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Federal Register, Volume 77 Issue 134 (Thursday, July 12, 2012)[Federal Register Volume 77, Number 134 (Thursday, July 12, 2012)]
[Proposed Rules]
[Pages 41110-41120]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16498]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN 3038-AD85
Exemptive Order Regarding Compliance With Certain Swap
Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed exemptive order and request for comment.
———————————————————————–
SUMMARY: The Commodity Futures Trading Commission (“Commission”) is
proposing to grant, pursuant to section 4(c) of the Commodity Exchange
Act (“CEA”), temporary exemptive relief in order to allow non-U.S.
swap dealers and non-U.S. major swap participants to delay compliance
with certain entity-level requirements of the CEA (and Commission
regulations promulgated thereunder), subject to specified conditions.
Additionally, with respect to transaction-level requirements of the CEA
(and Commission regulations promulgated thereunder), the relief would
allow non-U.S. swap dealers and non-U.S. major swap participants, as
well as foreign branches of U.S. swap dealers and major swap
participants, to comply only with those requirements as may be required
in the home jurisdiction of such non-U.S. swap dealers and non-U.S.
major swap participants (or in the case of foreign branches of a U.S.
swap dealer or U.S. major swap participant, the foreign location of the
branch) for swaps with non-U.S. counterparties. This relief would
become effective concurrently with the date upon which swap dealers and
major swap participants must first apply for registration and expire 12
months following the publication of this proposed order in the Federal
Register. Finally, U.S. swap dealers and U.S. major swap participants
may delay compliance with certain entity-level requirements of the CEA
(and
[[Page 41111]]
Commission regulations promulgated thereunder) from the date upon which
swap dealers and major swap participants must apply for registration
until January 1, 2013.
DATES: Comments must be received on or before August 13, 2012.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD85,
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 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
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1 See 17 CFR 145.9.
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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 Procedures Act 2 and other
applicable laws, and may be accessible under the Freedom of Information
Act.3
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2 5 U.S.C. 551, et seq.
3 5 U.S.C. 552.
FOR FURTHER INFORMATION CONTACT: 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]; Carlene S. Kim,
Assistant General Counsel, Office of General Counsel, (202) 418-5613,
[email protected], Commodity Futures Trading Commission, Three Lafayette
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Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”),4 which amended the CEA and established a new regulatory
framework for swaps. The legislation was enacted to reduce systemic
risk, increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers (each, an
“SD”) and major swap participants (each, an “MSP”); (2) imposing
clearing and trade execution requirements on standardized derivative
products; (3) creating rigorous recordkeeping and data reporting
regimes with respect to swaps, including real-time public reporting;
and (4) enhancing the Commission’s rulemaking and enforcement
authorities over all registered entities, intermediaries, and swap
counterparties subject to the Commission’s oversight.
—————————————————————————
4 See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
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To implement the Dodd-Frank Act, the Commission has promulgated
rules pursuant to the various new provisions of the CEA, including
those specifically applicable to SDs and MSPs. Examples of such
provisions include CEA section 4s(a) (governing registration of SDs and
MSPs) 5 and section 4s(j) (requiring SDs and MSPs to establish a
comprehensive internal risk management program).6 Rules to implement
other requirements in the provisions of the CEA have been proposed but
not finalized. These include CEA section 4s(e) (governing capital and
margin requirements for SDs and MSPs) 7 and CEA section 4s(i)
(relating to the timely and accurate processing and netting of swaps
entered by SDs and MSPs).8
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5 7 U.S.C. 6s(a).
6 7 U.S.C. 6s(j).
7 7 U.S.C. 6s(e).
8 7 U.S.C. 6s(i).
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Further, the Commission approved for publication a proposed
interpretive guidance and policy statement (“Cross-Border Interpretive
Guidance”) on the application of the CEA’s swap provisions and the
implementing Commission regulations to cross-border activities and
transactions.9 A brief overview of the Cross-Border Interpretive
Guidance follows.
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9 [CITE TO THE CB GUIDANCE RELEASE]
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II. Cross-Border Interpretive Guidance
To provide greater clarity to market participants regarding their
obligations under the Dodd-Frank Act, the Commission has published the
Cross-Border Interpretive Guidance. Broadly speaking, the Cross-Border
Interpretive Guidance sets forth the manner in which the Commission
proposes to interpret section 2(i) of the CEA 10 as it applies to the
requirements under the Dodd-Frank Act and the Commission’s regulations
promulgated thereunder regarding cross-border swap activities.
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10 Section 722(d) of the Dodd-Frank Act, which amended the CEA
to add a new section 2(i), provides that the swaps provisions of the
CEA apply to cross-border transactions and activities when certain
conditions are met, namely, when such activities have a “direct and
significant” connection with activities in, or effect on, commerce
in the United States or when they contravene Commission rulemaking.
