2011-32841

Federal Register, Volume 76 Issue 247 (Friday, December 23, 2011)[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]

[Rules and Regulations]

[Pages 80233-80241]

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

[FR Doc No: 2011-32841]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter 1

Amendment to July 14, 2011 Order for Swap Regulation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: On October 25, 2011, the Commodity Futures Trading Commission

(``CFTC'' or the ``Commission'') published in the Federal Register a

Notice of Proposed Amendment (``Notice'') to extend the temporary

exemptive relief the Commission granted on July 14, 2011 (``July 14

Order'') from certain provisions of the Commodity Exchange Act

(``CEA'') that otherwise would have taken effect on the general

effective date of title VII of the Dodd-Frank Wall Street Reform and

Consumer Protection Act (``the Dodd-Frank Act'')--July 16, 2011. This

final order extends the July 14 Order with certain modifications.

Specifically, it extends the potential latest expiration date of the

July 14 Order from December 31, 2011 to July 16, 2012; and adds

provisions to account for the repeal and replacement (as of December

31, 2011) of part 35 of the Commission's regulations.

DATES: This final order will be effective on December 23, 2011.

FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, (202) 418-

5864, mhiggin[email protected], Office of the General Counsel; Jocelyn

Partridge, Special Counsel, (202) 418-5926, [email protected],

Division of Clearing and Risk; Ryne Miller, Attorney Advisor, (202)

418-5921, [email protected], Division of Market 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 Act into

law.\1\ Title VII of the Dodd-Frank Act amends the CEA \2\ to establish

a comprehensive new regulatory framework for swaps. The legislation was

enacted 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 swap

dealers and major swap participants; (2) imposing clearing and trade

execution requirements on standardized derivative products; (3)

creating robust recordkeeping and real-time reporting regimes; and (4)

enhancing the rulemaking and enforcement authorities of the Commission

with respect to, among others, all registered entities and

intermediaries subject to the Commission's oversight.\3\

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

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

\2\ 7 U.S.C. 1 et seq.

\3\ Title VII also includes amendments to the federal securities

laws to establish a similar regulatory framework for security-based

swaps under the authority of the Securities and Exchange Commission

(``SEC'').

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Section 754 of the Dodd-Frank Act states that, unless otherwise

provided, the provisions of subtitle A of title VII of the Dodd-Frank

Act \4\ ``shall take effect on the later of 360 days after the date of

the enactment of this subtitle or, to the extent a provision of this

subtitle requires a rulemaking, not less than 60 days after publication

of the final rule or regulation implementing such provision of this

subtitle.'' Thus, the general effective date for provisions of title

VII that do not require a rulemaking was July 16, 2011. This includes

the provisions that repealed several provisions of the CEA as in effect

prior to the Dodd-Frank Act that excluded or exempted, in whole or in

part, certain transactions from Commission oversight.\5\

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\4\ All of the amendments to the CEA in title VII are contained

in subtitle A. Accordingly, for convenience, references to ``title

VII'' in this Notice shall refer only to subtitle A of title VII.

\5\ These exclusions and exemptions were contained in former CEA

sections 2(d), 2(e), 2(g), 2(h), and 5d, 7 U.S.C. 2(d), 2(e), 2(g),

2(h), and 7a-3.

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Section 712(d)(1) of the Dodd-Frank Act requires the Commission and

the SEC to undertake a joint rulemaking to ``further define'' certain

terms used in title VII, including the terms ``swap,'' ``swap dealer,''

``major swap participant,'' and ``eligible contract participant.'' \6\

Section 721(c) requires

[[Page 80234]]

the Commission to adopt a rule to ``further define'' the terms

``swap,'' ``swap dealer,'' ``major swap participant,'' and ``eligible

contract participant'' to prevent evasion of statutory and regulatory

obligations.\7\ The Commission and the SEC have jointly issued two

notices of proposed rulemaking that address these further

definitions.\8\

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\6\ Section 712(d)(1) provides: ``Notwithstanding any other

provision of this title and subsections (b) and (c), the Commodity

Futures Trading Commission and the Securities and Exchange

Commission, in consultation with the Board of Governors [of the

Federal Reserve System], shall further define the terms `swap',

`security-based swap', `swap dealer', `security-based swap dealer',

`major swap participant', `major security-based swap participant',

and `security-based swap agreement' in section 1a(47)(A)(v) of the

Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)

of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''

\7\ Section 721(c) provides: ``To include transactions and

entities that have been structured to evade this subtitle (or an

amendment made by this subtitle), the Commodity Futures Trading

Commission shall adopt a rule to further define the terms `swap',

`swap dealer', `major swap participant', and `eligible contract

participant'.''

\8\ See Further Definition of ``Swap Dealer,'' ``Security-Based

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

Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

80174, Dec. 21, 2010 and Further Definition of ``Swap,'' ``Security-

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

Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,

2011.

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The Commission's final rulemakings further defining the terms in

sections 712(d) and 721(c) were not expected to be in effect as of July

16, 2011 (i.e., the general effective date set forth in section 754 of

the Dodd-Frank Act). Accordingly, on July 14, 2011 the Commission

exercised its exemptive authority under CEA section 4(c) \9\ and its

authority under section 712(f) of the Dodd-Frank Act by issuing the

July 14 Order.\10\ In so doing, the Commission sought to address

concerns that had been raised about the applicability of various

regulatory requirements to certain agreements, contracts, and

transactions after July 16, 2011, and thereby ensure that current

practices will not be unduly disrupted during the transition to the new

regulatory regime.\11\

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\9\ 7 U.S.C. 6(c).

\10\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

made effective by the Commission on July 14, 2011; published in the

Federal Register on July 19, 2011). Section 712(f) of the Dodd-Frank

Act states that ``in order to prepare for the effective dates of the

provisions of this Act,'' including the general effective date set

forth in section 754, the Commission may ``exempt persons,

agreements, contracts, or transactions from provisions of this Act,

under the terms contained in this Act.'' Section 754 specifies that

unless otherwise provided in Title VII, provisions requiring a

rulemaking become effective ``not less than 60 days after

publication of the final rule'' (but not before July 16, 2011).

\11\ Concurrent with the July 14 Order, the Commission's

Division of Clearing and Intermediary Oversight and the Division of

Market Oversight (together ``the Divisions'') identified certain

provisions of the Dodd-Frank Act and CEA as amended that would take

effect on July 16, 2011, but that may not be eligible for the

exemptive relief provided by the Commission in its July 14 Order--

specifically, the amendments made to the CEA by Dodd-Frank Act

sections 724(c), 725(a), and 731. On July 14, 2011, the Divisions

issued Staff No-Action Relief addressing the application of these

provisions after July 16, 2011. The Commission staff has informed

the Commission that it is separately considering whether to issue a

no-action letter in which the staff would state that it would not

recommend that the Commission commence an enforcement action against

markets or market participants for failure to comply with the above-

referenced provisions over a period of time co-extensive with that

set forth in this final order.

