2013-30978

Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]

[Notices]

[Pages 78899-78910]

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

[FR Doc No: 2013-30978]

[[Page 78899]]

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COMMODITY FUTURES TRADING COMMISSION

Comparability Determination for Switzerland: Certain Entity-Level

Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Comparability Determination for Certain Requirements

under Swiss Financial Market Regulation.

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SUMMARY: The following is the analysis and determination of the

Commodity Futures Trading Commission (``Commission'') regarding certain

parts of a request by UBS AG (``UBS'') that the Commission determine

that laws and regulations applicable in Switzerland provide a

sufficient basis for an affirmative finding of comparability with

respect to the following regulatory obligations applicable to swap

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

with the Commission: (i) Chief compliance officer; (ii) risk

management; and (iii) swap data recordkeeping (collectively, the

``Internal Business Conduct Requirements'').

DATES: Effective Date: This determination will become effective

immediately upon publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,

[email protected], Frank Fisanich, Chief Counsel, 202-418-5949,

[email protected], and Scott Lee, Special Counsel, 202-418-5090,

[email protected], Division of Swap Dealer and Intermediary Oversight,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

On July 26, 2013, the Commission published in the Federal Register

its ``Interpretive Guidance and Policy Statement Regarding Compliance

with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance,

the Commission set forth its interpretation of the manner in which it

believes that section 2(i) of the Commodity Exchange Act (``CEA'')

applies Title VII's swap provisions to activities outside the U.S. and

informed the public of some of the policies that it expects to follow,

generally speaking, in applying Title VII and certain Commission

regulations in contexts covered by section 2(i). Among other matters,

the Guidance generally described the policy and procedural framework

under which the Commission would consider a substituted compliance

program with respect to Commission regulations applicable to entities

located outside the U.S. Specifically, the Commission addressed a

recognition program where 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 promulgated thereunder.

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\1\ 78 FR 45292 (July 26, 2013). The Commission originally

published proposed and further proposed guidance on July 12, 2012

and January 7, 2013, respectively. See Cross-Border Application of

Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214

(July 12, 2012) and Further Proposed Guidance Regarding Compliance

with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).

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In addition to the Guidance, on July 22, 2013, the Commission

issued the Exemptive Order Regarding Compliance with Certain Swap

Regulations (the ``Exemptive Order'').\2\ Among other things, the

Exemptive Order provided time for the Commission to consider

substituted compliance with respect to six jurisdictions where non-U.S.

SDs are currently organized. In this regard, the Exemptive Order

generally provided non-U.S. SDs and MSPs in the six jurisdictions with

conditional relief from certain requirements of Commission regulations

(those referred to as ``Entity-Level Requirements'' in the Guidance)

until the earlier of December 21, 2013, or 30 days following the

issuance of a substituted compliance determination.\3\

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\2\ 78 FR 43785 (July 22, 2013).

\3\ The Entity-Level Requirements under the Exemptive Order

consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,

23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the

Commission's regulations.

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On July 11, 2013, UBS (``applicant'') submitted a request that the

Commission determine that laws and regulations applicable in

Switzerland provide a sufficient basis for an affirmative finding of

comparability with respect to certain Entity-Level Requirements,

including the Internal Business Conduct Requirements.\4\ On November

13, 2013, the application was supplemented with corrections and

additional materials. The following is the Commission's analysis and

determination regarding the Internal Business Conduct Requirements, as

detailed below.\5\

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\4\ For purposes of this notice, the Internal Business Conduct

Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,

23.602, 23.603, 23.605, and 23.606.

\5\ This notice does not address SDR Reporting. The Commission

may provide a comparability determination with respect to the SDR

Reporting requirement in a separate notice.

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II. Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

Reform and Consumer Protection Act\6\ (``Dodd-Frank Act'' or ``Dodd-

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

for swaps.

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\6\ Public Law 111-203, 124 Stat. 1376 (2010).

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Section 722(d) of the Dodd-Frank Act amended the CEA by adding

section 2(i), which provides that the swap provisions of the CEA

(including any CEA rules or regulations) 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 rules or regulations as are necessary or

appropriate to prevent evasion of the swap provisions of the CEA

enacted under Title VII of the Dodd-Frank Act.\7\

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

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In the three years since its enactment, the Commission has

finalized 68 rules and orders to implement Title VII of the Dodd-Frank

Act. The finalized rules include those promulgated under section 4s of

the CEA, which address registration of SDs and MSPs and other

substantive requirements applicable to SDs and MSPs. With few

exceptions, the delayed compliance dates for the Commission's

regulations implementing such section 4s requirements applicable to SDs

and MSPs have passed and new SDs and MSPs are now required to be in

full compliance with such regulations upon registration with the

Commission.\8\ Notably, the requirements under Title VII of the Dodd-

Frank Act related to SDs and MSPs by their terms apply to all

registered SDs and MSPs, irrespective of where they are located, albeit

subject to the limitations of CEA section 2(i).

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\8\ The compliance dates are summarized on the Compliance Dates

page of the Commission's Web site available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.

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To provide guidance as to the Commission's views regarding the

scope of the cross-border application of Title VII of the Dodd-Frank

Act, the Commission set forth in the Guidance its interpretation of the

manner in which it believes that Title VII's swap provisions apply to

activities outside the U.S. pursuant to section 2(i) of the CEA. Among

other matters, the Guidance generally described the policy and

procedural framework under which the Commission would consider a

substituted compliance program with respect to Commission regulations

[[Page 78900]]

applicable to entities located outside the U.S. Specifically, the

Commission addressed a recognition program where 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. With respect

to the standards forming the basis for any determination of

comparability (``comparability determination'' or ``comparability

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finding''), the Commission stated:

In evaluating whether a particular category of foreign

regulatory requirement(s) is comparable and comprehensive to the

applicable requirement(s) under the CEA and Commission regulations,

the Commission will take into consideration all relevant factors,

including but not limited to, the comprehensiveness of those

requirement(s), the scope and objectives of the relevant regulatory

requirement(s), the comprehensiveness of the foreign regulator's

supervisory compliance program, as well as the home jurisdiction's

authority to support and enforce its oversight of the registrant. In

this context, comparable does not necessarily mean identical.

Rather, the Commission would evaluate whether the home

jurisdiction's regulatory requirement is comparable to and as

comprehensive as the corresponding U.S. regulatory

requirement(s).\9\

\9\ 78 FR 45342-45.

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Upon a comparability finding, consistent with CEA section 2(i) and

comity principles, the Commission's policy generally is that eligible

entities may comply with a substituted compliance regime, subject to

any conditions the Commission places on its finding, and subject to the

Commission's retention of its examination authority and its enforcement

authority.\10\

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\10\ See the Guidance, 78 FR 45342-44.

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In this regard, the Commission notes that a comparability

determination cannot be premised on whether an SD or MSP must disclose

comprehensive information to its regulator in its home jurisdiction,

but rather on whether information relevant to the Commission's

oversight of an SD or MSP would be directly available to the Commission

and any U.S. prudential regulator of the SD or MSP.\11\ The

Commission's direct access to the books and records required to be

maintained by an SD or MSP registered with the Commission is a core

requirement of the CEA\12\ and the Commission's regulations,\13\ and is

a condition to registration.\14\

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\11\ Under Sec. Sec. 23.203 and 23.606, all records required by

the CEA and the Commission's regulations to be maintained by a

registered SD or MSP shall be maintained in accordance with

Commission regulation 1.31 and shall be open for inspection by

representatives of the Commission, the United States Department of

Justice, or any applicable prudential regulator.

In its Final Exemptive Order Regarding Compliance with Certain

Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted

that an applicant for registration as an SD or MSP must file a Form

7-R with the National Futures Association and that Form 7-R was

being modified at that time to address existing blocking, privacy,

or secrecy laws of foreign jurisdictions that applied to the books

and records of SDs and MSPs acting in those jurisdictions. See id.

at 871-72 n. 107. The modifications to Form 7-R were a temporary

measure intended to allow SDs and MSPs to apply for registration in

a timely manner in recognition of the existence of the blocking,

privacy, and secrecy laws. In the Guidance, the Commission clarified

that the change to Form 7-R impacts the registration application

only and does not modify the Commission's authority under the CEA

and its regulations to access records held by registered SDs and

MSPs. Commission access to a registrant's books and records is a

fundamental regulatory tool necessary to properly monitor and

examine each registrant's compliance with the CEA and the

regulations adopted pursuant thereto. The Commission has maintained

an ongoing dialogue on a bilateral and multilateral basis with

foreign regulators and with registrants to address books and records

access issues and may consider appropriate measures where requested

to do so.

\12\ See, e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the

CEA.

\13\ See, e.g., Sec. Sec. 23.203(b) and 23.606.

