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2012-30885

  • Federal Register, Volume 78 Issue 1 (Wednesday, January 2, 2013)[Federal Register Volume 78, Number 1 (Wednesday, January 2, 2013)]

    [Rules and Regulations]

    [Pages 17-22]

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

    [FR Doc No: 2012-30885]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 23

    RIN 3038-AC96

    Business Conduct and Documentation Requirements for Swap Dealers

    and Major Swap Participants; Extension of Compliance Date

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Extension of compliance dates; request for comment.

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

    changing the compliance dates for certain rules in the Commission's

    regulations governing business conduct standards for swap dealers

    (``SDs'') and major swap participants (``MSPs''), and certain rules

    requiring SDs and MSPs to engage in portfolio reconciliation and to

    have certain documentation with their swap counterparties. The

    Commission is extending the compliance date for certain rules by four

    months, and up to six months for others. The extended compliance dates

    are intended to provide SDs and MSPs with additional time to achieve

    compliance with certain regulations.

    DATES: Compliance Dates: The compliance date for the regulations at 17

    CFR 23.201(b)(3)(ii), 23.402; 23.410(c); 23.430; 23.431(a) through (c);

    23.432; 23.434(a)(2), (b), and (c); 23.440; 23.450, and 23.505 is

    extended until May 1, 2013; the compliance date for the regulations at

    17 CFR 23.502 and 23.504 is extended until July 1, 2013.

    Comment Date: The Commission will, however, consider any comments

    received on or before February 1, 2013 and may revise the modified

    compliance dates, if warranted.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AC96

    and Business Conduct and Documentation Requirements for Swap Dealers

    and Major Swap Participants, by any of the following methods:

    Agency Web site, www.cftc.gov, via its Comments Online

    process at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting

    comments through the Web site.

    Mail: 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 may be exempt from disclosure under the Freedom of Information

    Act, a petition for confidential treatment of the exempt information

    may be submitted according to the established procedures in Sec. 145.9

    of the Commission's regulation, 17 CFR 145.9.

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

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

    submission from www.cftc.gov that it may deem to be inappropriate for

    publication, such as obscene language. All submissions that have been

    redacted or removed that contain comments on the merits of the

    rulemaking will be retained in the public comment file and will be

    considered as required under the Administrative Procedure Act and other

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

    Act.

    FOR FURTHER INFORMATION CONTACT: Frank Fisanich, Chief Counsel, 202-

    418-5949, ffisanich@cftc.gov, Jason A. Shafer, Attorney-Advisor, 202-

    418-5097, jshafer@cftc.gov, Division of Swap Dealer and Intermediary

    Oversight, or Sayee Srinivasan, Research Analyst, 202-418-5309,

    ssrinivasan@cftc.gov, Office of the Chief Economist, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,

    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of

    [[Page 18]]

    the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'') \3\

    to establish a comprehensive regulatory framework to reduce risk,

    increase transparency, and promote market integrity within the

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

    registration and comprehensive regulation of SDs and MSPs; (2) imposing

    clearing and trade execution requirements on standardized derivative

    products; (3) creating rigorous recordkeeping and real-time reporting

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

    authorities with respect to all registered entities and intermediaries

    subject to the Commission's oversight.

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

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

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

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    In the two years since its enactment, the Commission has finalized

    41 rules to implement Title VII of the Dodd-Frank Act. Earlier this

    year, the Commission, jointly with the Securities and Exchange

    Commission, finalized the main foundational elements of the Dodd-Frank

    regulatory framework by adopting regulations further defining the terms

    ``swap dealer'' and ``major swap participant,'' \4\ as well as the

    regulations further defining the term ``swap.'' \5\ The Commission also

    adopted regulations setting forth a comprehensive scheme for the

    registration process for SDs and MSPs.\6\ Other finalized rules include

    various substantive requirements applicable to SDs and MSPs under CEA

    section 4s,\7\ which address reporting and recordkeeping,\8\ business

    conduct standards,\9\ documentation standards,\10\ duties,\11\ and

    designation of chief compliance officers.\12\

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    \4\ See Further Definition of ``Swap Dealer,'' ``Security-Based

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

    Swap Participant,'' and ``Eligible Contract Participant,'' 77 FR

    30596 (May 23, 2012).

    \5\ See Further Definition of ``Swap,'' ``Security-Based Swap,''

    and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based

    Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).

