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2013-30979

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

    [Notices]

    [Pages 78839-78852]

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

    [FR Doc No: 2013-30979]

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    COMMODITY FUTURES TRADING COMMISSION

    Comparability Determination for Canada: Certain Entity-Level

    Requirements

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Comparability Determination for Certain Requirements

    under the Laws of Canada.

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    SUMMARY: The following is the analysis and determination of the

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

    parts of a joint request by the Canadian Bankers Association (``CBA''),

    five individual Canadian banks provisionally-registered with the

    Commodity Futures Trading Commission (``Commission'') as swap dealers

    (``SDs''), and the Office of the Superintendent of Financial

    Institutions (``OSFI'') that the Commission determine that certain laws

    and regulations applicable in Canada provide a sufficient basis for an

    affirmative finding of comparability with respect to the following

    regulatory obligations applicable to 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 Andy Chapin, Associate Director, 202-418-5465,

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

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

    Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

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

    its ``Interpretive Guidance and Policy Statement Regarding Compliance

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

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

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

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

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

    generally speaking, in applying Title VII and certain Commission

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

    the Guidance generally described the policy and procedural framework

    under which the Commission would consider a substituted compliance

    program with respect to Commission regulations applicable to entities

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

    recognition program where compliance with a comparable regulatory

    requirement of a foreign jurisdiction would serve as a reasonable

    substitute for compliance with the attendant requirements of the CEA

    and the Commission's regulations promulgated thereunder.

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

    published proposed and further proposed guidance on July 12, 2012

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

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

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

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

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

    issued the Exemptive Order Regarding Compliance with Certain Swap

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

    Exemptive Order provided time for the Commission to consider

    substituted compliance with respect to six jurisdictions where non-U.S.

    SDs are currently organized. In this regard, the Exemptive Order

    generally provided non-U.S. SDs and MSPs in the six jurisdictions with

    conditional relief from certain requirements of Commission regulations

    (those referred to as ``Entity-Level Requirements'' in the Guidance)

    until the earlier of December 21, 2013, or 30 days following the

    issuance of a substituted compliance determination.\3\

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

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

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

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

    Commission's regulations.

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    On May 13, 2013, the CBA, five individual Canadian banks

    provisionally registered with the Commission as SDs, and OSFI

    (collectively hereinafter, the ``applicant'') submitted a request that

    the Commission determine that laws and regulations applicable in Canada

    provide a sufficient basis for an affirmative finding of comparability

    with respect to certain Entity-Level Requirements, including the

    Internal Business Conduct Requirements.\4\ The applicants provided

    Commission staff with a supplemental submission from the Ontario

    Securities Commission (``OSC'') dated June 7, 2013. The following is

    the Commission's analysis and determination regarding the Internal

    Business Conduct Requirements, as detailed below.\5\

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

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

    23.602, 23.603, 23.605, and 23.606.

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

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

    determination with respect to the SDR Reporting requirement in a

    separate notice.

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    II. Background

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

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

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

    for swaps.

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

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

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

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

    activities when certain conditions are met, namely, when such

    activities have a ``direct and significant connection with activities

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

    contravene Commission rules or regulations as are necessary or

    appropriate to prevent evasion of the swap provisions of the CEA

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

    [[Page 78840]]

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

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

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

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

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

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

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

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

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

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

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

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

    other matters, the Guidance generally described the policy and

    procedural framework under which the Commission would consider a

    substituted compliance program with respect to Commission regulations

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

    Commission addressed a recognition program where compliance with a

    comparable regulatory requirement of a foreign jurisdiction would serve

    as a reasonable substitute for compliance with the attendant

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

    to the standards forming the basis for any determination of

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

    finding''), the Commission stated:

    In evaluating whether a particular category of foreign

    regulatory requirement(s) is comparable and comprehensive to the

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

    the Commission will take into consideration all relevant factors,

    including but not limited to, the comprehensiveness of those

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

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

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

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

    this context, comparable does not necessarily mean identical.

    Rather, the Commission would evaluate whether the home

    jurisdiction's regulatory requirement is comparable to and as

    comprehensive as the corresponding U.S. regulatory

    requirement(s).\9\

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    \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\

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

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    In this regard, the Commission notes that a comparability

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

    comprehensive information to its regulator in its home jurisdiction,

    but rather on whether information relevant to the Commission's

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

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

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

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

    requirement of the CEA \12\ and the Commission's regulations,\13\ and

    is a condition to registration.\14\

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

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

    registered SD or MSP shall be maintained in accordance with

    Commission regulation 1.31 and shall be open for inspection by

    representatives of the Commission, the United States Department of

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

    In its Final Exemptive Order Regarding Compliance with Certain

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

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

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

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

    or secrecy laws of foreign jurisdictions that applied to the books

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

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

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

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

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

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

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

    and its regulations to access records held by registered SDs and

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

    fundamental regulatory tool necessary to properly monitor and

    examine each registrant's compliance with the CEA and the

    regulations adopted pursuant thereto. The Commission has maintained

    an ongoing dialogue on a bilateral and multilateral basis with

    foreign regulators and with registrants to address books and records

    access issues and may consider appropriate measures where requested

    to do so.

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

    CEA.

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

    \14\ See supra note 10.