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II. Description of Relief Provided in July 14 Order

The July 14 Order groups the relevant provisions of the Dodd-Frank

Act into four categories and provides temporary exemptive relief, set

to expire no later than December 31, 2011, with respect to Categories 2

and 3. A summary of the four categories of provisions follows.

Category 1 covers statutory provisions which by their express terms

require a rulemaking. Because, under section 754 of the Dodd-Frank Act,

these provisions do not become effective until at least 60 days after

the final rule is published, no exemptive relief from the general

effective date is necessary. Category 1 provisions include, among

others, the further definitions of terms regarding swap entities or

instruments as required by the Dodd-Frank Act (such as the terms

``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible

contract participant''). Category 1 also includes, among others: (1)

Registration, capital and margin requirements, and business conduct

standards for swap dealers and major swap participants; (2) provisions

prohibiting agricultural swaps except pursuant to CFTC rules; (3) rules

regarding swap execution facilities; and (4) various swap data

recordkeeping and reporting requirements. A complete list of the

Category 1 provisions is included in the appendix to the July 14 Order.

The first part of the relief provided for in the July 14 Order

reaches those Dodd-Frank Act provisions (``Category 2 provisions'')

that are self-effectuating (i.e., do not require a rulemaking) and that

reference one or more of the terms for which the Commission and SEC are

required to provide further definition, including ``swap,'' ``swap

dealer,'' ``major swap participant,'' ``eligible contract

participant,'' and ``security-based swap agreement'' (collectively, the

``referenced terms''). These Category 2 provisions include, for

example, the trade execution requirement of CEA section 2(h)(8), as

amended by Dodd-Frank Act section 723. A complete list of the Category

2 provisions is included in the appendix to the July 14 Order. Because

the Category 2 provisions would have taken effect on July 16, 2011

pursuant to section 754, the Commission granted temporary relief from

those provisions, but only to the extent that the requirements in such

provisions specifically relate to a referenced term that is not yet

further defined. Thus, if a Category 2 provision also applies to

futures or options on futures, the provision took effect on July 16

with respect to futures or options on futures. The exemption for

Category 2 provisions expires on the earlier of: (1) The effective date

of the applicable final rule further defining the relevant term; or (2)

December 31, 2011.

In part two of the July 14 Order, the Commission provides temporary

exemptive relief from the provisions of the CEA that may apply to

certain agreements, contracts, and transactions in exempt or excluded

commodities (generally, financial, energy and metals commodities) as a

result of the repeal of the CEA exemptions and exclusions in former CEA

sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011 pursuant to

sections 723(a)(1) and 734(a) of the Dodd-Frank Act (the ``Category 3

provisions''). As explained in the July 14 Order, this relief is based

on the Commission's existing ``part 35'' exemptive rules.\12\

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\12\ 76 FR at 42514. The July 14 Order did not extend to

agreements, contracts, or transactions that fully met the conditions

of part 35, since in such circumstances further relief was

unnecessary.

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Part 35 originally was promulgated in 1993 pursuant to, among

others, the Commission's general exemptive authority in CEA section

4(c) and its plenary options authority under section 4c(b),\13\ and

provides a broad-based exemption from the CEA for ``swap agreements''

in any commodity. Specifically, part 35 exempts ``swap agreements,'' as

defined therein, from most of the provisions of the CEA if: (1) They

are entered into by ``eligible swap participants'' (``ESPs''); \14\ (2)

they are not part of a fungible class of agreements standardized as to

their material economic terms; (3) the creditworthiness of any party

having an actual or potential obligation under the swap agreement would

be a material

[[Page 80235]]

consideration in entering into or determining the terms of the swap

agreement, including pricing, cost, or credit enhancement terms; and

(4) they are not entered into or traded on a multilateral transaction

execution facility.

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\13\ 7 U.S.C. 6c(b).

\14\ As noted in the July 14 Order, the parties covered under

the ESP definition, while very broad, are not coextensive with those

covered by the terms ``eligible commercial entity'' or ``eligible

contract participant.'' Therefore, it is possible that a small

segment of persons or entities that are currently relying on one or

more of the CEA exclusions or exemptions cited above might not

qualify as an ESP and consequently would not be eligible for part

35. 76 FR at 42511, n. 40.

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Under part two of the relief provided for in the July 14 Order, the

Commission stated that transactions in exempt or excluded commodities

(and persons offering, entering into, or rendering advice or rendering

other services with respect to such transactions) are temporarily

exempt from provisions of the CEA that may apply to such transactions

if such transactions comply with part 35, notwithstanding that: (1) The

transaction may be executed on a multilateral transaction execution

facility; (2) the transaction may be cleared; (3) persons offering or

entering into the transaction may be eligible contract participants as

defined in the CEA (prior to the enactment of the Dodd-Frank Act); (4)

the transaction may be part of a fungible class of agreements that are

standardized as to their material economic terms; and/or (5) no more

than one of the parties to the transaction is entering into the

transaction in conjunction with its line of business, but is neither an

eligible contract participant nor an ESP, and the transaction was not

and is not marketed to the public.\15\

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\15\ 76 FR at 42514. With respect to commodity options, the

Commission clarified that options identified in the swap agreement

definition in paragraph (b)(1)(i) of Sec. 35.1 of the Commission's

regulations and any options captured by the concluding catch-all

language in that paragraph, as well as any options described in

paragraphs (b)(1)(ii) and/or (iii) of Sec. 35.1, involving excluded

or exempt commodities are within the scope of the July 14 Order. 76

FR at 42514-15.

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Thus, for certain transactions, the July 14 Order provides relief

notwithstanding that the transaction may not satisfy certain part 35

requirements (e.g., cleared, executed on a multilateral trade execution

facility, entered into by certain persons that are not eligible

contract participants, etc.). The Commission stated in the July 14

Order that this relief is limited to transactions in exempt and

excluded commodities, and does not extend to transactions in

agricultural commodities, because transactions in agricultural

commodities were not covered by the applicable statutory exclusions and

exemptions in effect prior to July 16, 2011.\16\ The exemption in part

two of the July 14 Order expires on the earlier of: (1) The repeal,

withdrawal or replacement of part 35; or (2) December 31, 2011.

