[ad_1]
Federal Register, Volume 77 Issue 134 (Thursday, July 12, 2012)[Federal Register Volume 77, Number 134 (Thursday, July 12, 2012)]
[Proposed Rules]
[Pages 41213-41242]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16496]
[[Page 41213]]
Vol. 77
Thursday,
No. 134
July 12, 2012
Part II
Commodities Futures Trading Commission
———————————————————————–
17 CFR Part 1
Cross-Border Application of Certain Swaps Provisions of the Commodity
Exchange Act; Proposed Rule
Federal Register / Vol. 77 , No. 134 / Thursday, July 12, 2012 /
Proposed Rules
[[Page 41214]]
———————————————————————–
COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN 3038-AD57
Cross-Border Application of Certain Swaps Provisions of the
Commodity Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed interpretive guidance and policy statement.
———————————————————————–
SUMMARY: The Commodity Futures Trading Commission (“Commission” or
“CFTC) is publishing for public comment this proposed interpretive
guidance and policy statement regarding the cross-border application of
the swaps provisions of the Commodity Exchange Act (“CEA”) that were
enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, and the Commission’s regulations promulgated
thereunder. Specifically, this proposed interpretive guidance and
policy statement describes the following: The general manner in which
the Commission will consider whether a person’s swap dealing activities
or swap positions may require registration as a swap dealer or major
swap participant, respectively, and the application of the related
requirements under the CEA to swaps involving such persons; and the
application of the clearing, trade execution, and certain reporting and
recordkeeping provisions under the CEA, to cross-border swaps involving
one or more counterparties that are not swap dealers or major swap
participants. This proposed interpretive guidance and policy statement
also generally describes the policy and procedural framework under
which the Commission may permit compliance with a comparable regulatory
requirement of a foreign jurisdiction to substitute for compliance with
the requirements of the CEA.
DATES: Comments must be received on or before August 27, 2012.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD57,
by any of the following methods:
The agency’s Web site: at http://comments.cftc.gov. Follow
the instructions for submitting comments through the Web site.
Mail: 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.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commodity Futures Trading
Commission to consider information that you believe is exempt from
disclosure under the Freedom of Information Act, 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
—————————————————————————
1 17 CFR 145.9.
—————————————————————————
Throughout this proposed interpretive guidance, the Commission
requests comment in response to specific questions set out herein. For
convenience, the Commission has numbered each of these requests for
comment. The Commission asks that, in submitting responses to these
requests for comment, commenters kindly identify the specific number of
each request to which their comments are responsive.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the proposal
will be retained in the public comment file and will be considered as
required under the Administrative Procedure Act 2 and other
applicable laws, and may be accessible under the Freedom of Information
Act.3
—————————————————————————
2 5 U.S.C. 551, et seq.
3 5 U.S.C. 552.
FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Assistant General
Counsel, Office of General Counsel, (202) 418-5613, [email protected]; Gary
Barnett, Director, Division of Swap Dealer and Intermediary Oversight,
(202) 418-5977, [email protected]; Jacqueline H. Mesa, Director, Office
of International Affairs, (202) 418-5386, [email protected]; Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
—————————————————————————
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
B. Scope of the Proposed Interpretive Guidance and Policy
Statement
II. Consideration of Whether a Non-U.S. Person Is a Swap Dealer or
Major Swap Participant
A. Analysis of Section 2(i)
B. Interpretation of the Term “U.S. Person”
C. Definitions and Registration Thresholds
1. Background
2. Swap Dealer
i. Aggregation of Swaps
ii. Regular Business
3. Major Swap Participant
i. Aggregation of Positions
4. Relevance of Guarantees
5. Summary
D. Branches, Agencies, Affiliates and Subsidiaries of U.S. Swap
Dealers and U.S. Branches, Agencies, Affiliates, and Subsidiaries of
Non-U.S. Swap Dealers
III. Cross-Border Application of the CEA’s Swap Provisions
A. Principles of International Comity
B. Application of Swap Provisions to Non-U.S. Swap Dealers and
Foreign Branches, Agencies, Subsidiaries and Affiliates of U.S. Swap
Dealers
1. Regulatory Categories
2. Entity-Level Requirements
i. Capital Requirements
ii. Chief Compliance Officer
iii. Risk Management
iv. Swap Data Recordkeeping
v. Swap Data Reporting
vi. Physical Commodity Swaps Reporting
3. Transaction-Level Requirements
i. Clearing and Swap Processing
ii. Margin and Segregation Requirements for Uncleared Swaps
iii. Mandatory Trade Execution
iv. Swap Trading Relationship Documentation
v. Portfolio Reconciliation and Compression
vi. Real-Time Public Reporting
vii. Trade Confirmation
viii. Daily Trading Records
ix. External Business Conduct Standards
4. Application of the Entity-Level Requirements
5. Application of the Transaction-Level Requirements
i. Clearing and Swap Processing, Margin (and Segregation), Trade
Execution, Swap Trading Relationship Documentation, Portfolio
Reconciliation and Compression, Real-Time Public Reporting, Trade
Confirmation, and Daily Trading Records
ii. External Business Conduct Standards
C. Substituted Compliance
1. Entity-Level Requirements
2. Transaction-Level Requirements
D. Application of Entity-Level and Transaction-Level
Requirements to Branches, Agencies, Affiliates, and Subsidiaries of
U.S. Swap Dealers
1. Foreign Branches and Agencies of U.S. Swap Dealers
2. Foreign Affiliates and Subsidiaries of U.S. Swap Dealers
IV. Process for Comparability Determinations
A. Overview
1. Scope of Review
[[Page 41215]]
2. Process
3. Clearing
V. Cross-Border Application of the CEA’s Swap Provisions to
Transactions Involving Other (Non-Swap Dealer and Non-MSP) Market
Participants
A. Cross-Border Transactions With U.S. Persons
B. Clearing, Trade Execution, Real-Time Public Reporting, Large-
Trader Reporting, SDR Reporting, and Swap Data Recordkeeping
I. Background
A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
In the fall of 2008 a series of large financial institution
failures triggered a financial and economic crisis that threatened to
freeze U.S. and global credit markets. As a result, unprecedented
governmental intervention was required to ensure the stability of the
U.S. financial system.4 These failures revealed the vulnerability of
the U.S. financial system and economy to wide-spread systemic risk
resulting from, among other things, poor risk management practices of
financial firms, the lack of supervisory oversight for certain
financial institutions as a whole, and the interconnectedness of the
global swap business.5
—————————————————————————
4 On October 3, 2008, President Bush signed the Emergency
Economic Stabilization Act of 2008, which was principally designed
to allow the U.S. Treasury and other government agencies to take
action to restore liquidity and stability to the U.S. financial
system (e.g., the Troubled Asset Relief Program–also known as
TARP–under which the U.S. Treasury was authorized to purchase up to
$700 billion of troubled assets that weighed down the balance sheets
of U.S. financial institutions). See Public Law 110-343, 122 Stat.
3765 (2008).
5 See Financial Crisis Inquiry Commission, “The Financial
Crisis Inquiry Report: Final Report of the National Commission on
the Causes of the Financial and Economic Crisis in the United
States,” Jan. 2011, at xxvii, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
—————————————————————————
American International Group (“AIG”) is a prime example of how
the stability of a large financial institution could be undermined by
its activities abroad and how the entire U.S. financial system could be
threatened as a result.6 AIG was a regulated U.S. insurance company
nearly undone by its collateral posting obligations under swaps entered
into by its subsidiary, AIG Financial Products (“AIGFP”). AIGFP was
headquartered in Connecticut and had major operations in London, with
trades routed through Banque AIG, a French bank. AIGFP suffered
enormous losses from credit default swaps that it issued on certain
underlying securities, which, because AIGFP’s performance on such
credit default swaps had been guaranteed by its parent, caused credit
agencies to downgrade the credit rating of the entire AIG corporation.
The downgrade triggered collateral calls and resulted in a liquidity
crisis at AIG, which ultimately necessitated over $85 billion of
indirect assistance from the Federal Reserve Bank of New York to
prevent AIG’s default.
—————————————————————————
6 See, e.g., Gretchen Morgenson, “Behind Insurer’s Crisis,
Blind Eye to a Web of Risk,” N.Y. Times, Sept. 27, 2008. Corrected
version published Sept. 30, 2008, available at http://www.nytimes.com/2008/09/28/business/28melt.html?pagewanted=all.
—————————————————————————
The Lehman Brothers Holding Inc. (“LBHI”) bankruptcy offers
another stark lesson on how risks can spread quickly across the
affiliated entities of a multinational financial institution,
ultimately causing the collapse of the entire financial institution.
LBHI was a U.S.-based multinational corporation, with various
affiliates and subsidiaries operating globally, including Lehman
Brothers International (Europe) (“LBIE”).
The Lehman global business and operations relied on “highly
integrated, trading and non-trading relationships across the group.”
7 The affiliates and subsidiaries within the group provided each
other with more than equity investments and capital. They provided each
other with treasury functions, custodial arrangements, depository
functions, trading facilitation, swaps, funding, management,
information technology and other operational services. Most notably,
many of LBIE’s obligations under its swaps with certain counterparties
were guaranteed by the ultimate holding company, LBHI. In fact, at the
time of default, LBIE had an estimated 130,000 OTC derivatives trades
outstanding, most of which were guaranteed by LBHI.8
—————————————————————————
7 “The global nature of the Lehman business with highly
integrated, trading and non-trading relationships across the group
led to a complex series of inter-company positions being outstanding
at the date of Administration. There are over 300 debtor and
creditor balances between LBIE and its affiliates representing
$10.5B of receivables and $11.0B of payables as at September 15
2008.” See Lehman Brothers International (Europe) in
Administration, Joint Administrators’ Progress Report for the Period
15 September 2008 to 14 March 2009, available at: http://www.pwc.co.uk/assets/pdf/Ibie-progress-report-14049.pdf.
8 Id.
—————————————————————————
There are other parallels. In the many events leading up to the
2008 crisis, Citigroup, like many other financial institutions,
utilized numerous structured investment vehicles (“SIVs”) to shift
certain activities off balance sheets and manage both capital
requirements and reported accounting.9 Citigroup stood behind these
vehicles through liquidity puts, a form of a guarantee. When the SIVs’
funding was exhausted, Citigroup ultimately assumed approximately $49
billion of debt directly onto its balance sheet.10 Similarly, in
2007, Bear Stearns found itself exposed to the failings of two overseas
hedge funds, Bear Stearns High-Grade Structured Credit Strategies
Master Fund, Ltd. and Bear Stearns High-Grade Structured Credit
Strategies Enhanced Leverage Master Fund, Ltd.11 The funds were
incorporated in the Cayman Islands as exempted liability companies,
with registered offices in the Cayman Islands. However, when the funds
collapsed under the weight of their significant investments in subprime
mortgages, Bear Stearns bailed out the funds.
—————————————————————————
9 See, e.g., Andrew Bary, “Of Citi and SIVs: Can Banks Plug
the Leak?,” Barron’s, Oct. 22, 2007, available at http://online.barrons.com/article/SB119284238641065650.html.
10 See, e.g., Financial Times, Citi launches $49bn SIV rescue
(Dec. 14, 2007), available at http://www.ft.com/intl/cms/s/0/6626b45e-a9dd-11dc-aa8b-0000779fd2ac.html#axzz1yMOOB81bMarketWatch MarketWatch.
Citigroup says it will absorb SIV assets (Dec. 14, 2007), available
at http://articles.marketwatch.com/2007-12-14/news/30679845_1_sivs-citigroup-ceo-vikram-pandit.
11 See In Re: Bear Sterns High-Grade Structured Credit
Strategies Master Funds, LTC, 374 B.R. 122 (Bankr. S.D.N.Y. 2007),
available at http://www.nysb.uscourts.gov/opinions/brl/158971_25_opinion.pdf.
—————————————————————————
A decade before the AIG and Lehman collapses, a hedge fund advised
by Long-Term Capital Management L.P. (“LTCM”) nearly failed, leading
a number of creditors to provide LTCM substantial financial assistance
under the supervision of the Federal Reserve Bank of New York. LTCM was
based in Greenwich, Connecticut but managed trades in Long-Term Capital
Portfolio LP, a partnership registered in the Cayman Islands. This
hedge fund, with approximately $4 billion in capital and a balance
sheet of just over $100 billion, had a swap book in excess of $1
trillion notional. More recently, J.P. Morgan Chase & Co. (“J.P.
Morgan”), the largest U.S. bank, has disclosed a multi-billion dollar
trading loss stemming from its Chief Investment Office located in
London.12 The significant reported losses at J.P. Morgan are a
reminder of a key lesson from the failures of AIG and Lehman: A
regulatory gap or lapse within any part of a financial institution can
lead to the failure of the entire institution.
—————————————————————————
12 See “Lehman Brothers International (Europe) in
Administration, Joint Administrators’ Progress Report for the Period
15 September 2008 to 14 March 2009,” available at: http://www.pwc.co.uk/assets/pdf/Ibie-progress-report-14049.pdf.
—————————————————————————
As these examples illustrate, corporate structures and inter-
affiliate obligations may cause the activity, regardless of where that
activity takes place, to have a direct and significant connection with
activities in, or effect
[[Page 41216]]
on, commerce in the U.S. In many of the largest financial institutions,
the overall business operates as a tightly integrated network of
business lines and services conducted through various branches or
affiliated legal entities which are under the unified management of the
parent entity.13 These large financial institutions effectively
operate their businesses as a single business, by virtue of the
relationship with the parent company and to each other, with the
constituent parts inextricably linked to each other. The interconnected
nature of the relationships among the affiliated entities within a
corporate group means that a risk in any part of this group, whether in
the United States or abroad, can quickly spread throughout the
organization and jeopardize the financial integrity of the entire
group.
—————————————————————————
13 Typically, the various business lines and services–while
conducted out of separate legal entities–are highly integrated and
inter-dependent. Key strategic and operational decisions are
centralized and informed by the firm’s global, group-wide
perspective. The individual legal entities affiliates and
subsidiaries share common corporate support functions, such as
treasury, custodial, brokerage and depository services and related
infrastructures. The affiliated entities within the corporate group
may also provide funding or credit support for each other and enter
into trades with each other. In large part, this consolidated
structure is necessary to allow the firm to address and manage
customer needs, funding opportunities, capital and other regulatory
requirements, financial accounting and tax planning, among other
things.
—————————————————————————
Congress sought to address the deficiencies in the regulatory
system that contributed to the financial crisis through the enactment
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”), which was signed by President Obama on July 21,
2010.14 Title VII of the Dodd-Frank Act amended the CEA 15 to
overhaul the structure and oversight of the over-the-counter
derivatives market that previously had been subject to little or no
oversight. One of the cornerstones of this legislation is the
establishment of a new statutory framework for comprehensive regulation
of financial institutions that participate in the swaps market as swap
dealers or major swap participants (“MSPs”), which must register and
are subject to greater oversight and regulation.16 A key goal of this
new framework for swap dealers and MSPs is to minimize the potential
for the recurrence of the type of financial and operational stresses
that contributed to the 2008 financial crisis.
—————————————————————————
14 Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
15 7 U.S.C. 1, et seq.
16 In this proposed interpretative guidance and policy
statement, the provisions of the CEA relating to swaps that were
enacted by Title VII of the Dodd-Frank Act are also referred to
herein as “the Dodd-Frank requirements.”
—————————————————————————
Efforts to regulate the swaps market are underway not only in the
United States, but also abroad in the wake of the 2008 financial
crisis. In 2009, leaders of the Group of 20 (“G20”) whose membership
includes the European Union (“EU”), the United States, and 18 other
countries–agreed that: (i) OTC derivatives contracts should be
reported to trade repositories; (ii) all standardized OTC derivatives
contracts should be cleared through central counterparties and traded
on exchanges or electronic trading platforms, where appropriate, by the
end of 2012; and (iii) non-centrally cleared contracts should be
subject to higher capital requirements. In line with the G20
commitment, much progress has been made to coordinate and harmonize
international reform efforts, but the pace of reform varies among
jurisdictions and disparities in regulations remain due to differences
in cultures, legal and political traditions, and financial systems.17
—————————————————————————
17 Legislatures and regulators in a number of foreign
jurisdictions are undertaking significant regulatory reforms over
the swaps market and its participants. See CFTC and SEC, Joint
Report on International Swap Regulation Required by Section 719(c)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Jan. 31, 2012, at 23, available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf.
For example, the European Parliament adopted the substance of
the European Market Infrastructure Regulation (“EMIR”) on March
29, 2012. See Proposal for a Regulation of the European Parliament
and of the Council on OTC derivatives, central counterparties and
trade repositories–Outcome of the European Parliament’s first
reading (Brussels, 28 to 29 March 2012), available at http://register.consilium.europa.eu/pdf/en/12/st06/st06399.en12.pdf.
In December 2010, the European Commission released a public
consultation on revising the Markets in Financial Instruments
Directive (“MiFID”). See “European Commission Public
Consultation: Review of the Markets in Financial Instruments
Directive,” Dec. 8, 2010, available at http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf.
In October 2011, the European Commission released two public
consultations, one to revise MiFID and the other for creating a new
regulation entitled the Markets in Financial Instruments Regulation
(“MiFIR”). See “European Commission Proposal for a Directive of
the European Parliament and of the Council on markets in financial
instruments repealing Directive 2004/39/EC of the European
Parliament and of the Council,” COM (2011) 656 final (Oct. 20,
2011), available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf; “European Commission
Proposal for a Regulation of the European Parliament and of the
Council on markets in financial instruments and amending regulation
[EMIR] on OTC derivatives, central counterparties and trade
repositories,” COM (2011) 652 final (Oct. 20, 2011), available at
http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_652_en.pdf.
The Japanese legislature passed the Amendment to the Financial
Instruments and Exchange Act (“FIEA”) in May 2010. See Outline of
the bill for amendment of the Financial Instruments and Exchange
Act, May 2010, available at http://www.fsa.go.jp/en/refer/diet/174/01.pdf.
—————————————————————————
B. The Scope of the Proposed Interpretative Guidance and Policy
Statement
In light of the global nature of the swap market, the extent to
which the Dodd-Frank Act’s requirements will apply to cross-border
activities is critically important. U.S. market participants regularly
enter into swaps with other market participants that are domiciled
outside of the U.S. or incorporated in non-U.S. jurisdictions.18 Many
U.S. and non-U.S. domiciled or incorporated financial institutions
conduct their swaps business across multiple jurisdictions, with swaps
that are negotiated and executed by a branch or affiliate in one
jurisdiction while the actual counterparty to the swap is an entity in
another jurisdiction.
—————————————————————————
18 See Bank of International Settlements (BIS), Committee on
the Global Financial System, No. 46, The macro financial
implications of alternative configurations for access to central
counterparties in OTC derivatives markets, Nov. 2011, at 1,
available at http://www.bis.org/publ/cgfs46.pdf (“The configuration
of access must take account of the globalized nature of the market,
in which a significant proportion of OTC derivatives trading is
undertaken across borders.”).
—————————————————————————
The Commission received numerous comments during the Dodd-Frank Act
rulemaking process from interested parties concerning the application
of Title VII of the Dodd-Frank Act and the Commission’s implementing
regulations thereunder to the cross-border activities of non-U.S. and
U.S. market participants.19 The key issues raised by
[[Page 41217]]
the commenters include (i) the nature of the connections to the United
States that would require a non-U.S. person to register as a swap
dealer or MSP under the CEA and the Commission’s regulations; 20 (ii)
which Dodd-Frank Act requirements apply to the swap activities of non-
U.S. persons, U.S. persons, and their branches, agencies, subsidiaries
and affiliates outside of the United States; 21 and (iii) to the
extent that Title VII of the Dodd-Frank requirements would apply, the
circumstances under which the Commission would consider permitting a
non-U.S. person to comply with the regulatory regime of its foreign
jurisdiction instead of complying with the Dodd-Frank Act and the
Commission’s regulations promulgated thereunder.22
—————————————————————————
19 See, e.g., Institute of International Bankers (“IIB”)
(Jan. 10, 2011); International Swaps and Derivatives Association
(“ISDA”) (Feb. 22, 2011), Securities Industry and Financial
Markets Association (“SIFMA”) (Feb. 3, 2011), Cleary Gottlieb
Steen & Hamilton LLP (“Cleary”) (Sept. 20, 2011), and Barclays
Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG,
HSBC, Nomura Securities International, Inc., Rabobank Nederland,
Royal Bank of Canada, The Royal Bank of Scotland Group PLC,
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, The Toronto-Dominion
Bank, and UBS AG (“Twelve Foreign Banks”) (Feb. 17, 2011). In
total, the Commission received approximately 120 comment letters
(submitted in response to various proposed rules implementing the
Dodd-Frank Act) that addressed or raised issues related to cross-
border swap activities. These letters, received by the Commission in
response to various Commission rulemakings, may be found on the
Commission’s Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/index.htm.
In addition, the Commission and the Securities and Exchange
Commission (“SEC”) held a joint public roundtable on August 1,
2011 on international issues relating to the implementation of Title
VII of the Dodd-Frank Act (“Roundtable”). During the Roundtable,
commenters discussed the impact of the various requirements on their
cross-border activities. A copy of the transcript from the
Roundtable can be found on the Commission’s Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission21_080111-trans.pdf.
20 Commenters agreed generally that non-U.S. persons engaged
in swap dealing activity directly with U.S. counterparties should be
registered with the Commission as swap dealers. See, e.g., Cleary
(Sept. 20, 2011). On the other hand, according to commenters, swap
dealing conducted outside of the U.S. between non-U.S. persons is
not sufficiently connected to the U.S. to warrant swap dealer
registration. See, e.g., Twelve Foreign Banks (Feb. 17, 2011); SIFMA
(Feb. 3, 2011). Commenters also said that a non-U.S. person that
limits its U.S. swap activity to U.S. persons that are registered as
swap dealers should not have to register, because regulation of the
U.S. registered swap dealer is sufficient. See Bank of Tokyo-
Mitsubishi UFJ Ltd., Mizuho Corporate Bank Ltd., Sumitomo Mitsui
Banking Corporation (“Japanese Banks”) (May 5, 2011) and Twelve
Foreign Banks (Feb. 17, 2011).
21 See, e.g., Cleary (Sept. 20, 2011) IIB (Jan. 10, 2011) and
SIFMA (Feb. 3, 2011). Generally speaking, these commenters urged
that the Commission adopt a framework that preserves the strengths
of existing market practices and home country supervision, while
avoiding regulatory duplication, unrealistic extraterritorial
supervisory responsibilities, and fragmentation of the swap markets.
See, e.g., IIB (Jan. 10, 2011) and SIFMA (Feb. 3, 2011). According
to these commenters, entities outside the United States should
comply with rules adopted under the Dodd-Frank Act with respect to
requirements applicable to specific swaps, but should be subject to
home country supervision by their home country regulators with
respect to requirements applicable at the entity level. On the other
hand, other commenters said that a U.S. entity must not be able to
conduct swap business with non-U.S. persons free from regulation
under the Dodd-Frank Act by establishing a non-U.S. affiliate and
conducting the swap business through the affiliate. See Better
Markets, Inc. (Jan. 24, 2011).
22 See, e.g., Seven Foreign Banks (Jan. 11, 2011) and Hess
(Jan. 24, 2011). Commenters stated that deference to comparable home
country regulation accords with principles of international comity
and is consistent with the approach taken by U.S. banking regulators
with respect to non-U.S. banks. See, e.g., FSR (Feb. 22, 2011), IIB
(April 11, 2011), Cleary (Sept. 20, 2011). Numerous commenters also
recommended that comparability should be determined based on whether
the home country entity-level requirements are reasonably designed
to achieve the same policy objectives as the corresponding
requirements under the Dodd-Frank Act. See Cleary (Sept. 20, 2011).
Commenters said that the Commission should defer to the home
country, entity-level requirements only when they are comparable.
