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2011-15195

  • Federal Register, Volume 76 Issue 117 (Friday, June 17, 2011)[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]

    [Proposed Rules]

    [Pages 35372-35378]

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

    [FR Doc No: 2011-15195]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter 1

    Effective Date for Swap Regulation

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed order and request for comment.

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    SUMMARY: Pursuant to section 754 of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (``Dodd-Frank Act''), the general effective

    date for certain provisions of subtitle A of title VII of the Dodd-

    Frank Act (``Title VII'') that do not require a rulemaking is 360 days

    after enactment, or July 16, 2011, unless another effective date is

    specifically provided. Following the general effective date, market

    participants may be subject to certain Commodity Exchange Act (``CEA''

    or ``Act'') requirements but not others. To provide greater clarity

    regarding the applicability of various statutory and regulatory

    requirements, the Commodity Futures Trading Commission (``CFTC'' or the

    ``Commission'') is proposing to grant, pursuant to its section 4(c)

    exemptive authority, temporary relief in two parts with respect to

    various requirements of the CEA that apply or may apply to certain

    agreements, contracts, and transactions. In part one, the Commission is

    proposing to temporarily exempt persons or entities with respect to

    provisions of the CEA added or amended by the Dodd-Frank Act that

    reference one or more terms regarding entities or instruments that

    Title VII requires be ``further defined,'' such as the terms ``swap,''

    ``swap dealer,'' ``major swap participant,'' or ``eligible contract

    participant,'' to the extent that requirements or portions of such

    provisions specifically relate to such referenced terms. In part two,

    the Commission is proposing to grant relief from certain provisions of

    the CEA that will or may apply to certain agreements, contracts, and

    transactions in exempt or excluded commodities as a result of the

    repeal of various CEA exemptions and exclusions as of July 16, 2011.

    DATES: Comments must be received on or before July 1, 2011.

    ADDRESSES: Comments may be submitted, referenced as ``Effective

    Dates,'' by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

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

    Follow the instructions for submitting comments.

    Mail: Send to David A. Stawick, Secretary, Commodity

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

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    Please submit your comments using only one method. ``Effective

    Dates'' must be in the subject field of responses submitted via e-mail,

    and clearly indicated on written submissions. 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 CFTC 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 procedures established in section 145.9 of the CFTC's

    regulations.\1\

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    \1\ 17 CFR 145.9.

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    The CFTC 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, including obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of this action 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: Terry Arbit, Deputy General Counsel,

    202-418-5120, tarbit@cftc.gov, or Harold Hardman, Deputy General

    Counsel, 202-418-5120, hhardman@cftc.gov, Office of the General

    Counsel, or Steven Kane, Consultant, 202-418-5911, skane@cftc.gov,

    Office of the Chief Economist, Commodity Futures Trading Commission,

    Three Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\

    Title VII of the Dodd-Frank Act amends the CEA \3\ to establish a

    comprehensive new regulatory framework for 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

    [[Page 35373]]

    requirements on standardized derivative products; (3) creating robust

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

    rulemaking and enforcement authorities of the Commission with respect

    to, among others, all registered entities and intermediaries subject to

    the Commission's oversight. Title VII also includes amendments to the

    Federal securities laws to establish a similar regulatory framework for

    security-based swaps under the authority of the Securities and Exchange

    Commission (``SEC'').

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

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

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

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    Section 754 of the Dodd-Frank Act provides that, unless otherwise

    provided, the provisions of subtitle A of Title VII \4\ ``shall take

    effect on the later of 360 days after the date of the enactment of this

    subtitle or, to the extent a provision of this subtitle requires a

    rulemaking, not less than 60 days after publication of the final rule

    or regulation implementing such provisions of this subtitle.'' The date

    360 days after the date of enactment is July 16, 2011.

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    \4\ Subtitle A of Title VII contains two parts. Part I, entitled

    ``Regulatory Authority,'' consists of sections 711-720; part II,

    entitled ``Regulation of Swap Markets,'' consists of sections 721-

    754. Subtitle B of Title VII is entitled ``Regulation of Security-

    Based Swap Markets,'' and consists of sections 761-774. References

    to ``Title VII'' in this Release shall include only subtitle A of

    Title VII.

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    To implement the Dodd-Frank Act, the Commission has to-date issued

    53 advance notices of proposed rulemaking or notices of proposed

    rulemaking, two interim final rules, one final rule, and one proposed

    interpretive order. The regulatory requirements that have been proposed

    by the Commission present a substantially complete mosaic of the

    Commission's proposed regulatory framework under Title VII. In light of

    this substantially complete mosaic, the Commission reopened or extended

    the comment period of many of its proposed rulemakings in order to

    provide the public with an additional opportunity to comment on the

    proposed new regulatory framework for swaps, either in part or as a

    whole.\5\ The extended comment period closed on June 3, 2011. The

    Commission also has solicited public comments on phasing of rule

    implementation (i.e., identifying which requirements can be met sooner

    and which ones will take more time).\6\

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    \5\ See Reopening and Extension of Comment Periods for

    Rulemakings Implementing the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, 76 FR 25274, May 4, 2011.

    \6\ The Commission has noted its ability to phase in

    implementation of the new requirements based on factors such as: The

    type of swap, including by asset class; the type of market

    participants that engage in such trades; the speed with which market

    infrastructures can meet the new requirements; and whether

    registered market infrastructures or participants might be required

    to have policies and procedures in place ahead of compliance with

    such policies and procedures by non-registrants. http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/staffconcepts050211.pdf.