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\16\ The Commission also stated, though, that because part 35

remained in effect at the time of the July 14 Order, market

participants could continue to rely on part 35 with respect to swaps

(other than commodity options) on enumerated agricultural

commodities as defined in CEA section 1a(4) or Sec. 32.2 of the

Commission's regulations, as well as swaps and commodity options on

non-enumerated agricultural commodities, to the extent these

transactions fully comply with part 35. Under the July 14 Order,

market participants also may continue to rely on part 32 for options

on enumerated agricultural commodities to the extent these

transactions are conducted in accordance with Sec. 32.13(g) of the

Commission's regulations. Rule 32.13(g) permits off-exchange options

offered to producers, processors, commercial users or merchants of

the commodity or its products or by-products that have a net worth

of at least $10 million, provided the offeree also has a net worth

of at least $10 million.

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Category 4 contains those Dodd-Frank Act provisions for which the

Commission determined not to issue relief, and which therefore went

into effect on July 16, 2011. A complete list of the Category 4

provisions is included in the appendix to the July 14 Order.

The temporary exemptions issued in the July 14 Order are subject to

several conditions. These conditions provide that the July 14 Order

shall not: (1) Limit in any way the Commission's anti-fraud or anti-

manipulation authority under the CEA; (2) apply to any provision of the

Dodd-Frank Act or the CEA that became effective prior to July 16, 2011;

(3) affect any effective date or compliance date set forth in any

rulemaking issued by the Commission to implement provisions of the

Dodd-Frank Act; (4) limit the Commission's authority under Dodd-Frank

Act section 712(f) to issue rules, orders, or exemptions prior to the

effective date of any provision of the Dodd-Frank Act and the CEA, in

order to prepare for such effective date; and (5) affect the

applicability of any provision of the CEA to futures contracts or

options on futures contracts, or to cash markets.\17\

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\17\ 76 FR at 42522.

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III. Discussion of the Proposed Amendments to the July 14 Order

On October 25, 2011, the Commission published in the Federal

Register a Notice to amend the July 14 Order in two ways.\18\ First,

the Commission proposed to amend the July 14 Order to extend the

potential latest expiry dates. With respect to provisions covered in

the first part of the relief in the July 14 Order, the Commission

proposed that the temporary exemptive relief expire upon the earlier

of: (1) The effective date of the applicable final rule further

defining the relevant referenced term; or (2) July 16, 2012.\19\ This

proposed amendment addressed the potential that, as of December 31,

2011, the CFTC-SEC joint rulemakings ``further defining'' the

referenced terms will not yet be effective. The Commission also

proposed to amend the July 14 Order to extend the expiry date of the

second part of the relief in the July 14 Order until the earlier of:

(1) July 16, 2012; or (2) such other compliance date as may be

determined by the Commission. For the same reason stated by the

Commission in issuing the second part of the relief provided in the

July 14 Order, the Commission proposed extending this exemptive relief

to ``allow markets and market participants to continue to operate under

the regulatory regime as in effect prior to July 16, 2011, but subject

to various implementing regulations that the Commission promulgates and

applies to the subject transactions, market participants, or markets.''

\20\

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\18\ Effective Date for Swap Regulation, 76 FR 65999, Oct. 25,

2011.

\19\ The date of July 16, 2012, is consistent with the potential

transitional period provided in section 723(c) of the Dodd-Frank Act

regarding former CEA section 2(h) and section 734(c) of the Dodd-

Frank Act regarding former CEA section 5d (i.e., for ``not longer

than a 1-year period'' following the general effective date of title

VII).

\20\ 76 FR at 42513.

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Second, the Commission proposed to include within the second part

of the relief any agreement, contract or transaction that fully meets

the conditions in part 35 as in effect prior to December 31, 2011. This

proposed amendment addressed the fact that such transactions, which

were not included within the scope of the July 14 Order because the

exemptive rules in part 35 covered them at that time, now require

temporary relief because part 35 will no longer be available as of

December 31, 2011.\21\ Accordingly, to ensure that the exemptive relief

currently available for these transactions continues to be available

after December 31, 2011, the Commission proposed to amend the July 14

Order to incorporate by reference the part 35 relief available prior to

December 31, 2011. Whereas the relief provided in part two of the July

14 Order was (and would remain) limited to transactions in excluded or

exempt

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commodities, the proposed amendment also would include, beginning on

January 1, 2012, transactions in agricultural commodities that fully

meet the conditions in part 35 as in effect prior to December 31,

2011.\22\ The Commission proposed that this further amendment to the

July 14 Order is necessary to ensure that the same scope of the

exemptive relief available before December 31, 2011 is available to all

swaps and extends through July 16, 2012, at the latest.

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\21\ The Commission recently promulgated a rule pursuant to

section 723(c)(3) of the Dodd-Frank Act, and CEA sections 4(c) and

4c(b), that, effective December 31, 2011, will repeal the existing

part 35 relief and replace it with new Sec. 35.1 of the

Commission's regulations. See Agricultural Swaps, 76 FR 49291, Aug.

10, 2011. Rule 35.1 provides, in pertinent part, that ``agricultural

swaps may be transacted subject to all provisions of the CEA, and

any Commission rule, regulation or order thereunder, that is

otherwise applicable to swaps. [It] also clarifies that by issuing a

rule allowing agricultural swaps to transact subject to the laws and

rules applicable to all other swaps, the Commission is allowing

agricultural swaps to transact on [designated contract markets

(``DCMs''), swap execution facilities (``SEFs'')], or otherwise to

the same extent that all other swaps are allowed to trade on DCMs,

SEFs, or otherwise.'' Id. at 49296.

\22\ The Commission also clarified that, by operation of new

Sec. 35.1 of the Commission's regulations, the Commission's

statement in adopting the July 14 Order that a DCM may list and

trade swaps ``under the DCM's rules related to futures contracts,

without exemptive relief,'' 76 FR at 42518, would apply, as of

December 31, 2011, to swaps in agricultural commodities.

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In proposing these amendments, the Commission sought to ensure that

current practices will not be unduly disrupted during the transition to

the new regulatory regime. As stated above, the proposed July 16, 2012

date coincides with the potential transitional period provided in

sections 723(c) and 734(c) of the Dodd-Frank Act.\23\ Further, the

Commission stated that, should the Commission deem it appropriate to

terminate or extend any exemptive relief under part two of the July 14

Order, it would be in a better position to comprehensively evaluate and

consider any tailored exemption at that time.

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\23\ See Order Regarding the Treatment of Petitions Seeking

Grandfather Relief for Exempt Commercial Markets and Exempt Boards

of Trade, 75 FR 56513, Sept. 16, 2010.