    \6\ See Registration of Swap Dealers and Major Swap

    Participants, 77 FR 2613 (Jan. 19, 2012).

    \7\ 7 U.S.C 6s.

    \8\ 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).

    \9\ See Business Conduct Standards for Swap Dealers and Major

    Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012).

    \10\ See Confirmation, Portfolio Reconciliation, Portfolio

    Compression, and Swap Trading Relationship Documentation

    Requirements for Swap Dealers and Major Swap Participants, 77 FR

    55904 (Sept. 11, 2012).

    \11\ See supra note 8.

    \12\ Id.

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    Among other things, upon registration, an SD or MSP must submit

    documentation demonstrating its compliance with any Commission

    regulation issued pursuant to section 4s(e), (f), (g), (h), (i), (j),

    (k), or (l) of the CEA that is applicable to it and for which the

    compliance date has passed. Such Commission regulations include

    business conduct standards under subpart H of part 23 of the

    Commission's regulation promulgated under section 4s(h) of the CEA,

    documentation standards under subpart I of part 23 of the Commission's

    regulations promulgated under section 4s(i) of the CEA, and reporting

    and recordkeeping requirements under subpart F of part 23 of the

    Commission's regulations promulgated under section 4s(f) of the CEA.

    With respect to business conduct standards with counterparties,

    section 4s(h) of the CEA provides the Commission with both mandatory

    and discretionary rulemaking authority to impose business conduct

    standards on SDs and MSPs in their dealings with counterparties,

    including Special Entities, and section 4s(i) of the CEA establishes

    swap documentation standards for SDs and MSPs.

    Pursuant to section 4s(h) of the CEA, on December 22, 2010, the

    Commission published in the Federal Register proposed subpart H of part

    23 of the Commission's regulations.\13\ There was a 60-day period for

    the public to comment on the proposing release. On May 4, 2011, the

    Commission published in the Federal Register a notice to re-open the

    public comment period for an additional 30 days, which ended on June 3,

    2011.\14\ On February 17, 2012, the Commission adopted as final rules

    subpart H to part 23, which set forth business conduct standards for

    swap dealers and major swap participants in their dealings with

    counterparties.\15\ A number of the Commission's rules under subpart H

    of part 23 require SDs and MSPs to provide or obtain specific

    information from their counterparties prior to entering into (or in

    some cases, offering to enter into) a swap with such

    counterparties.\16\ Subpart H of part 23 permits SDs and MSPs to rely

    on written representations from their counterparties and standardized

    disclosures, each of which may require amendments or supplements to an

    SD's or MSP's relationship documentation with such counterparties prior

    to entering into a swap with such counterparties.\17\

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    \13\ Business Conduct Standards for Swap Dealers and Major Swap

    Participants With Counterparties, 75 FR 80638 (proposed Dec. 22,

    2010).

    \14\ Reopening and Extension of Comment Periods for Rulemakings

    Implementing the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, 75 FR 25274 (May 4, 2011).

    \15\ See supra note 9.

    \16\ See, e.g., Sec. 23.402(b) (requiring SDs to obtain

    essential facts about their counterparty prior to execution of a

    transaction); Sec. 23.430(a) (requiring SDs and MSPs to verify that

    a counterparty meets the eligibility standards for an eligible

    contract participant before offering to enter into or entering into

    a swap with such counterparty); and Sec. 23.431(a) (requiring SDs

    and MSPs to provide material information concerning a swap to its

    counterparty at a reasonably sufficient time prior to entering into

    the swap).

    \17\ See Sec. 23.402(d), (e), and (f).

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    SDs and MSPs are required to comply with the requirements found in

    subpart H to part 23 by January 1, 2013.\18\

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    \18\ The external business conduct standards final rule required

    that swap dealers and major swap participants must comply with the

    rules in subpart H of part 23 on the later of 180 days after the

    effective date of these rules or the date no which swap dealers or

    major swap participants are required to apply for registration

    pursuant to Commission rule 3.10. However, in a subsequent

    rulemaking, the compliance date for Sec. Sec. 23.402; 23.410(c);

    23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c); 23.440;

    and 23.450 was deferred until January 1, 2013. See Confirmation,

    Portfolio Reconciliation, Portfolio Compression, and Swap Trading

    Relationship Documentation Requirements for Swap Dealers and Major

    Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012).

