Font Size: AAA // Print // Bookmark

2013-30978

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

    [Notices]

    [Pages 78899-78910]

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

    [FR Doc No: 2013-30978]

    [[Page 78899]]

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

    COMMODITY FUTURES TRADING COMMISSION

    Comparability Determination for Switzerland: Certain Entity-Level

    Requirements

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Comparability Determination for Certain Requirements

    under Swiss Financial Market Regulation.

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

    SUMMARY: The following is the analysis and determination of the

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

    parts of a request by UBS AG (``UBS'') that the Commission determine

    that laws and regulations applicable in Switzerland 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, and Scott Lee, Special Counsel, 202-418-5090,

    slee@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.

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

    \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).

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

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

    issued the Exemptive Order Regarding Compliance with Certain Swap

    Regulations (the ``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\

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

    \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.

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

    On July 11, 2013, UBS (``applicant'') submitted a request that the

    Commission determine that laws and regulations applicable in

    Switzerland provide a sufficient basis for an affirmative finding of

    comparability with respect to certain Entity-Level Requirements,

    including the Internal Business Conduct Requirements.\4\ On November

    13, 2013, the application was 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\

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

    \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 SDR Reporting. The Commission

    may provide a comparability determination with respect to the SDR

    Reporting requirement in a separate notice.

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

    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.

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

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

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

    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\

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

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

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

    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).

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

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

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

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

    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

    [[Page 78900]]

    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.

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

    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\

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

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

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

    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 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\

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

    \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 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\ Id.

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

    III. Regulation of SDs and MSPs in Switzerland

    On July 11, 2013, UBS submitted a request that the Commission

    assess the comparability of laws and regulations applicable in

    Switzerland with the CEA and the Commission's regulations promulgated

    thereunder. On November 13, 2013, the application was supplemented with

    corrections and additional materials.

    As represented to the Commission by the applicant, SDs in

    Switzerland are primarily regulated by the Swiss Financial Market

    Supervisory Authority (``FINMA''). FINMA protects creditors, investors,

    and policy holders, ensuring the smooth functioning of the financial

    markets and preserving the reputation of Swiss financial institutions.

    In its role as state supervisory authority, FINMA acts as an oversight

    authority of banks, insurance companies, exchanges, securities dealers,

    collective investment schemes, distributors, and insurance

    intermediaries. It issues operating licenses for companies in the

    supervised sectors. Through its supervisory activities, FINMA's role is

    to ensure that supervised institutions comply with the requisite laws,

    ordinances, directives and regulations, and continue at all times to

    fulfill the licensing requirements.\15\

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

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

    determinations herein are based on the comparability of Swiss

    requirements applicable to FINMA supervised institutions, an SD or

    MSP that is not supervised by FINMA, or is otherwise not subject to

    the requirements applicable to FINMA supervised institutions upon

    which the Commission bases its determinations, may not be able to

    rely on the Commission's comparability determinations herein.

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

    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\

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

    \16\ 78 FR 45343.

    \17\ 78 FR 45343.

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

    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\

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

    \18\ 78 FR 45343.

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

    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

    [[Page 78901]]

    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.

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

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

    program would generally be available for swap data repository

    reporting (``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.

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

    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.

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

    \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.

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

    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 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\

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

    \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.

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

    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\

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

    \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.

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

    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\

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

    \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\ The applicant did not request a compatibility determination

    for Sec. 23.608 (Restrictions on counterparty clearing

    relationships), therefore, this notice does not address Sec.

    23.608. Additionally, this notice does not address Sec. 23.609

    (Clearing member risk management). The Commission declines to take

    up the request for a comparability determination with respect to

    Sec. 23.609 due to the Commission's view that there are not laws or

    regulations applicable in Switzerland to compare with the

    prohibitions and requirements of Sec. 23.609. 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 Switzerland.

    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.

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

    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

    [[Page 78902]]

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

    and MSPs.'' \30\

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

    \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 as, e.g., independent bilateral

    arrangements, statements of intent, declarations, or letters.

    \30\ 78 FR 45344.

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

    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 to the use and confidentiality of non-public information shared

    pursuant to the arrangement.

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

    \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. Sec. 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'').

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

    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

    [[Page 78903]]

    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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as section 4s(k) of the CEA and

    Commission regulation 3.3.

    The applicant represented that Swiss law and FINMA regulations

    require a regulated entity within FINMA's jurisdiction to appoint a

    senior management member to act in the capacity of a CCO, with

    responsibility for the oversight of all of the entity's regulated

    businesses, including its swaps business. The CCO is required by law to

    report, directly or indirectly, to senior management of the regulated

    entity with respect to any material compliance issues in any of the

    banking entity's businesses.

