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2013-30981

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

    [Notices]

    [Pages 78878-78890]

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

    [FR Doc No: 2013-30981]

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    COMMODITY FUTURES TRADING COMMISSION

    Comparability Determination for the European Union: Certain

    Transaction-Level Requirements

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Comparability Determination for Certain Requirements

    under the European Market Infrastructure Regulation.

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    SUMMARY: The following is the analysis and determination of the

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

    parts of a joint request by the European Commission (``EC'') and the

    European Securities and Markets Authority (``ESMA'') that the

    Commission determine that laws and regulations applicable in the

    European Union (``EU'') provide a sufficient basis for an affirmative

    finding of comparability with respect to the following regulatory

    obligations applicable to swap dealers (``SDs'') and major swap

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

    trading relationship documentation; (ii) swap portfolio reconciliation

    and compression; (iii) trade confirmation; and (iv) daily trading

    records (collectively, the ``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 Ellie Jester, Special Counsel, 202-418-5874,

    ajester@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'' (``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

    [[Page 78879]]

    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 (and foreign branches of U.S. SDs and MSPs) in the

    six jurisdictions with conditional relief from certain requirements of

    Commission regulations (those referred to as ``Transaction-Level

    Requirements'' in the Guidance) until the earlier of December 21, 2013,

    or 30 days following the issuance of a substituted compliance

    determination.\3\ However, the Commission provided only transitional

    relief from the real-time public reporting requirements under part 43

    of the Commission's regulations until September 30, 2013, stating that

    ``it would not be in the public interest to further delay reporting

    under part 43 . . . .'' \4\ Similarly, the Commission provided

    transitional relief only until October 10, 2013, from the clearing and

    swap processing requirements (as described in the Guidance), stating

    that, ``[b]ecause SDs and MSPs have been committed to clearing their

    [credit default swaps] and interest rate swaps for many years, and

    indeed have been voluntarily clearing for many years, any further delay

    of the Commission's clearing requirement is unwarranted.'' \5\ The

    Commission did not make any comparability determination with respect to

    clearing and swap processing prior to October 10, 2013, or real-time

    public reporting prior to September 30, 2013.

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

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

    consist of 17 CFR 37.12, 38.11, 23.202, 23.205, 23.400-451, 23.501,

    23.502, 23.503, 23.504, 23.505, 23.506, 23.610, and parts 43 and 50

    of the Commission's regulations.

    \4\ See id. at 43789.

    \5\ See id. at 43790.

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    On May 7, 2013, the EC and ESMA (collectively, the ``applicant'')

    submitted a request that the Commission determine that laws and

    regulations applicable in the EU provide a sufficient basis for an

    affirmative finding of comparability with respect to certain

    Transaction-Level Requirements, including the Business Conduct

    Requirements.\6\ The applicant provided Commission staff with an

    updated submission on August 6, 2013. On November 11, 2013, the

    application was further supplemented with corrections and additional

    materials. The following is the Commission's analysis and determination

    regarding the Business Conduct Requirements, as detailed below.

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    \6\ For purposes of this notice, the Business Conduct

    Requirements consist of 17 CFR 23.202, 23.501, 23.502, 23.503, and

    23.504.

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    In addition to the Business Conduct Requirements described below,

    the applicant also requested a comparability determination with respect

    to law and regulations applicable in the EU governing (1) clearing and

    swap processing;\7\ and (2) real-time public reporting. The Commission

    declines to take up the request for such comparability determination at

    this time due to the Commission's view that there are not laws or

    regulations applicable in the EU to compare with the requirements of

    the Commission's regulations on mandatory clearing and swap processing,

    and real-time public reporting. The Commission may address these

    requests in a separate notice at a later date in consequence of further

    developments in the law and regulations applicable in the EU.

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    \7\ According to the most recent Financial Stability Board

    Progress Report, the EU is scheduled to have a clearing requirement

    by Q3 2014. That report also states that the EU is scheduled to

    begin authorizing CCPs in Q4 2013, issue its first clearing

    determinations in Q1 2014, and adopt central clearing Regulatory

    Technical Standards (RTS) in Q2 2014 (OTC Derivatives Working Group,

    ``OTC Derivatives Market Reforms: Sixth Progress Report on

    Implementation,'' Financial Stability Board, Sept. 2, 2013). Under

    EMIR, ESMA would determine which swaps would be subject to mandatory

    clearing according to provisions that are comparable to those set

    forth in Commission regulation 39.5(b). A clearing requirement would

    apply to financial entities, as well as to non-financial entities

    whose swap activity exceeds a certain threshold. ESMA's ``Discussion

    Paper, The Clearing Obligation under EMIR'' (July 2013) describes

    the standardized swaps that could be subject to a clearing

    requirement. Such swaps include the interest rate and credit default

    swaps covered by the Commission's clearing requirement (Commission

    regulation 50.4), other credit default swap indices, non-deliverable

    forwards that may be included in a Commission clearing requirement,

    and many other swaps including OTC equity index derivatives cleared

    only through European central counterparties, some of which are not

    Commission-registered derivatives clearing organizations.

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    II. Background

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

    Reform and Consumer Protection Act\8\ (``Dodd-Frank Act'' or ``Dodd-

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

    for swaps.

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    \8\ Public Law 111-203, 124 Stat. 1376 (2016).

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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.\9\

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    \9\ 7 U.S.C. 2(i).

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    In the three years since its enactment, the Commission has

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

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

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

    substantive requirements applicable to SDs and MSPs. With few

    exceptions, the delayed compliance dates for the Commission's

    regulations implementing such section 4s requirements applicable to SDs

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

    full compliance with such regulations upon registration with the

    Commission.\10\ 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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    \10\ 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 describes 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 established 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

    [[Page 78880]]

    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).\11\

    \11\ 78 FR 45342-45345.

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

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

    entities may comply with a substituted compliance regime subject to any

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

    Commission's retention of its examination authority and its enforcement

    authority.\12\

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    \12\ 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.\13\ 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\14\ and the Commission's regulations,\15\ and is

    a condition to registration.\16\

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    \13\ Under Sec. Sec. 23.203 and 23.606, all records required by

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

    registered SD or MSP shall be maintained in accordance with

    Commission regulation 1.31 and shall be open for inspection by

    representatives of the Commission, the United States Department of

    Justice, or any applicable prudential regulator.

    In its Final Exemptive Order Regarding Compliance with Certain

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

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

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

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

    or secrecy laws of foreign jurisdictions that applied to the books

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

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

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

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

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

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

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

    and its regulations to access records held by registered SDs and

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

    fundamental regulatory tool necessary to properly monitor and

    examine each registrant's compliance with the CEA and the

    regulations adopted pursuant thereto. The Commission has maintained

    an ongoing dialogue on a bilateral and multilateral basis with

    foreign regulators and with registrants to address books and records

    access issues and may consider appropriate measures where requested

    to do so.

    \14\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the

    CEA.

    \15\ See e.g., Sec. Sec. 23.203(b) and 23.606.

    \16\ See supra note 13.

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    III. Regulation of SDs and MSPs in the EU

    On May 7, 2013, the EC and ESMA submitted a request that the

    Commission assess the comparability of laws and regulations applicable

    in the EU with the requirements of the CEA and the Commission's

    regulations, and that a determination be made on the extent to which

    SDs and MSPs in the EU can rely on substituted compliance.\17\ The

    applicant provided Commission staff with an updated submission on

    August 6, 2013. On November 11, 2013, the application was further

    supplemented with corrections and additional materials.

