 3806'' (``AS

    [[Page 78869]]

    3806'').\33\ AS 3806 provides principles and guidance for designing,

    developing, implementing, maintaining and improving a flexible,

    responsive effective and measurable compliance program within an

    organization. Although this is a non-governmental standard, ASIC refers

    to AS 3806 in its regulatory guidance for AFSL licensees and asks AFSL

    holders to refer to the standards when complying with their regulatory

    obligations.

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

    \33\ AS 3806 is a standard published by ``Standards Australia,''

    a non-government standards organization. Australian Standards are

    not legal documents, but can be referenced in Australian legislation

    and become mandatory.

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

    AFSL licensees must comply with section 912A of the

    Corporations Act, which, among other obligations, requires that such

    entities: Do all things necessary to ensure that the financial services

    covered by the license are provided efficiently, honestly and fairly;

    have adequate arrangements in place for managing conflicts of interest

    that may arise wholly, or partially, in relation to activities

    undertaken by the licensee or a representative of the licensee in the

    provision of financial services as part of the financial services

    business of the licensee or the representative; comply with any

    conditions on the license; comply with the financial services laws;

    take reasonable steps to ensure that representatives comply with the

    financial services laws; maintain the competence to provide the

    financial services covered by the license; ensure that representatives

    are adequately trained and competent to provide those financial

    services; and if those financial services are provided to retail

    clients, have a dispute resolution system.

    AFSL licensees are also required under section 912D of the

    Corporations Act to report to ASIC any significant breach (or likely

    breach) of its regulatory obligations. ASIC Regulatory Guide 78 Breach

    reporting by AFS licensees expands on this obligation and requires AFSL

    holders to have a documented process for, amongst other things,

    rectifying breaches and ensuring that arrangements are in place to

    prevent the recurrence of the breach.

    ADIs are also required under APRA prudential standard APS

    310 Audit and Related Matters (``APS 310'') to provide APRA a high-

    level description of its risk management systems covering all major

    areas of risk and annually, within three months of its annual balance

    date, provide APRA with a declaration from its CEO endorsed by the

    board that attests that: they have established systems to monitor and

    manage those risk including, where appropriate, by setting and

    requiring adherence to a series of prudent limits, and by adequate and

    timely reporting processes; the risk management systems are operating

    effectively and are adequate with regard to the risks they are designed

    to control; and the descriptions of risk management systems provided to

    APRA are accurate and current.\34\

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    \34\ Not relevant for the Commission's comparability

    determination herein, the applicant also referenced APRA draft

    prudential standard CPS 220 Risk Management (``Draft CPS 220''),

    which was released by APRA on May 9, 2013. This draft prudential

    standard, if finalized in a form similar to its draft form, will

    require each ADI (including SD ADIs) to have a designated compliance

    function that assists senior management in effectively managing

    compliance risks. It will also require that the compliance function

    be adequately staffed by appropriately trained and competent persons

    who have sufficient authority to perform their role effectively, and

    have a reporting line independent from business lines. APRA expects

    to finalize Draft CPS 220 prior to its implementation date of

    January 1, 2015.

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

    Commission Determination: The Commission finds that the provisions

    and requirements under the Australian regimes specified above are

    generally identical in intent to Sec. 3.3 by seeking to ensure firms

    have designated a qualified individual as the compliance officer that

    reports directly to a sufficiently senior function of the firm and that

    has the independence, responsibility, and authority to develop and

    administer compliance policies and procedures reasonably designed to

    ensure compliance with the CEA and Commission regulations, resolve

    conflicts of interest, remediate noncompliance issues, and report

    annually on compliance of the firm.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the CCO requirements of the

    provisions of Australian law and regulations specified above are

    comparable to and as comprehensive as Sec. 3.3, with the exception of

    Sec. 3.3(e) concerning preparing and signing an annual compliance

    report and Sec. 3.3(f) concerning certifying and furnishing an annual

    compliance report to the Commission.

    Notwithstanding that the Commission has not determined that the

    requirements of Australian law and regulations are comparable to and as

    comprehensive as Sec. Sec. 3.3(e) and 3.3(f), any SD or MSP to which

    both Sec. 3.3 and the Australian law and regulations specified above

    are applicable would generally be deemed to be in compliance with

    Sec. Sec. 3.3(e) and (f) if that SD or MSP complies with the

    Australian law and regulations specified above, subject to preparing

    and signing an annual compliance report in accordance with Sec. 3.3(e)

    and certifying and furnishing the Commission with an annual compliance

    report in accordance with Sec. 3.3(f). The Commission notes that it

    generally expects registrants to submit required reports to the

    Commission in the English language.

    B. Risk Management Duties (Sec. Sec. 23.600--23.609)

    Section 4s(j) of the CEA requires each SD and MSP to establish

    internal policies and procedures designed to, among other things,

    address risk management, monitor compliance with position limits,

    prevent conflicts of interest, and promote diligent supervision, as

    well as maintain business continuity and disaster recovery

    programs.\35\ The Commission adopted regulations 23.600, 23.601,

    23.602, 23.603, 23.605, and 23.606 to implement the statute.\36\ The

    Commission also adopted regulation 23.609, which requires certain risk

    management procedures for SDs or MSPs that are clearing members of a

    derivatives clearing organization (``DCO'').\37\ Collectively, these

    requirements help to establish a robust and comprehensive internal risk

    management program for SDs and MSPs with respect to their swaps

    activities,\38\ which is critical to effective systemic risk management

    for the overall swaps market. In making its comparability determination

    with regard to these risk management duties, the Commission will

    consider each regulation individually.\39\

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    \35\ 7 U.S.C. 6s(j).

    \36\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR

    20128 (April 3, 2012) (relating to risk management program,

    monitoring of position limits, business continuity and disaster

    recovery, conflicts of interest policies and procedures, and general

    information availability, respectively).

    \37\ See Customer Documentation Rule, 77 FR 21278. Also, SDs

    must comply with Commission regulation 23.608, which prohibits SDs

    providing clearing services to customers from entering into

    agreements that would: (i) Disclose the identity of a customer's

    original executing counterparty; (ii) limit the number of

    counterparties a customer may trade with; (iii) impose counterparty-

    based position limits; (iv) impair a customer's access to execution

    of a trade on terms that have a reasonable relationship to the best

    terms available; or (v) prevent compliance with specified time

    frames for acceptance of trades into clearing.

    \38\ ``Swaps activities'' is defined in Commission regulation

    23.600(a)(7) to mean, ``with respect to a registrant, such

    registrant's activities related to swaps and any product used to

    hedge such swaps, including, but not limited to, futures, options,

    other swaps or security-based swaps, debt or equity securities,

    foreign currency, physical commodities, and other derivatives.'' The

    Commission's regulations under 17 CFR Part 23 are limited in scope

    to the swaps activities of SDs and MSPs.

    \39\ As stated above, this notice does not address Sec. 23.608

    (Restrictions on counterparty clearing relationships). The

    Commission declines to take up the request for a comparability

    determination with respect to this regulation due to the

    Commission's view that there are not laws or regulations applicable

    in Australia to compare with the prohibitions and requirements of

    Sec. 23.608. The Commission may provide a comparability

    determination with respect to this regulation at a later date in

    consequence of further developments in the law and regulations

    applicable in Australia.

