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2012-16498

  • Federal Register, Volume 77 Issue 134 (Thursday, July 12, 2012)[Federal Register Volume 77, Number 134 (Thursday, July 12, 2012)]

    [Proposed Rules]

    [Pages 41110-41120]

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

    [FR Doc No: 2012-16498]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    RIN 3038-AD85

    Exemptive Order Regarding Compliance With Certain Swap

    Regulations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed exemptive order and request for comment.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

    proposing to grant, pursuant to section 4(c) of the Commodity Exchange

    Act (``CEA''), temporary exemptive relief in order to allow non-U.S.

    swap dealers and non-U.S. major swap participants to delay compliance

    with certain entity-level requirements of the CEA (and Commission

    regulations promulgated thereunder), subject to specified conditions.

    Additionally, with respect to transaction-level requirements of the CEA

    (and Commission regulations promulgated thereunder), the relief would

    allow non-U.S. swap dealers and non-U.S. major swap participants, as

    well as foreign branches of U.S. swap dealers and major swap

    participants, to comply only with those requirements as may be required

    in the home jurisdiction of such non-U.S. swap dealers and non-U.S.

    major swap participants (or in the case of foreign branches of a U.S.

    swap dealer or U.S. major swap participant, the foreign location of the

    branch) for swaps with non-U.S. counterparties. This relief would

    become effective concurrently with the date upon which swap dealers and

    major swap participants must first apply for registration and expire 12

    months following the publication of this proposed order in the Federal

    Register. Finally, U.S. swap dealers and U.S. major swap participants

    may delay compliance with certain entity-level requirements of the CEA

    (and

    [[Page 41111]]

    Commission regulations promulgated thereunder) from the date upon which

    swap dealers and major swap participants must apply for registration

    until January 1, 2013.

    DATES: Comments must be received on or before August 13, 2012.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD85,

    by any of the following methods:

    The agency's Web site, 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

    www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that you believe is exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the procedures established in

    Sec. 145.9 of the Commission's regulations.\1\

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    \1\ See 17 CFR 145.9.

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

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

    submission from 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 proposal

    will be retained in the public comment file and will be considered as

    required under the Administrative Procedures Act \2\ and other

    applicable laws, and may be accessible under the Freedom of Information

    Act.\3\

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    \2\ 5 U.S.C. 551, et seq.

    \3\ 5 U.S.C. 552.

    FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, Division of

    Swap Dealer and Intermediary Oversight, (202) 418-5977,

    gbarnett@cftc.gov; Jacqueline H. Mesa, Director, Office of

    International Affairs, (202) 418-5386, jmesa@cftc.gov; Carlene S. Kim,

    Assistant General Counsel, Office of General Counsel, (202) 418-5613,

    ckim@cftc.gov, Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed Title VII of the Dodd-

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

    Act''),\4\ which amended the CEA and established a new regulatory

    framework for swaps. The legislation was enacted to reduce systemic

    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 (each, an

    ``SD'') and major swap participants (each, an ``MSP''); (2) imposing

    clearing and trade execution requirements on standardized derivative

    products; (3) creating rigorous recordkeeping and data reporting

    regimes with respect to swaps, including real-time public reporting;

    and (4) enhancing the Commission's rulemaking and enforcement

    authorities over all registered entities, intermediaries, and swap

    counterparties subject to the Commission's oversight.

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    \4\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).

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    To implement the Dodd-Frank Act, the Commission has promulgated

    rules pursuant to the various new provisions of the CEA, including

    those specifically applicable to SDs and MSPs. Examples of such

    provisions include CEA section 4s(a) (governing registration of SDs and

    MSPs) \5\ and section 4s(j) (requiring SDs and MSPs to establish a

    comprehensive internal risk management program).\6\ Rules to implement

    other requirements in the provisions of the CEA have been proposed but

    not finalized. These include CEA section 4s(e) (governing capital and

    margin requirements for SDs and MSPs) \7\ and CEA section 4s(i)

    (relating to the timely and accurate processing and netting of swaps

    entered by SDs and MSPs).\8\

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    \5\ 7 U.S.C. 6s(a).

    \6\ 7 U.S.C. 6s(j).

    \7\ 7 U.S.C. 6s(e).

    \8\ 7 U.S.C. 6s(i).

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    Further, the Commission approved for publication a proposed

    interpretive guidance and policy statement (``Cross-Border Interpretive

    Guidance'') on the application of the CEA's swap provisions and the

    implementing Commission regulations to cross-border activities and

    transactions.\9\ A brief overview of the Cross-Border Interpretive

    Guidance follows.

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    \9\ [CITE TO THE CB GUIDANCE RELEASE]

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    II. Cross-Border Interpretive Guidance

    To provide greater clarity to market participants regarding their

    obligations under the Dodd-Frank Act, the Commission has published the

    Cross-Border Interpretive Guidance. Broadly speaking, the Cross-Border

    Interpretive Guidance sets forth the manner in which the Commission

    proposes to interpret section 2(i) of the CEA \10\ as it applies to the

    requirements under the Dodd-Frank Act and the Commission's regulations

    promulgated thereunder regarding cross-border swap activities.

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    \10\ Section 722(d) of the Dodd-Frank Act, which amended the CEA

    to add a new section 2(i), provides that the swaps provisions of the

    CEA apply to cross-border transactions and activities when certain

    conditions are met, namely, when such activities have a ``direct and

    significant'' connection with activities in, or effect on, commerce

    in the United States or when they contravene Commission rulemaking.

    See 7 U.S.C. 2(i).

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    Specifically, in the Cross-Border Interpretive Guidance, the

    Commission described the general manner in which it proposes to

    consider: (1) Whether a non-U.S. person's swap dealing activities are

    sufficient to require registration as a ``swap dealer'',\11\ as further

    defined in a joint release adopted by the Commission and the SEC

    (collectively, the ``Commissions''); (2) whether a non-U.S. person's

    swap positions are sufficient to require registration as a ``major swap

    participant'',\12\ as further defined in a joint release adopted by the

    Commissions; \13\ and (3) the treatment of foreign branches, agencies,

    affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-

    U.S. SDs. The Cross-Border Interpretive Guidance also proposes, in

    certain circumstances, to permit a non-U.S. SD or non-U.S. MSP to

    comply with comparable and comprehensive foreign regulatory

    requirements in order to satisfy applicable statutory and regulatory

    requirements under Title VII of the Dodd-Frank Act.\14\ Finally, the

    Cross-Border Interpretive Guidance sets forth the manner in which the

    Commission proposes to interpret section 2(i) of the CEA as it applies

    to the clearing,

    [[Page 41112]]

    trading, and certain reporting requirements under the Dodd-Frank Act

    with respect to swaps between counterparties that are not SDs or MSPs.

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    \11\ 7 U.S.C. 1a(49).

    \12\ 7 U.S.C 1a(33).

    \13\ See ``Further Definition of `Swap Dealer,' `Security-Based

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

    Participant' and `Eligible Contract Participant'; Final Rule, 77 FR

    30596, May 23, 2012.

    \14\ The Cross-Border Interpretive Guidance does not address the

    scope of the Commission's authority under CEA section 2(i) over non-

    swap agreements, contracts, transactions or markets within the

    Commission's jurisdiction or persons who participate in or operate

    those markets.

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    III. Proposed Relief

    A. Scope of Relief

    In order to ensure an orderly transition to the Dodd-Frank Act's

    regulatory regime and to provide certainty to market participants and

    in response to commenters' requests,\15\ the Commission is proposing to

    provide temporary exemptive relief pursuant to section 4(c) of the

    CEA.\16\ Specifically, the relief would allow non-U.S. SDs and non-U.S.