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    \17\ On July 11, 2013, the Commission staff issued a no-action

    letter related to EU rules on risk mitigation. See No-Action Relief

    for Registered Swap Dealers and Major Swap Participants from Certain

    Requirements under Subpart I of Part 23 of Commission Regulations in

    Connection with Uncleared Swaps Subject to Risk Mitigation

    Techniques under EMIR, CFTC Letter No. 13-45 (July, 11, 2013)

    (``Risk Mitigation Letter''). The Commission staff found that the

    Commission and the EU have essentially identical rules in important

    areas of risk mitigation for the largest counterparty swap market

    participants. Specifically, the Commission staff determined that

    under EMIR, the EU has adopted risk mitigation rules that are

    essentially identical to certain provisions of the Commission's

    business conduct standards for SDs and MSPs. In areas such as

    confirmation, portfolio reconciliation, portfolio compression,

    valuation, and dispute resolution, the Commission staff found that

    the respective regimes are essentially identical. The Commission

    staff determined that where a swap/OTC derivative is subject to

    concurrent jurisdiction under US and EU risk mitigation rules,

    compliance under EMIR will achieve compliance with the relevant

    Commission rules because they are essentially identical. The

    Commission's analysis of the subject submission is informed by the

    staff's finding in connection with the Risk Mitigation Letter but

    the Commission notes that the standards applied in that context are

    distinguishable from the ``comparable and comprehensive'' standards

    applied in the instant comparability determination.

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    As represented to the Commission by the applicant, swap activities

    in the EU member states is governed primarily by the European Market

    Infrastructure Regulation (``EMIR'').\18\

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    \18\ EMIR: Regulation (EU) No 648/2012 of the European

    Parliament and of the Council of 4 July 2012 on OTC derivatives,

    central counterparties and trade repositories. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF

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    EMIR and the Regulatory Technical Standards (``RTS'') are

    regulations with immediate, binding, and direct effect in all EU member

    states (i.e., no transposition into domestic law is required). EMIR

    entered into force on August 16, 2012.

    Commission Delegated Regulation (EU) No 149/2013 of December 19,

    2012 supplementing Regulation (EU) No 648/2012 of the European

    Parliament and of the Council with regard to regulatory technical

    standards on indirect clearing arrangements, the clearing obligation,

    the public register, access to a trading venue, non-financial

    counterparties, and risk mitigation techniques for OTC derivatives

    contracts not cleared by a central counterparty (``CCP'') (``OTC RTS'')

    entered into force on March 15, 2013.

    It is helpful to note certain terminology used in EMIR:

    Financial counterparties (``FCs''), Article 2(8) EMIR: all

    types of counterparties established in the EU--regardless of size or

    activity--that are financial in nature and authorized as such: credit

    institutions, insurers/reinsurers, pension funds, and hedge funds.

    Non-financial counterparties (``NFCs''), Article 2(9)

    EMIR: all types of counterparties established in the EU that do not

    meet the definition of an FC (e.g., corporates, certain SPVs).

    Non-financial counterparties above the clearing threshold

    (``NFCs+''), Non-financial counterparties below the clearing threshold

    (``NFCs-''):

    The clearing thresholds are calculated at the group level

    and are as follows:

    (a) EUR 1 billion in gross notional value for OTC credit derivative

    contracts;

    (b) EUR 1 billion in gross notional value for OTC equity derivative

    contracts;

    (c) EUR 3 billion in gross notional value for OTC interest rate

    derivative contracts;

    (d) EUR 3 billion in gross notional value for OTC foreign exchange

    derivative contracts; and

    (e) EUR 3 billion in gross notional value for OTC commodity

    derivative contracts and other OTC derivative contracts not provided

    for under points (a) to (d).

    However, transactions objectively measurable as reducing risks

    directly relating to the commercial activity or treasury financing

    activity of the NFC or its group (i.e., hedges) do not count towards

    the clearing threshold.\19\ Under the hedging definition both portfolio

    and macro hedging are allowed.

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    \19\ See EMIR Article 10 and RTS Article 10.

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    Certain requirements of EMIR and the RTS are subject to delayed

    implementation. EMIR Article 11 and

    [[Page 78881]]

    RTS Articles 12 to 17 are subject to a phase-in period:

    Timely Confirmation: Staggered phase-in according to

    product type.

    Portfolio Reconciliation, Compression, and Dispute

    Resolution: Requirements operational for all market participants

    subject to them (different provisions apply to FC, NFC+ and NFC-) as of

    September 15, 2013.

    Daily mark-to-market and mark-to-model: Applies to FC and

    NFC+ as of March 15, 2013.

    In addition, as represented to the Commission by the applicant,

    swap activities in the EU are also governed by a number of regulatory

    requirements other than EMIR.

    Markets in Financial Instruments Directive (``MiFID)'':\20\ MiFID

    is a directive and in accordance with the Treaty on the Functioning of

    the European Union, all member states of the EU are legally bound to

    implement the provisions of MiFID by November 1, 2007, by transposing

    them into their national laws. MiFID applies in particular to

    investment firms, which comprise any legal person whose regular

    occupation or business is the provision of one or more investment

    services to third parties and/or the performance of one or more

    investment activities on a professional basis. Investment services and

    activities means any of the services and activities listed in Section A

    of Annex I of MiFID relating to any of the instruments listed in

    Section C of Annex I of MiFID. Section C of Annex 1 refers explicitly

    to swaps as well as ``other derivative financial instruments.''

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    \20\ Directive 2004/39/EC and the relevant implementing measures

    (Directive 2006/73/EC and Regulation 1287/2006). http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0039:EN:NOT

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    Due to the requirement that each EU member state transpose MiFID

    into its national law, the comparability determinations in this notice

    are based on the representations of the applicant to the Commission

    that (i) each member state of the EU where an SD or MSP would seek to

    rely on substituted compliance on the basis of the comparability of the

    MiFID standards has completed the process of transposing MiFID into its

    national law;\21\ (ii) such national laws have transposed MiFID without

    change in any aspect that is material for a comparability determination

    contained herein; and (iii) such transposed law is in full force and

    effect as of the time that any SD or MSP seeks to rely on a relevant

    comparability determination contained herein. The Commission notes that

    to the extent that any of the foregoing representations are incorrect,

    an affected comparability determination will not be valid.\22\

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    \21\ See the Web site of the European Commission for

    confirmation of the transposition of MiFID into the national law of

    each member state, available here: http://ec.europa.eu/internal_market/securities/docs/transposition/table_en.pdf. Note that the

    issue of partial implementation in the Netherlands was resolved in

    2008, http://ec.europa.eu/eu_law/eulaw/decisions/dec_08_05_06.htm.The Commission notes that the EC has certified to the

    Commission that each member state in which a registered SD or MSP is

    organized has completed the transposition process (e.g., Ireland,

    UK, France, Spain, and Germany).

    \22\ Because the applicant's request and the Commission's

    determinations herein are based on the comparability of EU

    requirements applicable to entities subject to EMIR and MiFID, an SD

    or MSP that is not subject to the requirements of EMIR or MiFID upon

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

    rely on the Commission's comparability determinations herein. The

    applicant has noted for the Commission that the concept of an MSP is

    not explicitly mirrored in EU legislation and so it cannot be

    confirmed that MSPs would always be covered by EMIR and MiFID.

    However, the applicant states that the definition of an ``investment

    firm'' under MiFID is considerably wider than that of an SD, and

    thus MSP's should, in most cases, be caught within the definition of

    ``investment firm.''

