2010-23142

FR Doc 2010-23142[Federal Register: September 16, 2010 (Volume 75, Number 179)]

[Notices]

[Page 56513-56516]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr16se10-32]

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COMMODITY FUTURES TRADING COMMISSION

Orders Regarding the Treatment of Petitions Seeking Grandfather

Relief for Exempt Commercial Markets and Exempt Boards of Trade

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice; final orders.

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SUMMARY: The Commission is issuing orders whereby entities currently

operating as exempt commercial markets, pursuant to Section 2(h)(3)-(7)

of the Commodity Exchange Act, or exempt boards of trade, pursuant to

Section 5d of the Commodity Exchange Act, may receive grandfather

relief to continue to operate in accordance with those provisions

notwithstanding their deletion from the Commodity Exchange Act,

effective July 15, 2011, by the Dodd-Frank Wall Street Reform and

Consumer Protection Act. The Commission's orders set forth various

conditions for such grandfather relief, including the filing of a

relief petition

[[Page 56514]]

and a swap execution facility or designated contract market application

with the Commission.

DATES: Effective Date: September 10, 2010. Comments on this notice will

be accepted until October 18, 2010.

ADDRESSES: You may submit comments or petitions for relief, identified

with ``ECM/EBOT Grandfather Relief'' in the subject line, whichever is

appropriate, by any of the following methods:

E-mail for Comments: [email protected] E-mail for

petitions: ecmebotpetitionscftc.gov.

Mail: David A. Stawick, Secretary of the Commission,

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

Street, NW., Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments and petitions will be posted as

received to http://www.cftc.gov.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Chief Counsel,

Division of Market Oversight, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

Telephone: (202) 418-5481. E-mail: [email protected]; or Beverly E.

Loew, Assistant General Counsel, Office of the General Counsel, same

address. Telephone: (202) 418-5648. E-mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Introduction

On July 21, 2010, President Obama signed into law the Dodd-Frank

Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\

Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act

(``CEA'') \3\ to establish a comprehensive new regulatory framework for

swaps and security-based swaps. Among other changes to the CEA, the

Dodd-Frank Act eliminated certain exempt market categories--exempt

commercial markets (``ECMs'') and exempt boards of trade (``EBOTs'')--

from the CEA; established a new regulated market category--swap

execution facilities (``SEFs''); revised certain requirements for an

extant regulated market category--designated contract markets

(``DCMs''); and authorized the Commission to grant grandfather relief

for entities in the eliminated exempt market categories in order to

assist those entities to transition their business models to a

different market category.\4\

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

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

Dodd-Frank Act may be accessed at http://www.cftc.gov./

LawRegulation/OTCDERIVATIVES/index.htm.

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

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

2010.''

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

\4\ The same provision of the Dodd-Frank Act that eliminated

EBOTs also deleted CEA Section 5a--a provision that established a

category of regulated markets known as derivatives transaction

execution facilities (``DTEFs''). See Section 734 of the Dodd-Frank

Act. The Dodd-Frank Act does not, however, authorize the Commission

to grant grandfather relief to the DTEFs. Accordingly, DTEFs are not

addressed in the Commission's subject order. Notably, the Commission

has never registered a DTEF.

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II. Background and Discussion

a. Exempt Commercial Markets and Exempt Boards of Trade

Sections 723 and 734 of the Dodd-Frank Act will strike from the CEA

enabling provisions for two categories of exempt markets established by

the Commodity Futures Modernization Act of 2000 (``CFMA'').\5\

Specifically, Section 723 of the Dodd-Frank Act will strike CEA Section

2(h)(3)-(7) and, thus, eliminate the ECM category.\6\ Similarly,

Section 734 of the Dodd-Frank Act will strike CEA Section 5d and, thus,

eliminate the EBOT category.\7\

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\5\ See Commodity Futures Modernization Act of 2000, Public Law

106-554, 114 Stat. 2763 (2000).

\6\ See Section 723(a)(1)(A) of the Dodd-Frank Act.

\7\ See Section 734(a) of the Dodd-Frank Act.

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The Commission notes that ECMs and EBOTs are both required to

operate their execution platforms as trading facilities, as that term

is defined by CEA Section 1a(34), and must limit access to a narrow

group of market participants--eligible commercial entities in the case

of ECMs and eligible contract participants in the case of EBOTs. These

requirements are not inconsistent with the execution platform and

market participant requirements for DCMs or SEFs as they are set forth

in the CEA and the Dodd-Frank Act. Accordingly, while the ECM and EBOT

provisions will be eliminated from the CEA effective July 15, 2011, the

basic structural requirements for both of those market categories

should facilitate the ability of ECMs and EBOTs to transition to either

the SEF or DCM market category; provided, of course, that they comply

with the enhanced regulatory requirements for those two categories.