\14\ Id.

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III. Regulation of SDs and MSPs in Switzerland

On July 11, 2013, UBS submitted a request that the Commission

assess the comparability of laws and regulations applicable in

Switzerland with the CEA and the Commission's regulations promulgated

thereunder. On November 13, 2013, the application was supplemented with

corrections and additional materials.

As represented to the Commission by the applicant, SDs in

Switzerland are primarily regulated by the Swiss Financial Market

Supervisory Authority (``FINMA''). FINMA protects creditors, investors,

and policy holders, ensuring the smooth functioning of the financial

markets and preserving the reputation of Swiss financial institutions.

In its role as state supervisory authority, FINMA acts as an oversight

authority of banks, insurance companies, exchanges, securities dealers,

collective investment schemes, distributors, and insurance

intermediaries. It issues operating licenses for companies in the

supervised sectors. Through its supervisory activities, FINMA's role is

to ensure that supervised institutions comply with the requisite laws,

ordinances, directives and regulations, and continue at all times to

fulfill the licensing requirements.\15\

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\15\ Because the applicant's request and the Commission's

determinations herein are based on the comparability of Swiss

requirements applicable to FINMA supervised institutions, an SD or

MSP that is not supervised by FINMA, or is otherwise not subject to

the requirements applicable to FINMA supervised institutions upon

which the Commission bases its determinations, may not be able to

rely on the Commission's comparability determinations herein.

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IV. Comparable and Comprehensiveness Standard

The Commission's comparability analysis will be based on a

comparison of specific foreign requirements against the specific

related CEA provisions and Commission regulations as categorized and

described in the Guidance. As explained in the Guidance, within the

framework of CEA section 2(i) and principles of international comity,

the Commission may make a comparability determination on a requirement-

by-requirement basis, rather than on the basis of the foreign regime as

a whole.\16\ In making its comparability determinations, the Commission

may include conditions that take into account timing and other issues

related to coordinating the implementation of reform efforts across

jurisdictions.\17\

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\16\ 78 FR 45343.

\17\ 78 FR 45343.

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In evaluating whether a particular category of foreign regulatory

requirement(s) is comparable and comprehensive to the corollary

requirement(s) under the CEA and Commission regulations, the Commission

will take into consideration all relevant factors, including, but not

limited to:

The comprehensiveness of those requirement(s);

The scope and objectives of the relevant regulatory

requirement(s);

The comprehensiveness of the foreign regulator's

supervisory compliance program; and

The home jurisdiction's authority to support and enforce

its oversight of the registrant.\18\

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\18\ 78 FR 45343.

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In making a comparability determination, the Commission takes an

``outcome-based'' approach. An ``outcome-based'' approach means that

when evaluating whether a foreign jurisdiction's regulatory

requirements are comparable to, and as comprehensive as, the corollary

areas of the CEA and Commission regulations, the Commission ultimately

focuses on regulatory outcomes (i.e., the home jurisdiction's

requirements do not have to be identical).\19\ This approach

[[Page 78901]]

recognizes that foreign regulatory systems differ and their approaches

vary and may differ from how the Commission chose to address an issue,

but that the foreign jurisdiction's regulatory requirements nonetheless

achieve the regulatory outcome sought to be achieved by a certain

provision of the CEA or Commission regulation.

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\19\ 78 FR 45343. The Commission's substituted compliance

program would generally be available for swap data repository

reporting (``SDR Reporting''), as outlined in the Guidance, only if

the Commission has direct access to all of the data elements that

are reported to a foreign trade repository pursuant to the

substituted compliance program. Thus, direct access to swap data is

a threshold matter to be addressed in a comparability evaluation for

SDR Reporting. Moreover, the Commission explains in the Guidance

that, due to its technical nature, a comparability evaluation for

SDR Reporting ``will generally entail a detailed comparison and

technical analysis.'' A more particularized analysis will generally

be necessary to determine whether data stored in a foreign trade

repository provides for effective Commission use, in furtherance of

the regulatory purposes of the Dodd-Frank Act. See 78 FR 45345.

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In doing its comparability analysis the Commission may determine

that no comparability determination can be made \20\ and that the non-

U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to

its foreign branches, or non-registrant, to the extent applicable under

the Guidance, may be required to comply with the CEA and Commission

regulations.

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\20\ A finding of comparability may not be possible for a number

of reasons, including the fact that the foreign jurisdiction has not

yet implemented or finalized particular requirements.

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The starting point in the Commission's analysis is a consideration

of the regulatory objectives of the foreign jurisdiction's regulation

of swaps and swap market participants. As stated in the Guidance,

jurisdictions may not have swap specific regulations in some areas, and

instead have regulatory or supervisory regimes that achieve comparable

and comprehensive regulation to the Dodd-Frank Act requirements, but on

a more general, entity-wide, or prudential, basis.\21\ In addition,

portions of a foreign regulatory regime may have similar regulatory

objectives, but the means by which these objectives are achieved with

respect to swaps market activities may not be clearly defined, or may

not expressly include specific regulatory elements that the Commission

concludes are critical to achieving the regulatory objectives or

outcomes required under the CEA and the Commission's regulations. In

these circumstances, the Commission will work with the regulators and

registrants in these jurisdictions to consider alternative approaches

that may result in a determination that substituted compliance

applies.\22\

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\21\ 78 FR 45343.

\22\ As explained in the Guidance, such ``approaches used will

vary depending on the circumstances relevant to each jurisdiction.

One example would include coordinating with the foreign regulators

in developing appropriate regulatory changes or new regulations,

particularly where changes or new regulations already are being

considered or proposed by the foreign regulators or legislative

bodies. As another example, the Commission may, after consultation

with the appropriate regulators and market participants, include in

its substituted compliance determination a description of the means

by which certain swaps market participants can achieve substituted

compliance within the construct of the foreign regulatory regime.

The identification of the means by which substituted compliance is

achieved would be designed to address the regulatory objectives and

outcomes of the relevant Dodd-Frank Act requirements in a manner

that does not conflict with a foreign regulatory regime and reduces

the likelihood of inconsistent regulatory obligations. For example,

the Commission may specify that SDs and MSPs in the jurisdiction

undertake certain recordkeeping and documentation for swap

activities that otherwise is only addressed by the foreign

regulatory regime with respect to financial activities generally. In

addition, the substituted compliance determination may include

provisions for summary compliance and risk reporting to the

Commission to allow the Commission to monitor whether the regulatory

outcomes are being achieved. By using these approaches, in the

interest of comity, the Commission would seek to achieve its

regulatory objectives with respect to the Commission's registrants

that are operating in foreign jurisdictions in a manner that works

in harmony with the regulatory interests of those jurisdictions.''

78 FR 45343-44.

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Finally, the Commission will generally rely on an applicant's

description of the laws and regulations of the foreign jurisdiction in

making its comparability determination. The Commission considers an

application to be a representation by the applicant that the laws and

regulations submitted are in full force and effect, that the

description of such laws and regulations is accurate and complete, and

that, unless otherwise noted, the scope of such laws and regulations

encompasses the swaps activities \23\ of SDs and MSPs\24\ in the

relevant jurisdictions.\25\ Further, as stated in the Guidance, the

Commission expects that an applicant would notify the Commission of any

material changes to information submitted in support of a comparability

determination (including, but not limited to, changes in the relevant

supervisory or regulatory regime) as, depending on the nature of the

change, the Commission's comparability determination may no longer be

valid.\26\

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\23\ ``Swaps activities'' is defined in Commission regulation

23.600(a)(7) to mean, ``with respect to a registrant, such

registrant's activities related to swaps and any product used to

hedge such swaps, including, but not limited to, futures, options,

other swaps or security-based swaps, debt or equity securities,

foreign currency, physical commodities, and other derivatives.'' The

Commission's regulations under 17 CFR Part 23 are limited in scope

to the swaps activities of SDs and MSPs.

\24\ No SD or MSP that is not legally required to comply with a

law or regulation determined to be comparable may voluntarily comply

with such law or regulation in lieu of compliance with the CEA and

the relevant Commission regulation. Each SD or MSP that seeks to

rely on a comparability determination is responsible for determining

whether it is subject to the laws and regulations found comparable.

Currently, there are no MSPs organized outside the U.S. and the

Commission therefore cautions any non-financial entity organized

outside the U.S. and applying for registration as an MSP to

carefully consider whether the laws and regulations determined to be

comparable herein are applicable to such entity.

\25\ The Commission has provided the relevant foreign

regulator(s) with opportunities to review and correct the

applicant's description of such laws and regulations on which the

Commission will base its comparability determination. The Commission

relies on the accuracy and completeness of such review and any

corrections received in making its comparability determinations. A

comparability determination based on an inaccurate description of

foreign laws and regulations may not be valid.

