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2011-27535

  • Federal Register, Volume 76 Issue 206 (Tuesday, October 25, 2011)[Federal Register Volume 76, Number 206 (Tuesday, October 25, 2011)]

    [Proposed Rules]

    [Pages 65999-66004]

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

    [FR Doc No: 2011-27535]

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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 amendment.

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    SUMMARY: On July 14, 2011, the Commodity Futures Trading Commission

    (``CFTC'' or the ``Commission'') issued a final order (``July 14

    Order'') that grants temporary exemptive relief from certain provisions

    of the Commodity Exchange Act (``CEA'') that otherwise would have taken

    effect on the general effective date of title VII of the Dodd-Frank

    Wall Street Reform and Consumer Protection Act (``the Dodd-Frank

    Act'')--July 16, 2011. The July 14 Order grants temporary relief in two

    parts. The first part addresses those CEA provisions added or amended

    by title VII of the Dodd-Frank Act that reference one or more terms

    regarding entities or instruments that title VII requires be ``further

    defined'' to the extent that requirements or portions of such

    provisions specifically relate to such referenced terms and do not

    require a rulemaking. The second part, which is based on part 35 of the

    Commission's regulations, addresses certain provisions of the CEA that

    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 the general effective date of July 16,

    2011. This is a notice of a proposed amendment to that July 14 Order,

    76 FR 42508 (July 19, 2011), that would modify the temporary exemptive

    relief provided therein by extending the potential latest expiration

    date of the July 14 Order; and adding provisions to account for the

    repeal and replacement (as of December 31, 2011) of part 35 of the

    Commission's regulations. Only comments pertaining to these proposed

    amendments to the July 14 Order will be considered as part of this

    notice of proposed amendment.

    DATES: Submit comments on or before November 25, 2011.

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

    Amendments,'' by any of the following methods:

    Agency Web site, via its Comments Online process at 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.

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

    Follow the instructions for submitting comments.

    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 may be 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 procedures in

    Sec. 145.9 of the Commission's regulations, 17 CFR 145.9.

    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: Terry Arbit, Deputy General Counsel,

    202-418-5357, tarbit@cftc.gov, or Mark D. Higgins, Counsel, 202-418-

    5864, mhiggins@cftc.gov, Office of the General Counsel, Commodity

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

    NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    law.\1\ Title VII of the Dodd-Frank Act amends the CEA \2\ 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 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.\3\

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

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

    \2\ 7 U.S.C. 1 et seq.

    \3\ 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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    Section 754 of the Dodd-Frank Act states that, unless otherwise

    provided, the provisions of subtitle A of title VII of the Dodd-Frank

    Act \4\ ``shall take

    [[Page 66000]]

    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 provision of this subtitle.'' Thus, the

    general effective date for provisions of title VII that do not require

    a rulemaking was July 16, 2011. This includes the provisions that

    repealed several provisions of the CEA as in effect prior to the Dodd-

    Frank Act that excluded or exempted, in whole or in part, certain

    transactions from Commission oversight.\5\

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    \4\ All of the amendments to the CEA in title VII are contained

    in subtitle A. Accordingly, for convenience, references to ``title

    VII'' in this notice of proposed amendment shall refer only to

    subtitle A of title VII.

    \5\ These exclusions and exemptions were contained in former CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d, 7 U.S.C. 2(d), 2(e), 2(g),

    2(h), and 7a-3.

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

    the SEC to undertake a joint rulemaking to ``further define'' certain

    terms used in title VII, including the terms ``swap,'' ``swap dealer,''

    ``major swap participant,'' and ``eligible contract participant.''\6\

    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.\7\ The Commission has issued

    two notices of proposed rulemaking that address these further

    definitions.\8\

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    \6\ Section 712(d)(1) 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)).''

    \7\ 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'.''

    \8\ 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 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) were not expected to be in effect as of July

    16, 2011 (i.e., the general effective date set forth in section 754 of

    the Dodd-Frank Act). Accordingly, the Commission on July 14, 2011

    exercised its exemptive authority under CEA section 4(c) \9\ and its

    authority under section 712(f) of the Dodd-Frank Act by issuing the

    July 14 Order.\10\ In so doing, the Commission sought to address

    concerns that had been raised about the applicability of various

    regulatory requirements to certain agreements, contracts, and

    transactions after July 16, 2011, and thereby ensure that current

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

    regulatory regime.\11\

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    \9\ 7 U.S.C. 6(c).