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    II. Background and Discussion

    Section 712(d)(1) of the Dodd-Frank Act requires the Commission and

    the SEC to further define certain terms used in Title VII, including

    the terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and

    ``eligible contract participant.'' \7\ Section 721(c) requires the

    Commission to adopt a rule to further define the terms ``swap,'' ``swap

    dealer,'' ``major swap participant,'' and ``eligible contract

    participant'' to prevent evasion of statutory and regulatory

    obligations.\8\ The Commission has issued two notices of proposed

    rulemaking that address these definitions.\9\

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    \7\ Section 712(d) provides: ``Notwithstanding any other

    provision of this title and subsections (b) and (c), the Commodity

    Futures Trading Commission and the Securities and Exchange

    Commission, in consultation with the Board of Governors [of the

    Federal Reserve System], shall further define the terms `swap',

    `security-based swap', `swap dealer', `security-based swap dealer',

    `major swap participant', `major security-based swap participant',

    and `security-based swap agreement' in section 1a(47)(A)(v) of the

    Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)

    of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''

    \8\ Section 721(c) provides: ``To include transactions and

    entities that have been structured to evade this subtitle (or an

    amendment made by this subtitle), the Commodity Futures Trading

    Commission shall adopt a rule to further define the terms `swap',

    `swap dealer', `major swap participant', and `eligible contract

    participant'.''

    \9\ See Further Definition of ``Swap Dealer,'' ``Security-Based

    Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based

    Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

    80174, Dec. 21, 2010 (``Entity Definitions'') and Further Definition

    of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap

    Agreement'' Mixed Swaps; Security-Based Swap Agreement

    Recordkeeping, 76 FR 29818, May 23, 2011.

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    The Commission's final rulemakings further defining the terms in

    sections 712(d) and 721(c) will not be in place as of July 16, 2011.

    Consequently, concerns have been raised about effects upon the swaps

    market during the period between July 16, 2011 and prior to the date(s)

    that those rulemakings have been completed. The Commission is proposing

    this relief to address these concerns and provide clarity to market

    participants upon the general effective date of the Dodd-Frank Act. The

    Commission reiterates its intent to ``strive to ensure that current

    practices will not be unduly disrupted during the transition to the new

    regulatory regime.'' \10\

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    \10\ See Notice Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Trading Activity Done in Reliance Upon

    Section 2(h)(1)-(2) of the Commodity Exchange Act, 75 FR 56512,

    56513, Sept. 16, 2010 (``Grandfather Notice'').

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    Section 712(f) of the Dodd-Frank Act authorizes the Commission to

    ``promulgate rules, regulations, or orders permitted by this [Dodd-

    Frank] Act,'' conduct studies and prepare reports, register persons,

    and ``exempt persons, agreements, contracts, or transactions from the

    provisions of the Act, under the terms contained in this Act,'' in

    order to prepare for the effective dates of the provisions of Title

    VII. Section 4(c) of the CEA, as amended by the Dodd-Frank Act,

    provides the Commission with authority to exempt certain agreements,

    contracts, and transactions that may otherwise be subject to the CEA

    from various provisions of the CEA.\11\

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    \11\ 7 U.S.C. 6(c).

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    The provisions of Title VII can be grouped into 4 major categories:

    (1) Provisions that require a rulemaking (for which relief is not being

    proposed); (2) self-effectuating provisions that reference terms that

    require further definition; (3) self-effectuating provisions that do

    not reference terms that require further definition and that repeal

    provisions of current law; and (4) self-effectuating provisions for

    which relief is not being proposed.

    Section 754 specifies that unless otherwise provided in Title VII,

    provisions requiring a rulemaking become effective ``not less than 60

    days after publication of the final rule'' (but not before July 16,

    2011). Category 1 provisions, therefore, are not self-effectuating. A

    significant number of the Title VII provisions fall into this category.

    Examples of such provisions in Category 1 include new CEA section 4s(a)

    (governing registration of swap dealers and major swap participants),

    new CEA section 4s(e) (governing capital and margin requirements for

    swap dealers and major swap participants), and new CEA section 4s(h)

    (external business conduct standards for swap dealers and major swap

    participants).\12\ The requirements in these provisions of the CEA will

    not become effective, at a minimum, until 60 days after publication of

    a final Commission rule (and not before July 16, 2011).

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    \12\ 7 U.S.C. 6s(a), 6s(e) and 6s(h), respectively.

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    Because these provisions are not self-effectuating as of July 16,

    2011, it is not necessary to provide relief with respect to Category 1

    provisions as of July 16, and they are outside the scope of the

    proposed order. Similarly, Category 4 provisions also are outside the

    scope of the proposed order, and will go into

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    effect on July 16, 2011.\13\ Lists of Category 1 and Category 4

    provisions prepared by Commission staff will be published on the

    Commission's Web site.

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    \13\ Examples of Category 4 provisions include new CEA section

    5b(c)(2), 7 U.S.C. 7a-1(c)(2) (core principles for derivatives

    clearing organizations (``DCOs'')); new CEA section 5(d), 7 U.S.C.

    7(d) (core principles for designated contract markets); and new CEA

    sections 4c(a)(5)-(6), 7 U.S.C. 6c(a)(5)-(6) (certain anti-

    disruptive practices authority). To the extent that the Commission

    has issued proposed rulemakings to implement any Category 4

    provisions, any requirements or guidance in such rulemakings will

    not become effective until the effective date of a final rulemaking.