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IV. Discussion of the Final Order

The Commission received five comments in response to the Notice

proposing to amend the July 14 Order.\24\ The comments generally

focused upon three issues: (1) The general expiration date of the

relief to be provided by the proposed amendment; (2) the application of

the proposed amendment to agricultural swaps; and, (3) the expiry date

applicable to exempt commercial markets (``ECMs'') operating pursuant

to grandfather relief authorized by section 723(c)(l)-(2) of the Dodd-

Frank Act and their market participants and clearing organizations. The

comments and Commission determinations regarding each of these issues

is discussed in the sections that follow. In addition, the final order

includes other technical, non-substantive changes to the wording of the

proposed amended order.

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\24\ The Commission received comments from Better Markets, CME

Group (CME); LCH.Clearnet Limited (LCH); Nodal Exchange LLC (Nodal

Exchange or Nodal); and the Securities Industry and Financial Market

Association (SIFMA). The comment file is available on the

Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (last visited Dec. 2, 2011).

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A. Expiry Date of July 16, 2012

1. Comments

Commenters were divided on whether the Commission should include an

expiry or ``sunset'' date of July 16, 2012. For example, Better Markets

stated that continuing to set outside dates for the exemptive relief,

rather than granting open-ended exemptive relief, establishes important

deadlines so that work can be prioritized and completed as quickly as

prudently possible.\25\ In contrast, CME Group and SIFMA recommended

the Commission avoid setting a sunset provision date for the expiration

of the temporary exemptive relief.\26\ SIFMA stated that the Commission

should instead provide exemptive relief that lasts on a provision-by-

provision basis until related substantive requirements of the Dodd-

Frank Act are implemented, as the SEC provided for in its parallel

relief under subtitle B of title VII.\27\ SIFMA said that avoiding the

imposition of a sunset date would allow the Commission to adopt its

final rules in a logical order that provides market participants with

necessary legal certainty.\28\

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\25\ Better Markets at 2.

\26\ CME at 2; SIFMA at 2.

\27\ SIFMA at 2.

\28\ SIFMA at 2-3. Although beyond the scope of the Notice,

SIFMA also reiterated its request that the Commission provide a

comprehensive rulemaking schedule and implementation plan, as well

as clear positions on the extraterritorial scope of Title VII and

treatment of inter-affiliate transactions, as set forth in its

November 4 Letter on the Commission's proposed compliance and

implementation schedules for clearing, trade execution,

documentation and margin. SIFMA at 3.

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2. Commission Determination

The Commission has determined to retain, as proposed, an outmost

expiry date of July 16, 2012 for two reasons. First, the Commission

continues to believe that it is appropriate and prudent to periodically

review the extent and scope of any relief provided from the CEA, as

amended by the Dodd-Frank Act.\29\ The Commission anticipates that

additional rulemakings to implement the Dodd-Frank Act will be

completed during the extended period of exemptive relief between

December 31, 2011 and July 16, 2012. During this period the Commission

also will be considering the appropriate phase-in of the various

regulatory requirements under the Dodd-Frank rulemakings. Accordingly,

the Commission believes it appropriate to periodically re-examine the

scope and extent of the proposed exemptive relief in order to ensure

that the scope of relief is appropriately tailored to the schedule of

implementation of the Dodd-Frank Act requirements. Second, particularly

with respect to part two of the July 14 Order, the limitation of this

extension of exemptive relief to no later than July 16, 2012 is

consistent with the transitional relief provided by the Congress in

section 723(c) of the Dodd-Frank Act regarding former CEA section 2(h)

and section 734(c) of the Dodd-Frank Act regarding former CEA section

5d (i.e., for ``not longer than a 1-year period'' following the general

effective date of title VII).\30\ As stated in the Notice, should the

Commission deem it appropriate to terminate or extend any exemptive

relief under part two of the July 14 Order, the Commission will be in a

better position to comprehensively evaluate and consider any tailored

exemption at that time.\31\

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\29\ The Commission's position in this regard is unchanged from

the first Effective Date for Swap Regulation proposal, 76 FR 35372,

35374, June 17, 2011.

\30\ See Orders Regarding the Treatment of Petitions Seeking

Grandfather Relief for Exempt Commercial Markets and Exempt Boards

of Trade, 75 FR 56513, Sept. 16, 2010.

\31\ 76 FR at 66002.

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B. Application to Agricultural Swaps

1. Comments

CME sought clarification on the application of the proposed

amendment to agricultural swaps.\32\ CME stated that it was not clear

from the Notice whether the proposed relief: (1) Would apply only to

agricultural swaps that meet part 35 as in effect prior to December 31,

2011; or (2) includes agricultural swaps that meet part 35 as in effect

prior to December 31, 2011 notwithstanding that: (i) The transaction

may be executed on a multilateral transaction execution facility; (ii)

the transaction may be cleared; (iii) persons offering or entering into

the transaction may be eligible contract participants as defined in the

CEA prior to July 16; (iv) the transaction may be part of a fungible

class of agreements that are standardized as to their material economic

terms; and/or (v) no more than one of the parties to the transaction is

entering into the transaction in conjunction with its line of business,

but is neither an eligible contract participant nor an ESP), and the

transaction was not and is not marketed to the public. CME believes the

latter is consistent with new Commission regulation Sec. 35.1, and

that the Commission should make this clear in

[[Page 80237]]

the text of any final order issued pursuant to the Notice.\33\

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\32\ CME at 2-3.

\33\ Id.

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CME further stated that pursuant to the Notice and new regulation

Sec. 35.1, starting on January 1, 2012, swaps based on agricultural

commodities, like swaps based on exempt and excluded commodities, may

trade on either a DCM, ECM or exempt board of trade (``EBOT'') (until

such time as status as a swap execution facility (``SEF'') is

available). CME believes the Commission should make this clear in the

text of any final order issued pursuant to the Notice.\34\

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\34\ CME at 3.

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2. Commission Determination

Prior to the Dodd-Frank Act, the CEA did not permit transactions in

agricultural commodities on ECMs or EBOTs.\35\ Nothing in the Notice or

the Commission's recently promulgated Sec. 35.1\36\ provide that

agricultural swaps may trade on an ECM or EBOT. Rather, regulation

Sec. 35.1 allows agricultural swaps to transact subject to the laws

and rules applicable to all other swaps, and to transact on DCMs, SEFs,

``or otherwise'' to the same extent that all other swaps are allowed to

trade on DCMs, SEFs, ``or otherwise.'' \37\ To interpret the phrase

``or otherwise'', in conjunction with the exemptive relief issued

herein, as expanding the permissible role for ECMs and EBOTs to

agricultural commodities would be: (1) Contrary to the plain language

of the pre-Dodd-Frank exemptions for ECMs and EBOTs; and (2)

inconsistent with the intent underlying the July 14 Order to preserve

the status quo during implementation of the new swap regulatory

regime.\38\ Accordingly, the Commission now clarifies that new part 35

\39\ and the exemptive relief issued herein, and any interaction of the

two, do not operate to expand the pre-Dodd-Frank scope of transactions

eligible to be transacted on either an ECM or EBOT to include

transactions in agricultural commodities.

