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2010-27555

  • FR Doc 2010-27555[Federal Register: November 2, 2010 (Volume 75, Number 211)]

    [Proposed Rules]

    [Page 67254-67258]

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

    [DOCID:fr02no10-12]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1 and 4

    RIN 3038-AD11

    Removing Any Reference to or Reliance on Credit Ratings in

    Commission Regulations; Proposing Alternatives to the Use of Credit

    Ratings

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing rules to implement new statutory provisions

    enacted by Title IX of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act. These proposed rules apply to futures commission

    merchants, designated clearing organizations and commodity pool

    operators. The proposed rules implement the new statutory framework

    that requires agencies to replace any reference to or

    [[Page 67255]]

    reliance on credit ratings in their regulations with an appropriate

    alternative standard.

    DATES: Submit comments on or before December 2, 2010.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD11

    by any of the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Agency Web site, via its Comments Online process: http://

    comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    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.

    Please submit your comments using only one method.

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

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the established in

    CFTC Regulation 145.9.\1\

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    \1\ 17 CFR 145.9.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Adrianne Joves, Counsel, Office of

    General Counsel, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202)

    418-5420. E-mail: ajoves@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII

    of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'')

    \4\ to establish a comprehensive new regulatory framework for swaps and

    security-based swaps. The legislation was enacted to reduce risk,

    increase transparency, and promote market integrity within the

    financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating robust

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. 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.

    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

    \4\ 7 U.S.C. 1 et seq.

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    In addition, Title IX of the Dodd-Frank Act addresses credit

    ratings agencies. In pertinent part, Title IX requires Federal agencies

    to review, modify and report on their regulations that require the use

    of an assessment of the creditworthiness of a security or money market

    instrument and that rely on or reference credit ratings.\5\ Section

    939A of the Dodd-Frank Act directs that the Commission:

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    \5\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

    Public Law 111-203, Sec. 939A (2010).

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    (1) Review Commission regulations that require the use of an

    assessment of the credit-worthiness of a security or money market

    instrument;

    (2) Remove any reference to or reliance on credit ratings in such

    regulations and substitute an appropriate standard of credit-

    worthiness;

    (3) Seek to establish, to the extent possible, uniform standards of

    credit-worthiness; and

    (4) Report to Congress after the completion of the rulemaking

    process.\6\

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    \6\ Id.

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    The Dodd-Frank Act contains a statutory deadline of July 21, 2011,

    for completing the required review of Commission regulations for any

    such reference to or reliance on credit ratings.\7\

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    \7\ Id. at Sec. 939A(a).

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    The Commission has completed the required review of its regulations

    \8\ and has identified two categories of regulations that contain any

    reliance on credit ratings: (1) Those that rely on ratings to limit how

    Commission registrants might invest or deposit customer funds; and (2)

    those that require disclosing a credit rating to describe an

    investment's characteristics. However, not every instance identified by

    this review specifically references or relies on credit ratings to

    assess the credit-worthiness of a security or a money market

    instrument. Nonetheless, in keeping with its efforts to fully comply

    with both the spirit and letter of the Dodd-Frank Act, the Commission

    is proposing to amend all of its identified regulations that rely on

    credit ratings regarding financial instruments. Accordingly, the

    Commission proposes amending Rules 1.49 \9\ and 4.24 \10\ to remove any

    references or reliance on credit ratings and replace them with

    alternative standards. Elsewhere in today's Federal Register, the

    Commission is also publishing notice of its proposal to amend

    Commission regulations 1.25 and 30.7, which in part proposes removing

    all references to or reliance on credit ratings in those regulations.

    Finally, the Commission is also publishing in today's Federal Register

    notice of its proposal to amend Part 40 of its regulations. This

    proposal includes removing Appendix A to Part 40,\11\ which contained

    one reference to credit ratings.

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    \8\ Supra note 4.

    \9\ 17 CFR 1.49 (2009).

    \10\ 17 CFR 4.24(h)(1)(i) (2009).

    \11\ 17 CFR app. pt. 40 guideline no. 1 (2009).