    In two cases, a Category 4 provision that amends the CEA

    references a term that requires further definition, but

    nevertheless, the Commission does not believe that it is appropriate

    to include the provision in the proposed order. These provisions are

    new CEA section 5b(g), 7 U.S.C. 7a-1(g) (depository institutions and

    SEC-registered clearing agencies clearing swaps prior to enactment

    are ``deemed to be registered'' as DCOs); and amended CEA section

    22(a), 7 U.S.C. 25(a) (private right of action with respect to

    swaps).

    There also are provisions in Category 4 that reference a term

    that requires further definition, but that do not amend the CEA and

    thus are outside the scope of the Commission's exemptive authority

    under CEA Section 4(c). Such provisions in Title VII include, for

    example: (1) Section 711 and much of section 712 (provisions

    regarding certain definitions and regulatory authority of CFTC and

    SEC); and (2) sections 724(b) and 725(g) (amending the Bankruptcy

    Code and the Legal Certainty for Bank Products Act of 2000,

    respectively).

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    The proposed relief discussed herein is considered in two parts,

    each addressing one of the remaining Categories noted above: (1)

    Category 2--provisions that are self-effectuating (i.e., do not require

    rulemaking) and reference terms that require further definition (i.e.,

    ``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible

    contract participant''); and (2) Category 3--provisions that are self-

    effectuating (i.e., do not require rulemaking) and repeal provisions of

    current law, but that do not reference terms that require further

    definition. These parts are discussed, in turn, in the sections that

    follow.

    A. Part One: Category 2--Self-Effectuating Provisions Referencing Terms

    That Require Further Definition

    Some provisions of Title VII that do not require a rulemaking and

    thus, under section 754, become effective on July 16, 2011,

    specifically reference the terms ``swap,'' ``swap dealer,'' ``major

    swap participant,'' or ``eligible contract participant'' (or other

    entities or instruments) which themselves are the subject of

    rulemakings for further definition under sections 712(d) and 721(c) of

    the Dodd-Frank Act. As discussed above, the final rulemakings on these

    further definitions will not be in place by July 16, 2011.

    In response to requests from market participants for greater

    clarity regarding the applicability of various regulatory requirements

    to certain agreements, contracts, and transactions (referred to

    hereafter collectively as ``transactions'') following the general

    effective date,\14\ the Commission is proposing this temporary

    exemptive order pursuant to section 4(c) of the CEA. Specifically, for

    the Category 2 provisions described above, the Commission proposes to

    exempt persons and entities from the provisions of the CEA, as added or

    amended by the Dodd-Frank Act, that reference one or more of the terms

    regarding entities or instruments subject to further definition under

    sections 712(d) and 721(c) of the Dodd-Frank Act, including the terms

    ``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible

    contract participant.'' \15\ The proposed exemptive relief from such

    provisions would apply only with respect to those requirements or

    portions of such provisions that specifically relate to such referenced

    terms.

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    \14\ See, e.g., Futures Industry Association, Petition for

    Exemption Pursuant to Section 4(c) of the Commodity Exchange Act

    (June 1, 2011) (requesting that the Commission ``adopt an order

    pursuant to section 4(c) of the [CEA] exempting such Clearing

    Members from the requirements of section 4d(f) of the CEA, as added

    by section 724 of [the Dodd-Frank Act], for a period of not less

    than 30 calendar days, beginning July 16, 2011, the effective date

    of many provisions of the Dodd-Frank Act, and ending not before

    August 15, 2011'') (footnote omitted). New CEA section 4d(f), 7

    U.S.C. 7d(f), falls within Category 2 discussed above.

    See also (1) Futures Industry Association, Institute of

    International Bankers, International Swaps and Derivatives

    Association, Investment Company Institute, Securities Industry and

    Financial Markets Association, and U.S. Chamber of Commerce, Request

    for Clarification and Relief Under Sections 754 and 739 of the Dodd-

    Frank Wall Street Reform and Consumer Protection Act; Petition for

    Exemption Pursuant to Section 4(c) of the Commodity Exchange Act,

    (June 10, 2011); (2) The Financial Services Roundtable, Letter re.

    Automatically Effective Provisions under Title VII of the Dodd-Frank

    Act, Application for Exemption Pursuant to Section 4(c) of the

    Commodity Exchange Act and Section 712(f) Pending Effectiveness of

    Final Rulemaking (June 10, 2011); (3) National Grain and Feed

    Association, Letter re. Status of Options on Agricultural

    Commodities Entered Into After July 16, 2011 (June 7, 2011); and (4)

    Paul Pantano on behalf of Commodity Options and Agricultural Swaps

    Working Group, Letter re. Transition Exemption for Options on

    Agricultural Commodities Entered Into After July 15, 2011 (June 6,

    2011).

    \15\ The Commission's authority to provide exemptive relief

    under CEA section 4(c), as amended by section 721(d) of the Dodd-

    Frank Act, may not extend to certain Category 2 provisions of the

    Dodd-Frank Act and the CEA. These provisions include: new CEA

    section 4s(l), 7 U.S.C. 6s(l) (providing for swap dealer segregation

    requirements with respect to uncleared swaps); amended CEA section

    5b(a), 7 U.S.C. 7a-1(a) (prohibiting a DCO from performing the

    functions of a DCO with respect to swaps unless the DCO is

    registered with the Commission); and new CEA section 4s(k), 7 U.S.C.

    6s(k) (providing for the duties and designation of a chief

    compliance officer for swap dealers and major swap participants). As

    such, these provisions will take effect on July 16, 2011, and may

    not be subject to the exemptive relief noted above granted by the

    Commission. The Commission staff has informed the Commission that it

    is separately considering whether to issue a no-action letter in

    which the staff would state that it would not recommend that the

    Commission commence an enforcement action against markets or market

    participants for failure to comply with the above-referenced

    provisions over a similar time period.