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    III. Regulation of SDs and MSPs in Canada

    On May 13, 2013, the applicant submitted a request that the

    Commission assess the comparability of Canadian laws and regulations

    with the requirements of the CEA and the Commission's regulations

    promulgated thereunder. OSC provided a supplement to the submission on

    June 7, 2013. On November 8, 2013, OSFI further supplemented the

    application with corrections and additional materials.

    All of the currently registered Canadian SDs are banks regulated

    under the Canadian Bank Act (the ``Bank Act''),\15\ relevant

    regulations thereunder, and guidelines, advisories, and interpretations

    provided by OSFI. As the governing prudential regulator in Canada, OSFI

    supervises all Canadian banks on a consolidated basis, including those

    provisionally registered with the Commission as SDs (the ``Canadian

    Bank SDs''). To implement its ``Supervisory Framework,'' OSFI has

    published guidelines, advisories, and interpretations which OSFI

    expects each bank to follow. Each of the five Canadian Bank SDs also

    has been designated as Domestic Systemically Important Banks

    (``DSIBs'') due to the potential impact that failure could have on the

    domestic economy based on their size, interconnectedness,

    substitutability, and complexity. As DSIBs, these banks are expected to

    have advanced practices in terms of the design and operation of

    oversight functions and controls, and are subject to continued

    supervisory intensity, enhanced disclosure requirements, and a capital

    surcharge.\16\

    Canada's provincial securities administrators, coordinated by the

    Derivatives Committee of the Canadian Securities Administrators

    (``CSA''), are responsible for regulating the capital markets.

    Harmonized policy recommendations are made at the CSA level, while

    regulations are made at the provincial level. Currently, the CSA has

    issued a Consultation Paper 91-407 on ``Derivatives Registration''

    (comment period closed June 17, 2013).

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    \15\ Consolidated Acts of Canada, S.C. 1991, c. 46.

    \16\ Because the applicant's request and the Commissions

    determinations herein are based on the comparability of Canadian

    requirements applicable to banks, an SD or MSP that is not a bank,

    or is otherwise not subject to the requirements applicable to banks

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

    to rely on the Commission's comparability determinations herein.

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    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

    [[Page 78841]]

    basis of the foreign regime as a whole.\17\ 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.\18\

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    \17\ 78 FR 45343.

    \18\ 78 FR 45343.

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    In evaluating whether a particular category of foreign regulatory

    requirement(s) is comparable and comprehensive to the corollary

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

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

    limited to:

    The comprehensiveness of those requirement(s),

    The scope and objectives of the relevant regulatory

    requirement(s),

    The comprehensiveness of the foreign regulator's

    supervisory compliance program, and

    The home jurisdiction's authority to support and enforce

    its oversight of the registrant.\19\

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

    program would generally be available for SDR Reporting, as outlined

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

    the data elements that are reported to a foreign trade repository

    pursuant to the substituted compliance program. Thus, direct access

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

    comparability evaluation for SDR Reporting. Moreover, the Commission

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

    comparability evaluation for SDR Reporting ``will generally entail a

    detailed comparison and technical analysis.'' A more particularized

    analysis will generally be necessary to determine whether data

    stored in a foreign trade repository provides for effective

    Commission use, in furtherance of the regulatory purposes of the

    Dodd-Frank Act. See 78 FR 45345.

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    In 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).\20\ This approach recognizes

    that foreign regulatory systems differ and their approaches vary and

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

    the foreign jurisdiction's regulatory requirements nonetheless achieve

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

    the CEA or Commission regulation.

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    \20\ 78 FR 45343.

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    In doing its comparability analysis the Commission may determine

    that no comparability determination can be made \21\ and that the non-

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

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

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

    regulations.

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    \21\ A finding of comparability may not be possible for a number

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

    yet implemented or finalized particular requirements.

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

    of the regulatory objectives of the foreign jurisdiction's regulation

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

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

    instead have regulatory or supervisory regimes that achieve comparable

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

    a more general, entity-wide, or prudential, basis.\22\ 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.\23\

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    \22\ 78 FR 45343.

    \23\ As explained in the Guidance, such ``approaches used will

    vary depending on the circumstances relevant to each jurisdiction.

    One example would include coordinating with the foreign regulators

    in developing appropriate regulatory changes or new regulations,

    particularly where changes or new regulations already are being

    considered or proposed by the foreign regulators or legislative

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

    with the appropriate regulators and market participants, include in

    its substituted compliance determination a description of the means

    by which certain swaps market participants can achieve substituted

    compliance within the construct of the foreign regulatory regime.

    The identification of the means by which substituted compliance is

    achieved would be designed to address the regulatory objectives and

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

    that does not conflict with a foreign regulatory regime and reduces

    the likelihood of inconsistent regulatory obligations. For example,

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

    undertake certain recordkeeping and documentation for swap

    activities that otherwise is only addressed by the foreign

    regulatory regime with respect to financial activities generally. In

    addition, the substituted compliance determination may include

    provisions for summary compliance and risk reporting to the

    Commission to allow the Commission to monitor whether the regulatory

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

    interest of comity, the Commission would seek to achieve its

    regulatory objectives with respect to the Commission's registrants

    that are operating in foreign jurisdictions in a manner that works

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

    78 FR 45343-44.

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

    description of the laws and regulations of the foreign jurisdiction in

    making its comparability determination. The Commission considers an

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

    regulations submitted are in full force and effect, that the

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

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

    encompasses the swaps activities \24\ of SDs and MSPs \25\ in the

    relevant jurisdictions.\26\ 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.\27\

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    \24\ ``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 Part 23 (17 CFR Part 23) are limited

    in scope to the swaps activities of SDs and MSPs.