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    Section 4s(i)(1) of the CEA requires SDs and MSPs to ``conform with

    such standards as may be prescribed by the Commission by rule or

    regulation that relate to timely and accurate confirmation, processing,

    netting, documentation, and valuation of all swaps.'' Under section

    4s(i)(2), the Commission is required to adopt rules ``governing

    documentation standards for swap dealers and major swap participants.''

    The Commission proposed the regulations on swap confirmation, portfolio

    reconciliation, and portfolio compression on December 28, 2010.\19\ In

    a separate rulemaking, on February 8, 2011, the Commission proposed

    regulations governing swap documentation, including what documentation

    would be required to be kept by the SD or MSP when it transacts with a

    counterparty that exercises its rights under the end-user clearing

    exception from the mandatory clearing requirement under section 2(h)(7)

    of the CEA.\20\ There was a 60-day comment period for both proposals.

    On September 11, 2012, the Commission issued final rules governing swap

    [[Page 19]]

    confirmation (Sec. 23.501), portfolio reconciliation (Sec. 23.502),

    portfolio compression (Sec. 23.503), and swap trading relationship

    documentation (Sec. 23.504), and end user exception documentation

    (Sec. 23.505).\21\ Among other things, Sec. 23.502 requires SDs and

    MSPs to agree in writing with each counterparty on the terms of

    conducting portfolio reconciliation.\22\ Section 23.504 requires that

    an SD or MSP execute swap trading relationship documentation meeting

    the requirements of the rule with a counterparty prior to or

    contemporaneously with entering into a swap transaction with such

    counterparty.\23\ Section 23.505 requires, with an exception, that SDs

    and MSPs, when transacting with market participants claiming the

    exception to clearing under 2(h)(7) of the CEA, obtain documentation

    sufficient to provide a reasonable basis on which to believe that its

    counterparty meets the statutory conditions required for the

    exception.\24\

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    \19\ Confirmation, Portfolio Reconciliation, and Portfolio

    Compression Requirements for Swap Dealers and Major Swap

    Participants, 75 FR 8519 (proposed Dec. 28, 2010).

    \20\ Swap Trading Relationship Documentation for Swap Dealers

    and Major Swap Participants, 76 FR 6715 (proposed Feb. 8, 2011).

    \21\ See supra note 10.

    \22\ See Sec. 23.502(a)(1).

    \23\ See Sec. 23.504(a)(2).

    \24\ See Sec. 23.505(a).

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    With regard to the portfolio reconciliation requirements found in

    Sec. 23.502, the Commission staggered the compliance dates by

    providing extended compliance dates for those SDs and MSPs that have

    not been previously regulated by a prudential regulator, and thus are

    least likely to have the infrastructure in place to begin regular

    reconciliation with their counterparties.\25\ SDs and MSPs that have

    been previously regulated by a prudential regulator need not comply

    with Sec. 23.502 until December 11, 2012. SDs and MSPs that have not

    been previously regulated need not comply with Sec. 23.502 until March

    11, 2013. The earliest that an SD or MSP would be required to comply

    with the swap trading relationship documentation requirements found in

    Sec. 23.504 is January 1, 2013.\26\ Additionally, the earliest that an

    SD or MSP would be required to comply with the documentation

    requirements found in Sec. 23.505 is December 31, 2012.

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    \25\ 77 FR 55904, 55941-42 (Sept. 11, 2012).

    \26\ The current compliance schedule associated with Sec.

    23.504 is as follows: With respect to swap transactions with SDs,

    security-based swap dealers, MSPs, major security-based swap

    participants, or any private fund, as defined in section 202(a) of

    the Investment Advisers Act of 1940, that is not a third-party

    subaccount (defined below) and that executes 200 or more swaps per

    month based on a monthly average over the 12 months preceding this

    adopting release (active funds), SDs and MSPs must comply with Sec.

    23.504 by January 1, 2013. With respect to swap transactions with

    commodity pools; private funds as defined in section 202(a) of the

    Investment Advisers Act of 1940 other than active funds; or persons

    predominantly engaged in activities that are in the business of

    banking, or in activities that are financial in nature as defined in

    section 4(k) of the Bank Holding Company Act of 1956, provided that

    the entity is not an account that is managed by an investment

    manager that (1) is independent of and unaffiliated with the

    account's beneficial owner or sponsor, and (2) is responsible for

    the documentation necessary for the account's beneficial owner to

    document swaps as required under section 4s(i) of the CEA (third-

    party subaccounts), SDs and MSPs must comply with Sec. 23.504 by

    April 1, 2013. With respect to swap transactions with any other

    counterparty, SDs and MSPs must comply with Sec. 23.504 by July 1,

    2013. 77 FR 55904, 55940 (Sept. 11, 2012). However, in a final rule

    recently adopted by the Commission, the compliance schedules for

    active funds was amended by requiring private funds to calculate the

    number of swaps they enter as a monthly average over the past 12

    months preceding November 1, 2012.