Commenters also discussed Dodd-Frank Act requirements that
potentially apply to all swap market participants, not just
registered swap dealers and MSPs. For instance, commenters said that
when a non-U.S. person executes or clears a swap on a U.S.-
registered facility, the non-U.S. person should be subject to the
Commission’s swap position limit requirements. See US Banks (Feb.
22, 2011). Commenters said that clearing requirements should not
apply to swaps between two non-U.S. persons, and that the regulators
in various countries should work together to recognize comparably-
regulated clearinghouses. See SIFMA (Feb. 3, 2011) and Seven Foreign
Banks (Jan. 11, 2011).
—————————————————————————
In this proposed interpretive guidance and policy statement
(“proposed interpretive guidance”), the Commission addresses the key
issues raised by the commenters with respect to the application of
Title VII of the Dodd-Frank Act and the Commission’s rules promulgated
thereunder to cross-border swaps and activities. Following the
background discussion in Section I, the Commission sets out its
proposed interpretive guidance in the subsequent three sections.
Section II sets forth the Commission’s proposed interpretation of its
authority to apply the Dodd-Frank Act and its regulations
extraterritorially under section 2(i) of the CEA.23 Section II also
describes the general manner in which the Commission proposes to
consider the following: (i) Whether a non-U.S. person’s swap dealing
activities are sufficient to require registration as a “swap dealer,”
as further defined in a joint release adopted by the Commission and the
SEC (collectively, the “Commissions”); (ii) whether a non-U.S.
person’s swap positions are sufficient to require registration as a
“major swap participant,” as further defined in a joint release
adopted by the Commissions; and (iii) the treatment for registration
purposes of foreign branches, agencies, affiliates, and subsidiaries of
U.S. swap dealers and of U.S. branches of non-U.S. swap dealers.24
—————————————————————————
23 7 U.S.C. 2(i).
24 See Further Definition of “Swap Dealer,” “Security-Based
Swap Dealer,” “Major Swap Participant,” “Major Security-Based
Swap Participant” and “Eligible Contract Participant”; Final
Rule, 77 FR 30596, May 23, 2012.
—————————————————————————
Section III sets forth the manner in which the Commission proposes
to interpret section 2(i) of the CEA as it applies to the requirements
under Title VII of the Dodd-Frank Act and the Commission’s regulations
promulgated thereunder to swaps and activities of non-U.S. swap
dealers, non-U.S. MSPs and foreign branches, agencies, affiliates, and
subsidiaries of U.S. swap dealers. In section III, the Commission also
proposes to permit a non-U.S. swap dealer or non-U.S. MSP to comply
with comparable foreign regulatory requirements in order to satisfy
applicable statutory and regulatory requirements under Title VII of the
Dodd-Frank Act.25 In section IV, the Commission generally describes a
process by which a non-U.S. applicant for swap dealer or MSP
registration may seek the Commission’s recognition of substituted
compliance with a comparable foreign regulatory requirement and the
general scope of Commission review in making the requisite
comparability finding. Section V sets forth the manner in which the
Commission proposes to interpret section 2(i) of the CEA as it applies
to the clearing, trading, and certain reporting requirements under the
Dodd-Frank Act with respect to swaps between counterparties that are
not swap dealers or MSPs.
—————————————————————————
25 This proposed interpretative release does not address the
scope of the Commission’s authority under CEA section 2(i) over non-
swap agreements, contracts, transactions or markets within the
Commission’s jurisdiction or persons who participate in or operate
those markets.
—————————————————————————
The Commission clarifies that this proposed interpretive guidance
does not establish or modify any person’s rights and obligations under
the CEA or the Commission’s regulations promulgated thereunder. The
Commission notes that the proposed interpretive guidance does not limit
the applicability of any CEA provision or Commission regulation to any
person, entity or transaction except as provided herein.
II. Consideration of Whether a Non-U.S. Person Is a Swap Dealer or
Major Swap Participant
A. Section 2(i) of the CEA
Section 722(d) of the Dodd-Frank Act amends section 2 of the CEA
26 to add a new paragraph (i) entitled “Applicability,” which
consists of two subsections. Specifically, section 2(i) states that the
provisions added to the CEA by Title VII of the Dodd-Frank Act shall
not apply to activities outside the United States unless those
activities–
—————————————————————————
26 7 U.S.C. 2.
—————————————————————————
(1) have a direct and significant connection with activities in, or
effect on, commerce of the United States; or
(2) contravene such rules or regulations as the Commission may
prescribe or promulgate as are necessary or appropriate to prevent the
evasion of any provision of this Act that was enacted by the Wall
Street Transparency and Accountability Act of 2010.27
—————————————————————————
27 7 U.S.C. 2(i).
Section 2(i) provides the Commission with express authority over
activities outside the United States when such swaps and activities
have a “direct and significant” connection with activities
[[Page 41218]]
in, or effect on, commerce of the United States or when they contravene
such rules as the Commission may promulgate to prevent evasion of the
provisions of Title VII of the Dodd-Frank Act.28 Section 2(i) does
not, however, require the Commission to extend its reach to the outer
bounds of that authorization. Rather, in exercising its authority with
respect to swap activities outside the United States, the Commission
will be guided by consideration of international comity principles. The
subsections that follow address the general manner in which the
Commission will determine the cross-border application of the CEA’s
swap provisions, consistent with section 2(i) of the CEA.
—————————————————————————
28 A primary purpose of Title VII of the Dodd-Frank Act is to
address risk to the U.S. financial system created by
interconnections in the swaps market. Senator Blanche Lincoln, then
Chairman of the Senate Agriculture Committee, noted: “In 2008, our
Nation’s economy was on the brink of collapse. America was being
held captive by a financial system that was so interconnected, so
large, and so irresponsible that our economy and our way of life
were about to be destroyed.” Congressional Record S5818, July 14,
2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf. Senator Jeanne Shaheen stated: “We need to put
in place reforms to stop Wall Street firms from growing so big and
so interconnected that they can threaten our entire economy.”
Congressional Record S5888, July 15, 2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf. Senator Debbie Stabenow opined: “For too long the over-
the-counter derivatives market has been unregulated, transferring
risk between firms and creating a web of fragility in a system where
entities became too interconnected to fail.” Congressional Record
S5905, July 15, 2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf. As these legislative
records indicate, Congress sought to ensure that the Commission
would be able to effectively regulate activities in the swaps
marketplace, wherever those activities may occur, that are
significantly connected with or affect the U.S. financial system.
—————————————————————————
B. Proposed Interpretation of the Term “U.S. Person”
For purposes of this interpretive guidance, the Commission proposes
to interpret the term “U.S. person” by reference to the extent to
which swap activities or transactions involving one or more such person
have the relevant effect on U.S. commerce. For example, this
interpretation would help determine whether non-U.S. persons engaging
in swap dealing transactions with “U.S. persons” in excess of the de
minimis level would be required to register and regulated as a swap
dealer. In addition, for the same reasons, the term “U.S. person” can
be helpful in determining the level of U.S. interest for purposes of
analyzing and applying principles of international comity when
considering the extent to which U.S. transaction-level requirements
should apply to swap transactions.
Specifically, as proposed, the term “U.S. person” would include,
but not be limited to: (i) Any natural person who is a resident of the
United States; (ii) any corporation, partnership, limited liability
company, business or other trust, association, joint-stock company,
fund, or any form of enterprise similar to any of the foregoing, in
each case that is either (A) organized or incorporated under the laws
of the United States or having its principal place of business in the
United States 29 (“legal entity”) or (B) in which the direct or
indirect owners thereof are responsible for the liabilities of such
entity and one or more of such owners is a U.S. person; (iii) any
individual account (discretionary or not) where the beneficial owner is
a U.S. person; (iv) any commodity pool, pooled account, or collective
investment vehicle (whether or not it is organized or incorporated in
the United States) of which a majority ownership is held, directly or
indirectly, by a U.S. person(s); (v) any commodity pool, pooled
account, or collective investment vehicle the operator of which would
be required to register as a commodity pool operator under the CEA;
(vi) a pension plan for the employees, officers, or principals of a
legal entity with its principal place of business inside the United
States; and (vii) an estate or trust, the income of which is subject to
United States income tax regardless of source.
—————————————————————————
29 The term “United States” means the United States, its
states, the District of Columbia, Puerto Rico, the U.S. Virgin
Islands, and any other territories or possessions of the United
States government, its agencies or instrumentalities.
—————————————————————————
Under this interpretation, the term “U.S. person” generally means
that a foreign branch or agency of a U.S. person would be covered by
virtue of the fact that it is a part, or an extension, of a U.S.
person. By contrast, a foreign affiliate or subsidiary of a U.S. person
would be considered a non-U.S. person, even where such an affiliate or
subsidiary has certain or all of its swap-related obligations
guaranteed by the U.S. person.
Request for Comment
Q1. Please provide specific comments regarding the Commission’s
proposed interpretation of the term “U.S. person.”
Q1a. In the Commission’s view, the concerns regarding risks
associated with the affiliate group structure are heightened where a
U.S. person guarantees (or provides similar support) to a foreign
affiliate or subsidiary. In such situations, the risk of the swaps
executed abroad are effectively transferred to or incurred by the U.S.
person. Or stated differently, the risk of the affiliate’s swap
transactions have a direct and significant connection to, or effect on,
the U.S. person that is the guarantor. Under these circumstances,
notwithstanding that the U.S. person may be subject to a robust
regulatory regime, its financial stability may be put at risk by
activities outside the firm. Accordingly, the Commission is
considering, and seeks comments on, whether the term “U.S. person”
should be interpreted to include a foreign affiliate or subsidiary
guaranteed by a U.S. person.
Q1b.Several commenters have suggested that the Commission adopt the
definition of “U.S. person” in the SEC’s Regulation S.30 Should the
Commission interpret the term “U.S. person” in a similar manner
notwithstanding that Regulation S has a different focus?
—————————————————————————
30 See 17 CFR 230.902(k); SEC Release No. 33-6863, 55 FR
18306, May 2, 1990.
—————————————————————————
Q1c. As an alternative to the proposed interpretation of the term
“U.S. person,” should the Commission interpret the term to include a
concept of control under which a non-U.S. person who is controlled by
or under common control with a U.S. person would also be considered a
U.S. person? If so, how should the Commission define the term
“controlled by or under common control?”
Q1d. Are there other examples of persons or interests that should
be specifically identified as a “U.S. person” in the final
interpretive guidance?
C. The Definitions and Registration Thresholds
1. Background
The Commission adopted its final rulemaking further defining the
terms “swap dealer” and “major swap participant” jointly with the
SEC on April 18, 2012 (“Final Entities Rulemaking”).31 In the Final
Entities Rulemaking, the Commissions, among other things, adopted final
rules and interpretive guidance implementing the statutory definitions
of the terms “swap dealer” and “major swap participant” in CEA
sections 1a(49) and 1a(33).32 The final rules and interpretive
guidance delineate the activities that cause a person to be a swap
dealer and the level of swap positions that cause a person to be an
MSP. In addition, the
[[Page 41219]]
Commissions adopted rules concerning the statutory exceptions from the
definition of swap dealer, including a de minimis exception.33
—————————————————————————
31 Further Definition of “Swap Dealer,” “Security-Based
Swap Dealer,” “Major Swap Participant,” “Major Security-Based
Swap Participant” and “Eligible Contract Participant;” Final
Rule, 77 FR 30596, May 23, 2012.
32 7 U.S.C. 1a(49) and 1a(33).
33 Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides
that “[t]he Commission shall exempt from designation as a swap
dealer an entity that engages in a de minimis quantity of swap
dealing in connection with transactions with or on behalf of its
customers. The Commission shall promulgate regulations to establish
factors with respect to the making of this determination to
exempt.” This provision is implemented in section 1.3(ggg)(4) of
the Commission’s regulations.
—————————————————————————
Section 1.3(ggg)(4) of the Commission’s regulations sets forth a de
minimis threshold of swap dealing, which takes into account the
notional amount of a person’s swap dealing activity over the prior 12
months.34 When a person engages in swap dealing transactions above
that threshold, such person meets the definition of a swap dealer under
section 1a(49) of the CEA,35 and is required to register as a swap
dealer with the Commission under CEA section 4s(b).36 Sections
1.3(jjj)(1) and 1.3(lll)(1) of the Commission’s regulations set forth
swap position thresholds for the MSP definition.37 When a person
holds swap positions above those thresholds, such person meets the
definition of an MSP under section 1a(33) of the CEA,38 and is
required to register as an MSP with the Commission under CEA section
4s(b).39
—————————————————————————
34 The limitations associated with the de minimis exception
apply only in connection with a person’s dealing activities. See
Final Entities Rulemaking at Part II.D. As used in this release, the
meaning of the term “swap dealing” is consistent with that used in
the Final Entities Rulemaking.
35 7 U.S.C. 1a(49).
36 7 U.S.C. 6s(b). See also Registration of Swap Dealers and
Major Swap Participants, Final Rule 77 FR 2613, 2616, Jan. 19, 2012
(“Final Registration Rule”).
37 See Final Entities Rulemaking at Parts IV.B. and IV.E.
38 7 U.S.C. 1a(33).
39 7 U.S.C. 6s(b). See also Final Registration Rule at 2616,
Jan. 19, 2012, available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2012-792a.pdf.
—————————————————————————
Once required to register as a swap dealer or MSP, the person
becomes subject to all of the requirements imposed on swap dealers or
MSPs under Title VII, respectively, including but not limited to
sections 2(a)(13), 4r, and 4s of the CEA,40 which require swap
dealers and MSPs to comply with various prudential, business conduct,
reporting, clearing, and trading requirements. Unless a swap dealer or
MSP applies for and is granted a limited designation, all of the swap
dealer’s or MSP’s swap activities are subject to such requirements, not
only the swap activities that trigger the registration requirement.
—————————————————————————
40 7 U.S.C. 2(a)(13), 6r, and 6s.
—————————————————————————
The statutory definitions of swap dealer and MSP do not contain any
geographic limitations and do not distinguish between U.S. and non-U.S.
swap dealers or non-U.S. MSPs.41 Similarly, the Final Entities
Rulemaking does not contain any such limitations or distinctions. In
this proposed interpretive guidance, the Commission interprets section
2(i) of the CEA as it applies to the provisions in the CEA related to
swap dealers and MSPs and, accordingly, proposes the general manner in
which the swap dealer and MSP registration and related requirements
apply to the activities of non-U.S. persons, and to the foreign
branches, agencies, subsidiaries and affiliates of U.S. persons and
U.S. branches of non-U.S. persons.
—————————————————————————
41 The statutory definition of MSP in CEA section 1a(33)(B) (7
U.S.C. 1a(33)(B)) does state, however, that the Commission should
consider the impact on “the financial system of the United States”
in defining what constitutes a “substantial position” for purposes
of the definition. The Commission believes that this proposed
interpretative guidance, which focuses on a non-U.S. person’s swap
positions with U.S. persons, is consistent with this statutory
directive.
—————————————————————————
2. Swap Dealer
In enacting the swap dealer definition and the associated
requirements for swap dealers Congress sought to ensure that those
entities that engage in more than a de minimis level of swap dealing be
considered swap dealers, register, and be regulated as swap
dealers.42 In the Final Entities Rulemaking, the Commission
established a notional threshold for determining whether a person
engages in more than a de minimis level of swap dealing and therefore
must register as a swap dealer. The Commission proposes that the level
of swap dealing that is substantial enough to require a person to
register as a swap dealer when conducted by a U.S. person also
constitutes a “direct and significant connection” within the meaning
of section 2(i)(1) of the CEA when such dealing activities are
conducted by a non-U.S. person with U.S. persons as counterparties.
Accordingly, consistent with this interpretation and the Commission’s
Final Entities Rulemaking, the Commission proposes that non-U.S.
persons who engage in more than a de minimis level of swap dealing with
U.S. persons would be required to register as swap dealers.43
—————————————————————————
42 The Commission does not believe it is necessary for
purposes of this proposed interpretive guidance to determine whether
such swaps or activities between a non-U.S. person and a U.S. person
are located within or outside of the United States. Regardless of
whether the location of any particular swap or activity is within or
outside the United States, the Commission proposes that it is the
aggregate notional amount of such swap dealing activities that is
relevant for registration. Accordingly, the consideration of such
swaps within the meaning of CEA section 2(i) for the purposes of
this proposed guidance does not necessarily mean that the Commission
considers such activities to be outside of the United States. See
Final Entities Rulemaking at Part II.B.4. for what constitutes
“swap dealing activities.”
43 In the Final Entities Rulemaking, the Commissions codified
exclusions from the dealer definition for swaps and security-based
swaps between majority-owned affiliates. The Commission construes
section 2(i) to apply such inter-affiliates exclusion to swaps
between a non-U.S. person and its U.S. affiliate or between two
affiliated non-U.S. persons. See section 1.3(ggg)(6)(i) of the
Commission’s regulations.
—————————————————————————
The Commission does not propose, however, that a non-U.S. person
should include, in determining whether the de minimis threshold is met,
the notional value of dealing transactions with foreign branches of
registered U.S. swap dealers. This is intended to address the concerns
of non-U.S. persons who may be required to register as a swap dealer,
notwithstanding the fact that their dealing activities with U.S.
persons as counterparties are limited to foreign branches of registered
U.S. swap dealers. In such cases, the Dodd-Frank Act transactional
requirements (or comparable requirement) would nevertheless apply to
swaps with those foreign branches and, thus, there is little concern
that this exclusion could be used to engage in swap activities outside
of the Dodd-Frank Act (comparable) requirements. Accordingly, the
Commission believes that it would be appropriate and consistent with
section 2(i) to allow non-U.S. persons to conduct swap dealing
activities with registered U.S. swap dealers outside the United States
(through their foreign branches), without triggering registration as a
swap dealer as a result.
i. Aggregation of Swaps
The Commission notes that section 1.3(ggg)(4) of the Commission’s
regulations requires that a person include, in determining whether its
swap dealing activities exceed the de minimis threshold, the aggregate
notional value of swap dealing transactions entered into by its
affiliates under common control. It is the Commission’s view that this
provision would require that a non-U.S. person, in determining whether
its swap dealing transactions exceed the de minimis threshold, include
the aggregate notional value of any swap dealing transactions between
U.S. persons and any of its non-U.S. affiliates under common control,
and any swap dealing transactions of any of its non-U.S. affiliates
under common control where
[[Page 41220]]
the obligations of such non-U.S. affiliates are guaranteed by U.S.
persons.44
—————————————————————————
44 See Final Entities Rulemaking at Part II.D.4.
—————————————————————————
The Commission is not proposing, however, that a non-U.S. person
should include, in this determination, the notional value of dealing
transactions in which its U.S. affiliates engage. Again, the
Commission’s proposed interpretation is that a direct and significant
connection with activities in, or effect on, U.S. commerce, in these
circumstances, exists when non-U.S. persons conduct more than a de
minimis level of swap dealing activities with U.S. persons. In the case
of an affiliated group of non-U.S. persons under common control, the
Commission believes that all of the affiliated non-U.S. persons should
aggregate the notional value of their swap dealing transactions with
U.S. persons (and their swap dealing transactions with non-U.S. persons
in which such person’s obligations are guaranteed by U.S. persons), in
order to determine, in effect, the level of swap dealing activities
conducted by the affiliated group of non-U.S. persons in the aggregate.
However, since the focus is on the level of activity conducted by non-
U.S. persons, swap dealing transactions of affiliated U.S. persons
should not be included.45
—————————————————————————
45 See also 77 FR at 2616.
—————————————————————————
ii. Regular Business
As stated in the Final Entities Rulemaking, a person is required to
apply the de minimis test only if it determines it is engaged in swap
dealing activity under the rule further defining the term “swap
dealer,” which excludes swap activities that are not part of “a
regular business.” A person that is not engaged in swap dealing as
part of “a regular business” is not required to apply the de minimis
test and is not a swap dealer under the CEA.
The Commission proposes that a non-U.S. person without a guarantee
from a U.S. person applying the swap dealer definition should determine
first whether its swap activities with respect to U.S. persons as
counterparties qualify as swap dealing activity under the rule further
defining the term “swap dealer” and the exclusion of swap activities
that are not part of “a regular business.” Thus, for example, a non-
U.S. person without a guarantee that determines it is not engaged in
swap dealing as part of “a regular business” with respect to U.S.
persons as counterparties is not required to apply the de minimis test
or to register as a swap dealer. This would be true even if the non-
U.S. person were engaged in swap dealing as part of “a regular
business” with respect to non-U.S. persons as counterparties.
The determination of whether a person is engaged in swap dealing
activity involves application of the interpretive guidance in Part
II.A.4. of the Final Entities Rulemaking, which provides for
consideration of the relevant facts and circumstances. Similarly, the
Commission proposes that the determination by a non-U.S. person without
a guarantee of whether it is engaged in swap dealing as part of “a
regular business” with respect to U.S. persons as counterparties (as
opposed to its swap dealing activity with respect to non-U.S. persons
as counterparties) will depend on consideration of the relevant facts
and circumstances in light of the interpretive guidance in the Final
Entities Rulemaking.
Request for Comment
Q2. Do commenters agree that in determining whether it is a swap
dealer, a non-U.S. person without a guarantee from a U.S. person should
consider whether it is engaged in swap dealing as part of “a regular
business” only with respect to U.S. persons (as opposed to non-U.S.
persons)? Why or why not? In such an analysis, would it generally be
feasible for the non-U.S. person to distinguish swap dealing activities
with U.S. persons from swap dealing activities with non-U.S. persons
and are there any practical difficulties in this approach?
3. Major Swap Participant
The MSP definition and associated requirements for MSPs reflect
Congress’ direction that any entity that holds swap positions above a
level that could, among other things, “significantly impact the
financial system of the United States,” be considered an MSP and
register and be regulated as an MSP.46 In the Final Entities
Rulemaking, the Commission further defined MSP to clarify when a person
must register. The Commission believes that the level of swap positions
that is substantial enough to require a person to register as an MSP
when held by a U.S. person, also constitutes a “direct and significant
connection” within the meaning of section 2(i) of the CEA when such
positions reflect swaps between a non-U.S. person and U.S. persons.
Consistent with this interpretation and the Commission’s Final Entities
Rulemaking, a non-U.S. person who holds swap positions where a U.S.
person is a counterparty above the specified MSP thresholds would
qualify and register as an MSP.
—————————————————————————
46 CEA section 1a(33)(B), 7 U.S.C. 1a(33)(B). As is the case
with respect to swap dealers, the Commission does not believe it is
necessary, for purposes of this proposed interpretative guidance, to
determine whether such swaps or activities between a non-U.S. person
and a U.S. person are located within or outside of the United
States.
—————————————————————————
i. Aggregation of Positions
In determining whether it is an MSP, a non-U.S. person would
“count” all of its swap positions where its counterparty is a U.S.
person, but would not “count” any swap position where its
counterparty is a non-U.S. person. As with swap dealing transactions, a
swap between a non-U.S. person and a U.S. person, or a swap between a
non-U.S. person and another non-U.S. person under which the first non-
U.S. person’s obligations are guaranteed by a U.S. person, in and of
itself may have a direct and significant connection with activities in,
or effect on, commerce of the United States within the meaning of
section 2(i) of the CEA. Similarly, for purposes of applying section
2(i) of the CEA to the MSP definition and associated requirements, the
Commission believes the appropriate focus is on whether in the
aggregate such swaps have a direct and significant connection with
activities in, or effect on, U.S. commerce, rather than whether each
particular swap has such a connection or effect.
4. Relevance of Guarantees
In the event of a default or insolvency of a non-U.S. swap dealer
with more than a de minimis level of swap dealing with U.S. persons or
a non-U.S. MSP with more than the threshold level of swap positions
with U.S. persons, the swap dealer’s or MSP’s U.S. counterparties could
be adversely affected. Such an event may adversely affect numerous
persons engaged in commerce within the United States, disrupt such
commerce, and increase risks of a widespread disruption to the
financial system in the United States. For that reason, the Commission
has a significant regulatory interest in ensuring that the swap dealer
or MSP is managing the risks of such swaps appropriately and ensuring
that its U.S. counterparties receive the appropriate protections under
the CEA.