    MSPs \17\ to delay compliance with certain Entity-Level Requirements

    (as defined below) under the Dodd-Frank Act (and the Commission's

    regulations thereunder), subject to specified conditions described

    herein. Under the proposed relief, non-U.S. SDs and non-U.S. MSPs would

    be afforded additional time to prepare for the application of the

    Entity-Level Requirements with assurances that they would not be in

    violation of the CEA as a result. This would, in turn, facilitate an

    orderly transition to the Entity-Level Requirements of the Dodd-Frank

    Act regulatory regime, while minimizing undue disruptions to current

    market operations.

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    \15\ See Letter from Securities Industry and Financial Markets

    Association and Institute of International Bankers, dated, April 25,

    2012, available on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

    \16\ 7 U.S.C. 6(c).

    \17\ As used in this proposed exemptive order, the term ``non-

    U.S. swap dealer'' refers to swap dealers that are non-U.S.-based as

    well as those that are foreign affiliates of a U.S. person.

    Similarly, the term ``non-U.S. MSP'' refers to MSPs that are non-

    U.S.-based, as well as foreign affiliates of a U.S. person.

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    An exception to the foregoing relief from the Entity-Level

    Requirements relates to the Swap Data Repository (``SDR'') reporting

    requirement \18\ and part 20 of the Commission's regulations (``Large

    Trader Reporting''). Specifically, non-U.S. SDs and non-U.S.MSPs would

    be required to comply with the SDR reporting requirement for all swaps

    with U.S. person counterparties (``U.S. counterparties''), upon its

    compliance date. Under the proposed exemptive order, the reporting

    obligations of an SD under the Large Trader Reporting regulations would

    apply (or not apply) in the same manner as the SDR reporting

    requirements would apply (or not apply) to such SD.

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    \18\ See 7 U.S.C. 2(a)(13)(G). The Commission believes that the

    data reported to, and collected by, SDRs will be important to its

    ability to effectively monitor and address the risk exposures of

    individual market participants (including SDs and MSPs) and the

    concentration of risk within the swaps market more generally.

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    However, under the proposed exemptive order, non-U.S. SDs and non-

    U.S. MSPs that are not affiliates or subsidiaries of a SD would be

    permitted to delay compliance with the SDR reporting requirement for

    swaps with non-U.S. counterparties. The Commission believes that this

    approach would facilitate such registrants' phasing in of their

    compliance with the SDR reporting requirement, without substantially

    undermining the regulatory objectives of SDR reporting. The Commission

    is not proposing to extend similar relief to non-U.S. SDs and non-U.S.

    MSPs that are affiliates or subsidiaries of a U.S. SD given the

    Commission's supervisory interest in data related to the swap

    activities of non-U.S. SDs and non-U.S. MSPs that are part of a U.S.-

    based affiliated group.

    The Commission also proposes to grant, with respect to Transaction-

    Level Requirements (as defined below), temporary relief to non-U.S. SDs

    and non-U.S. MSPs, as well as foreign branches of U.S. SDs and U.S.

    MSPs, for swaps with a non-U.S. counterparty in order that they comply

    only with the regulations as may be required in the home jurisdiction

    of the non-U.S. SD or non-U.S. MSP (or in the case of foreign branches

    of a U.S. SD or a U.S. MSP, the foreign location of the branch).\19\

    With respect to swaps with a U.S. counterparty, however, these

    registrants would be required to comply with all applicable

    Transaction-Level Requirements that are in effect. Given the nature of

    these requirements (i.e., they may be applied on a transaction-by-

    transaction basis) and their importance to the protection of U.S.

    counterparties, the Commission would require non-U.S. SDs and non-U.S.

    MSPs, as well as foreign branches of U.S. SDs and U.S. MSPs, to comply

    with all applicable Transaction-Level Requirements with respect to such

    counterparties.\20\

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    \19\ Under the proposed Cross-Border Interpretive Guidance and

    for purposes of this order, a foreign branch of a U.S. person is

    deemed a U.S. person. Accordingly, swaps entered between a foreign

    branch of a U.S. person with another foreign branch of a U.S. person

    would be subject to the Dodd-Frank Transaction-Level Requirements.

    The Commission solicits comments on whether, for purposes of this

    order, substituted compliance should be permitted for such swaps,

    which effectively would allow foreign branches to comply only with

    the regulations as may be required in the foreign location of the

    branches.

    \20\ This relief does not cover swaps between non-SDs and non-

    MSPs. Any such swaps involving a U.S. counterparty would be subject

    to applicable Dodd-Frank Act requirements as set forth in the Cross-

    Border Interpretive Guidance.

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    The relief for non-U.S. SDs and non-U.S. MSPs (and foreign branches

    of U.S. SDs and U.S. MSPs with respect to Transaction-Level

    Requirements) would become effective on the compliance date for

    registration of SDs and MSPs and expire 12 months following the

    publication of this proposed order in the Federal Register. The

    Commission is committed to an orderly transition to the Dodd-Frank

    Act's regulatory regime. In furtherance of that objective, the

    Commission intends to consider extending the effectiveness of this

    exemptive relief at its expiration based on, among other things,

    whether and when substituted compliance with foreign regulatory

    requirements for non-U.S. persons is available.

    With respect to U.S. SDs and U.S. MSPs, the Commission proposes to

    permit such registrants to delay compliance with certain Entity-Level

    Requirements under the Dodd-Frank Act (and the Commission's regulations

    thereunder) until January 1, 2013. Under the proposed relief, U.S. SDs

    and U.S. MSPs would be afforded additional time to prepare for the

    application of the Entity-Level Requirements so as to ensure an orderly

    transition, while minimizing undue disruptions to current market

    operations. This relief with respect to Entity-Level Requirements,

    however, does not extend to swap data recordkeeping, SDR reporting or

    Large Trader Reporting requirements. That is, U.S. SDs and U.S. MSPs

    would be required to comply with the swap data recordkeeping, SDR and

    Large Trader Reporting requirements for all swaps. Finally, the

    Commission reiterates that a U.S. person would be expected to apply for

    registration as an SD or MSP by the effective date of the Swap

    Definitional Rule.

    Finally, the relief for U.S. SDs and U.S. MSPs (with respect to

    Entity-Level Requirements) would be effective until January 1, 2013.

    The Commission believes that allowing U.S. registrants additional time

    as specified is appropriate in light of the importance of implementing

    the Dodd-Frank Act regulatory regime as expeditiously as possible while

    taking due consideration of the need for U.S. registrants to effect an

    orderly transition to the new regulatory regime.

    B. Conditions to Relief

    Under this proposal, a non-U.S. SD or non-U.S. MSP seeking relief

    from the specified Entity-Level Requirements must satisfy certain

    conditions. First, the non-U.S. person that is required to register as

    an SD or MSP must apply to become registered as such when registration

    is required. Second, within

    [[Page 41113]]

    60 days of applying for registration, the non-U.S. applicant would be

    required to submit to the National Futures Association (``NFA'') a

    compliance plan addressing how it plans to comply, in good faith, with

    all applicable requirements under the CEA and related rules and

    regulations upon the effective date of the Cross-Border Interpretive

    Guidance.\21\

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    \21\ Additionally, a U.S. SD or U.S. MSP whose foreign branch

    seeks to rely on the exemptive relief with respect to swaps with

    non-U.S. counterparties must submit a compliance plan addressing how

    it plans to comply, in good faith, with all applicable Transaction-

    Level Requirements under the CEA upon the expiration of this

    proposed exemptive order.

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    At a minimum, such plan would provide, for each Entity-Level and

    Transaction-Level Requirement, a description of: (1) Whether the non-

    U.S. SD or non-U.S. MSP plans to comply with each of the Entity-Level

    and Transaction-Level Requirements that are in effect at such time or

    plans to seek a comparability determination and rely on compliance with

    one or more of the requirements of the home jurisdiction, as

    applicable; and (2) to the extent that the non-U.S. SD or non-U.S. MSP

    would seek to comply with one or more of the requirement(s) of the home

    jurisdiction, a description of such requirement(s). The Commission

    notes that such person may modify or alter the compliance plan as

    appropriate, provided that they submit any such amended plan to

    NFA.\22\

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    \22\ The Commission anticipates that compliance plans would be

    updated on a periodic basis as new regulations are adopted and come

    into effect. Such updates should be submitted to NFA. Any such

    submission should identify the name of the registrant, the fact that

    the submission is made in reliance upon and pursuant to this

    exemptive relief, and contact name and information.