    \10\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

    made effective by the Commission on July 14, 2011; published in the

    Federal Register on July 19, 2011).

    \11\ Concurrent with the July 14 Order, the Commission's

    Division of Clearing and Intermediary Oversight and the Division of

    Market Oversight (together ``the Divisions'') identified certain

    provisions of the Dodd-Frank Act and CEA as amended that would take

    effect on July 16, 2011, but that may not be eligible for the

    exemptive relief provided by the Commission in its July 14 Order--

    specifically, the amendments made to the CEA by Dodd-Frank Act

    sections 724(c), 725(a), and 731. On July 14, 2011, the Divisions

    issued Staff No-Action Relief addressing the application of these

    provisions after July 16, 2011. Available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/noactionletter071411.pdf (last visited Sept. 26, 2011). The

    Commission anticipates that the Divisions will extend and conform

    this no-action relief to any final amendment to the July 14 Order

    that may result from this proposal.

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    Description of Existing Relief

    The July 14 Order groups the relevant provisions of the Dodd-Frank

    Act into four categories and provides temporary exemptive relief, set

    to expire no later than December 31, 2011, with respect to Categories 2

    and 3. A summary of the four categories of provisions follows.

    Category 1 covers statutory provisions which by their express terms

    require rulemaking to implement. Because, under section 754 of the

    Dodd-Frank Act, these provisions do not become effective until at least

    60 days after the final rule is published, no exemptive relief from the

    general effective date is necessary. Category 1 provisions include,

    among others, the further definitions of terms regarding swap entities

    or instruments as required by the Dodd-Frank Act (such as the terms

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

    contract participant''). Category 1 also includes, among others: (1)

    Registration, capital and margin requirements, and business conduct

    standards for swap dealers and major swap participants; (2) provisions

    prohibiting agricultural swaps except pursuant to CFTC rules; (3) rules

    regarding swap execution facilities; and (4) various swap data

    recordkeeping and reporting requirements. A complete list of the

    Category 1 provisions is included in the appendix to the July 14 Order.

    The first part of the relief provided for in the July 14 Order

    reaches those Dodd-Frank Act provisions (``Category 2 provisions'')

    that are self-effectuating (i.e., do not require a rulemaking) and that

    reference one or more of the terms for which the Commission and SEC are

    required to provide further definition, including ``swap,'' ``swap

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

    participant,'' and ``security-based swap agreement'' (collectively, the

    ``referenced terms''). These Category 2 provisions include, for

    example, the trade execution requirement of CEA section 2(h)(8), as

    amended by Dodd-Frank Act section 723. A complete list of the Category

    2 provisions is included in the appendix to the July 14 Order. Because

    the Category 2 provisions would have taken effect on July 16, 2011

    pursuant to section 754, the Commission granted temporary relief from

    those provisions, but only to the extent that the requirements in such

    provisions specifically relate to a referenced term that is not yet

    further defined. Thus, if a Category 2 provision also applies to

    futures or options on futures, the provision took effect on July 16

    with respect to futures or options on futures. The exemption for

    Category 2 provisions expires on the earlier of: (1) The effective date

    of the applicable final rule further defining the relevant term; or (2)

    December 31, 2011.

    In part two of the July 14 Order, the Commission provides temporary

    exemptive relief from the provisions of the CEA that may apply to

    certain agreements, contracts, and transactions in exempt or excluded

    commodities (generally, financial, energy and metals commodities) as a

    result of the repeal of the CEA exemptions and exclusions in former CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011 pursuant to

    sections 723(a)(1) and 734(a) of the Dodd-Frank Act (the ``Category 3

    provisions''). As explained in the July 14 Order, this relief is based

    on the Commission's existing ``part 35'' exemptive rules.\12\

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    \12\ 76 FR at 42514. The July 14 Order did not extend to

    agreements, contracts, or transactions that fully met the conditions

    of part 35, since in such circumstances further relief was

    unnecessary.

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    Part 35 originally was promulgated in 1993 pursuant to, among

    others, the Commission's general exemptive authority in CEA section

    4(c) and its plenary options authority under section 4c(b),\13\ and

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

    [[Page 66001]]

    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''); \14\ (2) they are not part of a fungible class of

    agreements standardized as to their material economic terms; (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; and (4) they are not entered into or

    traded on a multilateral transaction execution facility.

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    \13\ 7 U.S.C. 6c(b).