    Under Swiss law, compliance entails the adherence to legal,

    regulatory and internal policies, as well as the observance of the

    customary standards and rules of professional conduct within the

    market. The risk of violations of provisions, standards, or rules of

    professional conduct and the corresponding legal and regulatory

    sanctions, financial losses, or damage to one's reputation are deemed

    to be compliance risks.

    Accordingly, FINMA Circular 2008/24 of November 20, 2008,

    Supervision and Internal Control of Banks,\33\ requires banks to take

    the necessary operational measures and precautions to ensure

    compliance. Pursuant to such Circular, banks:

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

    \33\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20081120-FINMA_Circ_08-24.pdf.

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

    Must designate one member of senior management to act in

    the capacity of the CCO with responsibility for oversight of the

    compliance function;

    Must maintain a compliance function with unrestricted

    access to information and independence from profit-generating business

    activities;

    Must allocate adequate resources and authority to the

    compliance function;

    Must not permit compensation of employees of the

    compliance function to contain incentives that could lead to conflicts

    of interest;

    Must conduct an annual assessment (at minimum) of

    compliance risk and compliance policies, approved by management;

    Must timely report to management regarding material

    changes to compliance risks, serious violations, and remediation; and

    Must prepare an annual report assessing compliance risks

    and activities and furnish such report to the board of directors,

    internal auditors, and outside auditors.

    Commission Determination: The Commission finds that the Swiss law

    and regulations 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 Swiss law

    and regulations are comparable to and as comprehensive as Sec. 3.3,

    with the exception of 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 the Swiss standards specified above are comparable to

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

    3.3 and the Swiss law and regulations specified above are applicable

    would generally be deemed to be in compliance with Sec. 3.3 if that SD

    or MSP complies with the Swiss law and regulations specified above,

    subject to certifying and furnishing the Commission with the annual

    report required under Swiss law and regulations specified above 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.\34\ The Commission adopted regulations 23.600, 23.601,

    23.602, 23.603, 23.605, and 23.606 to implement the statute.\35\ 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'').\36\ Collectively, these

    requirements help to establish a robust and comprehensive internal risk

    management program for SDs and MSPs with respect to their swaps

    activities,\37\ 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.

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

    \34\ 7 U.S.C. 6s(j).

    \35\ 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).

    \36\ See Customer Documentation Rule, 77 FR 21278 (April 9,

    2012). 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.

    \37\ See supra note 20.

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

    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

    [[Page 78904]]

    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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as section 4s(j)(2) of the CEA

    and Commission regulation 23.600.

    Article 9 of the Swiss Banking Ordinance,\38\ FINMA Circular 2008/

    24,\39\ and Bank Liquidity Ordinance of the Swiss Federal Council,

    address specific forms of risk and detail requirements related to

    controls and management of those risks including, but not limited to:

    market risk, liquidity risk, operational and settlement risk, credit

    risk, reputational risk, and legal risk. Specifically, pursuant to such

    Swiss law and regulations, Swiss banks:

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

    \38\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20090101-BankO.pdf.

    \39\ See supra note 31.

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

    Must have an internal audit function that annually

    assesses the effectiveness of risk management;

    Must segregate the risk management function from trading

    functions;

    Must make the board of directors responsible to regulate,

    establish, maintain, monitor, and regularly supervise an appropriate

    internal control function in conformity with the bank's risk profile;

    Must have internal documentation of the risk management

    function sufficient for an outside auditor to form a reliable opinion;

    Must keep internal auditors independent from management;

    Must have internal controls based on systematic risk

    analysis, and must ensure material risks are recorded, limited, and

    monitored, including risks posed by affiliates;

    Must establish an internal audit function that reports

    directly to the board or audit committee;

    Must have the board of directors regularly discuss with

    management its assessment of the adequacy and effectiveness of internal

    controls;

    Must maintain and regularly test internal control

    functions; and

    Must define the bank's capacity to assume liquidity risk

    (risk tolerance limits), monitor and manage intra-day liquidity risks,

    and monitor assets that are used to generate liquidity.

    Commission Determination: The Commission finds that the Swiss 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 Swiss law and regulations 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 Swiss law and regulations, as 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 Swiss 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 Swiss 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 Swiss 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

    [[Page 78905]]

    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'').\40\ 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).

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

    \40\ 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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as section 4s(j)(1) of the CEA

    and Commission regulation 23.601.