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    [[Page 78870]]

    1. Risk Management Program for SDs and MSPs (Sec. 23.600)

    Commission Requirement: Implementing section 4s(j)(2) of the CEA,

    Commission regulation 23.600 generally requires that:

    Each SD or MSP must establish and enforce a risk

    management program consisting of a system of written risk management

    policies and procedures designed to monitor and manage the risks

    associated with the swap activities of the firm, including without

    limitation, market, credit, liquidity, foreign currency, legal,

    operational, and settlement risks, and furnish a copy of such policies

    and procedures to the CFTC upon application for registration and upon

    request;

    The SD or MSP must establish a risk management unit

    independent from the business trading unit;

    The risk management policies and procedures of the SD or

    MSP must be approved by the firm's governing body;

    Risk tolerance limits and exceptions therefrom must be

    reviewed and approved quarterly by senior management and annually by

    the governing body;

    The risk management program must have a system for

    detecting breaches of risk tolerance limits and alerting supervisors

    and senior management, as appropriate;

    The risk management program must account for risks posed

    by affiliates and be integrated at the consolidated entity level;

    The risk management unit must provide senior management

    and the governing body with quarterly risk exposure reports and upon

    detection of any material change in the risk exposure of the SD or MSP;

    Risk exposure reports must be furnished to the CFTC within

    five business days following provision to senior management;

    The risk management program must have a new product policy

    for assessing the risks of new products prior to engaging in such

    transactions;

    The risk management program must have policies and

    procedures providing for trading limits, monitoring of trading,

    processing of trades, and separation of personnel in the trading unit

    from personnel in the risk management unit; and

    The risk management program must be reviewed and tested at

    least annually and upon any material change in the business of the SD

    or MSP.

    Regulatory Objective: Through the required system of risk

    management, the Commission seeks to ensure that firms are adequately

    managing the risks of their swaps activities to prevent failure of the

    SD or MSP, which could result in losses to counterparties doing

    business with the SD or MSP, and systemic risk more generally. To this

    end, the Commission believes the risk management program of an SD or

    MSP must contain at least the following critical elements:

    Identification of risk categories;

    Establishment of risk tolerance limits for each category

    of risk and approval of such limits by senior management and the

    governing body;

    An independent risk management unit to administer a risk

    management program; and

    Periodic oversight of risk exposures by senior management

    and the governing body.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as section 4s(j)(2)

    of the CEA and Commission regulation 23.600.\40\

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

    \40\ Not relevant for the Commission's comparability

    determination herein, the applicant also referenced Draft CPS 220.

    Draft CPS 220 seeks to introduce additional requirements in respect

    of the risk management framework for ADIs. APRA expects to finalize

    CPS 220 prior to its implementation date of January 1, 2015. Under

    Draft CPS 220, an APRA-regulated institution must have policies and

    procedures that provide the board with a comprehensive institution-

    wide view of its material risks. Draft CPS 220 also requires the

    risk management function of an ADI be ``operationally independent''

    and must be headed by a designated Chief Risk Officer (``CRO''). The

    CRO must be involved in, and have the authority to provide effective

    challenge to, activities and decisions that may materially affect

    the institution's risk profile.

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

    The regulatory framework for ADIs under the Banking Act is

    based on the banking supervision principles published by the Basel

    Committee on Banking Supervision.\41\ This prudential framework

    includes requirements (largely set out in detailed and separate

    prudential standards) regarding capital adequacy, credit risk, market

    risk, liquidity, credit quality, large exposures, associations with

    related entities, outsourcing, business continuity management, audit

    and related arrangements for prudential reporting, governance, and fit

    and proper management.

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

    \41\ The Corporations Act requires AFSL holders to comply with

    risk management requirements, however, this requirement does not

    apply where an entity is regulated by APRA. See section 912A(1)(h).

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

    In particular, APS 310 (discussed above) requires an ADI's

    board and management to ensure that the ADI meets prudential and

    statutory requirements and has management practices to limit risks to

    prudent levels. APS 310 mandates that the ADI's risk management

    practices must be detailed in descriptions of risk management systems

    that must be regularly reviewed and updated, at least annually, to take

    account of changing circumstances.

    APRA Prudential standard APS 116 Capital Adequacy: Market

    Risk (``APS 116'') states that the board, or a board committee, of an

    ADI must ensure that the ADI has in place adequate systems to identify,

    measure and manage market risk, including identifying responsibilities,

    providing adequate separation of duties and avoiding conflicts of

    interest.

    For certain trading positions, APS 116 states that an ADI

    must have ``clearly defined policies and procedures for the active

    management of positions such that: positions are managed on a trading

    desk; position limits are set and monitored for appropriateness;

    positions are marked-to-market daily and when marking-to-model the

    parameters are assessed on a daily basis; and positions are reported to

    senior management as an integral part of the institution's risk

    management process.

    If an ADI has received approval to apply an ``internal

    model'' for market risk, as opposed to the ``standard method'' of

    calculating capital requirements, APS 116 requires the ADI to have an

    independent risk control unit that is responsible for the design and

    implementation of the ADI's market risk management system. The risk

    control unit must produce and analyze daily reports on the output of

    the ADI's risk measurement model, including an evaluation of limit

    utilization. This risk control unit must be independent from business

    trading and other risk taking units and must report directly to senior

    management of the ADI.

    If an ADI has received approval to apply an ``internal

    model'' for market risk, APS 116 states that the board or a board

    committee and senior management of an ADI must be actively involved in

    the risk control process. Daily reports must be prepared by the

    independent risk control unit and must be reviewed by a level of

    management with sufficient seniority and authority to enforce

    reductions of positions.

    APS 116 states that an ADI must ensure that an independent

    review of the risk measurement system and

    [[Page 78871]]

    overall risk management process is carried out initially (i.e., at the

    time when model approval is sought) and then regularly as part of the

    ADI's internal audit process.

    Commission Determination: The Commission finds that the provisions

    of Australian law and regulations specified above are generally

    identical in intent to Sec. 23.600 by requiring a system of risk

    management that seeks to ensure that firms are adequately managing the

    risks of their swaps activities to prevent failure of the SD or MSP,

    which could result in losses to counterparties doing business with the

    SD or MSP, and systemic risk more generally. Specifically, the

    Commission finds that the Australian provisions specified above

    comprehensively require SDs and MSPs to establish risk management

    programs containing the following critical elements:

    Identification of risk categories;

    Establishment of risk tolerance limits for each category

    of risk and approval of such limits by senior management and the

    governing body;

    An independent risk management unit to administer a risk

    management program; and

    Periodic oversight of risk exposures by senior management

    and the governing body.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the risk management program

    requirements of the provisions of Australian law and regulations

    specified above, are comparable to and as comprehensive as Sec.

    23.600, with the exception of Sec. 23.600(c)(2) concerning the

    requirement that each SD and MSP produce a quarterly risk exposure

    report and provide such report to its senior management, governing

    body, and the Commission.

    Notwithstanding that the Commission has not determined that the

    requirements of Australian law and regulations are comparable to and as

    comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.

    23.600 and the Australian law and regulations specified above are

    applicable would generally be deemed to be in compliance with Sec.