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    The Commission requests comment on all aspects of the proposed

    rules, as well as comment on the specific provisions and issues

    highlighted in the discussion below.

    II. Discussion

    A. Removing Reliance on or Reference to Credit Ratings To Limit How

    Registrants Might Deposit Customer Funds

    As noted above, after completing the required review of Commission

    regulations for references to or reliance on credit ratings, two

    instances were identified where credit ratings were used to help limit

    how registrants might handle customer funds. Commission regulations

    1.49 and 30.7, which were written to mirror one another,\12\ both

    include a reference to credit ratings. The Commission is proposing to

    remove those references to credit ratings from both 30.7 and 1.49. The

    Commission's proposal to remove the reference to credit ratings from

    regulation 30.7 is

    [[Page 67256]]

    being published elsewhere in today's Federal Register.

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    \12\ See 68 FR 5549 (Feb. 4, 2003).

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    1. Commission Regulation 1.49

    Commission Regulation 1.49 \13\ places qualifications on the types

    of depositories where futures commission merchants (FCMs) and

    designated clearing organizations (DCOs) might place customer funds.

    Similar to 30.7, 1.49 currently requires that an acceptable foreign

    depository must either: (1) Have in excess of $1 billion of regulatory

    capital; or (2) issue commercial paper or a long-term debt instrument

    that is rated in one of the two highest rating categories by at least

    one nationally recognized statistical rating organization (NRSRO).

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    \13\ 17 CFR 1.49(d)(3)(i)(B) (2009).

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    In keeping with the Dodd-Frank Act, the Commission proposes to

    remove all ratings requirements from Regulation 1.49. This proposal is

    based on the Commission's views regarding the uncertain reliability of

    ratings as currently administered. Recent events in the financial

    markets have revealed significant weaknesses in the ratings industry

    and its ability to reliably gauge the safety of debt instruments.

    Further, Congress and other Federal financial regulators have

    considered eliminating or restricting rating requirements with some

    frequency during the past two years.\14\

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    \14\ See 74 FR 63832 (Dec. 4, 2009) (discussing the efforts of

    the Securities Exchange Commission). See also 75 FR 52283 (Aug. 25,

    2010) (discussing the efforts of the Federal banking agencies.)

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    Finally, noting that the requirements regarding the placement of

    customer funds in foreign depositories in the two regulations were

    originally written to mirror one another,\15\ this proposal to remove

    the reference to credit ratings in Commission regulation 1.49 is done

    in concert with proposals found elsewhere in today's Federal Register

    regarding Commission regulation 30.7. That proposal considers the

    reference to credit ratings in Commission regulation 30.7 to be no more

    useful or necessary to gauge the safety of a depository institution

    than similar references found in Commission regulation 1.25. To explain

    its proposal to remove references to credit ratings in Commission

    regulation 1.25, the Commission notes the poor past performance of

    credit ratings in gauging the safety of certain types of investments,

    and its view that credit ratings are not necessary to gauge the future

    ability of certain types of investments to preserve customer funds. As

    a result, this proposal serves to align Commission regulation 1.49 with

    proposed Commission regulations 1.25 and 30.7, and to greater simplify

    the regulatory treatment of investment of customer funds.

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    \15\ See supra note 11.

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    Request for Comment

    The Commission requests comment on whether relying on a minimum

    capital requirement of $1 billion dollars in regulatory capital is an

    adequate alternative standard to current Commission regulation 1.49.

    The Commission also requests comment on whether there is another

    standard or measure of solvency and credit-worthiness that might be

    used as an appropriate, additional test of a bank's safety.

    Specifically, the Commission seeks comment on whether a leverage ratio

    or a capital adequacy ratio requirement consistent with or similar to

    those in the Basel III accords\16\ would be an appropriate additional

    safeguard for a bank or trust company located outside the United

    States.

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    \16\ See Press Release, Basel Committee on Banking Supervision,

    Group of Governors and Heads of Supervision Announces Higher Global

    Minimum Capital Standards (Sept. 12, 2010) (http://bis.org/press/

    p100912.pdf).

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    The Commission welcomes any other comments on this proposal.

