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2012-31734

  • Federal Register, Volume 78 Issue 4 (Monday, January 7, 2013)[Federal Register Volume 78, Number 4 (Monday, January 7, 2013)]

    [Proposed Rules]

    [Pages 909-913]

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

    [FR Doc No: 2012-31734]

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    Proposed Rules

    Federal Register

    ________________________________________________________________________

    This section of the FEDERAL REGISTER contains notices to the public of

    the proposed issuance of rules and regulations. The purpose of these

    notices is to give interested persons an opportunity to participate in

    the rule making prior to the adoption of the final rules.

    ========================================================================

    Federal Register / Vol. 78, No. 4 / Monday, January 7, 2013 /

    Proposed Rules

    [[Page 909]]

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    RIN 3038-AD85

    Further Proposed Guidance Regarding Compliance With Certain Swap

    Regulations

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Further Proposed Guidance.

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    SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission

    (``Commission'' or ``CFTC'') published for public comment, pursuant to

    section 4(c) of the Commodity Exchange Act (``CEA''), a proposed order

    (``Proposed Order'') that would grant market participants temporary

    conditional relief from certain provisions of the CEA, as amended by

    Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection

    Act (``Dodd-Frank Act'' or ``Dodd-Frank''), and the Commission also

    published its proposed interpretive guidance and policy statement

    (``Proposed Guidance'') regarding the cross-border application of the

    swap provisions of the CEA as added by Title VII of the Dodd-Frank Act.

    The Commission is proposing further guidance on certain specific

    aspects of the Proposed Guidance (``Further Proposed Guidance''). The

    Commission has separately determined to finalize the Proposed Order.

    DATES: Comments on the Further Proposed Guidance must be received on or

    before February 6, 2013.

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

    by any of the following methods:

    Agency Web Site: http://www.cftc.gov.

    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 instructions for submitting comments.

    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 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 procedure established in CFTC regulation

    145.9 (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: Carlene S. Kim, Deputy General

    Counsel, (202) 418-5613, ckim@cftc.gov, Terry Arbit, Deputy General

    Counsel, (202) 418-5357, tarbit@cftc.gov, Mark Fajfar, Assistant

    General Counsel, (202) 418-6636, mfajfar@cftc.gov, Office of General

    Counsel; Gary Barnett, Director, Division of Swap Dealer and

    Intermediary Oversight, (202) 418-5977, gbarnett@cftc.gov; Jacqueline

    H. Mesa, Director, Office of International Affairs, (202) 418-5386,

    jmesa@cftc.gov; 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\

    which amended the CEA \2\ to establish 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 (``SDs'') and major swap

    participants (``MSPs''); (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. Section 722(d) of the Dodd-Frank Act also

    amended the CEA to add section 2(i), which provides that the swap

    provisions of the CEA apply to cross-border activities when certain

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

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

    the United States'' or when they contravene Commission rulemaking.\3\

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

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

    \2\ 7 U.S.C. 1 et seq. (amended 2010).

    \3\ 7 U.S.C. 2(i).

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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. The finalized

    rules include those promulgated under CEA section 4s,\4\ which address

    registration of SDs and MSPs and other substantive requirements

    applicable to SDs and MSPs. Notably, many section 4s requirements

    applicable to SDs and MSPs are tied to the date on which a person is

    required to register, unless a later compliance date is specified.\5\ A

    number of other rules specifically

    [[Page 910]]

    applicable to SDs and MSPs have been proposed but not finalized.\6\

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    \4\ 7 U.S.C. 6s.

    \5\ Examples of section 4s implementing rules that become

    effective for SDs and MSPs at the time of their registration include

    requirements relating to swap data reporting (Commission regulation

    23.204) and conflicts of interest (Commission regulation 23.605 (c)-

    (d)). The chief compliance officer requirement (Commission

    regulations 3.1 and 3.3) is an example of those rules that have

    specific compliance dates. The compliance dates are summarized on

    the Compliance Dates page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm).

    \6\ These include rules under CEA section 4s(e), 7 U.S.C. 6s(e)

    (governing capital and margin requirements for SDs and MSPs).