    \25\ 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.

    \26\ 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.

    \27\ 78 FR 45345.

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    The Guidance provided a detailed discussion of the Commission's

    policy regarding the availability of substituted

    [[Page 78842]]

    compliance \28\ for the Internal Business Conduct Requirements.\29\

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    \28\ 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.

    \29\ This notice does not address Sec. 23.608 (Restrictions on

    counterparty clearing relationships). The Commission declines to

    take up the request for a comparability determination with respect

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

    laws or regulations applicable in Canada to compare with the

    prohibitions and requirements of Sec. 23.608. The Commission may

    provide a comparability determination with respect to this

    regulation at a later date in consequence of further developments in

    the law and regulations applicable in Canada.

    This notice also does not address capital adequacy because the

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

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

    determination with respect to these requirements at a later date or

    in a separate notice.

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    V. Supervisory Arrangement

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

    determination that substituted compliance is appropriate, it would

    expect to enter into an appropriate memorandum of understanding

    (``MOU'') or similar arrangement \30\ with the relevant foreign

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

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

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

    to establish supervisory MOUs or other arrangements that provide for

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

    and MSPs.'' \31\

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    \30\ An MOU is one type of arrangement between or among

    regulators. Supervisory arrangements could include, as appropriate,

    cooperative arrangements that are memorialized and executed as

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

    arrangements, statements of intent, declarations, or letters.

    \31\ 78 FR 45344.

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    The Commission is in the process of developing its registration and

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

    initiative includes setting forth supervisory arrangements with

    authorities that have joint jurisdiction over SDs and MSPs that are

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

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

    Commission has not negotiated prior supervisory arrangements with

    certain authorities, the negotiation of supervisory arrangements

    presents a unique opportunity to develop close working relationships

    between and among authorities, as well as highlight any potential

    issues related to cooperation and information sharing.

    Accordingly, the Commission is negotiating such a supervisory

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

    Commission expects that the arrangement will establish expectations for

    ongoing cooperation, address direct access to information,\32\ provide

    for notification upon the occurrence of specified events, memorialize

    understandings related to on-site visits,\33\ and include protections

    related to the use and confidentiality of non-public information shared

    pursuant to the arrangement.

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    \32\ Section 4s(j)(3) and (4) of the CEA and Commission

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

    required to be maintained in accordance with Commission regulation

    1.31 available promptly upon request to, among others,

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

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

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

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

    Dodd-Frank recordkeeping requirement through substituted

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

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

    regulations to access books and records held by registered SDs and

    MSPs as ``a fundamental regulatory tool necessary to properly

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

    the regulations adopted pursuant thereto'').

    \33\ The Commission retains its examination authority, both

    during the application process as well as upon and after

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

    policy that ``eligible entities may comply with a substituted

    compliance regime under certain circumstances, subject, however, to

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

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

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

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    These arrangements will establish a roadmap for how authorities

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

    arrangement, however, nothing in these arrangements will supersede

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

    application of domestic secrecy or blocking laws to regulated entities.

    VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by

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

    Internal Business Conduct Requirements that are the subject of this

    comparability determination, and the Commission's regulatory objectives

    with respect to such requirements. Immediately following a description

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

    Internal Business Conduct Requirements that the applicant 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;

    [[Page 78843]]

    The CCO must administer the regulatory compliance policies

    of the SD or MSP;

    The CCO must take reasonable steps to ensure compliance

    with the CEA and Commission regulations, and resolve conflicts of

    interest;

    The CCO must establish procedures for detecting and

    remediating non-compliance issues;

    The CCO must annually prepare and sign an ``annual

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

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

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

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

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

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

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

    penalty of law; and

    The annual compliance report must be furnished to the CFTC

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

    simultaneously with its annual financial condition report.

    Regulatory Objective: The Commission believes that compliance by

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

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

    and the stability and integrity of the market intermediaries registered

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

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

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

    Commission seeks to ensure firms have designated a qualified individual

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

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

    authority to develop and administer compliance policies and procedures

    reasonably designed to ensure compliance with the CEA and Commission

    regulations, resolve conflicts of interest, remediate noncompliance

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

    officer on compliance of the firm.

    Comparable Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

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

    CEA and Commission regulation 3.3.