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    In addition to MiFID, the applicant noted that there are a number

    of proposed laws and regulations that, when implemented, would affect

    the regulation of SDs and MSPs in the EU.\23\

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    \23\ The applicant provided information regarding MiFID II and

    the Markets in Financial Instruments Regulation (``MiFIR''), http://ec.europa.eu/internal_market/securities/isd/mifid/index_en.htm,

    stating that these two proposals are part of the legislative package

    for the review of MiFID, and that the legislative process may be

    concluded with the adoption of the final political agreement by the

    end of 2013. The applicant further stated that an additional 18 to

    24 months will be needed to adopt implementing measures, with the

    overall package to be applied by the end of 2015.

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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 basis of the foreign regime as

    a whole.\24\ 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.\25\

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    \24\ 78 FR 45343.

    \25\ 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.\26\

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    \26\ 78 FR 45343.

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    In making a comparability determination, the Commission takes an

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

    when evaluating whether a foreign jurisdiction's regulatory

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

    areas of the CEA and Commission regulations, the Commission ultimately

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

    requirements do not have to be identical).\27\ 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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    \27\ 78 FR 45343. The Commission's substituted compliance

    program would generally be available for swap data repository

    reporting (``SDR Reporting''), as outlined in the Guidance, only if

    the Commission has direct access to all of the data elements that

    are reported to a foreign trade repository pursuant to the

    substituted compliance program. Thus, direct access to swap data is

    a threshold matter to be addressed in a comparability evaluation for

    SDR Reporting. Moreover, the Commission explains in the Guidance

    that, due to its technical nature, a comparability evaluation for

    SDR Reporting ``will generally entail a detailed comparison and

    technical analysis.'' A more particularized analysis will generally

    be necessary to determine whether data stored in a foreign trade

    repository provides for effective Commission use, in furtherance of

    the regulatory purposes of the Dodd-Frank Act. See 78 FR 45345.

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    In doing its comparability analysis, the Commission may determine

    that no comparability determination can be made\28\ 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

    [[Page 78882]]

    applicable under the Guidance, may be required to comply with the CEA

    and Commission regulations.

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    \28\ 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.\29\ 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 swap 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.\30\

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    \29\ 78 FR 45343.

    \30\ As explained in the Guidance, such ``approaches used will

    vary depending on the circumstances relevant to each jurisdiction.

    One example would include coordinating with the foreign regulators

    in developing appropriate regulatory changes or new regulations,

    particularly where changes or new regulations already are being

    considered or proposed by the foreign regulators or legislative

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

    with the appropriate regulators and market participants, include in

    its substituted compliance determination a description of the means

    by which certain swaps market participants can achieve substituted

    compliance within the construct of the foreign regulatory regime.

    The identification of the means by which substituted compliance is

    achieved would be designed to address the regulatory objectives and

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

    that does not conflict with a foreign regulatory regime and reduces

    the likelihood of inconsistent regulatory obligations. For example,

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

    undertake certain recordkeeping and documentation for swap

    activities that otherwise is only addressed by the foreign

    regulatory regime with respect to financial activities generally. In

    addition, the substituted compliance determination may include

    provisions for summary compliance and risk reporting to the

    Commission to allow the Commission to monitor whether the regulatory

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

    interest of comity, the Commission would seek to achieve its

    regulatory objectives with respect to the Commission's registrants

    that are operating in foreign jurisdictions in a manner that works

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

    78 FR 45343-44.

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

    Finally, the Commission generally will 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\31\ of SDs and MSPs\32\ in the

    relevant jurisdictions. \33\ 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.\34\

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    \31\ ``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.

    \32\ 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 solely responsible for

    determining whether it is legally required to comply with 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.

    \33\ 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.

    \34\ 78 FR 45345.

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

    The Guidance provided a detailed discussion of the Commission's

    policy regarding the availability of substituted compliance\35\ for the

    Business Conduct Requirements.

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

    \35\ 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.

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

    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\36\ 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.''\37\

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    \36\ 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.

    \37\ 78 FR 45344.

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

    The Commission is in the process of developing its registration and

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

    initiative includes setting forth supervisory arrangements with

    authorities that have joint jurisdiction over SDs and MSPs that are

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

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

    Commission has not negotiated prior supervisory arrangements with

    certain authorities, the negotiation of supervisory arrangements

    presents a unique opportunity to develop close working relationships

    between and among authorities, as well as highlight any potential

    issues related to cooperation and information sharing.

    Accordingly, the Commission is negotiating such a supervisory

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

    Commission expects that the arrangement will establish expectations for

    ongoing cooperation, address direct access to information,\38\ provide

    for

    [[Page 78883]]

    notification upon the occurrence of specified events, memorialize

    understandings related to on-site visits,\39\ and include protections

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

    pursuant to the arrangement.

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

    \38\ 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'').

    \39\ The Commission retains its examination authority, both

    during the application process as well as upon and after

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

    policy that ``eligible entities may comply with a substituted

    compliance regime under certain circumstances, subject, however, to

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

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

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

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

    These arrangements will establish a roadmap for how authorities

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

    arrangement, however, nothing in these arrangements will supersede

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

    application of domestic secrecy or blocking laws to regulated entities.

    VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by

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

    Business Conduct Requirements in the ``risk mitigation and

    transparency'' category 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 Business

    Conduct Requirements that the requestor submitted for a comparability

    determination, the Commission provides a description of the foreign

    jurisdiction's comparable laws, regulations, or rules and whether such

    laws, regulations, or rules meet the applicable regulatory objective.

    The Commission's determinations in this regard and the discussion

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

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

    or rules may be comparable to and as 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 release.

    As was stated in the Guidance, the Commission understands 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. Portfolio Reconciliation and Compression

    CEA section 4s(i) directs the Commission to prescribe regulations

    for the timely and accurate processing and netting of all swaps entered

    into by SDs and MSPs. Accordingly, pursuant to CEA section 4s(i), the

    Commission adopted Sec. Sec. 23.502 and 23.503, which require SDs and

    MSPs to perform portfolio reconciliation and compression, respectively,

    for all swaps.\40\

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    \40\ 7 U.S.C. 6s(i).

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

    1. Portfolio Reconciliation (Sec. 23.502)

    Commission Requirement: Regulation 23.502 provides standards for

    the timely and accurate confirmation, processing, and valuation of

    uncleared swaps by SDs and MSPs. The regulation requires SDs and MSPs

    to engage in portfolio reconciliation,\41\ which is a post-execution

    processing and risk management technique that is designed to: (i)

    identify and resolve discrepancies between the counterparties with

    regard to the terms of a swap after execution and during the life of

    the swap; and (ii) identify and resolve discrepancies between the

    counterparties regarding the valuation of the swap.

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

    \41\ The term ``portfolio reconciliation'' is defined in Sec.

    23.500(i) as any process by which the two parties to one or more

    swaps: (1) exchange the terms of all swaps in the swap portfolio

    between the counterparties; (2) exchange each counterparty's

    valuation of each swap in the swap portfolio between the

    counterparties as of the close of business on the immediately

    preceding business day; and (3) resolve any discrepancy in material

    terms and valuations.

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

    Pursuant to Commission regulation 23.502, for swap portfolios with

    other SDs/MSPs, an SD/MSP must agree in writing on the terms of

    reconciling the terms and valuations of each uncleared swap in the

    portfolio (which may be performed bilaterally or by a qualified third

    party), and must perform the reconciliation no less frequently than:

    Each business day for portfolios of 500 or more swaps;

    Once each week for portfolios of more than 50 but fewer

    than 500 swaps; and

    Quarterly for portfolios of no more than 50 swaps.

    Discrepancies in material terms must be resolved immediately; and

    SDs and MSPs must have policies and procedures to resolve discrepancies

    of 10% or greater in valuations as soon as possible but no later than

    five business days, provided that the SD or MSP has policies and

    procedures for identifying how it will comply with variation margin

    requirements pending resolution of a valuation dispute.