    23.600(c)(2) if that SD or MSP complies with the Australian law and

    regulations specified above, subject to compliance with the requirement

    that it produce quarterly risk exposure reports and provide such

    reports to its senior management, governing body, and the Commission in

    accordance with Sec. 23.600(c)(2). The Commission notes that it

    generally expects reports furnished to the Commission by registrants to

    be in the English language.

    2. Monitoring of Position Limits (Sec. 23.601)

    Commission Requirement: Implementing section 4s(j)(1) of the CEA,

    Commission regulation 23.601 requires each SD or MSP to establish and

    enforce written policies and procedures that are reasonably designed to

    monitor for, and prevent violations of, applicable position limits

    established by the Commission, a designated contract market (``DCM''),

    or a swap execution facility (``SEF'').\42\ The policies and procedures

    must include an early warning system and provide for escalation of

    violations to senior management (including the firm's governing body).

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

    \42\ The setting of position limits by the Commission, a DCM, or

    a SEF is subject to requirements under the CEA and Commission

    regulations other than Sec. 23.601. The setting of position limits

    and compliance with such limits is not subject to the Commission's

    substituted compliance regime.

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

    Regulatory Objective: Generally, position limits are implemented to

    ensure market integrity, fairness, orderliness, and accurate pricing in

    the commodity markets. Commission regulation 23.601 thus seeks to

    ensure that SDs and MSPs have established the necessary policies and

    procedures to monitor the trading of the firm to prevent violations of

    applicable position limits established by the Commission, a DCM, or a

    SEF. As part of its Risk Management Program, Sec. 23.601 is intended

    to ensure that established position limits are not breached by the SD

    or MSP.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as section 4s(j)(1)

    of the CEA and Commission regulation 23.601.

    Section 912A(1)(ca) of the Corporations Act, which

    requires AFSL holders to take reasonable steps to ensure its

    representatives comply with the financial services laws, which would

    include regulatory position limits.

    APS 310 (discussed above) requires an ADI's board and

    management to ensure that the ADI meets prudential and statutory

    requirements and has management practices to limit risks to prudent

    levels.

    In addition to the foregoing, the applicant also submitted various

    guidelines and required best practices concerning the setting of

    internal risk tolerance limits and monitoring for compliance with such

    internal limits. Although the Commission recognizes these as prudent

    risk management practices, the Commission does not believe that these

    provisions are comparable to Sec. 23.601 because Sec. 23.601 requires

    monitoring for compliance with external position limits set by the

    Commission, a DCM, or a SEF.

    Commission Determination: The Commission finds that the Australian

    provisions specified above are generally identical in intent to Sec.

    23.601 by requiring SDs and MSPs to establish necessary policies and

    procedures to monitor the trading of the firm to prevent violations of

    applicable position limits established by applicable laws and

    regulations, including those of the Commission, a DCM, or a SEF.

    Specifically, the Commission finds that the provisions of Australian

    law and regulations specified above, while not specific to the issue of

    position limit compliance, nevertheless comprehensively require SDs and

    MSPs to monitor for regulatory compliance generally, which includes

    monitoring for compliance with position limits set pursuant to

    applicable law and the responsibility of senior management (including

    the board of directors) for such compliance.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the compliance monitoring

    requirements of Australian law and regulations, as specified above, are

    comparable to and as comprehensive as Sec. 23.601. For the avoidance

    of doubt, the Commission notes that this determination may not be

    relied on to relieve an SD or MSP from its obligation to strictly

    comply with any applicable position limit established by the

    Commission, a DCM, or a SEF.

    3. Diligent Supervision (Sec. 23.602)

    Commission Requirement: Commission regulation 23.602 implements

    section 4s(h)(1)(B) of the CEA and requires each SD and MSP to

    establish a system to diligently supervise all activities relating to

    its business performed by its partners, members, officers, employees,

    and agents. The system must be reasonably designed to achieve

    compliance with the CEA and CFTC regulations. Commission regulation

    23.602 requires that the supervisory system must specifically designate

    qualified persons with authority to carry out the supervisory

    responsibilities of the SD or MSP for all activities relating to its

    business as an SD or MSP.

    Regulatory Objective: The Commission's diligent supervision rule

    seeks to ensure that SDs and MSPs

    [[Page 78872]]

    strictly comply with the CEA and the Commission's rules. To this end,

    through Sec. 23.602, the Commission seeks to ensure that each SD and

    MSP not only establishes the necessary policies and procedures that

    would lead to compliance with the CEA and Commission regulations, but

    also establishes an effective system of internal oversight and

    enforcement of such policies and procedures to ensure that such

    policies and procedures are diligently followed.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as section

    4s(h)(1)(B) of the CEA and Commission regulation 23.602.

    CPS 520 (discussed above) sets forth the fitness

    requirements for all APRA regulated institutions. These standards apply

    to all directors and senior managers of an ADI as well as other

    ``responsible persons.'' The applicable key requirements of this

    prudential standard are: an ADI must have a Fit and Proper policy that

    meets certain standards; the fitness and propriety of a responsible

    person must generally be assessed prior to initial appointment and then

    re-assessed annually; and an ADI must take steps to ensure that a

    person is not appointed to, or does not continue to hold, a responsible

    person position for which they are not qualified.

    Section 912A(1)(ca) of the Corporations Act requires that

    an AFSL licensee take reasonable steps to ensure that its

    representatives comply with the financial services laws.

    RG 104 (discussed above) sets forth guidance for an AFSL

    licensee with respect to supervision. These regulatory guidelines

    require that an AFSL licensee have measures for monitoring and

    supervising their representatives to determine whether they are

    complying with the financial services laws. They also require that an

    AFSL licensee take measures to ensure that their representatives who

    provide financial services have, and maintain the necessary knowledge

    and skills, to competently provide those services.

    Commission Determination: The Commission finds that the provisions

    of Australian law and regulations specified above are generally

    identical in intent to Sec. 23.602 because such standards seek to

    ensure that SDs and MSPs strictly comply with applicable law, which

    would include the CEA and the Commission's regulations. Through the

    provisions specified above, Australian law and regulations seek to

    ensure that each SD and MSP not only establishes the necessary policies

    and procedures that would lead to compliance with applicable law, which

    would include the CEA and Commission regulations, but also establishes

    an effective system of internal oversight and enforcement of such

    policies and procedures to ensure that such policies and procedures are

    diligently followed.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the internal supervision

    requirements of the provisions of Australian law and regulations, as

    specified above, are comparable to and as comprehensive as Sec.

    23.602.

    4. Business Continuity and Disaster Recovery (Sec. 23.603)

    Commission Requirement: To ensure the proper functioning of the

    swaps markets and the prevention of systemic risk more generally,

    Commission regulation 23.603 requires each SD and MSP, as part of its

    risk management program, to establish a business continuity and

    disaster recovery plan that includes procedures for, and the

    maintenance of, back-up facilities, systems, infrastructure, personnel,

    and other resources to achieve the timely recovery of data and

    documentation and to resume operations generally within the next

    business day after the disruption.

    Regulatory Objective: Commission regulation 23.603 is intended to

    ensure that any market disruption affecting SDs and MSPs, whether

    caused by natural disaster or otherwise, is minimized in length and

    severity. To that end, this requirement seeks to ensure that entities

    adequately plan for disruptions and devote sufficient resources capable

    of carrying out an appropriate plan within one business day, if

    necessary.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as Commission

    regulation 23.603.

