Federal Register, Volume 76 Issue 143 (Tuesday, July 26, 2011)[Federal Register Volume 76, Number 143 (Tuesday, July 26, 2011)]

[Proposed Rules]

[Pages 44508-44511]

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

[FR Doc No: 2011-18763]

———————————————————————–

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II

[Release No. 34-64926; File No. 4-635]

Acceptance of Public Submissions for a Study on International

Swap Regulation Mandated by Section 719(c) of the Dodd-Frank Wall

Street Reform and Consumer Protection Act

AGENCY: Commodity Futures Trading Commission; Securities and Exchange

Commission.

ACTION: Request for comment.

———————————————————————–

SUMMARY: Section 719(c) of the Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act) requires the Commodity Futures

Trading Commission (CFTC) and the Securities and Exchange Commission

(SEC and, together with the CFTC, the Commissions) jointly to study and

then report to Congress on swap regulation and clearinghouse regulation

in the United States, Asia, and Europe and to identify areas of

regulation that are similar and other areas of regulation that could be

harmonized. The report also must identify major dealers, exchanges,

clearinghouses, clearing members, and regulators in each geographic

area and describe the major contracts (including trading volumes,

clearing volumes, and notional values), methods for clearing swaps, and

the systems used for setting margin in each geographic area. In

connection with the study and report, the CFTC and SEC are issuing this

request for information through public comment.

DATES: Submit comments on or before September 26, 2011.

ADDRESSES: You may submit comments by any of the following methods:

CFTC

Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

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.

Please submit comments using only one method. Comments should be

identified by “International Swap Regulation Study” in the subject

line of responses submitted electronically and in paper submissions.

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

by an English translation. Comments will be posted on the CFTC’s

Internet Web site at http://www.cftc.gov, without review and without

removal of personally identifying information. You should submit only

information that you wish to make available publicly. If you wish the

CFTC to consider information that may be exempt from disclosure under

the Freedom of Information Act (FOIA), a petition for confidential

treatment of the exempt information may be submitted according to the

procedures established in Sec. 145.9 of the Commission’s

regulations.1 The CFTC reserves the right, but shall have no

obligation, to review, pre-screen, filter, redact, refuse, or remove

any or all of your submission from http://www.cftc.gov that it may deem

to be inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments

will be retained in the public comment file and may be accessible under

FOIA.

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1 CFTC regulations referred to herein are found at 17 CFR Ch.

1 (2010). They are accessible on the Commission’s Web site at http://www.cftc.gov.

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SEC

Electronic Comments

Use the agency’s Internet comment form at http://www.sec.gov/rules/other.shtml; or

Send an e-mail to [email protected]. Please include

File Number 4-635 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,

Secretary, Securities and Exchange Commission, Station Place, 100 F

Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number 4-635. This file number

should be included on the subject line if e-mail is used. To help the

SEC process and review your comments more efficiently, please use only

one method. Comments will be posted on the SEC’s Internet Web site at

http://www.sec.gov. Comments also are available for Web site viewing

and printing in the SEC’s Public Reference Room, Station Place, 100 F

Street, NE., Washington, DC 20549, on official business days between

the hours of 10 a.m. and 3 p.m. All comments received will be posted

without change; the SEC does not edit personally identifying

information from submissions. You should submit only information that

you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Natalie Markman Radhakrishnan,

Senior Special Counsel, 202-418-5059, [email protected], Office

of International Affairs, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; SEC:

Babback Sabahi, Senior Counsel, 202-551-5398, [email protected], Office

of International Affairs, Securities and Exchange Commission, Station

Place, 100 F Street, NE., Washington, DC 20549-1004.

SUPPLEMENTARY INFORMATION:

I. Background

The Dodd-Frank Act was enacted on July 21, 2010.2 Title VII of

the legislation 3 amends the Commodity Exchange Act 4 and the

Securities Exchange Act of 1934 5 to establish a comprehensive new

regulatory framework for swaps and security-based swaps to reduce risk,

increase transparency, and promote market integrity within the

financial system. Among other things, Title VII: (1) Provides for the

registration and comprehensive regulation of swap dealers, security-

based swap dealers, major swap participants, and major security-based

swap participants; (2) imposes clearing and trade execution

[[Page 44509]]

requirements on swaps and security-based swaps, subject to certain

exceptions; (3) creates rigorous recordkeeping and real-time reporting

regimes; and (4) enhances the Commissions’ rulemaking and enforcement

authorities with respect to certain registered entities and

intermediaries subject to the Commissions’ oversight.

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2 See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-

Frank Act may be accessed at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.