See 7 U.S.C. 2(i).
—————————————————————————
Specifically, in the Cross-Border Interpretive Guidance, the
Commission described the general manner in which it proposes to
consider: (1) Whether a non-U.S. person’s swap dealing activities are
sufficient to require registration as a “swap dealer”,11 as further
defined in a joint release adopted by the Commission and the SEC
(collectively, the “Commissions”); (2) whether a non-U.S. person’s
swap positions are sufficient to require registration as a “major swap
participant”,12 as further defined in a joint release adopted by the
Commissions; 13 and (3) the treatment of foreign branches, agencies,
affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-
U.S. SDs. The Cross-Border Interpretive Guidance also proposes, in
certain circumstances, to permit a non-U.S. SD or non-U.S. MSP to
comply with comparable and comprehensive foreign regulatory
requirements in order to satisfy applicable statutory and regulatory
requirements under Title VII of the Dodd-Frank Act.14 Finally, the
Cross-Border Interpretive Guidance sets forth the manner in which the
Commission proposes to interpret section 2(i) of the CEA as it applies
to the clearing,
[[Page 41112]]
trading, and certain reporting requirements under the Dodd-Frank Act
with respect to swaps between counterparties that are not SDs or MSPs.
—————————————————————————
11 7 U.S.C. 1a(49).
12 7 U.S.C 1a(33).
13 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.
14 The Cross-Border Interpretive Guidance 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.
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III. Proposed Relief
A. Scope of Relief
In order to ensure an orderly transition to the Dodd-Frank Act’s
regulatory regime and to provide certainty to market participants and
in response to commenters’ requests,15 the Commission is proposing to
provide temporary exemptive relief pursuant to section 4(c) of the
CEA.16 Specifically, the relief would allow non-U.S. SDs and non-U.S.
MSPs 17 to delay compliance with certain Entity-Level Requirements
(as defined below) under the Dodd-Frank Act (and the Commission’s
regulations thereunder), subject to specified conditions described
herein. Under the proposed relief, non-U.S. SDs and non-U.S. MSPs would
be afforded additional time to prepare for the application of the
Entity-Level Requirements with assurances that they would not be in
violation of the CEA as a result. This would, in turn, facilitate an
orderly transition to the Entity-Level Requirements of the Dodd-Frank
Act regulatory regime, while minimizing undue disruptions to current
market operations.
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15 See Letter from Securities Industry and Financial Markets
Association and Institute of International Bankers, dated, April 25,
2012, available on the Commission’s Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
16 7 U.S.C. 6(c).
17 As used in this proposed exemptive order, the term “non-
U.S. swap dealer” refers to swap dealers that are non-U.S.-based as
well as those that are foreign affiliates of a U.S. person.
Similarly, the term “non-U.S. MSP” refers to MSPs that are non-
U.S.-based, as well as foreign affiliates of a U.S. person.
—————————————————————————
An exception to the foregoing relief from the Entity-Level
Requirements relates to the Swap Data Repository (“SDR”) reporting
requirement 18 and part 20 of the Commission’s regulations (“Large
Trader Reporting”). Specifically, non-U.S. SDs and non-U.S.MSPs would
be required to comply with the SDR reporting requirement for all swaps
with U.S. person counterparties (“U.S. counterparties”), upon its
compliance date. Under the proposed exemptive order, the reporting
obligations of an SD under the Large Trader Reporting regulations would
apply (or not apply) in the same manner as the SDR reporting
requirements would apply (or not apply) to such SD.
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18 See 7 U.S.C. 2(a)(13)(G). The Commission believes that the
data reported to, and collected by, SDRs will be important to its
ability to effectively monitor and address the risk exposures of
individual market participants (including SDs and MSPs) and the
concentration of risk within the swaps market more generally.
—————————————————————————
However, under the proposed exemptive order, non-U.S. SDs and non-
U.S. MSPs that are not affiliates or subsidiaries of a SD would be
permitted to delay compliance with the SDR reporting requirement for
swaps with non-U.S. counterparties. The Commission believes that this
approach would facilitate such registrants’ phasing in of their
compliance with the SDR reporting requirement, without substantially
undermining the regulatory objectives of SDR reporting. The Commission
is not proposing to extend similar relief to non-U.S. SDs and non-U.S.
MSPs that are affiliates or subsidiaries of a U.S. SD given the
Commission’s supervisory interest in data related to the swap
activities of non-U.S. SDs and non-U.S. MSPs that are part of a U.S.-
based affiliated group.
The Commission also proposes to grant, with respect to Transaction-
Level Requirements (as defined below), temporary relief to non-U.S. SDs
and non-U.S. MSPs, as well as foreign branches of U.S. SDs and U.S.