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    The Commission further notes that the proposed relief does not

    limit the applicability of any CEA provision or Commission regulation

    to any person, entity or transaction except as provided in the proposed

    order. In addition, the proposed relief would not affect any effective

    date or compliance date set out in any specific Dodd-Frank Act

    rulemaking by the Commission.

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

    Section 4(c)(1) of the CEA authorizes the Commission to ``promote

    responsible economic or financial innovation and fair competition'' by

    exempting any transaction or class of transaction from any of the

    provisions of the CEA (subject to certain exceptions) where the

    Commission determines that the exemption would be consistent with the

    public interest.\23\ Under section 4(c)(2) of the CEA, the Commission

    may not grant exemptive relief unless it determines that: (1) The

    exemption is appropriate for the transaction 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''; \24\ 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 CEA.\25\ 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. 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.\26\

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    \23\ 7 U.S.C. 6(c)(1).

    \24\ 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 swaps

    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.

    \25\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2).

    \26\ 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.

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    As noted earlier, the Commission is proposing to issue this relief

    in order to ensure an orderly transition to the Dodd-Frank Act

    regulatory regime and to provide greater legal certainty to market

    participants regarding their obligations under the CEA with respect to

    their cross-border activities. The proposed relief also would advance

    the congressional mandate concerning harmonization of international

    standards, consistent with section 752(a) of the Dodd-Frank Act. In

    that section, Congress directed that, in order to ``promote effective

    and consistent global regulation of swaps and security-based swaps,''

    the Commission, ``as appropriate, shall consult and coordinate with

    foreign regulatory authorities on the establishment of consistent

    international standards with respect to the regulation'' of swaps and

    security-based swaps.\27\ The proposed relief, by providing U.S. and

    non-U.S. registrants the latitude necessary to develop and modify their

    compliance plans as the regulatory structure in their home jurisdiction

    changes, would promote greater regulatory consistency and coordination

    with international regulators.

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    \27\ See section 752(a) of the Dodd-Frank Act.

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    The Commission emphasizes that the proposed order is temporary in

    duration 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. For similar reasons, the Commission believes that

    the proposed order would 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. Finally, the

    Commission believes that the order would be limited to appropriate

    persons within the meaning of section 4c(3)(K) since the SDs and MSPs

    eligible for the relief are likely to be financial institutions active

    in the swaps market.\28\ The Commission seeks comment on whether the

    proposed temporary exemptive order is consistent with the public

    interest and the other requirements of CEA section 4(c).

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    \28\ 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'').

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    V. Terms ``U.S. Person,'' ``Entity-Level Requirements,'' and

    ``Transaction-Level Requirements''

    A. U.S. Person

    In the Cross-Border Interpretive Guidance, the Commission proposes

    to interpret the term ``U.S. person'' by reference to the extent to

    which swap activities or transactions involving one or more such

    persons have the relevant effect on U.S. commerce. Specifically, as

    proposed, the term ``U.S. person'' would include, but not be limited

    to: (1) Any natural person who is a resident of the United States; (2)

    any corporation, partnership, limited liability company, business or

    other trust, association, joint-stock company, fund, or any form of

    enterprise similar to any of the foregoing, in each case either (A)

    organized or incorporated under the laws of the United States \29\ or

    having its principal place of business in the United States (``legal

    entity'') or (B) in which the direct or indirect owners thereof are

    responsible for the liabilities of such entity and one or more of such

    [[Page 41114]]

    owners is a U.S. person; (3) any individual account (discretionary or

    not) where the beneficial owner is a U.S. person; (4) any commodity

    pool, pooled account, or collective investment vehicle (whether or not

    it is organized or incorporated in the United States) of which a

    majority ownership or equity interest is held, directly or indirectly,

    by a U.S. person(s); (5) any commodity pool, pooled account, or

    collective investment vehicle the operator of which would be required

    to register as a commodity pool operator under the CEA; (6) a pension

    plan for the employees, officers, or principals of a legal entity with

    its principal place of business inside the United States; and (7) an

    estate or trust, the income of which is subject to United States income

    tax regardless of source.

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    \29\ United States would mean the United States, its states, the

    District of Columbia, Puerto Rico, the U.S. Virgin Islands, and any

    other territories or possessions of the United States government,

    its agencies or instrumentalities.

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    Under the interpretation of the term ``U.S. person'' in the Cross-

    Border Interpretive Guidance, a foreign branch or agency of a U.S.

    person would be covered by virtue of the fact that it is an extension

    of a U.S. person. By contrast, a foreign affiliate or subsidiary of a

    U.S. person would be considered a non-U.S. person. Solely for purposes

    of the temporary exemptive relief provided in the proposed order, the

    Commission adopts the interpretation of the term ``U.S. person'' as set

    forth in the Cross-Border Interpretive Guidance.

    B. Entity-Level and Transaction-Level Requirements

    Solely for purposes of the temporary exemptive relief provided in

    the proposed order, the Commission incorporates the proposed categories

    of Entity-Level and Transaction-Level Requirements, as set forth in the

    Cross-Border Interpretive Guidance.

    1. Entity-Level Requirements

    In the Cross-Border Interpretive Guidance, the Commission proposes

    to divide the Dodd-Frank Act requirements that would apply to SDs and

    MSPs into those that: (1) Apply to an SD or MSP at an entity level

    (i.e., to the firm as a whole); and (2) apply at a transactional level

    (i.e., to specific transactions). Specifically, the entity-level

    requirements under Title VII of the Dodd-Frank Act and the Commission's

    regulations promulgated thereunder relate to: (1) Capital adequacy; (2)

    chief compliance officer; (3) risk management; (4) swap data

    recordkeeping; (5) reporting to an SDR; and (6) physical commodity

    swaps reporting (collectively, the foregoing requirements are referred

    to herein as ``Entity-Level Requirements''). The first subcategory of

    Entity-Level Requirements relating to capital adequacy, chief

    compliance officer, risk management, and swap data recordkeeping relate

    to risks to a firm as a whole. These requirements address and manage

    risks that arise from a firm's operation as an SD or MSP. Individually,

    they represent a key component of a firm's internal risk controls.

    Collectively, they constitute a firm's first line of defense against

    financial, operational, and compliance risks that could lead to a

    firm's default or failure. In short, these requirements relate to risks

    to a firm as a whole.

    At the core of a robust internal risk controls system is the firm's

    capital--and particularly, how the firm identifies and manages its risk

    exposure arising from its portfolio of activities.\30\ Equally

    foundational to the financial integrity of a firm is an effective

    internal risk management process, which must be comprehensive in scope

    and reliant on timely and accurate data regarding its swap activities.

    To be effective, such system must be under the supervision of a strong

    and independent function. These internal controls-related

    requirements--namely, the requirements relating to chief compliance

    officer, risk management, swap data recordkeeping--are designed to

    serve that end.

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

    \30\ By way of illustration, consistent with the purpose of the

    capital requirement, which is to reduce the likelihood and cost of

    an SD's default by requiring a financial cushion, an SD's or MSP's

    capital requirements would be set on the basis of its overall

    portfolio of assets and liabilities.

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

    No less important to the financial integrity of a firm is the SDR

    reporting requirement. SDR reporting ensures the Commission access to

    the information it needs to effectively supervise the risk exposure of

    its registrants and, thus, serves to lower their risk of failure. Given

    the functions of these reporting requirements, each must be applied on

    a firm-wide basis, across all swaps, in order to ensure that the

    Commission has a comprehensive and accurate picture of its activities.

    Otherwise, the intended benefits of these Entity-Level Requirements

    would be significantly compromised, if not undermined.