    APRA prudential standard CPS 232 Business Continuity Management

    (``CPS 232'') requires each ADI to implement a whole-of-business

    approach to business continuity management. Specifically, CPS 232

    states that:

    A regulated institution must identify, assess, and manage

    potential business continuity risks to ensure that it is able to meet

    its financial and service obligations to its depositors, policyholders

    and other creditors;

    The board of a regulated institution must consider

    business continuity risks and controls as part of its overall risk

    management systems and approve a Business Continuity Management Policy;

    A regulated institution must develop and maintain a

    Business Continuity Plan that documents procedures and information

    which enable the regulated institution to manage business disruptions;

    A regulated institution must review the Business

    Continuity Plan annually and periodically arrange for its review by the

    internal audit function or an external expert; and

    A regulated institution must notify APRA in the event of

    certain disruptions.

    Commission Determination: The Commission finds that the provisions

    of Australian law and regulations specified above are generally

    identical in intent to Sec. 23.603 because such standards seek to

    ensure that any market disruption affecting SDs and MSPs, whether

    caused by natural disaster or otherwise, is minimized in length and

    severity. To that end, the Commission finds that the provisions of

    Australian law and regulations specified above seek to ensure that

    entities adequately plan for disruptions and devote sufficient

    resources capable of carrying out an appropriate plan in a timely

    manner.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the business continuity and

    disaster recovery requirements of the provisions of Australian law and

    regulations, as specified above, are comparable to and as comprehensive

    as Sec. 23.603.

    5. Conflicts of Interest (Sec. 23.605)

    Commission Requirement: Section 4s(j)(5) of the CEA and Commission

    regulation 23.605(c) generally require each SD or MSP to establish

    structural and institutional safeguards to ensure that the activities

    of any person within the firm relating to research or analysis of the

    price or market for any commodity or swap are separated by appropriate

    informational partitions within the firm from the review, pressure, or

    oversight of persons whose involvement in pricing, trading, or clearing

    activities might potentially bias their judgment or supervision.

    In addition, section 4s(j)(5) of the CEA and Commission regulation

    23.605(d)(1) generally prohibits an SD or MSP from directly or

    indirectly interfering with or attempting to influence the decision of

    any clearing unit of any affiliated clearing member of a DCO to provide

    [[Page 78873]]

    clearing services and activities to a particular customer, including:

    Whether to offer clearing services to a particular

    customer;

    Whether to accept a particular customer for clearing

    derivatives;

    Whether to submit a customer's transaction to a particular

    DCO;

    Whether to set or adjust risk tolerance levels for a

    particular customer; or

    Whether to set a customer's fees based on criteria other

    than those generally available and applicable to other customers.

    Commission regulation 23.605(d)(2) generally requires each SD or

    MSP to create and maintain an appropriate informational partition

    between business trading units of the SD or MSP and clearing units of

    any affiliated clearing member of a DCO to reasonably ensure compliance

    with the Act and the prohibitions set forth in Sec. 23.605(d)(1)

    outlined above.

    The Commission observes that Sec. 23.605(d) works in tandem with

    Commission regulation 1.71, which requires FCMs that are clearing

    members of a DCO and affiliated with an SD or MSP to create and

    maintain an appropriate informational partition between business

    trading units of the SD or MSP and clearing units of the FCM to

    reasonably ensure compliance with the Act and the prohibitions set

    forth in Sec. 1.71(d)(1), which are the same as the prohibitions set

    forth in Sec. 23.605(d)(1) outlined above.

    Finally, Sec. 23.605(e) requires that each SD or MSP have policies

    and procedures that mandate the disclosure to counterparties of

    material incentives or conflicts of interest regarding the decision of

    a counterparty to execute a derivative on a swap execution facility or

    DCM or to clear a derivative through a DCO.

    Regulatory Objective: Commission regulation 23.605(c) seeks to

    ensure that research provided to the general public by an SD or MSP is

    unbiased and free from the influence of the interests of an SD or MSP

    arising from the SD's or MSP's trading business.

    In addition, the Sec. 23.605(d) (working in tandem with Sec.

    1.71) seeks to ensure open access to the clearing of swaps by requiring

    that access to and the provision of clearing services provided by an

    affiliate of an SD or MSP are not influenced by the interests of an

    SD's or MSP's trading business.

    Finally, Sec. 23.605(e) seeks to ensure equal access to trading

    venues and clearinghouses, as well as orderly and fair markets, by

    requiring that each SD and MSP disclose to counterparties any material

    incentives or conflicts of interest regarding the decision of a

    counterparty to execute a derivative on a SEF or DCM, or to clear a

    derivative through a DCO.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as Commission

    regulation 23.605(c).

    Section 912A(1)(aa) of the Corporations Act requires AFSL

    licensees to have adequate arrangements for the management of conflicts

    of interest that may arise wholly, or partially, in relation to

    activities undertaken by a licensee or a representative of the licensee

    in the provision of financial services.

    ASIC Regulatory Guide 181 Licensing: Managing conflicts of

    interest and ASIC Regulatory Guide 79 Research report providers:

    Improving the quality of investment research (specific to research

    reports provided in Australia), set out ASIC's expectations regarding

    how financial service licensees are to manage conflicts of interest

    that arise in relation to the financial services that they provide. The

    conflicts management obligation requires that all conflicts of interest

    be adequately managed, recognizing that many conflicts of interest can

    be managed by a combination of internal controls and disclosures. Where

    conflicts cannot be adequately managed through internal controls and/or

    disclosure, the ASIC guidelines require that an AFSL holder must avoid

    the conflict or refrain from providing the affected financial service.

    Section 941A of the Corporations Act requires AFSL

    licensees to provide a Financial Services Guide to retail clients if

    they provide a financial service to the client.

    Section 942B(2)(f) of the Corporations Act states that the

    Financial Services Guide must provide disclosures about relationships

    that may influence the provision of the financial service.\43\

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

    \43\ In addition to the foregoing, the applicant referenced

    Draft CPS 220. This draft prudential standard, if finalized in a

    form similar to its draft form, will require each ADI (including SD

    ADIs) to have policies and procedures for identifying, monitoring,

    and managing potential and actual conflicts of interest.

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

    The applicant has represented to the Commission that ASIC and APRA,

    in the process of their oversight and enforcement of the foregoing

    Australian law and regulations for ADIs and ASFL licensees, would

    require any SD or MSP subject to such law and regulations to resolve or

    mitigate conflicts of interests in the provision of clearing services

    by a clearing member of a DCO that is an affiliate of the SD or MSP, or

    the decision of a counterparty to execute a derivative on a SEF or DCM,

    or clear a derivative through a DCO, through appropriate information

    firewalls and disclosures.

    Commission Determination: The Commission finds that the provisions

    of Australian law and regulations specified above with respect to

    conflicts of interest that may arise in producing or distributing

    research are generally identical in intent to Sec. 23.605(c) because

    such standards seek to ensure that research provided to the general

    public by an SD is unbiased and free from the influence of the

    interests of an SD arising from the SD's trading business.