3 Pursuant to section 701 of the Dodd-Frank Act, Title VII may

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

2010”.

4 7 U.S.C. 1 et seq.

5 15 U.S.C. 78a et seq.

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Section 719(c)(1) of the Dodd-Frank Act requires the CFTC and SEC

jointly to conduct a study on swap regulation and clearinghouse

regulation in the United States, Asia, and Europe and to identify areas

of regulation that are similar and other areas of regulation that could

be harmonized.6 Pursuant to Section 719(c)(2) of the Dodd-Frank Act,

the Commissions must submit a report to Congress within 18 months after

the Dodd-Frank Act’s enactment (i.e., on or before Monday, January 23,

2012) that describes the results of the study and includes: (1) The

identification of the major dealers, exchanges, clearinghouses, and

regulators in each geographic area; (2) lists of the major swap

contracts (including trading volumes, clearing volumes, and notional

values) in each geographic area; and (3) a description of the methods

for clearing swaps and the systems used for setting margin in each

geographic area.7

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6 Section 719(c)(1) provides:

(1) IN GENERAL.-The Commodity Futures Trading Commission and the

Securities and Exchange Commission shall jointly conduct a study-

(A) relating to-

(i) swap regulation in the United States, Asia, and Europe; and

(ii) clearing house and clearing agency regulation in the United

States, Asia, and Europe; and

(B) that identifies areas of regulation that are similar in the

United States, Asia and Europe and other areas of regulation that

could be harmonized[.]

7 Section 719(c)(2) provides:

(2) REPORT.-Not later than 18 months after the date of enactment

of this Act, the Commodity Futures Trading Commission and the

Securities and Exchange Commission shall submit to the Committee on

Agriculture, Nutrition, and Forestry and the Committee on Banking,

Housing, and Urban Affairs of the Senate and the Committee on

Agriculture and the Committee on Financial Services of the House of

Representatives a report that includes a description of the results

of the study under subsection (a), including-

(A) identification of the major exchanges and their regulator in

each geographic area for the trading of swaps and security-based

swaps including a listing of the major contracts and their trading

volumes and notional values as well as identification of the major

swap dealers participating in such markets;

(B) identification of the major clearing houses and clearing

agencies and their regulator in each geographic area for the

clearing of swaps and security-based swaps, including a listing of

the major contracts and the clearing volumes and notional values as

well as identification of the major clearing members of such

clearing houses and clearing agencies in such markets;

(C) a description of the comparative methods of clearing swaps

in the United States, Asia, and Europe; and

(D) a description of the various systems used for establishing

margin on individual swaps, security-based swaps, and swap

portfolios.

The provision’s reference to “subsection (a)” presumably

should be replaced with a reference to subsection (1) because no

such subsection (a) applies to this study. Moreover, although

Section 719(c) is entitled “International Swap Regulation” and

does not consistently refer to both swaps and security-based swaps

throughout, Congress mandated a joint study and, accordingly, the

Commissions have interpreted the terms “swap” and “swaps” to

include both swap(s) and security-based swap(s) in the context of

this statutory provision.

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II. Request for Comments

In connection with the study and report required by Section 719(c)

of the Dodd-Frank Act, the CFTC and SEC have determined to issue this

request for information through public comment. Congress has directed

the Commissions to conduct an independent joint study on specific

topics and, in particular, to identify areas of regulation that could

be harmonized.8 The Commissions have determined that this request for

public comment will be an effective and transparent means of gathering

information necessary for the study and report from interested parties.

This public comment process will, as needed, be supplemented by other

means of gathering the comprehensive range of information requested by

Congress.9

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8 In addition to the study and report required by Section

719(c), Congress directed the Commissions (and prudential

regulators) in Section 752(a) of the Dodd-Frank Act to “as

appropriate * * * consult and coordinate with foreign regulatory

authorities on the establishment of consistent international

standards with respect to the regulation (including fees) of swaps,

security-based swaps, swap entities, and security-based swap

entities” in order to “promote effective and consistent global

regulation of swaps and security-based swaps”.

9 For example, Commission staff will engage in ongoing

consultation with regulatory authorities and others throughout the

study.

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The Commissions also are mindful of differences in regulatory

development across jurisdictions. In the United States and under the

Dodd-Frank Act, many of the required regulations with regard to swaps

already have been proposed and made available for public comment.10

Other jurisdictions, however, are proceeding under different time

frames. For example, the Japanese Diet amended the Financial

Instruments and Exchange Act by adopting legislation on over-the-

counter (OTC) derivatives on July 10, 2009, and on May 12, 2010. These

amendments are expected to be implemented by November 2012. The

European Commission (EC), in turn, proposed legislation on clearing and

trade repositories on September 15, 2010.11 This proposed legislation

calls for the European Securities and Markets Authority to propose

technical standards by June 30, 2012.12

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10 For more information, visit CFTC and SEC Web sites on

implementation of the Dodd-Frank Act, respectively at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm and http://www.sec.gov/spotlight/dodd-frank.shtml.