MSPs, for swaps with a non-U.S. counterparty in order that they comply
only with the regulations as may be required in the home jurisdiction
of the non-U.S. SD or non-U.S. MSP (or in the case of foreign branches
of a U.S. SD or a U.S. MSP, the foreign location of the branch).19
With respect to swaps with a U.S. counterparty, however, these
registrants would be required to comply with all applicable
Transaction-Level Requirements that are in effect. Given the nature of
these requirements (i.e., they may be applied on a transaction-by-
transaction basis) and their importance to the protection of U.S.
counterparties, the Commission would require non-U.S. SDs and non-U.S.
MSPs, as well as foreign branches of U.S. SDs and U.S. MSPs, to comply
with all applicable Transaction-Level Requirements with respect to such
counterparties.20
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19 Under the proposed Cross-Border Interpretive Guidance and
for purposes of this order, a foreign branch of a U.S. person is
deemed a U.S. person. Accordingly, swaps entered between a foreign
branch of a U.S. person with another foreign branch of a U.S. person
would be subject to the Dodd-Frank Transaction-Level Requirements.
The Commission solicits comments on whether, for purposes of this
order, substituted compliance should be permitted for such swaps,
which effectively would allow foreign branches to comply only with
the regulations as may be required in the foreign location of the
branches.
20 This relief does not cover swaps between non-SDs and non-
MSPs. Any such swaps involving a U.S. counterparty would be subject
to applicable Dodd-Frank Act requirements as set forth in the Cross-
Border Interpretive Guidance.
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The relief for non-U.S. SDs and non-U.S. MSPs (and foreign branches
of U.S. SDs and U.S. MSPs with respect to Transaction-Level
Requirements) would become effective on the compliance date for
registration of SDs and MSPs and expire 12 months following the
publication of this proposed order in the Federal Register. The
Commission is committed to an orderly transition to the Dodd-Frank
Act’s regulatory regime. In furtherance of that objective, the
Commission intends to consider extending the effectiveness of this
exemptive relief at its expiration based on, among other things,
whether and when substituted compliance with foreign regulatory
requirements for non-U.S. persons is available.
With respect to U.S. SDs and U.S. MSPs, the Commission proposes to
permit such registrants to delay compliance with certain Entity-Level
Requirements under the Dodd-Frank Act (and the Commission’s regulations
thereunder) until January 1, 2013. Under the proposed relief, U.S. SDs
and U.S. MSPs would be afforded additional time to prepare for the
application of the Entity-Level Requirements so as to ensure an orderly
transition, while minimizing undue disruptions to current market
operations. This relief with respect to Entity-Level Requirements,
however, does not extend to swap data recordkeeping, SDR reporting or
Large Trader Reporting requirements. That is, U.S. SDs and U.S. MSPs
would be required to comply with the swap data recordkeeping, SDR and
Large Trader Reporting requirements for all swaps. Finally, the
Commission reiterates that a U.S. person would be expected to apply for
registration as an SD or MSP by the effective date of the Swap
Definitional Rule.
Finally, the relief for U.S. SDs and U.S. MSPs (with respect to
Entity-Level Requirements) would be effective until January 1, 2013.
The Commission believes that allowing U.S. registrants additional time
as specified is appropriate in light of the importance of implementing
the Dodd-Frank Act regulatory regime as expeditiously as possible while
taking due consideration of the need for U.S. registrants to effect an
orderly transition to the new regulatory regime.
B. Conditions to Relief
Under this proposal, a non-U.S. SD or non-U.S. MSP seeking relief
from the specified Entity-Level Requirements must satisfy certain
conditions. First, the non-U.S. person that is required to register as
an SD or MSP must apply to become registered as such when registration
is required. Second, within
[[Page 41113]]
60 days of applying for registration, the non-U.S. applicant would be
required to submit to the National Futures Association (“NFA”) a
compliance plan addressing how it plans to comply, in good faith, with
all applicable requirements under the CEA and related rules and
regulations upon the effective date of the Cross-Border Interpretive
Guidance.21
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21 Additionally, a U.S. SD or U.S. MSP whose foreign branch
seeks to rely on the exemptive relief with respect to swaps with
non-U.S. counterparties must submit a compliance plan addressing how
it plans to comply, in good faith, with all applicable Transaction-
Level Requirements under the CEA upon the expiration of this
proposed exemptive order.
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At a minimum, such plan would provide, for each Entity-Level and
Transaction-Level Requirement, a description of: (1) Whether the non-
U.S. SD or non-U.S. MSP plans to comply with each of the Entity-Level
and Transaction-Level Requirements that are in effect at such time or
plans to seek a comparability determination and rely on compliance with
one or more of the requirements of the home jurisdiction, as
applicable; and (2) to the extent that the non-U.S. SD or non-U.S. MSP
would seek to comply with one or more of the requirement(s) of the home
jurisdiction, a description of such requirement(s). The Commission
notes that such person may modify or alter the compliance plan as
appropriate, provided that they submit any such amended plan to
NFA.22
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22 The Commission anticipates that compliance plans would be
updated on a periodic basis as new regulations are adopted and come
into effect. Such updates should be submitted to NFA. Any such
submission should identify the name of the registrant, the fact that
the submission is made in reliance upon and pursuant to this
exemptive relief, and contact name and information.