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    Section 4s(f)(1) of the CEA requires SDs and MSPs to ``make such

    reports as are required by the Commission by rule or regulation

    regarding the transactions and positions and financial condition of the

    registered swap dealer or major swap participant.'' Under section

    4s(f)(1)(B)(i) and (ii) of the CEA, the Commission was authorized to

    prescribe the books and records requirements of ``all activities

    related to the business of swap dealers and major swap participants.''

    On December 9, 2010, the Commission proposed Sec. 23.201, which set

    forth the records SDs and MSPs must maintain.\27\ After a 60-day period

    for the public to comment on the proposal, the Commission published a

    Federal Register notice that re-opened the comment period for an

    additional 30 days ending on June 3, 2011.\28\ On April 3, 2012, the

    Commission adopted final rules governing, among other requirements,

    general records requirements for SDs and MSPs (Sec. 23.201).\29\ The

    earliest that an SD or MSP would be required to comply with Sec.

    23.201 is December 31, 2012.\30\

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    \27\ Reporting, Recordkeeping, and Daily Trading Records

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    76666 (proposed Dec. 9, 2010).

    \28\ See supra note 14.

    \29\ See supra note 8.

    \30\ See 77 FR 20128, 20165 (Apr. 3, 2012). Sec. 23.201(a)(1)

    is currently the subject of a staff no-action letter that was

    published on October 26, 2012, which provided no-action relief from

    compliance with Sec. 23.201(a)(1) until March 31, 2013. See CFTC

    Letter No. 12-29, Request for No-Action Relief for Swap Dealers and

    Major Swap Participants from Compliance with Certain Internal

    Business Conduct Requirements Found in subpart F to part 23 of the

    CFTC's Regulations (http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-29.pdf).

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    II. Compliance Date Extension for Certain Business Conduct and

    Documentation Requirements for Swap Dealers and Major Swap Participants

    Subsequent to the issuance of the above-identified rules, the

    Commission received requests from a variety of market participants for

    additional time to achieve compliance with the documentation

    requirements of such rules.\31\ More specifically, market participants

    requested that the Commission extend the compliance dates for the

    provisions of subpart H of part 23 that involve documentation,\32\ the

    compliance dates for the provisions of Sec. 23.502 (Portfolio

    Reconciliation), which has a significant documentation component, and

    the compliance dates for the provisions of Sec. 23.504 (Swap Trading

    Relationship Documentation),\33\ which also has a significant

    documentation component, to facilitate an orderly transition to the new

    regulatory regime.

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    \31\ See, e.g., Letter dated Dec. 4, 2012 from the International

    Swaps and Derivatives Association (``ISDA'') requesting exercise of

    Commission authority regarding part 23 Compliance Rules, Letter

    dated Nov. 27, 2012 (revised Dec. 6, 2012) from ISDA requesting

    exercise of Commission authority regarding part 23 compliance rules

    (``ISDA Dec. 6 Letter''), and Letter dated Nov. 20, 2012 from ISDA

    requesting no-action relief from compliance with Sec. Sec. 23.502

    and 23.504.

    \32\ The current compliance date for Sec. Sec. 23.402;

    23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and

    (c); 23.440; and 23.450 is January 1, 2013. See Confirmation,

    Portfolio Reconciliation, Portfolio Compression, and Swap Trading

    Relationship Documentation Requirements for Swap Dealers and Major

    Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012); see also

    Business Conduct Standards for Swap Dealers and Major Swap

    Participants with Counterparties, 77 FR 9734, 9823-27 (Feb. 17,

    2012) (promulgating the relevant provisions of subpart H of part 23

    of the Commission's Regulations).

    \33\ 77 FR at 55940.

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    In their letter, ISDA states that in order to facilitate an

    efficient transition to compliance, it has sponsored a number of

    documentation protocols for its members and other market participants,

    where amendments or supplements required by the Commission's

    regulations are effected through delivery of an adherence letter by

    each party to the underlying document to be amended (i.e., a master

    agreement), and provides for additional bilateral delivery requirements

    in order to effectuate the addition of supplemental terms.\34\

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    \34\ See http://www2.isda.org/dodd-frank-documentation-initiative/.