11 On December 8, 2010, the EC also issued a public

consultation to solicit views on revisions to the Markets in

Financial Instruments Directive that are designed, among other

things, to increase transparency for OTC derivatives and other

instruments by setting requirements for trading venues and

investment firms, and to enhance business conduct standards

applicable to all investment firms. The EC is expected to publish a

proposal further to this consultation during summer 2011.

12 See various provisions of the EC’s proposed European

Markets Infrastructure Regulation, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0484:FIN:EN:PDF.

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In order to strike a balance between meeting the statutory deadline

for the study and report and providing timely information to Congress,

the Commissions have determined to publish the request at this time and

to provide for a 60-day comment period. Given the pace of developments

in the regulation of OTC derivatives here in the United States and in

other jurisdictions, the Commissions plan to conduct the study based

upon information received and collected by the last day of the comment

period.13 Comments should be submitted during the open comment

period, but staff may consider comments filed after the deadline and

may consult with interested and/or relevant parties after the comment

period closes in order to obtain additional or clarifying information.

The Commissions welcome public comment on all aspects of the study.14

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13 The Commissions may, however, in their discretion and

depending on the significance of the developments, decide to address

certain legislative or regulatory developments that take place after

the comment period has ended.

14 In light of the statutory deadline established in Section

719(c) of the Dodd-Frank Act, the Commissions request comment on how

best to ensure that the study reflects the latest state of

regulatory implementation in Asia and Europe. Commenters are

encouraged to submit information regarding significant relevant

legislative or regulatory developments occurring after the end of

the comment period and prior to the submission of the report to

Congress.

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The Commissions have developed the following requests for comment

to gather information in support of the study mandated by Section

719(c) and request that commenters include a description, either in

English or accompanied by an English translation, of the underlying

source material used in composing each submitted response. Commenters

may also provide any additional relevant information beyond that

specifically requested. Because

[[Page 44510]]

Section 719(c) requires the Commissions to prepare a report relating to

the swap markets of the United States, Asia, and Europe, commenters are

specifically asked to provide information about markets in those

jurisdictions. Commenters also may provide any relevant information on

other jurisdictions. If regulatory requirements in a jurisdiction are

under consideration but not yet enacted or effective, commenters should

make note of this in their answer and provide as much relevant

information as possible on recent and anticipated developments.

While all commenters are welcome to respond to the items below in

their entirety, in order to provide more focus, the requests for

comment have been divided into three groups. The first group, items A-

E, inquires about information to which foreign regulators may have the

most efficient access. Item F, by contrast, inquires about information

that may be available to a wider range of commenters, while item G

inquires about information that exchanges and clearinghouses might be

uniquely positioned to provide.

A. Status of Regulation

1. For each jurisdiction on which comment is being provided, please

provide the name of the jurisdiction being commented upon.

2. Does the jurisdiction have a legal definition of the term

“swap”, “security-based swap”, or other similar term or terms

(hereinafter referred to as a “Swap” or “Swaps”)? If so, please

provide such definition(s).15

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15 These terms may include, but may not be limited to, OTC

derivatives. The Dodd-Frank Act includes definitions of the terms

“swap” and “security-based swap”.

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3. Are Swaps included within the scope of any statute, regulation,

or other legal requirement in the jurisdiction?

a. If not, is the jurisdiction planning to or considering whether

to regulate, or to modify regulation of, Swaps?

b. Please further describe the present status of regulatory efforts

and the anticipated timeline for such efforts.

4. What type of counterparty may enter into a Swap? Do any

limitations apply?

5. Are certain types or classes of Swaps prohibited, or are certain

entities prohibited from entering into certain types or classes of

Swaps?

6. If Swaps are regulated:

a. Who determines which instruments, transactions, or agreements

should be regulated as Swaps?

b. Which Swaps, if any, are required to be executed on an organized

market, on an electronic execution facility, or on any other type of

market?

c. Which Swaps, if any, are required to be cleared by a central

counterparty and, for those required to be cleared, how are the trades

of non-clearing participants cleared? 16

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16 If applicable, how does the mandatory clearing requirement

work, e.g., who decides which Swaps are required to be cleared, what

criteria are applied, does the requirement apply to existing Swaps

or to those entered into at a certain point in time, are any

entities exempt from the clearing requirement?