    For swap portfolios with non-SDs/MSPs, an SD/MSP must establish

    policies and procedures for engaging in portfolio reconciliation that

    include:

    Agreement in writing on the terms for reconciling the

    terms and valuations of each uncleared swap in the portfolio (which may

    be performed bilaterally or by a qualified third party);

    Portfolio reconciliation frequencies of quarterly for

    portfolios of more than 100 swaps, and annually for portfolios of 100

    or fewer swaps; and

    Discrepancies in material terms and valuations of more

    than 10% must be subject to procedures for resolving such discrepancies

    in a timely fashion.

    An SD/MSP must report any valuation dispute exceeding $20,000,000

    to the Commission and any applicable prudential regulator if not

    resolved within three business days (with respect to disputes between

    SDs/fMSPs) or five business days (with any other counterparty).

    Regulatory Objective: The Commission's portfolio reconciliation

    rule is designed to ensure accurate confirmation of a swap's terms and

    to identify and resolve any discrepancies between counterparties

    regarding the valuation of the swap. Given that arriving at a daily

    valuation is one of the building blocks for the margin regulations and

    is essential for the mitigation of risk posed by swaps, the regulations

    are aimed at ensuring that valuation disputes are resolved in a timely

    manner. Disputes related to confirming the terms of a swap, as well as

    swap valuation disputes impacting margin payments, have long been

    recognized as a significant problem in the OTC derivatives market, and

    portfolio reconciliation is widely recognized as an effective means of

    identifying and resolving these disputes. By identifying and managing

    mismatches in key economic terms and valuation for individual

    transactions across an entire portfolio, the regulations are aimed at

    achieving a process in which overall risk can be

    [[Page 78884]]

    identified and reduced. The frequency of reconciliation of material

    terms and valuations of each swap required by the regulations will

    ensure the risk-reducing benefits of reconciliation by presenting a

    consolidated view of counterparty exposure down to the transaction

    level. The frequency with which portfolio reconciliation must be

    performed is a key component of this regulation.

    Comparable EU Law and Regulations: The applicant has represented to

    the Commission that the following provisions of law and regulations

    applicable in the EU are in full force and effect in the EU, and

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

    Commission regulation 23.502.

    OTC RTS Art. 13.1: FCs and NFCs must agree with each of

    their counterparties in writing or other equivalent electronic means on

    the terms on which portfolios of uncleared OTC derivative contracts

    shall be reconciled. Such agreement must be reached before entering

    into the OTC derivative contract.

    OTC RTS Art. 13.2: Portfolio reconciliation must be

    performed by the counterparties to the OTC derivative contracts with

    each other, or by a qualified third party duly mandated to this effect

    by a counterparty.

    The portfolio reconciliation must cover key trade terms

    that identify each particular OTC derivative contract and must include

    at least the valuation attributed to each contract in accordance with

    the mark-to-market/mark-to-model obligation.

    In order to identify at an early stage any discrepancy in

    a material term of the OTC derivative contract, including its

    valuation, the portfolio reconciliation must be performed within the

    following timeframes. For portfolios between or among FCs or NFCs+,

    each business day when the counterparties have 500 or more OTC

    derivative contracts outstanding with each other; once per week when

    the counterparties have between 51 and 499 OTC derivative contracts

    outstanding with each other at any time during the week; and once per

    quarter when the counterparties have 50 or less OTC derivative

    contracts outstanding with each other at any time during the quarter.

    For portfolios where at least one of the counterparties is an NFC-,

    once per quarter when the counterparties have more than 100 OTC

    derivative contracts outstanding with each other at any time during the

    quarter; and once per year when the counterparties have 100 or less OTC

    derivative contracts outstanding with each other.

    Commission Determination: Pursuant to the foregoing standards under

    EMIR, FCs and NFCs must agree in writing with each of their OTC

    derivatives counterparties on the terms on which portfolios will be

    reconciled,\42\ which corresponds to the requirement in Commission

    regulation 23.502(a) and (b) that SDs and MSPs agree in writing with

    each counterparty (financial and non-financial) on the terms for

    conducting portfolio reconciliation.

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

    \42\ See Article 13 of the EMIR Regulatory Technical Standards.

    In addition, Article 13(2) permits the reconciliation to be

    performed by a third-party, which corresponds to Commission

    regulation 23.502(a)(2) and (b)(2).

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

    The EMIR standards require portfolio reconciliation covering key

    trade terms of each OTC derivative contract, including at least the

    valuation of each contract,\43\ which corresponds to the requirements

    under Commission regulation 23.502 that discrepancies in material terms

    and valuations be resolved.

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

    \43\ See Article 13(2) of the EMIR Regulatory Technical

    Standards.

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

    Frequency of reconciliation required under the EMIR standards for

    FCs and NFCs+ is daily when the number of outstanding OTC derivative

    contracts between counterparties is 500 or more, weekly when the number

    of outstanding OTC derivative contracts between counterparties is

    greater than 50 and less than 500, and quarterly when the number of OTC

    derivative contracts between counterparties is 50 or less,\44\ which

    corresponds with the frequency required of SDs and MSPs outlined above

    with respect to portfolios with other SDs and MSPs. EMIR requires

    reconciliation with NFCs- less frequently; quarterly for portfolios of

    more than 100 transactions and annually otherwise\45\--which

    corresponds with the requirement of Commission regulation 23.502(b)(3).

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

    \44\ See Article 13(3)(a) of the EMIR Regulatory Technical

    Standards.

    \45\ See Article 13(3)(b) of the EMIR Regulatory Technical

    Standards.

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

    The EMIR standards require FCs to report to the relevant competent

    authority any disputes between counterparties relating to an OTC

    derivative contract, its valuation or the exchange of collateral for an

    amount or a value higher than [euro]15 million and outstanding for at

    least 15 business days,\46\ while Commission regulation 23.502(c) has a

    similar reporting requirement for disputes of at least $20 million

    outstanding from three to five days, depending on counterparty type.

    The EMIR standards, similar to Sec. 23.502(a)(5), require FCs and NFCs

    to have detailed procedures and processes for resolving disputes

    related to valuation.

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

    \46\ See Article 15(2) of the EMIR Regulatory Technical

    Standards.

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

    Generally identical in intent to Sec. 23.502, the EMIR portfolio

    reconciliation standards are designed to ensure that valuation disputes

    are recognized and resolved in a timely manner. This regular

    reconciliation will assist in identifying and resolving discrepancies,

    which in turn will aid the entities in their collateralization and risk

    management.

    Based on the foregoing and the representations of the applicant,

    the Commission finds that the portfolio reconciliation requirements of

    the EMIR standards submitted by the applicant are comparable to and as

    comprehensive as the portfolio reconciliation requirements of

    Commission regulation 23.502.

    2. Portfolio Compression (Sec. 23.503)

    Commission Requirement: Portfolio compression is a post-trade

    processing and netting mechanism whereby substantially similar

    transactions among two or more counterparties are terminated and

    replaced with a smaller number of transactions of decreased notional

    value. Portfolio compression is intended to ensure timely and accurate

    processing and netting of swaps,\47\ and is widely acknowledged as an

    effective risk mitigation tool.\48\

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

    \47\ For example, the reduced transaction count may decrease

    operational risk as there are fewer trades to maintain, process, and

    settle.

    \48\ See Confirmation, Portfolio Reconciliation, Portfolio

    Compression, and Swap Trading Relationship Requirements for Swap

    Dealers and Major Swap Participants, 77 FR 55904, 55932 (Sept. 11,

    2012).