    OSFI's Legislative Compliance Management Guideline E-13 (``LCM

    Guideline'') requires Canadian banks to establish an enterprise-wide

    framework of regulatory risk management controls to ensure that

    regulatory compliance risks are managed effectively. The required LCM

    framework must meet the requirements of the LCM Guideline, which sets

    out OSFI's expectations. The Canadian Bank SDs are required to

    demonstrate that they satisfy those expectations in particular

    circumstances. Pursuant to the LCM Guideline:

    The compliance oversight function should be designated to

    a member of senior management as the bank's CCO;

    Such CCO should have sufficient stature, authority,

    resources, and access to achieve compliance with applicable law;

    Such CCO should have appropriate skills and knowledge to

    effectively fulfill the requirements of the function;

    The CCO should approve the content and frequency of

    reports and that such reports should be sufficient to enable the CCO,

    senior management, and the bank's board to discharge their compliance

    responsibilities;

    OSFI expects that each bank's LCM framework will include

    identification, assessment, communication, and maintenance of

    applicable regulatory requirements, compliance procedures, monitoring

    procedures, and reporting procedures;

    OSFI expects the CCO to be responsible for the LCM

    framework and to report issues directly to the board, including any

    material compliance issues and their remediation; and

    Normal course reports to the board should be made no less

    than annually, and contain discussion of material weaknesses, non-

    compliance issues, and remedial action plans.

    In addition, the OSFI Corporate Governance Guideline of Federally

    Regulated Financial Institutions (``OSFI Corporate Governance

    Guideline'') states that the bank's board of directors should be

    responsible for the selection, performance, management, compensation,

    and evaluation of a CCO. Pursuant to the OSFI Supervisory Framework,

    OSFI monitors banks' management of compliance risk and reports on

    banks' compliance with the Bank Act annually to the Canadian Minister

    of Finance.

    Commission Determination: The Commission finds that the OSFI

    standards specified above are generally identical in intent to Sec.

    3.3 by seeking to ensure firms have designated a qualified individual

    as the compliance officer that reports directly to a sufficiently

    senior function of the firm and that has the independence,

    responsibility, and authority to develop and administer compliance

    policies and procedures reasonably designed to ensure compliance with

    the CEA and Commission regulations, resolve conflicts of interest,

    remediate noncompliance issues, and report annually on compliance of

    the firm.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the CCO requirements of the OSFI

    standards, specified above, 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.\34\

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

    \34\ Because the Commission has not determined that the

    requirements of the OSFI standards are comparable to and as

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

    and the OSFI standards specified above are applicable would

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

    MSP complies with the OSFI standards specified above, subject to

    certifying and furnishing the Commission with the annual report

    required under the OSFI standards 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.

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

    Notwithstanding that the Commission has not determined that the

    requirements of the OSFI standards are comparable to and as

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

    and the OSFI standards specified above are applicable would generally

    be deemed to be in compliance with Sec. 3.3(f) if that SD or MSP

    complies with the OSFI standards specified above, subject to certifying

    and furnishing the Commission with the annual report required under the

    OSFI standards 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.\35\ The Commission adopted regulations 23.600, 23.601,

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

    [[Page 78844]]

    Commission also adopted regulation 23.609, which requires certain risk

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

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

    requirements help to establish a robust and comprehensive internal risk

    management program for SDs and MSPs with respect to their swaps

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

    for the overall swaps market. In making its comparability determination

    with regard to these risk management duties, the Commission will

    consider each regulation individually.\39\

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

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

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

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

    monitoring of position limits, business continuity and disaster

    recovery, conflicts of interest policies and procedures, and general

    information availability, respectively).

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

    must comply with Commission regulation 23.608, which prohibits SDs

    providing clearing services to customers from entering into

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

    original executing counterparty; (ii) limit the number of

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

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

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

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

    frames for acceptance of trades into clearing.

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

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

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

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

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

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

    Commission's regulations under Part 23 (17 CFR Part 23) are limited

    in scope to the swaps activities of SDs and MSPs.

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

    (Restrictions on counterparty clearing relationships). The

    Commission declines to take up the request for a comparability

    determination with respect to this regulation due to the

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

    in Canada to compare with the prohibitions and requirements of Sec.

    23.608. The Commission may provide a comparability determination

    with respect to this regulation at a later date in consequence of

    further developments in the law and regulations applicable in

    Canada.

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

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

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

    Commission regulation 23.600 generally requires that:

    Each SD or MSP must establish and enforce a risk

    management program consisting of a system of written risk management

    policies and procedures designed to monitor and manage the risks

    associated with the swap activities of the firm, including without

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

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

    and procedures to the CFTC upon application for registration and upon

    request;

    The SD or MSP must establish a risk management unit

    independent from the business trading unit;

    The risk management policies and procedures of the SD or

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

    Risk tolerance limits and exceptions therefrom must be

    reviewed and approved quarterly by senior management and annually by

    the governing body;

    The risk management program must have a system for

    detecting breaches of risk tolerance limits and alerting supervisors

    and senior management, as appropriate;

    The risk management program must account for risks posed

    by affiliates and be integrated at the consolidated entity level;

    The risk management unit must provide senior management

    and the governing body with quarterly risk exposure reports and upon

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

    Risk exposure reports must be furnished to the CFTC within

    five business days following provision to senior management;

    The risk management program must have a new product policy

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

    transactions;

    The risk management program must have policies and

    procedures providing for trading limits, monitoring of trading,

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

    from personnel in the risk management unit; and

    The risk management program must be reviewed and tested at

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

    or MSP.

    Regulatory Objective: Through the required system of risk

    management, the Commission seeks to ensure that firms are adequately

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

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

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

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

    MSP must contain at least the following critical elements:

    Identification of risk categories;

    Establishment of risk tolerance limits for each category

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

    governing body;

    An independent risk management unit to administer a risk

    management program; and

    Periodic oversight of risk exposures by senior management

    and the governing body.