    B. Removing Reliance on Credit Ratings To Help Disclose the

    Characteristics of an Investment

    After completing the required review of Commission regulations for

    references to or reliance on credit ratings, two instances were

    identified where credit ratings were used to help disclose the

    characteristics of an investment. Commission regulation 4.24 \17\ and

    Appendix A to Part 40 \18\ both include a reference to credit ratings.

    As a result, while the references to credit ratings are not

    specifically related to the credit-worthiness of securities or money

    market instruments, in keeping with the spirit of the Dodd-Frank Act

    the Commission is proposing to remove the references to credit ratings

    from 4.24. Elsewhere in today's Federal Register the Commission is

    proposing amendments to Part 40 of the Commission's regulations,

    including the removal of Appendix A to Part 40.

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    \17\ 17 CFR 4.24(h)(1)(i) (2009).

    \18\ 17 CFR app. pt. 40 guideline no. 1 (2009).

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    1. Commission Regulation 4.24

    Commission Regulation 4.24 requires commodity pool operators (CPOs)

    to disclose the characteristics of the commodity and other interests

    that the pool will trade including, if applicable, their investment

    rating. In keeping with its stated goal of complying fully with the

    spirit and letter of the Dodd-Frank Act, the Commission proposes

    removing the references to ratings Commission regulation 4.24 and

    replacing that reference with the phrase ``credit-worthiness.'' While

    CPOs may still choose to reference an investment rating to describe the

    credit-worthiness of an investment in its disclosures, the Commission

    notes that the CPO as appropriate should make an independent assessment

    of the credit-worthiness of those investments.

    Request for Comment

    The Commission requests comment on what effect removing credit

    ratings as one characteristic included in Commission regulation 4.24

    might have on the ability of investors and others to understand the

    disclosures of commodity pool operators (CPOs) regarding the

    characteristics of a commodity pool. The Commission also requests

    comment on the ability of CPOs to make independent assessments of the

    credit-worthiness of their pool's investments.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \19\ requires Federal

    agencies, in promulgating rules, to consider the impact of those rules

    on small businesses. The rule amendments proposed herein will affect

    FCMs, DCOs and CPOs. The Commission has previously established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its rules on small entities in accordance with

    the RFA.\20\ The Commission has previously determined that registered

    FCMs,\21\ DCOs \22\ and CPOs \23\ are not small entities for the

    purpose of the RFA. Accordingly, pursuant to 5 U.S.C. 605(b), the

    Chairman, on behalf of the Commission, certifies that the proposed

    rules will not have a significant economic impact on a substantial

    number of small entities.

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    \19\ 5 U.S.C. 601 et seq.

    \20\ 47 FR 18618 (Apr. 30, 1982).

    \21\ Id. at 18619.

    \22\ 66 FR 45604, 45609 (Aug. 29, 2001).

    \23\ 47 FR 18618-21 (Apr. 30, 1982).

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    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \24\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The proposed rule amendments do not

    require a new collection of information on the part of any entities

    subject to the

    [[Page 67257]]

    proposed rule amendments. Accordingly, for purposes of the PRA, the

    Commission certifies that these proposed rule amendments, if

    promulgated in final form, would not impose any new reporting or

    recordkeeping requirements.

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    \24\ 44 U.S.C. 3501 et seq.

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    C. Costs and Benefits of the Proposed Rules

    Section 15(a) of the CEA \25\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

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

    quantify the costs and benefits of rule or to determine whether the

    benefits of the rulemaking 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 rule

    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.

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    \25\ 7 U.S.C. 19(a).

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    Summary of proposed requirements. Proposed rule 1.49 would

    facilitate greater protection of customer funds. The proposed

    amendments align proposed regulation 1.49 with proposals made elsewhere

    in today's Federal Register regarding Commission regulations 1.25 and

    30.7. Like those proposals, the proposed amendments to Commission

    regulation 1.49 are made with the primary purpose of safeguarding the

    funds of customers.

    Proposed amendments to Commission regulation 4.24 would lessen

    reliance on credit ratings and will reduce risk in the financial system

    by placing more responsibility on CPOs to fully understand the credit-

    worthiness of their investments .