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

    Pursuant to Sec. 23.503, an SD/MSP must establish policies and

    procedures for terminating fully offsetting uncleared swaps, when

    appropriate; for periodically participating in bilateral and

    multilateral compression exercises for uncleared swaps with other SDs/

    MSPs, when appropriate; and for engaging in such exercises for

    uncleared swaps with non-SDs/MSPs upon request.

    Regulatory Objective: The purpose of portfolio compression is to

    reduce the operational risk, cost, and inefficiency of maintaining

    unnecessary transactions on the counterparties' books.

    Comparable EU Law and Regulations: The applicant has represented to

    the Commission that the following provisions of law and regulations

    applicable in the EU are in full force and effect in the EU, and

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

    Commission regulation 23.503:

    [[Page 78885]]

    OTC RTS Art. 14: FCs and NFCs with 500 or more uncleared

    OTC derivative contracts outstanding with a counterparty must have

    procedures to regularly, and at least twice a year, analyse the

    possibility of conducting a portfolio compression exercise in order to

    reduce their counterparty credit risk and engage in such a portfolio

    compression exercise; and

    FCs and NFCs must ensure that they are able to provide a

    reasonable and valid explanation to the relevant competent authority

    for concluding that a portfolio compression exercise is not

    appropriate.

    Commission Determination: The EMIR standards specified above

    require FCs and NFCs with 500 or more OTC uncleared derivative

    contracts outstanding with a counterparty to have procedures to

    regularly, and at least twice a year, analyze the possibility of

    conducting a portfolio compression exercise in order to reduce their

    counterparty credit risk and engage in such a portfolio compression

    exercise,\49\ which corresponds to the requirement under Sec. 23.503

    that SDs and MSPs establish procedures for periodically engaging in

    compression exercises with their counterparties.

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

    \49\ See Article 14 of the EMIR Regulatory Technical Standards.

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

    Under the EMIR standards, FCs and NFCs also must ensure that they

    are able to provide a reasonable and valid explanation to the relevant

    competent authority for concluding that a portfolio compression

    exercise is not appropriate.\50\ This requirement corresponds directly

    to regulation 23.503 that SDs and MSPs engage in compression exercises

    with their counterparties ``when appropriate,'' which would necessarily

    require such registrants to demonstrate to the Commission why a

    compression opportunity was not appropriate.

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

    \50\ See id.

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

    Generally identical in intent to Sec. 23.503, the EMIR portfolio

    compression standards are designed to reduce the operational risk,

    cost, and inefficiency of maintaining unnecessary transactions on the

    counterparties' books.

    Based on the foregoing and the representations of the applicant,

    the Commission finds that the EMIR portfolio compression standards

    submitted by the applicant are comparable to and as comprehensive as

    the portfolio compression requirements of Commission regulation 23.503.

    B. Trade Confirmation (Sec. 23.501)

    Commission Requirement: Section 4s(i) of the CEA\51\ requires that

    each SD and MSP comply with the Commission's regulations prescribing

    timely and accurate confirmation of swaps.

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

    \51\ 7 U.S.C. 6s(i).

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

    Subject to an implementation period, Sec. 23.501 requires

    confirmation of swap transactions (which includes execution,

    termination, assignment, novation, exchange, transfer, amendment,

    conveyance, or extinguishing of rights or obligations of a swap) among

    SDs and MSPs by the end of the first business day following the day of

    execution.

    Subject to an implementation period, with respect to swaps with

    non-SDs/MSPs, SDs and MSPs are required to establish policies and

    procedures reasonably designed to ensure confirmation with non-SDs and

    non-MSPs by the end of the first business day following the day of

    execution if the counterparty is a financial entity or the end of the

    second business day if the counterparty is a non-financial entity.

    SDs and MSPs are also required to send an acknowledgement of a swap

    transaction to a counterparty that is not an SD/MSP by the end of the

    first business day following the day of execution, and are required to

    provide a draft confirmation to non-SDs/MSPs prior to execution of a

    swap, if requested.

    The day of execution is determined by reference to the business

    days of the counterparties and whether the swap was executed after 4:00

    p.m. in the place of at least one of the counterparties.

    Commission regulation 23.501 does not apply to swaps executed on a

    swap execution facility (``SEF'') or designated contract market

    (``DCM'') if the SEF/DCM provides for confirmation of swap transactions

    at the same time as execution. It also does not apply to swap

    transactions that are submitted for clearing by a derivatives clearing

    organization (``DCO'') within the time required for confirmation and

    the DCO provides confirmation at the same time the swap transaction is

    accepted for clearing.

    Regulatory Objective: Timely and accurate confirmation of swaps--

    together with portfolio reconciliation and compression--are important

    post-trade processing mechanisms for reducing risks and improving

    operational efficiency. Through Sec. 23.501, the Commission seeks to

    ensure that both parties to a trade are informed of and agree upon all

    terms of a swap transaction\52\ in writing in a timely manner following

    execution, thereby promoting post-trade processing, netting, and

    valuation of the swap for risk management purposes. The correct

    calculation of cash flows, margin requirements, discharge of settlement

    obligations, and accurate measurement of counterparty credit exposure

    are all dependent on timely and accurate confirmation.\53\

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

    \52\ Pursuant to Sec. 23.500(l), ``swap transaction'' is

    defined to mean ``any event that results in a new swap or in a

    change to the terms of a swap, including execution, termination,

    assignment, novation, exchange, transfer, amendment, conveyance, or

    extinguishing of rights or obligations of a swap.''

    \53\ See Confirmation, Portfolio Reconciliation, Portfolio

    Compression, and Swap Trading Relationship Documentation

    Requirements for Swap Dealers and Major Swap Participants, 12 CFR

    Part 23, 77 FR 55904 at 55917 (September 11, 2012) (Final Rule).

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

    Comparable EU Law and Regulations: The applicant has represented to

    the Commission that the following provisions of law and regulations

    applicable in the EU are in full force and effect in the EU, and

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

    Commission regulation 23.501.

    OTC RTS Art 12.1: Subject to an implementation period, FCs and

    NFCs+ must have in place procedures to ensure that uncleared OTC

    derivatives transactions between FCs and NFCs+ are confirmed, where

    available via electronic means, as soon as possible and at the latest

    by the end of the next business day following the date of execution.

    OTC RTS Art. 12.2: Subject to an implementation period, FCs and

    NFCs+ must have in place procedures to ensure that non-centrally

    cleared OTC derivatives transactions with non- FCs/NFCs+ are confirmed,

    where available via electronic means, as soon as possible and at the

    latest by the end of the second business day following the date of

    execution.

    OTC RTS Art. 12.3: For transactions concluded after 4:00 p.m. local

    time, or with a counterparty located in a different time zone which

    does not allow confirmation by the set deadline, the confirmation must

    take place as soon as possible and, at the latest, one business day

    following the deadline set out above.

    OTC RTS Art. 12.4: FCs must establish the necessary procedure to

    report on a monthly basis to the relevant competent authority the

    number of unconfirmed OTC derivative transactions referred to in OTC

    RTS Art. 12.1--12.3 that have been outstanding for more than five

    business days.

    [[Page 78886]]

    Commission Determination: Pursuant to the EMIR standards specified

    above, and subject to a phase-in period, OTC derivative contracts

    entered into between FCs or NFCs+ must be confirmed as soon as possible

    and at the latest by the end of the next business day following the

    date of execution,\54\ which corresponds to Commission regulation

    23.501(a)(1) and (3)(i), requiring confirmation with other SDs, MSPs,

    and financial entities by the end of the first business day following

    the day of execution.