\26\ 78 FR 45345.

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The Guidance provided a detailed discussion of the Commission's

policy regarding the availability of substituted compliance \27\ for

the Internal Business Conduct Requirements.\28\

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\27\ See 78 FR 45348-50. The Commission notes that registrants

and other market participants are responsible for determining

whether substituted compliance is available pursuant to the Guidance

based on the comparability determination contained herein (including

any conditions or exceptions), and its particular status and

circumstances.

\28\ The applicant did not request a compatibility determination

for Sec. 23.608 (Restrictions on counterparty clearing

relationships), therefore, this notice does not address Sec.

23.608. Additionally, this notice does not address Sec. 23.609

(Clearing member risk management). The Commission declines to take

up the request for a comparability determination with respect to

Sec. 23.609 due to the Commission's view that there are not laws or

regulations applicable in Switzerland to compare with the

prohibitions and requirements of Sec. 23.609. The Commission may

provide a comparability determination with respect to this

regulation at a later date in consequence of further developments in

the law and regulations applicable in Switzerland.

This notice also does not address capital adequacy because the

Commission has not yet finalized rules for SDs and MSPs in this

area, nor SDR Reporting. The Commission may provide a comparability

determination with respect to these requirements at a later date or

in a separate notice.

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V. Supervisory Arrangement

In the Guidance, the Commission stated that, in connection with a

determination that substituted compliance is appropriate, it would

expect to enter into an appropriate memorandum of understanding

(``MOU'') or similar arrangement \29\ with the relevant foreign

regulator(s). Although existing arrangements would indicate a foreign

regulator's ability to cooperate and share information, ``going

forward, the Commission and relevant foreign supervisor(s) would need

to establish supervisory MOUs or other arrangements that provide for

[[Page 78902]]

information sharing and cooperation in the context of supervising [SDs]

and MSPs.'' \30\

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\29\ An MOU is one type of arrangement between or among

regulators. Supervisory arrangements could include, as appropriate,

cooperative arrangements that are memorialized and executed as

addenda to existing MOUs or as, e.g., independent bilateral

arrangements, statements of intent, declarations, or letters.

\30\ 78 FR 45344.

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The Commission is in the process of developing its registration and

supervision regime for provisionally-registered SDs and MSPs. This new

initiative includes setting forth supervisory arrangements with

authorities that have joint jurisdiction over SDs and MSPs that are

registered with the Commission and subject to U.S. law. Given the

developing nature of the Commission's regime and the fact that the

Commission has not negotiated prior supervisory arrangements with

certain authorities, the negotiation of supervisory arrangements

presents a unique opportunity to develop close working relationships

between and among authorities, as well as highlight any potential

issues related to cooperation and information sharing.

Accordingly, the Commission is negotiating such a supervisory

arrangement with each applicable foreign regulator of an SD or MSP. The

Commission expects that the arrangement will establish expectations for

ongoing cooperation, address direct access to information,\31\ provide

for notification upon the occurrence of specified events, memorialize

understandings related to on-site visits,\32\ and include protections

related to the use and confidentiality of non-public information shared

pursuant to the arrangement.

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\31\ Section 4s(j)(3) and (4) of the CEA and Commission

regulation 23.606 require a registered SD or MSP to make all records

required to be maintained in accordance with Commission regulation

1.31 available promptly upon request to, among others,

representatives of the Commission. See also 7 U.S.C. Sec. 6s(f); 17

CFR 23.203. In the Guidance, the Commission states that it

``reserves this right to access records held by registered [SDs] and

MSPs, including those that are non-U.S. persons who may comply with

the Dodd-Frank recordkeeping requirement through substituted

compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461

(affirming the Commission's authority under the CEA and its

regulations to access books and records held by registered SDs and

MSPs as ``a fundamental regulatory tool necessary to properly

monitor and examine each registrant's compliance with the CEA and

the regulations adopted pursuant thereto'').

\32\ The Commission retains its examination authority, both

during the application process as well as upon and after

registration of an SD or MSP. See 78 FR 45342 (stating Commission

policy that ``eligible entities may comply with a substituted

compliance regime under certain circumstances, subject, however, to

the Commission's retention of its examination authority'') and 45344

n. 471 (stating that the ``Commission may, as it deems appropriate

and necessary, conduct an on-site examination of the applicant'').

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These arrangements will establish a roadmap for how authorities

will consult, cooperate, and share information. As with any such

arrangement, however, nothing in these arrangements will supersede

domestic laws or resolve potential conflicts of law, such as the

application of domestic secrecy or blocking laws to regulated entities.

VI. Comparability Determination and Analysis

The following section describes the requirements imposed by

specific sections of the CEA and the Commission's regulations for the

Internal Business Conduct Requirements that are the subject of this

comparability determination, and the Commission's regulatory objectives

with respect to such requirements. Immediately following a description

of the requirement(s) and regulatory objective(s) of the specific

Internal Business Conduct Requirements that the requestor submitted for

a comparability determination, the Commission provides a description of

the foreign jurisdiction's comparable laws, regulations, or rules and

whether such laws, regulations, or rules meet the applicable regulatory

objective.

The Commission's determinations in this regard and the discussion

in this section are intended to inform the public of the Commission's

views regarding whether the foreign jurisdiction's laws, regulations,

or rules may be comparable and comprehensive as those requirements in

the Dodd-Frank Act (and Commission regulations promulgated thereunder)

and therefore, may form the basis of substituted compliance. In turn,

the public (in the foreign jurisdiction, in the United States, and

elsewhere) retains its ability to present facts and circumstances that

would inform the determinations set forth in this notice.

As was stated in the Guidance, the Commission recognizes the

complex and dynamic nature of the global swap market and the need to

take an adaptable approach to cross-border issues, particularly as it

continues to work closely with foreign regulators to address potential

conflicts with respect to each country's respective regulatory regime.

In this regard, the Commission may review, modify, or expand the

determinations herein in light of comments received and future

developments.

A. Chief Compliance Officer (Sec. 3.3)

Commission Requirement: Implementing section 4s(k) of the CEA,

Commission regulation 3.3 generally sets forth the following

requirements for SDs and MSPs:

An SD or MSP must designate an individual as Chief

Compliance Officer (``CCO'');

The CCO must have the responsibility and authority to

develop the regulatory compliance policies and procedures of the SD or

MSP;

The CCO must report to the board of directors or the

senior officer of the SD or MSP;

Only the board of directors or a senior officer may remove

the CCO;

The CCO and the board of directors must meet at least once

per year;

The CCO must have the background and skills appropriate

for the responsibilities of the position;

The CCO must not be subject to disqualification from

registration under sections 8a(2) or (3) of the CEA;

Each SD and MSP must include a designation of a CCO in its

registration application;

The CCO must administer the regulatory compliance policies

of the SD or MSP;

The CCO must take reasonable steps to ensure compliance

with the CEA and Commission regulations, and resolve conflicts of

interest;

The CCO must establish procedures for detecting and

remediating non-compliance issues;

The CCO must annually prepare and sign an ``annual

compliance report'' containing: (i) A description of policies and

procedures reasonably designed to ensure compliance; (ii) an assessment

of the effectiveness of such policies and procedures; (iii) a

description of material non-compliance issues and the action taken;

(iv) recommendations of improvements in compliance policies; and (v) a

certification by the CCO or CEO that, to the best of such officer's

knowledge and belief, the annual report is accurate and complete under

penalty of law; and

The annual compliance report must be furnished to the CFTC

within 90 days after the end of the fiscal year of the SD or MSP,

simultaneously with its annual financial condition report.

Regulatory Objective: The Commission believes that compliance by

SDs and MSPs with the CEA and the Commission's rules greatly

contributes to the protection of customers, orderly and fair markets,

and the stability and integrity of the market intermediaries registered

with the Commission. The Commission expects SDs and MSPs to strictly

comply with the CEA and the Commission's rules and to devote sufficient

resources to ensuring such compliance. Thus, through its CCO rule, the

Commission seeks to ensure firms have designated a qualified individual

as CCO that reports directly to the board

[[Page 78903]]

of directors or the senior officer of the firm and that has the

independence, responsibility, and authority to develop and administer

compliance policies and procedures reasonably designed to ensure

compliance with the CEA and Commission regulations, resolve conflicts

of interest, remediate noncompliance issues, and report annually to the

Commission and the board or senior officer on compliance of the firm.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as section 4s(k) of the CEA and

Commission regulation 3.3.

The applicant represented that Swiss law and FINMA regulations

require a regulated entity within FINMA's jurisdiction to appoint a

senior management member to act in the capacity of a CCO, with

responsibility for the oversight of all of the entity's regulated

businesses, including its swaps business. The CCO is required by law to

report, directly or indirectly, to senior management of the regulated

entity with respect to any material compliance issues in any of the

banking entity's businesses.