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    ISDA published its first Dodd-Frank protocol in August 2012,

    focused on facilitating compliance with several new Commission

    regulations, including those found in part 23.\35\ Pursuant to

    [[Page 20]]

    this first protocol, each party that submits an adherence letter must

    also deliver a completed questionnaire to another protocol participant

    for the addition of supplemental terms to be effective with respect to

    that protocol participant. To facilitate the delivery of completed

    questionnaires, ISDA, together with Markit, have developed a

    technology-based solution to automate the information-gathering process

    and provide sharing of submitted data and documents to permissioned

    counterparties.

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    \35\ ISDA's first Dodd-Frank protocol is intended to facilitate

    compliance with the following Final Rules: Business Conduct

    Standards for Swap Dealers and Major Swap Participants With

    Counterparties, 77 FR 9734 (Feb. 17, 2012); Large Trader Reporting

    for Physical Commodity Swaps, 76 FR 43851 (July 22, 2011); Position

    Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011); Real-Time

    Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9,

    2012); Swap Data Recordkeeping and Reporting Requirements, 77 FR.

    2136 (Jan. 13, 2012); 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); and Swap Data Recordkeeping and Reporting Requirements: Pre-

    Enactment and Transition Swaps, 77 FR 35200 (June 12, 2012).

    However, the changes to compliance dates affected in this release do

    not address compliance with rules other than those specifically

    stated in the text above.

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    ISDA has represented to the Commission that, despite an extensive

    counterparty outreach and education effort by its members, only 17.5%

    of counterparties to prospective SDs and MSPs have submitted an

    adherence letter for its first Dodd-Frank protocol and less than 1%

    have submitted the completed questionnaires necessary for SDs and MSPs

    to make use of the protocol and integrate necessary counterparty

    information into their compliance systems. ISDA has represented that

    more time is needed for these counterparties to understand the

    Commission's requirements, to understand the legal consequences of

    adhering to the protocol, and to gather the information needed to

    complete the questionnaire from principals and beneficial owners.

    In addition, ISDA states that Hurricane Sandy has hampered the

    ability of SDs, MSPs, and their counterparties to complete the

    documentation process necessary to comply with the Commission's

    regulations within the original compliance periods. ISDA states that

    Hurricane Sandy shut down institutions and vendors, depleted staff and

    severely damaged development efforts in a number of compliance areas--

    producing a knock-on effect across institutional (and vendor)

    compliance efforts (including delays at Markit--the provider of

    protocol automation mechanisms). Further, specifically with respect to

    the January 1, 2013 compliance date for subpart H of part 23 of the

    Commission's regulations, ISDA has represented that compliance

    obstacles are compounded by industry code freezes, which are typically

    put into effect near the calendar year-end to ensure a stable IT

    environment for the closing of books and records. The freezes limit the

    ability of firms to make adjustments to IT infrastructure related to

    the delivery of required disclosure and the re-onboarding of

    counterparties in accordance with the counterparty characteristics

    provided in response to the first Dodd-Frank protocol.

    Absent completion of the protocol process by a counterparty, or

    completion of bilateral amendments to trading documentation with the

    equivalent effect, an SD or MSP that continues to enter into swaps with

    such counterparty would be in violation of multiple Commission

    regulations contained in part 23. In order to avoid such violations of

    Commission regulations, ISDA has represented that many SDs and MSPs

    will stop entering into swaps with counterparties that have not

    completed the protocol process by December 31, 2012, which could result

    in a sudden and dramatic drop in the number of participants in the swap

    markets. ISDA states that the resulting decrease in liquidity would

    damage all market participants as well as the broader economy.

    ISDA has further represented that market participants are working

    diligently toward publishing a second Dodd-Frank protocol covering

    other Commission rules requiring documentation supplements, including

    Sec. Sec. 23.502 and 23.504, but require additional time to complete

    the review process and implement the protocol. ISDA states that the

    pace of implementation of its second Dodd-Frank protocol has been

    adversely affected by the difficulty of reaching agreement on the

    valuation methodologies required by Sec. 23.504(b)(4),\36\ the

    developmental challenges to reaching the agreement on reconciliation

    processes required by Sec. 23.502(a)(1), the consumption of legal and

    operational resources by the implementation of the first Dodd-Frank

    protocol, and the effects of Hurricane Sandy discussed above.