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

    \54\ See Article 12 of the EMIR Regulatory Technical Standards.

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

    For OTC derivative contracts with all other NFCs, the EMIR

    standards require confirmation as soon as possible and, at the latest,

    by the end of the second business day following the date of

    execution.\55\ This approach corresponds to the Commission regulation

    23.501(a)(3)(ii), which requires written policies and procedures

    reasonably designed to ensure confirmation with non-SDs, non-MSPs, or

    non-financial entities by the end of the second business day following

    the day of execution.

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

    \55\ See id.

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

    As with Commission regulation 23.501(a)(5), which provides for a

    next business day adjustment for transactions executed after 4:00 p.m.

    or on a non-business day, the EMIR standards provide that transactions

    concluded after 4:00 p.m. local time, or with a counterparty located in

    a different time zone that does not allow confirmation by the set

    deadline, the confirmation must take place as soon as possible and, at

    the latest, one business day following the otherwise applicable

    deadline.

    Generally identical in intent to Sec. 23.501, the EMIR trade

    confirmation requirements are designed to ensure that both parties to a

    trade are informed of, and agree upon, all terms of a swap transaction

    in writing in a timely manner following execution, thereby promoting

    post-trade processing, netting, and valuation of the swap for risk

    management purposes.

    Based on the foregoing and the representations of the applicant,

    the Commission finds that the trade confirmation requirements of the

    EMIR standards are comparable to and as comprehensive as the swap

    transaction confirmation requirements of Commission regulation 23.501.

    C. Swap Trading Relationship Documentation (Sec. 23.504)

    Commission Requirement: Section 4s(i) of the CEA requires each SD

    and MSP to conform to Commission standards for the timely and accurate

    confirmation, processing, netting, documentation, and valuation of

    swaps.\56\ Pursuant to this requirement, the Commission adopted Sec.

    23.504.

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    \56\ See 7 U.S.C. 6s(i).

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

    Pursuant to Sec. 23.504(a), SDs and MSPs must have policies and

    procedures reasonably designed to ensure that the SD or MSP enters into

    swap trading relationship documentation with each counterparty prior to

    executing any swap with such counterparty. Such requirement does not

    apply to cleared swaps.

    Pursuant to Sec. 23.504(b), SDs and MSPs must, at a minimum,

    document terms relating to:

    Payment obligations;

    Netting of payments;

    Events of default or other termination events;

    Netting of obligations upon termination;

    Transfer of rights/obligations;

    Governing law;

    Valuation--must be able to value swaps in a predictable

    and objective manner--complete and independently verifiable methodology

    for valuation;

    Dispute resolution procedures; and

    Credit support arrangements with initial/variation margin

    at least as high as set for SD/MSPs or prudential regulator

    (identifying haircuts and class of eligible assets).

    Regulatory Objective: Through Commission regulation 23.504, the

    Commission seeks to reduce the legal, operational, counterparty credit,

    and market risk that can arise from undocumented swaps or undocumented

    terms of swaps. Inadequate documentation of swap transactions is more

    likely to result in collateral and legal disputes, thereby exposing

    counterparties to significant counterparty credit risk.

    In particular, documenting agreements regarding valuation is

    critical because, as the Commission has noted, the ability to determine

    definitively the value of a swap at any given time lies at the center

    of many of the OTC derivatives market reforms contained in the Dodd-

    Frank Act and is a cornerstone of risk management. With respect to

    other SDs/MSPs and financial entities, or upon request of any other

    counterparty, the regulation requires agreement on the process

    (including alternatives and dispute resolution procedures) for

    determining the value of each swap for the duration of such swap for

    purposes of complying with the Commission's margin and risk management

    requirements, with such valuations based on objective criteria to the

    extent practicable.

    Comparable EU Law and Regulations: The applicant has represented to

    the Commission that the following provisions of law and regulations

    applicable in the EU are in full force and effect in the EU, and

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

    Commission regulation 23.504.

    MiFID requires counterparties to be classified as retail clients,

    professional clients,\57\ and eligible counterparties,\58\ and

    corresponding different conduct of business rules apply.\59\ Investment

    firms have to correctly categorize clients and notify those clients of

    their classification; furthermore, investment firms should be able to

    demonstrate the correctness of the classification.

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

    \57\ Annex II of MiFID.

    \58\ Article 24 MiFID.

    \59\ Article 19 MiFID and 28 to 34 of MiFID L2D.

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

    Firms have to conclude agreements with retail and professional

    clients setting out the respective rights and obligations and any other

    terms for the provision of the services.\60\ Ex-ante information has to

    be provided to clients on the services provided, the risks, and the

    safeguarding of their assets.\61\ Adequate ex-post reports also have to

    be provided.\62\ Irrespective of the classification of clients,

    specific record-keeping obligations regulate the recording of client

    orders and transactions.\63\

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

    \60\ Article 19 (7) MiFID.

    \61\ Article 19 (3) MiFID and Articles 29-33 MiFID L2D.

    \62\ Article 19 (8) MiFID and Articles 40-43 of MiFID L2D.

    \63\ Article 51 MiFID L2D and Articles 7-8 and Annex I, table I

    of MiFID L2R.

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

    With respect to dispute resolution, when concluding OTC derivative

    contracts with each other, FCs and NFCs must have agreed detailed

    procedures and processes in relation to: (a) the identification,

    recording, and monitoring of disputes relating to the recognition or

    valuation of the contract and to the exchange of collateral between

    counterparties, and (b) the resolution of disputes in a timely manner

    with a specific process for handling those disputes that are not

    resolved within five business days. Those procedures must at least

    record the length of time for which the dispute remains outstanding,

    the counterparty, and the amount which is disputed.\64\

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

    \64\ EMIR Art. 11 and OTC RTS Art 15.

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

    Commission Determination: The EMIR standards specified above

    require OTC derivative contracts entered into between FCs or NFCs to be

    confirmed in

    [[Page 78887]]

    writing,\65\ which corresponds to the requirements of Commission

    regulation 23.504(b)(2).

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

    \65\ See Article 12 of the EMIR Regulatory Technical Standards.

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

    Pursuant to EMIR Article 11, FCs and NFCs+ are required to value

    outstanding OTC derivatives contracts on a mark-to-market basis daily,

    or where market conditions determine otherwise, a ``reliable and

    prudent marking to model'' may be used.\66\ This corresponds with

    Commission regulation 23.504(b)(4)(i), which requires SDs and MSPs to

    engage in daily valuation with other SDs and MSPs, and financial

    entities, but allows such procedures to be included in documentation

    with NFCs to the extent such counterparties request them.

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

    \66\ See Article 11(2) of EMIR. See also Article 16 of the EMIR

    Regulatory Technical Standards (describing the market conditions

    that prevent marking-to-market) and Article 17 of the EMIR

    Regulatory Technical Standards (describing the criteria for using

    marking-to-model).

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

    Under the EMIR standards, when concluding OTC derivative contracts

    with each other, counterparties must have agreed detailed procedures

    and processes in relation to the identification, recording, and

    monitoring of disputes relating to the recognition or valuation of the

    contracts and to the exchange of collateral between counterparties and

    in relation to the resolution of disputes in a timely manner, including

    a specific process for handling disputes that are not resolved within

    five business days. These aspects of the EMIR standards correspond to

    the valuation documentation requirements under Commission regulation

    23.504(b)(4), which also require use of market transactions for

    valuations to the extent practicable, or other objective criteria, and

    an agreement on detailed processes for valuation dispute resolution for

    purposes of complying with margin requirements.