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    This proposed relief would not in any way limit the Commission's

    authority with respect to any person, entity, or transaction pursuant

    to CEA sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or

    13, or the regulations of the Commission promulgated pursuant to such

    authorities, including CEA section 4c(b) proscribing fraud.\16\ This

    relief would not apply to any provisions of Title VII and the CEA that

    have become effective prior to July 16, 2011 \17\ or Commission

    regulations already issued. Further, this relief would not affect any

    effective date set out in any specific Dodd-Frank Act rulemaking by the

    Commission. In addition, the proposed order would not limit the

    Commission's authority under section 712(f) of the Dodd-Frank Act to

    issue rules, orders, or exemptions prior to the effective date of any

    provision, in order to prepare for the effective date of such

    provision, provided that such rule, order, or exemption shall not

    become effective prior to the effective date of the provision. Finally,

    this proposed order would not affect the applicability of any provision

    of the CEA to futures contracts or options on futures contracts.\18\

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    \16\ The Dodd-Frank Act amended the CEA's anti-fraud and anti-

    manipulation provisions, including CEA section 4b, to cover

    ``swaps.'' Although these provisions therefore would, under the

    proposed relief, not apply to ``swaps'' under the Dodd-Frank Act

    because that term is subject to further definition, nevertheless,

    they will apply to all transactions other than ``swaps'' (including,

    but not limited to, futures contracts, options on futures contracts,

    transactions with retail customers in foreign currency or other

    commodities pursuant to CEA section 2(c)(2) (7 U.S.C. 2(c)(2)), and

    transactions subject to exemptive relief pursuant to part two of the

    proposed order).

    \17\ See, e.g., section 737(d) of the Dodd-Frank Act (amendments

    regarding position limits effective on the date of enactment).

    Similarly, this relief would not affect the effective date of any

    provision that may become effective after July 16, 2011, such as

    section 716 of the Dodd-Frank Act.

    \18\ Accordingly and by way of non-exclusive example, where a

    provision references both swaps and futures, this relief does not

    affect in any way the application of the provision (and any

    implementing Commission regulations thereunder) insofar as it refers

    to futures.

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    The proposed temporary exemptive relief would expire upon the

    earlier of: (1) The effective date of the applicable final rule further

    defining the relevant term; or (2) December 31, 2011. The

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    Commission is proposing to limit this proposed relief to no more than a

    fixed period--i.e. December 31, 2011--for several reasons.

    First, the Commission believes it appropriate and prudent to

    periodically review the extent and scope of any relief provided from

    the CEA, as amended by the Dodd-Frank Act. The Commission anticipates

    that additional rulemakings to implement the Dodd-Frank Act will be

    completed during this period of transitional relief. During this period

    the Commission also will be considering the appropriate phase-in of the

    various regulatory requirements under the Dodd-Frank rulemakings.

    Accordingly, the Commission believes it would be appropriate to

    periodically re-examine the scope and extent of the proposed exemptive

    relief in order to ensure that the scope of relief is appropriately

    tailored to the schedule of implementation of the Dodd-Frank Act

    requirements.\19\

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    \19\ The Commission adopted a similar approach in not granting

    ``grandfather'' relief with respect to transactions being conducted

    under CEA sections 2(h)(1) and (2), 7 U.S.C, 2(h)(1) and (2):

    ``Until the contents and timing of the Commission's regulations

    affecting bilateral swaps are better known, however, the Commission

    has determined not to grant grandfather relief as it is impossible

    to know at this time whether such relief will be necessary.'' See

    Grandfather Notice, 75 FR at 56513.

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    Second, the limitation of this exemptive relief to no more than a

    fixed period of time is consistent with similar limitations on

    transitional relief provided by the Congress elsewhere in Title VII.

    Section 723(c) of the Dodd-Frank Act allows persons to submit petitions

    to the Commission ``to remain subject to section 2(h) of the [CEA].''

    \20\ In acting upon such petitions, the Commission may allow persons to

    ``continue operating subject to section 2(h) [of the CEA] for not

    longer than a 1-year period.'' Similarly, section 734 authorizes the

    Commission to grant petitions for persons to remain subject to the

    provisions of section 5d of the CEA governing the operation of exempt

    boards of trade (``EBOTs'') ``for up to 1 year after the effective date

    of this subtitle.'' \21\ In light of these provisions authorizing the

    Commission to provide transitional relief for no longer than a fixed

    period of time, the Commission believes it would be appropriate to

    provide transitional relief consistent with section 712(f) of the Dodd-

    Frank Act and CEA section 4(c) under this proposed order for no longer

    than a fixed time period.

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    \20\ 7 U.S.C. 2(h).

    \21\ 7 U.S.C. 7a-3.

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    The Commission nonetheless reiterates its intent that existing

    practices should not be unduly disrupted during any transition period.

    Moreover, the Commission reiterates its intent to deliberatively and

    efficiently proceed to complete the rulemakings to implement the Dodd-

    Frank Act. In the event that a further definitions rulemaking is

    completed prior to December 31, 2011, the Commission will at that time

    address the appropriate phase-in and implementation dates of the

    resulting regulatory requirements. Alternatively, should the proposed

    order expire at the end of the fixed time period--December 31, 2011--

    such expiration will not affect the Commission's ability to provide

    further relief, as appropriate, to avoid undue disruption or costs to

    market participants.