    Each of the Entity-Level Requirements is summarized below.

    i. Capital requirements

    Section 4s(e)(3)(A) of the CEA specifically directs the Commission

    to set capital requirements for SDs and MSPs that are not subject to

    the capital requirements of prudential regulators (hereinafter referred

    to as ``non-bank SDs and MSPs'').\31\ Pursuant to section 4s(e)(3), the

    Commission proposed regulations, which would require non-bank SDs and

    MSPs to hold a minimum level of adjusted net capital (i.e.,

    ``regulatory capital'') based on whether the non-bank SD or MSP is: (1)

    Also a futures commission merchant (``FCM''); (2) not an FCM, but is a

    non-bank subsidiary of a bank holding company; or (3) neither an FCM

    nor a non-bank subsidiary of a bank holding company.\32\

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

    \31\ See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) of the CEA

    explicitly requires the adoption of rules establishing capital and

    margin requirements for SDs and MSPs, and applies a bifurcated

    approach that requires each SD and MSP for which there is a

    prudential regulator to meet the capital and margin requirements

    established by the applicable prudential regulator, and each SD and

    MSP for which there is no prudential regulator to comply with the

    Commission's capital and margin regulations. See 7 U.S.C. 6s(e).

    Further, systemically important financial institutions (``SIFIs'')

    that are not futures commission merchants (``FCMs'') would be exempt

    from the Commission's capital requirements, and would comply instead

    with Federal Reserve Board requirements applicable to SIFIs, while

    non-bank (and non-FCM) subsidiaries of U.S. bank holding companies

    would calculate their Commission capital requirement using the same

    methodology specified in Federal Reserve Board regulations

    applicable to the bank holding company, as if the subsidiary itself

    were a bank holding company. The term ``prudential regulator'' is

    defined in CEA section 1a(39) as the Board of Governors of the

    Federal Reserve System, the Office of the Comptroller of the

    Currency, the Federal Deposit Insurance Corporation, the Farm Credit

    Administration, and the Federal Housing Finance Agency. See 7 U.S.C.

    1a(39).

    \32\ See 7 U.S.C. 6s(e). See also 76 FR 27802, May 12, 2011,

    available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-10881a.pdf. ``The

    Commission's capital proposal for [SDs] and MSPs includes a minimum

    dollar level of $20 million. A non-bank [SD] or MSP that is part of

    a U.S. bank holding company would be required to maintain a minimum

    of $20 million of Tier 1 capital as measured under the capital rules

    of the Federal Reserve Board. [An SD] or MSP that also is registered

    as an FCM would be required to maintain a minimum of $20 million of

    adjusted net capital as defined under [proposed] Sec. 1.17. In

    addition, an [SD] or MSP that is not part of a U.S. bank holding

    company or registered as an FCM would be required to maintain a

    minimum of $20 million of tangible net equity, plus the amount of

    the [SD's] or MSP's market risk exposure and OTC counterparty credit

    risk exposure.'' See id. at 27817.

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

    ii. Chief Compliance Officer

    Section 4s(k) requires that each SD and MSP designate an individual

    to serve as its chief compliance officer (``CCO'') and specifies

    certain duties of the CCO.\33\ Pursuant to section 4s(k), the

    Commission recently adopted Sec. 3.3, which requires SDs and MSPs to

    designate a CCO who would be responsible for administering the firm's

    compliance policies and procedures, reporting directly to the board of

    directors or a senior officer of the SD or MSP, as well as preparing

    and filing (with the Commission) a certified report of compliance with

    the CEA.\34\

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    \33\ See 7 U.S.C. 6s(k).

    \34\ See 17 CFR 3.3.

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

    [[Page 41115]]

    iii. Risk Management

    Section 4s(j) of the CEA requires each SD and MSP to establish

    internal policies and procedures designed to, among other things,

    address risk management, monitor compliance with position limits,

    prevent conflicts of interest, and promote diligent supervision, as

    well as maintain business continuity and disaster recovery

    programs.\35\ The Commission recently adopted implementing regulations

    (Sec. Sec. 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and

    23.607).\36\ The Commission also recently adopted Sec. 23.609, which

    requires certain risk management procedures for SDs or MSPs that are

    clearing members of a derivatives clearing organization (``DCO'').\37\

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

    \35\ 7 U.S.C. 6s(j).

    \36\ 17 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and

    23.607; ``Margin Requirements for Uncleared Swaps for Swap Dealers

    and Major Swap Participants,'' 77 FR 20128, Apr. 3, 2012 (relating

    to risk management program, monitoring of position limits, business

    continuity and disaster recovery, conflicts of interest policies and

    procedures, general information availability, and antitrust

    considerations, respectively).

    \37\ 17 CFR 23.609, ``Customer Clearing Documentation, Timing of

    Acceptance for Clearing, and Clearing Member Risk Management,'' 77

    FR 21278 (Apr. 9, 2012). In the same release, the Commission also

    adopted Sec. 23.608, which prohibits SDs providing clearing

    services to customers from entering into agreements that would: (1)

    Disclose the identity of a customer's original executing

    counterparty; (2) limit the number of counterparties a customer may

    trade with; (3) impose counterparty-based position limits; (4)

    impair a customer's access to execution of a trade on terms that

    have a reasonable relationship to the best terms available; or (5)

    prevent compliance with specified time frames for acceptance of

    trades into clearing.

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

    iv. Swap Data Recordkeeping

    CEA section 4s(f)(1)(B) requires SDs and MSPs to keep books and

    records for all activities related to their business.\38\ Section

    4s(g)(1) requires SDs and MSPs to maintain trading records for each

    swap and all related records, as well as a complete audit trail for

    comprehensive trade reconstructions.\39\ Pursuant to these provisions,

    the Commission adopted Sec. Sec. 23.201 and 23.203, which require SDs

    and MSPs to keep records including complete transaction and position

    information for all swap activities, including documentation on which

    trade information is originally recorded.\40\ SDs and MSPs also must

    comply with part 46 of the Commission's regulations, which addresses

    the recordkeeping requirements for swaps entered into before the date

    of enactment of the Dodd-Frank Act (``pre-enactment swaps'') and data

    relating to swaps entered into on or after the date of enactment but

    prior to the compliance date of the SDR reporting rules (``transition

    swaps'').\41\

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

    \38\ 7 U.S.C. 6s(f)(1)(B).

    \39\ 7 U.S.C. 6s(g)(1).

    \40\ 17 CFR. 23.201and 23.203; ``Margin Requirements for

    Uncleared Swaps for Swap Dealers and Major Swap Participants,'' 77

    FR 20128, Apr. 3, 2012. These requirements also require an SD to

    provide the Commission with regular updates concerning its financial

    status, as well as information concerning internal corporate

    procedures.

    \41\ 17 CFR 46.1 et seq.; ``Swap Data Recordkeeping and

    Reporting Requirements: Pre-Enactment and Transition Swaps,'' 76 FR

    22833, Apr. 25, 2011.

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

    v. Swap Data Reporting

    CEA section 2(a)(13)(G) requires all swaps, whether cleared or

    uncleared, to be reported to a registered SDR.\42\ CEA section 21

    requires SDRs to collect and maintain data related to swaps as

    prescribed by the Commission, and to make such data electronically

    available to regulators.\43\ SDs and MSPs would be required to comply

    with part 45 of the Commission's regulations, which set forth the

    specific transaction data that reporting counterparties and registered

    entities must report to a registered SDR; and part 46, which addresses

    the recordkeeping requirements for pre-enactment swaps and data

    relating to transition swaps.

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

    \42\ 7 U.S.C. 2(a)(13)(G).

    \43\ 7 U.S.C. 24a.