Similar effects on U.S. persons and on the U.S. financial system
may occur in the event of a default or insolvency of a non-U.S. person
with respect to a non-de minimis level of swap dealing transactions, or
swap positions above the MSP threshold, of the non-U.S. person that are
guaranteed by a U.S. person. In these circumstances, and regardless of
whether the non-U.S. person’s counterparty is a U.S. person or
[[Page 41221]]
a non-U.S. person, the risk of default by the non-U.S. person with
respect to its guaranteed swaps ultimately rests with a U.S. person. If
there is a default by the non-U.S. person, the U.S. person would be
held responsible to settle those obligations. However, the Commission’s
interpretive guidance with respect to guarantees differs slightly for
swap dealers and MSPs.47 We therefore discuss the two cases
separately here.
—————————————————————————
47 For purposes of this interpretive guidance, references to a
guarantee are intended to refer not only to traditional guarantee of
payment or performance of the related swaps, but would also include
other formal arrangements to support the non-U.S. person’s ability
to pay or perform its obligations, including without limitation,
liquidity puts and keepwell agreements.
—————————————————————————
Accordingly, the Commission proposes to interpret CEA section 2(i)
as requiring a non-U.S. person to register with the Commission as a
swap dealer when the aggregate notional value of its swap dealing
activities with U.S. persons, or of its swap dealing activities with
non-U.S. persons where the dealing non-U.S. person’s obligations are
guaranteed, or its ability to pay or perform its obligations thereunder
are otherwise formally supported, by a U.S. person, exceed the de
minimis level of swap dealing as set forth in section 1.3(ggg)(4) of
the Commission’s regulations. The Commission believes that when the
aggregate level of swap dealing by a non-U.S. person, considering both
swaps directly with U.S. persons and swaps with non-U.S. persons under
which the dealing non-U.S. person’s obligations are guaranteed by a
U.S. person, exceeds the de minimis level of swap dealing, the dealing
non-U.S. person’s activities have the requisite “direct and
significant connection with activities in, or effect on, commerce of
the United States.”
With respect to whether a person is an MSP, the Commission’s
interpretive guidance in the Final Entities Rulemaking provides that a
person’s swap positions are attributed to a parent, other affiliate or
guarantor to the extent that the counterparties to those positions
would have recourse to the other entity in connection with the position
unless the first person is itself subject to capital regulation by the
CFTC or SEC (e.g., including where the first person is a swap dealer or
MSP) or is a U.S. entity regulated as a bank in the United States.48
In accordance with this guidance, the Commission proposes that swap
positions between a non-U.S. person, where the obligations of such non-
U.S. person thereunder are guaranteed by a U.S. person, should be
attributed to the U.S. person (and not the non-U.S. person) in
determining whether either person is an MSP. In other words, the
Commission proposes to interpret CEA section 2(i) as requiring non-U.S.
persons to register with the Commission as MSPs when their swaps with
U.S. persons, disregarding any such positions where their obligations
thereunder are guaranteed by U.S. persons, exceed a relevant MSP
threshold as set forth in the Final Entities Rulemaking.
—————————————————————————
48 See Final Entities Rulemaking at part IV.H.
—————————————————————————
5. Summary
This proposed interpretation may be summarized as follows. In
determining whether a non-U.S. person is engaged in more than a de
minimis level of swap dealing, the person should consider the aggregate
notional value of:
Swap dealing transactions between it (or any of its non-
U.S. affiliates under common control) and a U.S. person (other than
foreign branches of U.S. persons that are registered swap dealers); and
Swap dealing transactions (or any swap dealing
transactions of its non-U.S. affiliates under common control) where its
obligations or its non-U.S. affiliates’ obligations thereunder are
guaranteed by U.S. persons.
In determining whether a non-U.S. person holds swap positions above
the MSP thresholds, the person should consider the aggregate notional
value of:
Any swap position between it and a U.S. person (but its
swap positions where its obligations thereunder are guaranteed by a
U.S. person generally should be attributed to that U.S. person and not
included in the non-U.S. person’s determination); and
Any swap between another non-U.S. person and a U.S.
person, where it guarantees the obligations of the non-U.S. person
thereunder.
D. Foreign Branches, Agencies, Affiliates, and Subsidiaries of U.S.
Swap Dealers and U.S. Branches, Agencies, Affiliates, and Subsidiaries
of Non-U.S. Swap Dealers
1. Foreign 49 Branches and Agencies of U.S. Swap Dealers
—————————————————————————
49 In this release, the term “foreign” is used
interchangeably with the term “non-U.S.”
—————————————————————————
The Commission understands that branches and agencies are not
separate legal entities; rather, a branch or agency is a corporate
extension of its principal entity.50 Given that a foreign branch or
agency has no legal existence separate from a U.S. principal entity
that is the legal counterparty to swaps, the Commission would apply the
Dodd-Frank Act registration requirements to a U.S. person and its
foreign branches and agencies on an entity-wide basis.51 Under this
approach, the Commission would require the U.S. person (principal
entity) to register as the swap dealer. Although certain duties and
obligations may be performed by the foreign branches and agencies, the
U.S. person (principal entity) would remain responsible for compliance
with all of the applicable responsibilities.52
—————————————————————————
50 See, e.g., Federal Reserve Bank of New York, Foreign Banks
and the Federal Reserve, at http://www.ny.frb.org/aboutthefed/fedpoint/fed26.html (last visited Feb. 26, 2012). See also Federal
Reserve Board, “Policy Statement on the Supervision and Regulation
of Foreign Banking Organizations,” Feb. 23, 1979, Federal Reserve
Regulatory Service 4-835; Federal Reserve Board Supervisory Letter
SR 08-09 re: Consolidated Supervision of Bank Holding Companies and
the Combined U.S. Operations of Foreign Banking Organizations, Oct.
16, 2008. See also Institute of International Bankers, Comment
Letter at 15-16, Jan. 10, 2011 (acknowledging the principal-agency
relationship and advocating for the Commission to adopt a
registration regime predicated on the intermediating activities of
U.S. branches and agencies).
51 The Commission notes that the supervisory authority of the
Office of the Comptroller of the Currency extends to foreign branch
offices of national banks under its jurisdiction.
52 Under this model, the foreign branch or agency of the U.S.
person would not register separately as a swap dealer.
—————————————————————————
2. Foreign Affiliates or Subsidiaries of U.S. Persons
A number of large financial institutions operate a “central
booking” model under which swaps are solicited or negotiated through
their branches, agencies, affiliates or subsidiaries but are booked,
directly or indirectly, in a single legal entity (typically the parent
company) for balance sheet and financial reporting purposes.53 In
some cases, the affiliate which has negotiated the swap may be acting
as a principal and may transfer the exposure to the central booking
entity by back-to-back transactions or other arrangements. In other
cases, the affiliate that has arranged or negotiated the trade may be
acting as an agent for the central booking entity, in which case the
central booking entity may enter into the swap transaction so that the
central booking entity is, as a contractual matter, directly facing the
third-party counterparty in the swap transaction. Given these various
ways of implementing a central booking arrangement, the question arises
as to how the Dodd-Frank Act registration
[[Page 41222]]
requirement would apply to the affiliate facing the third party
counterparty and the central booking entity or guarantor. The following
subsection addresses which entity must register as a swap dealer in
such central “booking” model.
—————————————————————————
53 See Seven Foreign Banks (“Many foreign banks operate and
manage their global swaps businesses out of a single entity * * *.
[T]his entity is the central booking vehicle, acting as principal to
counterparties in the U.S. and other jurisdictions.”) (Jan. 11,
2011); IIB (Jan. 10, 2011). These comment letters are available on
the Commission’s Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=903.
—————————————————————————
The Commission proposes to interpret section 2(i) of CEA so that
the U.S. person who books the swaps would be required to register as a
swap dealer, regardless of whether the swaps were directly booked by
the U.S. person (by such person becoming a party to the swap) or
indirectly transferred to the U.S. person (by way of a back-to-back
swap or other arrangement). In either case, the affiliate may also be
required to register as a swap dealer if by its activities it
independently meets the definition of swap dealer.
3. U.S. Branches, Agents, Affiliates, or Subsidiaries of Non-U.S.
Persons
A similar analysis applies when a non-U.S. person is the booking
entity (i.e., the legal counterparty) to swaps.54 Under these
circumstances, even if the U.S. branch, agency, affiliate, or
subsidiary of a non-U.S. person engages in solicitation or negotiation
in connection with the swap entered into by the non-U.S. person, the
Commission proposes to interpret section 2(i) of CEA such that the
Dodd-Frank Act requirements, including the registration requirement,
applicable to swap dealers also apply to the non-U.S. person.
—————————————————————————
54 As further described below (in subsection E), a number of
commenters urge the Commission to treat a branch of a non-U.S. bank
as a separate legal entity. Extending this logic to the registration
context, these commenters support the registration and regulation of
the branch. The Commission notes CEA section 1a(39) (7 U.S.C.
1a(39)) states that the term “prudential regulator” shall mean the
Board of Governors of the Federal Reserve System in the case of a
swap dealer, MSP, security-based swap dealer, or major security-
based swap participant that is–
(v) any bank holding company [citation omitted], any foreign
bank (as defined in section 1(b)(7) of the International Banking Act
of 1978 (12 U.S.C. 3101(b)(7)) that is treated as a bank holding
company under section 8(a) of the International Banking Act of 1978
(12 U.S.C. 3106(a)), and any subsidiary of such a company or foreign
bank (other than a subsidiary that is described in subparagraph (A)
or (B) or that is required to be registered with the Commission as a
swap dealer or major swap participant under this Act or with the
[SEC] as a security-based swap dealer or major security-based swap
participant).
Clearly, Congress contemplated that foreign banks that become
bank holding companies by virtue of the presence of a branch or a
subsidiary in the United States may be regulated as swap dealers.
—————————————————————————
Request for Comment
Q3. Please provide comments regarding all aspects of the
Commission’s proposed interpretation, including particular alternative
interpretations the Commission should consider in assessing whether a
non-U.S. person should be required to register as a swap dealer or MSP.
Q3a. Do commenters agree that the Commission should determine
whether a non-U.S. person, without a guarantee from a U.S. affiliate,
is a swap dealer based solely upon the aggregate notional amount of
swap dealing activities with U.S. persons as counterparties? Why or why
not?
Q3b. Do commenters agree that the Commission should determine
whether a non-U.S. person is a swap dealer based on the aggregate
notional amount of swap dealing activities when the swap dealing
obligations of such non-U.S. person are guaranteed by a U.S. person?
Why or why not?
Q3c. Do commenters agree that in determining whether a non-U.S.
person is a swap dealer, the notional amount of swap dealing activities
conducted by it and all of its non-U.S. affiliates under common control
should be aggregated together? Why or why not? Should the Commission
further interpret the phrase “under common control” and, if so, how
should the Commission define “common control” for aggregation
purposes? Should the notional amount of swap dealing activities
conducted by its U.S. affiliates also be included?
Q3d. Are any other aspects of a swap–such as, for example, the
place of execution or clearing–relevant to the determination of
whether a non-U.S. person is a swap dealer?
Q3e. Do commenters agree that the Commission should determine
whether a non-U.S. person is an MSP based solely on its swap positions
with U.S. persons as counterparties? If not, why?
Q3f. Do commenters agree that, in determining whether a non-U.S.
person is an MSP, its swap positions guaranteed by a U.S. person should
be attributed to such U.S. person and not the non-U.S. person? If not,
why? How should the Commission’s determination change when some but not
all of the non-U.S. person’s swap obligations are guaranteed by a U.S.
person?
Q3g. Are any other aspects of a swap–such as the place of
execution or clearing–relevant to the determination of whether a non-
U.S. person is an MSP?
Q4. As noted above, the Commission does not propose that a non-U.S.
person should include, in determining whether the swap dealer de
minimis threshold is met, the notional value of swap dealing
transactions with foreign branches of U.S. swap dealers. Noting the
risk-based, as opposed to activities-based, nature of the MSP
registration category and related calculations, the Commission seeks
comment on whether a non-U.S. person should include, in determining
whether it is required to register as an MSP, its swap positions with
foreign branches of U.S. swap dealers.
Q5. Under the aggregation description above, a non-U.S. person, in
determining whether the de minimis threshold is met, must include the
notional value of dealing swaps by its non-U.S. affiliates under common
control. The Commission requests comments on whether, to the extent
that any such non-U.S. affiliate is registered with the Commission as a
swap dealer, the notional value of dealing swaps entered into by such
registered swap dealer should not be aggregated with the notional value
of dealing swaps entered into by the other non-U.S. affiliates under
common control.55
—————————————————————————
55 Thus, within an affiliated group of firms, the dealing
activities of any affiliates that are registered with the Commission
as swap dealers would not be included in considering whether any of
the other affiliates are required to register as a swap dealer.
However, all non-U.S. affiliates under common control that are not
so registered would have to aggregate the notional value of any swap
dealing transactions with U.S. persons (or where the obligations of
such non-U.S. affiliates are guaranteed by U.S. persons) to
determine if such swap dealing transactions exceed the de minimis
threshold of swap dealing activity.
—————————————————————————
Q7. Should the Commission consider any other types of swap dealing
transactions by non-U.S. persons to determine whether a non-U.S. person
is a swap dealer? If so, which ones?
Q8. Do commenters agree that the Commission should exclude the swap
dealing transactions of a non-U.S. person from the determination of
whether such non-U.S. person qualifies as a swap dealer, where the
counterparty to such dealing swaps are non-U.S. persons (guaranteed or
not)? Should the Commission exclude swap obligations in excess of a
capped guaranty provided by a U.S. person (i.e., a guaranty that limits
the U.S. person’s liability to a capped or maximum amount)? How should
the Commission account for the reduced risks assumed by a U.S. person
guaranteeing certain or all swaps of a particular non-U.S. person under
that non-U.S. person’s master agreements with non-U.S. counterparties,
where the U.S. person’s liability under the guarantee is limited?
Q9. Can a limited designation registration as provided for in the
statutory definitions of the terms “swap dealer” and “major swap
participant” be used to address the Commission’s regulatory interests
under the Dodd-Frank Act with respect to cross-border swap activities?
If so, how?
[[Page 41223]]
III. Cross-Border Application of the CEA’s Swap Provisions and
Implementing Regulations
A non-U.S. person who meets or exceeds the de minimis threshold for
swap dealers or the position thresholds for MSPs would be required to
register with the Commission as a swap dealer or MSP, respectively,
pursuant to the procedures prescribed in Part 3 of the Commission’s
regulations.56 Once registered, the non-U.S. swap dealer or non-U.S.
MSP would become subject to all of the substantive requirements under
Title VII of the Dodd-Frank Act that apply to registered swap dealers
or MSPs, including but not limited to sections 2(a)(13), 4r, and 4s of
the CEA, with respect to all of their swap activities. In other words,
the requirements under Title VII of the Dodd-Frank Act related to swap
dealers and MSPs apply to all registered swap dealers and MSPs,
irrespective of where such dealer or MSP is based. In exercising its
authority over non-U.S. swap dealers, non-U.S. MSPs, or cross-border
activities, however, the Commission will be informed by canons of
statutory construction regarding the application of its authority in a
manner consistent with principles of international comity. A brief
discussion of these principles follows.
—————————————————————————
56 See 7 U.S.C. 6s(b)(1). See also 77 FR 2613, 2616, Jan. 19,
2012.
—————————————————————————
A. Principles of International Comity
The Supreme Court has held that “an act of Congress ought never to
be construed to violate the law of nations if any other possible
construction remains.” 57 Jurisdiction is generally construed, “to
avoid unreasonable interference with the sovereign authority of other
nations.” 58 The most relevant Supreme Court precedents addressing
the application of international comity concepts in determining the
extraterritorial applicability of federal statutes come from
antitrust.59 In these cases, the Supreme Court has noted that the
principles in the Third Restatement of Foreign Relations Law are
relevant to the interpretation of U.S. law:
—————————————————————————
57 Hartford Fire Ins. Co. et al., 509 U.S. 764, 817 (1993); F.
Hoffmann-La Roche, Ltd., 542 U.S. 155, 164 (2004).
58 F. Hoffmann-La Roche, Ltd., 542 U.S. at 164.
59 See notes 82-84, supra.
This rule of construction reflects principles of customary
international law–law that (we must assume) Congress ordinarily
seeks to follow. See Restatement (Third) of Foreign Relations Law of
the United States Sec. Sec. 403(1), 403(2) (1986). * * *
This rule of statutory construction cautions courts to assume
that legislators take account of the legitimate sovereign interests
of other nations when they write American laws. It thereby helps the
potentially conflicting laws of different nations work together in
harmony–a harmony particularly needed in today’s highly
interdependent commercial world.60
—————————————————————————
60 F. Hoffmann-La Roche, Ltd., 542 U.S. at 164-65.
Specifically, section 403 of the Restatement (Third) of Foreign
Relations Law states, in relevant part:
Whether exercise of jurisdiction over a person or activity is
unreasonable is determined by evaluating all relevant factors,
including, where appropriate:
(a) The link of the activity to the territory of the regulating
state, i.e., the extent to which the activity takes place within the
territory, or has substantial, direct, and foreseeable effect upon
or in the territory;
(b) The connections, such as nationality, residence, or economic
activity, between the regulating state and the person principally
responsible for the activity to be regulated, or between that state
and those whom the regulation is designed to protect;
(c) The character of the activity to be regulated, the
importance of regulation to the regulating state, the extent to
which other states regulate such activities, and the degree to which
the desirability of such regulation is generally accepted;
(d) The existence of justified expectations that might be
protected or hurt by the regulation;
(e) The importance of the regulation to the international
political, legal, or economic system;
(f) The extent to which the regulation is consistent with the
traditions of the international system;
(g) The extent to which another state may have an interest in
regulating the activity; and
(h) The likelihood of conflict with regulation by another state.
In accordance with judicial and executive branch precedent and
guidance in interpreting statutes with cross-border application, the
Commission proposes that it should exercise its regulatory authority
over cross-border activities in a manner consistent with these
principles of statutory construction and international comity.61 The
Commission is therefore guided by these principles as discussed in
these precedents.62
—————————————————————————
61 For a similar consideration of the application of
principles of international comity by federal agencies in the
enforcement of the antitrust laws, see U.S. Department of Justice
and the Federal Trade Commission, Antitrust Enforcement Guidelines
for International Operations, Apr. 1995, which is available at
http://www.justice.gov/atr/public/guidelines/internat.htm.
62 The Commission has a longstanding policy of considering
principles of international comity in its rulemakings and
interpretations. For example, the Commission adopted regulatory
amendments that codify its longstanding policy towards foreign
brokers. See Exemption from Registration for Certain Foreign
Persons, 72 FR 63976, 63978-79, Nov. 14, 2007. The amendments
codified a registration exemption for any foreign person functioning
as an introducing broker, commodity pool operator or commodity
trading advisor solely on behalf of customers located outside the
United States, if all commodity interest transactions are submitted
for clearing to a registered FCM. See id. at 63978-79. In addition,
the Commission amended Sec. 3.12 of the Commission’s regulations to
codify a registration exemption for any individual located in the
branch office of a Commission registrant that does not solicit or
accept orders from customers located in the United States.
—————————————————————————
B. Proposed Application of the CEA’s Swap Provisions to Non-U.S. Swap
Dealers and Foreign Branches, Agencies, Affiliates, and Subsidiaries of
U.S. Swap Dealers
1. Categories of Regulatory Requirements
Title VII of the Dodd-Frank Act establishes a comprehensive new
regulatory framework for swap dealers and MSPs. This framework is an
important element of the “improve[d] financial architecture” that
Congress intended in enacting the Dodd-Frank Act and its goal of
reducing systemic risk and enhancing market transparency.63 Among
other things, a registered swap dealer or MSP must comport with certain
standards (and regulations as the Commission may promulgate) governing
risk management, internal and external business conducts, and
reporting. Further, U.S. swap dealers and MSPs, once registered, are
required to comply with all of the requirements applicable to swap
dealers and MSPs for all their swaps, not just the swaps that make them
a swap dealer or MSP.
—————————————————————————
63 S. Rep. No. 111-176, at 228 (2010), available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf.
—————————————————————————
A number of commenters recommended that the Commission, in
interpreting the cross-border applicability of the Dodd-Frank Act swap
provisions to a registered swap dealer or MSP, should distinguish
between requirements that: (i) Apply at an entity level (i.e., to the
firm as a whole); or (ii) apply at a transactional level (i.e., to the
individual transaction or trading relationship).64 These commenters
believed that requirements that relate to the core operations of a firm
should be applied on an entity-level basis and would include the
capital and related prudential requirements and recordkeeping, as well
as certain risk mitigation requirements (e.g., information barriers and
the designation of a chief compliance officer). The commenters stated
that other requirements, such as margin, should apply on transaction-
by-transaction basis and only to swaps with U.S. counterparties.65
—————————————————————————
64 See, e.g., SIFMA (Feb. 3, 2011), ISDA (Jan. 24, 2011),
Cleary (Sept. 20, 2011), Seven Foreign Banks (Jan. 11, 2011), and
Twelve Foreign Banks (Feb. 17, 2011).
65 See SIFMA (Feb. 3, 2011).
—————————————————————————
The Commission agrees with the commenters that the various Dodd-
Frank Act swap provisions can be conceptually divided into the
following
[[Page 41224]]
two categories: (i) Entity-Level Requirements, which apply to a swap
dealer or MSP to the firm as a whole; and (ii) Transactional-Level
Requirements, which apply to the individual swap. A discussion of the
Entity-Level Requirements is set out in the section immediately below,
followed by discussions of the Transaction-Level Requirements.
2. Entity-Level Requirements
The Entity-Level Requirements under Title VII of the Dodd-Frank Act
and the Commission’s regulations promulgated thereunder relate to: (i)
Capital adequacy; (ii) chief compliance officer; (iii) risk management;
(iv) swap data recordkeeping; (v) swap data reporting (“SDR
Reporting”); and (vi) physical commodity swaps reporting (“Large
Trader Reporting”). The Entity-Level Requirements apply to registered
swap dealers and MSPs across all their swaps without distinctions as to
the counterparty or the location of the swap.
The first subcategory of Entity-Level Requirements relating to
capital adequacy, chief compliance officer, risk management, and swap
data recordkeeping relate to risks to a firm as a whole. These
requirements address and manage risks that arise from a firm’s
operation as a swap dealer or MSP. Individually, they represent a key
component of a firm’s internal risk controls. Collectively, they
constitute a firm’s first line of defense against financial,
operational, and compliance risks that could lead to a firm’s default
or failure.
At the core of a robust internal risk controls system is the firm’s
capital–and particularly, how the firm identifies and manages its risk
exposure arising from its portfolio of activities.66 Equally
foundational to the financial integrity of a firm is an effective
internal risk management process, which must be comprehensive in scope
and reliant on timely and accurate data regarding its swap activities.
To be effective, such system must have a strong and independent
compliance function. These internal controls-related requirements–
namely, the requirements related to chief compliance officer, risk
management, swap data recordkeeping–are designed to serve that end.
Given their functions, this subcategory of Entity-Level Requirements
must be applied on a firm-wide basis to effectively address risks to
the swap dealer or MSP as a whole.
—————————————————————————
66 By way of illustration, consistent with the purpose of the
capital requirement, which is intended to reduce the likelihood and
cost of a swap dealer’s default by requiring a financial cushion, a
swap dealer’s or MSP’s capital requirements would be set on the
basis of its overall portfolio of assets and liabilities.