    Accordingly, ISDA has represented that an extension of the compliance

    dates for Sec. Sec. 23.502 and 23.504 would allow for a smooth and

    orderly progression to compliance with such rules and avoid unnecessary

    market disruption.

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    \36\ Commission regulation Sec. 23.504(b)(4) requires SDs and

    MSPs to agree with their counterparties, prior to the execution of a

    swap, on the process for determining the value of such swap at any

    time from execution to the termination, maturity, or expiration of

    such swap.

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    For reasons described above, the Commission has decided to defer

    the compliance dates for Sec. Sec. 23.201(b)(3)(ii), 23.402;

    23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c);

    23.440; 23.450; and 23.505 of subpart F, subpart H, and subpart I of

    part 23 until May 1, 2013. In addition, the Commission has decided to

    defer the compliance dates for Sec. 23.502 (Portfolio Reconciliation)

    and Sec. 23.504 (Swap Trading Relationship Documentation) \37\ of

    subpart I of part 23 until July 1, 2013.\38\ Compliance dates for all

    other provisions of subpart F, subpart H, and subpart I of part 23

    remain unchanged. All market participants are subject to the new

    compliance dates regardless of whether they participate in any protocol

    sponsored by ISDA.

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    \37\ As discussed in note 26 supra, the Commission imposed a

    staggered compliance schedule for Sec. 23.504, establishing three

    separate compliance dates based on the type of counterparty. The

    compliance date established herein--July 1, 2013--provides SDs and

    MSPs with a single compliance date for Sec. 23.504, that is

    applicable for all types of counterparties.

    \38\ The Commission's decision to defer compliance does not

    reflect an endorsement of the industry-led effort, nor does it imply

    that the Commission has reviewed the documentation protocol for

    compliance with Commission rules.

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    III. Related Matters

    A. Administrative Law Matters and Request for Comments

    The Administrative Procedure Act \39\ (``APA'') generally requires

    an agency to publish a notice of a proposed rulemaking in the Federal

    Register.\40\ This requirement does not apply, however, when the agency

    ``for good cause finds * * * that notice and public procedure are

    impracticable, unnecessary, or contrary to the public interest.'' \41\

    Moreover, while the APA requires generally that an agency publish an

    adopted rule in the Federal Register 30 days before it becomes

    effective, this requirement does not apply if the agency finds good

    cause to make the rule effective sooner.\42\

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    \39\ 5 U.S.C. 553.

    \40\ 5 U.S.C. 553(b).

    \41\ Id.

    \42\ 5 U.S.C. 553(d).

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    The Commission, for good cause, finds that notice and solicitation

    of comment regarding the amendments is impracticable, unnecessary and

    contrary to the public interest. As of December 3, 2012, the CFTC has

    finalized over 41 new rulemakings pursuant to the Dodd-Frank Act, with

    each rulemaking imposing significant new regulatory requirements on

    market participants. In the aggregate, the rulemakings establish

    [[Page 21]]

    a robust and comprehensive registration and regulatory framework

    intended to achieve the overarching goals of the Dodd-Frank Act, as

    detailed in Section I above. In promulgating the final rules, the

    Commission constructed a phased implementation schedule that was

    intended to allow market participants to achieve full compliance

    through an orderly and effective process over a period of time. Market

    participants, including a trade association, buy-side firms and sell-

    side dealers, have represented to the Commission that they have been

    diligently preparing to comply with the part 23 rules, in accordance

    with the phased implementation schedule. The Commission anticipates

    that the phased implementation schedule for most rules promulgated

    under part 23 will continue, on schedule, without need for delay.

    Notwithstanding the Commission's efforts to implement the business

    conduct standards rules required under the Dodd-Frank Act in a timely

    manner, the Commission has determined that, due to circumstances beyond

    the Commission's control, a short delay in the implementation schedule

    for a limited set of part 23 rules is necessary. As discussed in

    greater detail in Section II above, ISDA has represented that, despite

    an extensive counterparty outreach and education effort by its members,

    a relatively small percentage of counterparties have fully executed the

    necessary documentation to comply with the provisions of subpart H of

    part 23 that involve documentation. ISDA has represented that more time

    is needed for these counterparties to understand the Commission's

    requirements, to understand the legal consequences of adhering to the

    required documentation, and to gather the information needed to

    complete the questionnaire from principals and beneficial owners. ISDA

    further represented that without additional time to address that

    relatively narrow scope of documentation rules, a sudden and dramatic

    drop in the number of participants in the swap markets could occur, and

    the resulting decrease in liquidity would damage all market

    participants as well as the broader economy.