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\35\ Specifically, the statutory provisions authorizing ECMs

(pre Dodd-Frank CEA section 2(h)) applied to transactions in exempt

commodities, and the statutory provisions authorizing EBOTs (pre

Dodd-Frank CEA section 5d) applied to transactions in excluded

commodities. Agricultural commodities are neither exempt nor

excluded commodities.

\36\ See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011.

\37\ Id. at 49296.

\38\ The Notice stated: ``[T]he proposed extension of this

exemptive relief `will allow markets and market participants to

continue to operate under the regulatory regime as in effect prior

to July 16, 2011 * * * ' '' 76 FR 65999, at 66001. The regulatory

regime as in effect prior to July 16, 2011, did not permit

transactions in agricultural commodities on ECMs or EBOTs.

\39\ See footnote 36, above.

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To clarify this point, and as compared to the proposed amended

order, the Commission has reformatted this final order by moving the

text addressing transactions that meet part 35 as in effect prior to

December 31, 2011, to a paragraph separate from the text addressing

transactions that meet part 35 as in effect prior to December 31, 2011

notwithstanding that: (i) The transaction may be executed on a

multilateral transaction execution facility; (ii) the transaction may

be cleared; (iii) persons offering or entering into the transaction may

be eligible contract participants as defined in the CEA prior to July

16; (iv) the transaction may be part of a fungible class of agreements

that are standardized as to their material economic terms; and/or (v)

no more than one of the parties to the transaction is entering into the

transaction in conjunction with its line of business, but is neither an

eligible contract participant nor an ESP, and the transaction was not

and is not marketed to the public.

C. Expiry Date Applicable to ECMs and EBOTs Operating Pursuant to

Grandfather Relief Authorized by Section 723(c)(1)-(2) of the Dodd-

Frank Act and Their Market Participants and Clearing Organizations

1. Comments

Two commenters, Nodal Exchange and LCH, expressed concern with the

expiry date of the second part of the relief contained in the proposed

amended order \40\ as it applies to ECMs that have petitioned for the

grandfather relief authorized by section 723(c)(1)-(2) of the Dodd-

Frank Act \41\ and/or to such ECMs' market participants or clearing

organizations. As set forth above, the Commission proposed to amend the

July 14 Order to extend the expiry date of the second part of the

relief until the earlier of: (1) July 16, 2012; or (2) such other

compliance date as may be determined by the Commission.

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\40\ As noted above, part two of the July 14 Order provides

temporary exemptive relief from the provisions of the CEA that

apply, or may apply, to certain agreements, contracts, and

transactions in exempt or excluded commodities as a result of the

repeal of the exemptions and exclusions contained in former CEA

sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011. See

sections 723(a)(1) and 734(a) of the Dodd-Frank Act.

\41\ Section 723(c) of the Dodd-Frank Act permitted persons to

submit to the Commission, within 60 days of the enactment of the

Dodd-Frank Act, a petition to remain subject to former section 2(h)

of the CEA and authorized the Commission to allow such persons to

continue to operate subject to former section 2(h) of the CEA for

not longer than a one year period.

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Nodal Exchange is an ECM that has filed for grandfather relief

under the ECM ``Grandfather Order'' issued by the Commission pursuant

to the authority provided by section 723(c)(1)-(2) of the Dodd-Frank

Act.\42\ The ECM Grandfather Order permits ECMs that satisfy specified

conditions to continue to operate pursuant to the provisions of former

CEA section 2(h)(3)-(7) until July 15, 2012. Among the applicable

conditions are the requirements that the ECM must have filed a formal

SEF or DCM application with the Commission within sixty days after the

effective date of final regulations implementing the provisions of

either section 733 or section 735 of the Dodd-Frank Act,\43\ whichever

is applicable, and that the ECM's SEF or DCM application be pending

before the Commission.

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\42\ See Orders Regarding the Treatment of Petitions Seeking

Grandfather Relief for Exempt Commercial Markets and Exempt Boards

of Trade, 75 FR 56513, Sept. 16, 2010.

\43\ Sections 733 and 735 of the Dodd-Frank Act include Core

Principles and other statutory requirements applicable to SEFs and

DCMs, respectively.

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Nodal Exchange requested that the proposed amended order be

modified in two ways. First, Nodal requested that ``the Commission

provide relief to ECMs compliant with the grandfathering provisions by

extending the second part of the July 14 Order for these compliant ECMs

until the latter of (1) July 16, 2012; or (2) such other compliance

date as may be determined by the Commission.'' \44\ In support of its

request, Nodal stated that ``[s]ince the Dodd-Frank Act eliminates ECMs

by no later than July 16, 2012, it would appear that Nodal Exchange

must become a registered DCM or SEF by July 16, 2012.'' \45\ Nodal

asserted, however, that it ``appears highly unlikely that Nodal

Exchange will be able to be either a registered DCM or SEF by July 16,

2012 because the rules for neither DCMs nor SEFs have been finalized''

and because ``based on the proposed rules for DCMs, the 180-day

statutory review period will probably govern the application review

process.'' \46\

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\44\ Nodal at 2 (emphasis in the original).

\45\ Id. at 1.

\46\ Id. at 2.

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Nodal claimed that its ``markets will be disrupted if Nodal

Exchange cannot be registered as a DCM or SEF by July 16, 2012, unless

Nodal Exchange can be permitted to continue to operate as an ECM until

the Commission grants appropriate registration.'' \47\ Nodal also

claimed that ``[w]ithout further guidance from the Commission

consistent with the ECM transition

[[Page 80238]]

period of section 723(c) of the Dodd-Frank Act,'' the proposed amended

order ``creates unnecessary uncertainty for Nodal Exchange, its

participants, its clearing house LCH.Clearnet,\48\ and the LCH.Clearnet

clearing members for Nodal Exchange participants.'' \49\

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\47\ Id.

\48\ Nodal represents that all of its contracts are cleared by

LCH.Clearnet. Id. at 1, fn. 1.

\49\ Id. at 2.

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Second, Nodal asserted that with respect to non-ECM entities such

as Nodal Exchange participants and their LCH clearing members,

extending the relief in the July 14 Order until the earlier of: (1)

July 16, 2012; or (2) such other compliance date as may be determined

by the Commission ``creates uncertainty in the timeline for compliance

with the new regulatory regime,'' noting that it is ``unclear what

circumstances could cause `such other compliance date' to be determined

by the Commission.'' \50\ Accordingly, Nodal Exchange requested that

the Commission provide exemptive relief to ``non-ECM market

participants'' by extending the second part of the July 14 Order until

July 16, 2012 without qualification.\51\

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\50\ Id.