    Comparable Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

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

    of the CEA and Commission regulation Sec. 23.600.

    The OSFI Corporate Governance Guideline requires that each bank

    establish a risk appetite framework (``RAF'') that:

    Guides the amount of risk the bank is willing to accept in

    pursuit of its strategic and business objectives.

    Sets basic goals, benchmarks, parameters, and limits, and

    should consider all applicable types of risks.

    Contains all elements required by an annex to the

    Corporate Governance Guideline, including a risk appetite statement,

    specific risk tolerance limits, and processes for implementation of the

    RAF.

    Further, the OSFI Corporate Governance Guideline states that DSIBs

    should establish a dedicated risk committee to oversee risk management

    on an enterprise-wide basis, and that the oversight of the risk

    management activities of the bank are to be independent from

    operational management, adequately resourced, and have appropriate

    status and visibility.

    The OSFI Derivatives Best Practice Guideline states that each bank

    should ensure that each derivative product traded is subject to a

    product authorization signed off by senior management, and sets forth

    OSFI's expectations with respect to having documented policies and

    procedures for risk management, creating risk tolerance limits, and

    measuring, reporting, managing, and controlling the risks associated

    with the derivatives business, including market, currency, interest

    rate, equity price, commodity price, credit, settlement, liquidity,

    operational, and legal risks.

    Finally, OSFI represents that its oversight pursuant to the

    Supervisory Framework will assess the extent to which the risk

    management function integrates policies, practices, and limits with

    day-to-day business activities and with the bank's strategic, capital,

    and liquidity management policies. Under the Supervisory Framework,

    OSFI also will assess whether the risk management function effectively

    monitors risk positions against approved limits and ensures that

    material breaches are addressed on a timely basis. OSFI represents that

    it will look at various indicators, including the extent to which the

    bank proactively updates its policies, practices, and

    [[Page 78845]]

    limits in response to changes in the industry and in the institution's

    strategy, business activities and risk tolerances.\40\

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

    \40\ In addition to the foregoing, the applicant notes that the

    Canadian Bank SDs may be subject to heightened standards for their

    derivatives business in the near future under regulatory

    recommendations that would require registrants to establish,

    maintain and apply systems, policies and procedures that establish

    robust compliance and risk management systems specifically for their

    derivatives business. See CSA Consultation Paper 91-407.

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

    Commission Determination: The Commission finds that the OSFI

    standards 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 OSFI

    standards specified above would comprehensively require SDs and MSPs to

    establish risk management programs containing the following critical

    elements:

    Identification of risk categories;

    Establishment of risk tolerance limits for each category

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

    governing body;

    An independent risk management unit to administer a risk

    management program; and

    Periodic oversight of risk exposures by senior management

    and the governing body.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the risk management program

    requirements of the OSFI standards, 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 the OSFI standards are comparable to and as

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

    23.600 and the OSFI standards specified above are applicable would

    generally be deemed to be in compliance with Sec. 23.600(c)(2) if that

    SD or MSP complies with the OSFI standards specified above, subject to

    compliance with the requirement that it produce quarterly risk exposure

    reports and provide such reports to its senior management, governing

    body, and the Commission in accordance with Sec. 23.600(c)(2). The

    Commission notes that it generally expects reports furnished to the

    Commission by registrants to be in the English language.

    2. Monitoring of Position Limits (Sec. 23.601)

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

    Commission regulation 23.601 requires each SD or MSP to establish and

    enforce written policies and procedures that are reasonably designed to

    monitor for, and prevent violations of, applicable position limits

    established by the Commission, a DCM, or a SEF.\41\ 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).

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

    \41\ 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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

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

    the CEA and Commission regulation Sec. 23.601.

    OSFI states that the monitoring of position limits is an aspect of

    the risk management and compliance framework for each bank.

    Specifically:

    OSFI's LCM Guideline requires Canadian banks to establish

    an enterprise-wide framework of regulatory risk management controls to

    ensure that regulatory compliance risks are managed effectively. The

    required LCM framework sets out OSFI's expectations and banks are

    required to demonstrate that they satisfy those expectations in

    particular circumstances; and

    OSFI expects that each bank's LCM framework will include

    identification, assessment, communication, and maintenance of

    applicable regulatory requirements, compliance procedures, monitoring

    procedures, and reporting procedures.\42\

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

    \42\ In addition to the foregoing, the applicant also submitted

    various guidelines and required best practices concerning the

    setting of internal risk tolerance limits and monitoring for

    compliance with such internal limits. Although the Commission

    recognizes these as prudent risk management practices, the

    Commission does not believe that these provisions are relevant for a

    comparability determination with respect to Sec. 23.601 because

    Sec. 23.601 requires monitoring for compliance with external

    position limits set by the Commission, a DCM, or a SEF.

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

    The applicants represent to the Commission that the OSFI

    requirement to monitor the effectiveness of procedures to ensure

    compliance with regulatory obligations includes applicable regulatory

    obligations of an SD or MSP under the CEA, Commission regulations, and

    position limits set by the Commission, a DCM, or a SEF. OSFI expects

    banks to comply with all applicable regulatory requirements, which

    includes legislation, regulations, and regulatory directives applicable

    to the activities of the bank or its subsidiaries worldwide.