Under Swiss law, compliance entails the adherence to legal,

regulatory and internal policies, as well as the observance of the

customary standards and rules of professional conduct within the

market. The risk of violations of provisions, standards, or rules of

professional conduct and the corresponding legal and regulatory

sanctions, financial losses, or damage to one's reputation are deemed

to be compliance risks.

Accordingly, FINMA Circular 2008/24 of November 20, 2008,

Supervision and Internal Control of Banks,\33\ requires banks to take

the necessary operational measures and precautions to ensure

compliance. Pursuant to such Circular, banks:

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\33\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20081120-FINMA_Circ_08-24.pdf.

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Must designate one member of senior management to act in

the capacity of the CCO with responsibility for oversight of the

compliance function;

Must maintain a compliance function with unrestricted

access to information and independence from profit-generating business

activities;

Must allocate adequate resources and authority to the

compliance function;

Must not permit compensation of employees of the

compliance function to contain incentives that could lead to conflicts

of interest;

Must conduct an annual assessment (at minimum) of

compliance risk and compliance policies, approved by management;

Must timely report to management regarding material

changes to compliance risks, serious violations, and remediation; and

Must prepare an annual report assessing compliance risks

and activities and furnish such report to the board of directors,

internal auditors, and outside auditors.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 3.3 by seeking to ensure firms have designated a qualified

individual as the compliance officer that reports directly to a

sufficiently senior function of the firm and that has the independence,

responsibility, and authority to develop and administer compliance

policies and procedures reasonably designed to ensure compliance with

the CEA and Commission regulations, resolve conflicts of interest,

remediate noncompliance issues, and report annually on compliance of

the firm.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the CCO requirements of Swiss law

and regulations are comparable to and as comprehensive as Sec. 3.3,

with the exception of Sec. 3.3(f) concerning certifying and furnishing

an annual compliance report to the Commission.

Notwithstanding that the Commission has not determined that the

requirements of the Swiss standards specified above are comparable to

and as comprehensive as Sec. 3.3(f), any SD or MSP to which both Sec.

3.3 and the Swiss law and regulations specified above are applicable

would generally be deemed to be in compliance with Sec. 3.3 if that SD

or MSP complies with the Swiss law and regulations specified above,

subject to certifying and furnishing the Commission with the annual

report required under Swiss law and regulations specified above in

accordance with Sec. 3.3(f). The Commission notes that it generally

expects registrants to submit required reports to the Commission in the

English language.

B. Risk Management Duties (Sec. Sec. 23.600--23.609)

Section 4s(j) of the CEA requires each SD and MSP to establish

internal policies and procedures designed to, among other things,

address risk management, monitor compliance with position limits,

prevent conflicts of interest, and promote diligent supervision, as

well as maintain business continuity and disaster recovery

programs.\34\ The Commission adopted regulations 23.600, 23.601,

23.602, 23.603, 23.605, and 23.606 to implement the statute.\35\ The

Commission also adopted regulation 23.609, which requires certain risk

management procedures for SDs or MSPs that are clearing members of a

derivatives clearing organization (``DCO'').\36\ Collectively, these

requirements help to establish a robust and comprehensive internal risk

management program for SDs and MSPs with respect to their swaps

activities,\37\ which is critical to effective systemic risk management

for the overall swaps market. In making its comparability determination

with regard to these risk management duties, the Commission will

consider each regulation individually.

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\34\ 7 U.S.C. 6s(j).

\35\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR

20128 (April 3, 2012) (relating to risk management program,

monitoring of position limits, business continuity and disaster

recovery, conflicts of interest policies and procedures, and general

information availability, respectively).

\36\ See Customer Documentation Rule, 77 FR 21278 (April 9,

2012). Also, SDs must comply with Commission regulation 23.608,

which prohibits SDs providing clearing services to customers from

entering into agreements that would: (i) Disclose the identity of a

customer's original executing counterparty; (ii) limit the number of

counterparties a customer may trade with; (iii) impose counterparty-

based position limits; (iv) impair a customer's access to execution

of a trade on terms that have a reasonable relationship to the best

terms available; or (v) prevent compliance with specified time

frames for acceptance of trades into clearing.

\37\ See supra note 20.

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1. Risk Management Program for SDs and MSPs (Sec. 23.600)

Commission Requirement: Implementing section 4s(j)(2) of the CEA,

Commission regulation 23.600 generally requires that:

Each SD or MSP must establish and enforce a risk

management program consisting of a system of written risk management

policies and procedures designed to monitor and manage the risks

associated with the swap activities of the firm, including without

limitation, market, credit, liquidity, foreign currency, legal,

operational, and settlement risks, and furnish a copy of such policies

and procedures to the

[[Page 78904]]

CFTC upon application for registration and upon request;

The SD or MSP must establish a risk management unit

independent from the business trading unit;

The risk management policies and procedures of the SD or

MSP must be approved by the firm's governing body;

Risk tolerance limits and exceptions therefrom must be

reviewed and approved quarterly by senior management and annually by

the governing body;

The risk management program must have a system for

detecting breaches of risk tolerance limits and alerting supervisors

and senior management, as appropriate;

The risk management program must account for risks posed

by affiliates and be integrated at the consolidated entity level;

The risk management unit must provide senior management

and the governing body with quarterly risk exposure reports and upon

detection of any material change in the risk exposure of the SD or MSP;

Risk exposure reports must be furnished to the CFTC within

five business days following provision to senior management;

The risk management program must have a new product policy

for assessing the risks of new products prior to engaging in such

transactions;

The risk management program must have policies and

procedures providing for trading limits, monitoring of trading,

processing of trades, and separation of personnel in the trading unit

from personnel in the risk management unit; and

The risk management program must be reviewed and tested at

least annually and upon any material change in the business of the SD

or MSP.

Regulatory Objective: Through the required system of risk

management, the Commission seeks to ensure that firms are adequately

managing the risks of their swaps activities to prevent failure of the

SD or MSP, which could result in losses to counterparties doing

business with the SD or MSP, and systemic risk more generally. To this

end, the Commission believes the risk management program of an SD or

MSP must contain at least the following critical elements:

Identification of risk categories;

Establishment of risk tolerance limits for each category

of risk and approval of such limits by senior management and the

governing body;

An independent risk management unit to administer a risk

management program; and

Periodic oversight of risk exposures by senior management

and the governing body.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as section 4s(j)(2) of the CEA

and Commission regulation 23.600.

Article 9 of the Swiss Banking Ordinance,\38\ FINMA Circular 2008/

24,\39\ and Bank Liquidity Ordinance of the Swiss Federal Council,

address specific forms of risk and detail requirements related to

controls and management of those risks including, but not limited to:

market risk, liquidity risk, operational and settlement risk, credit

risk, reputational risk, and legal risk. Specifically, pursuant to such

Swiss law and regulations, Swiss banks:

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\38\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20090101-BankO.pdf.

\39\ See supra note 31.

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Must have an internal audit function that annually

assesses the effectiveness of risk management;

Must segregate the risk management function from trading

functions;

Must make the board of directors responsible to regulate,

establish, maintain, monitor, and regularly supervise an appropriate

internal control function in conformity with the bank's risk profile;

Must have internal documentation of the risk management

function sufficient for an outside auditor to form a reliable opinion;

Must keep internal auditors independent from management;

Must have internal controls based on systematic risk

analysis, and must ensure material risks are recorded, limited, and

monitored, including risks posed by affiliates;

Must establish an internal audit function that reports

directly to the board or audit committee;

Must have the board of directors regularly discuss with

management its assessment of the adequacy and effectiveness of internal

controls;

Must maintain and regularly test internal control

functions; and

Must define the bank's capacity to assume liquidity risk

(risk tolerance limits), monitor and manage intra-day liquidity risks,

and monitor assets that are used to generate liquidity.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 23.600 by requiring a system of risk management that seeks to

ensure that firms are adequately managing the risks of their swaps

activities to prevent failure of the SD or MSP, which could result in

losses to counterparties doing business with the SD or MSP, and

systemic risk more generally. Specifically, the Commission finds that

the Swiss law and regulations specified above comprehensively require

SDs and MSPs to establish risk management programs containing the

following critical elements:

Identification of risk categories;

Establishment of risk tolerance limits for each category

of risk and approval of such limits by senior management and the

governing body;

An independent risk management unit to administer a risk

management program; and

Periodic oversight of risk exposures by senior management

and the governing body.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the risk management program

requirements of Swiss law and regulations, as specified above, are

comparable to and as comprehensive as Sec. 23.600, with the exception

of Sec. 23.600(c)(2) concerning the requirement that each SD and MSP

produce a quarterly risk exposure report and provide such report to its

senior management, governing body, and the Commission.

Notwithstanding that the Commission has not determined that the

requirements of Swiss law and regulations are comparable to and as

comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.

23.600 and the Swiss law and regulations specified above are applicable

would generally be deemed to be in compliance with Sec. 23.600(c)(2)

if that SD or MSP complies with Swiss law and regulations specified

above, subject to compliance with the requirement that it produce

quarterly risk exposure reports and provide such reports to its senior

management, governing body, and the Commission in accordance with Sec.

23.600(c)(2). The Commission notes that it generally expects reports

furnished to the Commission by registrants to be in the English

language.

2. Monitoring of Position Limits (Sec. 23.601)

Commission Requirement: Implementing section 4s(j)(1) of the CEA,

Commission regulation 23.601 requires each SD or MSP to establish and

enforce written policies and procedures that are reasonably designed

[[Page 78905]]

to monitor for, and prevent violations of, applicable position limits

established by the Commission, a designated contract market (``DCM''),

or a swap execution facility (``SEF'').\40\ The policies and procedures

must include an early warning system and provide for escalation of

violations to senior management (including the firm's governing body).

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\40\ The setting of position limits by the Commission, a DCM, or

a SEF is subject to requirements under the CEA and Commission

regulations other than Sec. 23.601. The setting of position limits

and compliance with such limits is not subject to the Commission's

substituted compliance regime.

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Regulatory Objective: Generally, position limits are implemented to

ensure market integrity, fairness, orderliness, and accurate pricing in

the commodity markets. Commission regulation 23.601 thus seeks to

ensure that SDs and MSPs have established the necessary policies and

procedures to monitor the trading of the firm to prevent violations of

applicable position limits established by the Commission, a DCM, or a

SEF. As part of its Risk Management Program, Sec. 23.601 is intended

to ensure that established position limits are not breached by the SD

or MSP.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as section 4s(j)(1) of the CEA

and Commission regulation 23.601.

The applicant represented that Swiss law and regulations require

banking entities under FINMA's supervision to comply with regulations

in the jurisdictions in which they conduct business, which would

include compliance with the position limit regimes imposed by the

Commission, a DCM, or SEF, as applicable. Specifically, FINMA Circular

2008/24 \41\ requires banking entities whose compliance policies and

procedures govern activities in multiple jurisdictions must ensure that

such policies and procedures ensure compliance in each jurisdiction.

Thus, activities of a Swiss banking entity that have an impact on

United States territory must be in compliance with the Commission's

position limit regime.

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\41\ See supra note 31.

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FINMA Newsletter 31 of December 13, 2011, Unauthorized Trading of

Banks \42\ and Swiss law address specific requirements relating to

monitoring for and complying with applicable position limits. Pursuant

to Swiss law and regulations, Swiss banks:

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\42\ Text of English Translation available at: http://www.finma.ch/e/finma/publikationen/Documents/finma-mitteilung-31-2011-e.pdf.

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Must manage for unauthorized trading and maintain

oversight of trading activities and related risks, including compliance

with applicable position limits; and

Banking entities must devote adequate attention and

management resources to identify, measure, and control compliance

risks.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 23.601 by requiring SDs and MSPs to establish necessary policies

and procedures to monitor the trading of the firm to prevent violations

of applicable position limits established by applicable laws and

regulations, including those of the Commission, a DCM, or a SEF.

Specifically, the Commission finds that the Swiss law and regulations

specified above, comprehensively require SDs and MSPs to monitor for

regulatory compliance with position limits set pursuant to applicable

law and the responsibility of senior management (including the board of

directors) for such compliance.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the compliance monitoring

requirements of Swiss law and regulations, as specified above, are

comparable to and as comprehensive as Sec. 23.601. For the avoidance

of doubt, the Commission notes that this determination may not be

relied on to relieve an SD or MSP from its obligation to strictly

comply with any applicable position limit established by the

Commission, a DCM, or a SEF.

3. Diligent Supervision (Sec. 23.602)

Commission Requirement: Commission regulation 23.602 implements

section 4s(h)(1)(B) of the CEA and requires each SD and MSP to

establish a system to diligently supervise all activities relating to

its business performed by its partners, members, officers, employees,

and agents. The system must be reasonably designed to achieve

compliance with the CEA and CFTC regulations. Commission regulation

23.602 requires that the supervisory system must specifically designate

qualified persons with authority to carry out the supervisory

responsibilities of the SD or MSP for all activities relating to its

business as an SD or MSP.

Regulatory Objective: The Commission's diligent supervision rule

seeks to ensure that SDs and MSPs strictly comply with the CEA and the

Commission's rules. To this end, through Sec. 23.602, the Commission

seeks to ensure that each SD and MSP not only establishes the necessary

policies and procedures that would lead to compliance with the CEA and

Commission regulations, but also establishes an effective system of

internal oversight and enforcement of such policies and procedures to

ensure that such policies and procedures are diligently followed.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as section 4s(h)(1)(B) of the

CEA and Commission regulation 23.602.

FINMA Circular 2008/24 \43\ requires segregation of duties

and control activities. Management is required to ensure an appropriate

segregation of duties and avoids assigning responsibilities which could

lead to conflicting responsibilities or interests.

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\43\ See supra note 31.

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Controlling activities are to be an integral part of all

work processes, e.g., process controls; results monitoring; and review

of conduct of employees and organizational units where no quantitative

results are observable.

As previously stated above, the applicant represents that Swiss law

requires banking entities under FINMA's supervision to comply with

regulations in the jurisdictions in which they conduct business, which

would include compliance with the CEA and Commission regulations as

applicable. Specifically, FINMA Circular 2008/24 requires banking

entities whose compliance policies and procedures govern activities in

multiple jurisdictions must ensure that such policies and procedures

ensure compliance in each jurisdiction. Thus, activities of a Swiss

banking entity that have an impact on United States territory must be

in compliance with the CEA and Commission regulations.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 23.602 because such standards seek to ensure that SDs and MSPs

strictly comply with applicable law, which would include the CEA and

the Commission's regulations. Through the Swiss laws and regulations

specified above, Swiss laws and regulations seek to ensure that each SD

and MSP not only establishes the

[[Page 78906]]

necessary policies and procedures that would lead to compliance with

applicable law, which would include the CEA and Commission regulations,

but also establishes an effective system of internal oversight and

enforcement of such policies and procedures to ensure that such

policies and procedures are diligently followed.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the internal supervision

requirements of Swiss law and regulations, as specified above, are

comparable to and as comprehensive as Sec. 23.602.

4. Business Continuity and Disaster Recovery (Sec. 23.603)

Commission Requirement: To ensure the proper functioning of the

swaps markets and the prevention of systemic risk more generally,

Commission regulation 23.603 requires each SD and MSP, as part of its

risk management program, to establish a business continuity and

disaster recovery plan that includes procedures for, and the

maintenance of, back-up facilities, systems, infrastructure, personnel,

and other resources to achieve the timely recovery of data and

documentation and to resume operations generally within the next

business day after the disruption.

Regulatory Objective: Commission regulation 23.603 is intended to

ensure that any market disruption affecting SDs and MSPs, whether

caused by natural disaster or otherwise, is minimized in length and

severity. To that end, this requirement seeks to ensure that entities

adequately plan for disruptions and devote sufficient resources capable

of carrying out an appropriate plan within one business day, if

necessary.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as Commission regulation 23.603.

Annex 1 of FINMA's Circular on Operational Risk \44\

requires banks to have contingency or business continuity plans to

ensure their ability to operate under exceptional circumstances and to

limit consequences of severe business disruptions.

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\44\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/en/Library/Legislative-Texts/Documents/pub-20130408-finma-circular-***8-21-en.pdf.

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FINMA Circular 2008/10 of November 20, 2008, Self-

regulation as a minimum standard,\45\ and sections 5.4.1 (Business

Impact Analysis) and 5.4.2 (Business Continuity Strategy) of the Swiss

Bankers' Association Recommendations for Business Continuity

Management,\46\ establish minimum business continuity management

standards for banks and securities dealers in Switzerland.

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\45\ Text of English translation available at: http://finma.ch/e/regulierung/Documents/finma-rs-2008-10-e.pdf.

\46\ Text of English translation available at: http://shop.sba.ch/11107_e.pdf.

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Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 23.603 because such standards seek to ensure that any market

disruption affecting SDs and MSPs, whether caused by natural disaster

or otherwise, is minimized in length and severity. To that end, the

Commission finds that the Swiss laws and regulations specified above

seek to ensure that entities adequately plan for disruptions and devote

sufficient resources capable of carrying out an appropriate plan in a

timely manner.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the business continuity and

disaster recovery requirements of Swiss law and regulations, as

specified above, are comparable to and as comprehensive as Sec.