    The applicant represented that Swiss law and regulations require

    banking entities under FINMA's supervision to comply with regulations

    in the jurisdictions in which they conduct business, which would

    include compliance with the position limit regimes imposed by the

    Commission, a DCM, or SEF, as applicable. Specifically, FINMA Circular

    2008/24 \41\ requires banking entities whose compliance policies and

    procedures govern activities in multiple jurisdictions must ensure that

    such policies and procedures ensure compliance in each jurisdiction.

    Thus, activities of a Swiss banking entity that have an impact on

    United States territory must be in compliance with the Commission's

    position limit regime.

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

    \41\ See supra note 31.

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

    FINMA Newsletter 31 of December 13, 2011, Unauthorized Trading of

    Banks \42\ and Swiss law address specific requirements relating to

    monitoring for and complying with applicable position limits. Pursuant

    to Swiss law and regulations, Swiss banks:

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

    \42\ Text of English Translation available at: http://www.finma.ch/e/finma/publikationen/Documents/finma-mitteilung-31-2011-e.pdf.

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

    Must manage for unauthorized trading and maintain

    oversight of trading activities and related risks, including compliance

    with applicable position limits; and

    Banking entities must devote adequate attention and

    management resources to identify, measure, and control compliance

    risks.

    Commission Determination: The Commission finds that the Swiss law

    and regulations 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 Swiss law and regulations

    specified above, comprehensively require SDs and MSPs to monitor for

    regulatory 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 Swiss 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 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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as section 4s(h)(1)(B) of the

    CEA and Commission regulation 23.602.

    FINMA Circular 2008/24 \43\ requires segregation of duties

    and control activities. Management is required to ensure an appropriate

    segregation of duties and avoids assigning responsibilities which could

    lead to conflicting responsibilities or interests.

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

    \43\ See supra note 31.

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

    Controlling activities are to be an integral part of all

    work processes, e.g., process controls; results monitoring; and review

    of conduct of employees and organizational units where no quantitative

    results are observable.

    As previously stated above, the applicant represents that Swiss law

    requires banking entities under FINMA's supervision to comply with

    regulations in the jurisdictions in which they conduct business, which

    would include compliance with the CEA and Commission regulations as

    applicable. Specifically, FINMA Circular 2008/24 requires banking

    entities whose compliance policies and procedures govern activities in

    multiple jurisdictions must ensure that such policies and procedures

    ensure compliance in each jurisdiction. Thus, activities of a Swiss

    banking entity that have an impact on United States territory must be

    in compliance with the CEA and Commission regulations.

    Commission Determination: The Commission finds that the Swiss 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 Swiss laws and regulations

    specified above, Swiss laws and regulations seek to ensure that each SD

    and MSP not only establishes the

    [[Page 78906]]

    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 Swiss 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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as Commission regulation 23.603.

    Annex 1 of FINMA's Circular on Operational Risk \44\

    requires banks to have contingency or business continuity plans to

    ensure their ability to operate under exceptional circumstances and to

    limit consequences of severe business disruptions.

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

    \44\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/en/Library/Legislative-Texts/Documents/pub-20130408-finma-circular-***8-21-en.pdf.

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

    FINMA Circular 2008/10 of November 20, 2008, Self-

    regulation as a minimum standard,\45\ and sections 5.4.1 (Business

    Impact Analysis) and 5.4.2 (Business Continuity Strategy) of the Swiss

    Bankers' Association Recommendations for Business Continuity

    Management,\46\ establish minimum business continuity management

    standards for banks and securities dealers in Switzerland.

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

    \45\ Text of English translation available at: http://finma.ch/e/regulierung/Documents/finma-rs-2008-10-e.pdf.

    \46\ Text of English translation available at: http://shop.sba.ch/11107_e.pdf.

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

    Commission Determination: The Commission finds that the Swiss 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 Swiss laws 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 Swiss 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

    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 futures commission merchants

    (``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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the

    [[Page 78907]]

    following provisions of law and regulations applicable in Switzerland

    are in full force and effect in Switzerland, and comparable to and as

    comprehensive as Commission regulation 23.605(c).

    The FINMA Circular on market conduct rules \47\ and the FINMA

    Circular on Self-regulation recognize the Swiss Bankers' Association

    Directives on the Independence of Financial Research \48\ as minimum

    standards. These circulars require information partitions where

    necessary to prevent conflicts of interest. In particular, they require

    the research unit to be independent from business trading units.

    Adherence to information partitions is to be monitored and is a

    designated compliance function, while the ultimate responsibility for

    handling confidential price-sensitive information and conflicts of

    interest lies with executive management.

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

    \47\ Text of English translation available at: http://www.finma.ch/e/regulierung/Documents/finma-rs-2008-38-e.pdf (stating

    that analysis or research departments are to be organized

    independently and be segregated as separate areas of

    confidentiality).