    \14\ As noted in the July 14 Order, the parties covered under

    the ESP definition, while very broad, are not coextensive with those

    covered by the terms ``eligible commercial entity'' 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 part

    35. 76 FR at 42511, n. 40.

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    Under part two of the relief provided for in the July 14 Order, the

    Commission stated that transactions in exempt or excluded commodities

    (and persons offering, entering into, or rendering advice or rendering

    other services with respect to such transactions) are temporarily

    exempt from provisions of the CEA that may apply to such transactions

    if such transactions 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 the enactment of the Dodd-Frank Act); (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.\15\

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    \15\ 76 FR at 42514. With respect to commodity options, the

    Commission made clear that options identified in the swap agreement

    definition in paragraph (b)(1)(i) of Sec. 35.1 of the Commission's

    regulations and any options captured by the concluding catch-all

    language in that paragraph, as well as any options described in

    paragraphs (b)(1)(ii) and/or (iii) of Sec. 35.1, involving excluded

    or exempt commodities are within the scope of the July 14 Order. 76

    FR at 42514-15.

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    Thus, for certain transactions, the July 14 Order provides relief

    notwithstanding that the transaction may not satisfy certain part 35

    requirements (e.g., cleared, executed on a multilateral trade execution

    facility, entered into by certain persons that are not eligible

    contract participants, etc.). The Commission stated in the July 14

    Order that this relief is limited to transactions in exempt and

    excluded commodities, and does not extend to transactions in

    agricultural commodities, because transactions in agricultural

    commodities were not covered by the applicable statutory exclusions and

    exemptions in effect prior to July 16, 2011.\16\ The exemption in part

    two of the July 14 Order expires on the earlier of: (1) The repeal,

    withdrawal or replacement of part 35; or (2) December 31, 2011.

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    \16\ The Commission also stated, though, that because part 35

    remained in effect at the time of the July 14 Order, market

    participants could continue to rely on part 35 with respect to swaps

    (other than commodity options) on enumerated agricultural

    commodities as defined in CEA section 1a(4) or Sec. 32.2 of the

    Commission's regulations, as well as swaps and commodity options on

    non-enumerated agricultural commodities, to the extent these

    transactions fully comply with part 35. Under the July 14 Order,

    market participants also may continue to rely on part 32 for options

    on enumerated agricultural commodities to the extent these

    transactions are conducted in accordance with Sec. 32.13(g) of the

    Commission's regulations. Rule 32.13(g) permits off-exchange options

    between producers, processors, commercial users or merchants of the

    commodity or its products or by-products that have a net worth of at

    least $10 million.

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    Category 4 contains those Dodd-Frank Act provisions for which the

    Commission determined not to issue relief, and which therefore went

    into effect on July 16, 2011. A complete list of the Category 4

    provisions is included in the appendix to the July 14 Order.

    The temporary exemptions issued in the July 14 Order are subject to

    several conditions. These conditions provide that the July 14 Order

    shall not: (1) Limit in any way the Commission's anti-fraud or anti-

    manipulation authority under the CEA; (2) apply to any provision of the

    Dodd-Frank Act or the CEA that became effective prior to July 16, 2011;

    (3) affect any effective date or compliance date set forth in any

    rulemaking issued by the Commission to implement provisions of the

    Dodd-Frank Act; (4) limit the Commission's authority under Dodd-Frank

    Act section 712(f) to issue rules, orders, or exemptions prior to the

    effective date of any provision of the Dodd-Frank Act and the CEA, in

    order to prepare for such effective date; and (5) affect the

    applicability of any provision of the CEA to futures contracts or

    options on futures contracts, or to cash markets.\17\

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    \17\ 76 FR at 42522.

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    II. Discussion of the Proposed Amendments to the July 14 Order

    The Commission is proposing to amend the July 14 Order in two ways.

    First, the Commission is proposing to amend the July 14 Order to extend

    the potential latest expiry dates. With respect to provisions covered

    in the first part of the relief in the July 14 Order, the Commission is

    proposing that the temporary exemptive relief expire upon the earlier

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

    defining the relevant referenced term; or (2) July 16, 2012.\18\ This

    amendment addresses the potential that, as of December 31, 2011, the

    CFTC-SEC joint rulemakings ``further defining'' the referenced terms

    will not yet be effective. The Commission also is proposing to amend

    the July 14 Order to extend the expiry date of the second part of the

    relief in the July 14 Order until the earlier of: (1) July 16, 2012; or

    (2) such other compliance date as may be determined by the Commission.