    With respect to conflicts of interest that may arise in the

    provision of clearing services by an affiliate of an SD or MSP, the

    Commission further finds that although the general conflicts of

    interest prevention requirements under the Australian law and

    regulations specified above do not require with specificity that access

    to and the provision of clearing services provided by an affiliate of

    an SD or MSP not be improperly influenced by the interests of an SD's

    or MSP's trading business, such general requirements would require

    prevention and remediation of such improper influence when recognized

    or discovered. Thus such standards would ensure open access to

    clearing.

    Finally, although not as specific as the requirements of Sec.

    23.605(e) (Undue influence on counterparties), the Commission finds

    that the general disclosure requirements of the Australian law and

    regulations specified above would ensure equal access to trading venues

    and clearinghouses by requiring that each SD and MSP disclose to

    counterparties any material incentives or conflicts of interest

    regarding the decision of a counterparty to execute a derivative on a

    SEF or DCM, or to clear a derivative through a DCO.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the provisions of Australian law

    and regulations specified above in relation to conflicts of interest

    are comparable to and as comprehensive as Sec. 23.605.

    6. Availability of Information for Disclosure and Inspection (Sec.

    23.606)

    Commission Requirement: Commission regulation 23.606 implements

    sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to

    disclose to the Commission, and an

    [[Page 78874]]

    SD's or MSP's U.S. prudential regulator (if any) comprehensive

    information about its swap activities, and to establish and maintain

    reliable internal data capture, processing, storage, and other

    operational systems sufficient to capture, process, record, store, and

    produce all information necessary to satisfy its duties under the CEA

    and Commission regulations. Such systems must be designed to provide

    such information to the Commission and an SD's or MSP's U.S. prudential

    regulator within the time frames set forth in the CEA and Commission

    regulations and upon request.

    Regulatory Objective: Commission regulation 23.606 seeks to ensure

    that each SD and MSP captures and maintains comprehensive information

    about their swap activities, and is able to retrieve and disclose such

    information to the Commission and its U.S. prudential regulator, if

    any, as necessary for compliance with the CEA and the Commission's

    regulations and for purposes of Commission oversight, as well as

    oversight by the SD's or MSP's U.S. prudential regulator, if any.

    The Commission observes that it would be impossible to meet the

    regulatory objective of Sec. 23.606 unless the required information is

    available to the Commission and any U.S. prudential regulator under the

    foreign legal regime. Thus, a comparability determination with respect

    to the information access provisions of Sec. 23.606 would be premised

    on whether the relevant information would be available to the

    Commission and any U.S. prudential regulator of the SD or MSP, not on

    whether an SD or MSP must disclose comprehensive information to its

    regulator in its home jurisdiction.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as Commission

    regulation 23.606.

    Section 912C of the Corporations Act and sections 29-33 of the ASIC

    Act enable ASIC to gather information from AFSL licensees, including:

    A statement containing specified information about the

    financial services provided by the AFSL holder or its representatives,

    or the financial services business carried on by the licensee;

    Inspection of books without charge;

    Issuance of a notice to a body corporate to produce books

    about the affairs of the body corporate;

    Issuance of a notice to a person who carries out a

    financial services business to produce books relating to, among other

    things, a dealing in financial products, or the character or financial

    position of the business;

    Issuance of a notice to produce books relating to the

    supply of financial services; and

    Issuance of a notice to produce documents in the person's

    possession that relate to the affairs of the body corporate.

    In addition, Section 988A of the Corporations Act requires AFSL

    license holders to keep financial records that correctly record and

    explain the transactions and financial position of the financial

    services business carried out by the licensee.

    Part 2.3 of the ASIC Derivative Transaction Rules (Reporting) 2013

    places certain requirements on reporting entities (which includes the

    five SD ADIs as reporting entities from October 1, 2013). Specifically,

    Rule 2.3.1 requires reporting entities to keep records in relation to

    OTC derivatives transactions (including swaps) that enable the

    reporting entity to demonstrate it has complied with the Derivative

    Transaction Rules, and must keep the records for a period of at least

    five years from the date the record is made or amended. Reporting

    entities must also keep a record of all information that it is required

    to be reported under such rules.

    Rule 2.3.2 further requires a reporting entity to, on request by

    ASIC, provide ASIC within a reasonable time with records or other

    information relating to compliance with or determining whether there

    has been compliance with the Rules.

    Commission Determination: The Commission finds that the Australian

    law and regulations specified above are generally identical in intent

    to Sec. 23.606 because such standards seek to ensure that each SD and

    MSP captures and stores comprehensive information about their swap

    activities, and are able to retrieve and disclose such information as

    necessary for compliance with applicable law and for purposes of

    regulatory oversight.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the Australian law and

    regulations with respect to the availability of information for

    inspection and disclosure, as specified above, are comparable to, and

    as comprehensive as, Sec. 23.606, with the exception of Sec.

    23.606(a)(2) concerning the requirement that an SD or MSP make

    information required by Sec. 23.606(a)(1) available promptly upon

    request to Commission staff and the staff of an applicable U.S.

    prudential regulator. The applicant has not submitted any provision of

    law or regulations applicable in Australia upon which the Commission

    could make a finding that SDs and MSPs would be required to retrieve

    and disclose comprehensive information about their swap activities to

    the Commission or any U.S. prudential regulator as necessary for

    compliance with the CEA and Commission regulations, and for purposes of

    Commission oversight and the oversight of any U.S. prudential

    regulator.

    Notwithstanding that the Commission has not determined that the

    requirements of Australian law and regulations are comparable to and as

    comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both Sec.

    23.606 and the Australian law and regulations specified above are

    applicable would generally be deemed to be in compliance with Sec.

    23.606(a)(2) if that SD or MSP complies with the Australian law and

    regulations specified above, subject to compliance with the requirement

    that it produce information to Commission staff and the staff of an

    applicable U.S. prudential regulator in accordance with Sec.

    23.606(a)(2).

    7. Clearing Member Risk Management (Sec. 23.609)

    Commission Requirement: Commission regulation 23.609 generally

    requires each SD or MSP that is a clearing member of a DCO to:

    Establish risk-based limits based on position size, order

    size, margin requirements, or similar factors;

    Screen orders for compliance with the risk-based limits;

    Monitor for adherence to the risk-based limits intra-day

    and overnight;

    Conduct stress tests under extreme but plausible

    conditions of all positions at least once per week;

    Evaluate its ability to meet initial margin requirements

    at least once per week;

    Evaluate its ability to meet variation margin requirements

    in cash at least once per week;

    Evaluate its ability to liquidate positions it clears in

    an orderly manner, and estimate the cost of liquidation; and

    Test all lines of credit at least once per year.

    Regulatory Objective: Through Commission regulation 23.609, the

    Commission seeks to ensure the financial integrity of the markets and

    the clearing system, to avoid systemic risk, and to protect customer

    funds. Effective risk management by SDs and MSPs that are clearing

    members is essential to achieving these objectives. A failure of risk

    management can cause

    [[Page 78875]]

    a clearing member to become insolvent and default to a DCO. Such

    default can disrupt the markets and the clearing system and harm

    customers.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as Commission

    regulation 23.609.

