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,

[email protected]; Jacqueline H. Mesa, Director, Office of

International Affairs, (202) 418-5386, [email protected]; Carlene S. Kim,

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

[email protected], 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

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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.

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\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.

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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\

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\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/idc/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.

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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.

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[[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\

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\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.

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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\

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\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.

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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.

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

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

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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\

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

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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.

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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

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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.

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

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[[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.

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

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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.

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\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.

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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.

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\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.

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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\

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\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.

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(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