\51\ Id.

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In a related comment, LCH similarly requested that the Commission

extend the exemptive relief in the second part of the July 14 Order to

July 16, 2012 ``without any qualification.'' \52\ LCH.Clearnet Limited,

one of the LCH's operating companies, is registered with the Commission

as a derivatives clearing organization (``DCO'') and provides clearing

services for Nodal Exchange. According to LCH, the second part of the

Commission's July 14 Order permits LCH.Clearnet Limited to continue to

clear transactions for Nodal Exchange.\53\ LCH acknowledged that

LCH.Clearnet's ``DCO designation must be amended before Nodal

Exchange's change in registration [to a DCM or SEF] occurs.'' \54\

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\52\ LCH at 1.

\53\ Id. at 2.

\54\ Id.

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LCH commented that the Commission ``created unnecessary uncertainty

for LCH.Clearnet Limited, Nodal, and LCH.Clearnet clearing members for

firms trading on Nodal by proposing that the extension of the July 14

Order would expire `upon the earlier of: (I) July 16, 2012; or (II)

such other compliance date as may be determined by the Commission.' ''

\55\ Stating that ``no explanation for the `other compliance date'

language'' was provided, LCH maintained that the addition of this

language ``raises the spectre that the Commission could rescind the

exemptive relief at any time for any reason or without allowing

sufficient time for LCH.Clearnet Limited to apply for and receive an

amended order of registration.'' \56\ LCH stated that extending the

expiration date of the second part of the July 14 Order to July 16,

2012 without qualification would be ``consistent with the transitional

period for ECMs provided in section 723(c) of Dodd-Frank'' and the

Commission's goal of striving ``to ensure that current practices will

not be unduly disrupted during the transition to the new regulatory

regime.'' \57\

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\55\ Id. (emphasis in the original).

\56\ Id.

\57\ Id.

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2. Commission Determination

Although these comments came from an ECM and its clearing

organization, the points raised in these comments also are applicable

to EBOTs that are operating under essentially the same Grandfather

Order requirements as ECMs.\58\ Accordingly, in modifying the proposed

amended order to address the comments received regarding ECMs, the

Commission also has determined to modify the proposed amended order to

address EBOTs.

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\58\ See Orders Regarding the Treatment of Petitions Seeking

Grandfather Relief for Exempt Commercial Markets and Exempt Boards

of Trade, 75 FR 56513, Sept. 16, 2010.

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While the final order continues to provide that the exemption set

forth in the second part of the order generally shall expire upon the

earlier of July 16, 2012 or such other compliance date as may be

determined by the Commission, it has been modified to provide that the

exemption will not expire prior to July 16, 2012 in certain

circumstances. Specifically, no other compliance date will be

determined (and thus, the exemption will remain in effect until July

16, 2012) for agreements, contracts, and transactions (and for persons

offering, entering into, or rendering advice or rendering other

services with respect to, such agreements, contracts or transactions)

that: (1) Are executed on an ECM or EBOT that is operating under the

terms of the Commission's ECM/EBOT Grandfather Order and that complies

with all of the applicable conditions of the ECM/EBOT Grandfather

Order; and (2) are cleared by a Commission-registered DCO. This

modification is narrow. It applies only to agreements, contracts, and

transactions that are executed on a grandfathered ECM or EBOT and are

cleared by a registered DCO, and it is restricted in scope to those

specific requirements or provisions of the CEA (and relevant

implementing regulations) that otherwise would apply to such

agreements, contracts, and transactions and that are inconsistent with

the ECM or EBOT Grandfather Order.\59\

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\59\ This modification does not affect the applicability of

general provisions applicable to DCOs or clearing requirements that

the Commission may promulgate under the Dodd-Frank Act that may

become effective before July 16, 2012. Such requirements would still

apply to the DCO and transactions that are not executed on an ECM or

EBOT.

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As noted by the commenters, the Commission, in proposing the

amendments to the July 14 Order, sought to ensure that current

practices will not be unduly disrupted during the transition to the new

regulatory regime.\60\ The Commission also stated that it believes it

is in the interest of the public and market participants to continue to

provide regulatory certainty regarding the applicability of title VII

of the Dodd-Frank Act.\61\ The modification contained in the final

order will further these objectives by providing greater consistency

between the expiration of this exemptive relief and the terms of the

ECM/EBOT Grandfather Order authorized by Congress in sections 723(c)

and 734(c) of the Dodd-Frank Act. It also will reduce the likelihood of

legal uncertainty that could arise were the exemptive relief applicable

to grandfathered ECMs and EBOTs that execute particular transactions

and the DCOs that clear those same transactions subject to disparate

expiration dates. In this way, ECMs and EBOTs that are compliant with

the conditions contained in the ECM/EBOT Grandfather Order, their

market participants, and their DCOs and clearing members, are more

likely to operate without disruption through the end of the grandfather

relief period authorized by the Dodd-Frank Act--July 16, 2012.

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\60\ See, e.g., 76 FR at 66002.

\61\ Id.

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The Commission, though, has determined not to modify the expiration

date of the second part of the proposed amended order to permit the

relief to expire later than July 16, 2012 for the same reasons that it

has decided to retain a ``sunset'' or expiration provision generally.

First, the Commission continues to believe that it is appropriate and

prudent to periodically review the extent and scope of any exemptive

relief provided from the CEA, as amended by the Dodd-Frank Act. Second,

the limitation of this exemptive relief to no later than July 16, 2012

is consistent with the transitional relief provided by Congress (i.e.,

for ``not longer than a 1-year period''). Finally, should the

Commission deem it

[[Page 80239]]

appropriate to terminate or extend any exemptive relief under part two

of the July 14 Order, the Commission will be in a better position to

comprehensively evaluate and consider any tailored exemption at that

time.\62\

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\62\ See 76 FR at 66002.

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V. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act (``PRA'') \63\ imposes certain

requirements on Federal agencies (including the Commission) in

connection with conducting or sponsoring any collection of information

as defined by the PRA. These amendments to the July 14 Order will not

require a new collection of information from any persons or entities

that will be subject to the final order.

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\63\ 44 U.S.C. 3507(d).

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B. Cost-Benefit Considerations

Section 15(a) of the CEA \64\ requires the Commission to consider

the costs and benefits of its action before issuing an order under the

CEA. CEA section 15(a) further specifies that costs and benefits shall

be evaluated in light of five broad areas of market and public concern:

(1) Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission may in its discretion give

greater weight to any one of the five enumerated areas and could in its

discretion determine that, notwithstanding its costs, a particular

order is necessary or appropriate to protect the public interest or to

effectuate any of the provisions or to accomplish any of the purposes

of the CEA.