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    Further, the Commission published for public comment the Proposed

    Guidance,\7\ which set forth the manner in which it proposed to

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

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

    thereunder regarding cross-border swap activities. Specifically, in the

    Proposed Guidance, the Commission described the general manner in which

    it proposed to consider: (1) Whether a non-U.S. person's swap dealing

    activities are sufficient to require registration as a ``swap

    dealer'',\8\ as further defined in a joint release adopted by the

    Commission and the Securities and Exchange Commission (``SEC'')

    (collectively, the ``Commissions''); \9\ (2) whether a non-U.S.

    person's swap positions are sufficient to require registration as a

    ``major swap participant,'' \10\ as further defined in the Final

    Entities Rules; 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 Proposed Guidance also generally described the policy and

    procedural framework under which the Commission may permit compliance

    with a comparable regulatory requirement of a foreign jurisdiction to

    substitute for compliance with the requirements of the CEA. Last, the

    Proposed Guidance set forth the manner in which the Commission proposed

    to interpret section 2(i) of the CEA as it applies to the clearing,

    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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    \7\ ``Cross-Border Application of Certain Swaps Provisions of

    the Commodity Exchange Act,'' 77 FR 41214, Jul. 12, 2012.

    \8\ 7 U.S.C. 1a(49).

    \9\ 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 (``Final Entities Rules'').

    \10\ 7 U.S.C. 1a(33).

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    Contemporaneously with the Proposed Guidance, the Commission

    published the Proposed Order pursuant to section 4(c) of the CEA,\11\

    in order to foster an orderly transition to the new swaps regulatory

    regime and to provide market participants greater certainty regarding

    their obligations with respect to cross-border swap activities during

    the pendency of the Proposed Order. The Proposed Order would grant

    temporary relief from certain swap provisions of Title VII of the Dodd-

    Frank Act.

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    \11\ ``Exemptive Order Regarding Compliance With Certain Swap

    Regulations,'' 77 FR 41110 Jul. 12, 2012.

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

    The public comment periods on the Proposed Order and the Proposed

    Guidance ended on August 13, 2012 and August 27, 2012, respectively.

    The Commission received approximately 26 letters on the Proposed Order

    and approximately 288 letters on the Proposed Guidance from a variety

    of market participants and other interested parties, including major

    U.S. and non-U.S. banks and financial institutions that conduct global

    swaps business, trade associations, clearing organizations, law firms

    (representing international banks and dealers), individual citizens,

    and foreign regulators.\12\ The Commission staff also held numerous

    meetings and discussions with various market participants, domestic

    bank regulators, and other interested parties to discuss the Proposed

    Order and the Proposed Guidance.\13\

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    \12\ Some of the commenters submitted a single comment letter

    addressing both the Proposed Order and the Proposed Guidance. The

    comment letters submitted in response to the Proposed Order and

    Proposed Guidance may be found on the Commission's Web site at

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.

    Approximately 200 individuals submitted substantially identical

    letters to the effect that oversight of the $700 trillion global

    derivatives market is the key to meaningful reform. The letters

    stated that because the market is inherently global, risks can be

    transferred around the world with the touch of a button. Further,

    according to these letters, loopholes in the Proposed Guidance could

    allow foreign affiliates of Wall Street banks to escape regulation.

    Lastly, the letters requested that the Proposed Guidance be

    strengthened to ensure that the Dodd-Frank derivatives protections

    will directly apply to the full global activities of all important

    participants in the U.S. derivatives markets.

    \13\ The records of these meetings and communications can be

    found on the Commission's Web site at: http://cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

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

    Further, the Commission staff closely consulted with the staff of

    the SEC in an effort to increase understanding of each other's

    regulatory approaches and to harmonize the cross-border approaches of

    the two agencies to the greatest extent possible, consistent with their

    respective statutory mandates.\14\ The Commission expects that this

    consultative process will continue as each agency works towards

    implementing its respective cross-border policy.

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    \14\ In addition to differences in the applicable statutory

    provisions, there are also differences in the markets and products

    overseen by each agency, which may lead to divergent approaches to

    cross-border activities.

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

    The Commission also recognizes the critical role of international

    cooperation and coordination in the regulation of derivatives in the

    highly interconnected global market, where risks are transmitted across

    national borders and market participants operate in multiple

    jurisdictions. Close cooperative relationships and coordination with

    other jurisdictions take on even greater importance given that, prior

    to the recent reforms, the swaps market has largely operated without

    regulatory oversight and many jurisdictions are in differing stages of

    implementing their regulatory reform. To this end, the Commission staff

    has actively engaged in discussions with their foreign counterparts in

    an effort to better understand and develop a more harmonized cross-

    border regulatory framework. The Commission expects that these

    discussions will continue as it finalizes the cross-border interpretive

    guidance and as other jurisdictions develop their own regulatory

    requirements for derivatives.\15\

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    \15\ This is one aspect of the Commission's on-going bilateral