    Commission Determination: The Commission finds that the OSFI

    standards 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 OSFI standards specified

    above, while not specific to the issue of position limit compliance,

    nevertheless comprehensively require SDs and MSPs to monitor for

    regulatory compliance generally, including monitoring for compliance

    with position limits set pursuant to applicable law (including the CEA

    and Commission regulations) 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 the OSFI standards, 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

    [[Page 78846]]

    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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, and comparable to and as comprehensive as section 4s(h)(1)(B)

    of the CEA and Commission regulation 23.602.

    Section 157 of the Bank Act imposes a duty on the board of

    directors of a bank to manage or supervise the management of the

    business and affairs of the bank.

    OSFI's Supervisory Framework states that the board and

    senior management are designated as ultimately accountable for the

    safety and soundness of the bank.

    OSFI's Corporate Governance Guideline states that banks

    should appoint a senior officer, identified as the Chief Risk Officer

    (``CRO''), who has responsibility for the oversight of all relevant

    risks across the firm. The CRO must be identified in the bank's license

    application along with a description of the resources and authority

    allocated to discharge his duties. Like the CCO, the CRO should have

    sufficient stature and authority within the organization, be

    independent from operational management, have unfettered access and,

    for functional purposes, a direct reporting line to the board of

    directors or risk committee.

    In addition, the applicant states that diligent supervision is an

    aspect of the risk management and compliance framework for each bank,

    which includes requirements for controls and monitoring. Specifically:

    OSFI's LCM Guideline requires Canadian banks to establish

    an enterprise-wide framework of regulatory risk management controls to

    ensure that regulatory compliance risks are managed effectively. The

    required LCM framework sets out OSFI's expectations and banks are

    required to demonstrate that they satisfy those expectations in

    particular circumstances; and

    OSFI expects that each bank's LCM framework will include

    identification, assessment, communication, and maintenance of

    applicable regulatory requirements, compliance procedures, monitoring

    procedures, and reporting procedures.

    The applicants represent to the Commission that the OSFI

    requirement to monitor the effectiveness of procedures to ensure

    compliance with regulatory obligations includes applicable regulatory

    obligations of an SD or MSP under the CEA and Commission regulations.

    OSFI expects banks to comply with all applicable regulatory

    requirements, which includes legislation, regulations, and regulatory

    directives applicable to the activities of the bank or its subsidiaries

    worldwide.

    Commission Determination: The Commission finds that the provisions

    of the Bank Act and the OSFI standards specified above are generally

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

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

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

    provisions of the Bank Act and the OSFI standards specified above,

    Canadian laws and regulations seek to ensure that each SD and MSP not

    only establishes the necessary policies and procedures that would lead

    to compliance with applicable law, which would include the CEA and

    Commission regulations, but also establishes an effective system of

    internal oversight and enforcement of such policies and procedures to

    ensure that such policies and procedures are diligently followed.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the internal supervision

    requirements of the Bank Act and the OSFI standards, 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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, and comparable to and as comprehensive as Commission regulation

    23.603.

    The applicant has represented that business continuity and disaster

    recovery are aspects of the risk management framework for each bank.

    Specifically:

    OSFI's Derivatives Best Practice Guideline requires banks

    to regularly assess contingency plans to deal with operations and

    systems risks.

    OSFI's Outsourcing of Business Activities, Functions and

    Processes Guideline requires banks that outsource functions to ensure

    that adequate continuity and disaster recovery are in place.

    OSFI's Supervisory Framework subjects each bank to a

    ``Business Continuity & Disaster Recovery Preparedness Cross Sector

    Review'' that is divided into three broad sections: Structure,

    Operational Management, and Controls & Oversight. Pursuant to such

    review, OSFI ensures: the existence of a plan for both business

    continuity and disaster recovery; that such plans have essential

    components related to identification of documents, data, staff,

    supervisory personnel, back-up locations, third party disruptions,

    [[Page 78847]]

    etc.; that plans are distributed to all employees; that appropriate

    emergency contacts are identified; that plans are reviewed at least

    annually; that plans are subject to comprehensive testing and audit;

    and that records related to developing and maintaining the plans are

    maintained in accordance with banking supervisory guidelines and are

    accessible to OSFI.

    Commission Determination: The Commission finds that the OSFI

    standards 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 OSFI standards specified above seek to ensure

    that entities adequately plan for disruptions and devote sufficient

    resources capable of carrying out an appropriate plan in a timely

    manner.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the business continuity and

    disaster recovery requirements of the OSFI standards, 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 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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, and comparable to and as comprehensive as Commission regulation

    23.605(c).

    The Bank Act subsection 157(2)(c), as well as the Competition Act,

    requires that directors of a bank establish procedures to resolve

    conflicts of interest, including techniques for the identification and

    remediation of potential conflict situations, tied selling, exclusive

    dealing, and refusal to deal, and for restricting the use of

    confidential information.

    The Bank Act subsection 157(2)(b) requires the directors of a bank

    to have a review committee to ensure compliance with the self-dealing

    provisions of the Bank Act, while 157(2)(d) requires that banks

    designate a committee of the board of directors to monitor the conflict

    of interest procedures.