    Generally identical in intent to Sec. 23.504(b)(2) and (4), the

    EMIR confirmation and valuation documentation requirements are designed

    to reduce the legal, operational, counterparty credit, and market risk

    that can arise from undocumented transactions or terms, reducing the

    risk of collateral and legal disputes, and exposure of counterparties

    to significant counterparty credit risk.

    Based on the foregoing and the representations of the applicant,

    the Commission finds the confirmation and valuation documentation

    requirements of the EMIR standards specified above are comparable to

    and as comprehensive as the swap trading relationship documentation

    requirements of Commission regulations Sec. 23.504(b)(2) and (4).

    For the avoidance of doubt the Commission notes that the foregoing

    comparability determination only applies with regard to two provisions

    of Sec. 23.504 (i.e., Sec. 23.504(b)(2) and (4)). No comparability

    finding is made regarding the other provisions of Sec. 23.504, namely

    Sec. 23.504(a)(2) and (c)(2), that SDs and MSPs establish policies and

    procedures, approved in writing by senior management of the SD or MSP,

    reasonably designed to ensure that they have entered into swap trading

    relationship documentation with each counterparty prior to or

    contemporaneously with entering into a swap transaction with such

    counterparty.\67\

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

    \67\ See Commission regulation 23.504(a)(2), 17 CFR

    23.504(c)(2).

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

    Moreover, the foregoing comparability determination does not extend

    to the requirement that such documentation include terms addressing

    payment obligations, netting of payments, events of default or other

    termination events, calculation and netting of obligations upon

    termination, transfer of rights and obligations, governing law, dispute

    resolution, and credit support arrangements, as well as notice of the

    status of the counterparty under the orderly liquidation procedures of

    Title II of the Dodd-Frank Act, and the effect of clearing on swaps

    executed bilaterally.\68\ Nor does this determination relieve an SD or

    MSP from the documentation audit and recordkeeping requirements under

    Sec. 23.504(c) and (d).

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

    \68\ See Sec. 23.504(b)(1), (3), (5), and (6).

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

    D. Daily Trading Records (Sec. 23.202)

    Commission Requirement: Section 4s(g)(1) of the CEA and Commission

    regulation 23.202 generally require that SDs and MSPs retain daily

    trading records for swaps and related cash and forward transactions,

    including:

    Documents on which transaction information is originally

    recorded;

    All information necessary to conduct a comprehensive and

    accurate trade reconstruction;

    Pre-execution trade information including records of all

    oral and written communications concerning quotes, solicitations, bids,

    offers, instructions, trading, and prices that lead to the execution of

    a swap or related cash and forward transactions, whether communicated

    by phone, fax, instant messaging, chat rooms, email, mobile device, or

    other digital or electronic media;

    Reliable timing date for the initiation of a trade;

    A record of the time, to the nearest minute using

    Coordinated Universal Time (UTC), of each quotation provided or

    received prior to trade execution;

    Execution trade information including the terms of each

    swap and related cash or forward transaction, terms regarding payment

    or settlement, initial and variation margin requirements, option

    premiums, and other cash flows;

    The trade ticket for each swap and related cash or forward

    transaction;

    The date and time of execution of each swap and related

    cash or forward transaction to the nearest minute using UTC;

    The identity of the counterparty and the date and title of

    the agreement to which each swap is subject, including any swap trading

    relationship documentation and credit support arrangements;

    The product name and identifier, the price at which the

    swap was executed, and the fees, commissions and other expenses

    applicable;

    Post-execution trade information including records of

    confirmation, termination, novation, amendment, assignment, netting,

    compression, reconciliation, valuation, margining, collateralization,

    and central clearing;

    The time of confirmation to the nearest minute using UTC;

    Ledgers of payments and interest received, moneys borrowed

    and loaned, daily swap valuations, and daily calculation of current and

    potential future exposure for each counterparty;

    Daily calculation of initial and variation margin

    requirements;

    Daily calculation of the value of collateral, including

    haircuts;

    Transfers of collateral, including substitutions, and the

    types of collateral transferred; and

    Credits and debits for each counterparty's account.

    Daily trading records must be maintained in a form and manner

    identifiable and searchable by transaction and counterparty, and

    records of swaps must be maintained for the duration of the swap plus

    five years, and voice recordings for one year. Records must be

    ``readily accessible'' for the first two years of the five year

    retention period (consistent with Sec. 1.31).

    Regulatory Objective: Through Sec. 23.202, the Commission seeks to

    ensure that an SD's or MSP's records include all information necessary

    to conduct a comprehensive and accurate trade reconstruction for each

    swap, which necessarily requires the records to be identifiable by

    transaction and

    [[Page 78888]]

    counterparty. Complete and accurate trade reconstruction is critical

    for both regulatory oversight and investigations of illegal activity

    pursuant to the Commission's enforcement authority. The Commission

    believes that a comprehensive and accurate trade reconstruction

    requires records of pre-execution, execution, and post-execution trade

    information.

    Comparable EU Law and Regulations: The applicant has represented to

    the Commission that the following provisions of law and regulations

    applicable in the EU are in full force and effect in the EU, and

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

    Commission regulation 23.202.

    MiFID Article 13.6 and MiFID L2D Articles 5.1.f and 51: Firms are

    required to maintain records of all services and transactions

    undertaken by the firm that are sufficient to enable regulator

    authorities to monitor compliance with MiFID and to ascertain whether

    the firm has complied with all obligations with respect to clients or

    potential clients.

    Firms are required to keep detailed records in relation to every

    client order and decision to deal, and every client order executed or

    transmitted.

    All required records must be retained in a medium available for

    future reference by the regulator, and in a form/manner that:

    Allows the regulator to access them readily and

    reconstitute each key stage of processing each transaction;

    Allows corrections or other amendments, and the contents

    of the records prior to such corrections or amendments, to be easily

    ascertained; and

    Ensures that records are not manipulated or altered.

    MiFID Article 25(2): Firms must keep at the disposal of the

    regulator, for at least five years, the relevant data relating to all

    transactions in financial instruments which they have carried out,

    whether on their own account or on behalf of a client.

    MiFID L2R Articles 9 to 16: Requires transaction reporting in order

    to provide the competent authorities with the necessary information to

    conduct proper market surveillance.

    Investment firms are required to report details of all executed

    transactions in any financial instruments admitted to trading on a

    Regulated Market to the competent authority as quickly as possible and

    no later than the close of the following working day.

    The content of the transaction report is specified in L2 measures

    (MiFID L2R Article 13).

    The reporting obligation lies with investment firms. In a case

    where all the required information with respect to derivatives

    transactions has been transmitted to a TR that transmits this

    information onwards to the competent authority the obligation on the

    investment firm to report will be waived.

    Commission Determination: The Commission finds that compliance with

    MiFID would enable the relevant competent authority to conduct a

    comprehensive and accurate trade reconstruction for each swap, which

    the Commission finds generally meets the regulatory objective of Sec.

    23.202. However, the request did not provide any basis on which the

    Commission could determine that MiFID or EMIR are comparable to and as

    comprehensive as Sec. 23.202(a)(1) or regulation 23.202(b)(1), which

    require records of oral communications to be maintained for swap

    transactions and related cash and forward transactions, respectively,

    including telephone, voicemail, and mobile device recordings.\69\

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

    \69\ In the EU's request for a comparability determination

    proposed regulations concerning the recording of oral communications

    were submitted. These requirements are currently under negotiation.

    The Commission may reconsider the EU's request when and if the

    proposal is enacted.

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

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the daily trading records

    requirements of MiFID are comparable to and as comprehensive as Sec.

    23.202, excepting Sec. 23.202(a)(1) and (b)(1). This determination is

    limited to the content of the recordkeeping requirements of Sec.