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The Commission further notes that the proposed relief does not
limit the applicability of any CEA provision or Commission regulation
to any person, entity or transaction except as provided in the proposed
order. In addition, the proposed relief would not affect any effective
date or compliance date set out in any specific Dodd-Frank Act
rulemaking by the Commission.
IV. Section 4(c) of the Commodity Exchange Act
Section 4(c)(1) of the CEA authorizes the Commission to “promote
responsible economic or financial innovation and fair competition” by
exempting any transaction or class of transaction from any of the
provisions of the CEA (subject to certain exceptions) where the
Commission determines that the exemption would be consistent with the
public interest.23 Under section 4(c)(2) of the CEA, the Commission
may not grant exemptive relief unless it determines that: (1) The
exemption is appropriate for the transaction and consistent with the
public interest; (2) the exemption is consistent with the purposes of
the CEA; (3) the transaction will be entered into solely between
“appropriate persons”; 24 and (4) the exemption will not have a
material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory
responsibilities under the CEA.25 The Commission may grant such an
exemption by rule, regulation or order, after notice and opportunity
for hearing, and may do so on application of any person or on its own
initiative. In enacting section 4(c), Congress noted that the goal of
the provision is to give the Commission a means of providing certainty
and stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.26
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23 7 U.S.C. 6(c)(1).
24 CEA section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the
term “appropriate persons” a number of specified categories of
persons deemed appropriate under the CEA for entering into swaps
exempted by the Commission under section 4(c). This includes persons
the Commission determines to be appropriate in light of their
financial or other qualifications, or the applicability of
appropriate regulatory protections.
25 CEA Section 4(c)(2), 7 U.S.C. 6(c)(2).
26 See “Notice Regarding the Treatment of Petitions Seeking
Grandfather Relief for Trading Activity Done in Reliance Upon
Section 2(h)(1)-(2) of the Commodity Exchange Act,” 75 FR 56512,
56513, Sept. 16, 2010.
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As noted earlier, the Commission is proposing to issue this relief
in order to ensure an orderly transition to the Dodd-Frank Act
regulatory regime and to provide greater legal certainty to market
participants regarding their obligations under the CEA with respect to
their cross-border activities. The proposed relief also would advance
the congressional mandate concerning harmonization of international
standards, consistent with section 752(a) of the Dodd-Frank Act. In
that section, Congress directed that, in order to “promote effective
and consistent global regulation of swaps and security-based swaps,”
the Commission, “as appropriate, shall consult and coordinate with
foreign regulatory authorities on the establishment of consistent
international standards with respect to the regulation” of swaps and
security-based swaps.27 The proposed relief, by providing U.S. and
non-U.S. registrants the latitude necessary to develop and modify their
compliance plans as the regulatory structure in their home jurisdiction
changes, would promote greater regulatory consistency and coordination
with international regulators.
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27 See section 752(a) of the Dodd-Frank Act.
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The Commission emphasizes that the proposed order is temporary in
duration and reserves the Commission’s anti-fraud and anti-manipulation
enforcement authority. As such, the Commission believes that the
proposed order would be consistent with the public interest and
purposes of the CEA. For similar reasons, the Commission believes that
the proposed order would not have a material adverse effect on the
ability of the Commission or any contract market to discharge its
regulatory or self-regulatory duties under the CEA. Finally, the
Commission believes that the order would be limited to appropriate
persons within the meaning of section 4c(3)(K) since the SDs and MSPs
eligible for the relief are likely to be financial institutions active
in the swaps market.28 The Commission seeks comment on whether the
proposed temporary exemptive order is consistent with the public
interest and the other requirements of CEA section 4(c).
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28 CEA Section 4(c)(3)(K), 7 U.S.C. 6(c)(3)(K) (appropriate
persons may include such “other persons that the Commission
determines to be appropriate in light of their financial or other
qualifications, or the applicability of appropriate regulatory
protections”).
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V. Terms “U.S. Person,” “Entity-Level Requirements,” and
“Transaction-Level Requirements”
A. U.S. Person
In the Cross-Border 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
persons have the relevant effect on U.S. commerce. Specifically, as
proposed, the term “U.S. person” would include, but not be limited
to: (1) Any natural person who is a resident of the United States; (2)
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 either (A)
organized or incorporated under the laws of the United States 29 or
having its principal place of business in the United States (“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
[[Page 41114]]
owners is a U.S. person; (3) any individual account (discretionary or
not) where the beneficial owner is a U.S. person; (4) 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 or equity interest is held, directly or indirectly,
by a U.S. person(s); (5) 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; (6) a pension
plan for the employees, officers, or principals of a legal entity with
its principal place of business inside the United States; and (7) an
estate or trust, the income of which is subject to United States income
tax regardless of source.
