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2010-23142

  • FR Doc 2010-23142[Federal Register: September 16, 2010 (Volume 75, Number 179)]

    [Notices]

    [Page 56513-56516]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr16se10-32]

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    COMMODITY FUTURES TRADING COMMISSION

    Orders Regarding the Treatment of Petitions Seeking Grandfather

    Relief for Exempt Commercial Markets and Exempt Boards of Trade

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice; final orders.

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    SUMMARY: The Commission is issuing orders whereby entities currently

    operating as exempt commercial markets, pursuant to Section 2(h)(3)-(7)

    of the Commodity Exchange Act, or exempt boards of trade, pursuant to

    Section 5d of the Commodity Exchange Act, may receive grandfather

    relief to continue to operate in accordance with those provisions

    notwithstanding their deletion from the Commodity Exchange Act,

    effective July 15, 2011, by the Dodd-Frank Wall Street Reform and

    Consumer Protection Act. The Commission's orders set forth various

    conditions for such grandfather relief, including the filing of a

    relief petition

    [[Page 56514]]

    and a swap execution facility or designated contract market application

    with the Commission.

    DATES: Effective Date: September 10, 2010. Comments on this notice will

    be accepted until October 18, 2010.

    ADDRESSES: You may submit comments or petitions for relief, identified

    with ``ECM/EBOT Grandfather Relief'' in the subject line, whichever is

    appropriate, by any of the following methods:

    E-mail for Comments: ecmebotcomments@cftc.gov. E-mail for

    petitions: ecmebotpetitionscftc.gov.

    Mail: David A. Stawick, Secretary of the Commission,

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

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments and petitions will be posted as

    received to http://www.cftc.gov.

    FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Chief Counsel,

    Division of Market Oversight, Commodity Futures Trading Commission,

    Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

    Telephone: (202) 418-5481. E-mail: dvanwagner@cftc.gov; or Beverly E.

    Loew, Assistant General Counsel, Office of the General Counsel, same

    address. Telephone: (202) 418-5648. E-mail: bloew@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 21, 2010, President Obama signed into law the Dodd-Frank

    Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\

    Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act

    (``CEA'') \3\ to establish a comprehensive new regulatory framework for

    swaps and security-based swaps. Among other changes to the CEA, the

    Dodd-Frank Act eliminated certain exempt market categories--exempt

    commercial markets (``ECMs'') and exempt boards of trade (``EBOTs'')--

    from the CEA; established a new regulated market category--swap

    execution facilities (``SEFs''); revised certain requirements for an

    extant regulated market category--designated contract markets

    (``DCMs''); and authorized the Commission to grant grandfather relief

    for entities in the eliminated exempt market categories in order to

    assist those entities to transition their business models to a

    different market category.\4\

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

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

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

    \3\ 7 U.S.C. 1 et seq.

    \4\ The same provision of the Dodd-Frank Act that eliminated

    EBOTs also deleted CEA Section 5a--a provision that established a

    category of regulated markets known as derivatives transaction

    execution facilities (``DTEFs''). See Section 734 of the Dodd-Frank

    Act. The Dodd-Frank Act does not, however, authorize the Commission

    to grant grandfather relief to the DTEFs. Accordingly, DTEFs are not

    addressed in the Commission's subject order. Notably, the Commission

    has never registered a DTEF.

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    II. Background and Discussion

    a. Exempt Commercial Markets and Exempt Boards of Trade

    Sections 723 and 734 of the Dodd-Frank Act will strike from the CEA

    enabling provisions for two categories of exempt markets established by

    the Commodity Futures Modernization Act of 2000 (``CFMA'').\5\

    Specifically, Section 723 of the Dodd-Frank Act will strike CEA Section

    2(h)(3)-(7) and, thus, eliminate the ECM category.\6\ Similarly,

    Section 734 of the Dodd-Frank Act will strike CEA Section 5d and, thus,

    eliminate the EBOT category.\7\

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    \5\ See Commodity Futures Modernization Act of 2000, Public Law

    106-554, 114 Stat. 2763 (2000).

    \6\ See Section 723(a)(1)(A) of the Dodd-Frank Act.

    \7\ See Section 734(a) of the Dodd-Frank Act.

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    The Commission notes that ECMs and EBOTs are both required to

    operate their execution platforms as trading facilities, as that term

    is defined by CEA Section 1a(34), and must limit access to a narrow

    group of market participants--eligible commercial entities in the case

    of ECMs and eligible contract participants in the case of EBOTs. These

    requirements are not inconsistent with the execution platform and

    market participant requirements for DCMs or SEFs as they are set forth

    in the CEA and the Dodd-Frank Act. Accordingly, while the ECM and EBOT

    provisions will be eliminated from the CEA effective July 15, 2011, the

    basic structural requirements for both of those market categories

    should facilitate the ability of ECMs and EBOTs to transition to either

    the SEF or DCM market category; provided, of course, that they comply

    with the enhanced regulatory requirements for those two categories.