—————————————————————————
The second subcategory of Entity-Level Requirements, namely, SDR
Reporting and Large Trader Reporting, relates more closely to the
Commission’s market surveillance program. Among other things, data
reported to swap data repositories (“SDRs”) will enhance the
Commission’s understanding of concentrations of risks within the
market, as well as promote a more effective monitoring of risk profiles
of market participants in the swaps market. Large Trader Reporting,
along with an analogous reporting system for futures contracts, is
essential to the Commission’s ability to conduct effective surveillance
of the futures market and their economically equivalent swaps. Given
the functions of these reporting requirements, each must be applied
across swaps, irrespective of the counterparty or the location of the
swap, in order to ensure that the Commission has a comprehensive and
accurate picture of market activities. Otherwise, the intended benefits
of these Entity-Level Requirements would be significantly compromised,
if not undermined. Each of the Entity-Level Requirements is discussed
in the subsections that follow.
i. Capital Requirements
Section 4s(e)(3)(A) of the CEA specifically directs the Commission
to set capital requirements for swap dealers and MSPs that are not
subject to the capital requirements of prudential regulators
(hereinafter referred to as “non-bank swap dealers or MSPs”).67
These requirements must: “(1) [h]elp ensure the safety and soundness
of the swap dealer or major swap participant; and (2) [be] appropriate
for the risk associated with the non-cleared swaps held as a swap
dealer or major swap participant.” 68 Pursuant to section 4s(e)(3),
the Commission proposed regulations, which would require non-bank swap
dealers and MSPs to hold a minimum level of adjusted net capital (i.e.,
“regulatory capital”) based on whether the non-bank swap dealer or
MSP is: (i) Also a futures commission merchant (“FCM”); (ii) not an
FCM, but is a non-bank subsidiary of a bank holding company; or (iii)
neither an FCM nor a non-bank subsidiary of a bank holding company.69
The purpose of the capital requirement is to reduce the likelihood and
cost of a swap dealer’s or MSP’s default by requiring a financial
cushion that can absorb losses in the event of the firm’s default.
—————————————————————————
67 See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) of the CEA
explicitly requires the adoption of rules establishing capital and
margin requirements for swap dealers and MSPs, and applies a
bifurcated approach that requires each swap dealer and MSP for which
there is a prudential regulator to meet the capital and margin
requirements established by the applicable prudential regulator, and
each swap dealer and MSP for which there is no prudential regulator
to comply with the Commission’s capital and margin regulations. See
7 U.S.C. 6s(e). Further, systemically important financial
institutions (“SIFIs”) that are not futures commission merchants
would be exempt from the Commission’s capital requirements, and
would comply instead with Federal Reserve Board requirements
applicable to SIFIs, while nonbank (and non-futures commission
merchant) subsidiaries of U.S. bank holding companies would
calculate their Commission capital requirement using the same
methodology specified in Federal Reserve Board regulations
applicable to the bank holding company, as if the subsidiary itself
were a bank holding company. The term “prudential regulator” is
defined in CEA section 1a(39) as the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the Farm Credit
Administration, and the Federal Housing Finance Agency. See 7 U.S.C.
1a(39).
68 See 7 U.S.C. 6s(e)(3)(A).
69 See 7 U.S.C. 6s(e). See also Capital Requirements of Swap
Dealers and Major Swap Participants, 76 FR 27802, May 12, 2011.
“The Commission’s capital proposal for [swap dealers] and MSPs
includes a minimum dollar level of $20 million. A non-bank [swap
dealer] or MSP that is part of a U.S. bank holding company would be
required to maintain a minimum of $20 million of Tier 1 capital as
measured under the capital rules of the Federal Reserve Board. [A
swap dealer] or MSP that also is registered as an FCM would be
required to maintain a minimum of $20 million of adjusted net
capital as defined under [proposed] section 1.17. In addition, a
[swap dealer] or MSP that is not part of a U.S. bank holding company
or registered as an FCM would be required to maintain a minimum of
$20 million of tangible net equity, plus the amount of the [swap
dealer’s] or MSP’s market risk exposure and OTC counterparty credit
risk exposure.” See id. at 27817.
—————————————————————————
ii. Chief Compliance Officer
Section 4s(k) requires that each swap dealer and MSP designate an
individual to serve as its chief compliance officer (“CCO”) and
specifies certain duties of the CCO.70 Pursuant to section 4s(k), the
Commission recently adopted Sec. 3.3, which requires swap dealers and
MSPs to designate a CCO who would be responsible for administering the
firm’s compliance policies and procedures, reporting directly to the
board of directors or a senior officer of the swap dealer or MSP, as
well as preparing and filing with the Commission a certified report of
compliance with the CEA.71 The chief compliance function is an
integral element of a firm’s risk management and oversight and the
Commission’s effort to foster a strong culture of compliance within
swap dealers and MSPs.
—————————————————————————
70 See 7 U.S.C. 6s(k).
71 See 17 CFR 3.3.
—————————————————————————
[[Page 41225]]
iii. Risk Management
Section 4s(j) of the CEA requires each swap dealer 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.72 The Commission recently adopted implementing
sections 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 23.607 of
its regulations.73 The Commission also recently adopted section
23.609 of its regulations, which requires certain risk management
procedures for swap dealers or MSPs that are clearing members of a
derivatives clearing organization (“DCO”).74 Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for swap dealers and MSPs, which is critical to
effective systemic risk management for the overall swaps market.
—————————————————————————
72 7 U.S.C. 6s(j).
73 7 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and
23.607; see also Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rule, Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rule, and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128, Apr. 3,
2012 (relating to risk management program, monitoring of position
limits, business continuity and disaster recovery, conflicts of
interest policies and procedures, general information availability,
and antitrust considerations, respectively).
74 17 CFR 23.609, see also Customer Clearing Documentation,
Timing of Acceptance for Clearing, and Clearing Member Risk
Management, 77 FR 21278, Apr. 9, 2012. Also, swap dealers must
comply with Sec. 23.608, which prohibits swap dealers 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.
—————————————————————————
iv. Swap Data Recordkeeping
CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep
books and records for all activities related to their business.75
Section 4s(g)(1) requires swap dealers and MSPs to maintain trading
records for each swap and all related records, as well as a complete
audit trail for comprehensive trade reconstructions.76 Pursuant to
these provisions, the Commission adopted Sec. Sec. 23.201 and 23.203,
which require swap dealers and MSPs to keep records including complete
transaction and position information for all swap activities, including
documentation on which trade information is originally recorded.77
Swap dealers and MSPs also must comply with Part 46 of the Commission’s
regulations, which addresses the recordkeeping requirements for swaps
entered into before the date of enactment of the Dodd-Frank Act (“pre-
enactment swaps”) and data relating to swaps entered into on or after
the date of enactment but prior to the compliance date of the swap data
reporting rules (“transition swaps”).78
—————————————————————————
75 7 U.S.C. 6s(f)(1)(B).
76 7 U.S.C. 6s(g)(1).
77 17 CFR 23.201 and 23.203; see also 77 FR 20128, Apr. 3,
2012. These requirements also require a swap dealer to provide the
Commission with regular updates concerning its financial status, as
well as information concerning internal corporate procedures.
78 17 CFR 46.1 et seq.; Swap Data Recordkeeping and Reporting
Requirements: Pre-Enactment and Transition Swaps, 76 FR 22833, Apr.
25, 2011.
—————————————————————————
v. Swap Data Reporting
CEA section 2(a)(13)(G) requires all swaps, whether cleared or
uncleared, to be reported to a registered SDR.79 CEA section 21
requires SDRs to collect and maintain data related to swaps as
prescribed by the Commission, and to make such data electronically
available to regulators.80 Swap dealers and MSPs would be required to
comply with Part 45 of the Commission’s regulations, which sets forth
the specific transaction data that reporting counterparties and
registered entities must report to a registered SDR; and Part 46, which
addresses the recordkeeping requirements for pre-enactment swaps and
data relating to transition swaps. Among other things, data reported to
SDRs will enhance the Commission’s understanding of concentrations of
risks within the market, as well as promote a more effective monitoring
of risk profiles of market participants in the swaps market. The
Commission also believes that there are benefits that will accrue to
swap dealers and MSPs as a result of the timely reporting of
comprehensive swap transactional data and consistent data standards for
recordkeeping, among other things. Such benefits include more robust
risk monitoring and management capabilities for swap dealers and MSPs,
which in turn will improve the monitoring of their current swap market
positions.
—————————————————————————
79 7 U.S.C. 2(a)(13)(G).
80 7 U.S.C. 24a.
—————————————————————————
vi. Physical Commodity Swaps Reporting (Large Trader Reporting)
CEA section 4t 81 authorizes the Commission to establish a large
trader reporting system for significant price discovery swaps (of which
economically equivalent swaps subject to part 20 reporting are a
subset) in order to implement the statutory mandate in CEA section 4a
82 for the Commission to establish and monitor position limits, as
appropriate, for physical commodity swaps. Pursuant thereto, the
Commission adopted part 20 rules requiring swap dealers, among other
entities, to submit routine position reports on certain physical
commodity swaps and swaptions.83 Additionally, part 20 rules require
that swap dealers, among other entities, comply with certain
recordkeeping obligations.
—————————————————————————
81 7 U.S.C. 6t.
82 7 U.S.C. 6a.
83 Large Trader Reporting for Physical Commodity Swaps, 76 FR
43851, July 22, 2011. The rules require regular position reporting
and recordkeeping by clearing organizations, clearing members, and
swap dealers for any principal or counterparty accounts with
reportable position in physical commodity swaps. In general, the
rules apply to swaps that are linked to either the price of any of
the 46 physical commodity futures contracts the Commission
enumerates (Covered Futures Contracts) or the price of the physical
commodity at the delivery location of any of the Covered Futures
Contracts.
—————————————————————————
3. Transaction-Level Requirements
The Transaction-Level Requirements under Title VII of the Dodd-
Frank Act and the Commission’s regulations (proposed or adopted)
include: (i) Clearing and swap processing; (ii) margining and
segregation for uncleared swaps; (iii) trade execution; (iv) swap
trading relationship documentation; (v) portfolio reconciliation and
compression; (vi) real-time public reporting; (vii) trade confirmation;
(viii) daily trading records; and (ix) external business conduct
standards.
The Transaction-Level Requirements–with the exception of external
business conduct standards–relate to both risk mitigation and market
transparency. Certain of these requirements, such as clearing and
margining, serve to lower a firm’s risk of failure. In that respect,
these Transaction-Level Requirements could be classified as Entity-
Level Requirements. Other Transaction-Level Requirements–such as trade
confirmation, swap trading relationship documentation, and portfolio
reconciliation and compression–also serve important risk mitigation
functions, but are less closely connected to risk mitigation of the
firm as a whole and thus are more appropriately applied
[[Page 41226]]
on a transaction-by-transaction basis. Likewise, the requirements
related to trade execution, trade confirmation, daily trading records,
and real-time public reporting have a closer nexus to the transparency
goals of the Dodd-Frank Act, as opposed to addressing the risk of a
firm’s failure.
As a result, whether a particular Dodd-Frank Act requirement should
apply on a transaction-by-transaction basis in the context of cross-
border activity for purposes of section 2(i) of the CEA requires the
Commission to exercise some degree of judgment, including
considerations of international comity. Each of the Transaction-Level
Requirements is discussed below.
i. Clearing and Swap Processing
Section 2(h) of the CEA requires a swap to be submitted for
clearing to a DCO if the Commission has determined that the swap is
required to be cleared, unless one of the parties to the swap is
eligible for an exception from the clearing requirement and elects not
to clear the swap.84 Clearing via a DCO eliminates the risk of
settlement for swap dealers or MSPs and their counterparties. Closely
interlocked with the clearing requirement are the following swap
processing requirements: (i) The recently finalized Sec. 23.506, which
requires swap dealers and MSPs to submit swaps promptly for clearing;
and (ii) Sec. 23.610, which establishes certain standards for swap
processing by swap dealers and MSPs that are clearing members of a
DCO.85 Together, the clearing and swap processing requirements
promote safety and soundness of swap dealers and MSPs, and aim to
protect their counterparties from the risk of a default.
—————————————————————————
84 7 U.S.C. 2(h)(1), (7).
85 17 CFR 23.506, 23.610 and Customer Clearing Documentation,
Timing of Acceptance for Clearing, and Clearing Member Risk
Management, 77 FR 21278, Apr. 9, 2012.
—————————————————————————
ii. Margin and Segregation Requirements for Uncleared Swaps
Section 4s(e) of the CEA requires the Commission to set margin
requirements for swap dealers (and MSPs) that trade in swaps that are
not cleared.86 The margin requirements aim to reduce the risk of swap
dealers, MSPs, and their counterparties taking on excessive risks posed
by uncleared swaps without having adequate financial backing to fulfill
their obligations under the swap. In addition, with respect to swaps
that are not submitted for clearing, section 4s(l) requires that a swap
dealer or MSP notify the counterparty of its right to require
segregation of funds provided as margin, and upon such request, to
segregate the funds with a third-party custodian for the benefit of the
counterparty. In this way, the segregation requirement enhances the
safety of margin and thereby provides additional financial protection
to counterparties.
—————————————————————————
86 See 7 U.S.C. 6s(e). See also Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR
23732, 23733-40, Apr. 28, 2011. Section 4s(e) explicitly requires
the adoption of rules establishing margin requirements for swap
dealers and MSPs, and applies a bifurcated approach that requires
each swap dealer and MSP for which there is a prudential regulator
to meet the margin requirements established by the applicable
prudential regulator, and each swap dealer and MSP for which there
is no prudential regulator to comply with the Commission’s margin
regulations. In contrast, the segregation requirements in section
4s(1) do not use a bifurcated approach–that is, all swap dealers
and MSPs are subject to the Commission’s rule regarding notice and
third party custodians for margin collected for uncleared swaps.
—————————————————————————
iii. Trade Execution Requirement
Integrally linked to the clearing requirement is the trade
execution requirement, which is intended to bring the trading of
mandatorily cleared swaps onto regulated exchanges. Specifically,
section 2(h)(8) of the CEA provides that unless a clearing exception
applies and is elected, a swap that is subject to a clearing
requirement must be executed on a designated contract market (“DCM”)
or swap execution facility (“SEF”), unless no such DCM or SEF makes
the swap available to trade.87 By requiring the trades of mandatorily
cleared swaps to be executed on an exchange–with its attendant pre-
and post-trade transparency and safeguards to ensure market integrity–
the trade execution requirement furthers the statutory goals of
financial stability, market efficiency and enhanced transparency.
—————————————————————————
87 See 7 U.S.C. 2(h)(8).
—————————————————————————
iv. Swap Trading Relationship Documentation
CEA Section 4s(i) requires each swap dealer and MSP to conform to
Commission standards for the timely and accurate confirmation,
processing, netting, documentation and valuation of swaps. Pursuant
thereto, the Commission has proposed Sec. 23.504(a) of its
regulations, which would require swap dealers and MSPs to “establish,
maintain and enforce written policies and procedures” to ensure that
the swap dealer or MSP executes written swap trading relationship
documentation.88 Under proposed Sec. Sec. 23.505(b)(1), 23.504
(b)(3), and 23.504(b)(4) of the Commission’s regulations, the swap
trading relationship documentation must include, among other things:
all terms governing the trading relationship between the swap dealer or
MSP and its counterparty; credit support arrangements; investment and
re-hypothecation terms for assets used as margin for uncleared swaps,
and custodial arrangements.89 Further, the swap trading relationship
documentation requirement applies to all swaps with registered swap
dealers and MSPs. A robust swap documentation standard may promote
standardization of documents and transactions, which are key conditions
for central clearing, and lead to other operational efficiencies,
including improved valuation and risk management.
—————————————————————————
88 See Swap Trading Relationship documentation Requirements
for Swap Dealers and Major Swap Participants, 76 FR 6715, Feb. 8,
2011.
89 The requirements under section 4s(i) relating to trade
confirmations is a Transaction-Level Requirement. Accordingly,
proposed section 23.504(b)(2), which requires a swap dealer’s and
MSP’s swap trading relationship documentation to include all
confirmations of swaps, will apply on a transaction-by-transaction
basis.
—————————————————————————
v. Portfolio Reconciliation and Compression
CEA section 4s(i) directs the Commission to prescribe regulations
for the timely and accurate processing and netting of all swaps entered
into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the
Commission proposed Sec. Sec. 23.502 and 23.503 of its regulations,
which would require swap dealers and MSPs to perform portfolio
reconciliation and compression, respectively, for all swaps.90
Portfolio reconciliation is a post-execution risk management tool to
ensure accurate confirmation of a swap’s terms and to identify and
resolve any discrepancies between counterparties regarding the
valuation of the swap. Portfolio compression is a post-trade processing
and netting mechanism that is intended to ensure timely, accurate
processing and netting of swaps.91 Proposed Sec. 23.503(c) would
require all swap dealers and MSPs to participate in bilateral
compression exercises and/or multilateral portfolio compression
exercises conducted by their self-regulatory organizations (“SROs”)
or DCOs of which they are members.92 Further, participation in
multilateral
[[Page 41227]]
portfolio compression exercises is mandatory for dealer-to-dealer
trades.
—————————————————————————
90 See Confirmation, Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap Dealers and Major Swap
Participants, 75 FR 81519, Dec. 28, 2010.
91 For example, the reduced transaction count may decrease
operational risk as there are fewer trades to maintain, process and
settle.
92 See 17 CFR 23.503(c), 75 FR 81519, Dec. 28, 2010.
—————————————————————————
vi. Real-Time Public Reporting
Section 2(a)(13) of the CEA directs the Commission to promulgate
rules providing for the public availability of swap transaction data on
a real time basis.93 In accordance with this mandate, the Commission
promulgated part 43 of its rules on December 20, 2011, which provide
that all “publicly reportable swap transactions” must be reported and
publicly disseminated.94 The real-time dissemination of swap
transaction and pricing data supports the fairness and efficiency of
markets and increases transparency, which in turn improves price
discovery and decreases risk (e.g., liquidity risk).95
—————————————————————————
93 See 7 U.S.C. 2(a)(13). See also Real-Time Public Reporting
of Swap Transaction Data, 77 FR 1182, 1183, Jan. 9, 2012.
94 Part 43 defines a “publicly reportable swap transaction”
as (i) any swap that is an arm’s-length transaction between two
parties that results in a corresponding change in the market risk
position between the two parties; or (ii) any termination,
assignment, novation, exchange, transfer, amendment, conveyance, or
extinguishing of rights or obligations of a swap that changes the
pricing of a swap. See 77 FR 1182, Jan. 9, 2012.
95 See 77 FR 1182, 1183.
—————————————————————————
vii. Trade Confirmation
Section 4s(i) of the CEA 96 requires that each swap dealer and
MSP must comply with the Commission’s regulations prescribing timely
and accurate confirmation of swaps. The Commission has proposed Sec.
23.501, which requires, among other things, a timely and accurate
confirmation of all swaps and life cycle events for existing swaps.97
Timely and accurate confirmation of swaps–together with portfolio
reconciliation and compression–are important post-trade processing
mechanisms for reducing risks and improving operational efficiency.98
—————————————————————————
96 7 U.S.C. 6s(i).
97 See 17 CFR 23.501; see also 75 FR 81519, Dec. 28, 2010.
98 In addition, the Commission notes that proposed Sec.
23.504(b)(2) requires a swap dealer’s and MSP’s swap trading
relationship to include all confirmations of swaps.
—————————————————————————
viii. Daily Trading Records
Pursuant to section CEA 4s(g)(1), the Commission adopted Sec.
23.202 of its regulations, which requires swap dealers and MSPs to
maintain daily trading records, including records of trade information
related to pre-execution, execution, and post-execution data that is
needed to conduct a comprehensive and accurate trade reconstruction for
each swap. The final rule also requires that records be kept of cash or
forward transactions used to hedge, mitigate the risk of, or offset any
swap held by the swap dealer or MSP.99 Accurate and timely
recordkeeping regarding all phases of a swap can serve to greatly
enhance a firm’s internal supervision, as well as the Commission’s
ability to detect and address market abuses.
—————————————————————————
99 See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, Apr. 3, 2012.
—————————————————————————
ix. External Business Conduct Standards
Pursuant to CEA section 4s(h), the Commission has adopted external
business conduct rules, which establish business conduct standards
governing the conduct of swap dealers and MSPs in dealing with their
counterparties in entering into swaps.100 Broadly speaking, these
rules are designed to enhance counterparty protection by significantly
expanding the obligations of swap dealers and MSPs towards their
counterparties. Under these rules, swap dealers and MSPs will be
required, among other things, to conduct due diligence on their
counterparties to verify eligibility to trade, provide disclosure of
material information about the swap to their counterparties, provide a
daily mid-market mark for uncleared swaps and, when recommending a swap
to a counterparty, make a determination as to the suitability of the
swap for the counterparty based on reasonable diligence concerning the
counterparty.
—————————————————————————
100 See 7 U.S.C. 6s(h). See also Business Conduct Standards
for Swap Dealers and Major Swap Participants With Counterparties, 77
FR 9734, 9822-29, Feb. 17, 2012.
—————————————————————————
4. Application of the Entity-Level Requirements 101
—————————————————————————
101 Appendix A in this release provides a chart describing the
application of the Entity-Level Requirements to U.S. and non-U.S.
swap dealers and MSPs.
—————————————————————————
The Dodd-Frank Act takes a comprehensive and integrated approach to
the regulation of the swaps market. The first subcategory of Entity-
Level Requirements, relating to capital adequacy, chief compliance
officer, risk management, and swap data recordkeeping are at the heart
of such framework. Specifically, these Entity-Level Requirements ensure
that registered swap dealers and MSPs implement and maintain a
comprehensive and robust system of internal controls to ensure the
financial integrity of the firm, and in turn, the protection of the
financial system. In this respect, the Commission has strong
supervisory interests in applying the same rigorous standards, or
comparable standards, to non-U.S. swap dealers and non-U.S. MSPs whose
swaps activities or positions are substantial enough to require
registration under the CEA. Requiring such swap dealers and MSPs to
rigorously monitor and address the risks they incur as part of their
day-to-day businesses would lower the registrants’ risk of default–and
ultimately protect the public and the financial system.
Therefore, the Commission proposes to interpret CEA section 2(i) so
as to require that registered non-U.S. swap dealers and non-U.S. MSPs
comply with all of the first subcategory of Entity-Level
Requirements.102 In consideration of principles of international
comity, the Commission further proposes to interpret CEA section 2(i)
so as to permit substituted compliance with foreign regulations for
these Entity-Level Requirements in certain circumstances. The
circumstances in which the Commission proposes to consider permitting
substituted compliance are explained below in the Section III.C. of
this proposed interpretative guidance.
—————————————————————————
102 As discussed above in Section II.D of this proposed
interpretive guidance, the Commission considers foreign branches and
agencies of U.S. swap dealers to be the agents of their U.S. person.
Thus, in all instances, the U.S. swap dealer would be responsible
for complying with all Entity-Level Requirements.
—————————————————————————
With respect to SDR Reporting, the Commission believes that direct
access to data concerning all swaps in which a registered swap dealer
or MSP enters is essential in order for the Commission to carry out its
supervisory mandates concerning, among other things, increased
transparency, systemic risk mitigation, market monitoring, and market
abuse prevention. For example, data reported to SDRs would be critical
to ensure that the Commission has a comprehensive and accurate picture
of swap dealers and MSPs that are its registrants, including the gross
and net counterparty exposures of swaps of all swap dealers and MSPs,
to the greatest extent possible. Similarly, swap data reported by swap
dealers to the Commission under Large Trader Reporting is critical to
the Commission’s ability to effectively monitor and oversee the swaps
market.
For these reasons, the Commission proposes to interpret CEA section
2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs to report
all of their swaps to a registered SDR 103 and to require non-U.S.
swap dealers to report
[[Page 41228]]
all of their reportable positions under part 20. At the same time, the
Commission recognizes the interests of foreign jurisdictions with
respect to swaps between a non-U.S. swap dealer or non-U.S. MSP with a
non-U.S. counterparty and therefore, further interprets CEA section
2(i) so as to permit substituted compliance with comparable foreign
regimes for SDR Reporting and Large Trader Reporting.
—————————————————————————
103 See 7 U.S.C. 2(a)(13)(G). See also 77 FR at 2197-2211.
—————————————————————————
5. Application of the Transaction-Level Requirements 104
—————————————————————————
104 Appendix B in this release provides charts describing the
application of the Transaction-Level Requirements to U.S. and non-
U.S. swap dealers and MSPs.