    The regulatory framework for ADIs under the Banking Act is

    based on the banking supervision principles published by the Basel

    Committee on Banking Supervision.\44\ This prudential framework

    includes requirements (largely set out in detailed and separate

    prudential standards) regarding capital adequacy, credit risk, market

    risk, liquidity, credit quality, large exposures, associations with

    related entities, outsourcing, business continuity management, audit

    and related arrangements for prudential reporting, governance, and fit

    and proper management.

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

    \44\ The Corporations Act requires AFSL holders to comply with

    risk management requirements, however, this requirement does not

    apply where an entity is regulated by APRA. See section 912A(1)(h).

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

    In particular, APS 310 (discussed above) requires an ADI's

    board and management to ensure that the ADI meets prudential and

    statutory requirements and has management practices to limit risks to

    prudent levels. APS 310 mandates that the ADI's risk management

    practices must be detailed in descriptions of risk management systems

    that must be regularly reviewed and updated, at least annually, to take

    account of changing circumstances.

    APRA Prudential standard APS 116 Capital Adequacy: Market

    Risk (``APS 116'') states that the board, or a board committee, of an

    ADI must ensure that the ADI has in place adequate systems to identify,

    measure and manage market risk, including identifying responsibilities,

    providing adequate separation of duties and avoiding conflicts of

    interest.

    For certain trading positions, APS 116 states that an ADI

    must have ``clearly defined policies and procedures for the active

    management of positions such that: Positions are managed on a trading

    desk; position limits are set and monitored for appropriateness;

    positions are marked-to-market daily and when marking-to-model the

    parameters are assessed on a daily basis; and positions are reported to

    senior management as an integral part of the institution's risk

    management process.

    If an ADI has received approval to apply an ``internal

    model'' for market risk, as opposed to the ``standard method'' of

    calculating capital requirements, APS 116 requires the ADI to have an

    independent risk control unit that is responsible for the design and

    implementation of the ADI's market risk management system. The risk

    control unit must produce and analyze daily reports on the output of

    the ADI's risk measurement model, including an evaluation of limit

    utilization. This risk control unit must be independent from business

    trading and other risk taking units and must report directly to senior

    management of the ADI.

    If an ADI has received approval to apply an ``internal

    model'' for market risk, APS 116 states that the board or a board

    committee and senior management of an ADI must be actively involved in

    the risk control process. Daily reports must be prepared by the

    independent risk control unit and must be reviewed by a level of

    management with sufficient seniority and authority to enforce

    reductions of positions.

    APS 116 states that an ADI must ensure that an independent

    review of the risk measurement system and overall risk management

    process is carried out initially (i.e., at the time when model approval

    is sought) and then regularly as part of the ADI's internal audit

    process.

    Further, on June 4, 2013, APRA issued a letter to all ADIs,

    including the Australian SDs outlining the framework for the

    application of risk management requirements to the Australian banks'

    membership of CCPs. Such a framework should include, at a minimum:

    application of appropriate systems and controls to monitor, on a

    continuing basis, the risk that membership of and conduct of business

    through a CCP or multiple CCPs may create and to manage such risk. This

    would include application of limits on potential risk exposures. These

    clearly articulated conditions together with APRA's prudential

    standards are designed to achieve a comparable regulatory outcome as

    Commission regulation 23.609.

    Specifically, APRA has represented to the Commission that, in the

    process of its oversight and enforcement of the foregoing Australian

    law, regulations, and prudential standards, any SD or MSP subject to

    such standards that is a clearing member of a DCO would be expected to

    have established risk-based limits and a compliance and assessment

    framework for these limits consistent with the Commission's

    requirements for a clearing member and set out in the SD's or MSP's

    risk management policy framework. APRA would expect banks in Australia

    to adhere to their risk limit policies and any targeted review would

    examine the banks' risk management policy framework that captures these

    regulatory obligations.

    Commission Determination: The Commission finds that the Australian

    law and regulations specified above are generally identical in intent

    to Sec. 23.609 because such standards seek to ensure the financial

    integrity of the markets and the clearing system, to avoid systemic

    risk, and to protect customer funds.

    The Commission notes that the Australian law and regulations

    specified above are not as specific as Sec. 23.609 with respect to

    ensuring that SDs and MSPs that are clearing members of a DCO establish

    detailed procedures and limits for clearing member risk management

    purposes. Nevertheless, the Commission finds that the general

    requirements under the Australian law and regulations specified above,

    implemented in the context of clearing member risk management and

    pursuant to the representations of ASIC and APRA, meet the Commission's

    regulatory objective specified above.

    Based on the foregoing and the representations above, the

    Commission hereby determines that the clearing member risk management

    requirements of the Australian law and regulations specified above are

    comparable to and as comprehensive as Sec. 23.609.

    C. Swap Data Recordkeeping (Sec. Sec. 23.201 and 23.203)

    Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the

    CEA, and Commission regulation 23.201 generally require SDs and MSPs to

    retain records of each transaction, each position held, general

    business records (including records related to complaints and sales and

    marketing materials), records related to governance, financial records,

    records of data reported to SDRs, and records of real-time reporting

    data along with a record of the date and time the SD or MSP made such

    reports. Transaction records must be kept in a form and manner

    identifiable and searchable by transaction and counterparty.

    Commission regulation 23.203, requires SDs and MSPs to maintain

    records of a swap transaction until the termination, maturity,

    expiration, transfer, assignment, or novation date of the transaction,

    and for a period of five years after such date. Records must be

    ``readily accessible'' for the first 2 years of the 5 year retention

    period (consistent with Sec. 1.31).

    [[Page 78876]]

    The Commission notes that the comparability determination below

    with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data

    recordkeeping generally and swap data recordkeeping relating to

    complaints and marketing and sales materials in accordance with Sec.

    23.201(b)(3) and (4).\45\

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

    \45\ See the Guidance for a discussion of the availability of

    substituted compliance with respect to swap data recordkeeping, 78

    FR 45332-33.

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

    Regulatory Objective: Through the Commission's regulations

    requiring SDs and MSPs to keep comprehensive records of their swap

    transactions and related data, the Commission seeks to ensure the

    effectiveness of the internal controls of SDs and MSPs, and

    transparency in the swaps market for regulators and market

    participants.

    The Commission's regulations require SDs and MSPs to keep swap data

    in a level of detail sufficient to enable regulatory authorities to

    understand an SD's or MSP's swaps business and to assess its swaps

    exposure.

    By requiring comprehensive records of swap data, the Commission

    seeks to ensure that SDs and MSPs employ effective risk management, and

    strictly comply with Commission regulations. Further, such records

    facilitate effective regulatory oversight.

    The Commission observes that it would be impossible to meet the

    regulatory objective of Sec. Sec. 23.201 and 23.203 unless the

    required information is available to the Commission and any U.S.

    prudential regulator under the foreign legal regime. Thus, a

    comparability determination with respect to the information access

    provisions of Sec. 23.203 would be premised on whether the relevant

    information would be available to the Commission and any U.S.

    prudential regulator of the SD or MSP, not on whether an SD or MSP must

    disclose comprehensive information to its regulator in its home

    jurisdiction.

    Comparable Australian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Australia are in full force and effect in

    Australia, and comparable to and as comprehensive as sections

    4s(f)(1)(B) and 4s(g)(1) of the CEA and Sec. Sec. 23.201 and 23.203.

    Section 286 of the Corporations Act requires firms to keep

    financial records that correctly record and explain its transactions,

    financial position and performance for 7 years after the transactions

    are completed.