    B. Part Two: Category 3--Provisions That are Self-Effectuating and

    Repeal Provisions of Current Law But That Do Not Reference Terms That

    Require Further Definition

    Currently, the CEA includes provisions that exclude or exempt, in

    whole or in part, certain transactions from Commission oversight under

    the CEA. These are as follows:

    i. Section 2(d)(1),\22\ transactions in excluded commodities \23\

    between eligible contract participants and not executed or traded on a

    trading facility;

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    \22\ 7 U.S.C. 2(d)(1).

    \23\ The term ``excluded commodity'' is defined in CEA section

    1a(13), 7 U.S.C. 1a(13), to include, among other things, financial

    instruments such as a currency, interest rate, or exchange rate, or

    any economic or commercial index based on prices, rates, values, or

    levels that are not within the control of any party to the

    transaction.

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    ii. Section 2(d)(2),\24\ principal-to-principal transactions in

    excluded commodities between certain eligible contract participants and

    executed or traded on an electronic trading facility;

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    \24\ 7 U.S.C. 2(d)(2).

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    iii. Section 2(g),\25\ transactions subject to individual

    negotiation between eligible contract participants in commodities other

    than agricultural commodities and not executed or traded on a trading

    facility;

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    \25\ 7 U.S.C. 2(g).

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    iv. Sections 2(h)(1)-(2),\26\ transactions in exempt commodities

    \27\ between eligible contract participants and not entered into on a

    trading facility;

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    \26\ 7 U.S.C. 2(h)(1)-(2).

    \27\ The term ``exempt commodity'' is defined in CEA section

    1a(14), 7 U.S.C. 1a(14), as a commodity other than an excluded or

    agricultural commodity, and includes energy and metals commodities.

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    v. Sections 2(h)(3)-(7),\28\ principal-to-principal transactions in

    exempt commodities between eligible commercial entities (``ECEs'') \29\

    and executed or traded on an electronic trading facility (called exempt

    commercial markets, or ``ECMs'');

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    \28\ 7 U.S.C. 2(h)(3)-(7).

    \29\ The term ``eligible commercial entity'' is defined in CEA

    section 1a (11), 7 U.S.C. 1a(11).

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    vi. Section 5d,\30\ transactions in commodities, among other

    things, having a nearly inexhaustible deliverable supply or no cash

    market, between eligible contract participants and traded on an EBOT;

    and

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    \30\ 7 U.S.C. 7a-3.

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    vii. Section 2(e),\31\ which generally provides that nothing in the

    CEA governs or is applicable to an electronic trading facility that

    limits transactions authorized to be conducted on its facilities to

    those satisfying the requirements of sections 2(d)(2), 2(g) or 2(h)(3).

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    \31\ 7 U.S.C. 2(e).

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    Under the Dodd-Frank Act, these provisions all will be removed from

    the CEA as of July 16, 2011. However, part 35 of the Commission's

    regulations will continue to be available with respect to transactions

    that meet the conditions therein, until such time as it may be

    withdrawn, amended, or replaced by the Commission.

    Part 35 originally was promulgated in 1993 pursuant to the

    Commission's general exemptive authority in CEA section 4(c), and

    provides a broad-based exemption from the CEA for ``swap agreements''

    in any commodity. Specifically, part 35 exempts ``swap agreements,'' as

    defined therein, from most of the provisions of the CEA if: (1) They

    are entered into by ``eligible swap participants'' (``ESPs''); \32\ (2)

    they are not part of a fungible class of agreements standardized as to

    their material economic terms; \33\ (3) the creditworthiness of any

    party having an actual or potential obligation under the swap agreement

    would be a material consideration in entering into or determining the

    terms of the swap agreement, including pricing, cost, or credit

    enhancement terms; \34\ and (4)

    [[Page 35376]]

    they are not entered into or traded on a multilateral transaction

    execution facility.\35\ Accordingly, transactions that fully meet the

    conditions of part 35 are outside the scope of the proposed order.\36\

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

    \32\ The parties covered under the ESP definition, while very

    broad, are not coextensive with those covered by the terms ``ECE''

    or ``eligible contract participant.'' Therefore, it is possible that

    a small segment of persons or entities that are currently relying on

    one or more of the CEA exclusions or exemptions cited above might

    not qualify as an ESP and consequently would not be eligible for

    exemptive relief under part 35.

    \33\ This condition was designed so that the exemption would not

    establish ``a market in swap agreements, the terms of which are

    fixed and are not subject to negotiation that functions essentially

    in the same manner as an exchange but for the bilateral execution of

    transactions.'' See Exemption for Certain Swap Agreements, 58 FR

    5587, at 5590, Jan. 22, 1993.

    \34\ By this condition, the exemption does not extend to

    transactions that are subject to a clearing system where the credit

    risk of individual members of the system to each other in a

    transaction to which each is a counterparty is effectively

    eliminated and replaced by a system of mutualized risk of loss that

    binds members generally whether or not they are counterparties to

    the original transaction. Id. at 5591.

    \35\ In this context, a multilateral transaction execution

    facility is a physical or electronic facility in which all market

    makers and other participants that are members simultaneously have

    the ability to execute transactions and bind both parties by

    accepting offers which are made by one member and open to all

    members of the facility. Id.

    \36\ Similarly, part 32 of the Commission's regulations will

    continue to be available with respect to commodity option

    transactions that meet the conditions therein, until such time as

    part 32 may be withdrawn, amended, or replaced by the Commission.

    See Commodity Options and Agricultural Swaps, 76 FR 6095, Feb 3,

    2011.

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

    However, because part 35 covers essentially non-standardized, non-

    cleared, non-exchange traded transactions, certain persons or entities

    that currently rely on the CEA exclusions or exemptions cited above may

    not qualify for part 35. In response to requests from market

    participants for greater clarity regarding the applicability of various

    statutory and regulatory requirements to certain transactions following

    the general effective date, the Commission, pursuant to its authority

    under section 4(c) of the CEA, is proposing to grant relief for those

    transactions that satisfy the conditions specified below.