    The extended compliance dates provided herein do not include all

    business conduct standards promulgated by the Commission. Specifically,

    compliance dates for Sec. 23.410(a) and (b), Sec. 23.433, and Sec.

    23.434(a)(1) are not being extended. Consequently, fundamental

    counterparty protections relating to (i) prohibitions on fraud,

    manipulation and abusive practices, (ii) fair dealings in

    communications, and (iii) reasonable diligence regarding recommended

    swaps would not be affected by delayed compliance.

    Accordingly, for the reasons discussed above, the Commission finds

    good cause to extend the compliance dates for a short period, for a

    limited number of rules promulgated under part 23, to enable market

    participants to continue the work necessary to achieve full compliance.

    Specifically, the compliance date for Sec. Sec. 23.201(b)(3)(ii),

    23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2),

    (b), and (c); 23.440; 23.450, and 23.505 is delayed until May 1, 2013,

    providing an additional 4 months from the original compliance date.

    Likewise, the compliance date for Sec. 23.502 and Sec. 23.504 is

    deferred until July 1, 2013, providing an additional 6 months from the

    original date.\43\ Compliance dates for all other provisions of part 23

    remain unchanged. The Commission anticipates that the amended

    compliance dates will enable market participants to achieve full

    compliance with the affected rules prior to the expiration of the

    amended compliance period.

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

    \43\ The Commission's decision to defer compliance does not

    reflect an endorsement of the industry-led effort, nor does it imply

    that the Commission has reviewed the documentation protocol for

    compliance with Commission rules. All market participants are

    subject to the new compliance dates regardless of whether they

    participate in the protocol.

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

    Although the Commission is dispensing with prior notice of proposed

    rulemaking, the Commission is soliciting written comments on the

    changes to compliance dates affected by this release within 30 days

    after publication of this release in the Federal Register. The

    Commission will consider those comments and make changes to the

    amendments if necessary.

    B. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (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.\44\ The changes to compliance dates affected by this release

    will not impose any new recordkeeping or information collection

    requirements, or other collections of information that require approval

    of the Office of Management and Budget under the PRA. The Commission

    invites public comment on the accuracy of its estimate that no

    additional information collection requirements or changes to existing

    collection requirements would result from the rules proposed herein.

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

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

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

    C. Considerations of the Costs and Benefits

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

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing an order. Section 15(a) further specifies that

    the costs and benefits shall be evaluated in light of the following

    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.

    1. Background

    The Commission is changing its compliance dates for amendments to

    specific sections of subparts H, I and F of part 23 of the Commission

    regulations. Subpart H to part 23 sets forth business conduct standards

    for SDs and MSPs in their dealings with counterparties. SDs and MSPs

    are required to comply with the requirements found in subpart H to part

    23 by January 1, 2013. The changes to compliance dates for Sec. Sec.

    23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2),

    (b), and (c); 23.440; and 23.450 contained in subpart H rules will

    extend the compliance dates for these provisions until May 1, 2013.

    Compliance dates for all other provisions of subpart H of part 23

    remain unchanged.

    With regard to the portfolio reconciliation requirements found in

    Sec. 23.502, for those SDs and MSPs that have been previously

    regulated by a prudential regulator, the Commission had provided for a

    compliance date of December 11, 2012. The compliance date for SDs and

    MSPs that have not been previously regulated was March 11, 2013. The

    earliest that an SD or MSP would be required to comply with the swap

    trading relationship documentation requirements of Sec. 23.504 is

    January 1, 2013. The earliest that an SD or MSP would be required to

    comply with the end user documentation requirements of Sec. 23.505 is

    December 31, 2012. The changes to compliance dates for Sec. Sec.

    23.502 and 23.504 contained in subpart I will extend the compliance

    dates for these provisions until July 1, 2013. The changes to

    compliance dates for Sec. 23.505 will extend the compliance date for

    this rule until May 1, 2013.

    With regard to the general records requirements found in Sec.

    23.201 of

    [[Page 22]]

    subpart F of part 23, the earliest that an SD or MSP would be required

    to comply with such requirements is December 31, 2012. The changes to

    compliance dates for Sec. 23.201 will extend the compliance date for

    certain provisions of this rule until May 1, 2013.