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\64\ 7 U.S.C. 19(a).

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The Commission requested but received no comments on the

consideration of costs and benefits of the proposed amendments

discussed in the Notice. In the Notice, the Commission stated that the

proposed amendments to the existing July 14 Order would not change the

nature or limit the scope of relief granted.\65\ The Commission

continues to believe that these amendments do not change the nature or

scope of the relief granted and, as such, impose no costs beyond the

costs imposed by the July 14 Order. Rather, this final order confers an

added benefit to market participants and the public by extending the

relief provided for in the July 14 Order through no later than July 16,

2012. Accordingly, the consideration of costs and benefits set forth in

the July 14 Order may be incorporated by reference in this final order.

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\65\ See 76 FR 42521.

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VI. Amendments to the July 14 Order

The Commission amends the July 14 Order to read as follows:

The Commission, to provide for the orderly implementation of the

requirements of Title VII of the Dodd-Frank Act, pursuant to sections

4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,

hereby issues this Order consistent with the determinations set forth

above, which are incorporated in this final order, as amended, by

reference, and:

(1) Exempts, subject to the conditions set forth in paragraph (4),

all agreements, contracts, and transactions, and any person or entity

offering, entering into, or rendering advice or rendering other

services with respect to, any such agreement, contract, or transaction,

from the provisions of the CEA, as added or amended by the Dodd-Frank

Act, that reference one or more of the terms regarding entities or

instruments subject to further definition under sections 712(d) and

721(c) of the Dodd-Frank Act, which provisions are listed in Category 2

of the Appendix to this Order; provided, however, that the foregoing

exemption:

a. Applies only with respect to those requirements or portions of

such provisions that specifically relate to such referenced terms; and

b. With respect to any such provision of the CEA, shall expire upon

the earlier of: (i) the effective date of the applicable final rule

further defining the relevant term referenced in the provision; or (ii)

July 16, 2012.

(2) Exempts, subject to the conditions set forth in paragraph (4),

all agreements, contracts, and transactions, and any person or entity

offering, entering into, or rendering advice or rendering other

services with respect to, any such agreement, contract, or transaction,

from the provisions of the CEA, if the agreement, contract, or

transaction complies with part 35 of the Commission's regulations as in

effect prior to December 31, 2011. This exemption shall expire upon the

earlier of (i) July 16, 2012; or (ii) such other compliance date as may

be determined by the Commission.

(3) Exempts, subject to the conditions set forth in paragraph (4),

all agreements, contracts, and transactions, and any person or entity

offering, entering into, or rendering advice or rendering other

services with respect to, any such agreement, contract, or transaction,

from the provisions of the CEA, if the agreement, contract, or

transaction complies with part 35 of the Commission's regulations as in

effect prior to December 31, 2011, including any agreement, contract,

or transaction in an exempt or excluded (but not agricultural)

commodity that complies with such provisions then in effect

notwithstanding that:

a. The agreement, contract, or transaction may be executed on a

multilateral transaction execution facility;

b. The agreement, contract, or transaction may be cleared;

c. Persons offering or entering into the agreement, contract or

transaction may not be eligible swap participants, provided that all

parties are eligible contract participants as defined in the CEA prior

to the date of enactment of the Dodd-Frank Act;

d. The agreement, contract, or transaction may be part of a

fungible class of agreements that are standardized as to their material

economic terms; and/or

e. No more than one of the parties to the agreement, contract, or

transaction is entering into the agreement, contract, or transaction in

conjunction with its line of business, but is neither an eligible

contract participant nor an eligible swap participant, and the

agreement, contract, or transaction was not and is not marketed to the

public;

Provided, however, that:

a. Such agreements, contracts, and transactions in exempt or

excluded commodities (and persons offering, entering into, or rendering

advice or rendering other services with respect to, any such agreement,

contract, or transaction) fall within the scope of any of the CEA

sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of

business provision as in effect prior to July 16, 2011; and

b. This exemption shall expire upon the earlier of: (i) July 16,

2012; or (ii) such other compliance date as may be determined by the

Commission, except that the exemption shall not expire prior to July

16, 2012 with limited respect to the specific requirements or

provisions of the CEA and regulations promulgated thereunder that

otherwise would apply to such agreements, contracts, and transactions

(and the persons offering, entering into, or rendering advice or

rendering other services with respect to them) and that are

inconsistent with the exempt commercial market (``ECM'')/exempt board

of trade (``EBOT'') Grandfather Order if (I) such agreements,

contracts, and transactions are executed on an ECM or an EBOT that is

operating under the terms of, and

[[Page 80240]]

compliant with the applicable conditions of, the Commission's ECM/EBOT

Grandfather Order which became effective September 20, 2010; (II) such

agreements, contracts, and transactions are cleared by a registered

derivatives clearing organization; and (III) such ECM or EBOT complies

with all other Commission regulations implementing the provisions of

the Dodd-Frank Act that are listed in Category 1 of the Appendix to

this Order.

(4) Provides that the foregoing exemptions in paragraphs (1), (2)

and (3) above shall not:

a. Limit in any way the Commission's authority with respect to any

person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b,

4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the

Commission promulgated pursuant to such authorities, including

regulations pursuant to CEA section 4c(b) proscribing fraud;

b. Apply to any provision of the Dodd-Frank Act or the CEA that

became effective prior to July 16, 2011;

c. Affect any effective or compliance date set forth in any

rulemaking issued by the Commission to implement provisions of the

Dodd-Frank Act;

d. Limit in any way the Commission's authority under section 712(f)

of the Dodd-Frank Act to issue rules, orders, or exemptions prior to

the effective date of any provision of the Dodd-Frank Act and the CEA,

in order to prepare for the effective date of such provision, provided

that such rule, order, or exemption shall not become effective prior to

the effective date of the provision; and

e. Affect the applicability of any provision of the CEA to futures

contracts or options on futures contracts, or to cash markets.

In its discretion, the Commission may condition, suspend,

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

motion. This final order, as amended, shall be effective immediately.

Issued in Washington, DC, on December 19, 2011 by the

Commission.

David A. Stawick,

Secretary of the Commission.

Note: The following appendix will not appear in the Code of

Federal Regulations.

Statement of Commissioner Scott D. O'Malia

For the fourth time this year,\66\ I am concurring with the

Commission's decision to provide market participants with temporary

relief from certain provisions of the Dodd-Frank Act.\67\ Again, I am

concurring despite my belief that this iteration of the final exemptive

order (the ``Second Iteration'') is deeply flawed--just like the July

14, 2011 final order (the ``First Iteration''). By now, it is well

known that I object to arbitrary sunsets. It is also well known that I

object to the Commission's recalcitrance--despite Congressional

direction--to set forth comprehensive rulemaking and implementation

schedules.\68\ I will not expound upon such objections here. Instead, I

would like to focus on the Commission's dogmatic adherence to the

exemptive approach taken by the First Iteration, even in light of known

facts. Such adherence sets a troubling precedent for our Dodd-Frank

outstanding proposals.