    The Bank Act subsection 459.1(1) prohibits a bank from imposing

    undue pressure on, or coercing a person to obtain a product or service

    from a particular person, including the bank and any of its affiliates,

    as a condition for obtaining another product or service from the bank.

    The Bank Act subsection 459.1(4.1) requires a bank to disclose

    coercive tied selling arrangements.

    OSFI's Supervisory Framework requires monitoring of conflicts of

    interest through a bank's risk management program.

    The applicants have represented to the Commission that OSFI, in the

    process of its oversight and enforcement of the foregoing Canadian

    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 Bank Act

    standards 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 Bank Act standards specified

    above

    [[Page 78848]]

    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 Bank Act 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.

    Based on the foregoing and the representations of the applicants,

    the Commission hereby determines that the requirements found in the

    Bank Act standards specified above in relation to conflicts of interest

    are comparable to and as comprehensive as Sec. 23.605.

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

    23.606)

    Commission Requirement: Commission regulation 23.606 implements

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

    disclose to the Commission, and an 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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, and comparable to and as comprehensive as Commission regulation

    23.606.

    OSFI relies on general reporting obligations of Canadian banks and

    OSFI's monitoring function under the OSFI Supervisory Framework with

    respect to availability of information for disclosure and inspection.

    Specifically, banks are expected to have appropriate policies and

    procedures in place to ensure that all regulatory filings are received

    by OSFI within specified timeframes and are error free. Banks are

    subject to penalties for late or erroneous filings pursuant to OSFI's

    Late and Erroneous Filing Penalty Framework.

    With respect to data capture and retention, as part of the bank

    licensing process, OSFI must approve a bank's operational risk

    management policies, including policies related to information

    technology, information management and security, and records retention.

    As part of the OSFI Supervisory Framework, OSFI generally requires

    banks to establish and maintain an enterprise-wide LCM framework. OSFI

    expects the LCM framework to include ``Adequate Documentation'' as one

    of its key controls. As set forth in the OSFI Derivatives Best Practice

    Guideline, each bank should have mechanisms in place to assure the

    confirmation, maintenance and safeguarding of derivatives contract

    documentation. In particular, it states:

    [t]he design of information systems will vary according to the

    risks demanded by the scope and complexity of an institution's

    involvement in derivatives. The degree of accuracy and timeliness of

    information processing should be sufficient to meet an institution's

    risk exposure monitoring needs. Appropriate information processing

    and reporting capabilities should be put in place and fully

    operational.

    Commission Determination: The Commission finds that the OSFI

    standards 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 OSFI standards with respect

    to the availability of information for inspection and disclosure, as

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

    23.606, with the exception of Sec. 23.606(a)(2) concerning the

    requirement that an SD or MSP make information required by Sec.

    23.606(a)(1) available promptly upon request to Commission staff and

    the staff of an applicable U.S. prudential regulator. The applicant has

    not submitted any provision of law or regulations applicable in Canada

    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 the OSFI standards are comparable to and as

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

    23.606 and the OSFI 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 OSFI 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).

    7. Clearing Member Risk Management (Sec. 23.609)

    Commission Requirement: Commission regulation 23.609 generally

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

    Establish risk-based limits based on position size, order

    size, margin requirements, or similar factors;

    Screen orders for compliance with the risk-based limits;

    [[Page 78849]]

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

    and overnight;

    Conduct stress tests under extreme but plausible

    conditions of all positions at least once per week;

    Evaluate its ability to meet initial margin requirements

    at least once per week;

    Evaluate its ability to meet variation margin requirements

    in cash at least once per week;

    Evaluate its ability to liquidate positions it clears in

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

    Test all lines of credit at least once per year.

    Regulatory Objective: Through Commission regulation 23.609, the

    Commission seeks to ensure the financial integrity of the markets and

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

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

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

    management can cause a clearing member to become insolvent and default

    to a DCO. Such default can disrupt the markets and the clearing system

    and harm customers.

    Comparable Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, and comparable to and as comprehensive as Commission regulation

    23.609.

    OSFI stated that, to the extent that any bank is a clearing member,

    risk management specifically for clearing members is an aspect of the

    risk management framework.

    OSFI Derivatives Best Practice Guideline states that banks should

    have knowledgeable individuals or units responsible for risk monitoring

    and control functions, including the responsibility for actively

    monitoring transactions and positions for adherence to internal policy

    limits. Moreover, stress tests should be performed regularly and should

    account for abnormally large market swings and periods of prolonged

    inactivity, while considering the effect of price changes on the ``mid-

    market value'' of the portfolio.

    More generally, the OSFI Corporate Governance Guideline requires

    that each bank establish a risk appetite framework (``RAF'') that:

    Guides the amount of risk the bank is willing to accept in

    pursuit of its strategic and business objectives.

    Sets basic goals, benchmarks, parameters, and limits, and

    should consider all applicable types of risks.

    Contains all elements required by an annex to the

    Corporate Governance Guideline, including a risk appetite statement,

    specific risk tolerance limits, and processes for implementation of the

    RAF.

    Further, the OSFI Corporate Governance Guideline states that DSIBs

    should establish a dedicated risk committee to oversee risk management

    on an enterprise-wide basis, and that the oversight of the risk

    management activities of the bank are to be independent from

    operational management, adequately resourced, and have appropriate

    status and visibility.