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29 United States would mean 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.
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Under the interpretation of the term “U.S. person” in the Cross-
Border Interpretive Guidance, a foreign branch or agency of a U.S.
person would be covered by virtue of the fact that it is 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. Solely for purposes
of the temporary exemptive relief provided in the proposed order, the
Commission adopts the interpretation of the term “U.S. person” as set
forth in the Cross-Border Interpretive Guidance.
B. Entity-Level and Transaction-Level Requirements
Solely for purposes of the temporary exemptive relief provided in
the proposed order, the Commission incorporates the proposed categories
of Entity-Level and Transaction-Level Requirements, as set forth in the
Cross-Border Interpretive Guidance.
1. Entity-Level Requirements
In the Cross-Border Interpretive Guidance, the Commission proposes
to divide the Dodd-Frank Act requirements that would apply to SDs and
MSPs into those that: (1) Apply to an SD or MSP at an entity level
(i.e., to the firm as a whole); and (2) apply at a transactional level
(i.e., to specific transactions). Specifically, the entity-level
requirements under Title VII of the Dodd-Frank Act and the Commission’s
regulations promulgated thereunder relate to: (1) Capital adequacy; (2)
chief compliance officer; (3) risk management; (4) swap data
recordkeeping; (5) reporting to an SDR; and (6) physical commodity
swaps reporting (collectively, the foregoing requirements are referred
to herein as “Entity-Level Requirements”). 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 an SD 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. In short, these requirements relate to risks
to a firm as a whole.
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.30 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 be under the supervision of a strong
and independent function. These internal controls-related
requirements–namely, the requirements relating to chief compliance
officer, risk management, swap data recordkeeping–are designed to
serve that end.
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30 By way of illustration, consistent with the purpose of the
capital requirement, which is to reduce the likelihood and cost of
an SD’s default by requiring a financial cushion, an SD’s or MSP’s
capital requirements would be set on the basis of its overall
portfolio of assets and liabilities.
—————————————————————————
No less important to the financial integrity of a firm is the SDR
reporting requirement. SDR reporting ensures the Commission access to
the information it needs to effectively supervise the risk exposure of
its registrants and, thus, serves to lower their risk of failure. Given
the functions of these reporting requirements, each must be applied on
a firm-wide basis, across all swaps, in order to ensure that the
Commission has a comprehensive and accurate picture of its activities.
Otherwise, the intended benefits of these Entity-Level Requirements
would be significantly compromised, if not undermined.
Each of the Entity-Level Requirements is summarized below.
i. Capital requirements
Section 4s(e)(3)(A) of the CEA specifically directs the Commission
to set capital requirements for SDs and MSPs that are not subject to
the capital requirements of prudential regulators (hereinafter referred
to as “non-bank SDs and MSPs”).31 Pursuant to section 4s(e)(3), the
Commission proposed regulations, which would require non-bank SDs and
MSPs to hold a minimum level of adjusted net capital (i.e.,
“regulatory capital”) based on whether the non-bank SD or MSP is: (1)
Also a futures commission merchant (“FCM”); (2) not an FCM, but is a
non-bank subsidiary of a bank holding company; or (3) neither an FCM
nor a non-bank subsidiary of a bank holding company.32
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31 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 SDs and MSPs, and applies a bifurcated
approach that requires each SD and MSP for which there is a
prudential regulator to meet the capital and margin requirements
established by the applicable prudential regulator, and each SD 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 (“FCMs”) would be exempt
from the Commission’s capital requirements, and would comply instead
with Federal Reserve Board requirements applicable to SIFIs, while
non-bank (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. 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).
32 See 7 U.S.C. 6s(e). See also 76 FR 27802, May 12, 2011,
available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2011-10881a.pdf. “The
Commission’s capital proposal for [SDs] and MSPs includes a minimum
dollar level of $20 million. A non-bank [SD] 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. [An SD] 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] Sec. 1.17. In
addition, an [SD] 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 [SD’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 SD and MSP designate an individual
to serve as its chief compliance officer (“CCO”) and specifies
certain duties of the CCO.33 Pursuant to section 4s(k), the
Commission recently adopted Sec. 3.3, which requires SDs 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 SD or MSP, as well as preparing
and filing (with the Commission) a certified report of compliance with
the CEA.34
—————————————————————————
33 See 7 U.S.C. 6s(k).
34 See 17 CFR 3.3.
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[[Page 41115]]
iii. Risk Management
Section 4s(j) of the CEA requires each SD and MSP to establish
internal policies and procedures designed to, among other things,
address risk management, monitor compliance with position limits,
prevent conflicts of interest, and promote diligent supervision, as
well as maintain business continuity and disaster recovery
programs.35 The Commission recently adopted implementing regulations
(Sec. Sec. 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and
23.607).36 The Commission also recently adopted Sec. 23.609, which
requires certain risk management procedures for SDs or MSPs that are
clearing members of a derivatives clearing organization (“DCO”).37
—————————————————————————
35 7 U.S.C. 6s(j).