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d. Which Swap transactions, if any, are required to be reported to

a data repository or other entity, the public, or regulatory

authorities?

e. Is regulatory oversight of the Swap market conducted by one

single regulatory authority or divided among different regulatory

authorities? If the latter, please identify each relevant regulatory

authority and describe its responsibilities and jurisdiction.

f. How does the regulatory framework regulate potential systemic

risk created by Swaps? Does it, for example, create a new oversight

body or designate certain entities as systemically important?

g. Does the regulatory authority, or regulatory authorities if more

than one regulator has oversight responsibilities over the Swap market,

have the ability to share information related to Swaps with domestic

and foreign regulatory authorities? 17

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17 In particular, are there any legal or other barriers to the

collection of information or to the sharing of information, e.g.,

client confidentiality protection or data privacy safeguards?

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h. How are cross-border Swap transactions regulated? Does the Swap

regulatory framework apply to persons located outside of the

jurisdiction doing business with persons located within the

jurisdiction, and, more generally, to cross-border Swap activities?

i. What enforcement authority exists over Swaps, and who may

exercise such authority?

B. Regulatory Requirements for Market Participants

1. How does the regulatory framework address participants in the

Swap market? What are the registration or licensing requirements for

Swap-related dealers, market participants, intermediaries, or others

(individually and collectively, “Participants”)?

2. Are any types of Participants in the Swap market excluded or

exempted from Swap-related registration or licensing requirements?

3. What is the process for updating, withdrawing, or terminating

Swap-related registration or an exemption from Swap-related

registration?

4. What are the Swap-related prudential regulatory requirements

(e.g., capital, liquidity, margin, risk management, segregation,

collateral)?

5. What are the requirements related to insolvency or bankruptcy in

regard to Participants?

6. What are the Swap-related business conduct requirements (e.g.,

interaction with counterparties, disclosure, supervision, reporting,

recordkeeping, documentation, confirmation, valuation, conflicts of

interest, avoidance of fraud and other abusive practices)?

7. Do Participants have the ability to share information with

domestic and/or foreign regulatory authorities?

8. How are foreign Participants treated (e.g., a special

recognition category, an exclusion or an exemption from registration)?

C. Regulatory Requirements for Organized Markets, Electronic Execution

Facilities, and Other Types of Markets

1. Does the regulatory framework include requirements for organized

markets, electronic execution facilities, and/or other types of markets

for Swaps (hereinafter referred to as “Markets”)?

2. What are the registration or licensing requirements for such

Markets?

3. Are any Markets excluded or exempted from such registration or

licensing requirements?

4. What is the process for updating, withdrawing, or terminating

such registration or exempting from such registration?

5. What are the ongoing regulatory responsibilities of such Markets

(e.g., access, surveillance, transparency, compliance, recordkeeping)?

6. Do Markets have the ability to share information with domestic

and/or foreign regulatory authorities?

7. How are foreign Markets treated (e.g., a special recognition

category, an exclusion or an exemption from registration)?

D. Regulatory Requirements for Central Counterparties

1. Does the regulatory framework include requirements for central

counterparties that provide clearing and settlement services for Swaps?

2. What are the registration or licensing requirements for such

central counterparties?

3. Who is excluded or exempted from such registration or licensing

requirements?

4. What is the process for updating, withdrawing, or terminating

such registration or exempting from such registration?

[[Page 44511]]

5. What are the ongoing regulatory responsibilities of such central

counterparties (e.g., financial resources, risk management, safeguards

against member or participant default, authority in the event of a

default, recordkeeping)? 18

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18 The Recommendations for Central Counterparties were

published in November 2004 (and currently are being revised) by the

Committee on Payment & Settlement Systems of the Bank for

International Settlements and the Technical Committee of IOSCO.

Links to this standard, as well as related standards and the

consultative report for revising them, are available at http://www.bis.org/publ/cpss94.htm.

—————————————————————————

6. Do such central counterparties have the ability to share

information with domestic and/or foreign regulatory authorities?

7. How are foreign central counterparties treated (e.g., a special

recognition category, an exclusion or an exemption from registration)?

E. Regulatory Requirements for Data Repositories

1. Does the regulatory framework include requirements for data

repositories for Swaps? 19

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19 If entities other than data repositories can fulfill this

function, please describe the jurisdiction’s requirements for such

activity and provide the relevant information for each question on

this topic.

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2. What are the registration or licensing requirements for such

data repositories?

3. Who is excluded or exempted from such registration or licensing

requirements?

4. What is the process for updating, withdrawing, or terminating

such registration or exempting from such registration?