    and multilateral efforts to promote international coordination of

    regulatory reform. The Commission staff is engaged in consultations

    with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada,

    Australia, Brazil, and Mexico on derivatives reform. In addition,

    the Commission staff is participating in several standard-setting

    initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and

    has created an informal working group of derivatives regulators to

    discuss implementation of derivatives reform. See also Joint Press

    Statement of Leaders on Operating Principles and Areas of

    Exploration in the Regulation of the Cross-border OTC Derivatives

    Market, included in CFTC Press Release 6439-12, Dec. 4, 2012.

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    The Commission has determined not to take further action on the

    Proposed Guidance at this time. The Commission believes it will be

    beneficial to have further consultations with other domestic and

    international regulators in an effort to harmonize cross-border

    regulatory approaches prior to taking action with respect to the

    Proposed Guidance. The Commission also believes that further

    consideration of public comments, including the comments that may be

    received on the Further Proposed Guidance regarding the Commission's

    interpretation of the term ``U.S. person,'' and its guidance regarding

    aggregation for purposes of SD registration, will be helpful to the

    Commission in issuing final interpretive guidance.

    Nonetheless, the Commission has separately determined to finalize

    the Proposed Order as a final, time-limited exemptive order (``Final

    Order'') that is substantially similar to the Proposed Order, except

    for the addition of provisions regarding registration and certain

    modifications and clarifications

    [[Page 911]]

    addressing public comments.\16\ Under the Final Order, a non-U.S.

    person that registers as an SD or MSP may delay compliance with certain

    entity-level requirements of the CEA (and Commission regulations

    promulgated thereunder), and non-U.S. SDs and MSPs and foreign branches

    of U.S. SDs and MSPs may delay compliance with certain transaction-

    level requirements of the CEA (and Commission regulations promulgated

    thereunder), subject to specified conditions. Recently, the Commission

    staff granted time-limited, no-action relief to promote continuity in

    the application of Dodd-Frank requirements and facilitate the

    transition to those requirements by enabling swap market participants

    to apply a uniform and readily ascertainable standard regarding which

    swaps must be included in the calculations under the SD and MSP

    definitions.\17\ The Final Order continues that process and furthers

    the same purposes.\18\

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    \16\ See ``Final Exemptive Order Regarding Compliance with

    Certain Swap Regulations,'' Dec. 21, 2012.

    \17\ See CFTC Division of Swap Dealer and Intermediary

    Oversight, Re: Time-Limited No-Action Relief: Swaps Only With

    Certain Persons to be Included in Calculation of Aggregate Gross

    Notional Amount for Purposes of Swap Dealer De Minimis Exception and

    Calculation of Whether a Person is a Major Swap Participant, No-

    Action Letter No. 12-22, Oct. 12, 2012 (``CFTC Letter No. 12-22'').

    \18\ The Commission intends that the Final Order is in addition

    to any no-action relief issued or to be issued by the Commission

    staff. Unless specifically provided in any letter providing no-

    action relief, the Final Order does not limit the availability of

    any no-action relief.

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    This release sets forth the Further Proposed Guidance.

    II. Further Proposed Guidance

    The Commission continues to review and consider the comments

    received on the Proposed Guidance, and to discuss these issues with

    domestic and foreign regulators. In this process, the Commission is

    considering several approaches that may further the purposes of the

    Proposed Guidance, which include enabling swap market participants to

    apply a uniform and readily ascertainable standard regarding which

    swaps must be included in the calculations under the SD and MSP

    definitions. In order to facilitate the Commission's further

    consideration of these issues, the Commission seeks comment on the

    following proposed interpretations.

    A. Aggregation of Affiliates' Swaps for Purposes of the De Minimis Test

    Commission regulation 1.3(ggg)(4) requires that a person include,

    in determining whether its swap dealing activities exceed the de

    minimis threshold, the aggregate notional value of swap dealing

    transactions entered by its affiliates under common control.\19\ Under

    the Proposed Guidance, a non-U.S. person, in determining whether its

    swap dealing transactions exceed the de minimis threshold, would

    include the aggregate notional value of swap dealing transactions

    entered into by its non-U.S. affiliates under common control but would

    not include the aggregate notional value of swap dealing transactions

    entered into by its U.S. affiliates.\20\ The Final Order provides that

    a non-U.S. person is not required to include, in its determination of

    whether it exceeds the de minimis threshold, the swap dealing

    transactions of any of its U.S. affiliates, and a non-U.S. person that

    is an affiliate of a person that is registered as an SD is not required

    to include in such determination the swap dealing transactions of any

    of its non-U.S. affiliates that engage in swap dealing activities, so

    long as such excluded affiliates are either (1) engaged in swap dealing

    activities with U.S. persons as of the effective date of the Final

    Order or (2) registered as an SD.\21\

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    \19\ 17 CFR 1.3(ggg)(4).

    \20\ Proposed Guidance, 77 FR at 41218-41220. Further, where the

    potential non-U.S. SD's swap obligations are guaranteed by a U.S.

    person, the non-U.S. person would be required to register with the

    Commission as an SD when the aggregate notional value of its swap

    dealing activities (along with the swap dealing activities of its

    non-U.S. affiliates that are under common control and also

    guaranteed by a U.S. person) with U.S. persons and non-U.S. persons

    exceeds the de minimis threshold. Additionally, the Proposed

    Guidance clarified that a non-U.S. person without a guarantee from a

    U.S. person would not be required to register as an SD if it does

    not engage in swap dealing with U.S. persons as part of ``a regular

    business'' with U.S. persons, even if the non-U.S. person engages in

    dealing with non-U.S. persons.

    \21\ See Final Order paragraph (3). For this purpose, the

    Commission construes ``affiliates'' to include persons under common

    control as stated in the Final Entities Rules with respect to the

    term ``swap dealer,'' which defines control as ``the possession,

    direct or indirect, of the power to direct or cause the direction of

    the management and policies of a person, whether through the

    ownership of voting securities, by contract or otherwise.'' See

    Final Entities Rules, 77 FR at 30631, fn. 437.

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

    The Commission also is proposing an alternative interpretation of

    the aggregation requirement in Commission regulation 1.3(ggg)(4). Under

    this alternative, a non-U.S. person would be required, in determining

    whether its swap dealing transactions exceed the de minimis threshold,

    to include the aggregate notional value of swap dealing transactions

    entered into by all its affiliates under common control (i.e., both

    non-U.S. affiliates and U.S. affiliates), but would not be required to

    include in such determination the aggregate notional value of swap

    dealing transactions of any non-U.S. affiliate under common control

    that is registered as an SD.\22\

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

    \22\ Also, under this alternative, a non-U.S. person would not

    be required to include the aggregate notional value of swap dealing

    transactions of any of its non-U.S. affiliates under common control

    where the counterparty to such affiliate is also a non-U.S. person.

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

    Under the aggregation rule stated in Commission regulation

    1.3(ggg)(4), any affiliate of a person that is registered as an SD will

    also have to register if it engages in any swap dealing transactions,

    even if the aggregate amount of such swap dealing transactions among

    all the unregistered affiliates is below the de minimis threshold.

    Based on comments received, the Commission understands that the

    application of this requirement to non-U.S. affiliates of non-U.S. SDs

    may, in certain circumstances, impose significant burdens on such non-

    U.S. affiliates without advancing significant regulatory interests of

    the Commission. Because the conduct of swap dealing business through

    locally-organized affiliates may in some cases be required in order to

    comply with legal requirements or business practices in foreign

    jurisdictions, such non-U.S. affiliates may be numerous and it would be

    impractical to require all such non-U.S. affiliates to register as SDs.

    Further, the Commission's interest in registration may be reduced for a

    non-U.S. affiliate of a registered non-U.S. SD where the non-U.S.

    affiliate (or group of such affiliates) engages in only a small amount

    of swap dealing activity with U.S. persons.

    On the other hand, the Commission has also considered that given

    the borderless nature of swap dealing activities, an SD may conduct

    swap dealing activities through various affiliates in different

    jurisdictions, which suggests that its interpretation should take into

    account the applicable swap dealing transactions entered by all of a

    non-U.S. person's affiliates under common control worldwide. Otherwise,

    affiliated persons may not be required to register solely because their

    swap dealing activities are divided, such that each affiliate falls

    below the de minimis level. The Commission is concerned that permitting

    such affiliates whose swap dealing activities individually fall below

    the de minimis level, but whose swap dealing activities in the

    aggregate exceed the de minimis level, to avoid registration as SDs

    would provide an incentive for firms to spread their swap dealing

    activities among several unregistered affiliates rather than centralize

    their swap dealing in

    [[Page 912]]

    registered firms. Such a result would increase systemic risks to U.S.

    market participants and impede the Commission's ability to protect U.S.

    markets.

    The Commission requests comment on all aspects of this proposed

    alternative approach. In particular, should this interpretation apply

    to non-U.S. persons that are guaranteed by a U.S. person with respect

    to their swap obligations in the same way that it applies to non-U.S.

    persons that are not so guaranteed? If so, should the Commission

    continue to construe the term ``guarantee'' for this purpose to mean

    any collateral promise by a guarantor to answer for the debt or

    obligation of an obligor under a swap? \23\ Should the term

    ``guarantee'' include arrangements such as keepwells and liquidity

    puts?

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    \23\ See ``Further Definition of `Swap,' `Security-Based Swap,'

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

    Swap Agreement Recordkeeping,'' 77 FR 48207, 48225 fn. 185, Aug. 13,

    2012.

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    Would it be appropriate that non-U.S. persons are not required to

    include in the de minimis calculation the swap dealing transactions of

    their U.S. affiliates under common control? Alternatively, should non-

    U.S. persons be permitted to exclude from the de minimis calculation

    the swap dealing transactions of their U.S. affiliates under common

    control that are registered as SDs?

    To the extent that the Commission adopts a final interpretation

    that does not require a person to include the swap dealing activities

    of one or more of its affiliates under common control in its

    determination of whether its swap dealing activity exceeds the de

    minimis threshold, the Commission is interested in commenters' views as

    to whether a person engaged in swap dealing activities could take

    advantage of such an interpretation to spread its swap dealing

    activities into multiple affiliates, each under the de minimis

    threshold, and therefore avoid the registration requirement, even

    though its aggregate level of swap dealing by the affiliates exceeds

    the de minimis threshold. Accordingly, if the Commission were to adopt

    such an interpretation with respect to aggregation, should the

    Commission include any conditions or limits in any such interpretation

    on the overall amount of swap dealing engaged in by unregistered

    persons within an affiliated group?

    B. Definition of ``U.S. Person''

    As noted above, in the Proposed Guidance the term ``U.S. person''

    would be defined by reference to the extent to which swap activities or

    transactions involving one or more such persons have the relevant

    connection with activities in, or effect on, U.S. commerce.\24\ That

    is, the term ``U.S. person'' identifies those persons whose swap

    activities--either individually or in the aggregate--satisfy the

    jurisdictional nexus under section 2(i) of the CEA.

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

    \24\ See Proposed Guidance, 77 FR at 41218. Specifically, as set

    forth in the Proposed Guidance, the definition of the term ``U.S.

    person'' would include, but not be limited to:

    (i) Any natural person who is a resident of the United States;

    (ii) 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

    that is either (A) organized or incorporated under the laws of the

    United States 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 owners is a U.S. person;

    (iii) Any individual account (discretionary or not) where the

    beneficial owner is a U.S. person;

    (iv) 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 is held, directly or

    indirectly, by a U.S. person(s);

    (v) 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;

    (vi) A pension plan for the employees, officers or principals of

    a legal entity with its principal place of business inside the

    United States; and

    (vii) An estate or trust, the income of which is subject to U.S.

    income tax regardless of source.

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    The Commission is proposing alternatives for two ``prongs'' of the

    proposed definition of the term ``U.S. person'' in the Proposed

    Guidance: Prong (ii)(B), which relates to U.S. owners that are

    responsible for the liabilities of a non-U.S. entity; and prong (iv),

    which relates to commodity pools and funds with majority-U.S.

    ownership.

    The Commission's proposed alternative version of prong (ii)(B)

    would limit its scope to a legal entity that is directly or indirectly

    majority-owned by one or more natural persons or legal entities that

    meet prong (i) or (ii) of the definition of the term ``U.S. person'' in

    the Final Order, in which such U.S. person(s) bears unlimited

    responsibility for the obligations and liabilities of the legal entity.

    This alternative prong (ii)(B) would not include an entity that is a

    limited liability company or limited liability partnership where

    partners have limited liability. Further, the majority-ownership

    criterion would avoid capturing those legal entities that have

    negligible U.S. ownership interests. Unlimited liability corporations

    where U.S. persons have majority ownership and where such U.S. persons

    have unlimited liability for the obligations and liabilities of the

    entity would be covered under this alternative to prong (ii)(B).\25\

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    \25\ Unlimited liability corporations include, solely by way of

    example, entities such as an unlimited company formed in the U.K.

    (see Brian Stewart, Doing Business in the United Kingdom Sec.

    18.02[2][c]) or an unlimited liability company formed under the law

    of Alberta, British Columbia or Nova Scotia (see Richard E.

    Johnston, Doing Business in Canada Sec. 15.04[5]).

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    The alternative prong (ii)(B) would be as follows:

    (ii) A 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

    that is either (A) organized or incorporated under the laws of a

    state or other jurisdiction in the United States or having its

    principal place of business in the United States or (B) directly or

    indirectly majority-owned by one or more persons described in prong

    (i) or (ii)(A) and in which such person(s) bears unlimited

    responsibility for the obligations and liabilities of the legal

    entity (other than a limited liability company or limited liability

    partnership where partners have limited liability);

    This alternative proposed prong would treat an entity as a U.S.

    person if one or more of its U.S. majority owners has unlimited

    responsibility for losses of, or nonperformance by, the entity. This

    would reflect that when the structure of an entity is such that the

    U.S. direct or indirect owners are ultimately liable for the entity's

    obligations and liabilities, the connection to activities in, or effect

    on, U.S. commerce satisfies the requisite jurisdictional nexus. This

    ``look-through'' requirement also would serve to prevent persons from

    creating such indirect ownership structures for the purpose of evading

    the Dodd-Frank regulatory regime. However, this alternative proposed

    prong would not cover a legal entity organized or domiciled in a

    foreign jurisdiction simply because the entity's swap obligations are

    guaranteed by a U.S. person.

    The Commission requests comment on all aspects of this alternative

    prong (ii)(B).

    With respect to prong (iv) of the definition of the term ``U.S.

    person'' in the Proposed Guidance, which relates to majority direct- or

    indirect-owned commodity pools, pooled accounts, or collective

    investment vehicles, the Commission is proposing an alternative under

    which any commodity pool, pooled account, investment fund or other

    collective investment vehicle would be deemed a U.S. person if it is

    [[Page 913]]

    (directly or indirectly) majority-owned by one or more natural persons

    or legal entities that meet prong (i) or (ii) of the definition of the

    term ``U.S. person'' in the Final Order. For purposes of this

    alternative prong (iv), majority-owned would mean the beneficial

    ownership of 50 percent or more of the equity or voting interests in

    the collective investment vehicle. The alternative prong (iv) would

    include a minor modification to clarify that it applies regardless of

    whether the collective investment vehicle is organized or incorporated

    in the United States. Similar to the alternative prong (ii)(B)

    discussed above, the collective investment vehicle's place of

    organization or incorporation would not be determinative of its status

    as a U.S. person.

    The alternative prong (iv) would clarify that a pool, fund, or

    other collective investment vehicle that is publicly traded will be

    deemed a U.S. person only if it is offered, directly or indirectly, to

    U.S. persons. This would address concerns expressed by commenters that

    ownership verification is particularly difficult for pools, funds, and

    other collective investment vehicles that are publicly traded.\26\

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

    \26\ See Letter from Security Industry and Financial Markets

    Association (Aug. 27, 2012) at A-20.

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

    The alternative prong (iv) would be as follows:

    (iv) A commodity pool, pooled account, investment fund, or other

    collective investment vehicle that is not described in prong (ii)

    and that is directly or indirectly majority-owned by one or more

    persons described in prong (i) or (ii), except any commodity pool,

    pooled account, investment fund, or other collective investment

    vehicle that is publicly-traded but not offered, directly or

    indirectly, to U.S. persons.

    This alternative proposed prong (iv) is intended to capture

    collective investment vehicles that are created for the purpose of

    pooling assets from U.S. investors and channeling these assets to trade

    or invest in line with the objectives of the U.S. investors, regardless

    of the place of the vehicle's organization or incorporation. These

    collective investment vehicles may serve as a means to achieve the

    investment objectives of their beneficial owners, rather than being

    separate, active operating businesses. As such, the beneficial owners

    would be directly exposed to the risks created by the swaps that their

    collective investment vehicles enter into. The Commission requests

    comment on all aspects of this alternative prong (iv).

    Issued in Washington, DC, on December 21, 2012, by the

    Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Appendices to Further Proposed Guidance Regarding Compliance With

    Certain Swap Regulations--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 Chilton,

    O'Malia and Wetjen voted in the affirmative; Commissioner Sommers

    voted in the negative.

    [FR Doc. 2012-31734 Filed 1-4-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 7, 2013



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