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

    vi. Physical Commodity Swaps Reporting (Large Trader Reporting)

    CEA section 4t \44\ authorizes the Commission to establish a large

    trader reporting system for significant price discovery swaps (of which

    economically equivalent swaps subject to part 20 reporting are a

    subset) in order to implement the statutory mandate in CEA section 4a

    \45\ for the Commission to establish position limits, as appropriate,

    for physical commodity swaps. Pursuant thereto, the Commission adopted

    part 20 rules requiring SDs, among other entities, to submit routine

    position reports on certain physical commodity swaps and swaptions.\46\

    Just as with SDR reporting, part 20 reporting serves the Dodd-Frank

    Act's objective to enhance regulatory oversight of the swaps market. In

    fact, a stated reason for the Commission's adoption of part 20 was its

    ability to, in effect, perform the function of physical commodity SDRs

    until such time as such entities are operational and have the ability

    to convert swaps into positions.\47\

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

    \44\ 7 U.S.C. 6t.

    \45\ 7 U.S.C. 6a.

    \46\ ``Large Trader Reporting for Physical Commodity Swaps,'' 76

    FR 43851, July 22, 2011.

    \47\ See 76 FR 43851, 43852.

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

    2. Transaction-Level Requirements

    The transaction-level requirements under Title VII of the Dodd-

    Frank Act and the Commission's regulations (proposed or adopted)

    include: (1) Clearing and swap processing; (2) margining (and

    segregation) for uncleared swaps; (3) trade execution; (4) trade

    confirmation; (5) swap trading relationship documentation; (6) real-

    time public reporting; (7) portfolio reconciliation and compression;

    (8) daily trading records; and (9) external business conduct standards

    (collectively, the foregoing requirements are referred to herein as

    ``Transaction-Level Requirements''). Broadly speaking, the Transaction-

    Level Requirements closely relate to the financial protection of SDs,

    MSPs and their counterparties, pre- and post-trade transparency, and

    other market-oriented regulatory safeguards.

    i. Clearing and Swap Processing

    Section 2(h)(1) of the CEA requires a swap to be submitted for

    clearing to a DCO if the Commission has determined that the swap is

    required to be cleared, unless one of the parties to the swap is

    eligible for an exception from the clearing requirement and elects not

    to clear the swap.\48\ Closely interlocked with the clearing

    requirement are the following swap processing requirements: (1) The

    recently finalized Sec. 23.506, which requires SDs and MSPs to submit

    swaps promptly for clearing; and (2) Sec. 23.610, which establishes

    certain standards for swap processing by SDs and MSPs that are clearing

    members of a DCO.\49\

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

    \48\ 7 U.S.C. 2(h)(1), (7).

    \49\ 17 CFR 23.506, 23.610 and ``Customer Clearing

    Documentation, Timing of Acceptance for Clearing, and Clearing

    Member Risk Management,'' 77 FR 21278, Apr. 9, 2012.

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

    ii. Margin (and Segregation) Requirements for Uncleared Swaps

    Section 4s(e) of the CEA requires the Commission to set margin

    requirements for SDs and MSPs that trade in swaps that are not

    cleared.\50\ In addition, with

    [[Page 41116]]

    respect to swaps that are not submitted for clearing, section 4s(l)

    requires that an SD or MSP notify the counterparty of its right to

    require segregation of funds provided as margin, and upon such request,

    to segregate the funds with a third-party custodian for the benefit of

    the counterparty.

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

    \50\ See 7 U.S.C. 6s(e). See also ``Margin Requirements for

    Uncleared Swaps for Swap Dealers and Major Swap Participants,'' 76

    FR 23732, 23733-40, Apr. 28, 2011. Section 4s(e) explicitly requires

    the adoption of rules establishing margin requirements for SDs and

    MSPs, and applies a bifurcated approach that requires each SD and

    MSP for which there is a prudential regulator to meet the margin

    requirements established by the applicable prudential regulator, and

    each SD and MSP for which there is no prudential regulator to comply

    with the Commission's margin regulations. In contrast, the

    segregation requirements in section 4s(1) do not use a bifurcated

    approach--that is, all SDs and MSPs are subject to the Commission's

    rule regarding notice and third party custodians for margin

    collected for uncleared swaps.

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

    iii. Trade Execution Requirement

    Integrally linked to the clearing requirement is the trade

    execution requirement, which is intended to bring the trading of

    mandatorily cleared swaps onto regulated exchanges. Specifically,

    section 2(h)(8) of the CEA provides that unless a clearing exception

    applies and is elected, a swap that is subject to a clearing

    requirement must be traded on a designated contract market (``DCM'') or

    swap execution facility (``SEF''), unless no DCM or SEF makes the swap

    available to trade.\51\

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

    \51\ See 7 U.S.C. 2(h)(8).

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

    iv. Swap Trading Relationship Documentation

    CEA Section 4s(i) requires each SD and MSP to conform to Commission

    standards for the timely and accurate confirmation, processing,

    netting, documentation and valuation of swaps. Pursuant thereto, the

    Commission has proposed Sec. 23.504(a), which would require SDs and

    MSPs to ``establish, maintain and enforce written policies and

    procedures'' to ensure that the SD or MSP executes written swap trading

    relationship documentation.\52\ Under proposed Sec. Sec. 23.505(b)(1),

    23.504(b)(3), and 23.504(b)(4), the swap trading relationship

    documentation must include, among other things: all terms governing the

    trading relationship between the SD or MSP and its counterparty; credit

    support arrangements; investment and rehypothecation terms for assets

    used as margin for uncleared swaps; and custodial arrangements.\53\

    Further, the swap trading relationship documentation requirement

    applies to all swaps with registered SDs and MSPs.

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

    \52\ See ``Swap Trading Relationship documentation Requirements

    for Swap Dealers and Major Swap Participants, 76 FR 6715,'' Feb. 8,

    2011.

    \53\ The requirements under section 4s(i) relating to trade

    confirmations is a Transaction-Level Requirement. Accordingly,

    proposed Sec. 23.504(b)(2), which requires an SD's and MSP's swap

    trading relationship documentation to include all confirmations of

    swaps, will apply on a transaction-by-transaction basis.

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

    v. Portfolio Reconciliation and Compression

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

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

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

    proposed regulations Sec. Sec. 23.502 and 23.503, which would require

    SDs and MSPs to perform portfolio reconciliation and compression,

    respectively, for all swaps.\54\ Proposed Sec. 23.503(c) would require

    all SDs and MSPs to participate in bilateral compression exercises and/

    or multilateral portfolio compression exercises conducted by their

    self-regulatory organizations or DCOs of which they are members.\55\

    Further, participation in multilateral portfolio compression exercises

    is mandatory for dealer-to-dealer trades.

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

    \54\ See ``Confirmation, Portfolio Reconciliation, and Portfolio

    Compression Requirements for Swap Dealers and Major Swap

    Participants,'' 75 FR 81519, Dec. 28, 2010.

    \55\ See 17 CFR 23.503(c), 75 FR 81519, Dec. 28, 2010.

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

    vi. Real-Time Public Reporting

    Section 2(a)(13) of the CEA directs the Commission to promulgate

    rules providing for the public availability of swap transaction data on

    a real-time basis.\56\ In accordance with this mandate, the Commission

    promulgated part 43 rules on December 20, 2011, which provide that all

    ``publicly reportable swap transactions'' must be reported and publicly

    disseminated.\57\

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

    \56\ See 7 U.S.C. 2(a)(13). See also ``Real-Time Public

    Reporting of Swap Transaction Data,'' 77 FR 1182, 1183, Jan. 9,

    2012.

    \57\ Part 43 defines a ``publicly reportable swap transaction''

    as (1) any swap that is an arm's-length transaction between two

    parties that results in a corresponding change in the market risk

    position between the two parties; or (2) any termination,

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

    extinguishing of rights or obligations of a swap that changes the

    pricing of a swap. See Real-Time Public Reporting of Swap

    Transaction Data, 77 FR 1182, Jan. 9, 2012.