36 17 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and
23.607; “Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants,” 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).
37 17 CFR 23.609, “Customer Clearing Documentation, Timing of
Acceptance for Clearing, and Clearing Member Risk Management,” 77
FR 21278 (Apr. 9, 2012). In the same release, the Commission also
adopted Sec. 23.608, which prohibits SDs providing clearing
services to customers from entering into agreements that would: (1)
Disclose the identity of a customer’s original executing
counterparty; (2) limit the number of counterparties a customer may
trade with; (3) impose counterparty-based position limits; (4)
impair a customer’s access to execution of a trade on terms that
have a reasonable relationship to the best terms available; or (5)
prevent compliance with specified time frames for acceptance of
trades into clearing.
—————————————————————————
iv. Swap Data Recordkeeping
CEA section 4s(f)(1)(B) requires SDs and MSPs to keep books and
records for all activities related to their business.38 Section
4s(g)(1) requires SDs and MSPs to maintain trading records for each
swap and all related records, as well as a complete audit trail for
comprehensive trade reconstructions.39 Pursuant to these provisions,
the Commission adopted Sec. Sec. 23.201 and 23.203, which require SDs
and MSPs to keep records including complete transaction and position
information for all swap activities, including documentation on which
trade information is originally recorded.40 SDs 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 SDR reporting rules (“transition
swaps”).41
—————————————————————————
38 7 U.S.C. 6s(f)(1)(B).
39 7 U.S.C. 6s(g)(1).
40 17 CFR. 23.201and 23.203; “Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants,” 77
FR 20128, Apr. 3, 2012. These requirements also require an SD to
provide the Commission with regular updates concerning its financial
status, as well as information concerning internal corporate
procedures.
41 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.42 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.43 SDs 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.
—————————————————————————
42 7 U.S.C. 2(a)(13)(G).
43 7 U.S.C. 24a.
—————————————————————————
vi. Physical Commodity Swaps Reporting (Large Trader Reporting)
CEA section 4t 44 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
45 for the Commission to establish position limits, as appropriate,
for physical commodity swaps. Pursuant thereto, the Commission adopted
part 20 rules requiring SDs, among other entities, to submit routine
position reports on certain physical commodity swaps and swaptions.46
Just as with SDR reporting, part 20 reporting serves the Dodd-Frank
Act’s objective to enhance regulatory oversight of the swaps market. In
fact, a stated reason for the Commission’s adoption of part 20 was its
ability to, in effect, perform the function of physical commodity SDRs
until such time as such entities are operational and have the ability
to convert swaps into positions.47
—————————————————————————
44 7 U.S.C. 6t.
45 7 U.S.C. 6a.
46 “Large Trader Reporting for Physical Commodity Swaps,” 76
FR 43851, July 22, 2011.
47 See 76 FR 43851, 43852.
—————————————————————————
2. Transaction-Level Requirements
The transaction-level requirements under Title VII of the Dodd-
Frank Act and the Commission’s regulations (proposed or adopted)
include: (1) Clearing and swap processing; (2) margining (and
segregation) for uncleared swaps; (3) trade execution; (4) trade
confirmation; (5) swap trading relationship documentation; (6) real-
time public reporting; (7) portfolio reconciliation and compression;
(8) daily trading records; and (9) external business conduct standards
(collectively, the foregoing requirements are referred to herein as
“Transaction-Level Requirements”). Broadly speaking, the Transaction-
Level Requirements closely relate to the financial protection of SDs,
MSPs and their counterparties, pre- and post-trade transparency, and
other market-oriented regulatory safeguards.
i. Clearing and Swap Processing
Section 2(h)(1) 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.48 Closely interlocked with the clearing
requirement are the following swap processing requirements: (1) The
recently finalized Sec. 23.506, which requires SDs and MSPs to submit
swaps promptly for clearing; and (2) Sec. 23.610, which establishes
certain standards for swap processing by SDs and MSPs that are clearing
members of a DCO.49
—————————————————————————
48 7 U.S.C. 2(h)(1), (7).
49 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 SDs and MSPs that trade in swaps that are not
cleared.50 In addition, with
[[Page 41116]]
respect to swaps that are not submitted for clearing, section 4s(l)
requires that an SD 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.