    Specifically, the Commission is proposing to temporarily exempt a

    transaction in exempt or excluded commodities (and any person or entity

    offering or entering into such transaction) from the CEA (other than

    the anti-fraud and anti-manipulation enforcement provisions identified

    below) following the general effective date if the transaction

    otherwise would comply with part 35, notwithstanding that: (1) The

    transaction may be executed on a multilateral transaction execution

    facility; (2) the transaction may be cleared; (3) persons offering or

    entering into the transaction may be eligible contract participants as

    defined in the CEA (prior to July 16, 2011); (4) the transaction may be

    part of a fungible class of agreements that are standardized as to

    their material economic terms; and/or (5) no more than one of the

    parties to the transaction is entering into the transaction in

    conjunction with its line of business, but is neither an eligible

    contract participant nor an ESP, and the transaction was not and is not

    marketed to the public (the ``line of business provision'').\37\

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

    \37\ Commenters responding to the Commission's proposed Entity

    Definitions have suggested that the Commission should exercise its

    authority to further define the term ``eligible contract

    participant'' to encompass the ``line of business'' provision that

    was a part of the Commission's Policy Statement Concerning Swap

    Transactions, 54 FR 30694, 30696-30697, July 21, 1989. The staff is

    evaluating these comments in the context of the Commission's

    rulemaking to further define the term ``eligible contract

    participant.''

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

    As noted above, this proposed temporary exemptive relief would not

    affect the availability of either part 35 or part 32 with respect to

    transactions that fully meet the conditions therein.\38\ For

    transactions that fall outside of existing part 35 or part 32, this

    relief would only be available to the extent those transactions (and

    persons offering or entering into such transactions) fall within the

    scope of any of the existing CEA sections 2(d), 2(e), 2(g), 2(h), and

    5d as in effect prior to July 16, 2011 \39\ or the line of business

    provision.

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

    \38\ In September 2010, the Commission published an order in the

    Federal Register providing that it would extend grandfather relief

    to ECMs and EBOTs provided that certain conditions are met. See

    Order Regarding the Treatment of Petitions Seeking Grandfather

    Relief for Exempt Commercial Markets and Exempt Boards of Trade, 75

    FR 56513, Sept. 16, 2010. Nothing in this proposed order is intended

    to impact the availability of this grandfather relief.

    \39\ This exemptive relief would not be available to an

    electronic trading facility that, as of July 15, 2011, is not

    already operating as an ECM pursuant to CEA sections 2h(3)-(7), or

    to an EBOT that, as of July 15, 2011, is not already operating

    pursuant to CEA section 5d, or not compliant with the conditions set

    forth in such provisions.

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

    With respect to any transaction within the scope of the proposed

    order, the proposed exemptive relief would not in any way limit the

    Commission's authority with respect to any person, entity, or

    transaction pursuant to CEA sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d),

    6c, 8(a), 9(a)(2) or 13, or the regulations of the Commission

    promulgated pursuant to such authorities, including CEA section 4c(b)

    proscribing fraud.\40\ Additionally, this proposed relief would not

    affect any Dodd-Frank Act implementing regulations (and any

    implementation period contained therein) that the Commission

    promulgates and applies to the subject transactions, market

    participants, or markets.\41\ This proposed temporary exemptive relief

    would expire upon the earlier of: (1) December 31, 2011; or (2) the

    repeal or replacement of part 35 or part 32, as applicable. The

    Commission is proposing to provide this exemptive relief in part two of

    the proposed order for no longer than a fixed period of time for the

    same reasons as described above with respect to part one of the

    proposed order.

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

    \40\ As discussed above, the addition of the term ``swap'' to

    some of these provisions would not in any way affect the

    applicability of these anti-fraud and anti-manipulation enforcement

    provisions to transactions subject to relief pursuant to part two of

    the proposed order.

    \41\ Further, the proposed order would not affect any Commission

    rulemaking authority over agreements, contracts, or transactions

    that may not depend on the terms subject to further definition under

    sections 712(d) or 721(c) of the Dodd-Frank Act. This relief also

    would not affect any provisions of the Dodd-Frank Act or the CEA

    that have become effective prior to July 16, 2011 or regulations

    already issued.

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

    III. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA \42\ authorizes the CFTC to exempt any

    transaction or class of transactions (including any person or class of

    persons offering, entering into, rendering advice or rendering other

    services with respect to, the transaction) from any of the provisions

    of the CEA (subject to certain exceptions). Pursuant to section

    4(c)(2), the Commission must determine that: (1) The exemption is

    appropriate for the transactions and consistent with the public

    interest; (2) the exemption is consistent with the purposes of the CEA;

    (3) the transaction will be entered into solely between ``appropriate

    persons;'' \43\ and (4) the exemption will not have a material adverse

    effect on the ability of the Commission or any contract market to

    discharge its regulatory or self-regulatory responsibilities under the

    [[Page 35377]]

    CEA.\44\ The Commission may grant such an exemption by rule, regulation

    or order, after notice and opportunity for hearing, and may do so on

    application of any person or on its own initiative. Further, the

    Commission may grant such an exemption either conditionally or

    unconditionally, or for stated periods within the Commission's

    discretion. Finally, section 712(f) of the Dodd-Frank Act authorizes

    the Commission to ``exempt persons, agreements, contracts, or

    transactions from the provisions of the [Dodd-Frank] Act, under the

    terms contained in'' the Dodd-Frank Act, in order to prepare for the

    effective dates of the provisions of Title VII.