23.603.

5. Conflicts of Interest (Sec. 23.605)

Commission Requirement: Section 4s(j)(5) of the CEA and Commission

regulation 23.605(c) generally require each SD or MSP to establish

structural and institutional safeguards to ensure that the activities

of any person within the firm relating to research or analysis of the

price or market for any commodity or swap are separated by appropriate

informational partitions within the firm from the review, pressure, or

oversight of persons whose involvement in pricing, trading, or clearing

activities might potentially bias their judgment or supervision.

In addition, section 4s(j)(5) of the CEA and Commission regulation

23.605(d)(1) generally prohibits an SD or MSP from directly or

indirectly interfering with or attempting to influence the decision of

any clearing unit of any affiliated clearing member of a DCO to provide

clearing services and activities to a particular customer, including:

Whether to offer clearing services to a particular

customer;

Whether to accept a particular customer for clearing

derivatives;

Whether to submit a customer's transaction to a particular

DCO;

Whether to set or adjust risk tolerance levels for a

particular customer; or

Whether to set a customer's fees based on criteria other

than those generally available and applicable to other customers.

Commission regulation 23.605(d)(2) generally requires each SD or

MSP to create and maintain an appropriate informational partition

between business trading units of the SD or MSP and clearing units of

any affiliated clearing member of a DCO to reasonably ensure compliance

with the Act and the prohibitions set forth in Sec. 23.605(d)(1)

outlined above.

The Commission observes that Sec. 23.605(d) works in tandem with

Commission regulation 1.71, which requires futures commission merchants

(``FCMs'') that are clearing members of a DCO and affiliated with an SD

or MSP to create and maintain an appropriate informational partition

between business trading units of the SD or MSP and clearing units of

the FCM to reasonably ensure compliance with the Act and the

prohibitions set forth in Sec. 1.71(d)(1), which are the same as the

prohibitions set forth in Sec. 23.605(d)(1) outlined above.

Finally, Sec. 23.605(e) requires that each SD or MSP have policies

and procedures that mandate the disclosure to counterparties of

material incentives or conflicts of interest regarding the decision of

a counterparty to execute a derivative on a swap execution facility or

DCM or to clear a derivative through a DCO.

Regulatory Objective: Commission regulation 23.605(c) seeks to

ensure that research provided to the general public by an SD or MSP is

unbiased and free from the influence of the interests of an SD or MSP

arising from the SD's or MSP's trading business.

In addition, the Sec. 23.605(d) (working in tandem with Sec.

1.71) seeks to ensure open access to the clearing of swaps by requiring

that access to and the provision of clearing services provided by an

affiliate of an SD or MSP are not influenced by the interests of an

SD's or MSP's trading business.

Finally, Sec. 23.605(e) seeks to ensure equal access to trading

venues and clearinghouses, as well as orderly and fair markets, by

requiring that each SD and MSP disclose to counterparties any material

incentives or conflicts of interest regarding the decision of a

counterparty to execute a derivative on a SEF or DCM, or to clear a

derivative through a DCO.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the

[[Page 78907]]

following provisions of law and regulations applicable in Switzerland

are in full force and effect in Switzerland, and comparable to and as

comprehensive as Commission regulation 23.605(c).

The FINMA Circular on market conduct rules \47\ and the FINMA

Circular on Self-regulation recognize the Swiss Bankers' Association

Directives on the Independence of Financial Research \48\ as minimum

standards. These circulars require information partitions where

necessary to prevent conflicts of interest. In particular, they require

the research unit to be independent from business trading units.

Adherence to information partitions is to be monitored and is a

designated compliance function, while the ultimate responsibility for

handling confidential price-sensitive information and conflicts of

interest lies with executive management.

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\47\ Text of English translation available at: http://www.finma.ch/e/regulierung/Documents/finma-rs-2008-38-e.pdf (stating

that analysis or research departments are to be organized

independently and be segregated as separate areas of

confidentiality).

\48\ Text of English translation available at: http://www.swissbanking.org/12108.pdf.

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More generally, imposing restrictions on particular customers would

contradict the open access principles outlined in art. 33 of the Swiss

National Bank Ordinance. In addition, under Swiss law, a bank must

comply with the Swiss competition laws, including the Federal Act on

Cartels and other Restraints on Competition. An activity that violates

the provision of these laws is a violation of these laws regardless of

where the putative activity took place.

The applicant has represented to the Commission that FINMA, in the

process of its oversight and enforcement of the foregoing Swiss

standards, would require any SD or MSP subject to such standards to

resolve or mitigate conflicts of interests in the provision of clearing

services by a clearing member of a DCO that is an affiliate of the SD

or MSP, or the decision of a counterparty to execute a derivative on a

SEF or DCM, or clear a derivative through a DCO, through appropriate

information firewalls and disclosures.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above with respect to conflicts of interest

that may arise in producing or distributing research are generally

identical in intent to Sec. 23.605(c) because such standards seek to

ensure that research provided to the general public by an SD is

unbiased and free from the influence of the interests of an SD arising

from the SD's trading business.

With respect to conflicts of interest that may arise in the

provision of clearing services by an affiliate of an SD or MSP, the

Commission further finds that although the general conflicts of

interest prevention requirements under the Swiss standards specified

above do not require with specificity that access to and the provision

of clearing services provided by an affiliate of an SD or MSP not be

improperly influenced by the interests of an SD's or MSP's trading

business, such general requirements would require prevention and

remediation of such improper influence when recognized or discovered.

Thus such standards would ensure open access to clearing.

Finally, although not as specific as the requirements of Sec.

23.605(e) (Undue influence on counterparties), the Commission finds

that the general disclosure requirements of the Swiss standards

specified above would ensure equal access to trading venues and

clearinghouses by requiring that each SD and MSP disclose to

counterparties any material incentives or conflicts of interest

regarding the decision of a counterparty to execute a derivative on a

SEF or DCM, or to clear a derivative through a DCO.

6. Availability of Information for Disclosure and Inspection (Sec.

23.606)

Commission Requirement: Commission regulation 23.606 implements

sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to

disclose to the Commission, and an SD's or MSP's U.S. prudential

regulator (if any) comprehensive information about its swap activities,

and to establish and maintain reliable internal data capture,

processing, storage, and other operational systems sufficient to

capture, process, record, store, and produce all information necessary

to satisfy its duties under the CEA and Commission regulations. Such

systems must be designed to provide such information to the Commission

and an SD's or MSP's U.S. prudential regulator within the time frames

set forth in the CEA and Commission regulations and upon request.

Regulatory Objective: Commission regulation 23.606 seeks to ensure

that each SD and MSP captures and maintains comprehensive information

about their swap activities, and is able to retrieve and disclose such

information to the Commission and its U.S. prudential regulator, if

any, as necessary for compliance with the CEA and the Commission's

regulations and for purposes of Commission oversight, as well as

oversight by the SD's or MSP's U.S. prudential regulator, if any.

The Commission observes that it would be impossible to meet the

regulatory objective of Sec. 23.606 unless the required information is

available to the Commission and any U.S. prudential regulator under the

foreign legal regime. Thus, a comparability determination with respect

to the information access provisions of Sec. 23.606 would be premised

on whether the relevant information would be available to the

Commission and any U.S. prudential regulator of the SD or MSP, not on

whether an SD or MSP must disclose comprehensive information to its

regulator in its home jurisdiction.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect in Switzerland,

and comparable to and as comprehensive as Commission regulation 23.606.

The Swiss Code of Obligations,\49\ Ordinance of the Swiss Federal

Council on Business Record Keeping,\50\ Swiss Financial Markets

Supervisory Authority Act,\51\ Swiss National Banking Ordinance,\52\

National Bank Act,\53\ and FINMA Circulars impose comprehensive

requirements with respect to data retention and storage, and the

availability of such data to regulatory authorities. These requirements

apply to all of a banking entity's business, including its swaps

business.

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\49\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/19110009/201305280000/220.pdf.

\50\ Text of ordinance available at: http://www.admin.ch/opc/de/classified-compilation/20001467/201301010000/221.431.pdf.

\51\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20052624/201307010000/956.1.pdf.

\52\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20040259/201307010000/951.131.pdf (requiring banks to report OTC derivatives information

biannually to the Bank of Internal Settlement).

\53\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20021117/201203010000/951.11.pdf (requiring the Swiss National Bank, pursuant to art. 14,

to monitor financial market developments and requiring banks to

provide statistical data about their activities to the Swiss

National Bank).