—————————————————————————
As discussed above, Transaction-Level Requirements serve to
mitigate risks to swap dealers and MSPs and their counterparties, to
promote greater market transparency and efficiency in the U.S. swaps
market, and to provide counterparty protections. The Commission has a
strong supervisory interest in ensuring that these Dodd-Frank Act
requirements apply to swaps between a registered swap dealer or MSP
(regardless of whether they are a U.S. person or non-U.S. person) and
U.S. persons as counterparties, with a limited exception. Accordingly,
the Commission proposes to interpret section 2(i) in a manner so as to
require non-U.S. swap dealers and non-U.S. MSPs to comply with
Transaction-Level Requirements for all of their swaps with U.S.
persons, other than foreign branches of U.S. persons, as
counterparties.105 Consistent with the foregoing rationale, in most
cases, the Commission does not intend to permit substituted compliance
for the Transaction-Level Requirements for swaps between non-U.S. swap
dealers or non-U.S. MSPs and U.S. persons.106 The following
discussion provides proposed guidance on the application of the
Transaction-Level Requirements to swaps by non-U.S. swap dealers and
non-U.S. MSPs with non-U.S. counterparties.
—————————————————————————
105 Moreover, the U.S. counterparties, as well as the non-U.S.
swap dealers and non-U.S. MSPs, may have an expectation that the
Dodd-Frank Act will extend to them and their swaps.
106 Section III.D. (below) addresses the application of the
Entity and Transaction-Level Requirements to branches, agencies,
subsidiaries, and affiliates of U.S. swap dealers.
—————————————————————————
i. Clearing and Swap Processing, Margin (and Segregation), Trade
Execution, Swap Trading Relationship Documentation, Portfolio
Reconciliation and Compression, Real-Time Public Reporting, Trade
Confirmation, and Daily Trading Records
With respect to swaps between non-U.S. swap dealers or non-U.S.
MSPs and non-U.S. counterparties, the Commission proposes to interpret
section 2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs
to comply with the clearing and swap processing and margin (and
segregation) requirements for swaps where the non-U.S. counterparty’s
performance is guaranteed by (or otherwise supported by) a U.S.
person.107 The Commission interprets section 2(i) in this manner
because where a non-U.S. counterparty’s swap obligations are guaranteed
by a U.S. person, the risk of non-performance by the counterparty rests
with the U.S. person. If the non-U.S. person defaults on its
obligations under the swaps, then the U.S. person guarantor will be
held responsible (or would bear the cost) to settle those obligations.
In circumstances in which a U.S. person ultimately bears the risk of
non-performance of a counterparty to a swap with a non-U.S. swap dealer
or non-U.S. MSP, the Commission has a strong regulatory interest in the
performance of the swap by both parties to the swap, and hence the
application of these Transaction-Level Requirements with respect to
such swaps is warranted. In consideration of international comity
principles, the Commission further interprets CEA section 2(i) so as to
permit substituted compliance for these Transaction-Level
Requirements.108
—————————————————————————
107 As noted above in Section II.B of this proposed
interpretive guidance, risk may be imported into the U.S. In these
circumstances, and regardless of whether the non-U.S. swap dealer’s
counterparty is a U.S. person or a non-U.S. person, the risk of
default by the non-U.S. swap dealer with respect to its swap dealing
transactions ultimately rests with a U.S. person.
108 Below (in Section IV), the Commission describes the
specific circumstances under which it proposes to permit compliance
with a foreign regulatory regime’s clearing requirement for swaps
entered into by non-U.S. swap dealers, non-U.S. MSPs, and other non-
U.S. market participants in lieu of compliance with a Commission-
issued clearing requirement.
—————————————————————————
Similarly, the requirements relating to portfolio reconciliation
and compression can serve to significantly mitigate risks to the
counterparties, and by extension, the U.S. person guaranteeing the non-
U.S. counterparty’s obligations under the swap. Specifically, portfolio
reconciliation serves to diminish the risk of disputes for the
counterparties. Portfolio compression also has the effect of lowering
the risk for the counterparties by diminishing operational risks. Other
Transaction-Level Requirements–trade confirmation, swap trading
relationship documentation, and daily trading records–by ensuring that
swaps are properly documented and recorded, serve to protect the
counterparties, as well as the U.S. person that is the guarantor.109
—————————————————————————
109 As noted above, the portfolio compression and swap trading
relationship documentation requirements apply to all swaps between
registered swap dealers. Thus, where the non-U.S. counterparty is
another U.S.-registered swap dealer, these Transaction-Level
Requirements apply. The Commission believes that this inclusive
approach is necessary given the significant role registered swap
dealers play in the swaps market.
—————————————————————————
The Commission also proposes to interpret section 2(i) so as to
require non-U.S. swap dealers and non-U.S. MSPs to comply with the
trade execution requirement for swaps where the non-U.S. counterparty’s
performance is guaranteed by a U.S. person.
The trade execution requirement is linked to the clearing
requirement and for that reason, should be treated in same manner as
the clearing requirement for regulatory purposes, which better ensures
the effectiveness of the clearing and trading mandates. Requiring swaps
to be traded on a regulated exchange provides market participants with
greater pre- and post-trade transparency. Similarly, real-time public
reporting improves price discovery by requiring that swap transaction
and pricing data be made publicly available. Together, trade execution
and real-time reporting requirements provide important information for
risk management purposes and bring greater efficiency to the
marketplace–to the benefit of the individual counterparties. As with
the other Transaction-Level Requirements, the Commission further
interprets CEA section 2(i), consistent with comity principles, so as
to permit substituted compliance with respect to these transactions.
Similar concerns regarding the flow of risk to the United States
are raised by an entity that effectively operates as a “conduit” for
a U.S. person to execute swaps outside the Dodd-Frank Act regime. The
Commission recognizes that such conduits may be used legitimately to
move economic risks from one person within a corporate group to another
in order to manage the group’s overall swap portfolio. The Commission
also recognizes that, in many cases, the
[[Page 41229]]
conduits could be subject to prudential and risk management
requirements and may lay off the risk of its dealing activities on an
individual or portfolio basis through transactions that would be
subject to and reported under the Dodd-Frank Act.
Nevertheless, the Commission is concerned that given the nature of
the relationship between the conduit and the U.S. person, the U.S.
person is directly exposed to risks from and incurred by the conduit.
The Commission is further concerned that rather than execute a swap
opposite a U.S. counterparty, which would be subject to the Dodd-Frank
transactional requirements, a U.S. swap dealer or MSP could execute a
swap with its foreign affiliate or subsidiary, which could then execute
a swap with a non-U.S. third-party in a jurisdiction that is
unregulated or lack comparable transactional requirements. Accordingly,
the Commission proposes to apply these Transaction-Level Requirements
to swaps in which: (i) A non-U.S. counterparty is majority-owned,
directly or indirectly, by a U.S. person; (ii) the non-U.S.
counterparty regularly enters into swaps with one or more other U.S.
affiliates or subsidiaries of the U.S. person; and (iii) the financials
of such non-U.S. counterparty are included in the consolidated
financial statements of the U.S. person. Further, the Commission
interprets CEA section 2(i), consistent with comity principles, so as
to permit substituted compliance for these Transaction-Level
Requirements with respect to swaps between a non-U.S. swap dealer or
non-U.S. MSP and such affiliate conduit.
Conversely, and consistent with the foregoing rationale, the
Commission proposes to interpret section 2(i) so as to not require the
application of any of these Transaction-Level Requirements to swaps
between a non-U.S. swap dealer or non-U.S. MSP with a non-U.S.
counterparty that is not guaranteed by a U.S. person. In such
instances, the Commission recognizes that foreign regulators have a
strong supervisory interest in swaps occurring within their territories
involving their domiciles.
ii. External Business Conduct Standards
With respect to the external business conduct standards, the
Commission proposes to interpret section 2(i) to not require non-U.S.
swap dealers and non-U.S. MSPs to comply with these requirements for
swaps with a non-U.S. counterparty (whether or not guaranteed by a U.S.
person). The Commission believes that sales practice concerns related
to swaps between non-U.S. persons taking place outside the United
States implicate fewer U.S. supervisory concerns and, when weighed
together with the supervisory interests of foreign regulatory regimes,
may not warrant application of these requirements.110
—————————————————————————
110 That is to say, just as the Commission would have a strong
supervisory interest in regulating and enforcing sales practices
associated with activities taking place within the United States,
the foreign regulators would have a similar claim to overseeing
sales practices occurring within their jurisdiction.
—————————————————————————
C. Substituted Compliance With Respect to Particular Requirements
The Commission believes that a cross-border policy that allows for
flexibility in the application of the CEA, while ensuring the high
level of regulation contemplated by the Dodd-Frank Act and avoiding
potentially conflicting regulations is consistent with principles of
international comity. It would also advance the congressional directive
that the Commission act in order to “promote effective and consistent
global regulation of swaps * * * as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment of
consistent international standards with respect to regulation
(including fees) of swaps * * *.” 111 Practical considerations–
namely, the limitations in the Commission’s supervisory resources and
its ability to effectively oversee and enforce application of the CEA
to cross-border transactions and activities–also support the
Commission applying its regulations in a manner that is focused on the
primary objectives of the CEA.
—————————————————————————
111 See section 752 of the Dodd-Frank Act. As the Supreme
Court observed in Hoffmann-LaRoche, principles of international
comity “help[ ] the potentially conflicting laws of different
nations work together in harmony–a harmony particularly needed in
today’s highly interdependent commercial world.” See Hoffmann-
LaRoche, 542 U.S. at 164-165.
—————————————————————————
In light of the foregoing considerations, the Commission proposes
to permit a non-U.S. swap dealer or non-U.S. MSP, once registered with
the Commission, to comply with a substituted compliance regime under
certain circumstances. Substituted compliance means that a non-U.S.
swap dealer or non-U.S. MSP is permitted to conduct business by
complying with its home regulations, without additional requirements
under the CEA. Specifically, the Commission proposes to permit non-U.S.
swap dealers and non-U.S. MSPs to substitute compliance with the
requirements of the relevant home jurisdiction’s law and regulations,
in lieu of compliance with the CEA and Commission’s regulations, if the
Commission finds that such requirements are comparable to cognate
requirements under the CEA and Commission regulations. As discussed
below, this approach would build on the Commission’s longstanding
policy of recognizing comparable regulatory regimes based on
international coordination and comity principles with respect to cross-
border activities involving futures (and options).112
—————————————————————————
112 For example, under part 30 of the Commission’s
regulations, if the Commission determines that compliance with the
foreign regulatory regime would offer comparable protection to U.S.
customers and there is an appropriate information-sharing
arrangement between the home supervisor and the Commission, the
Commission has permitted foreign brokers to comply with their home
regulations (in lieu of the applicable Commission regulations),
subject to appropriate conditions. See, e.g., 67 FR 30785 (Apr. 29,
2002); 71 FR 6759 (Feb. 9, 2001).
—————————————————————————
The Commission proposes that it would make comparability
determinations on an individual requirement basis, rather than the
foreign regime as a whole. In the Commission’s view, this would allow
for a more flexible registration process as it would permit a non-U.S.
person to become registered as a swap dealer or MSP even in the absence
of comparability with respect to all of the Dodd-Frank Act
requirements. Rather, a non-U.S. swap dealer or non-U.S. MSP may be
permitted to comply with regulations in its home jurisdiction to the
extent that the comparability standard is met but also may be required
to comply with certain of the Dodd-Frank Act requirements where
comparable home regulation(s) are lacking.113
—————————————————————————
113 The details concerning the Commission’s comparability
determinations will be discussed below in Section IV.
—————————————————————————
In this section, the Commission broadly outlines the circumstances
under which the Commission would permit a non-U.S. swap dealer or non-
U.S. MSP to rely on foreign regulation and supervision as a substitute
for compliance by that swap dealer or MSP with some or all of the
requirements that would otherwise be applicable to it under Title VII
of the Dodd-Frank Act.
1. Entity-Level Requirements
The Commission anticipates that non-U.S. persons that will register
as swap dealers or MSPs with the Commission will likely have their
principal swap business in their home jurisdiction. The Commission
believes that it would be appropriate to permit substituted compliance
with respect to the previously-described Entity-Level Requirements
where the non-U.S. swap dealers or non-U.S. MSPs are subject to
comparable regulation in their home jurisdiction. In these
circumstances, the Commission notes that the home
[[Page 41230]]
regulator would have a primary relationship to the swap dealer or MSP,
which, coupled with the firm-wide focus of the Entity-Level
Requirements, supports permitting substituted compliance.
With respect to SDR Reporting, the Commission proposes to permit
substituted compliance with respect to swaps by non-U.S. swap dealers
and non-U.S. MSPs with non-U.S. counterparties (whether or not such
non-U.S. swap dealers or such non-U.S. MSPs are guaranteed by U.S.
persons), provided that the Commission has direct access to the swap
data for such non-U.S. swap dealers or non-U.S. MSPs that is stored at
the foreign trade repository. The Commission believes that this
approach would minimize burdens on non-U.S. swap dealers and non-U.S.
MSPs that report their swaps data to a foreign trade repository, while
ensuring that the Commission has access to information that is critical
to its oversight of these entities.
2. Transaction-Level Requirements
As discussed above, the Commission proposes to interpret section
2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs to comply
with the clearing and swap processing, margining (and segregation),
trade execution, swap trading relationship documentation, portfolio
reconciliation and compression, real-time public reporting, trade
confirmation, and daily trading records requirements for all
transactions with a counterparty that is a U.S. person or is a non-U.S.
person whose swap obligations are guaranteed by a U.S. person.
The Commission would not permit substituted compliance with respect
to these Transaction-Level Requirements for a non-U.S. swap dealer’s or
non-U.S. MSP’s transactions with a counterparty that is a U.S. person,
with a limited exception.114 Generally, where swaps are executed with
U.S. persons, the Commission’s supervisory interests in such
transactions, which have a direct and significant connection with
activities in, or effect on, U.S. commerce, and in ensuring the
protection of U.S. counterparties weighs in favor of applying the
requirements of the CEA, rather than permitting substituted compliance.
—————————————————————————
114 The Commission, however, would continue to permit
substituted compliance with comparable home country regulations with
respect to Entity-Level Reqirements in this instance. Transactions
with a foreign branch or agency of a U.S. swap dealer are discussed
below.
—————————————————————————
On the other hand, it may be more appropriate for the Commission to
permit substituted compliance for transactions between a non-U.S. swap
dealer or non-U.S. MSP and a non-U.S. person whose swap obligations are
guaranteed by a U.S. person. In such circumstances, the foreign
jurisdiction has a strong supervisory interest in regulating the
activities of its domiciles occurring within its territory. At the same
time, given that such transactions are guaranteed by a U.S. person, the
Commission also has a strong supervisory interest in ensuring that the
protections of the Dodd-Frank Act are extended to the U.S. guarantor.
In consideration of these factors, the Commission would permit
substituted compliance with respect to these Transaction-Level
Requirements for swaps between a non-U.S. swap dealer or non-U.S. MSP
with a non-U.S. person guaranteed by a U.S. person, as well as swaps
with non-U.S. affiliate conduits. Substituted compliance, the
Commission believes, would address its supervisory concerns while, at
the same time, minimizing the potential for conflicts with the
requirements under foreign jurisdictions.115
—————————————————————————
115 As noted above, swaps with non-U.S. persons satisfying
each prong of the conduit test would be similarly subject to the
Transaction-Level Requirements, provided, however, that the non-U.S.
swap dealer or non-U.S. MSP executing such swaps may substitute
compliance with a comparable foreign regulatory regime in
appropriate cases.
—————————————————————————
D. Application of Entity-Level and Transaction-Level Requirements to
Branches, Agencies, Affiliates, and Subsidiaries of U.S. Swap Dealers
1. Foreign Branches and Agencies of U.S. Swap Dealers
As discussed above, the Commission considers foreign branches and
agencies of a U.S. person to be a part of the U.S. person. Thus, the
Commission proposes that the U.S. person would be legally responsible
for complying with all applicable Entity-Level Requirements. Further,
the Commission proposes to require compliance with most of the
Transaction-Level Requirements (i.e., clearing and swap processing,
margin (and segregation) for uncleared swaps, trade execution, real-
time reporting, trade confirmation, swap trading relationship
documentation, daily trading records, and portfolio reconciliation and
compression), irrespective of whether the counterparty is a U.S. person
or non-U.S. person.116 This approach is appropriate in light of the
Commission’s strong supervisory interests in entities that are part or
an extension of a U.S.-based swap dealer.
—————————————————————————
116 For reasons stated above, with respect to external
business conduct standards, the Commission would apply such
requirements only for swaps where the counterparty is a U.S. person.
—————————————————————————
The Commission further interprets section 2(i) to permit
substituted compliance with respect to the Transaction-Level
Requirements for swaps with certain counterparties. Specifically, the
Commission proposes to permit substituted compliance for swaps between
a foreign branch of a U.S. person and a non-U.S. person counterparty
(both whose obligations under the swap are guaranteed by a U.S. person
and those that are not). Given that the counterparty is a non-U.S.
person, coupled with the supervisory interest of the foreign
jurisdiction in the execution and clearing of trades occurring in that
jurisdiction, the Commission believes that it would be appropriate to
permit the parties to comply with comparable foreign requirements. In
doing so, the Commission notes that, as discussed in further detail
below, its recognition of substituted compliance would be based on an
evaluation of whether the requirements of the home jurisdiction are
comparable and comprehensive to the applicable requirement(s) under the
CEA and Commission regulations based on a consideration of all relevant
factors, including, among other things: (i) The comprehensiveness of
the foreign regulator’s supervisory compliance program; and (ii) the
authority of such foreign regulator to support and enforce its
oversight of the registrant’s branch or agency with regard to such
activities to which substituted compliance applies.
In limited circumstances where foreign regulations are not
comparable, the Commission believes that it could be appropriate to
permit foreign branches and agencies of U.S. swap dealers to comply
with the transaction-level requirements applicable to entities
domiciled or doing business in the foreign jurisdiction, rather than
the Transaction-Level Requirements that would otherwise be applicable
to the U.S. person’s activities.117 Specifically, the Commission
understands that U.S. swap dealers’ swap dealing activities through
branches or agencies in emerging markets in many cases may not be
significant but may be nevertheless an integral element of their global
business. Under the circumstances, the Commission proposes that section
2(i) should be interpreted to permit foreign branches and agencies of
U.S. swap dealers to
[[Page 41231]]
participate in the swap markets in such countries on a limited basis.
To be eligible for this exception, the aggregate notional value
(expressed in U.S. dollars and measured on a quarterly basis) of the
swaps of all foreign branches and agencies in such countries may not
exceed five percent of the aggregate notional value (expressed in U.S.
dollars and measured on a quarterly basis) of all of the swaps of the
U.S. swap dealer. However, the U.S. person relying on this exception
would be required to maintain records with supporting information to
verify its eligibility for the exception, as well as identify, define,
and address any significant risk that may arise from the non-
application of the Transaction-Level Requirements.118
—————————————————————————
117 As noted above, the proposed interpretive guidance does
not limit the applicability of any CEA provision or Commission
regulation to any person, entity or transaction except as provided
herein.
118 The Commission solicits comments on all aspects of the
proposed exception, including the conditions for eligibility. In
particular, the Commission is interested in the types of risk-
mitigating measure(s) that should be imposed on a firm as a
condition to the exception.
—————————————————————————
Further, as discussed above, the Commission proposes that the U.S.
person may task its foreign branch or agency to fulfill its regulatory
obligations with respect to the Transaction-Level Requirements. The
Commission would consider compliance by the foreign branch or agency to
constitute compliance with the Transaction-Level Requirements. The
Commission proposes, however, that the U.S. person remains responsible
for compliance with the Transaction-Level Requirements.
2. Foreign Affiliates and Subsidiaries of U.S. Swap Dealers
With respect to foreign affiliates or subsidiaries of U.S. swap
dealers, the Commission proposes that the regulatory requirements that
may apply to such affiliate or subsidiary would depend on where their
swaps are booked and whether the affiliate or subsidiary engages in
activities that trigger swap dealer registration. Where the swaps are
directly booked in the U.S. swap dealer but the foreign affiliate or
subsidiary facing the counterparty engages in swap dealing and
independently meets the definition of a swap dealer, the U.S. swap
dealer must comply with all of the swap dealer duties and obligations,
including capital-related prudential requirements. The foreign
affiliate or subsidiary would be required to separately register as a
swap dealer and comply with any Entity-Level and Transaction-Level
Requirements applicable to its swap dealing activities.
Thus, if the counterparty facing affiliate or subsidiary was acting
merely as a disclosed agent and did not meet the definition of a swap
dealer, then the Dodd-Frank Act requirements applicable to swap dealers
would not be applicable to the affiliate or subsidiary, provided that
the agency relationship was properly documented and the principal
remained primarily responsible for the actions of the affiliate. On the
other hand, if the counterparty facing affiliate or subsidiary
independently met the definition of a swap dealer, then it would be
required to register as a swap dealer and satisfy the Dodd-Frank Act
requirements applicable to swap dealers, even though all exposure to
the swaps it entered into were transferred to a central booking entity,
regardless of how those transfers were accomplished.119 In this
scenario, the Commission interprets section 2(i), consistent with the
principles of international comity, so as to permit substituted
compliance by the foreign affiliate or subsidiary.
—————————————————————————
119 As noted earlier, the booking entity itself also would be
required to register as a swap dealer and satisfy the Dodd-Frank Act
requirements applicable to swap dealers, even though the affiliate
facing the third party counterparty also was required to register as
a swap dealer.
—————————————————————————
Where the counterparty-facing affiliate or subsidiary and the
central booking entity are both required to comply with Dodd-Frank Act
requirements with respect to swap dealers, the question may arise as to
the allocation of responsibilities between the two entities for
obligations owed to the third-party counterparty. In such cases, the
Commission is of the view that both entities are responsible for
satisfying the Dodd-Frank Act requirements applicable to swap dealers
and with respect to the performance of an obligation owed to a third
party; satisfactory performance by one may satisfy the obligations of
both, but an unsatisfactory performance of an obligation owed to a
counterparty is a responsibility that will be borne by both entities.
In the case where non-U.S. affiliates or subsidiaries enter into
swaps that are not directly booked in a U.S. person, the Commission
proposes to interpret section 2(i) so as to require any such foreign
affiliates or subsidiaries to register as a swap dealer, assuming that
they individually or in the aggregate meet the definition of a swap
dealer. Because these affiliates or subsidiaries are domiciled in a
foreign jurisdiction and the swaps are not booked in the U.S. swap
dealer, these affiliates or subsidiaries would be treated in a manner
consistent with respect to non-U.S. swap dealers.120
—————————————————————————
120 Accordingly, the Commission would apply the clearing and
swap processing, margining (and segregation), trade execution, swap
trading relationship documentation, portfolio reconciliation and
compression, real-time public reporting, trade confirmation, and
daily trading records requirements to transactions with a non-U.S.
person guaranteed by a U.S. person. The Commission further believes
that it is appropriate to permit a foreign affiliate or subsidiary
to comply with comparable and comprehensive regulatory
requirement(s). Substituted compliance would mitigate any burden
associated with potentially duplicative or conflicting foreign
regulations and is appropriate in light of the foreign regulator’s
supervisory interests in entities domiciled and operating in its
jurisdiction. Similar concerns regarding the risk of non-performance
is not present where the non-U.S. counterparty is not guaranteed or
similarly supported by a U.S. person, and therefore, the Commission
proposes to not apply the Transaction-Level Requirements with
respect to such swaps.
—————————————————————————
With respect to SDR Reporting, the Commission proposes to interpret
section 2(i) so as to require foreign affiliates or subsidiaries of a
U.S. swap dealer to comply with the SDR Reporting requirement but would
permit substituted compliance, provided that the Commission has direct
access to the swap data for these swaps that is stored at the foreign
trade repository. As noted above, the Commission believes that this
approach would best minimize burdens on counterparties that report
their swaps data to a foreign trade repository, while ensuring that the
Commission has direct access to the information critical to its
oversight of the swaps market.