5. What are the ongoing regulatory responsibilities of such data

repositories (e.g., timing of reporting to the public, recordkeeping)?

6. Are such data repositories required to use a specified data

standard when they provide data to regulatory authorities and, if so,

what standard is required?

7. Do such data repositories have the ability to share information

with domestic and/or foreign regulatory authorities?

8. How are foreign data repositories treated (e.g., a special

recognition category, an exclusion or an exemption from registration)?

9. What are the regulatory requirements in connection with data

reporting for entities participating in the Swap market, such as

counterparties or Participants (e.g., maintaining records, reporting

data to a repository, real-time reporting to the public, providing

information to domestic and foreign regulatory authorities)?

F. Regulatory Comparison

1. Across jurisdictions, for any or all items listed above, which

areas of regulation are similar and which areas are different?

2. In viewing the existing laws, institutions, and enforcement

mechanisms of each respective jurisdiction as a whole, are such

similarities and differences appropriate and desirable for regulatory

purposes, or do certain aspects of a particular jurisdiction’s Swap

market warrant a different regulatory approach?

3. What are the potential costs and benefits (in terms of investor

protection, market efficiency, competition, or other factors) that may

arise from further consistency/harmonization of regulations across

borders?

4. How should consistency in regulation across jurisdictions be

measured and are there factors other than the harmonized text of a

regulation that should be taken into consideration when assessing the

degree to which cross-border regulatory harmonization has been

implemented in practice?

5. Assuming that a theoretically “optimal” set of regulations for

a particular jurisdiction might take into consideration elements unique

to a specific market in ways that might make cross-border harmonization

difficult, to what extent do the benefits of greater regulatory

harmonization across borders outweigh the costs associated with having

regulations that might be less tailored to a particular market’s

circumstances? In what areas do you believe the benefits of

harmonization most outweigh any potential downsides? 20 Are there any

areas where you believe the likely benefits of “optimal” market-

specific regulation outweigh the likely benefits of harmonization?

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20 In particular, please identify any potential opportunities

for regulatory arbitrage or impediments to the achievement of

consistent regulatory standards across jurisdictions.

—————————————————————————

6. In the United States, what steps should or could be taken to

better harmonize statutory requirements under the Dodd-Frank Act with

statutory requirements implemented in other jurisdictions?

7. In the United States, what steps could be taken to harmonize

CFTC or SEC regulations with regulations promulgated by authorities in

other jurisdictions?

G. Swap Market Information

1. Please identify major organized markets and electronic execution

facilities (and the Swaps-related regulator(s) for each) for the

trading of Swaps.

a. For each market or facility, please provide a listing and

description of the major contract classes and subclasses, such as

credit default swaps (CDS),21 equity swaps, currency swaps, interest

rate swaps (IRS),22 and commodity swaps;

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21 For CDS, include: corporate single name, sovereign single

name, multi-name, index; CDS on domestic and non-domestic reference

assets (classified by country, in the latter case); and CDS between

domestic and non-domestic participants (classified by country, in

the latter case).

22 For IRS, include: underlying currency, structure, and

maturity.

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b. For classes and subclasses of contracts identified in paragraph

a above, please provide:

i. The trading volumes in 2009, 2010, and year-to-date; and

ii. The outstanding notional values at year-end 2008, 2009, 2010,

and the most recent available.

2. Please identify major dealers participating in Swap markets (and

the Swap-related regulator(s) for each).

3. Please identify major central counterparties (and the Swap-

related regulator(s) for each) for the clearing of Swaps.

a. For each central counterparty, please provide a listing and

description of the major classes and subclasses of cleared Swap

contracts, such as CDS, equity swaps, currency swaps, IRS, and

commodity swaps;

b. For classes and subclasses of contracts identified in paragraph

a above, please provide:

i. The clearing volumes for 2009, 2010, and year-to-date; and

ii. The outstanding notional values at year-end 2008, 2009, 2010,

and the most recent available;

c. For each central counterparty, please provide:

i. A description of the method used to clear Swaps;

ii. A description of the systems used to establish margin on

individual Swaps and on Swap portfolios; and

iii. The name of each major clearing member of the central

counterparty (and the Swap-related regulator(s) for each).

Issued in Washington, DC, on July 20, 2011, by the Commodity

Futures Trading Commission.

David A. Stawick,

Secretary.

Issued in Washington, DC, on July 20, 2011, by the Securities

and Exchange Commission.

Elizabeth M. Murphy,

Secretary.

[FR Doc. 2011-18763 Filed 7-25-11; 8:45 am]

BILLING CODE 8011-01-P; 6351-01-P

Last Updated: July 26, 2011