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Collectively, these Swiss laws and regulations require a firm to

maintain swaps data and related books and records in a systematic,

logical, and chronological format so that the data cannot be damaged,

altered, or deleted. Further, a firm is required to maintain account

records, accounting records, and business correspondence for ten years.

These records must contain all

[[Page 78908]]

necessary information to establish, review, and reconstruct the

financial situation of the firm by FINMA, regulatory authorities, audit

firms, and persons or companies legally authorized to review such

records.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. 23.606 because such standards seek to ensure that each SD and MSP

captures and stores comprehensive information about their swap

activities, and are able to retrieve and disclose such information as

necessary for compliance with applicable law and for purposes of

regulatory oversight.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the requirements of Swiss law and

regulations with respect to the availability of information for

inspection and disclosure, as specified above, are comparable to, and

as comprehensive as, Sec. 23.606, with the exception of Sec.

23.606(a)(2) concerning the requirement that an SD or MSP make

information required by Sec. 23.606(a)(1) available promptly upon

request to Commission staff and the staff of an applicable prudential

regulator. The applicant has not submitted any provision of law or

regulations applicable in Switzerland, upon which the Commission could

make a finding that SDs and MSPs would be required to retrieve and

disclose comprehensive information about their swap activities to the

Commission or any U.S. prudential regulator as necessary for compliance

with the CEA and Commission regulations, and for purposes of Commission

oversight and the oversight of any U.S. prudential regulator.

Notwithstanding that the Commission has not determined that the

requirements of Swiss law and regulations are comparable to and as

comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both Sec.

23.606 and the Swiss standards specified above are applicable would

generally be deemed to be in compliance with Sec. 23.606(a)(2) if that

SD or MSP complies with the Swiss standards specified above, subject to

compliance with the requirement that it produce information to

Commission staff and the staff of an applicable U.S. prudential

regulator in accordance with Sec. 23.606(a)(2).

C. Swap Data Recordkeeping (Sec. Sec. 23.201 and 23.203)

Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the

CEA, and Commission regulation 23.201 generally require SDs and MSPs to

retain records of each transaction, each position held, general

business records (including records related to complaints and sales and

marketing materials), records related to governance, financial records,

records of data reported to swap data repositories (``SDRs''), and

records of real-time reporting data along with a record of the date and

time the SD or MSP made such reports. Transaction records must be kept

in a form and manner identifiable and searchable by transaction and

counterparty.

Commission regulation 23.203, requires SDs and MSPs to maintain

records of a swap transaction until the termination, maturity,

expiration, transfer, assignment, or novation date of the transaction,

and for a period of five years after such date. Records must be

``readily accessible'' for the first 2 years of the 5 year retention

period (consistent with Sec. 1.31).

The Commission notes that the comparability determination below

with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data

recordkeeping generally and swap data recordkeeping relating to

complaints and marketing and sales materials in accordance with Sec.

23.201(b)(3) and (4).\54\

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\54\ See the Guidance for a discussion of the availability of

substituted compliance with respect to swap data recordkeeping, 78

FR 45332-33.

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Regulatory Objective: Through the Commission's regulations

requiring SDs and MSPs to keep comprehensive records of their swap

transactions and related data, the Commission seeks to ensure the

effectiveness of the internal controls of SDs and MSPs, and

transparency in the swaps market for regulators and market

participants.

The Commission's regulations require SDs and MSPs to keep swap data

in a level of detail sufficient to enable regulatory authorities to

understand an SD's or MSP's swaps business and to assess its swaps

exposure.

By requiring comprehensive records of swap data, the Commission

seeks to ensure that SDs and MSPs employ effective risk management, and

strictly comply with Commission regulations. Further, such records

facilitate effective regulatory oversight.

The Commission observes that it would be impossible to meet the

regulatory objective of Sec. Sec. 23.201 and 23.203 unless the

required information is available to the Commission and any U.S.

prudential regulator under the foreign legal regime. Thus, a

comparability determination with respect to the information access

provisions of Sec. 23.203 would be premised on whether the relevant

information would be available to the Commission and any U.S.

prudential regulator of the SD or MSP, not on whether an SD or MSP must

disclose comprehensive information to its regulator in its home

jurisdiction.

Comparable Swiss Law and Regulations: The applicant has represented

to the Commission that the following provisions of law and regulations

applicable in Switzerland are in full force and effect Switzerland, and

comparable to and as comprehensive as sections 4s(f)(1)(B) and 4s(g)(1)

of the CEA and Sec. Sec. 23.201 and 23.203.

Under Swiss law and FINMA Circulars, a banking entity is subject to

extensive requirements regarding accounting records, which cover

records of transactions in all areas of the bank's business, including

its swaps business. Under the Swiss Code of Obligations,\55\ for

example:

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\55\ See supra note 51.

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According to art. 957, a Swiss firm has to properly

capture and maintain its books necessary to provide a fair view of its

kind and size of business. Accounting records and business

correspondence can be maintained in written or electronic format,

provided the format ensures that the records adequately reflect

business transactions;

According to art. 962, accounts, accounting records, and

business correspondence have to be retained for ten years;

Pursuant to art. 713, all deliberations and decisions by

the supervisory body have to be recorded in a protocol, signed by the

Chairman and the secretary; and

Pursuant to art. 747, the accounting records of a

dissolved company are kept for ten years at a location designated by

the liquidators or, if the liquidators cannot reach agreement, by the

commercial registry.

Commission Determination: The Commission finds that the Swiss law

and regulations specified above are generally identical in intent to

Sec. Sec. 23.201 and 23.202 because such standards seek to ensure the

effectiveness of the internal controls of SDs and MSPs, and

transparency in the swaps market for regulators and market

participants.

In addition, the Commission finds that the Swiss laws and

regulations specified above require SDs and MSPs to keep swap data in a

level of detail sufficient to enable regulatory authorities to

understand an SD's or MSP's swaps business and to assess its swaps

exposure.

[[Page 78909]]

Finally, the Commission finds that Swiss laws and regulations

specified above, by requiring comprehensive records of swap data, seek

to ensure that SDs and MSPs employ effective risk management, seek to

ensure that SDs and MSPs strictly comply with applicable regulatory

requirements (including the CEA and Commission regulations), and that

such records facilitate effective regulatory oversight.

Based on the foregoing and the representations of the applicant,

the Commission hereby determines that the requirements of Swiss law and

regulations with respect to the swap data recordkeeping, as specified

above, are comparable to, and as comprehensive as, Sec. Sec. 23.201

and 23.203, with the exception of Sec. 23.203(b)(2) concerning the

requirement that an SD or MSPs make records required by Sec. 23.201

open to inspection by any representative of the Commission, the United

States Department of Justice, or any applicable U.S. prudential

regulator. The applicant has not submitted any provision of law or

regulations applicable in Switzerland, upon which the Commission could

make a finding that SDs and MSPs would be required to make records

required by Sec. 23.201 open to inspection by any representative of

the Commission, the United States Department of Justice, or any

applicable U.S. prudential regulator.

Notwithstanding that the Commission has not determined that the

requirements of Swiss law and regulations are comparable to and as

comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both Sec.

23.203 and the Swiss law and regulations specified above are applicable

would generally be deemed to be in compliance with Sec. 23.203(b)(2)

if that SD or MSP complies with the Swiss law and regulations specified

above, subject to compliance with the requirement that it make records

required by Sec. 23.201 open to inspection by any representative of

the Commission, the United States Department of Justice, or any

applicable U.S. prudential regulator in accordance with Sec.

23.203(b)(2).

Issued in Washington, DC on December 20, 2013, by the

Commission.

Christopher J. Kirkpatrick,

Deputy Secretary of the Commission.

Appendices to Comparability Determination for Switzerland: Certain

Entity-Level Requirements

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--Joint Statement of Chairman Gary Gensler and Commissioners

Bart Chilton and Mark Wetjen

We support the Commission's approval of broad comparability

determinations that will be used for substituted compliance

purposes. For each of the six jurisdictions that has registered swap

dealers, we carefully reviewed each regulatory provision of the

foreign jurisdictions submitted to us and compared the provision's

intended outcome to the Commission's own regulatory objectives. The

resulting comparability determinations for entity-level requirements

permit non-U.S. swap dealers to comply with regulations in their

home jurisdiction as a substitute for compliance with the relevant

Commission regulations.

These determinations reflect the Commission's commitment to

coordinating our efforts to bring transparency to the swaps market

and reduce its risks to the public. The comparability findings for

the entity-level requirements are a testament to the comparability

of these regulatory systems as we work together in building a strong

international regulatory framework.

In addition, we are pleased that the Commission was able to find

comparability with respect to swap-specific transaction-level

requirements in the European Union and Japan.