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

    \42\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in

    full that:

    In order to promote responsible economic or financial innovation

    and fair competition, the Commission by rule, regulation, or order,

    after notice and opportunity for hearing, may (on its own initiative

    or on application of any person, including any board of trade

    designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 5 of this Act) exempt any agreement,

    contract, or transaction (or class thereof) that is otherwise

    subject to subsection (a) (including any person or class of persons

    offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    either unconditionally or on stated terms or conditions or for

    stated periods and either retroactively or prospectively, or both,

    from any of the requirements of subsection (a) of this section, or

    from any other provision of this chapter (except subparagraphs

    (C)(ii) and (D) of section 2(a)(1), except that the Commission and

    the Securities and Exchange Commission may by rule, regulation, or

    order jointly exclude any agreement, contract, or transaction from

    section 2(a)(1)(D)), if the Commission determines that the exemption

    would be consistent with the public interest.

    \43\ CEA Section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the

    term ``appropriate persons'' a number of specified categories of

    persons deemed appropriate under the CEA for entering into

    transactions exempted by the Commission under section 4(c). This

    includes persons the Commission determines to be appropriate in

    light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections.

    \44\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2), provides in full

    that:

    The Commission shall not grant any exemption under paragraph (1)

    from any of the requirements of subsection (a) of this section

    unless the Commission determines that--

    (A) The requirement should not be applied to the agreement,

    contract, or transaction for which the exemption is sought and that

    the exemption would be consistent with the public interest and the

    purposes of this Act; and

    (B) the agreement, contract, or transaction--

    (i) Will be entered into solely between appropriate persons; and

    (ii) Will not have a material adverse effect on the ability of

    the Commission or any contract market or derivatives transaction

    execution facility to discharge its regulatory or self-regulatory

    duties under this Act.

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

    In enacting section 4(c), Congress noted that the goal of the

    provision ``is to give the Commission a means of providing certainty

    and stability to existing and emerging markets so that financial

    innovation and market development can proceed in an effective and

    competitive manner.'' \45\ The proposed relief is intended to provide

    clarity and stability to the markets and market participants concerning

    the applicability of the provisions of the CEA, as added or amended by

    the Dodd-Frank Act (in part one), and the current provisions of the CEA

    as repealed by the Dodd-Frank Act (in part two), upon the general

    effective date of the Dodd-Frank Act, thereby avoiding or minimizing

    undue and unwarranted disruptions to the markets.

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

    \45\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

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

    The Commission notes that the proposed order is temporary in scope

    and reserves the Commission's anti-fraud and anti-manipulation

    enforcement authority. As such, the Commission believes that the

    proposed order would be consistent with the public interest and

    purposes of the CEA. The Commission also believes the order to be

    limited to appropriate persons, including persons in current

    registration categories for which the Dodd-Frank Act expanded the

    definition to include activities relating to swaps (e.g., introducing

    brokers, commodity pool operators, commodity trading advisors, and

    associated persons thereof).\46\ The proposed order will not have a

    material adverse effect on the ability of the Commission or any

    contract market to discharge its regulatory or self-regulatory duties

    under the CEA.

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

    \46\ See CEA section 4(c)(3)(K), 7 U.S.C. 6(c)(3)(K)

    (appropriate persons may include such ``other persons that the

    Commission determines to be appropriate in light of their financial

    or other qualifications, or the applicability of appropriate

    regulatory protections'').

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

    The Commission seeks comment on whether the proposed temporary

    exemptions are consistent with the public interest and other

    requirements of CEA section 4(c).

    IV. Request for Comment

    The Commission requests comment on all aspects of this proposed

    temporary exemptive order.

    V. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \47\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with conducting or sponsoring any collection of information

    as defined by the PRA. This proposed temporary exemptive order, if

    approved, would not require a new collection of information from any

    persons or entities that would be subject to the proposed order.

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

    \47\ 44 U.S.C. 3507(d).

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

    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \48\ requires the Commission to consider

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

    CEA. 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, section 15(a) simply

    requires the Commission to ``consider the costs and benefits'' of its

    action.

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

    \48\ 7 U.S.C. 19(a).

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

    Section 15(a) of the CEA further specifies that 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 to accomplish any of

    the purposes of the CEA.

    1. Protection of Market Participants and the Public

    As discussed above, the Commission is proposing that the scope of

    this temporary exemptive relief be limited to persons who are

    ``appropriate persons'' as set forth in section 4(c) of the Act.

    Further, this proposal does not affect the Commission's existing and

    future anti-fraud and anti-manipulation authorities, including CEA

    sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or

    the regulations of the Commission promulgated pursuant to such

    authorities, including section 4c(b) proscribing fraud. The Commission

    believes that market participants and the public will benefit from the

    clarity offered by the proposed temporary exemptive relief, while

    maintaining the Commission's authorities regarding the prevention and

    deterrence of fraud and manipulation. With respect to costs, the

    Commission believes that the exemptive relief imposes no affirmative

    duties or obligations on market participants and the public. The

    temporary exemptive relief does not contain any requirement to create,

    retain, submit, or disclose any information. Furthermore, the exemptive

    relief imposes no recordkeeping or related data retention or disclosure

    requirements on any person, including small businesses. Consequently,

    the Commission finds it unlikely that the exemptive relief will impose

    any additional costs beyond the existing costs associated with ongoing

    operations, including those that ensure that behavior and statements

    are not fraudulent or manipulative.