    23.202 (excepting subsections (a)(1) and (b)(1)) and does not extend to

    the requirement that the Commission and any U.S. prudential regulator

    of an SD or MSP have direct access to such records.\70\

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

    \70\ Unless the records required by MiFID are available to the

    Commission and any U.S. prudential regulator under the foreign legal

    regime, it would be impossible to meet the regulatory objective of

    Sec. 23.202. As stated in the Guidance, the ability to rely on a

    substituted compliance regime is dependent on direct access to the

    books and records of a registrant. This is the case with respect to

    any Transaction-Level Requirement, and not only the daily trading

    records required by Sec. 23.202. See 78 FR 45344-45.

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

    Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendices to Comparability Determination for the European Union:

    Certain Transaction-Level Requirements

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

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

    negative.

    Appendix 2--Joint Statement of Chairman Gary Gensler and Commissioners

    Bart Chilton and Mark Wetjen

    We support the Commission's approval of broad comparability

    determinations that will be used for substituted compliance

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

    dealers, we carefully reviewed each regulatory provision of the

    foreign jurisdictions submitted to us and compared the provision's

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

    resulting comparability determinations for entity-level requirements

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

    home jurisdiction as a substitute for compliance with the relevant

    Commission regulations.

    These determinations reflect the Commission's commitment to

    coordinating our efforts to bring transparency to the swaps market

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

    the entity-level requirements are a testament to the comparability

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

    international regulatory framework.

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

    comparability with respect to swap-specific transaction-level

    requirements in the European Union and Japan.

    The Commission attained this benchmark by working cooperatively

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

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

    Commission looks forward to continuing to collaborate with both

    foreign authorities and market participants to build on this

    progress in the months and years ahead.

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

    I respectfully dissent from the Commodity Futures Trading

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

    Comparability Determinations for Certain Requirements under the laws

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

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

    comparability determinations that the Commission has made, moving

    forward, the Commission must collaborate with foreign regulators to

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

    [[Page 78889]]

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

    based on the legally unsound cross-border guidance

    (``Guidance'');\1\ (2) are the result of a flawed substituted

    compliance process; and (3) fail to provide a clear path moving

    forward. If the Commission's objective for substituted compliance is

    to develop a narrow rule-by-rule approach that leaves unanswered

    major regulatory gaps between our regulatory framework and foreign

    jurisdictions, then I believe that the Commission has successfully

    achieved its goal today.

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

    \1\ Interpretive Guidance and Policy Statement Regarding

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

    2013).

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

    Determinations Based on Legally Unsound Guidance

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

    articulate a valid statutory foundation for its overbroad scope and

    inconsistently applies the statute to different activities.\2\ Section

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

    does not have jurisdiction over foreign activities unless ``those

    activities have a direct and significant connection with activities in,

    or effect on, commerce of the United States . . .'' \3\ However, the

    Commission never properly articulated how and when this limiting

    standard on the Commission's extraterritorial reach is met, which would

    trigger the application of Title VII of the Dodd-Frank Act \4\ and any

    Commission regulations promulgated thereunder to swap activities that

    are outside of the United States. Given this statutorily unsound

    interpretation of the Commission's extraterritorial authority, the

    Commission often applies CEA section 2(i) inconsistently and

    arbitrarily to foreign activities.

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

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

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

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

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

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

    Accordingly, because the Commission is relying on the legally

    deficient Guidance to make its substituted compliance determinations,

    and for the reasons discussed below, I cannot support the Notices. The

    Commission should have collaborated with foreign regulators to agree on

    and implement a workable regime of substituted compliance, and then

    should have made determinations pursuant to that regime.

    Flawed Substituted Compliance Process

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

    foreign rules identical to our rules, determining them to be

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

    require extensive gap analysis to assess to what extent each

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

    regulatory regimes. While I support the narrow comparability

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

    rush to provide some relief, the Commission has made substituted

    compliance determinations that only afford narrow relief and fail to

    address major regulatory gaps between our domestic regulatory framework

    and foreign jurisdictions. I will address a few examples below.

    First, earlier this year, the OTC Derivatives Regulators Group

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

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

    reforms.\5\ The ODRG specifically agreed that a flexible, outcomes-

    based approach, based on a broad category-by-category basis, should

    form the basis of comparability determinations.\6\

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

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

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

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

    approach should form the basis of final assessments regarding

    equivalence or substituted compliance.''

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

    However, instead of following this approach, the Commission has

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

    example, in Japan's Comparability Determination for Transaction-Level

    Requirements, the Commission has made a positive comparability

    determination for some of the detailed requirements under the swap

    trading relationship documentation provisions, but not for other

    requirements.\7\ This detailed approach clearly contravenes the ODRG's

    understanding.

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

    \7\ The Commission made a positive comparability determination

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

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

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

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

    Second, in several areas, the Commission has declined to consider a

    request for a comparability determination, and has also failed to

    provide an analysis regarding the extent to which the other

    jurisdiction is, or is not, comparable. For example, the Commission has

    declined to address or provide any clarity regarding the European

    Union's regulatory data reporting determination, even though the

    European Union's reporting regime is set to begin on February 12, 2014.

    Although the Commission has provided some limited relief with respect

    to regulatory data reporting, the lack of clarity creates unnecessary

    uncertainty, especially when the European Union's reporting regime is

    set to begin in less than two months.

    Similarly, Japan receives no consideration for its mandatory

    clearing requirement, even though the Commission considers Japan's

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

    Commission has declined to provide even a partial comparability

    determination, at least in this instance the Commission has provided a

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

    to the clearing requirement.\8\ Such treatment creates uncertainty and

    is contrary to increased global harmonization efforts.

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

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

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

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

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

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

    Compliance with Certain Swap 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

    [[Page 78890]]

    several outstanding questions regarding these comparability

    determinations. In doing so, the Commission must collaborate with

    foreign regulators to increase global harmonization.

    First, there is uncertainty surrounding the timing and outcome of

    the MOUs. Critical questions regarding information sharing,

    cooperation, supervision, and enforcement will remain unanswered until

    the Commission and our fellow regulators execute these MOUs.

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

    the swap data repository reporting requirements. These comparability

    determinations will be done as separate notices. However, the timing

    and process for these determinations remain uncertain.

    Third, the Commission has failed to provide clarity on the process

    for addressing the comparability determinations that it declined to

    undertake at this time. The Notices only state that the Commission may

    address these requests in a separate notice at a later date given

    further developments in the law and regulations of other jurisdictions.

    To promote certainty in the financial markets, the Commission must

    provide a clear path forward for market participants and foreign

    regulators.

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

    should extend the Exemptive Order to allow foreign regulators to

    further implement their regulatory regimes and coordinate with them to

    implement a harmonized substituted compliance process; (2) the

    Commission should implement a flexible, outcomes-based approach to the

    substituted compliance process and apply it similarly to all

    jurisdictions; and (3) the Commission should work closely with our

    fellow regulators to expeditiously implement MOUs that resolve

    regulatory differences and address regulatory oversight issues.

    Conclusion

    While I support the narrow comparability determinations that the

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

    foreign regulators to implement a substituted compliance process that

    would increase the global harmonization effort. I am disappointed that

    the Commission has failed to implement such a process.

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

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

    Commission's comparability determinations have done little to alleviate

    the burden of regulatory uncertainty and duplicative compliance with

    both U.S. and foreign regulations.

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

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

    Commission must learn to coordinate with foreign regulators to minimize

    confusion and disruption in bringing much needed clarity to the swaps

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

    Commission's approval of the Notices.

    [FR Doc. 2013-30981 Filed 12-26-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 27, 2013



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