    \48\ Text of English translation available at: http://www.swissbanking.org/12108.pdf.

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

    More generally, imposing restrictions on particular customers would

    contradict the open access principles outlined in art. 33 of the Swiss

    National Bank Ordinance. In addition, under Swiss law, a bank must

    comply with the Swiss competition laws, including the Federal Act on

    Cartels and other Restraints on Competition. An activity that violates

    the provision of these laws is a violation of these laws regardless of

    where the putative activity took place.

    The applicant has represented to the Commission that FINMA, in the

    process of its oversight and enforcement of the foregoing Swiss

    standards, would require any SD or MSP subject to such standards 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 Swiss 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 Swiss standards 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 Swiss standards

    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.

    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 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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect in Switzerland,

    and comparable to and as comprehensive as Commission regulation 23.606.

    The Swiss Code of Obligations,\49\ Ordinance of the Swiss Federal

    Council on Business Record Keeping,\50\ Swiss Financial Markets

    Supervisory Authority Act,\51\ Swiss National Banking Ordinance,\52\

    National Bank Act,\53\ and FINMA Circulars impose comprehensive

    requirements with respect to data retention and storage, and the

    availability of such data to regulatory authorities. These requirements

    apply to all of a banking entity's business, including its swaps

    business.

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

    \49\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/19110009/201305280000/220.pdf.

    \50\ Text of ordinance available at: http://www.admin.ch/opc/de/classified-compilation/20001467/201301010000/221.431.pdf.

    \51\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20052624/201307010000/956.1.pdf.

    \52\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20040259/201307010000/951.131.pdf (requiring banks to report OTC derivatives information

    biannually to the Bank of Internal Settlement).

    \53\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20021117/201203010000/951.11.pdf (requiring the Swiss National Bank, pursuant to art. 14,

    to monitor financial market developments and requiring banks to

    provide statistical data about their activities to the Swiss

    National Bank).

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

    Collectively, these Swiss laws and regulations require a firm to

    maintain swaps data and related books and records in a systematic,

    logical, and chronological format so that the data cannot be damaged,

    altered, or deleted. Further, a firm is required to maintain account

    records, accounting records, and business correspondence for ten years.

    These records must contain all

    [[Page 78908]]

    necessary information to establish, review, and reconstruct the

    financial situation of the firm by FINMA, regulatory authorities, audit

    firms, and persons or companies legally authorized to review such

    records.

    Commission Determination: The Commission finds that the Swiss 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 requirements of Swiss 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 prudential

    regulator. The applicant has not submitted any provision of law or

    regulations applicable in Switzerland, 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 Swiss 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 Swiss standards 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 Swiss standards 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).

    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 swap data repositories (``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).

    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).\54\

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

    \54\ 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 Swiss Law and Regulations: The applicant has represented

    to the Commission that the following provisions of law and regulations

    applicable in Switzerland are in full force and effect Switzerland, 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.

    Under Swiss law and FINMA Circulars, a banking entity is subject to

    extensive requirements regarding accounting records, which cover

    records of transactions in all areas of the bank's business, including

    its swaps business. Under the Swiss Code of Obligations,\55\ for

    example:

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

    \55\ See supra note 51.

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

    According to art. 957, a Swiss firm has to properly

    capture and maintain its books necessary to provide a fair view of its

    kind and size of business. Accounting records and business

    correspondence can be maintained in written or electronic format,

    provided the format ensures that the records adequately reflect

    business transactions;

    According to art. 962, accounts, accounting records, and

    business correspondence have to be retained for ten years;

    Pursuant to art. 713, all deliberations and decisions by

    the supervisory body have to be recorded in a protocol, signed by the

    Chairman and the secretary; and

    Pursuant to art. 747, the accounting records of a

    dissolved company are kept for ten years at a location designated by

    the liquidators or, if the liquidators cannot reach agreement, by the

    commercial registry.

    Commission Determination: The Commission finds that the Swiss law

    and regulations specified above are generally identical in intent to

    Sec. Sec. 23.201 and 23.202 because such standards 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 Swiss laws 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.

    [[Page 78909]]

    Finally, the Commission finds that Swiss laws 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 Swiss law and

    regulations with respect to the 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 MSPs 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 law or

    regulations applicable in Switzerland, 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 Swiss 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 Swiss 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 Swiss 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).

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

    Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Comparability Determination for Switzerland: 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--Joint Statement of Chairman Gary Gensler and Commissioners

    Bart Chilton and Mark 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--Statement of Dissent by 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

    [[Page 78910]]

    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 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. 2013-30978 Filed 12-26-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 27, 2013



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions