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2014-00080

  • Federal Register, Volume 79 Issue 5 (Wednesday, January 8, 2014)[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]

    [Proposed Rules]

    [Pages 1347-1349]

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

    [FR Doc No: 2014-00080]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    Request for Comment on Application of Commission Regulations to

    Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties

    Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in

    the United States

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Request for comment.

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

    requesting comment on an advisory issued by Commission staff on

    November 14, 2013 (the ``Staff Advisory''), regarding the applicability

    of certain Commission regulations to the activity in the United States

    of swap dealers (``SDs'') and major swap participants (``MSPs'')

    registered with the Commission that are established in jurisdictions

    other than the United States (whether an affiliate or not of a U.S.

    person, a ``non-U.S. SD'' or ``non-U.S. MSP'').

    DATES: Comments must be received on or before March 10, 2014.

    ADDRESSES: You may submit comments 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: Melissa D. Jurgens, 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 may be posted as received to http://www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that may be exempt from disclosure under the Freedom of Information

    Act, a petition for confidential treatment of the exempt information

    may be submitted according to the established procedures in CFTC

    Regulation 145.9 (17 CFR 145.9).

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

    review,

    [[Page 1348]]

    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: Gary Barnett, Director, 202-418-5977,

    gbarnett@cftc.gov, or Frank Fisanich, Chief Counsel, 202-418-5949,

    ffisanich@cftc.gov, Division of Swap Dealer and Intermediary Oversight,

    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 Wall Street

    Reform and Consumer Protection Act \1\ (``Dodd-Frank Act'' or ``Dodd-

    Frank''), which, in Title VII, established a new regulatory framework

    for swaps.

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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).

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    In the three years since the enactment of Dodd-Frank, the

    Commission has finalized 68 rules, orders, and guidance statements in

    the process of implementing Title VII of the Dodd-Frank Act. The

    finalized rules promulgated under section 4s of the CEA, added by the

    Dodd-Frank Act, address registration of SDs and MSPs and other

    substantive requirements applicable to SDs and MSPs, while guidance

    published by the Commission provided the Commission's general views

    regarding the scope of the cross-border application of such rules.\2\

    Among other things, the Guidance sets forth the Commission's general

    views on how it ordinarily expects to apply, in accordance with section

    2(i) of the CEA, the CEA and certain Commission regulations applicable

    on a transaction-by-transaction basis (the ``transactional

    requirements'') to swaps between a non-U.S. SD and a non-U.S. person,

    including swaps involving guaranteed or conduit affiliates of U.S.

    persons.\3\ In addition, the Guidance addressed the circumstances under

    which the transactional requirements could be satisfied through

    substituted compliance.\4\

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    \2\ See Interpretive Guidance and Policy Statement Regarding

    Compliance with Certain Swap Regulations 78 FR 45292 (July 26, 2013)

    (hereinafter, the ``Guidance'').

    \3\ For purposes of this notice, the Commission would generally

    interpret the terms ``U.S. person,'' ``guaranteed affiliate,'' and

    ``affiliate conduit'' in the same way as described in the Guidance,

    78 FR at 45316-45317, 45350-45359. The Commission uses the term

    ``non-U.S. person'' to refer to any person outside its

    interpretation of the term ``U.S. person.''

    \4\ The Guidance generally describes the policy and procedural

    framework under which the Commission would consider a substituted

    compliance program with respect to Commission regulations applicable

    to non-U.S. SDs. Specifically, the Commission described

    circumstances where it expected that compliance with a comparable

    regulatory requirement of a foreign jurisdiction would serve as a

    reasonable substitute for compliance with the attendant requirements

    of the CEA and the Commission's regulations, 78 FR at 45342-45344.

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    With few exceptions, the delayed compliance dates for the

    Commission's regulations implementing requirements of section 4s of the

    CEA have passed and SDs and MSPs are now required to be in full

    compliance with such regulations upon registration with the

    Commission.\5\

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    \5\ 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.)

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    Subsequent to publication of the Guidance, swap market participants

    have raised questions with Commission staff regarding compliance by

    non-U.S. SDs with the transactional requirements when using personnel

    or agents located in the United States to enter into swaps with non-

    U.S. persons. In other words, swap market participants have asked

    whether the transactional requirements would apply to these swaps (and

    if so, whether substituted compliance may be available for these swaps)

    even though such swaps are between two non-U.S. persons, regardless of

    whether the activities of the non-U.S. SD that lead to such swaps take

    place in the United States.

    In response to these inquires, the Staff Advisory \6\ was issued,

    stating that for swaps between a non-U.S. SD and a non-U.S. person, the

    transactional requirements either do not apply or, in some cases, may

    be subject to substituted compliance if the activities of the non-U.S.

    SD take place outside the United States. The Staff Advisory further

    stated that, for transactions arranged, executed, or negotiated by

    personnel or agents located in the United States of non-U.S. SDs

    (whether affiliates or not of a U.S. person) regularly using personnel

    or agents located in the U.S. to arrange, negotiate, or execute swaps

    with non-U.S. persons (the ``Covered Transactions''), the non-U.S. SD

    generally would be required to comply with the transactional

    requirements. The Staff Advisory further stated that this view would

    also apply to a Covered Transaction booked in a non-U.S. branch of the

    non-U.S. SD.\7\

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    \6\ Division of Swap Dealer and Intermediary Oversight,

    Applicability of Transaction-Level Requirements to Activity in the

    United States, Nov. 14, 2013. Available at: http://www.cftc.gov/ucm/groups/public/@1rlettergeneral/documents/letter/13-69.pdf. As stated

    in the Staff Advisory, the advisory, and the views expressed

    therein, represent the views of the Division of Swap Dealer and

    Intermediary Oversight only, and do not represent the position or

    view of the Commission or of any other office or division of the

    Commission.

    \7\ See the Staff Advisory, supra note 6.

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    The Commission notes that subsequent to the Staff Advisory, the

    Commission's Divisions of Swap Dealer and Intermediary Oversight,

    Market Oversight, and Clearing and Risk provided non-U.S. SDs time-

    limited staff no-action relief from certain transactional requirements

    for Covered Transactions,\8\ and have recently extended such relief

    until September 15, 2014, subject to certain terms and conditions

    stated in such Divisions' no-action letter.\9\

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    \8\ See CFTC Staff Letter 13-71, available on the Commission's

    Web site: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.

    \9\ See CFTC Staff Letter 14-01, available on the Commission's

    Web site.

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    II. Request for Comment

    In view of the complex legal and policy issues involved with

    respect to the Staff Advisory, the Commission is soliciting comment

    from all interested parties to further inform the Commission's and its

    staff's deliberations regarding the subjects addressed in the Staff

    Advisory.

    Accordingly, the Commission requests comment on all aspects of the

    Staff Advisory, including but not limited to the following points. If a

    comment relates to one of the specific points noted below, please

    identify the point by number and provide a detailed rationale

    supporting the response.

    1. The Commission invites comment on whether the Commission should

    adopt the Staff Advisory as Commission policy, in whole or in part.

    2. The Commission invites commenters to provide their views on

    whether transactional requirements should apply to Covered Transactions

    with non-U.S. persons who are not guaranteed or conduit affiliates of

    U.S. persons. Please provide a detailed analysis of any such view and

    its effect on other aspects of the Commission's cross-border policy, if

    any.

    3. The Commission invites comment on whether there should be any

    differentiation in treatment of swaps with non-U.S. counterparties

    depending on the nature of the SD (i.e., whether it is a guaranteed

    affiliate or a conduit affiliate of a U.S. person).

    [[Page 1349]]

    4. To the extent a non-U.S. SD must comply with the transactional

    requirements when entering a Covered Transaction, should the non-U.S.

    SD be able to rely on a substituted compliance program for purposes of

    complying with the relevant transactional requirements? If so, should

    substituted compliance be available for all transactional requirements

    or only specific requirements? Which requirements? Would the response

    be different depending on the nature of the counterparty (i.e., whether

    the non-U.S. counterparty is a guaranteed affiliate or a conduit

    affiliate of a U.S. person)?

    5. The Commission invites comment on the meaning of ``regularly''

    in the phrase ``persons regularly arranging, negotiating, or executing

    swaps for or on behalf of an SD'' and whether such persons are

    performing core, front-office activities of that SD's swap dealing

    business. If not, what specific activities would constitute the core,

    front-office activities of an SD's swap dealing business? What

    characteristics or factors distinguish a ``core, front-office''

    activity from other activities? Please be exhaustive in describing such

    activities.

    6. The Commission invites comment on the scope and degree of

    ``arranging, negotiating, or executing'' swaps as used in this context.

    Issued in Washington, DC, on January 3, 2014, by the Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendices To Request for Comment on Application of Commission

    Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S.

    Counterparties Involving Personnel or Agents of the Non-U.S. Swap

    Dealers Located in the United States

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

    Wetjen voted in the affirmative. Commissioner O'Malia voted in the

    negative.

    Appendix 2--Dissenting Statement of Commissioner Scott D. O'Malia

    If you thought that the Commission's approach last year

    regarding cross-border issues resulted in an unsound rulemaking

    process, the start of 2014 is no better.

    Today's announcement of the request for comment on a staff

    Advisory abrogates the Commission's fundamental legal obligations

    under the Administrative Procedure Act (``APA'') and provides

    another example of the Commission's unsound rule implementation

    process.

    Making matters worse, today's request for comment is completely

    outside the scope of the cross-border Guidance and the Exemptive

    Order as the Commission did not address the issue relating to swaps

    negotiated between non-U.S. swap dealers (``SDs'') and non-U.S.

    counterparties acting through agents of the non-U.S. SDs located in

    the United States. This is simply a strategic move by the Commission

    to try to duck blame for consistently circumventing the fundamental

    tenets of the APA and failing to adhere faithfully to the express

    congressional directive to limit the extraterritorial application of

    the Dodd-Frank Act to foreign transactions that ``have a direct and

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

    the United States.'' \1\

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    \1\ 7 U.S.C. 2(i).

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    Moreover, I question why the Commission has decided to request

    comment on a narrow issue of the extraterritorial application of

    Dodd-Frank, while essentially ignoring the dozens of comments

    already filed as part of the Commission's cross-border Exemptive

    Order.\2\ Simply requesting comment on a staff Advisory does not

    endorse the validity of the cross-border Guidance or the staff

    Advisory issued based on the Guidance.

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    \2\ See Statement of Dissent by Commissioner Scott D. O'Malia,

    Interpretive Guidance and Policy Statement Regarding Compliance With

    Certain Swap Regulations and Related Exemptive Order, July 12, 2013,

    http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

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    Additionally, I have serious concerns with the evolving

    jurisdictional application of the Commission's authority over cross-

    border trades. It appears based on the staff Advisory, that the

    Commission is applying a ``territorial'' jurisdiction test to

    elements of a trade between non-U.S. entities. To better understand

    the legal underpinnings of this position, I have included several

    additional questions to be considered as part of the overall comment

    file. It is my hope that public comments will provide greater

    clarity regarding our cross-border authority and identify areas

    where we must harmonize global rules with our international

    regulatory partners in the near future. It makes no sense to apply

    guidance or staff advisories that do not enjoy the full support and

    authority provided through rulemakings based on the Commodity

    Exchange Act (``CEA'').

    Looking forward into this year, the CFTC needs to do away with

    the reflexive rule implementation process via staff no-action and

    advisories that are not voted on by the Commission. It should be the

    goal of the Commission to develop rules that adhere to the APA and

    ensure proper regulatory oversight, transparency and promote

    competition in the derivatives space.

    In this regard, I would like to seek additional comment on the

    following points:

    1. Please provide your views on whether Covered Transactions

    with non-U.S. persons who are not guaranteed or conduit affiliates

    of U.S. persons meet the direct and significant test under CEA

    section 2(i).\3\ Please provide a detailed analysis of any such view

    and its effect on other aspects of the Commission's cross-border

    policy, if any. Would your view change depending on whether a non-

    U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S.

    person?

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

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    2. CEA section 2(a)(1) \4\ provides for the general

    jurisidiction of the Commission. Please provide your views on

    whether Covered Transactions with non-U.S. persons who are not

    guaranteed or conduit affiliates of U.S. persons fall within the

    Commission's jurisdiction under CEA section 2(a)(1) or any other

    provision of the CEA providing for Commission jurisdiction. Please

    provide a detailed analysis of any such view and its effect on other

    aspects of the Commission's cross-border policy, if any. Would your

    view change depending on the nature of the non-U.S. SD (i.e.,

    whether it is a guaranteed affiliate or a conduit affiliate of a

    U.S. person)?

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    \4\ 7 U.S.C. 2(a)(1).

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    3. To the extent that Covered Transactions fall within the

    Commission's jurisdiction, should a non-U.S. SD be required to

    comply with all, or only certain, Transaction-Level Requirements?

    Please provide a detailed analysis of any such view and its effect

    on other aspects of the Commission's cross-border policy, if any.

    Would your view change depending on the nature of the non-U.S. SD

    (i.e., whether it is a guaranteed affiliate or a conduit affiliate

    of a U.S. person)?

    4. In the open meeting to consider the cross-border final

    guidance and cross-border phase-in exemptive order, I asked about

    the Commission's enforcement and legal authority under the cross-

    border guidance. The Commission's General Counsel replied, ``[T]he

    guidance itself is not binding strictly. We couldn't go into court

    and, in a count of the complaint, list a violation of the guidance

    as an actionable claim.'' \5\ If the Commission adopts the staff

    Advisory as Commission policy (and not through the rulemaking

    process), please provide your views on the Commission's ability to

    enforce such policy.

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    \5\ Transcript of Open Meeting to Consider Cross-Border Final

    Guidance and Cross-Border Phase-In Exemptive Order (July 12, 2013),

    page 79.

    [FR Doc. 2014-00080 Filed 1-7-14; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 8, 2014



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