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

    vii. Trade Confirmation

    Section 4s(i) of the CEA \58\ requires that each SD and MSP must

    comply with the Commission's regulations prescribing timely and

    accurate confirmation of swaps. The Commission has proposed Sec.

    23.501, which requires, among other things, a timely and accurate

    confirmation of all swaps and life cycle events for existing swaps.\59\

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

    \58\ 7 U.S.C. 6s(i).

    \59\ See 17 CFR 23.501; ``Confirmation, Portfolio

    Reconciliation, and Portfolio Compression Requirements for Swap

    Dealers and Major Swap Participants,'' 75 FR 81519, Dec. 28, 2010.

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

    viii. Daily Trading Records

    Pursuant to CEA section 4s(g)(1), the Commission adopted Sec.

    23.202, which requires SDs and MSPs to maintain daily trading records,

    including records of trade information related to pre-execution,

    execution, and post-execution data that is needed to conduct a

    comprehensive and accurate trade reconstruction for each swap. The

    final rule also requires that records be kept of cash or forward

    transactions used to hedge, mitigate the risk of, or offset any swap

    held by the SD or MSP.\60\

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

    \60\ See ``Swap Dealer and Major Swap Participant Recordkeeping,

    Reporting, and Duties Rules; Futures Commission Merchant and

    Introducing Broker Conflicts of Interest Rules; and Chief Compliance

    Officer Rules for Swap Dealers, Major Swap Participants, and Futures

    Commission Merchants,'' 77 FR 20128, Apr. 3, 2012.

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

    ix. External Business Conduct Standards

    Pursuant to CEA section 4s(h), the Commission has adopted external

    business conduct rules, which establish business conduct standards

    governing the conduct of SDs and MSPs in dealing with their

    counterparties in entering into swaps.\61\

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

    \61\ See 7 U.S.C. 6s(h). See also 77 FR 9734, 9822-29.

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

    VI. Request for Comment

    The Commission requests comment on all aspects of this proposed

    exemptive order.

    VII. Related Matters

    A. Paperwork Reduction Act

    1. Overview

    The Paperwork Reduction Act (``PRA'') \62\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. An

    agency may not conduct or sponsor, and a person is not required to

    respond to, a collection of information unless it displays a currently

    valid control number. Part of this proposed rulemaking would result in

    new collection of information requirements within the meaning of the

    PRA. The Commission therefore is required to submit this proposal to

    the Office of Management and Budget (``OMB'') for review and approval

    in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Under this

    proposal, certain registrants claiming relief from the specified

    Entity-Level Requirements and Transaction-Level Requirements would be

    required to satisfy certain conditions that have PRA implications. The

    Commission will, by separate action, publish in the Federal Register a

    notice and request for comments on the paperwork burden associated with

    this exemptive order in accordance with 5 CFR 1320.8. If approved, this

    new collection of information will be mandatory.

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

    \62\ 44 U.S.C. 3501 et seq.

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

    [[Page 41117]]

    B. Consideration of Costs and Benefits

    Section 15(a) of the CEA \63\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

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

    participants and the public; (2) efficiency, competitiveness and

    financial integrity of futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations. The Commission considers the costs and benefits

    resulting from its own discretionary determinations with respect to the

    section 15(a) factors.

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

    \63\ 7 U.S.C. 19(a).

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

    Summary of the Proposed Exemption

    As discussed above, for a non-U.S. SD or non-U.S. MSP (or U.S.

    applicant relating to transaction-level requirements in the case of a

    branch of a U.S. SD) that has submitted a compliance plan describing

    how it will come into compliance with the swap requirements of the CEA

    as they become effective, the proposed exemptive order would delay the

    compliance date for certain Entity-Level Requirements and, to a more

    limited extent, Transaction-Level Requirements. An important exception

    to the foregoing is compliance with the CEA requirement regarding SDR

    reporting and the Large Trader Reporting requirement. For those

    requirements, non-U.S. SDs and non-U.S. MSPs must comply without delay

    with respect to transactions with U.S. counterparties.

    With respect to transactions with a U.S. counterparty, non-U.S.

    registrants would be required to comply with all Transaction-Level

    Requirements that are in effect. With respect to transactions with a

    non-U.S. counterparty, the non-U.S. SD or non-U.S. MSP, as well as

    foreign branches of U.S. SDs and U.S. MSPs, need only comply with such

    regulations as may be required by the home jurisdiction of such non-

    U.S. registrant (or in the case of a branch, the foreign location of

    the branch). U.S. SDs and U.S. MSPs would be permitted to delay

    compliance with Entity-Level Requirements, except the swap data

    recordkeeping, SDR reporting and Large Trader Reporting requirements.

    Costs

    As discussed above, the proposed order is exemptive in that it

    would provide eligible persons with relief in the form of additional

    time with which to comply with certain regulatory requirements. As with

    any exemptive order, the proposed order is permissive--eligible persons

    are not required to avail themselves of the exemptive relief provided.

    Accordingly, the Commission assumes that an entity will rely on the

    proposed exemption only if the anticipated benefits warrant the costs

    attendant to the condition that requires the filing of a compliance

    plan. Although there is significant uncertainty in the number of swap

    entities that will seek to register as SDs and MSPs, as well as the

    number of swap entities that will submit a compliance plan in order to

    obtain exemptive relief, the Commission believes it is reasonable to

    estimate that between 40 and 80 non-U.S. SDs and MSPs will submit

    compliance plans.\64\ The average cost of preparing and submitting the

    required compliance plan for such non-U.S. SDs and MSPs initially is

    estimated to be approximately $31,190 per registrant, or a total

    aggregate cost of between $1,247,600 (assuming that 40 SDs and MSPs

    submit a compliance plan) and $2,495,200 (assuming that 80 SDs and MSPs

    submit a compliance plan). This estimate is based on the hourly cost of

    personnel that are capable of evaluating both Commission and home

    country regulations in light of the non-U.S. persons' operations.\65\

    Further, the condition that requires the filing of a compliance plan is

    not static--that is, the condition requires that the non-U.S. person

    submit, if necessary, a revised plan to account for any material

    changes since the filing of the initial plan. The Commission estimates

    that in most cases the cost of submitting a revised plan or plans will

    be the same as the cost of preparing and submitting the initial plan.

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

    \64\ The Commission currently estimates that approximately 125

    entities will be covered by the definitions of the terms ``swap

    dealer'' and ``major swap participant.'' See ``Further Definition of

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

    Participant,' `Major Security-Based Swap Participant' and `Eligible

    Contract Participant' ''; Final Rule, 77 FR 30596, 30713, May 23,

    2012. However, not all of these entities are eligible for or will

    seek exemptive relief.

    \65\ Although different registrants may choose to staff

    preparation of the compliance plan with different personnel,

    Commission staff estimates that, on average, an initial compliance

    plan could be prepared and submitted with 70 hours of attorney time,

    as follows: 10 hours for a senior attorney at $830/hour, 30 hours

    for a mid-level attorney at $418/hour, and 30 hours for a junior

    attorney at $345/hour. To estimate the hourly cost of senior and

    junior-level attorney time, Commission staff consulted with a law

    firm that has substantial expertise in advising clients on similar

    regulations. For the hourly cost of the mid-level attorney,

    Commission staff reviewed data contained in Securities Industry and

    Financial Markets Association (``SIFMA''), Report on Management and

    Professional Earnings in the Securities Industry, Oct. 2011, for New

    York, and adjusted by a factor for overhead and other benefits,

    which the Commission has estimated to be 1.3.

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

    In addition, the Commission estimates that an additional 20 to 45

    U.S. SDs or U.S. MSPs whose foreign branch seeks to rely on the

    exemptive relief with respect to swaps with non-U.S. counterparties

    will submit a compliance plan. In this case, the compliance plan must

    only address how the registrant plans to comply, in good faith, with

    all applicable Transaction-Level Requirements under the CEA upon the

    expiration of this proposed exemptive order. The average cost of

    preparing and submitting the required compliance plan for such non-U.S.