Request for Comment
Q10. Please provide comments regarding all aspects of the
Commission’s proposed grouping of requirements into Entity-Level and
Transaction-Level Requirements and application of the same to U.S. and
non-U.S. persons as discussed above.
Q11. Are there any Entity-Level Requirements that should be
reclassified as Transaction-Level Requirements, or vice versa? In
particular, the Commission is interested in comments on whether
portfolio reconciliation and compression requirements, as central risk
mitigation and back-office functions, could or should be categorized as
entity-level requirements. Similarly, the Commission is interested in
comments on whether clearing and margin and segregation for uncleared
swaps should be categorized as Entity-Level requirements.
Q11a. Should the Commission group the Entity-Level Requirements and
Transaction-Level Requirements differently for swap dealers and MSPs?
If so, how and why?
[[Page 41232]]
Q11b. Should the real-time reporting and trade execution
requirements be treated in the same manner as the external business
conduct standards?
Q12. Please provide specific comments regarding the proposed
application of the Transaction-Level Requirements to swaps with
counterparties that are U.S. persons. Should the Commission permit
substituted compliance for swaps between a non-U.S. swap dealer or non-
U.S. MSP with a U.S. person?
Q13. Please provide specific comments regarding the proposed
application of the Transaction-Level Requirements to swaps with
counterparties that are non-U.S. persons.
Q14. Market participants may not be able to determine, in certain
cases, whether their counterparties are U.S. persons, non-U.S. persons
with a guarantee from U.S. persons, or non-U.S. persons without
guarantees. How should the Commission address this issue?
Q15. Please provide comments regarding the Commission’s proposed
interpretation with respect to non-U.S. swap counterparties whose swap
obligations are guaranteed by U.S. persons. Should the interpretation
for swaps between non-U.S. swap dealers or non-U.S. MSPs and non-U.S.
counterparties whose swap obligations are guaranteed by U.S. persons be
different than with respect to swaps between non-U.S. swap dealers or
non-U.S. MSPs and U.S. persons (e.g., should fewer Transaction-Level
Requirements apply)? If so, how (e.g., which Transaction-Level
Requirements should apply)? Should the Commission not permit
substituted compliance with respect to the Entity-Level and
Transaction-Level Requirements in connection with transactions with
non-U.S. persons?
Q15a. Should the Commission permit substituted compliance for some
requirements but not others? If so, which ones? Should the applicable
requirements be different for non-U.S. swap dealers as compared to non-
U.S. MSPs?
Q16. For Entity-Level Requirements, should the Commission not
permit substituted compliance for U.S. persons?
Q17. The Commission is aware that some non-U.S. swap dealers or
MSPs may be prohibited from reporting swap transaction data to an SDR
as a result of their home country’s privacy laws, especially with
respect to such swap dealer’s or MSP’s swaps with non-U.S. persons. How
should the Commission address the application of the SDR Reporting
requirement with respect to these swaps? Should the Commission address
the application of such requirements differently with respect to non-
U.S. swap dealers and non-U.S. MSPs?
Q18. The Commission seeks comments concerning the proposed
disapplication of the external business conduct standards to swaps
involving non-U.S. persons. Would it be consistent with the
expectations of non-U.S. persons to not apply these requirements to
swaps with their local swap dealer, irrespective of whether such dealer
is a foreign- or U.S.-based person? Should such requirements apply only
to swaps involving the foreign branches or affiliates of a U.S.-based
swap dealer?
Q19. Should the Commission interpret section 2(i) so as to not
apply the Transaction-Level requirements to the foreign branches of
U.S.-swap dealers operating in the emerging markets? If so, is it
appropriate to condition eligibility for such an exception in the
manner discussed above? Should the Commission permit a higher or lower
percentage of swaps to be executed through foreign branches of U.S.
registrants in emerging market jurisdictions without comparable
regulation? If so, why and what percentage would be appropriate?
Q20. With respect to the exception for foreign branches of a U.S.
swap dealer operating in the emerging markets with respect to swaps
with a non-U.S. person guaranteed by a U.S. person, should the
Commission change the baseline from the aggregate notional value of a
firm’s swap activities to $8 billion (or certain fixed numerical
threshold) so as to not disadvantage small swap dealers?
Q21. The Commission requests comment on its proposed approach of
applying the Transaction-Level Requirements to a conduit’s swaps as if
counterparty were a non-U.S. person that is guaranteed by a U.S. person
(i.e., Transaction-Level Requirements will apply, with substituted
compliance permitted).
Q22. The Commission requests comment on its proposed definition of
“conduit.” Are the three prongs of that definition appropriate? If
not, how should they be modified? Should the second prong include
language that limits application of the conduit test to “regular”
inter-affiliate transactions moving economic risk, in whole or in part,
to the United States. Should the definition of conduit distinguish
between different types of counterparties or registration status of
such counterparties?
Q23. The Commission requests comment on: (i) The prevalence of
cross-border inter-affiliate swaps and the mechanics of moving swap-
related risks between U.S. and non-U.S. affiliated entities for risk
management and other purposes; (ii) risk implications of cross border
inter-affiliate conduit swaps for the U.S. markets; and (iii) specific
means to address the risk issues potentially presented by cross-border
conduit arrangements.
Q24. The Commission proposed anti-evasion provisions in proposed
rule 1.6 of the product definitions joint rulemaking with the SEC.121
To what extent would inter affiliate conduit transactions be undertaken
for purposes of evasion as described in proposed rule 1.6?
—————————————————————————
121 See Further Definition of “Swap,” “Security-Based
Swap,” and “Security-Based Swap Agreement”; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,
2011.
—————————————————————————
Q25. The Commission requests comments on whether substituted
compliance should be permitted for swaps entered between a foreign
branch of a U.S. person with another foreign branch of a U.S. person.
IV. Substituted Compliance: Process for Comparability Determination
A. Overview
As noted above, the Commission will use its experience exempting
foreign brokers from registration as FCMs under its rule 30.10
“comparability” findings in developing an approach for swaps.
However, the Commission contemplates that it will calibrate its
approach to reflect the heightened requirements and expectations under
the Dodd-Frank Act. Accordingly, the Commission will examine the
regulatory requirements to which non-U.S. swap dealers and non-U.S.
MSPs are subject. The Commission will use an outcomes based approach to
determine whether these requirements are designed to meet the same
regulatory objectives of the Dodd-Frank Act. The Commission
contemplates that its approach also will require a more robust and
ongoing process of cooperation and coordination between the Commission
and the relevant foreign regulatory authority regarding ongoing
compliance efforts.
1. Scope of Review
As noted above, the Commission would determine comparability and
comprehensiveness by reviewing the foreign jurisdiction’s laws and
regulations. In making this determination, the Commission may
[[Page 41233]]
find that a jurisdiction has comparable law(s) and regulation(s) in
some, but not all, of the applicable Dodd-Frank Act provisions (and
related Commission regulations).122 Similar to its policy under rule
30.10, the Commission would retain broad discretion to determine that
the objectives of any program elements are met, notwithstanding the
fact that the foreign requirement(s) may not be identical to that of
the Commission.123 However, in cases where the foreign regulatory
regime does not achieve the objectives of the Dodd-Frank Act, the
Commission proposes to recognize substituted compliance in only those
areas that are determined to be comparable and comprehensive to the CEA
and Commission regulations.
—————————————————————————
122 The Commission anticipates that it would review
comparability in the areas described above: (i) Capital
requirements; (ii) chief compliance officer (iii) clearing and swap
processing; (iv) daily trading records; (v) margin (and segregation)
requirements for uncleared swap transactions; (vi) physical
commodity swaps reporting; (vii) portfolio reconciliation and
compression; (viii) real-time public reporting; (ix) SDR Reporting;
(x) risk management; (xi) swap data recordkeeping; (xii) swap
trading relationship documentation; (xiii) trade confirmation (xiv)
trade execution.
123 The Commission would retain broad enforcement authority,
including anti-fraud and anti-manipulation authority, with respect
to the subject cross-border swap activities.
—————————————————————————
In evaluating whether a particular foreign regulatory
requirement(s) is comparable and comprehensive to the applicable
requirement(s) under the CEA and Commission regulations, the Commission
would take into consideration all relevant factors, including but not
limited to, the scope and objectives of the relevant regulatory
requirement(s), and the comprehensiveness of those requirement(s), the
comprehensiveness of the foreign regulator’s supervisory compliance
program, as well as the authority to support and enforce its oversight
of the non-U.S. swap dealer or non-U.S. MSP applicant. In this context,
comparable does not necessarily mean identical. Rather, the Commission
would evaluate whether the home jurisdiction’s regulatory requirement
is comparable to the regulatory requirement(s) supported and enforced
by the Commission.
2. Process
The Commission may recognize the comparability of a foreign regime
and permit substituted compliance subject to such terms and conditions
as the Commission finds appropriate.124 Further, similar to its
policy under rule 30.10, the Commission would retain broad discretion
to determine that the objectives of any program elements are met,
notwithstanding the fact that the foreign regulations(s) may not be
identical to that of the Commission.
—————————————————————————
124 The procedures described in this subsection, which are not
all-inclusive, are contemplated for applicants for substituted
compliance. The Commission further notes that non-compliance with
the comparable home country regulations would constitute a breach of
the terms and conditions of the registration with the Commission and
potentially would serve as a basis for de-registration of the non-
U.S. swap dealer or non-U.S. MSP and/or the commencement of an
enforcement action.
—————————————————————————
A non-U.S. person may request the Commission’s permission to comply
with comparable requirements of its home jurisdiction, in lieu of the
applicable Dodd-Frank Act requirements, as described above. In lieu of
a non-U.S. person requesting substituted compliance, a group of non-
U.S. persons from the same jurisdiction, or a foreign regulator, may
submit an application for substituted compliance on behalf of non-U.S.
persons subject to a foreign supervisory regime.
Such request would be made directly to the Commission in connection
with its application to register as a swap dealer or MSP.125 The
Commission anticipates that it would work closely with the National
Futures Association to develop the necessary procedural framework.
—————————————————————————
125 After it completes its evaluation, the Commission intends
to post a finding of comparability on its Web site.
—————————————————————————
The Commission would expect that the applicant, at minimum, state
with specificity the factual basis for requesting that the Commission
recognize comparability with respect to a particular Dodd-Frank Act
requirement as described above and include with specificity all
applicable legislation, rules and policies. 126
—————————————————————————
126 The Commission may, as it deems appropriate and necessary,
conduct an on-site examination of the applicant, as well as consult
with the applicant’s home regulator. For certain matters, the
Commission may request an opinion of counsel.
—————————————————————————
An applicant would be expected to state that it is licensed and in
good standing with the applicant’s supervisor(s) in its home country.
Further, the Commission expects that, in a substituted compliance
situation, it would enter into an appropriate memorandum of
understanding (“MOU”) or similar arrangement between the Commission
and the relevant foreign supervisor(s). Existing information-sharing
and/or enforcement arrangements would be indicative of a foreign
supervisor’s ability to cooperate with the Commission. However, going
forward, the Commission and relevant foreign supervisor(s) would need
to establish supervisory MOUs or other arrangements that provide for
information sharing and cooperation in the context of supervising swap
dealers and MSPs. The Commission contemplates that such a supervisory
MOU would establish the type of ongoing coordination activities that
would continue on an ongoing basis between the Commission and the
foreign supervisor(s), including topics such as, but not limited to,
procedures for confirming continuing oversight activities, access to
information,127 on-site visits, and notification and procedures in
certain situations.128
—————————————————————————
127 The Commission notes that under Commission’s regulation
Sec. 23.603(i), a registered swap dealer or MSP must make all
records required to be maintained in accordance with Commission
regulation 1.31 promptly upon request to representatives of the
Commission. The Commission reserves this right to access records
held by registered swap dealers and MSPs, including those that are
non-U.S. persons who may comply with the Dodd-Frank recordkeeping
requirement through substituted compliance.
128 In this regard, the Commission has started working with
foreign regulators to prepare for such arrangements.
—————————————————————————
It is expected that the Commission generally may rely on prior
comparability determinations with respect to a particular jurisdiction
to facilitate its review of a subsequent applicant’s request for
recognition of substituted compliance.129 Subsequent to registration
with the Commission, the Commission expects that a non-U.S swap dealer
or non-U.S. MSP would notify the Commission of any material changes to
information submitted in support of a comparability finding (including,
but not limited to, changes in the relevant supervisory or regulatory
regime) as the Commission’s comparability determination may no longer
be valid. In order to avoid an unduly burdensome notification process,
the Commission contemplates that it would enumerate the specific
foreign requirements or category of requirements which, if changed,
would trigger a notification requirement.
—————————————————————————
129 Prior determinations of comparability under part 30.10 of
the Commission’s regulations will not be determinative for those
purposes.
—————————————————————————
Where the Commission proposes a change to its regulations governing
swaps, the Commission will evaluate whether the proposed regulatory
change would affect the basis upon which a prior comparability finding
was made. The Commission would initiate discussions with the affected
swap dealers and MSPs and their regulator(s) to determine how to
address any possible discrepancy in requirements.
3. Clearing
In response to a number of inquiries, with regard to swaps covered
by a
[[Page 41234]]
Commission-issued clearing requirement, the Commission notes that it
expects to find comparability with foreign regulatory regimes when (i)
the swap is subject to a mandate issued by appropriate government
authorities in the home country of the counterparties to the swap,
provided that the foreign mandate is comparable and comprehensive to
the Commission’s mandate; and (ii) the swap is cleared through a DCO
that is exempted from registration under the CEA.
Request for Comment
Q26. Please provide comments regarding the Commission’s substituted
compliance proposal, including the appropriate standard and degree of
comparability and comprehensiveness that should be applied to make such
determination.
Q27. What are some of the factors or elements of a supervisory
program that the Commission should consider in making a comparability
finding?
Q27a. Should the Commission take a different approach with respect
to swap dealers as compared to MSPs?
Q28. How should the Commission address potential inconsistencies or
conflicts between U.S. and non-U.S. requirements with respect to the
oversight of non-U.S. swap dealers and non-U.S. MSPs?
Q29. Many foreign jurisdictions are in the process of implementing
major changes to their oversight of the swaps market. Assuming that a
foreign jurisdiction has adopted swaps legislation but has yet to
finalize implementing regulations, should the Commission develop an
interim process that takes into account the development of
“comparable” legislation and proposed regulations?
Q30. How should the Commission ensure that prior comparability
determinations remain appropriate over time?
V. Cross-Border Application of the CEA’s Swap Provisions to
Transactions Involving Other (Non-Swap Dealer and MSP) Market
Participants
A. Cross-Border Transactions With U.S. Persons 130
—————————————————————————
130 Appendix C in this release provides a chart describing the
application of the specified Dodd-Frank provisions to transactions
between counterparties that are neither a swap dealer or MSP.
—————————————————————————
Several of the CEA’s swap provisions–namely, those relating to
clearing,131 trade execution,132 real-time public reporting,133
Large Trader Reporting,134 and SDR Reporting,135 and recordkeeping
136–also apply to persons or counterparties other than a swap dealer
or MSP. As a result, questions arise as to whether, and the extent to
which, these requirements apply to transactions outside the United
States involving U.S. and non-U.S. persons. In this section, the
Commission provides interpretive guidance concerning the application of
these Dodd-Frank Act provisions to cross-border transactions in which
neither counterparty is a swap dealer or MSP (i.e., all other market
participants including “financial entities,” as defined in CEA
section 2(h)(7)(C)).137
—————————————————————————
131 See Section III.B.3.i., supra.
132 See Section III.B.3.iii. supra.
133 See Section III.B.3.vi. supra.
134 See Section III.B.2.vi. supra.
135 See Section III.B.2.v. supra.
136 The Commission’s part 45 rules require non-swap dealers
and non-MSPs to keep “full, complete and systematic records” with
respect to each swap to which they are a counterparty. See 17 CFR
45.2. Such records must include those demonstrating that the parties
to a swap are entitled to make use of the clearing exception in CEA
section 2(h)(7). Non-swap dealers and non-MSPs must also comply with
the Commission’s regulations in part 46, which address the reporting
of data relating to pre-enactment swaps and data relating to
transition swaps.
137 Nothing in this interpretive guidance should be construed
to affect the ability of a foreign board of trade to offer swaps to
U.S. persons pursuant to part 48 of the Commission’s regulations.
—————————————————————————
The Commission believes that U.S. persons’ swap activities outside
the United States have a direct and significant connection with
activities in, or effect on, U.S. commerce. The swaps market today is
global in nature. To manage risks in a global economy, U.S. persons may
need to–and often do–transact swaps with both U.S. and non-U.S.
persons. Many such swap activities of U.S. persons, particularly those
with global operations, may be located outside the United States. In
light of the significant extent of U.S. persons’ swap activities
outside the United States in today’s global marketplace, and the risks
to U.S. persons and the financial system presented by such swaps
activities outside the United States with U.S. persons as
counterparties, the Commission believes that U.S. persons’ swap
activities outside the United States have the requisite connection with
or effect on U.S. commerce under section 2(i) to apply the swaps
provisions of the CEA to such activities.138
—————————————————————————
138 In further support of this interpretation, the Commission
notes that the risks to U.S. persons and the U.S. financial system
from swap activities of U.S. persons does not depend on the location
of such swap activities of U.S. persons. Moreover, the Commission
believes that section 2(i) does not require a transaction-by-
transaction determination that a particular swap outside the United
States has a direct and significant connection with activities in,
or effect on, commerce of the United States in order to apply the
swaps provisions of the CEA to such transactions; rather, it is the
aggregate of such activities and the aggregate connection of such
activities with activities in the U.S. or effect on U.S. commerce
that warrants application of the CEA swaps provisions to all such
activities. See F. Hoffmann-La Roche, Ltd., 542 U.S. at 164 (in
response to respondents’ argument that the court can take account of
comity considerations on a case by case basis, the Court held that
such approach is “too complex to be prove workable.”).
—————————————————————————
Accordingly, with respect to swaps where one (or both) of the
counterparties to the swap is a U.S. person, the Commission proposes to
interpret section 2(i) in a manner so that the Dodd-Frank Act
requirements relating to clearing, trade-execution, real-time public
reporting, Large Trader Reporting, and SDR Reporting, and recordkeeping
apply to such swaps. Conversely, where a non-U.S. person enters into a
swap with another non-U.S. person outside the United States, and where
neither counterparty is required to register as a swap dealer or MSP,
the Commission would not apply the Dodd-Frank Act requirements to such
swaps.139
—————————————————————————
139 The exception involves Large Trader Reporting, as further
discussed below.
—————————————————————————
As discussed above, the Commission is concerned that a non-U.S.
affiliate or subsidiary could effectively operate as a “conduit” for
the U.S. person. More specifically, the Commission is concerned that
the non-U.S. affiliate or subsidiary of a U.S. person could be used to
execute swaps with counterparties in foreign jurisdictions, outside the
Dodd-Frank Act regulatory regime. The Commission is considering whether
to propose measures to address this situation. However, at this time,
the Commission makes clear that such non-U.S. affiliate or subsidiary
would not be subject to the Dodd-Frank swap provisions, except pursuant
to specific Dodd-Frank Act provisions (or Commission regulation adopted
thereunder) or Commission orders.
B. Clearing, Trade Execution, Real-Time Public Reporting, Large Trader
Reporting, and SDR Reporting, and Swap Data Recordkeeping
As described in greater detail above, the Dodd-Frank Act’s clearing
requirement mitigates counterparty risks and, in turn, fosters
protection against systemic risk. In a similar vein, the trade
execution and real-time public reporting requirements serve to promote
both pre- and post-trade transparency which, in turn, enhance price
discovery and decrease risk. Together, these requirements serve an
important role in protecting U.S. market participants and the general
market against financial losses. Accordingly, the Commission interprets
section 2(i) to apply the Dodd-Frank Act’s clearing, trade
[[Page 41235]]
execution, and real-time public reporting requirements to any swaps
where one of the counterparties is a U.S. person (irrespective of the
location of the transaction), without permitting substituted compliance
with a foreign regulatory regime.
The Commission’s part 20 rules regarding Large Trader Reporting
require routine reports from clearing members, in addition to swap
dealers and clearing organizations, with reportable positions in
specified physical commodity swaps or swaptions. The Commission
believes that such data is essential in order for the Commission to
carry out its supervisory mandates concerning, among other things,
increased transparency, market monitoring, and market abuse prevention.
Therefore, the Commission proposes to interpret CEA section 2(i) to
require non-U.S. clearing members to report all reportable positions
under part 20. The part 20 rules also impose recordkeeping obligations
on traders with reportable positions. The Commission proposes to
interpret CEA section 2(i) so as to require non-U.S. persons with
reportable positions under part 20 to comply with such obligations.
Given the significance of these rules to the Commission’s oversight of
swaps and swaptions that are closely linked to the U.S. futures
markets, the Commission would not allow substituted compliance.
With respect to transactions that are subject to the SDR Reporting
and swap data recordkeeping requirements, the Commission proposes to
interpret section 2(i) so as to permit substituted compliance, provided
that the Commission has direct access to the swap data for these
transactions that is stored at the foreign trade repository. The
Commission has a strong supervisory interest in applying the SDR
reporting and recordkeeping requirements to any transactions involving
a U.S. counterparty in order to effectively monitor the swap activities
of U.S. persons. Nevertheless, the Commission believes that substituted
compliance is warranted where it would ease the burden on the
counterparties that report their swaps data to a foreign trade
repository and the Commission is assured of prompt access to the
information critical to its oversight of the swaps market.
The Commission recognizes that applying the Dodd-Frank Act
requirements to swaps conducted outside the United States involving a
U.S. counterparty may result in two or more jurisdictions asserting
authority over these swaps–with the counterparties potentially facing
conflicting or duplicative regulatory requirements. The Commission will
continue its efforts to address these issues through close coordination
and consultation with its regulatory counterparts in other
jurisdictions. The Commission also anticipates that cooperative efforts
would be reflected in the MOU or similar arrangement (whether bilateral
and/or multilateral) discussed above which would provide a framework
for regulatory coordination where two or more jurisdictions have
authority over a swap.
Request for Comment
Q31. Please provide comments regarding all aspects of the
Commission’s interpretation of CEA section 2(i) with respect to the
proposed application of the Transaction-Level Requirements. The
Commission is particularly interested in commenters’ views on the
impact on U.S. persons as a result of the proposed application of the
Dodd-Frank Act’s trading requirements.
Q32. What, if any, competitive or economic effects on U.S.
commerce, including U.S. persons, should the Commission consider when
interpreting CEA section 2(i)? What, if any, competitive or economic
effects on non-U.S. persons should the Commission consider when
interpreting CEA section 2(i)?
Appendix A–Entity-Level Requirements
The Entity-Level Requirements relate to the management of risks
to a swap dealer or MSP as a whole. Accordingly, these requirements
apply on a firm-wide basis, inclusive of all swaps and irrespective
of whether the counterparty is a U.S. person (or not) or where the
transactions are executed.
Capital: CEA section 4s(e) directs the Commission to set capital
requirements for swap dealers and MSPs that are not subject to the
capital requirements of prudential regulators (i.e., non-bank swap
entities). The Commission has proposed rule, Sec. 23.101, which
would apply FCM capital requirements if the nonbank swap dealer or
MSP is also registered as an FCM, and would apply other capital
requirements for those that are not also FCMs. Certain of these non-
FCM, nonbank swap entities would be required to meet capital
requirements established by the Federal Reserve Board; specifically,
SIFIs and nonbank subsidiaries of U.S. bank holding companies.140
—————————————————————————
140 SIFIs that are not FCMs would be exempt from the
Commission’s capital requirements, and would comply instead with
Federal Reserve Board requirements applicable to SIFIs, while
nonbank (and non-FCM) subsidiaries of U.S. bank holding companies
would calculate their Commission capital requirement using the same
methodology specified in Federal Reserve Board regulations
applicable to the bank holding company, as if the subsidiary itself
were a bank holding company.