    For the same reason stated by the Commission with respect to the second

    part of the relief provided in the July 14 Order, the proposed

    extension of this exemptive relief ``will allow markets and market

    participants to continue to operate under the regulatory regime as in

    effect prior to July 16, 2011, but subject to various implementing

    regulations that the Commission promulgates and applies to the subject

    transactions, market participants, or markets.'' \19\

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    \18\ The date of July 16, 2012, is consistent with the potential

    transitional period provided in section 723(c) of the Dodd-Frank Act

    regarding former CEA section 2(h) and section 734(c) of the Dodd-

    Frank Act regarding former CEA section 5d (i.e., for ``not longer

    than a 1-year period'' following the general effective date of title

    VII) .

    \19\ 76 FR at 42513.

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    Second, the Commission is proposing to include within the second

    part of the relief any agreement, contract or transaction that fully

    meets the conditions in part 35 as in effect on December 31, 2011. This

    amendment addresses the fact that such transactions, which were not

    included within the scope of the July 14 Order because the exemptive

    rules in part 35 covered them at that time, now require temporary

    relief because part 35 will no longer be available after December 31,

    2011.\20\ Accordingly, to ensure that the

    [[Page 66002]]

    exemptive relief currently available for these transactions continues

    to be available after December 31, 2011, the Commission proposes to

    amend the July 14 Order to incorporate by reference the part 35 relief

    available as of December 31, 2011. Whereas the relief provided in part

    two of the July 14 Order was (and would remain) limited to transactions

    in excluded or exempt commodities, this proposed amendment also would

    include, beginning on January 1, 2012, transactions in agricultural

    commodities that fully meet the conditions in part 35 as in effect on

    December 31, 2011.\21\ The Commission proposes that this further

    amendment to the July 14 Order is necessary to ensure that the same

    scope of the exemptive relief available before December 31, 2011 is

    available to all swaps and extends through July 16, 2012, at the

    latest.

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    \20\ The Commission recently promulgated a rule pursuant to

    section 723(c)(3) of the Dodd-Frank Act that, effective December 31,

    2011, will repeal the existing part 35 relief and replace it with

    new Sec. 35.1 of the Commission's regulations. See Agricultural

    Swaps, 76 FR 49291 (Aug. 10, 2011). Rule 35.1 provides, in pertinent

    part, that ``agricultural swaps may be transacted subject to all

    provisions of the CEA, and any Commission rule, regulation or order

    thereunder, that is otherwise applicable to swaps. [It] also

    clarifies that by issuing a rule allowing agricultural swaps to

    transact subject to the laws and rules applicable to all other

    swaps, the Commission is allowing agricultural swaps to transact on

    [designated contract markets (``DCMs''), swap execution facilities

    (``SEFs'')], or otherwise to the same extent that all other swaps

    are allowed to trade on DCMs, SEFs, or otherwise.'' Id. at 49296.

    \21\ The Commission also is clarifying that, by operation of new

    Sec. 35.1 of the Commission's regulations, the Commission's

    statement in adopting the July 14 Order that a DCM may list and

    trade swaps ``under the DCM's rules related to futures contracts,

    without exemptive relief,'' 76 FR at 42518, would apply, as of

    January 1, 2012, to swaps in agricultural commodities.

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    In proposing these amendments, the Commission continues to strive

    to ensure that current practices will not be unduly disrupted during

    the transition to the new regulatory regime. As stated above, the

    proposed July 16, 2012 date coincides with the potential transitional

    period provided in sections 723(c) and 734(c) of the Dodd-Frank

    Act.\22\ Further, should the Commission deem it appropriate to

    terminate or extend any exemptive relief under part two of the July 14

    Order, the Commission will be in a better position to comprehensively

    evaluate and consider any tailored exemption at that time.

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    \22\ 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.

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    The Commission believes it is in the interest of the public and

    market participants to continue to provide regulatory certainty

    regarding the applicability of the Dodd-Frank Act. There have been no

    disruptions to the market resulting from the July 14 Order, nor has the

    Commission received any request for additional relief beyond that

    provided for in the July 14 Order. Accordingly, the Commission believes

    the scope of the existing relief is appropriate and is proposing here

    only to amend that relief in the aforementioned ways. The Commission

    notes, for example, that Category 1 provisions--i.e., those for which a

    rulemaking is required--will continue to be addressed outside the scope

    of the July 14 Order. Further, where appropriate, the Commission

    expects to phase-in compliance with its final rules over a period of

    time as part of the Commission's ongoing commitment to ensuring an

    orderly transition to the new regulatory regime.