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\66\ See ``Do What You Can'', Opening Statement for the June 14,

2011 Commission Meeting, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement061411; Concurring

Statement on the Order Regarding the Effective Date for Swap

Regulation, dated July 14, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071411; Concurring

Statement, Second Extension of Temporary Exemptive Relief, dated

October 18, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement101811c.

\67\ To provide such relief, the Commission is relying on its

exemptive authority under section 4(c) of the Commodity Exchange Act

and its authority under section 712(f) of the Dodd-Frank Act.

\68\ See H.R. Rep. No. 112-101, at 54 (2011), available at

http://www.gpo.gov/fdsys/pkg/CRPT-112hrpt101/pdf/CRPT-112hrpt101.pdf.

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The Goal

The First Iteration provided for the termination of exemptive

relief on December 31, 2011, absent further Commission action (the

``December Sunset''). The primary reason that the Commission advanced

for the December Sunset was that ``it would be appropriate to

periodically re-examine the scope and extent of the proposed exemptive

relief in order to ensure that the scope of relief is appropriately

tailored to the schedule of implementation of the Dodd-Frank Act

requirements.'' \69\

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\69\ The proposed order for Effective Date for Swap Regulation,

76 FR 35372, 35375 (Jun. 17, 2011). See the final order for

Effective Date for Swap Regulation, 76 FR 42508, 42514 (Jul. 19,

2011) (stating that ``[t]he Commission has determined, for the

reasons discussed in the proposed order, not to alter the expiration

date(s) contained in the proposed order.'').

In both the First and Second Iterations, the Commission advanced

another reason for a sunset. Essentially, the Commission argued

that, with respect to the Category 3 provisions, ``limiting

exemptive relief to a fixed period is consistent with the approach

to transitional relief provided in sections 723(c) and 734 of the

Dodd-Frank Act.'' 76 FR at 42514. See Section IV(A)(2) of the Second

Iteration. With respect to the First Iteration, this statement was

somewhat odd, since the December Sunset was earlier--by six months--

than the end date for transitional relief specified by those two

Dodd-Frank sections. With respect to the Second Iteration, this

statement is accurate. However, the transitional relief specified by

those two Dodd-Frank sections may have been predicated on the

Commission completing its Dodd-Frank rulemakings by the general

effective date of July 16, 2011. If the Commission assumes

otherwise, then it would be imputing to Congress the intent to place

market participants in a Catch-22. Specifically, the Commission

would be stating that Congress intended to withdraw transitional

relief from market participants before the Commission completes the

Dodd-Frank structures to which market participants are explicitly

supposed to transition. This imputation may be somewhat ungenerous.

I believe that sections 723(c) and 734(c) of the Dodd-Frank Act,

when interpreted in the proper context, do not support a sunset in

the Second Iteration.

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The Facts

Let us now examine the facts. After all, hindsight should be 20/20.

First, the December Sunset has done nothing to ensure that the

Commission completes its Dodd-Frank rulemakings more expeditiously.

Specifically, the Commission has not completed the definitional

rulemakings that Category 2 provisions (as the First and Second

Iterations define such term) require to become effective. Additionally,

the Commission has not completed the rulemakings on designated contract

markets and swap execution facilities that would enable Category 3

provisions (as the First and Second Iterations define such term) to

become effective without disrupting existing markets.

Second, the December Sunset has not permitted the Commission to

tailor the scope and extent of the current exemption. This is

unsurprising. Market participants cannot reasonably comply with

Category 2 or 3 provisions unless the Commission completes predicate

rulemakings. An arbitrary sunset cannot change this fact. Hence, the

Second Iteration emphasizes that ``the proposed amendments to the

existing July 14 Order would not change the nature or limit the scope

of relief granted.'' \70\

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\70\ Section V(B) of the Second Iteration.

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Commission Response

As demonstrated above, the December Sunset achieved none of its

goals. However, in formulating the Second Iteration, the Commission

appears to have ignored inconvenient truths. The Second Iteration

extends the December Sunset to July 16, 2012. Simultaneously, the

Commission continues its refusal to provide market participants with

its plan for the completion of Dodd-Frank rulemakings by July 16, 2012.

In fact, at least one market participant has already indicated that--

based on reasonable estimates of Commission progress--it would need

exemptive relief beyond the

[[Page 80241]]

new sunset.\71\ I am already anticipating fifth and sixth votes on

exemptive relief.

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\71\ See comment letter from Nodal Exchange, LLC, dated November

23, 2011, to the proposed order on Effective Date for Swap

Regulation, 76 FR 65999 (Oct. 25, 2011), available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (stating

``[i]t appears highly unlikely that Nodal Exchange will be able to

be either a registered DCM or SEF by July 16, 2012 because the rules

for neither DCMs nor SEFs have been finalized. Furthermore, based on

the proposed rules for DCMs, the 180-day statutory review period

will probably govern the application review process. Without further

guidance from the Commission * * * the CFTC Proposed Release created

unnecessary uncertainty for Nodal Exchange, its participants, its

clearing house LCH.Clearnet, and the LCH.Clearnet clearing members

for Nodal Exchange participants.'').

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Let's Figure Out the Best Way to Reach the Goal

I support the Second Iteration because some certainty is better

than no certainty. However, if the Commission is truly open to

reconsidering its Dodd-Frank proposals--as some have indicated--the

Second Iteration should have contained no arbitrary sunset. In the

Second Iteration, the Commission displays a troubling willingness to

adhere to prior convention.\72\ By the fifth and sixth times I have to

vote on temporary relief, I hope that the Commission will have agreed

to grant market participants much-deserved certainty until applicable

rulemakings become effective. Additionally, I hope that the Commission

will have provided rulemaking and implementation schedules to market

participants, so that they can plan to be in compliance when such

rulemakings become effective. As Martin Luther King, Jr. has said: ``We

must accept finite disappointment, but never lose infinite hope.''

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\72\ According to the Office of Management and Budget, we have

promulgated five final rulemakings that would each result in an

annual effect on the American economy of more than $100 million a

year. If the Commission continues to adhere to its Dodd-Frank

approach, without consideration of new and applicable facts, then

the Commission may impose substantial and unnecessary costs on the

American economy--costs that we all can ill-afford.

[FR Doc. 2011-32841 Filed 12-22-11; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 23, 2011