—————————————————————————
Chief Compliance Officer: CEA Section 4s(k) requires that each
swap dealer and MSP to designate a chief compliance officer
(“CCO”) and specify certain duties by the CCO. Pursuant to section
4s(k), the Commission adopted Sec. 3.3, which requires swap dealers
and MSPs to designate a CCO responsible for administering the firm’s
compliance policies and procedures, reporting directly to the board
of directors or a senior officer of the swap dealer, as well as
preparing and filing (with the Commission) a certified report of
compliance with the CEA.
Risk Management: CEA Section 4s(j) requires each swap dealer 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. The Commission adopted implementing regulations
(Sec. Sec. 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and
23.607). The Commission also adopted: (A) Sec. 23.609, which
requires certain risk management procedures for swap dealers or MSPs
that are clearing members of a DCO; and (B) Sec. 23.608, which
prohibits swap dealers 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.
Swap Data Recordkeeping: CEA section 4s(f)(1)(B) requires swap
dealers and MSPs to keep books and records for all activities
related to their business. Section 4s(g)(1) requires swap dealers
and MSPs to maintain trading records for each swap transaction and
all related records, as well as a complete audit trail for
comprehensive trade reconstructions. Pursuant to these provisions,
the Commission adopted Sec. Sec. 23.201and 23.203, which require
swap dealers and MSPs to keep records including complete transaction
and position information for all swap activities, including
documentation on which trade information is originally recorded.
Swap dealers and MSPs also have to comply with Part 46 of the
Commission’s regulations, which addresses the recordkeeping
requirements for swaps entered into before the date of enactment of
the Dodd-Frank Act (“pre-enactment swaps”) and data relating to
swaps entered into on or after the date of enactment but prior to
the part 45 compliance date (“transition swaps”).
SDR Reporting: CEA section 2(a)(13)(G) requires all swaps,
whether cleared or uncleared, to be reported to a registered swap
data repository (“SDR”). CEA section 21 requires SDRs to collect
and maintain data related to swap transactions as prescribed by the
Commission, and to make such data
[[Page 41236]]
electronically available to regulators. Swap dealers and MSPs would
be required to comply with Part 45 of the Commission’s regulations,
which set forth the specific transaction data that reporting
counterparties and registered entities must report to a registered
SDR; and Part 46, which addresses the recordkeeping requirements for
pre-enactment swaps and data relating to transition swaps.
Physical Commodity Swaps Reporting (Large Trader Reporting): CEA
section 4t authorizes the Commission to establish a large trader
reporting system for significant price discovery swaps, of which the
economically equivalent swaps subject to part 20 reporting are a
subset, and in order to implement the statutory mandate in CEA
section 4a for the Commission to establish position limits, as
appropriate, for physical commodity swaps. The Commission published
part 20 rules requiring swap dealers, among other entities, to
submit routine position reports on certain physical commodity swaps
and swaptions.
Entity-Level Requirements
————————————————————————
————————————————————————
U.S.-Based Swap Dealer………. Apply.
Foreign Branches/Agencies of Apply.
U.S.-Based Swap Dealer**.
Foreign Affiliates of U.S.
Person:
–Swaps Booked in U.S……. Apply.*
Foreign Affiliate of U.S.
Person:
–The Affiliate is the Legal Substituted Compliance.***
Counterparty But All Swaps
Guaranteed by U.S. Person.
Foreign Affiliate of U.S.
Person:
–Swaps Not Booked in U.S. Substituted Compliance.
(i.e., Affiliate is Legal
Counterparty); and Swaps
Not Guaranteed by U.S.
Person.
Non-U.S.-Based Swap Dealer:
–Swaps neither Booked in Substituted Compliance.
U.S. nor Guaranteed by U.S.
Person.
————————————————————————
* Where swaps are solicited or negotiated by a foreign affiliate of a
U.S. person but directly booked in the U.S. person, the U.S. person
must comply with all of the swap dealer duties and obligations related
to the swaps, including registration, capital and related prudential
requirements.
** Both Entity-Level and Transaction-Level Requirements are the ultimate
responsibilities of the U.S.-based swap dealer.
*** With respect to the SDR reporting requirement, the Commission may
permit substituted compliance only if direct access to swap data is
provided to the Commission.
Appendix B–Transaction-Level Requirements
The Transaction-Level Requirements cover a range of Dodd-Frank
requirements: some of the requirements more directly address
financial protection of swap dealers (or MSPs) and their
counterparties; others address more directly market efficiency and/
or price discovery. Further, some of the Transaction-Level
Requirements can be classified as Entity-Level Requirements and
applied on a firm-wide basis across all swap transactions or
activities. Nevertheless, in the interest of comity principles, the
Commission believes that the Transaction-Level Requirements may be
applied on a transaction-by-transaction basis.
Category A: Risk Mitigation and Transparency
Clearing and Swap Processing: CEA section 2(h)(1) requires a
swap to be submitted for clearing to a derivatives clearing
organization (“DCO”) if the Commission has determined that the
swap is required to be cleared, unless one of the parties to the
swap is eligible for an exception under section 2(h)(7) from the
clearing requirement and elects not to clear the swap. Finally, the
Commission adopted Sec. 23.506, which requires swap dealers and
MSPs to submit swaps promptly for clearing and comply with Sec.
23.610, which establishes certain standards for swap processing by
swap dealers and MSPs that are clearing members of a DCO.
Margin (and Segregation) Requirement for Uncleared Swap
Transactions: Section 4s(e) explicitly requires the adoption of
rules establishing margin requirements for swap dealers and MSPs,
and applies a bifurcated approach that requires each swap dealer and
MSP for which there is a prudential regulator to meet the margin
requirements established by the applicable prudential regulator, and
each swap dealer and MSP for which there is no prudential regulator
to comply with Commission’s margin regulations. In contrast, the
“segregation” requirements in 4s(1) don’t use a bifurcated
approach–all swap dealers and MSPs are subject to the Commission’s
rule regarding notice and third party custodians for margin
collected for uncleared swaps.
Mandatory Trade Execution: CEA section 2(h)(8) provides that
unless a non-financial end-user exemption applies, a swap that is
subject to clearing requirement and made available to trade must be
traded on a DCM or SEF.
Swap Trading Relationship Documentation: CEA Section 4s(i)
requires each swap dealer and MSP to conform to commission standards
for the timely and accurate confirmation, processing, netting
documentation and valuation of swaps. Pursuant thereto the
Commission has proposed Sec. 23.504(a), which would require swap
dealers and MSPs to “establish, maintain and enforce written
policies and procedures” to ensure that the swap dealer or MSP
executes written swap trading relationship documentation. Under
proposed Sec. Sec. 23.505(b(1), 23.504 (b)(3), and 23.504(b)(4),
the swap trading relationship documentation must include, among
other things: all terms governing the trading relationship between
the swap dealer and its counterparty; credit support arrangements;
investment and rehypothecation terms for assets used as margin for
uncleared swaps and custodial arrangements.141 Further, the swap
trading relationship documentation requirement applies to all
transactions with registered swap dealers and MSPs.
—————————————————————————
141 The requirements under section 4s(i) relating to trade
confirmations is a Transaction-Level Requirement. Accordingly,
proposed 17 CFR 23.504(b)(2), which requires a swap dealer’s and
MSP’s swap trading relationship documentation to include all
confirmations of swap transactions, will apply on a transaction-by-
transaction basis.
—————————————————————————
Portfolio Reconciliation and Compression: CEA section 4s(i)
directs the Commission to prescribe regulations for the timely and
accurate processing and netting of all swaps entered into by swap
dealers and MSPs. Pursuant to CEA section 4s(i), the Commission
proposed regulations (Sec. Sec. 23.502 and 23.503), which would
require swap dealers and MSPs to perform portfolio reconciliation
and compression, respectively, for all swap transactions. Portfolio
reconciliation is a post-execution risk management tool to ensure
accurate confirmation of a swap’s terms and to identify and resolve
any discrepancies between counterparties regarding the valuation of
the swap. Portfolio compression is a post-trade processing and
netting mechanism that is intended to ensure timely accurate
processing and netting of swaps. Proposed Sec. 23.503(c) would
require all swap dealers and MSPs to participate in bilateral
compression exercises and/or multilateral portfolio compression
exercises conducted by their SROs or DCOs of which they are members.
Further, participation in multilateral portfolio compression
exercises is mandatory for dealer to dealer trades.
Real-Time Public Reporting: CEA section 2(a)(13) directs the
Commission to promulgate rules providing for the public availability
of swap transaction data in real time basis. The Commission
promulgated part 43 rules, which provides that all “publicly
reportable swap transactions” must be reported and publicly
disseminated.
Trade Confirmation: CEA section 4s(i) requires that each swap
dealer and MSP must comply with the Commission’s regulations
prescribing timely and accurate confirmation of transactions. The
Commission has proposed Sec. 23.501, which requires, among other
things, a timely and accurate confirmation of all swaps and life
cycle
[[Page 41237]]
events for existing swaps. In addition, proposed Sec. 23.504(b)(2)
requires a swap dealer’s and MSP’s swap trading relationship
documentation to include all confirmations of swap transactions.
Daily Trading Records: Pursuant to section CEA 4s(g)(1), the
Commission adopted Sec. 23.202, which requires swap dealers and
MSPs to maintain daily trading records, including records of trade
information related to pre-execution, execution, and post-execution
data that is needed to conduct a comprehensive and accurate trade
reconstruction for each swap. The final rule also requires that
records be kept of cash or forward transactions used to hedge,
mitigate the risk of, or offset any swap held by the swap dealer or
MSP.
Category B: Sales Practices
External Business Conduct Standards: Pursuant to CEA section
4s(h), the Commission has adopted external business conduct rules,
which establish business conduct standards governing the conduct of
swap dealers and MSPs in dealing with their counterparties in
entering into swaps.
Category A
—————————————————————————————————————-
Non-U.S. person
U.S. Person guaranteed by U.S. Non-U.S. person not guaranteed by
person ** U.S. person
—————————————————————————————————————-
U.S.-Based Swap Dealer………. Apply………….. Apply…………. Apply.
Foreign Affiliate/Swaps Booked Apply………….. Apply…………. Apply.
in U.S.*.
Foreign Branches/Agencies of Apply………….. Substituted Substituted Compliance.***
U.S.-Based Swap Dealer. Compliance***.
Foreign Affiliate of U.S.
Person:
–The Affiliate is the Legal Apply………….. Substituted Do Not Apply.
Counterparty But All Swaps Compliance.
Guaranteed by U.S. Person.
Foreign Affiliate of U.S.
Person:
–Swaps Not Booked in U.S. Apply………….. Substituted Do Not Apply.
(i.e., Affiliate is Legal Compliance.
Counterparty); and Swaps
Not Guaranteed by U.S.
Person.
Non-U.S.-Based Swap Dealer:
–Swaps neither Booked in Apply………….. Substituted Do Not Apply.
U.S. nor Guaranteed by U.S. Compliance.
Person.
—————————————————————————————————————-
* Where swaps are solicited or negotiated by a foreign affiliate but directly booked in the U.S. person, the
U.S. person must comply with all of the swap dealer duties and obligations, including all Transaction-Level
Requirements. The foreign affiliate, if separately required to register as a swap dealer, must comply with
those requirements applicable to its swap dealing activities.
** The Transaction-Level Requirements apply to swaps in which: (i) a non-U.S. counterparty is majority-owned,
directly or indirectly, by a U.S. person; (ii) the non-U.S. counterparty regularly enters into swaps with one
or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the financials of such non-U.S.
counterparty are included in the consolidated financial statements of the U.S. person.
*** Under limited circumstances, where there is not a comparable foreign regulatory regime, foreign branches and
agencies of U.S. swap dealers may comply with the local transaction-level requirements rather than the
Transaction-Level Requirements, subject to specified conditions.
Notes:
1. The swap trading relationship documentation requirement applies to all transactions with registered swap
dealers and MSPs.
2. Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades.
Category B
—————————————————————————————————————-
Non-U.S. person Non-U.S. person not
U.S. person guaranteed by U.S. guaranteed by U.S.
person ** person
—————————————————————————————————————-
U.S.-Based Swap Dealer……….. Apply……………….. Apply………………. Apply.
Foreign Affiliate of U.S. Person:
–Swaps are Booked in U.S.*.. Apply……………….. Do Not Apply………… Do Not Apply.
Foreign Branches/Agencies of U.S.- Apply……………….. Do Not Apply………… Do Not Apply.
Based Swap Dealer.
Foreign Affiliate of U.S. Person:
–The Affiliate is the Legal Apply……………….. Do Not Apply………… Do Not Apply.
Counterparty But All Swaps
Guaranteed by U.S. Person.
Foreign Affiliate of U.S. Person:
–Swaps Not Booked in U.S. Apply……………….. Do Not Apply………… Do Not Apply.
(i.e., Affiliate is Legal
Counterparty); and Swaps Not
Guaranteed by U.S. Person.
Non-U.S.-Based Swap Dealer:
–Swaps neither Booked in Apply……………….. Do Not Apply………… Do Not Apply.
U.S. nor Guaranteed by U.S.
Person.
—————————————————————————————————————-
* Where swaps are solicited or negotiated by an affiliate of a U.S. person but directly booked in the U.S.
person, the U.S. person must comply with all of the swap dealer duties and obligations, including all
Transaction-Level Requirements. The foreign affiliate, if separately required to register as a swap dealer,
must comply with those requirements applicable to its swap dealing activities.
** The Transaction-Level Requirements apply to swaps in which: (i) A non-U.S. counterparty is majority-owned,
directly or indirectly, by a U.S. person; (ii) the non-U.S. counterparty regularly enters into swaps with one
or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the financials of such non-U.S.
counterparty are included in the consolidated financial statements of the U.S. person.
Appendix C–All Other (Non-Swap Dealer/MSP) Market ParticipantS *
—————————————————————————————————————-
Non-U.S. person Non-U.S. person not
U.S. person guaranteed by U.S. guaranteed by U.S.
person person
—————————————————————————————————————-
U.S. Person…………………. Apply……………….. Apply………………. Apply.
Non-U.S. Person Guaranteed by Apply……………….. Do Not Apply………… Do Not Apply.
U.S. Person.
[[Page 41238]]
Non-U.S. Person Not Guaranteed by Apply……………….. Do Not Apply………… Do Not Apply.
U.S. Person.
—————————————————————————————————————-
* The relevant Dodd-Frank requirements are those relating to: clearing, trade execution, real-time public
reporting, Large Trader Reporting, SDR reporting and swap data recordkeeping.
Issued in Washington, DC, on June 29, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Cross-Border Application of Certain Swaps Provisions of
the Commodity Exchange Act–Commission Voting Summary and Statements of
Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations
Appendix 1–Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O’Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2–Statement of Chairman Gary Gensler
I support the proposed guidance on the cross-border application
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd Frank Act). The Commission is not required to solicit public
comment on interpretive guidance, but we are particularly interested
in the public’s input and look forward to comments on the proposed
guidance.
In 2008, swaps, and in particular credit default swaps,
concentrated risk in financial institutions and contributed to the
financial crisis, the worst economic crisis Americans have
experienced since the Great Depression. Eight million Americans lost
their jobs, millions of families lost their homes, and small
businesses across the country folded. Congress and the President
responded with the Dodd-Frank Act, bringing common-sense rules of
the road to the swaps marketplace.
Section 722(d) of the Dodd-Frank Act states that swaps reforms
shall not apply to activities outside the United States unless those
activities have “a direct and significant connection with
activities in, or effect on, commerce of the United States.” In
interpreting Section 722(d), we must not forget the lessons of the
2008 crisis and earlier. Swaps executed offshore by U.S. financial
institutions can send risk straight back to our shores. It was true
with the London and Cayman Islands affiliates of AIG, Lehman
Brothers, Citigroup and Bear Stearns. A decade earlier, it was true,
as well, with Long-Term Capital Management.
The nature of modern finance is that large financial
institutions set up hundreds, if not thousands of “legal entities”
around the globe.
They do so in an effort to respond to customer needs, funding
opportunities, risk management and compliance with local laws. They
do so as well, though, to lower their taxes, manage their reported
accounting, and to minimize regulatory, capital and other
requirements, so-called “regulatory arbitrage.” Many of these far-
flung legal entities, however, are still highly connected back to
their U.S. affiliates.
During a default or crisis, the risk that builds up offshore
inevitably comes crashing back onto U.S. shores. When an affiliate
of a large, international financial group has problems, the markets
accept this will infect the rest of the group. This was true with
AIG. Its subsidiary, AIG Financial Products, brought down the
company and nearly toppled the U.S. economy. It was run out of
London as a branch of a French-registered bank, though technically
was organized in the United States.
Lehman Brothers was another example. Among its complex web of
affiliates was Lehman Brothers International (Europe) in London.
When Lehman failed, the London affiliate had more than 130,000
outstanding swaps contracts, many of them guaranteed by Lehman
Brothers Holdings back in the United States.
Yet another example was Citigroup, which set up numerous
structured investment vehicles (SIVs) to move positions off its
balance sheet for accounting purposes, as well as to lower its
regulatory capital requirements. Yet, Citigroup had guaranteed the
funding of these SIVs through a mechanism called a liquidity put.
When the SIVs were about to fail, Citigroup in the United States
assumed the huge debt, and taxpayers later bore the brunt with two
multi-billion dollar infusions. The SIVs were launched out of London
and incorporated in the Cayman Islands.
Bear Stearns is another case. Bear Stearns’ two sinking hedge
funds it bailed out in 2007 were incorporated in the Cayman Islands.
Yet again, the public assumed part of the burden when Bear Stearns
itself collapsed nine months later.
A decade earlier, the same was true for Long-Term Capital
Management. When the hedge fund failed in 1998, its swaps book
totaled in excess of $1.2 trillion notional. The vast majority were
booked in its affiliated partnership in the Cayman Islands.
The recent events of JPMorgan Chase, where it executed swaps
through its London branch, are a stark reminder of this reality of
modern finance.
The proposed guidance interpreting Section 722(d),intended to be
flexible in application, includes the following key elements:
First, it provides the guidance that when a foreign entity
transacts in more than a de minimis level of U.S. facing swap
dealing activity, the entity would register under the Dodd-Frank Act
swap dealer registration requirements.
Second, it includes a tiered approach for foreign swap dealer
requirements. Some requirements would be considered entity-level,
such as for capital, chief compliance officer, swap data
recordkeeping, reporting to swap data repositories and large trader
reporting. Some requirements would be considered transaction-level,
such as clearing, margin, real-time public reporting, trade
execution, trading documentation and sales practices.
Third, entity-level requirements would apply to all registered
swap dealers, but in certain circumstances, foreign swap dealers
could meet these requirements by complying with comparable and
comprehensive foreign regulatory requirements, or what we call
“substituted compliance.”
Fourth, transaction-level requirements would apply to all U.S.
facing transactions. For these requirements, U.S. facing
transactions would include not only transactions with persons or
entities operating or incorporated in the United States, but also
transactions with their overseas branches. Likewise, this would
include transactions with foreign affiliates that are guaranteed by
a U.S. entity, as well as the foreign affiliates operating as
conduits for a U.S. entity’s swap activity. Foreign swap dealers, as
well as overseas branches of U.S. swap dealers, in certain
circumstances, may rely on substituted compliance when transacting
with foreign affiliates guaranteed by or operating as conduits of
U.S. entities.
Fifth, for certain transactions between a foreign swap dealer
(including an overseas affiliate of a U.S. person) and
counterparties not guaranteed by or operating as conduits for U.S.
entities, Dodd-Frank transaction-level requirements may not apply.
For example, this would be the case for a transaction between a
foreign swap dealer and a foreign insurance company not guaranteed
by a U.S. person. There are some in the financial community who
might want the CFTC to ignore the hard lessons of the crisis and
before.
They might comment that swap trades entered into in London
branches of U.S. entities do not have a direct and significant
connection with activities in, or effect on U.S. commerce.
They might comment that affiliates guaranteed by a U.S. mother
ship do not have a direct and significant connection with activities
in, or effect on U.S. commerce.
They might comment that affiliates acting as conduits for swaps
activity back here in
[[Page 41239]]
the United States do not have a direct and significant connection
with activities in, or effect on U.S. commerce.
If we were to follow these comments, though, American jobs and
markets might move offshore, yet the risk associated with such
overseas swaps activities, particularly in times of crisis, would
still have a direct and significant connection with activities in,
or effect on U.S. commerce.
Appendix 3–Statement of Commissioner Jill Sommers
Over a year ago, the Commission finally acknowledged that we
needed to address the growing uncertainty brewing among swap market
participants who were trying to decipher the extraterritorial reach
of the Dodd-Frank Act. We held a two-day roundtable last August and
have received numerous comments since then from market participants
and other regulators asking us to consider a global approach to the
regulation of these global markets. We were encouraged to coordinate
with our foreign and domestic partners and urged not to implement
our regulatory approach in a silo.
CFTC staff has worked diligently to address the challenging
issues associated with the statutory language of Section 2(i) of the
Commodity Exchange Act (CEA). Unfortunately, when the Proposed
Interpretive Guidance and Policy Statement (“Interpretive
Guidance”) was finally shared with the rest of the Commission on
June 1, 2012, we learned that staff had been guided by what could
only be called the “Intergalactic Commerce Clause” of the United
States Constitution, in that every single swap a U.S. person enters
into, no matter what the swap or where it was transacted, was stated
to have a direct and significant connection with activities in, or
effect on, commerce of the United States. This statutory and
constitutional analysis of the extraterritorial application of U.S.
law was, in my view, nothing short of extra-statutory and extra-
constitutional.
While the many revisions over the last several weeks have
tempered the outer limits of our initial approach, the Interpretive
Guidance nonetheless continues to ignore the Commission’s successful
history of mutual recognition of foreign regulatory regimes spanning
20-plus years. We have worked for decades to establish relationships
with our foreign counterparts built on respect and trust, and should
not be so eager and willing to disregard their capabilities. All G20
nations agreed to comprehensive regulation of swap markets and we
should rely on their regional expertise. The current document
acknowledges the concept of “substituted compliance,” but it is
extremely vague with respect to what the Commission will be
considering in making these determinations. In my view, a very broad
and high level review of regulatory regimes is appropriate versus a
word-for-word comparison of rule books.
While the market failures described in the “Background”
section of the Interpretive Guidance recount why the G20 nations
together agreed to a common set of principles for regulation of a
global marketplace, recounting those market failures does not
justify the expansive view the Commission has taken of its
jurisdictional reach, and does not justify the implication that
other nations are not capable of effective regulation.
As Commissioner O’Malia points out in his concurrence, not only
have we failed to coordinate with foreign regulators on a global
cross-border approach, we have failed to coordinate with our fellow
domestic regulators. As I have said for many months, we should be
proposing a rule defining the cross-border application of Dodd-Frank
that is harmonized with the SEC’s approach, both in substance and in
timing. Unfortunately we are not doing that. Instead, we are
proposing Interpretive Guidance that ultimately has the effect of a
rule. No matter what it is called, the Interpretive Guidance is so
inextricably linked to the entity definitions and the registration
rules that it is a part of those rules themselves. Because it is not
titled a “Notice of Proposed Rulemaking,” we skirt the
requirements of the Administrative Procedure Act and the requirement
under Section 15(a) of the CEA that the Commission conduct a cost-
benefit analysis. I believe this approach, yet again, needlessly
exposes the Commission to litigation.
Over the last two years, while considering many proposed and
final rules, I have been very clear that I cannot support an
approach that creates an un-level playing field for market
participants. I am concerned that the different compliance dates in
the Proposed Exemptive Order may unnecessarily disadvantage U.S.-
based swap dealers and MSPs from the moment the document is
published in the Federal Register. I encourage comment on this issue
and hope that if we determine to harmonize the compliance dates for
entities in the U.S. and abroad, that we can do so before too much
damage is done to U.S.-based market participants.