    The OSFI Derivatives Best Practice Guideline states that each bank

    should ensure that each derivative product traded is subject to a

    product authorization signed off by senior management, and sets forth

    OSFI's expectations with respect to having documented policies and

    procedures for risk management, creating risk tolerance limits, and

    measuring, reporting, managing, and controlling the risks associated

    with the derivatives business, including market, currency, interest

    rate, equity price, commodity price, credit, settlement, liquidity,

    operational, and legal risks.

    OSFI represents that its oversight pursuant to the Supervisory

    Framework will assess the extent to which the risk management function

    integrates policies, practices, and limits with day-to-day business

    activities and with the bank's strategic, capital, and liquidity

    management policies. Under the Supervisory Framework, OSFI also will

    assess whether the risk management function effectively monitors risk

    positions against approved limits and ensures that material breaches

    are addressed on a timely basis. OSFI represents that it will look at

    various indicators, including the extent to which the bank proactively

    updates its policies, practices, and limits in response to changes in

    the industry and in the institution's strategy, business activities and

    risk tolerances.\43\

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    \43\ In addition to the foregoing, the applicant notes that the

    Canadian Bank SDs may be subject to heightened standards for their

    derivatives business in the near future under regulatory

    recommendations that would require registrants to establish,

    maintain and apply systems, policies and procedures that establish

    robust compliance and risk management systems specifically for their

    derivatives business. See CSA Consultation Paper 91-407.

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

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

    process of its oversight and enforcement of the foregoing Canadian law

    and regulations, any SD or MSP subject to such standards that is a

    clearing member of a DCO would be required to comply with clearing

    member risk management requirements comparable to Commission regulation

    23.609.

    Commission Determination: The Commission finds that the OSFI

    standards specified above are generally identical in intent to Sec.

    23.609 because such standards seek to ensure the financial integrity of

    the markets and the clearing system, to avoid systemic risk, and to

    protect customer funds.

    The Commission notes that the OSFI standards specified above are

    not as specific as Sec. 23.609 with respect to ensuring that SDs and

    MSPs that are clearing members of a DCO establish detailed procedures

    and limits for clearing member risk management purposes. Nevertheless,

    the Commission finds that the general requirements under the OSFI

    standards specified above, implemented in the context of clearing

    member risk management and pursuant to the representations of OSFI,

    meet the Commission's regulatory objective specified above.

    Based on the foregoing and the representations above, the

    Commission hereby determines that the clearing member risk management

    requirements of the Canadian law and regulations specified above are

    comparable to and as comprehensive as Sec. 23.609.

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

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

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

    retain records of each transaction, each position held, general

    business records (including records related to complaints and sales and

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

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

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

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

    identifiable and searchable by transaction and counterparty.

    Commission regulation 23.203, requires SDs and MSPs to maintain

    records of a swap transaction until the termination, maturity,

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

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

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

    period (consistent with Sec. 1.31).

    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

    [[Page 78850]]

    and marketing and sales materials in accordance with Sec. 23.201(b)(3)

    and (4).\44\

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    \44\ 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 Canadian Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Canada are in full force and effect in

    Canada, 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.

    OSFI's Supervisory Framework requires banks to establish and

    maintain an enterprise-wide LCM framework of regulatory risk management

    controls, and these controls include oversight functions that are

    independent of the activities they oversee. OSFI expects the LCM

    framework to include ``Adequate Documentation'' as one of its key

    controls.

    As set forth in the OSFI Derivatives Best Practice Guideline, each

    bank should have mechanisms in place to assure the confirmation,

    maintenance, and safeguarding of derivatives contract documentation. In

    particular, it states:

    [t]he design of information systems will vary according to the risks

    demanded by the scope and complexity of an institution's involvement

    in derivatives. The degree of accuracy and timeliness of information

    processing should be sufficient to meet an institution's risk

    exposure monitoring needs. Appropriate information processing and

    reporting capabilities should be put in place and fully operational.

    Finally, Sections 238, 239 and 597 of the Bank Act generally

    require banks carrying on business in Canada to maintain records in

    Canada and to ensure that OSFI can access in Canada any records

    necessary to enable OSFI to fulfill its supervisory mandate.

    Commission Determination: The Commission finds that the Bank Act

    and OSFI standards specified above are generally identical in intent to

    Sec. Sec. 23.201 and 23.203 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 Bank Act and OSFI

    standards specified above require SDs and MSPs to keep swap data in a

    level of detail sufficient to enable regulatory authorities to

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

    exposure.

    Finally, the Commission finds that the Bank Act and OSFI standards

    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 the Bank Act

    and the OSFI standards with respect to swap data recordkeeping, as

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

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

    the requirement that an SD or 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 Canada 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 the Bank Act and the OSFI standards are comparable to

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

    Sec. 23.203 and the Bank Act and OSFI standards 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 Bank Act and OSFI

    standards 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 Canada: 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-

    [[Page 78851]]

    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 category-by-

    category basis, should form the basis of comparability

    determinations.\6\

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    \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

    [[Page 78852]]

    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. 2013-30979 Filed 12-26-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 27, 2013



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