Sections 723 and 734 of the Dodd-Frank Act contain similar

grandfather provisions for ECMs and EBOTs, respectively, whereby they

may petition the Commission to continue to operate as ECMs and EBOTs.

With some variation, both sections establish three basic requirements

regarding the processing of grandfather petitions.

First, entities seeking grandfather treatment must submit their

petitions to the Commission by a set deadline: ECMs must submit their

petitions within sixty days of the enactment of the Dodd-Frank Act

(i.e., by September 20, 2010) and EBOTs must submit their petitions by

the Dodd-Frank Act's effective date (i.e., by July 15, 2011). Second,

the Commission must consider all petitions in a ``prompt manner.''

Third, the Commission may grant grandfather treatment for up to one

year. In the case of EBOT petitions, the Dodd-Frank Act makes clear

that the one-year period would commence with the Dodd-Frank Act's

effective date of July 15, 2011. By contrast, the Dodd-Frank Act does

not specify what the reference date should be for the running of any

grandfather period for ECMs.

The Commission expects that many entities that currently operate as

ECMs or EBOTs will seek to become either SEFs or DCMs when the

Commission adopts regulations implementing Dodd-Frank's requirements

for those facilities. While the Commission expects to adopt SEF and DCM

regulations prior to the July 15, 2011, effective date for deleting the

ECM and EBOT provisions from the CEA, the Commission also anticipates

that concurrent with the implementation of those new provisions it will

have to process a large number of SEF and DCM applications from ECMs,

EBOTs and interdealer brokers.\8\ In order to ease this congestion of

applications, and to facilitate the transition of current ECM and EBOT

businesses to the new regulatory regime mandated by the Dodd-Frank Act,

the Commission believes that it would be appropriate to provide

grandfather relief allowing EBOTs and ECMs to continue to operate as

EBOTs and ECMs after the July 15, 2011, effective date of the Dodd-

Frank Act.

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\8\ Currently, there are 16 ECMs and 6 EBOTs with active

Notifications of Operation or Annual Certifications on file with the

Commission.

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Accordingly, the Commission is issuing orders that would establish

procedures whereby ECMs and EBOTs may petition for and receive

grandfather relief from the otherwise applicable provisions of the

Dodd-Frank Act, so long as they submit both timely and acceptable

grandfather relief requests and either DCM or SEF applications. To be

acceptable, the grandfather relief request shall contain a commitment

to provide the Commission and its staff with access to the books and

records of the ECM or EBOT relating to its business as an ECM or EBOT

in

[[Page 56515]]

accordance with the requirements in Commission Regulation 1.31, 17 CFR

1.31, effective July 15, 2011. Failure to comply with any request for

books and records in accordance with the requirements of Commission

Regulation 1.31 shall constitute a basis for revocation of the

grandfather relief. The grandfather relief will extend for as long as

the ECM or EBOT has a legitimate DCM or SEF application pending before

the Commission and, accordingly, the relief will expire upon the

Commission's approval or disapproval of the application.

b. Eligible Contract Participants Operating Pursuant to Section 2(h)(1)

Section 723 of the Dodd-Frank Act, which eliminated the ECM

category from the CEA, also deleted CEA Section 2(h)(1)-(2)--a

provision that provides an exemption for certain types of bilateral

trading conducted off of regulated markets. Although the Dodd-Frank Act

authorizes the Commission to grant grandfather relief to trading

activity that relies upon CEA Section 2(h)(1)-(2), the nature of that

trading activity is qualitatively different from trading activity on

EBOTs and ECMs, both of which must operate as trading facilities, as

that term is defined in CEA Section 1a(34). Accordingly, the issue of

grandfather treatment for Section 2(h)(1)-(2) bilateral trading will be

addressed by the Commission in a separate action.

III. Related Matters

a. Paperwork Reduction Act

The Commission has determined that these proposed orders will not

impose any new recordkeeping or information collection requirements, or

other collections of information that require approval of the Office of

Management and Budget under the Paperwork Reduction Act (``PRA'').\9\

Collections of information that may be associated with a SEF or DCM

application required as a condition for receiving relief will be

addressed within the SEF and DCM-related rulemakings implementing the

Dodd-Frank Act.

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\9\ 44 U.S.C. 3501 et seq.