    SDs and MSPs initially is estimated to be approximately $18,714 per

    U.S. registrant, or a total aggregate cost of between $374,280

    (assuming that 20 U.S. SDs and MSPs submit a compliance plan) and

    $842,130 (assuming that 45 SDs and MSPs submit a compliance plan). This

    estimate is based on the hourly cost of personnel that are capable of

    evaluating both Commission and home country regulations in light of the

    U.S. persons' foreign branch operations.\66\ Further, the condition

    that requires the filing of a compliance plan by a U.S. person is not

    static--that is, the condition requires that the U.S. person submit, if

    necessary, a revised plan to account for any material changes since the

    filing of the initial plan. The Commission estimates that in most cases

    the cost of submitting a revised plan or plans will be the same as the

    cost of preparing and submitting the initial plan.

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

    \66\ Although different registrants may choose to staff

    preparation of the compliance plan with different personnel,

    Commission staff estimates that, on average, an initial compliance

    plan could be prepared and submitted with 42 hours of attorney time,

    as follows: 6 hours for a senior attorney at $830/hour, 18 hours for

    a mid-level attorney at $418/hour, and 18 hours for a junior

    attorney at $345/hour. To estimate the hourly cost of senior and

    junior-level attorney time, Commission staff consulted with a law

    firm that has substantial expertise in advising clients on similar

    regulations. For the hourly cost of the mid-level attorney,

    Commission staff reviewed data contained in Securities Industry and

    Financial Markets Association (``SIFMA''), Report on Management and

    Professional Earnings in the Securities Industry, Oct. 2011, for New

    York, and adjusted by a factor for overhead and other benefits,

    which the Commission has estimated to be 1.3.

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

    Apart from the direct costs discussed above, the Commission

    proposes that the exemptive order may result in indirect costs to the

    public, including the costs of delayed compliance with the Entity-Level

    Requirements and, to a more limited extent, Transaction-Level

    Requirements of the Dodd-Frank Act. The Commission proposes that these

    costs are not, however, susceptible to

    [[Page 41118]]

    meaningful quantification due to a lack of data regarding several key

    variables, including the probability of a significant market

    disturbance, the impact of that disturbance on the U.S. public and U.S.

    entities, and the role of entities subject to the order in creating or

    propagating such a disturbance. Nevertheless, the Commission seeks

    comment on any such indirect costs, including empirical data from which

    to quantify the same.

    Benefits

    The proposed exemptive order provides a benefit in that it would

    allow affected entities additional time to transition into the new

    regulatory regime in a more orderly manner, which promotes stability in

    the markets as that transition occurs. This, in turn, promotes the

    integrity and efficiency of the swap markets during the transition

    period. The phased-in process would eliminate the need for affected

    persons to file individual applications for exemptive relief and/or no-

    action relief, and reduces compliance costs related to the exempted

    transactions that occur during the transition period. Another benefit

    will be increased international harmonization because the proposed

    relief provides U.S. and non-U.S. registrants the latitude necessary to

    develop and modify their compliance plans as the regulatory structure

    in their home jurisdiction changes, which would promote greater

    regulatory consistency and coordination with international regulators.

    The primary benefit of the proposed compliance plan condition is

    that it ensures that non-U.S. persons claiming the exemption would be

    actively and demonstrably considering and planning for compliance with

    the Entity-Level and Transaction-Level Requirements under the CEA, as

    may be applicable. Absent such a condition and the requirement, a non-

    U.S. person could simply claim the exemption, without making a good-

    faith effort to comply with the Dodd-Frank Act. Further, the

    requirement that the plan be updated to reflect any material change in

    the information initially submitted ensures that the planning for

    compliance is performed in a thoughtful and continuous manner. Finally,

    the compliance plan also would assist NFA and Commission staff in

    preparing for the registration of non-U.S. SDs and non-U.S. MSPs as

    they develop familiarity with the regulatory regimes of foreign

    jurisdictions.

    In addition, the relief would allow foreign branches of U.S. SDs

    and MSPs to comply only with those requirements as may be required in

    the jurisdiction where the foreign branch is located for swaps with

    non-U.S. counterparties, effective concurrently with the date upon

    which such SDs and MSPs must first apply for registration until 12

    months following the publication of the proposed order in the Federal

    Register. In addition, U.S. SDs and U.S. MSPs may delay compliance with

    certain entity-level requirements of the CEA (and Commission

    regulations promulgated thereunder) from the date upon which SDs and

    MSPs must apply for registration until January 1, 2013.

    The Commission requests comments on all aspects of the

    consideration of costs and benefits of the proposed exemptive order

    discussed in this Notice and any alternatives to the same. Commenters

    should submit estimates of any costs and benefits perceived, together

    with any supporting empirical evidence available.

    Section 15(a) Factors

    Protection of Market Participants and the Public

    The Commission expects that the exemptive relief provided in this

    proposed order would protect market participants and the public by

    facilitating a more orderly transition to the new regulatory regime

    than might otherwise occur in the absence of this proposed order. In

    particular, non-U.S. persons would be afforded additional time to come

    into compliance than would otherwise be the case, which contributes to

    greater stability and reliability of the swap markets during the

    transition process.

    As discussed above, to the extent that non-U.S. persons submit a

    plan for compliance regarding Entity-Level and Transaction-Level

    Requirements, such persons would experience savings during the interim

    period. Reduced costs may occur as the result of delaying decisions

    about new systems, operational patterns, legal agreements, or other

    business arrangements until such time as a non-U.S. person knows what

    its obligations will be with respect to the cross-border application of

    Title VII of the Dodd-Frank Act, as well as by reducing the period of

    time during which ongoing costs associated with Entity-Level

    Requirements are borne by that entity.

    As discussed above, non-U.S. SDs and non-U.S. MSPs taking advantage

    of this exemption would have to file a compliance plan with NFA and, if

    necessary, update the same. The costs of the compliance plan are

    discussed above.

    Efficiency, Competitiveness, and Financial Integrity of the Markets

    The proposed order would promote efficiency by providing additional

    time in which eligible persons may implement compliance controls and

    new technologies, and adjust operational patterns and legal agreements,

    if necessary. This additional time would minimize the risk that certain

    entities would withdraw from the market in order to avoid taking steps

    necessary for compliance.

    Price Discovery

    The Commission has not identified any costs or benefits of the

    proposed order with respect to price discovery.

    Risk Management

    Entity level risk-management and capital requirements could be

    delayed by operation of the exemptive order, which could weaken risk

    management. However, such potential risk is limited by the fact that

    the proposed exemptive order is finite in the additional time it

    provides eligible persons.

    Other Public Interest Considerations

    The Commission has not identified any other public interest costs

    or benefits of the proposed order.

    VIII. Proposed Order

    The Commission, in order to provide for an orderly implementation

    of Title VII of the Dodd-Frank Act, and consistent with the

    determinations set forth above, which are incorporated in the Final

    Order by reference, hereby grants, pursuant to section 4(c) of the CEA,

    temporary relief to non-U.S. swap dealers (``SDs'') and non-U.S. major

    swaps participants (``MSPs''), and to U.S. SDs and U.S. MSPs, including

    their foreign branches, from certain swap provisions of the CEA,

    subject to the terms and conditions below.\67\

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

    \67\ As used in this order, the terms ``U.S. person,'' ``Entity-

    Level Requirements,'' and ``Transaction-Level Requirements'' have

    the same meanings as provided in the Cross-Border Interpretive

    Guidance.