—————————————————————————
50 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 SDs and
MSPs, and applies a bifurcated approach that requires each SD and
MSP for which there is a prudential regulator to meet the margin
requirements established by the applicable prudential regulator, and
each SD 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 SDs 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 traded on a designated contract market (“DCM”) or
swap execution facility (“SEF”), unless no DCM or SEF makes the swap
available to trade.51
—————————————————————————
51 See 7 U.S.C. 2(h)(8).
—————————————————————————
iv. Swap Trading Relationship Documentation
CEA Section 4s(i) requires each SD 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 SDs and
MSPs to “establish, maintain and enforce written policies and
procedures” to ensure that the SD or MSP executes written swap trading
relationship documentation.52 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 SD or MSP and its counterparty; credit
support arrangements; investment and rehypothecation terms for assets
used as margin for uncleared swaps; and custodial arrangements.53
Further, the swap trading relationship documentation requirement
applies to all swaps with registered SDs and MSPs.
—————————————————————————
52 See “Swap Trading Relationship documentation Requirements
for Swap Dealers and Major Swap Participants, 76 FR 6715,” Feb. 8,
2011.
53 The requirements under section 4s(i) relating to trade
confirmations is a Transaction-Level Requirement. Accordingly,
proposed Sec. 23.504(b)(2), which requires an SD’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 SDs and MSPs. Pursuant to CEA section 4s(i), the Commission
proposed regulations Sec. Sec. 23.502 and 23.503, which would require
SDs and MSPs to perform portfolio reconciliation and compression,
respectively, for all swaps.54 Proposed Sec. 23.503(c) would require
all SDs and MSPs to participate in bilateral compression exercises and/
or multilateral portfolio compression exercises conducted by their
self-regulatory organizations or DCOs of which they are members.55
Further, participation in multilateral portfolio compression exercises
is mandatory for dealer-to-dealer trades.
—————————————————————————
54 See “Confirmation, Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap Dealers and Major Swap
Participants,” 75 FR 81519, Dec. 28, 2010.
55 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.56 In accordance with this mandate, the Commission
promulgated part 43 rules on December 20, 2011, which provide that all
“publicly reportable swap transactions” must be reported and publicly
disseminated.57
—————————————————————————
56 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.
57 Part 43 defines a “publicly reportable swap transaction”
as (1) 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 (2) 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 Real-Time Public Reporting of Swap
Transaction Data, 77 FR 1182, Jan. 9, 2012.
—————————————————————————
vii. Trade Confirmation
Section 4s(i) of the CEA 58 requires that each SD 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.59
—————————————————————————
58 7 U.S.C. 6s(i).
59 See 17 CFR 23.501; “Confirmation, Portfolio
Reconciliation, and Portfolio Compression Requirements for Swap
Dealers and Major Swap Participants,” 75 FR 81519, Dec. 28, 2010.
—————————————————————————
viii. Daily Trading Records
Pursuant to CEA section 4s(g)(1), the Commission adopted Sec.
23.202, which requires SDs 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 SD or MSP.60
—————————————————————————
60 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 SDs and MSPs in dealing with their
counterparties in entering into swaps.61
—————————————————————————
61 See 7 U.S.C. 6s(h). See also 77 FR 9734, 9822-29.
—————————————————————————
VI. Request for Comment
The Commission requests comment on all aspects of this proposed
exemptive order.
VII. Related Matters
A. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act (“PRA”) 62 imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number. Part of this proposed rulemaking would result in
new collection of information requirements within the meaning of the
PRA. The Commission therefore is required to submit this proposal to
the Office of Management and Budget (“OMB”) for review and approval
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Under this
proposal, certain registrants claiming relief from the specified
Entity-Level Requirements and Transaction-Level Requirements would be
required to satisfy certain conditions that have PRA implications. The
Commission will, by separate action, publish in the Federal Register a
notice and request for comments on the paperwork burden associated with
this exemptive order in accordance with 5 CFR 1320.8. If approved, this
new collection of information will be mandatory.
—————————————————————————
62 44 U.S.C. 3501 et seq.
—————————————————————————
[[Page 41117]]
B. Consideration of Costs and Benefits
Section 15(a) of the CEA 63 requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its own discretionary determinations with respect to the
section 15(a) factors.
—————————————————————————
63 7 U.S.C. 19(a).
—————————————————————————
Summary of the Proposed Exemption
As discussed above, for a non-U.S. SD or non-U.S. MSP (or U.S.
applicant relating to transaction-level requirements in the case of a
branch of a U.S. SD) that has submitted a compliance plan describing
how it will come into compliance with the swap requirements of the CEA
as they become effective, the proposed exemptive order would delay the
compliance date for certain Entity-Level Requirements and, to a more
limited extent, Transaction-Level Requirements. An important exception
to the foregoing is compliance with the CEA requirement regarding SDR
reporting and the Large Trader Reporting requirement. For those
requirements, non-U.S. SDs and non-U.S. MSPs must comply without delay
with respect to transactions with U.S. counterparties.