    Sections 723 and 734 of the Dodd-Frank Act contain similar

    grandfather provisions for ECMs and EBOTs, respectively, whereby they

    may petition the Commission to continue to operate as ECMs and EBOTs.

    With some variation, both sections establish three basic requirements

    regarding the processing of grandfather petitions.

    First, entities seeking grandfather treatment must submit their

    petitions to the Commission by a set deadline: ECMs must submit their

    petitions within sixty days of the enactment of the Dodd-Frank Act

    (i.e., by September 20, 2010) and EBOTs must submit their petitions by

    the Dodd-Frank Act's effective date (i.e., by July 15, 2011). Second,

    the Commission must consider all petitions in a ``prompt manner.''

    Third, the Commission may grant grandfather treatment for up to one

    year. In the case of EBOT petitions, the Dodd-Frank Act makes clear

    that the one-year period would commence with the Dodd-Frank Act's

    effective date of July 15, 2011. By contrast, the Dodd-Frank Act does

    not specify what the reference date should be for the running of any

    grandfather period for ECMs.

    The Commission expects that many entities that currently operate as

    ECMs or EBOTs will seek to become either SEFs or DCMs when the

    Commission adopts regulations implementing Dodd-Frank's requirements

    for those facilities. While the Commission expects to adopt SEF and DCM

    regulations prior to the July 15, 2011, effective date for deleting the

    ECM and EBOT provisions from the CEA, the Commission also anticipates

    that concurrent with the implementation of those new provisions it will

    have to process a large number of SEF and DCM applications from ECMs,

    EBOTs and interdealer brokers.\8\ In order to ease this congestion of

    applications, and to facilitate the transition of current ECM and EBOT

    businesses to the new regulatory regime mandated by the Dodd-Frank Act,

    the Commission believes that it would be appropriate to provide

    grandfather relief allowing EBOTs and ECMs to continue to operate as

    EBOTs and ECMs after the July 15, 2011, effective date of the Dodd-

    Frank Act.

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    \8\ Currently, there are 16 ECMs and 6 EBOTs with active

    Notifications of Operation or Annual Certifications on file with the

    Commission.

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    Accordingly, the Commission is issuing orders that would establish

    procedures whereby ECMs and EBOTs may petition for and receive

    grandfather relief from the otherwise applicable provisions of the

    Dodd-Frank Act, so long as they submit both timely and acceptable

    grandfather relief requests and either DCM or SEF applications. To be

    acceptable, the grandfather relief request shall contain a commitment

    to provide the Commission and its staff with access to the books and

    records of the ECM or EBOT relating to its business as an ECM or EBOT

    in

    [[Page 56515]]

    accordance with the requirements in Commission Regulation 1.31, 17 CFR

    1.31, effective July 15, 2011. Failure to comply with any request for

    books and records in accordance with the requirements of Commission

    Regulation 1.31 shall constitute a basis for revocation of the

    grandfather relief. The grandfather relief will extend for as long as

    the ECM or EBOT has a legitimate DCM or SEF application pending before

    the Commission and, accordingly, the relief will expire upon the

    Commission's approval or disapproval of the application.

    b. Eligible Contract Participants Operating Pursuant to Section 2(h)(1)

    Section 723 of the Dodd-Frank Act, which eliminated the ECM

    category from the CEA, also deleted CEA Section 2(h)(1)-(2)--a

    provision that provides an exemption for certain types of bilateral

    trading conducted off of regulated markets. Although the Dodd-Frank Act

    authorizes the Commission to grant grandfather relief to trading

    activity that relies upon CEA Section 2(h)(1)-(2), the nature of that

    trading activity is qualitatively different from trading activity on

    EBOTs and ECMs, both of which must operate as trading facilities, as

    that term is defined in CEA Section 1a(34). Accordingly, the issue of

    grandfather treatment for Section 2(h)(1)-(2) bilateral trading will be

    addressed by the Commission in a separate action.

    III. Related Matters

    a. Paperwork Reduction Act

    The Commission has determined that these proposed orders will not

    impose any new recordkeeping or information collection requirements, or

    other collections of information that require approval of the Office of

    Management and Budget under the Paperwork Reduction Act (``PRA'').\9\

    Collections of information that may be associated with a SEF or DCM

    application required as a condition for receiving relief will be

    addressed within the SEF and DCM-related rulemakings implementing the

    Dodd-Frank Act.

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    \9\ 44 U.S.C. 3501 et seq.