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b. Cost-Benefit Analysis

Section 15(a) of the CEA \10\ requires the Commission to consider

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

Act. By its terms, Section 15(a) does not require the Commission to

quantify the costs and benefits of an order or to determine whether the

benefits of the order outweigh its costs; rather, it requires that the

Commission ``consider'' the costs and benefits of its actions. Section

15(a) further specifies that the costs and benefits shall be evaluated

in light of five broad areas of market and public concern: (1)

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

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

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

interest considerations. The Commission may in its discretion give

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

discretion determine that, notwithstanding its costs, a particular

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

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

the Act. The Commission has determined that providing grandfather

relief to ECMs and EBOTs, as provided in these orders, will mitigate

market disruptions by permitting ECMs and EBOTs to continue to operate

while they transition into new market categories once the Dodd-Frank

Act becomes effective.\11\

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\10\ 7 U.S.C. 19(a).

\11\ The Commission is aware of certain ECMs that have block

trade mechanisms whereby large-sized block transactions are executed

away from the ECM's central marketplace, but in accordance with the

ECM's rules, and subsequently reported to the ECM and treated as

fungible with positions established through the central marketplace.

Those block trades and resultant positions should be considered

within the scope of the ECM grandfather relief being granted by this

release.

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c. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \12\ requires that

agencies consider the impact of their rules on small businesses. The

Commission previously has determined that neither ECMs nor EBOTs are

small entities for purposes of the RFA.\13\ Accordingly, the Chairman,

on behalf of the Commission, hereby certifies pursuant to 5 U.S.C.

605(b) that these Orders, taken in connection with Sections 2(h)(3)-(7)

and 5d of the Act and with the Part 36 rules, will not have a

significant impact on a substantial number of small entities.

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\12\ 5 U.S.C. 601 et seq.

\13\ 66 FR 42256, 42268 (Aug. 10, 2001).

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IV. Orders

a. ECM Grandfather Order

After considering the complete record in this matter, the

Commission has determined to issue the following Order pursuant to its

authority under Section 723(c) of the Dodd-Frank Act:

It is hereby ordered that any ECM that meets all of the following

applicable conditions may continue to operate pursuant to the

provisions of CEA Section 2(h)(3)-(7) until July 15, 2012 (one year

after the general effective date of the Dodd-Frank Act's amendments to

the CEA): \14\

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\14\ See Section 754 of the Dodd-Frank Act.

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(1) The ECM must have filed with the Commission by September 20,

2010, a grandfather relief petition that:

(a) Is labeled ``Exempt Commercial Market Grandfather Relief

Petition Filed Pursuant to Section 723(c)(2)(A) of the Dodd-Frank

Act,''

(b) Identifies the requesting ECM,

(c) Identifies a contact person at the ECM, including that person's

contact information at the ECM, and

(d) Grants the Commission and its representatives access to the

books and records of the ECM relating to its business as an ECM in

accordance with the requirements of Commission Regulation 1.31,

starting July 15, 2011 and throughout the pendency of the grandfather

relief.

(2) The ECM must have filed a formal SEF or DCM application with

the Commission within sixty days after the effective date of final

regulations implementing the provisions of either Section 733 or 735 of

the Dodd-Frank Act, whichever is appropriate.

(3) The ECM's SEF or DCM application is currently pending before

the Commission.

b. EBOT Grandfather Order

After considering the complete record in this matter, the

Commission has determined to issue the following Order pursuant to its

authority under Section 734(c)(1) of the Dodd-Frank Act:

It is hereby ordered that any EBOT that meets all of the following

applicable conditions may continue to operate pursuant to the

provisions of CEA Section 5d up until July 15, 2012 (one year after the

general effective date of the Dodd-Frank Act's amendments to the CEA):

\15\

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\15\ See Section 754 of the Dodd-Frank Act.

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(1) The EBOT must have filed with the Commission by July 15, 2011,

a grandfather relief petition that:

(a) Is labeled ``Exempt Board of Trade Grandfather Relief Petition

Filed Pursuant to Section 734(c)(1) of the Dodd-Frank Act,''

(b) Identifies the requesting EBOT,

(c) Identifies a contact person at the EBOT, including that

person's contact information at the EBOT, and

(d) Grants the Commission and its representatives access to the

books and records of the EBOT relating to its business as an EBOT in

accordance with the requirements of Commission

[[Page 56516]]

Regulation 1.31, starting July 15, 2011 and throughout the pendency of

the grandfather relief.

(2) The EBOT must have filed a formal SEF or DCM application with

the Commission within sixty days after the effective date of final

regulations implementing the provisions of either Section 733 or 735 of

the Dodd-Frank Act, whichever is appropriate.

(3) The EBOT's SEF or DCM application is currently pending before

the Commission.

Issued in Washington, DC, on September 10, 2010, by the

Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. 2010-23142 Filed 9-15-10; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: September 16, 2010