    Section 988A of the Corporations Act requires AFSL

    licensees to keep financial records that correctly record and explain

    the transactions and financial position of the licensee's financial

    services business.

    Section 988E of the Corporations Act specifies a list of

    categories of information to be shown in the records of an AFSL

    licensee, including records of all money received or paid by the

    licensee; acquisitions and disposals of financial products, the charges

    and credits arising from them, and the names of the person acquiring or

    disposing of each of those products; all income from commissions,

    interest and other sources and all payments of interest, commissions

    and other expenses; and records pertaining to the securities or managed

    investment products that are the property of the licensee or held by

    the licensee for other persons.

    Corporations regulation 7.8.11 further specifies

    categories of information to be shown in records, including all

    financial products dealt with by the AFSL licensee under instructions

    from another person; and records pertaining to property held by the

    licensee for another person.

    Corporations regulation 7.8.12 further specifies

    categories of information to be shown in records, including separate

    particulars of every transaction by the AFSL licensee, the date of such

    transactions, and copies of acknowledgments of the receipt of financial

    products or documents of title to financial products.

    Part 2.3 of the ASIC Derivative Transaction Rules (Reporting) 2013

    places certain requirements on reporting entities (which includes the

    five SD ADIs as reporting entities from October, 1 2013). Specifically,

    Rule 2.3.1 requires reporting entities to keep records in relation to

    OTC derivatives transactions (including swaps) that enable the

    reporting entity to demonstrate it has complied with the Derivative

    Transaction Rules, and must keep the records for a period of at least

    five years from the date the record is made or amended. Reporting

    entities must also keep a record of all information that it is required

    to be reported under such rules.

    Rule 2.3.2 further requires a reporting entity to, on request by

    ASIC, provide ASIC within a reasonable time with records or other

    information relating to compliance with or determining whether there

    has been compliance with the Rules.

    Commission Determination: The Commission finds that the provisions

    of Australian law and regulations specified above are generally

    identical in intent to Sec. Sec. 23.201 and 23.203 because such

    provisions seek to ensure the effectiveness of the internal controls of

    SDs and MSPs, and transparency in the swaps market for regulators and

    market participants.

    In addition, the Commission finds that the provisions of Australian

    law and regulations specified above require SDs and MSPs to keep swap

    data in a level of detail sufficient to enable regulatory authorities

    to understand an SD's or MSP's swaps business and to assess its swaps

    exposure.

    Finally, the Commission finds that the provisions of Australian law

    and regulations specified above, by requiring comprehensive records of

    swap data, seek to ensure that SDs and MSPs employ effective risk

    management, seek to ensure that SDs and MSPs strictly comply with

    applicable regulatory requirements (including the CEA and Commission

    regulations), and that such records facilitate effective regulatory

    oversight.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the requirements of Australian

    law and regulation with respect to swap data recordkeeping, as

    specified above, are comparable to, and as comprehensive as, Sec. Sec.

    23.201 and 23.203, with the exception of Sec. 23.203(b)(2) concerning

    the requirement that an SD or MSP make records required by Sec. 23.201

    open to inspection by any representative of the Commission, the United

    States Department of Justice, or any applicable U.S. prudential

    regulator. The applicant has not submitted any provision of Australian

    law or regulation upon which the Commission could make a finding that

    SDs and MSPs would be required to make records required by Sec. 23.201

    open to inspection by any representative of the Commission, the United

    States Department of Justice, or any applicable U.S. prudential

    regulator.

    Notwithstanding that the Commission has not determined that the

    requirements of Australian law and regulations are comparable to and as

    comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both Sec.

    23.203 and the Australian law and regulations specified above are

    applicable would generally be deemed to be in compliance with Sec.

    23.203(b)(2) if that SD or MSP complies with the Australian law and

    regulations specified above, subject to compliance with the requirement

    that it make records required by Sec. 23.201 open to inspection by any

    representative of the Commission, the United States Department of

    Justice, or any applicable U.S. prudential regulator in accordance with

    Sec. 23.203(b)(2).

    [[Page 78877]]

    Issued in Washington, DC on December 20, 2013, by the

    Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendices to Comparability Determination for Australia: Certain

    Entity-Level Requirements

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

    Wetjen voted in the affirmative. Commissioner O'Malia voted in the

    negative.

    Appendix 2--Statement of Chairman Gary Gensler and Commissioners

    Chilton and Wetjen

    We support the Commission's approval of broad comparability

    determinations that will be used for substituted compliance

    purposes. For each of the six jurisdictions that has registered swap

    dealers, we carefully reviewed each regulatory provision of the

    foreign jurisdictions submitted to us and compared the provision's

    intended outcome to the Commission's own regulatory objectives. The

    resulting comparability determinations for entity-level requirements

    permit non-U.S. swap dealers to comply with regulations in their

    home jurisdiction as a substitute for compliance with the relevant

    Commission regulations.

    These determinations reflect the Commission's commitment to

    coordinating our efforts to bring transparency to the swaps market

    and reduce its risks to the public. The comparability findings for

    the entity-level requirements are a testament to the comparability

    of these regulatory systems as we work together in building a strong

    international regulatory framework.

    In addition, we are pleased that the Commission was able to find

    comparability with respect to swap-specific transaction-level

    requirements in the European Union and Japan.

    The Commission attained this benchmark by working cooperatively

    with authorities in Australia, Canada, the European Union, Hong

    Kong, Japan, and Switzerland to reach mutual agreement. The

    Commission looks forward to continuing to collaborate with both

    foreign authorities and market participants to build on this

    progress in the months and years ahead.

    Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading

    Commission's (``Commission'') approval of the Notices of

    Comparability Determinations for Certain Requirements under the laws

    of Australia, Canada, the European Union, Hong Kong, Japan, and

    Switzerland (collectively, ``Notices''). While I support the narrow

    comparability determinations that the Commission has made, moving

    forward, the Commission must collaborate with foreign regulators to

    harmonize our respective regimes consistent with the G-20 reforms.

    However, I cannot support the Notices because they: (1) Are

    based on the legally unsound cross-border guidance (``Guidance'');

    \1\ (2) are the result of a flawed substituted compliance process;

    and (3) fail to provide a clear path moving forward. If the

    Commission's objective for substituted compliance is to develop a

    narrow rule-by-rule approach that leaves unanswered major regulatory

    gaps between our regulatory framework and foreign jurisdictions,

    then I believe that the Commission has successfully achieved its

    goal today.

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

    \1\ Interpretive Guidance and Policy Statement Regarding

    Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,

    2013).

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

    Determinations Based on Legally Unsound Guidance

    As I previously stated in my dissent, the Guidance fails to

    articulate a valid statutory foundation for its overbroad scope and

    inconsistently applies the statute to different activities.\2\

    Section 2(i) of the Commodity Exchange Act (``CEA'') states that the

    Commission does not have jurisdiction over foreign activities unless

    ``those activities have a direct and significant connection with

    activities in, or effect on, commerce of the United States * * *''

    \3\ However, the Commission never properly articulated how and when

    this limiting standard on the Commission's extraterritorial reach is

    met, which would trigger the application of Title VII of the Dodd-

    Frank Act \4\ and any Commission regulations promulgated thereunder

    to swap activities that are outside of the United States. Given this

    statutorily unsound interpretation of the Commission's

    extraterritorial authority, the Commission often applies CEA section

    2(i) inconsistently and arbitrarily to foreign activities.