The Commission attained this benchmark by working cooperatively

with authorities in Australia, Canada, the European Union, Hong

Kong, Japan, and Switzerland to reach mutual agreement. The

Commission looks forward to continuing to collaborate with both

foreign authorities and market participants to build on this

progress in the months and years ahead.

Appendix 3--Statement of Dissent by Commissioner Scott D. O'Malia

I respectfully dissent from the Commodity Futures Trading

Commission's (``Commission'') approval of the Notices of

Comparability Determinations for Certain Requirements under the laws

of Australia, Canada, the European Union, Hong Kong, Japan, and

Switzerland (collectively, ``Notices''). While I support the narrow

comparability determinations that the Commission has made, moving

forward, the Commission must collaborate with foreign regulators to

harmonize our respective regimes consistent with the G-20 reforms.

However, I cannot support the Notices because they: (1) Are

based on the legally unsound cross-border guidance (``Guidance'');

\1\ (2) are the result of a flawed substituted compliance process;

and (3) fail to provide a clear path moving forward. If the

Commission's objective for substituted compliance is to develop a

narrow rule-by-rule approach that leaves unanswered major regulatory

gaps between our regulatory framework and foreign jurisdictions,

then I believe that the Commission has successfully achieved its

goal today.

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\1\ Interpretive Guidance and Policy Statement Regarding

Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,

2013).

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Determinations Based on Legally Unsound Guidance

As I previously stated in my dissent, the Guidance fails to

articulate a valid statutory foundation for its overbroad scope and

inconsistently applies the statute to different activities.\2\

Section 2(i) of the Commodity Exchange Act (``CEA'') states that the

Commission does not have jurisdiction over foreign activities unless

``those activities have a direct and significant connection with

activities in, or effect on, commerce of the United States * * *.''

\3\ However, the Commission never properly articulated how and when

this limiting standard on the Commission's extraterritorial reach is

met, which would trigger the application of Title VII of the Dodd-

Frank Act \4\ and any Commission regulations promulgated thereunder

to swap activities that are outside of the United States. Given this

statutorily unsound interpretation of the Commission's

extraterritorial authority, the Commission often applies CEA section

2(i) inconsistently and arbitrarily to foreign activities.

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\2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

\3\ CEA section 2(i); 7 U.S.C. 2(i).

\4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer

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

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Accordingly, because the Commission is relying on the legally

deficient Guidance to make its substituted compliance

determinations, and for the reasons discussed below, I cannot

support the Notices. The Commission should have collaborated with

foreign regulators to agree on and implement a workable regime of

substituted compliance, and then should have made determinations

pursuant to that regime.

Flawed Substituted Compliance Process

Substituted compliance should not be a case of picking a set of

foreign rules identical to our rules, determining them to be

``comparable,'' but then making no determination regarding rules

that require extensive gap analysis to assess to what extent each

jurisdiction is, or is not, comparable based on overall outcomes of

the regulatory regimes. While I support the narrow comparability

determinations that the Commission has made, I am concerned that in

a rush to provide some relief, the Commission has made substituted

compliance determinations that only afford narrow relief and fail to

address major regulatory gaps between our domestic regulatory

framework and foreign jurisdictions. I will address a few examples

below.

First, earlier this year, the OTC Derivatives Regulators Group

(``ODRG'') agreed to a number of substantive understandings to

improve the cross-border implementation of over-the-counter

derivatives reforms.\5\ The ODRG specifically agreed that a

flexible, outcomes-based approach, based on a broad

[[Page 78910]]

category-by-category basis, should form the basis of comparability

determinations.\6\

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\5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.

\6\ http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.

Understanding number 2 states that ``[a] flexible, outcomes-based

approach should form the basis of final assessments regarding

equivalence or substituted compliance.''

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However, instead of following this approach, the Commission has

made its comparability determinations on a rule-by-rule basis. For

example, in Japan's Comparability Determination for Transaction-

Level Requirements, the Commission has made a positive comparability

determination for some of the detailed requirements under the swap

trading relationship documentation provisions, but not for other

requirements.\7\ This detailed approach clearly contravenes the

ODRG's understanding.

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\7\ The Commission made a positive comparability determination

for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),

(b)(4), (c), and (d), but not for Commission regulations

23.504(b)(5) and (b)(6).

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Second, in several areas, the Commission has declined to

consider a request for a comparability determination, and has also

failed to provide an analysis regarding the extent to which the

other jurisdiction is, or is not, comparable. For example, the

Commission has declined to address or provide any clarity regarding

the European Union's regulatory data reporting determination, even

though the European Union's reporting regime is set to begin on

February 12, 2014. Although the Commission has provided some limited

relief with respect to regulatory data reporting, the lack of

clarity creates unnecessary uncertainty, especially when the

European Union's reporting regime is set to begin in less than two

months.

Similarly, Japan receives no consideration for its mandatory

clearing requirement, even though the Commission considers Japan's

legal framework to be comparable to the U.S. framework. While the

Commission has declined to provide even a partial comparability

determination, at least in this instance the Commission has provided

a reason: the differences in the scope of entities and products

subject to the clearing requirement.\8\ Such treatment creates

uncertainty and is contrary to increased global harmonization

efforts.

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\8\ Yen-denominated interest rate swaps are subject to the

mandatory clearing requirement in both the U.S. and Japan.

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Third, in the Commission's rush to meet the artificial deadline

of December 21, 2013, as established in the Exemptive Order

Regarding Compliance with Certain Swap Regulations (``Exemptive

Order''),\9\ the Commission failed to complete an important piece of

the cross-border regime, namely, supervisory memoranda of

understanding (``MOUs'') between the Commission and fellow

regulators.

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\9\ Exemptive Order Regarding Compliance With Certain Swap

Regulations, 78 FR 43785 (Jul. 22, 2013).

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I have previously stated that these MOUs, if done right, can be

a key part of the global harmonization effort because they provide

mutually agreed-upon solutions for differences in regulatory

regimes.\10\ Accordingly, I stated that the Commission should be

able to review MOUs alongside the respective comparability

determinations and vote on them at the same time. Without these

MOUs, our fellow regulators are left wondering whether and how any

differences, such as direct access to books and records, will be

resolved.

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\10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.

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Finally, as I have consistently maintained, the substituted

compliance process should allow other regulatory bodies to engage

with the full Commission.\11\ While I am pleased that the Notices

are being voted on by the Commission, the full Commission only

gained access to the comment letters from foreign regulators on the

Commission's comparability determination draft proposals a few days

ago. This is hardly a transparent process.

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\11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

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Unclear Path Forward

Looking forward to next steps, the Commission must provide

answers to several outstanding questions regarding these

comparability determinations. In doing so, the Commission must

collaborate with foreign regulators to increase global

harmonization.

First, there is uncertainty surrounding the timing and outcome

of the MOUs. Critical questions regarding information sharing,

cooperation, supervision, and enforcement will remain unanswered

until the Commission and our fellow regulators execute these MOUs.

Second, the Commission has issued time-limited no-action relief

for the swap data repository reporting requirements. These

comparability determinations will be done as separate notices.

However, the timing and process for these determinations remain

uncertain.

Third, the Commission has failed to provide clarity on the

process for addressing the comparability determinations that it

declined to undertake at this time. The Notices only state that the

Commission may address these requests in a separate notice at a

later date given further developments in the law and regulations of

other jurisdictions. To promote certainty in the financial markets,

the Commission must provide a clear path forward for market

participants and foreign regulators.

The following steps would be a better approach: (1) The

Commission should extend the Exemptive Order to allow foreign

regulators to further implement their regulatory regimes and

coordinate with them to implement a harmonized substituted

compliance process; (2) the Commission should implement a flexible,

outcomes-based approach to the substituted compliance process and

apply it similarly to all jurisdictions; and (3) the Commission

should work closely with our fellow regulators to expeditiously

implement MOUs that resolve regulatory differences and address

regulatory oversight issues.

Conclusion

While I support the narrow comparability determinations that the

Commission has made, it was my hope that the Commission would work

with foreign regulators to implement a substituted compliance

process that would increase the global harmonization effort. I am

disappointed that the Commission has failed to implement such a

process.

I do believe that in the longer term, the swaps regulations of

the major jurisdictions will converge. At this time, however, the

Commission's comparability determinations have done little to

alleviate the burden of regulatory uncertainty and duplicative

compliance with both U.S. and foreign regulations.

The G-20 process delineated and put in place the swaps market

reforms in G-20 member nations. It is then no surprise that the

Commission must learn to coordinate with foreign regulators to

minimize confusion and disruption in bringing much needed clarity to

the swaps market. For all these shortcomings, I respectfully dissent

from the Commission's approval of the Notices.

[FR Doc. 2013-30978 Filed 12-26-13; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 27, 2013