As I reviewed the documents currently under consideration, it
occurred to me that two choices are presented. One is that the
Commission decline to issue the Interpretive Guidance and Proposed
Exemptive Order and leave market participants in a continued state
of uncertainty. The other is that the Commission issue these
documents and provide market participants with the certainty that we
are advancing a flawed policy. Neither is appealing.
My decision to support putting these proposals out for comment
was not easily reached. From the beginning I have supported a much
simpler approach to the extraterritorial reach of Dodd-Frank. I am
hopeful that the comment letters will encourage the Commission to
adopt a final rule that will rely on mutual recognition of all
global regulatory regimes in a manner that avoids costly, burdensome
duplicative regulations.
Appendix 4–Statement of Commissioner Scott D. O’Malia
I respectfully concur with the Commodity Futures Trading
Commission’s (the “Commission” or “CFTC”) approval of its
proposed interpretive guidance and policy statement (“Proposed
Guidance”) regarding section 2(i) of the Commodity Exchange Act
(“CEA”) 142 and its notice of proposed exemptive order
(“Proposed Order”). While I have strong reservations about the
statutory authority and disagree with the Commission’s decision to
issue interpretive guidance instead of a formal rulemaking, I
believe that the timely release of these proposals is critical for
firms to have some sense of what U.S. standards will apply to their
cross-border transaction, and how those standards will comport with
international standards. We expect that these proposals will improve
as a result of input from market participants, as well as an open
dialogue with global regulators.
—————————————————————————
142 See 7 U.S.C. 1 et seq.
—————————————————————————
These two proposals are complementary in that the Commission’s
long-awaited Proposed Guidance establishes our view of the
application of the swaps provisions of the CEA to cross-border swaps
transactions, while the Proposed Order will delay compliance with
certain entity-level and transaction-level swaps requirements in the
CEA pending the final adoption of the Proposed Guidance. The
Proposed Order also borrows definitions and concepts from the
Proposed Guidance, such as the proposed definition of “U.S.
person.” While I believe that the Commission’s issuance of the
Proposed Guidance and the Proposed Order are overdue, I have a
number of general concerns with the former.
I have been assured that the Proposed Guidance is a draft and,
although it is not required, will follow the normal notice-and-
comment process under the Administrative Procedure Act.143 After
the comment period, the Commission will review public comments and
subsequently will incorporate those comments into final guidance. I
would like to make it clear that if I were asked to vote on the
Proposed Guidance as final, my vote would be no.
—————————————————————————
143 See 5 U.S.C. 551 et seq.
—————————————————————————
The Proposed Guidance
My concerns with the Proposed Guidance relate generally to the
Commission’s unsound interpretation of section 2(i) of the CEA. In
particular, I believe that the Commission’s analysis: (i)
Misconstrues the language of section 2(i); (ii) is inconsistently
applied to different activities; (iii) loosely considers
international law and comity; (iv) lacks meaningful collaboration
with foreign and domestic regulators; and (v) blurs the lines
between interpretive guidance and legislative or interpretive
rulemaking. I discuss each of these concerns below.
i. Statutory Misconstruction
Section 2(i) of the CEA provides, in part, that the Commission’s
swap authority does not apply to foreign activities unless those
activities “have a direct and significant connection with
activities in, or effect on, commerce of the United States * * *.”
144 When Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”),145 it intended
that
[[Page 41240]]
section 2(i) act as a limitation on the Commission’s authority.
Under section 2(i), the Commission is required to demonstrate how
and when its jurisdiction applies to activities that take place
outside of the United States. Instead, the Commission’s Proposed
Guidance ignores the literal statutory construction of section 2(i)
and prejudicially switches the analysis. In other words, the
Proposed Guidance now places the burden on market participants to
explain why their foreign swaps activities are outside of the
Commission’s regulatory oversight. By placing the burden on market
participants to determine whether their swaps activities are subject
to the swaps provisions of the CEA–and without providing more
guidance to these participants–the Commission inappropriately
broadens the scope of swaps activities that will fall within the
Commission’s jurisdiction. The Commission could more clearly
delineate which activities it believes will have a direct and
significant connection with U.S. commerce in order to ensure that
our regulatory interests are preserved.146
—————————————————————————
144 7 U.S.C. 2(i) (2012).
145 See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
146 For example, in the case of non-interdealer swap
transactions, the Commission could focus its analysis on the
solicitation activities of swap dealers. In the case of other swap
transactions, the Commission could examine the location of where
performance of the primary obligations under a swap agreement takes
place.
—————————————————————————
ii. Inconsistent Application of CEA Section 2(i)
In addition, the Commission’s Proposed Guidance inconsistently
applies, and sometimes ignores, its own section 2(i) analysis. For
instance, the Commission sets forth in detail its belief that “the
level of swap dealing that is substantial enough to require a person
to register as a swap dealer when conducted by a U.S. person, also
constitutes a `direct and significant connection’ within the meaning
of section 2(i)(1) of the CEA.” 147 As a result, a non-U.S.
person would have a direct and significant connection with the
United States and therefore have to register with the Commission as
a swap dealer only once it engages in more than the de minimis level
of swap dealing with U.S. persons.148 In contrast to this somewhat
extensive analysis for swap dealers, the Commission provides a
sparse explanation of why it believes each and every swap
transaction between one or more U.S. persons or counterparties other
than a swap dealer or major swap participant (“MSP”) satisfies the
direct and significant connection analysis in section 2(i).149
Swap transactions that fall under this analysis would be subject to
certain transaction-level swaps requirements, including clearing,
exchange trading, reporting to a swap data repository under part 45
of the Commission’s regulations, real-time public reporting and
large swaps trader reporting under part 20 of the Commission’s
regulations.
—————————————————————————
147 The Commission’s analysis in the Proposed Guidance relies
on its analysis in the final entities rule. See Further Definition
of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap
Participant,” “Major Security-Based Swap Participant,” and
“Eligible Contract Participant,” 77 FR 30596 (May 23, 2012).
148 See 77 FR at 30634 (“[T]he Commissions believe that the
appropriate threshold for the phase-in period is an annual gross
notional level of swap dealing activity of $8 billion or less. In
particular, the $8 billion level should still lead to the regulation
of persons responsible for the vast majority of dealing activity
within the swap markets.”). The Commission ties the direct and
significant connection analysis to the crude analysis in the final
entities rule. I voted against the final entities rule for several
reasons, including its flawed reasoning. I expressed my support,
however, with respect to the positive outcome that resulted from the
establishment of the $8 billion de minimis threshold.
149 See section V of this Proposed Guidance (“In light of the
significant extent of U.S. persons’ swap activities outside of the
United States in today’s global marketplace, and the risks to U.S.
persons and the financial system presented by such swaps activities
outside of the United States with U.S. persons as counterparties,
the Commission believes that U.S. persons’ swap activities outside
the United States have the requisite connection with or effect on
U.S. commerce under section 2(i) to apply the swaps provisions of
the CEA to such activities.”). In a footnote in the Proposed
Guidance, the Commission then reasons without persuasive legal
support that the aggregate of outside activities and the aggregate
connection with U.S. commerce warrant the application of the CEA
swaps provisions to all such foreign activities.
The Commission’s analysis ignores and minimizes two important
points. First, it ignores the fact that multinational entities also
may have major operations and business relationships in foreign
jurisdictions and may be considered persons within those
jurisdictions. Second, its analysis minimizes the fact that there
are an appreciable number of U.S. persons who engage in a relatively
small number of swaps transactions. Even if those U.S. persons’
transactions were aggregated, it is questionable whether their swaps
in the aggregate would meet the “significant” element in the
section 2(i) analysis.
—————————————————————————
Similarly, in another instance, the Commission has divined an
exception to the application of certain Commission regulations for
situations where a foreign branch of a U.S. swap dealer engages in
swap dealing activities in emerging markets or other jurisdictions
without comparable swaps regimes.150 Although the policy result of
this exception is well intended, its bare analysis pales in
comparison to the Commission’s section 2(i) analysis in other places
of the Proposed Guidance.151
—————————————————————————
150 See section III.D.1 of this Proposed Guidance (“To be
eligible for this exception, the aggregate notional value (expressed
in U.S. dollars and measured on a quarterly basis) of the swaps of
all foreign branches in such countries may not exceed five percent
of the aggregate notional value (expressed in U.S. dollars and
measure on a quarterly basis) of all of the swaps of the U.S. swap
dealer.”).
151 See, e.g., the MSP discussion in section II.C.2. of this
Proposed Guidance.
—————————————————————————
In yet another section of the Proposed Guidance, the Commission
does not adequately explain why almost all transaction-level
requirements (i.e., clearing, margining for uncleared swaps, real-
time public reporting and certain business conduct standards)
equally satisfy the direct and significant connection analysis under
CEA section 2(i). In my view, two transaction-level requirements
related to pre- and post-trade transparency–namely, trade execution
and real-time public reporting requirements–do not raise the same
level of systemic risk concerns as clearing and margining for
uncleared swaps. I believe the Commission should better explain its
rationale for requiring foreign swap dealers transacting with non-
U.S. persons to meet the trade execution and real-time public
reporting requirements under Title VII of the Dodd-Frank Act and
Commission regulations.
iii. Loose Consideration of Principles of International Comity
Moreover, the Commission’s interpretation of CEA section 2(i) is
overly broad to the point where the extent of the Commission’s
jurisdiction is virtually endless. The Proposed Guidance takes the
position that all transactions involving a U.S. person fall within
the Commission’s jurisdiction, regardless of the location of the
transaction or the regulations in effect within the relevant
jurisdiction.
While section 2(i) gives the Commission jurisdiction to reach
activities that take place outside of the United States, the
Commission’s Proposed Guidance loosely considers principles of
international comity that are essential for determining the
extraterritorial applicability of U.S. law. Although the Proposed
Guidance expressly states that the Commission will exercise its
regulatory authority over cross-border activities in a manner
consistent with principles of international comity, the Commission’s
proposed approach could be described as unilateral and dismissive of
foreign law, even when those laws may achieve the same results
sought by the Commission.152
—————————————————————————
152 The Proposed Guidance correctly cites judicial and
executive branch precedent and guidance addressing the application
of international law and comity concepts in determining the
extraterritorial applicability of federal statutes. See section
III.A. of this Proposed Guidance. These concepts are found in
sections 403(1) and (2) of the Third Restatement of Foreign
Relations Law. See Restatement (Third) of Foreign Relations Law of
the United States Sec. Sec. 403(1), 403(2) (1986).
—————————————————————————
I strongly believe that the Commission instead must honor these
principles in order to respect the legitimate interests of other
sovereign nations. This approach would serve to complement, and not
limit, the ability of the Commission to effectively regulate swaps
markets. The Commission does not have the resources to register and
regulate all market participants and swaps activities. By relying on
comparable foreign regulatory regimes to address the trading
activities of foreign market participants, the Commission could
better allocate resources domestically in a more effective manner.
iv. The Commission Should Engage in Real and Meaningful Cooperation
With Foreign and Domestic Regulators
The Proposed Guidance references a series of well-known large
financial institution failures–such as Lehman Brothers and Long
Term Capital Management–to support the Commission’s over-expansive
interpretation and application of Title VII of the Dodd-Frank Act. I
agree that those failures had a detrimental effect on the U.S.
economy. We must not forget, however, that the swaps
[[Page 41241]]
markets are truly global and the Commission’s swaps regulations will
not operate in a vacuum. For that reason, the Commission should
consider the interaction of its swaps regulations with the
regulations of other jurisdictions, all of which have legitimate
regulatory interests in the trading of swaps by multinational
organizations. Thus, the Commission’s swaps regulation should be
concordant with foreign swaps regulations in order to avoid
duplication, conflict and unnecessary uncertainty.
In light of today’s highly interdependent, global financial
markets, the Commission needs to engage in real cooperation with
foreign regulators and to coordinate its swaps regulations with the
regulations of other sovereign nations. Concepts of comparability
and mutual recognition are essential.
The Commission should follow the example of international
cooperation and coordination seen in the efforts of the Basel
Commission on Banking Supervision (“BCBS”) and the International
Organization of Securities Commissions (“IOSCO”) in developing
harmonized international standards for the margining of uncleared
swaps. BCBS and IOSCO plans to publish a consultation paper
outlining these standards. Notwithstanding the Commission’s own
efforts to propose rules for the margining of uncleared swaps for
swap dealers and MSPs,153 the Commission plans to consider the
final policy recommendations set forth by BCBS and IOSCO when
adopting the Commission’s final rules for the margining of uncleared
swaps and may adapt those final rules to conform with BCBS and
IOSCO’s final policy recommendations. The Commission should follow
the lead of BCBS and IOSCO in harmonizing many of its other rules.
In my view, either the G20 or another international body or
consortium of nations could act as a springboard for the
coordination of swaps regulation.154
—————————————————————————
153 See Capital Requirements of Swap Dealers and Major Swap
Participants, 76 Fed. Reg. 27802 (May 12, 2011).
154 On June 18-19, 2012, the leaders of the G20 convened in
Los Cabos, Mexico to reaffirm their commitments with respect to the
regulation of the over-the-counter (“OTC”) derivatives markets.
Specifically, the G20 leaders reaffirmed their commitment that all
standardized OTC derivatives be traded on exchanges or electronic
platforms and be centrally cleared by the end 2012. See the G20
Declaration (June 2012), para. 39, p. 7, at: http://www.g20.org/images/stories/docs/g20/conclu/G20_Leaders_Declaration_2012.pdf.
The Commission should follow the spirit of the G20’s cooperative
efforts by working with foreign regulators to determine the
applicability of its swaps regulations to cross-border swaps.
—————————————————————————
On June 22, 2012, European Union Commissioner Michel Barnier
echoed this position in a statement to the Financial Times.155 Mr.
Barnier made clear that effective international regulation involves
regulators coordinating their efforts to implement mandatory
clearing, trading and reporting of over-the-counter derivatives. A
coordinated approach would ensure that swaps do not evade
regulation. Mr. Barnier also made clear that regulatory regimes that
assert jurisdiction over trading activity already within the
jurisdiction of another competent regulator is both unnecessary and
costly. I agree with Mr. Barnier’s view that our goal as regulators
should be to establish regulatory regimes that prevent swaps from
slipping through the cracks without applying our laws to activity
that is better regulated by our trusted colleagues abroad.
—————————————————————————
155 See statement by Commissioner Michel Barnier of the
European Union, Financial Times, June 22, 2012 (“Where the rules of
another country are comparable and consistent with the objectives of
U.S. law, it is reasonable to expect U.S. authorities to rely on
those rules and recognize activities regulated under them as
compliant. We in the EU can do exactly the same * * * This is
reasonable because it accepts legal boundaries and the need for
regulators to trust and rely on each other. It is effective because
it achieves our common objective of mandatory clearing, trading and
reporting of OTC derivatives: no trade will escape the regulation.
It is efficient because it avoids subjecting the same trades and
businesses to two different sets of rules simultaneously and
expensively.”).
—————————————————————————
Unfortunately, the Proposed Guidance overreaches in many
respects and, as a result, steps on the toes of other sovereign
nations. Today’s Proposed Guidance will likely provoke these nations
to develop strict swaps rules in retaliation that unfairly and
unnecessarily burden U.S. firms.156
—————————————————————————
156 Some jurisdictions have provisions that are similar to CEA
section 2(i). For example, Article 13 of European Market
Infrastructure Regulation (“EMIR”) provides that the European
Securities and Markets Authority must prescribe technical standards
specifying the contracts that are considered to have a direct,
substantial and foreseeable effect on the European Union, or in
cases where it is necessary or appropriate to prevent the evasion of
any general applicability provisions in EMIR. See Regulation of the
European Parliament and of the Council on OTC Derivatives, Central
Counterparties and Trade Repositories, European Market
Infrastructure Regulation (Mar. 29. 2012), available at: http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm. The Commission’s overreaching interpretation of CEA section
2(i) may inspire ESMA and other regulators to interpret their
provisions in a similar manner.
—————————————————————————
Interestingly, we not only fail to harmonize internationally, we
also fail to harmonize domestically. In other words, I believe that
the Commission should take a page from the Securities and Exchange
Commission’s (“SEC”) playbook regarding implementation and the
application of swaps requirements to cross-border activities.
Recently, the SEC issued a statement of general policy (the “SEC’s
Statement”) on the sequencing of compliance dates for final rules
applicable to the security-based swaps market.157 The SEC’s
Statement presents a commonsense sequencing of the compliance dates
for the SEC’s final rules implementing the provisions of Title VII
of the Dodd-Frank Act to domestic and cross-border swaps activities.
—————————————————————————
157 See Statement of General Policy on the Sequencing of the
Compliance Dates for Final Rules Applicable to Security-Based Swaps
Adopted Pursuant to the Securities Exchange Act of 1934 and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, to be
published under 17 CFR Part 240 (June 11, 2012), available at:
http://www.sec.gov/rules/policy/2012/34-67177.pdf.
—————————————————————————
In stark contrast, the Commission is engaging in what amounts to
high-frequency regulation. I am very critical of this regulatory
approach because it generally results in regulatory uncertainty and
unintended, adverse consequences. In my view, failure to achieve
real and meaningful harmonization of the implementation and
application of swaps and security-based swaps rules will result in
inconsistencies and added compliance challenges and costs for market
participants who trade in both markets.
v. Interpretive Guidance or an Interpretive Rule?
Several times while reading drafts of the Proposed Guidance, I
had to stop, put it down, and recall that I was reading the
Commission’s proposed interpretation of CEA section 2(i)–not a
prescriptive rule. Although the Commission has taken great pains to
clarify that it is publishing guidance and a policy statement
regarding the cross-border application of the swaps provisions of
the CEA, certain elements of the Proposed Guidance are written
similar to legislative or interpretive rules instead of interpretive
guidance. For example, the Proposed Guidance states that subsequent
to registration with the Commission:
[T]he Commission expects that a non-U.S. swap dealer or non-U.S.
MSP would notify the Commission of any material changes to
information submitted in support of a comparability finding
(including, but not limited to, changes in the relevant supervisory
or regulatory regime) as the Commission’s comparability
determination may no longer be valid.158
—————————————————————————
158 Section IV.A.2 of this Proposed Guidance.
The Commission’s artful use of the terms “expect” and
“expectation” in the Proposed Guidance does not disguise the fact
that it is requiring applicants to satisfy significant ongoing
monitoring and compliance obligations in order to maintain its
comparability finding. If the Commission wanted to require a non-
U.S. swap dealer or non-U.S. MSP applicant to submit these
additional documents in connection with such applicant’s ongoing
registration-related obligations, the Commission should have
included these requirements in the swap dealer and MSP registration
rulemaking, which the Commission finalized in January of this
year.159 Instead, the Commission is issuing today’s Proposed
Guidance in a manner that is outside of the requirements set forth
in the Administrative Procedure Act.160
—————————————————————————
159 See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613 (Jan. 19, 2012).
160 See 5 U.S.C. 551 et seq.
—————————————————————————
The Proposed Order
Notwithstanding my general concerns with the Proposed Guidance,
I believe that the Commission’s Proposed Order appropriately
provides both U.S. and foreign firms with transition periods in
which to comply with the Commission’s interpretation of CEA section
2(i). As noted above, the Proposed Order would permit foreign swap
dealer and MSP registrants to delay compliance with certain entity-
level requirements and transaction-level requirements under Title
VII of the Dodd-Frank Act pending the adoption of the Commission’s
final
[[Page 41242]]
interpretive guidance regarding section 2(i). My concurrence today
comes after several days of negotiations with my fellow
commissioners. I am relieved that we are protecting the
competitiveness of U.S. firms in the Proposed Order.161 Although I
am generally supportive of the Proposed Order, I do have a couple of
more pragmatic concerns regarding the manner in which foreign swap
dealers and MSPs will comply with the Commission’s registration
requirements.
—————————————————————————
161 Under the Proposed Order, U.S. swap dealers and MSPs will
only be required to register with the Commission and to meet the
requirements under parts 20 (large swap trader reporting) and 45
(swap data recordkeeping and reporting) until December 31, 2012
before other entity-level requirements will become effective.
—————————————————————————
First, I believe the Commission should tie the expiration of
this relief to the adoption of a final exemptive order. Currently,
the Proposed Order unjustifiably ties the expiration of the relief
to the date on which the Proposed Order is published in the Federal
Register. The Proposed Order’s current expiration does not make
sense in light of the fact that potential registrants will not know
the contours of the final relief until the Commission approves a
final exemptive order. If we do not tie the expiration of relief to
the publication of the final exemptive order, are we truly providing
adequate notice and a period of time in which registrants can
comply?
Second, the Proposed Order should at least include questions
regarding how the Commission proposes to address practical
considerations regarding the registration of foreign swap dealers
and MSPs. The Commission should set out its preliminary thinking
regarding how these foreign swap dealers and MSPs will register
their associated persons and principals, in addition to addressing
concerns regarding the transfer of, and withdrawal from, Commission
registration.
I have included a few questions at the end of my statement to
address these practical concerns.
Do Not Ignore the Significant Cost Implications
I would like to make one closing but important point regarding
the potential costs of today’s Proposed Guidance. While I understand
that the CEA only requires the Commission to consider the costs and
benefits of its regulations and orders–not interpretive guidance–
the Proposed Guidance, once finalized will result in significant
costs to the swaps industry. The implications of the Commission’s
adoption of interpretive guidance on cross-border swaps activities
will be nothing at which to laugh. Firms will incur significant
operational, legal and administrative expenses in connection with
the registration and ongoing compliance with the Commission’s swaps
regulations. Not to mention, many firms that operate through
branches may feel compelled to convert into, and separately
capitalize, affiliates in order to limit the impact of the
Commission’s interpretation.
Accordingly, I encourage the Commission to prepare a report
separate from its adoption of the Proposed Guidance, which analyzes
the costs attributable to the breadth of the Commission’s new
authority under CEA section 2(i). This report will help inform
market participants who seek guidance as to the potential costs of
trading swaps in the United States. More importantly, the report
will help inform the Commission in connection with the issuance of
future rulemakings under Title VII of the Dodd-Frank Act.
Conclusion
I am relieved that the Commission is finally issuing today’s
proposals. Commission staff has spent well over one year preparing
the proposals before us today. The publication of the Commission’s
interpretation of CEA section 2(i) is crucial. I hope that the
release of these proposals will enable market participants to
determine how the international rules and expansive international
oversight of the Dodd-Frank Act might impact their activities in the
United States and internationally. I want to ensure that U.S. firms
are placed on a fair and competitive playing field that offers no
opportunity for regulatory arbitrage. I am mindful that a seamless
regulatory net can only be achieved through international
cooperation and coordination.
In summary, I believe the Commission’s final interpretive
guidance should reflect: (1) Principles of international law and
comity; (2) a clear understanding of the implications of the
Proposed Guidance so that the Commission can make an informed
decision regarding the various policy alternatives; and (3) parity
to ensure that U.S. firms are not unfairly disadvantaged vis-
[agrave]-vis their foreign competitors. I fear that if we adopt the
Proposed Guidance as final, the Commission will take an
imperialistic view of the swaps market. I also remain concerned
regarding the Commission’s shaky legal analysis.
I look forward to reviewing the myriad of comments submitted in
response to today’s proposals. I implore market participants, as
well as domestic and foreign regulators, to share their views and
let us know how to harmonize our efforts so that we collectively can
develop an internationally consistent and complementary approach to
address the cross-border regulation of the swaps markets.
Questions
1. Please share your views regarding the Commission’s proposed
effective date for the relief set forth in the Proposed Order.
Should the expiration of the effective date be extended or
shortened?
2. Should the Commission permit swap dealer and MSP registrants
to conditionally de-register following the expiration of the
effective date of the Proposed Order? If so, under what conditions
should the Commission allow de-registration?
3. Should the Commission permit swap dealer and MSP registrants
to transfer their registration to a majority-owned affiliate or
subsidiary? If so, under what circumstances should the Commission
allow such a transfer?
[FR Doc. 2012-16496 Filed 7-11-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: July 12, 2012
[ad_2]
Source link