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    b. Cost-Benefit Analysis

    Section 15(a) of the CEA \10\ requires the Commission to consider

    the costs and benefits of its actions before issuing an order under the

    Act. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs; rather, it requires that the

    Commission ``consider'' the costs and benefits of its actions. Section

    15(a) further specifies that the costs and benefits shall be evaluated

    in light of five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the Act. The Commission has determined that providing grandfather

    relief to ECMs and EBOTs, as provided in these orders, will mitigate

    market disruptions by permitting ECMs and EBOTs to continue to operate

    while they transition into new market categories once the Dodd-Frank

    Act becomes effective.\11\

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    \10\ 7 U.S.C. 19(a).

    \11\ The Commission is aware of certain ECMs that have block

    trade mechanisms whereby large-sized block transactions are executed

    away from the ECM's central marketplace, but in accordance with the

    ECM's rules, and subsequently reported to the ECM and treated as

    fungible with positions established through the central marketplace.

    Those block trades and resultant positions should be considered

    within the scope of the ECM grandfather relief being granted by this

    release.

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    c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \12\ requires that

    agencies consider the impact of their rules on small businesses. The

    Commission previously has determined that neither ECMs nor EBOTs are

    small entities for purposes of the RFA.\13\ Accordingly, the Chairman,

    on behalf of the Commission, hereby certifies pursuant to 5 U.S.C.

    605(b) that these Orders, taken in connection with Sections 2(h)(3)-(7)

    and 5d of the Act and with the Part 36 rules, will not have a

    significant impact on a substantial number of small entities.

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    \12\ 5 U.S.C. 601 et seq.

    \13\ 66 FR 42256, 42268 (Aug. 10, 2001).

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    IV. Orders

    a. ECM Grandfather Order

    After considering the complete record in this matter, the

    Commission has determined to issue the following Order pursuant to its

    authority under Section 723(c) of the Dodd-Frank Act:

    It is hereby ordered that any ECM that meets all of the following

    applicable conditions may continue to operate pursuant to the

    provisions of CEA Section 2(h)(3)-(7) until July 15, 2012 (one year

    after the general effective date of the Dodd-Frank Act's amendments to

    the CEA): \14\

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    \14\ See Section 754 of the Dodd-Frank Act.

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    (1) The ECM must have filed with the Commission by September 20,

    2010, a grandfather relief petition that:

    (a) Is labeled ``Exempt Commercial Market Grandfather Relief

    Petition Filed Pursuant to Section 723(c)(2)(A) of the Dodd-Frank

    Act,''

    (b) Identifies the requesting ECM,

    (c) Identifies a contact person at the ECM, including that person's

    contact information at the ECM, and

    (d) Grants the Commission and its representatives access to the

    books and records of the ECM relating to its business as an ECM in

    accordance with the requirements of Commission Regulation 1.31,

    starting July 15, 2011 and throughout the pendency of the grandfather

    relief.

    (2) The ECM must have filed a formal SEF or DCM application with

    the Commission within sixty days after the effective date of final

    regulations implementing the provisions of either Section 733 or 735 of

    the Dodd-Frank Act, whichever is appropriate.

    (3) The ECM's SEF or DCM application is currently pending before

    the Commission.

    b. EBOT Grandfather Order

    After considering the complete record in this matter, the

    Commission has determined to issue the following Order pursuant to its

    authority under Section 734(c)(1) of the Dodd-Frank Act:

    It is hereby ordered that any EBOT that meets all of the following

    applicable conditions may continue to operate pursuant to the

    provisions of CEA Section 5d up until July 15, 2012 (one year after the

    general effective date of the Dodd-Frank Act's amendments to the CEA):

    \15\

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    \15\ See Section 754 of the Dodd-Frank Act.

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    (1) The EBOT must have filed with the Commission by July 15, 2011,

    a grandfather relief petition that:

    (a) Is labeled ``Exempt Board of Trade Grandfather Relief Petition

    Filed Pursuant to Section 734(c)(1) of the Dodd-Frank Act,''

    (b) Identifies the requesting EBOT,

    (c) Identifies a contact person at the EBOT, including that

    person's contact information at the EBOT, and

    (d) Grants the Commission and its representatives access to the

    books and records of the EBOT relating to its business as an EBOT in

    accordance with the requirements of Commission

    [[Page 56516]]

    Regulation 1.31, starting July 15, 2011 and throughout the pendency of

    the grandfather relief.

    (2) The EBOT must have filed a formal SEF or DCM application with

    the Commission within sixty days after the effective date of final

    regulations implementing the provisions of either Section 733 or 735 of

    the Dodd-Frank Act, whichever is appropriate.

    (3) The EBOT's SEF or DCM application is currently pending before

    the Commission.

    Issued in Washington, DC, on September 10, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-23142 Filed 9-15-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: September 16, 2010