    III. Request for Comment

    The Commission requests and will only consider comments on the

    amendments to the July 14 Order that are proposed in this notice of

    proposed amendment.

    IV. Related Matters

    a. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \23\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with conducting or sponsoring any collection of information

    as defined by the PRA. These proposed amendments, if approved, would

    not require a new collection of information from any persons or

    entities that would be subject to the proposed amendments.

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    \23\ 44 U.S.C. 3507(d).

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    b. Cost-Benefit Considerations

    Section 15(a) of the CEA \24\ requires the Commission to consider

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

    CEA. CEA section 15(a) 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.

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    \24\ 7 U.S.C. 19(a).

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    This notice of proposed amendment proposes to amend the existing

    July 14 Order by extending the currently available temporary relief to

    no later than July 16, 2012, and by accounting for the repeal of part

    35 of the Commission's regulations. As such, and because this proposal

    does not change the nature or limit the scope of relief granted in the

    July 14 Order, the costs and benefits set forth in the July 14 Order

    may be incorporated by reference in this proposal.\25\ Nevertheless,

    the Commission seeks comment on whether these proposed amendments would

    impose any costs or confer any benefits beyond the July 14 Order.

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    \25\ 76 FR 42521.

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    V. Proposed Amendments to the July 14 Order

    The Commission proposes the following amendments to the July 14

    Order:

    The Commission, to provide for the orderly implementation of the

    requirements of Title VII of the Dodd-Frank Act, pursuant to sections

    4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,

    hereby issues this Order consistent with the determinations set forth

    above, which are incorporated in this Final Order, as amended, by

    reference, and:

    (1) Exempts, subject to the conditions set forth in paragraph (3),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    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, which provisions are listed in Category 2

    of the Appendix to this Order; provided, however, that the foregoing

    exemption:

    a. Applies only with respect to those requirements or portions of

    such provisions that specifically relate to such referenced terms; and

    b. With respect to any such provision of the CEA, shall expire upon

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

    further defining the relevant term referenced in the provision; or (ii)

    July 16, 2012.

    (2) Exempts, subject to the conditions set forth in paragraph (3),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    from the provisions of the CEA, if the agreement, contract, or

    transaction complies with part 35 of the Commission's regulations as in

    effect as of December 31, 2011, including any

    [[Page 66003]]

    agreement, contract, or transaction in an exempt or excluded (but not

    agricultural) commodity that complies with such provisions then in

    effect notwithstanding that:

    a. The agreement, contract, or transaction may be executed on a

    multilateral transaction execution facility;

    b. The agreement, contract, or transaction may be cleared;

    c. Persons offering or entering into the agreement, contract or

    transaction may not be eligible swap participants, provided that all

    parties are eligible contract participants as defined in the CEA prior

    to the date of enactment of the Dodd-Frank Act;

    d. The agreement, contract, or transaction may be part of a

    fungible class of agreements that are standardized as to their material

    economic terms; and/or

    e. No more than one of the parties to the agreement, contract, or

    transaction is entering into the agreement, contract, or transaction in

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

    contract participant nor an eligible swap participant, and the

    agreement, contract, or transaction was not and is not marketed to the

    public;

    Provided, however, that: (i) Such agreements, contracts, and

    transactions (and persons offering, entering into, or rendering advice

    or rendering other services with respect to, any such agreement,

    contract, or transaction) fall within the scope of any of the existing

    CEA sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of

    business provision as in effect prior to July 16, 2011; and (ii) the

    foregoing exemption shall expire upon the earlier of: (I) July 16,

    2012; or (II) such other compliance date as may be determined by the

    Commission.

    (3) Provides that the foregoing exemptions in paragraphs (1) and

    (2) above shall not:

    a. Limit in any way 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

    regulations pursuant to CEA section 4c(b) proscribing fraud;

    b. Apply to any provision of the Dodd-Frank Act or the CEA that

    became effective prior to July 16, 2011;

    c. Affect any effective or compliance date set forth in any

    rulemaking issued by the Commission to implement provisions of the

    Dodd-Frank Act;

    d. Limit in any way 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 of the Dodd-Frank Act and the CEA,

    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; and

    e. Affect the applicability of any provision of the CEA to futures

    contracts or options on futures contracts, or to cash markets.