    2. Efficiency, Competition, and Financial Integrity

    Although the Dodd-Frank Act establishes a comprehensive new

    regulatory framework for swaps, the Commission's work to implement that

    framework will not be complete as of July 16, 2011. Accordingly, this

    relief offers the benefit of greater clarity in the swaps market that

    is in the interest of both the markets and the public. Accordingly, the

    Commission believes that this temporary exemptive relief is an

    appropriate measure to facilitate a transition to the comprehensive new

    regulatory framework for swaps set out in Title VII of the Dodd-Frank

    Act. Such an orderly transition will promote

    [[Page 35378]]

    market efficiency, competition, and financial integrity.

    3. Price Discovery

    As stated above, the temporary relief proposed here is designed to

    maintain the functioning of the markets until such time as the

    comprehensive new regulatory framework for swaps set forth in the Dodd-

    Frank Act is in place. With the clarity offered by the proposed

    exemptive relief, markets would function better as venues for price

    discovery.

    4. Sound Risk Management Practices

    Appropriate persons covered by this proposal would be subject to

    the Commission's full array of existing anti-fraud and anti-market

    manipulation provisions and certain new authorities provided under the

    Dodd-Frank Act. Market participants and the public will benefit

    substantially from the continuing protection through the prevention and

    deterrence of fraud and manipulation. Markets protected from fraud and

    manipulation function better as venues for price discovery and risk

    management.

    5. Other Public Interest Considerations

    The proposed exemptive order is temporary and limited. It would not

    affect the applicability of any provision of the CEA to futures

    contracts, options on futures contracts, or transactions with retail

    customers in foreign currency or other commodities pursuant to CEA

    section 2(c)(2). Further, it would expire at an appropriate date, as

    discussed above. The expiration provision would permit the Commission

    to ensure that the scope and extent of exemptive relief is

    appropriately tailored to the schedule of implementation of the Dodd-

    Frank Act requirements.

    After considering these factors, the Commission has determined to

    seek comment on the proposed temporary exemptive order, as discussed

    above. The Commission seeks comment on all aspects of the foregoing

    proposed application of the cost-benefit considerations set forth in

    CEA section 15(a). Commenters also are 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.

    Issued in Washington, DC, on June 14, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Effective Date for Swap Regulation--Commission Voting

    Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed order regarding the effective dates of

    certain Dodd-Frank Act provisions.

    The Dodd-Frank Act has a deadline of 360 days after enactment

    for completion of the bulk of our rulemakings--July 16, 2011. Both

    the Dodd-Frank Act and the Commodity Exchange Act (CEA) give the

    CFTC the flexibility and authority to address the issues relating to

    the effective dates of Title VII. We have coordinated closely with

    the SEC on these issues.

    Section 754 of the Dodd-Frank Act states that Subtitle A of

    Title VII--the Subtitle that provides for the regulation of swaps--

    ``shall take effect on the later of 360 days after the date of the

    enactment of this subtitle or, to the extent a provision of this

    subtitle requires a rulemaking, not less than 60 days after

    publication of the final rule or regulation implementing such

    provisions of this subtitle.''

    Thus, those provisions that require rulemakings will not go into

    effect until the CFTC finalizes the respective rules. This is a

    substantial portion of the derivatives provisions under Dodd-Frank.

    Furthermore, they will only go into effect based on the phased

    implementation dates included in the final rules. Today we are

    releasing a list of the provisions of the swaps subtitle that

    require rulemakings.

    There are other provisions of Title VII that do not require

    rulemaking and will take effect on July 16. The proposed order that

    we are considering today would provide relief until December 31,

    2011, or when the definitional rulemakings become effective,

    whichever is sooner, from certain provisions that would otherwise

    apply to swaps or swap dealers on July 16. This includes provisions

    that do not directly rely on a rule to be promulgated, but do refer

    to terms that must be further defined by the CFTC and SEC, such as

    ``swap'' and ``swap dealer.''

    The proposed order also would provide relief through no later

    than December 31, 2011, from certain CEA requirements that may

    result from the repeal, effective on July 16, 2011, of some of

    sections 2(d), 2(e), 2(g), 2(h) and 5d.

    There have been suggestions to delay implementation of the

    derivatives reforms included in the Dodd-Frank Act. That is not what

    today's proposed order is. Instead, it provides the time necessary

    for the Commission to complete the rulemaking process to implement

    the Dodd-Frank Act.

    Some might ask: Why six months? Six months will provide the

    Commission with the opportunity to re-examine the status of final

    rulemaking in light of the changed regulatory landscape at the time.

    It would allow us, if appropriate at the time, to tailor relief from

    certain provisions of the Dodd-Frank Act at the end of the year.

    It is important to note, however, that until the CFTC completes

    its rule-writing process and implements and enforces those new

    rules, the public remains unprotected.

    Appendix 3--Statement of Commissioner Bart Chilton

    I concur with the Commission's decision today to provide needed

    relief with regard to provisions of the Wall Street Reform and

    Consumer Protection Act that go into effect on July 16, 2011. I

    believe, however, that the precise nature of this relief must be

    developed utilizing an iterative process with affected parties to

    ensure that essential legal certainty is provided to the markets and

    to market participants. I will not support any final rule on this

    issue that does not provide clear and unequivocal guidance regarding

    the legality of transactions and the required responsibilities under

    the Act. In addition, this relief must be issued promptly, in order

    to ensure that there is no gap in the effective date of the Act's

    provisions and the common understanding of the effectiveness of

    those dates.

    [FR Doc. 2011-15195 Filed 6-15-11; 4:15 pm]

    BILLING CODE 6351-01-P

    Last Updated: June 17, 2011



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