    Costs. With respect to costs, the Commission has determined that

    its proposals present minimal costs while providing the great benefits

    of safeguarding customer funds and decreasing the risks associated with

    CPOs not evaluating the credit-worthiness of their investments. There

    may be some minimal costs associated with transferring customer funds,

    if necessary, to more sound foreign depository institutions and with

    CPOs improving their ability to make independent assessments regarding

    the credit-worthiness of their investments.

    Benefits. With respect to benefits, the Commission has determined

    that the proposed rules will help safeguard customer funds and will

    result in CPOs improving their understanding of the credit-worthiness

    of their investments. The proposed rules help protect market

    participants and the public by safeguarding customer funds and

    highlighting the accountability CPOs have for understanding the credit-

    worthiness of their investments. The proposed rules will not hinder the

    efficiency or competitiveness of futures markets, and may improve the

    financial integrity of the markets by helping to safeguard customer

    funds and encourage CPOs to better understand the credit-worthiness of

    their investments. The proposed rules will not have any effect on price

    discovery, and may help improve sound risk management practices.

    Public Comment. The Commission invites public comment on its cost-

    benefit considerations. Commenters are also invited to submit any data

    or other information that they may have quantifying or qualifying the

    costs and benefits of the Proposal with their comment letters.

    List of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Consumer protection.

    17 CFR Part 4

    Advertising, Commodity futures, Commodity pool operators, Commodity

    trading advisors, Consumer protection, Disclosure, Principals,

    Reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, the Commodity Futures

    Trading Commission proposed to amend 17 CFR parts 1 and 4 as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6k, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1,

    16, 16a, 19, 21, 23, and 24, as amended by the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376 (2010) and the Commodity Futures Modernization Act of

    2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

    2. Section 1.49 is amended by revising paragraph (d)(3) to read as

    follows:

    Sec. 1.49 Denomination of customer funds and location of

    depositories.

    * * * * *

    (d) * * *

    (3) A depository, if located outside the United States, must be:

    (i) A bank or trust company that has in excess of $1 billion of

    regulatory capital; or

    (ii) A futures commission merchant that is registered as such with

    the Commission; or

    (iii) A derivatives clearing organization.

    * * * * *

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a

    and 23 as amended by the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    2. Section 4.24 is amended by revising paragraph (h)(1)(i) to read

    as follows:

    Sec. 4.24 General disclosures required.

    * * * * *

    (h) * * *

    (1) * * *

    (i) The approximate percentage of the pool's assets that will be

    used to trade commodity interests, securities and other types of

    interests, categorized by type of commodity or market sector, type of

    security (debt, equity, preferred equity), whether traded or listed on

    a regulated exchange market, maturity ranges and by credit worthiness,

    as applicable;

    * * * * *

    By the Commodity Futures Trading Commission.

    Dated: October 27, 2010.

    David A. Stawick,

    Secretary.

    Statement of Chairman Gary Gensler Removing Any Reference to or

    Reliance on Credit Ratings in Commission Regulations; Proposing

    Alternatives to the Use of Credit Ratings

    October 26, 2010

    I support the proposal to remove any reliance on credit ratings

    within the Commission's regulations. Under Title IX of the Dodd-Frank

    Act, Congress required that the Commission review references to credit

    ratings in our

    [[Page 67258]]

    existing regulations and to specifically remove them if they were

    regarding certain financial instruments. The Commission has completed

    the required review of its regulations and has identified seven

    instances of references to credit ratings, five of which were regarding

    those financial instruments. Today, we are proposing removing these

    five references and reliance to credit ratings. This rule addresses two

    of those references in Regulation 1.49, which limits the types of banks

    in which futures commission merchants and derivatives clearing

    organizations may place customer funds, and 4.24, which requires

    commodity pool operators to disclose to their customers where they are

    putting customer money. The other actions we are taking today regarding

    rule certifications in Part 40 and investment of customer funds in

    Regulation 1.25 and 30.7 will address the remaining instances of credit

    ratings.

    [FR Doc. 2010-27555 Filed 11-1-10; 8:45 am]

    BILLING CODE P

    Last Updated: November 2, 2010