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

    \2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

    \3\ CEA section 2(i); 7 U.S.C. 2(i).

    \4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer

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

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

    Accordingly, because the Commission is relying on the legally

    deficient Guidance to make its substituted compliance

    determinations, and for the reasons discussed below, I cannot

    support the Notices. The Commission should have collaborated with

    foreign regulators to agree on and implement a workable regime of

    substituted compliance, and then should have made determinations

    pursuant to that regime.

    Flawed Substituted Compliance Process

    Substituted compliance should not be a case of picking a set of

    foreign rules identical to our rules, determining them to be

    ``comparable,'' but then making no determination regarding rules

    that require extensive gap analysis to assess to what extent each

    jurisdiction is, or is not, comparable based on overall outcomes of

    the regulatory regimes. While I support the narrow comparability

    determinations that the Commission has made, I am concerned that in

    a rush to provide some relief, the Commission has made substituted

    compliance determinations that only afford narrow relief and fail to

    address major regulatory gaps between our domestic regulatory

    framework and foreign jurisdictions. I will address a few examples

    below.

    First, earlier this year, the OTC Derivatives Regulators Group

    (``ODRG'') agreed to a number of substantive understandings to

    improve the cross-border implementation of over-the-counter

    derivatives reforms.\5\ The ODRG specifically agreed that a

    flexible, outcomes-based approach, based on a broad category-by-

    category basis, should form the basis of comparability

    determinations.\6\

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

    \5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.

    \6\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.

    Understanding number 2 states that ``[a] flexible, outcomes-based

    approach should form the basis of final assessments regarding

    equivalence or substituted compliance.''

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

    However, instead of following this approach, the Commission has

    made its comparability determinations on a rule-by-rule basis. For

    example, in Japan's Comparability Determination for Transaction-

    Level Requirements, the Commission has made a positive comparability

    determination for some of the detailed requirements under the swap

    trading relationship documentation provisions, but not for other

    requirements.\7\ This detailed approach clearly contravenes the

    ODRG's understanding.

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

    \7\ The Commission made a positive comparability determination

    for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),

    (b)(4), (c), and (d), but not for Commission regulations

    23.504(b)(5) and (b)(6).

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

    Second, in several areas, the Commission has declined to

    consider a request for a comparability determination, and has also

    failed to provide an analysis regarding the extent to which the

    other jurisdiction is, or is not, comparable. For example, the

    Commission has declined to address or provide any clarity regarding

    the European Union's regulatory data reporting determination, even

    though the European Union's reporting regime is set to begin on

    February 12, 2014. Although the Commission has provided some limited

    relief with respect to regulatory data reporting, the lack of

    clarity creates unnecessary uncertainty, especially when the

    European Union's reporting regime is set to begin in less than two

    months.

    Similarly, Japan receives no consideration for its mandatory

    clearing requirement, even though the Commission considers Japan's

    legal framework to be comparable to the U.S. framework. While the

    Commission has declined to provide even a partial comparability

    determination, at least in this instance the Commission has provided

    a reason: the differences in the scope of entities and products

    subject to the clearing requirement.\8\ Such treatment creates

    uncertainty and is contrary to increased global harmonization

    efforts.

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

    \8\ Yen-denominated interest rate swaps are subject to the

    mandatory clearing requirement in both the U.S. and Japan.

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

    Third, in the Commission's rush to meet the artificial deadline

    of December 21, 2013, as established in the Exemptive Order

    Regarding Compliance with Certain Swap

    [[Page 78878]]

    Regulations (``Exemptive Order''),\9\ the Commission failed to

    complete an important piece of the cross-border regime, namely,

    supervisory memoranda of understanding (``MOUs'') between the

    Commission and fellow regulators.

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

    \9\ Exemptive Order Regarding Compliance With Certain Swap

    Regulations, 78 FR 43785 (Jul. 22, 2013).

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

    I have previously stated that these MOUs, if done right, can be

    a key part of the global harmonization effort because they provide

    mutually agreed-upon solutions for differences in regulatory

    regimes.\10\ Accordingly, I stated that the Commission should be

    able to review MOUs alongside the respective comparability

    determinations and vote on them at the same time. Without these

    MOUs, our fellow regulators are left wondering whether and how any

    differences, such as direct access to books and records, will be

    resolved.

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

    \10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.

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

    Finally, as I have consistently maintained, the substituted

    compliance process should allow other regulatory bodies to engage

    with the full Commission.\11\ While I am pleased that the Notices

    are being voted on by the Commission, the full Commission only

    gained access to the comment letters from foreign regulators on the

    Commission's comparability determination draft proposals a few days

    ago. This is hardly a transparent process.

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

    \11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

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

    Unclear Path Forward

    Looking forward to next steps, the Commission must provide

    answers to several outstanding questions regarding these

    comparability determinations. In doing so, the Commission must

    collaborate with foreign regulators to increase global

    harmonization.

    First, there is uncertainty surrounding the timing and outcome

    of the MOUs. Critical questions regarding information sharing,

    cooperation, supervision, and enforcement will remain unanswered

    until the Commission and our fellow regulators execute these MOUs.

    Second, the Commission has issued time-limited no-action relief

    for the swap data repository reporting requirements. These

    comparability determinations will be done as separate notices.

    However, the timing and process for these determinations remain

    uncertain.

    Third, the Commission has failed to provide clarity on the

    process for addressing the comparability determinations that it

    declined to undertake at this time. The Notices only state that the

    Commission may address these requests in a separate notice at a

    later date given further developments in the law and regulations of

    other jurisdictions. To promote certainty in the financial markets,

    the Commission must provide a clear path forward for market

    participants and foreign regulators.

    The following steps would be a better approach: (1) The

    Commission should extend the Exemptive Order to allow foreign

    regulators to further implement their regulatory regimes and

    coordinate with them to implement a harmonized substituted

    compliance process; (2) the Commission should implement a flexible,

    outcomes-based approach to the substituted compliance process and

    apply it similarly to all jurisdictions; and (3) the Commission

    should work closely with our fellow regulators to expeditiously

    implement MOUs that resolve regulatory differences and address

    regulatory oversight issues.

    Conclusion

    While I support the narrow comparability determinations that the

    Commission has made, it was my hope that the Commission would work

    with foreign regulators to implement a substituted compliance

    process that would increase the global harmonization effort. I am

    disappointed that the Commission has failed to implement such a

    process.

    I do believe that in the longer term, the swaps regulations of

    the major jurisdictions will converge. At this time, however, the

    Commission's comparability determinations have done little to

    alleviate the burden of regulatory uncertainty and duplicative

    compliance with both U.S. and foreign regulations.

    The G-20 process delineated and put in place the swaps market

    reforms in G-20 member nations. It is then no surprise that the

    Commission must learn to coordinate with foreign regulators to

    minimize confusion and disruption in bringing much needed clarity to

    the swaps market. For all these shortcomings, I respectfully dissent

    from the Commission's approval of the Notices.

    [FR Doc. 2013-30974 Filed 12-26-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 27, 2013



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