    The changes to compliance dates being adopted do not change the

    substance of the rules; rather, they merely provide additional time by

    which parties can comply. As such, the costs and benefits of the

    Commission's action relate only to the additional time provided.

    2. Costs

    The Commission does not anticipate there being any new,

    quantifiable costs attributable to these changes to compliance dates

    being adopted because it is only extending the compliance dates for

    certain requirements in part 23 of the Commission's regulations. At the

    same time, however, the Commission is mindful that a delay in the

    protections afforded by the regulations could result in costs to the

    public, even if the same is not amenable to quantification. The

    Commission believes, however, that these costs are mitigated by the

    maintenance of various other provisions relating to (i) prohibitions on

    fraud, manipulation and abusive practices, (ii) fair dealings in

    communications, and (iii) reasonable diligence regarding recommended

    swaps. These provisions are unaffected by delayed compliance from this

    extension. The Commission invites comments from the public on any

    costs, quantitative and qualitative, arising from the delay granted by

    the changes to compliance dates being adopted.

    3. Benefits

    The additional time for compliance provided for in this release

    will yield substantial benefit for market participants and the public

    alike. Absent this extension, market participants would be required to

    implement temporary solutions while the more permanent, industry wide

    solutions described earlier are finalized. The Commission believes that

    this duplication of efforts to achieve compliance would impose

    extensive burdens and costs on parties without any concomitant benefit

    to the public. Moreover, the Commission is concerned that based on the

    representations made by market participants, absent the changes to

    compliance dates being adopted, market participants might exit the

    market or curtail their swaps activity due to a lack of legal certainty

    and protection afforded by Commission relief. If that were to occur,

    the Commission expects that reduced market liquidity would increase the

    costs of hedging, which would then be passed on the public in the form

    of higher costs.

    4. Section 15(a)

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

    effects of its actions in light of the following five factors:

    a. Protection of Market Participants and the Public

    The Commission believes that by extending the compliance date for

    certain regulations in part 23, market participants will be able to

    continue to participate in the swaps market without concerns about

    potential consequences of failure to comply with the specified

    regulations. This will, in turn, protect the public by ensuring that

    the economy does not suffer as a result of any unintended consequences

    that may have arisen if market participants exited the swaps market.

    The Commission recognizes that any delay in compliance with the

    aforementioned business conduct and documentation requirements

    continues to leave the public without the protections and attendant

    benefits of those requirements. However, the Commission believes that

    delaying compliance for only certain business conduct and documentation

    requirements, while retaining the original compliance dates for

    fundamental counterparty protections relating to (i) prohibitions on

    fraud, manipulation and abusive practices, (ii) fair dealings in

    communications, and (iii) reasonable diligence regarding recommended

    swaps, will mitigate those effects while avoiding this risk that market

    participants will exit the market due to legal uncertainty.

    b. Efficiency, Competitiveness, and Financial Integrity of Markets

    The Commission believes that extending the compliance dates for the

    aforementioned rules will help protect the efficiency and

    competitiveness of the markets by obviating the need to stop

    transacting in swaps due to delay in complying with specific Commission

    regulations. It will also strengthen the financial integrity of markets

    by ensuring that market participants do not transact in the swaps

    markets while not being in full compliance with these regulations.

    c. Price Discovery

    If concerns regarding non-compliance results in a reduction in

    participation by a large number of market participants, such a decrease

    in swaps activity will adversely impact the price discovery process of

    the swaps markets.

    d. Sound Risk Management

    If counterparties refrain from transacting in swaps, the ability of

    other market participants to hedge their risks using these instruments

    may suffer. By mitigating the concerns of market participants regarding

    compliance with Commission rules, the changes to compliance dates being

    adopted herein help ensure that, while firms diligently complete the

    compliance requirements, they can continue entering into swap

    transactions to hedge their business and investment risks.

    e. Other Public Interest Considerations

    The Commission has not identified an impact on other public

    interest considerations, other than those mentioned above, as a result

    of the changes to compliance dates being adopted herein, but seeks

    comment as to any potential impact on this and other 15(a) factors.

    Issued in Washington, DC on December 18, 2012, by the

    Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Appendix to Business Conduct and Documentation Requirements for Swap

    Dealers and Major Swap Participants--Commission Voting Summary

    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.

    [FR Doc. 2012-30885 Filed 12-31-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 2, 2013



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