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

    (1) Non-U.S. Person: A non-U.S. person may delay compliance with

    respect to Entity-Level Requirements (subject to the condition in

    paragraph (2) below); provided, however, that: (A) such person shall

    file with National Futures Association (``NFA'') an application to

    register as an SD or MSP, as applicable, pursuant to Commission

    Regulation part 3 by the date for which such person must apply for

    registration; (B) within 60 days of filing its application for

    registration, such person shall file with NFA a compliance plan

    addressing how it plans to comply, in

    [[Page 41119]]

    good faith, with the applicable Entity-Level and Transaction-Level

    Requirements under the CEA. At a minimum, such plan would provide, for

    each Entity-Level Requirement and Transaction-Level Requirement, a

    description of: (i) whether such person would comply with the Entity-

    Level and Transaction-Level requirements that are in effect or whether

    they would seek a comparability determination and rely on compliance

    with one or more of the requirements of the home jurisdiction; and (ii)

    to the extent that such person would comply with one or more of the

    requirement(s) of the home jurisdiction, a description of such

    requirement(s). Such persons may modify or alter the compliance plans

    as appropriate, provided that they submit any such amended plan to NFA.

    (2) Notwithstanding paragraph (1), non-U.S. SDs and non-U.S. MSPs

    shall be required to comply with the SDR reporting and Large Trader

    Reporting requirements for all swaps with U.S. counterparties, upon its

    compliance date. However, during the pendency of this Order, non-U.S.

    SDs and non-U.S. MSPs that are not affiliates or subsidiaries of a U.S.

    SD may delay compliance with the SDR reporting and Large Trader

    Reporting requirements for swaps with non-U.S. counterparties.

    (3) With respect to Transaction-Level Requirements as applied to

    transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S.

    MSPs may comply with such regulations only as may be required by the

    home jurisdiction of such registrants; provided, however, that such

    registrants shall comply with such requirements that are in effect for

    all swaps with U.S. counterparties.

    (4) The relief provided to non-U.S. SDs and non-U.S. MSPs in this

    order shall be effective concurrently with the date upon which SDs and

    MSPs must first apply for registration and expire 12 months following

    the publication of the proposed order in the Federal Register.

    (5) U.S Person: A U.S. person shall apply to register as an SD or

    MSP by the date such registration is required and shall comply with all

    applicable Entity-Level and Transaction-Level Requirements that are in

    effect, except as provided: (A) such person may delay compliance with

    the Entity-Level Requirements until January 1, 2013, except with

    respect to swap data recordkeeping, SDR reporting, and Large Trader

    Reporting requirements. Nevertheless, with respect to Transaction-Level

    Requirements as applied to swaps with a non-U.S. counterparty, a

    foreign branch of a U.S. SD or U.S. MSP may comply with those

    requirements only as may be required by the foreign location of such

    branches.

    (6) A U.S. SD or U.S. MSP whose foreign branch seeks to rely on the

    exemptive relief with respect to swaps with non-U.S. counterparties

    must submit a compliance plan (as described in paragraph (1) herein)

    addressing how it plans to comply, in good faith, with all applicable

    Transaction-Level Requirements under the CEA upon the expiration of

    this proposed exemptive order.

    (7) Scope of Relief: The temporary relief provided in this Order:

    (A) shall not affect, with respect to any swap within the scope of this

    Order, the applicability of any other CEA provision or Commission

    regulation (i.e., those outside the Entity-Level and Transaction-Level

    Requirements); (B) shall not limit the applicability of any CEA

    provision or Commission regulation to any person, entity or transaction

    except as provided in this Order; (C) shall not affect the

    applicability of any provision of the CEA or Commission regulation to

    futures contracts, or options on future contracts; and (D) shall not

    affect any effective or compliance date set out in any specific Dodd-

    Frank Act rulemaking by the Commission.

    Finally, the Commission may, in its discretion, condition, suspend,

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

    motion.

    Issued in Washington, DC, on June 29, 2012, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Exemptive Order Regarding Compliance With Certain Swap

    Regulations--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 Sommers,

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

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the exemptive order regarding the effective dates of

    certain Dodd-Frank Wall Street Reform and Consumer Protection Act

    (Dodd-Frank Act) provisions.

    Today's exemptive order makes five changes to the exemptive

    order issued on December 19, 2011.

    First, the proposed exemptive order extends the sunset date from

    July 16, 2012, to December 31, 2012.

    Second, the Commodity Futures Trading Commission (CFTC) and the

    Securities and Exchange Commission (SEC) have now completed the rule

    further defining the term ``swap dealer'' and ``securities-based

    swap dealer.'' Thus, the exemptive order no longer provides relief

    as it once did until those terms were further defined.

    The Commissions are also mandated by the Dodd-Frank Act to

    further define the term ``swap'' and ``securities-based swap.'' The

    staffs are making great progress, and I anticipate the Commissions

    will take up this final definitions rule in the near term. Until

    that rule is finalized, the exemptive order appropriately provides

    relief from the effective dates of certain Dodd-Frank provisions.

    Third, in advance of the completion of the definitions rule,

    market participants requested clarity regarding transacting in

    agricultural swaps. The exemptive order allows agricultural swaps

    cleared through a derivatives clearing organization or traded on a

    designated contract market to be transacted and cleared as any other

    swap. This is consistent with the agricultural swaps rule the

    Commission already finalized, which allows farmers, ranchers,

    packers, processors and other end-users to manage their risk.

    Fourth, unregistered trading facilities that offer swaps for

    trading were required under Dodd-Frank to register as swap execution

    facilities (SEFs) or designated contract markets (DCM) by July of

    this year. These facilities include exempt boards of trade, exempt

    commercial markets and markets excluded from regulation under

    section 2(d)(2). Given the Commission has yet to finalize rules on

    SEFs, this order gives these platforms additional time for such a

    transition.

    Fifth, the Commission is providing guidance regarding

    enforcement of rules that require that certain off-exchange swap

    transactions only be entered into by eligible contract participants

    (ECPs). The guidance provides that if a person takes reasonable

    steps to verify that its counterparty is an ECP, but the

    counterparty turns out not to be an ECP based on subsequent

    Commission guidance, absent other material factors, the CFTC will

    not bring an enforcement action against the person.

    Phased Compliance

    I support the proposed release on phased compliance for foreign

    swap dealers. The release provides phased compliance for foreign

    swap dealers (including overseas affiliates of U.S. swap dealers) of

    certain requirements of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (Dodd-Frank Act).

    Such phased compliance would enable market participants to

    comply with the Dodd-Frank Act in an orderly fashion. It would allow

    time for the CFTC to receive public comment on interpretive guidance

    on the cross-border application of the Dodd-Frank Act.

    Under the interpretive guidance, in certain circumstances,

    market participants may

    [[Page 41120]]

    comply with certain Dodd-Frank requirements by complying with

    comparable and comprehensive foreign regulatory requirements, or

    what we call ``substituted compliance.'' The release on phased

    compliance also allows time for the CFTC, foreign regulators and

    market participants to continue to consult and coordinate on

    regulation of cross-border swaps activity, as well as the

    appropriate implementation of substituted compliance.

    In this period, foreign swap dealers must file a plan

    demonstrating how they will eventually comply with Dodd-Frank, which

    in certain circumstances could be through substituted compliance.

    The release provides for phased compliance in the following

    manner:

    Foreign swap dealers would be required to register with

    the CFTC upon the compliance date of the registration requirement;

    U.S. and foreign swap dealers must comply with

    transaction-level requirements with U.S. persons, including branches

    of U.S. persons;

    For transaction-level requirements, foreign swap

    dealers, as well as overseas branches of U.S. swap dealers,

    transacting with non-U.S. persons is phased for one year.

    Entity-level requirements (other than reporting to SDRs

    and large trader reporting) that might come under substituted

    compliance is phased for one year; and

    For foreign swap dealers, swaps with U.S. persons,

    including branches of U.S. persons, would be required to be reported

    to a SDR or the CFTC.

    In addition, U.S. swap dealers' compliance with certain internal

    business conduct requirements is phased until January 1, 2013.

    The release addresses comments from U.S. and international

    market participants, and I look forward to additional input on the

    proposal.

    [FR Doc. 2012-16498 Filed 7-11-12; 8:45 am]

    BILLING CODE P

    Last Updated: July 12, 2012



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