    In its discretion, the Commission may condition, suspend,

    terminate, or otherwise modify this Order, as appropriate, on its own

    motion. This Final Order, as amended, shall be effective immediately.

    Issued in Washington, DC, on October 18, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note:

    The following appendices will not appear in the Code of Federal

    Regulations.

    Appendices to Notice of Proposed Amendment to Effective Date for Swap

    Regulation--Commission Voting Summary and Statements of Commissioners

    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 amendment to the July 14th Exemptive

    Order regarding the effective dates of certain Dodd-Frank Act

    provisions.

    The July 14th order provided 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.''

    Commission staff is working very closely with Securities and

    Exchange Commission (SEC) staff on rules relating to entity and

    product definitions. Staff is making great progress, and we

    anticipate taking up the further definition of entities in the near

    term and product definitions shortly thereafter.

    As these definitional rulemakings have yet to be finalized or

    become effective, today's proposed amendment would provide relief

    through July 16, 2012, or when the definitional rulemakings become

    effective--whichever is sooner.

    The order also provided relief through no later than December

    31, 2011, from certain CEA requirements that may apply as the result

    of the repeal, effective on July 16, 2011, of CEA sections 2(d),

    2(e), 2(g), 2(h) and 5d. The proposed amendment also extends this

    relief to July 16, 2012, or until a date the Commission may

    otherwise determine with respect to a particular requirement under

    the CEA.

    In addition, today's proposed amendment also tailors the July

    14th relief in light of the Commission's actions finalizing the

    agricultural swap rules.

    Appendix 2--Statement of Commissioner Scott O'Malia

    As Yogi Berra famously proclaimed: ``It is d[eacute]j[agrave] vu

    all over again.'' Yogi perfectly encapsulates my feelings today. We

    find ourselves again voting on a proposed order aimed at providing

    legal certainty in the form ``temporary exemptive relief'' for swap

    market participants that extends the soon to expire relief found in

    the Commission's July 14, 2011 exemptive order (``July 14 Order'').

    This temporary relief is necessary because: (1) The Commission has

    not yet put forth final rules defining such key terms such as

    ``swap'' and ``swap dealer''; and (2) certain exemptions and

    exclusions for transactions in exempt and excluded commodities

    currently relied upon by market participants will be repealed

    effective December 31, 2011. The proposal states: ``[t]he Commission

    proposes that this further amendment to the July 14 Order is

    necessary to ensure that the same scope of the exemptive relief

    available before December 31, 2011 is available to all swaps and

    extends through July 16, 2012, at the latest.''

    Unfortunately, we are once again facing an exemptive order that

    suffers the same faults that the July 14 Order suffered, namely: (1)

    It again includes an arbitrary sunset provision that will cut the

    transition period short and so will likely not provide necessary

    ``relief'' to market participants, and (2) it demonstrates the lack

    of ordering of rulemakings combined with the failure to put forth an

    implementation schedule. We now need to broaden the scope of the

    July 14 Order because the exemptive rules contained in part 35 will

    no longer be available to market participants after December 31,

    2011 even though the replacement regulatory regime is not in place

    yet.\26\ Part 35 is more commonly known as the swap exemption and is

    relied upon primarily by entities engaging in agricultural swaps.

    The Commission repealed part 35 in order to ensure that it is not

    used by individuals and entities who had relied on Sections 2(d),

    (g) and (h) of the Commodity Exchange Act (``CEA'') as an end run

    around the new statutory and regulatory requirements.

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

    \26\ The Commission recently promulgated a rule pursuant to

    section 723(c)(3) of the Dodd-Frank Act that, effective December 31,

    2011, will repeal the existing part 35 relief and replace it with

    new Sec. 35.1 of the Commission's regulations. See Agricultural

    Swaps, 76 FR 49291 (Aug. 10, 2011).

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

    I support the proposal, as I did last time, because it is

    important for the Commission to provide market participants and the

    public with the form of relief the exemptive order is contemplating,

    but I would have preferred

    [[Page 66004]]

    that this rule, like its predecessor, would not select an arbitrary

    end date.

    Mr. Chairman, I again renew my call for a comprehensive

    rulemaking schedule and implementation plan, that provides greater

    insight on reporting requirements to swap data repositories as well

    as separate rulemaking on real time and block rules. The Commission

    must also provide some certainty on the clearing and trading mandate

    including clarification of ``made available for trading'' and

    guidance on swap clearing.

    [FR Doc. 2011-27535 Filed 10-24-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: October 25, 2011