With respect to transactions with a U.S. counterparty, non-U.S.
registrants would be required to comply with all Transaction-Level
Requirements that are in effect. With respect to transactions with a
non-U.S. counterparty, the non-U.S. SD or non-U.S. MSP, as well as
foreign branches of U.S. SDs and U.S. MSPs, need only comply with such
regulations as may be required by the home jurisdiction of such non-
U.S. registrant (or in the case of a branch, the foreign location of
the branch). U.S. SDs and U.S. MSPs would be permitted to delay
compliance with Entity-Level Requirements, except the swap data
recordkeeping, SDR reporting and Large Trader Reporting requirements.
Costs
As discussed above, the proposed order is exemptive in that it
would provide eligible persons with relief in the form of additional
time with which to comply with certain regulatory requirements. As with
any exemptive order, the proposed order is permissive–eligible persons
are not required to avail themselves of the exemptive relief provided.
Accordingly, the Commission assumes that an entity will rely on the
proposed exemption only if the anticipated benefits warrant the costs
attendant to the condition that requires the filing of a compliance
plan. Although there is significant uncertainty in the number of swap
entities that will seek to register as SDs and MSPs, as well as the
number of swap entities that will submit a compliance plan in order to
obtain exemptive relief, the Commission believes it is reasonable to
estimate that between 40 and 80 non-U.S. SDs and MSPs will submit
compliance plans.64 The average cost of preparing and submitting the
required compliance plan for such non-U.S. SDs and MSPs initially is
estimated to be approximately $31,190 per registrant, or a total
aggregate cost of between $1,247,600 (assuming that 40 SDs and MSPs
submit a compliance plan) and $2,495,200 (assuming that 80 SDs and MSPs
submit a compliance plan). This estimate is based on the hourly cost of
personnel that are capable of evaluating both Commission and home
country regulations in light of the non-U.S. persons’ operations.65
Further, the condition that requires the filing of a compliance plan is
not static–that is, the condition requires that the non-U.S. person
submit, if necessary, a revised plan to account for any material
changes since the filing of the initial plan. The Commission estimates
that in most cases the cost of submitting a revised plan or plans will
be the same as the cost of preparing and submitting the initial plan.
—————————————————————————
64 The Commission currently estimates that approximately 125
entities will be covered by the definitions of the terms “swap
dealer” and “major swap participant.” 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, 30713, May 23,
2012. However, not all of these entities are eligible for or will
seek exemptive relief.
65 Although different registrants may choose to staff
preparation of the compliance plan with different personnel,
Commission staff estimates that, on average, an initial compliance
plan could be prepared and submitted with 70 hours of attorney time,
as follows: 10 hours for a senior attorney at $830/hour, 30 hours
for a mid-level attorney at $418/hour, and 30 hours for a junior
attorney at $345/hour. To estimate the hourly cost of senior and
junior-level attorney time, Commission staff consulted with a law
firm that has substantial expertise in advising clients on similar
regulations. For the hourly cost of the mid-level attorney,
Commission staff reviewed data contained in Securities Industry and
Financial Markets Association (“SIFMA”), Report on Management and
Professional Earnings in the Securities Industry, Oct. 2011, for New
York, and adjusted by a factor for overhead and other benefits,
which the Commission has estimated to be 1.3.
—————————————————————————
In addition, the Commission estimates that an additional 20 to 45
U.S. SDs or U.S. MSPs whose foreign branch seeks to rely on the
exemptive relief with respect to swaps with non-U.S. counterparties
will submit a compliance plan. In this case, the compliance plan must
only address how the registrant plans to comply, in good faith, with
all applicable Transaction-Level Requirements under the CEA upon the
expiration of this proposed exemptive order. The average cost of
preparing and submitting the required compliance plan for such non-U.S.
SDs and MSPs initially is estimated to be approximately $18,714 per
U.S. registrant, or a total aggregate cost of between $374,280
(assuming that 20 U.S. SDs and MSPs submit a compliance plan) and
$842,130 (assuming that 45 SDs and MSPs submit a compliance plan). This
estimate is based on the hourly cost of personnel that are capable of
evaluating both Commission and home country regulations in light of the
U.S. persons’ foreign branch operations.66 Further, the condition
that requires the filing of a compliance plan by a U.S. person is not
static–that is, the condition requires that the U.S. person submit, if
necessary, a revised plan to account for any material changes since the
filing of the initial plan. The Commission estimates that in most cases
the cost of submitting a revised plan or plans will be the same as the
cost of preparing and submitting the initial plan.
—————————————————————————
66 Although different registrants may choose to staff
preparation of the compliance plan with different personnel,
Commission staff estimates that, on average, an initial compliance
plan could be prepared and submitted with 42 hours of attorney time,
as follows: 6 hours for a senior attorney at $830/hour, 18 hours for
a mid-level attorney at $418/hour, and 18 hours for a junior
attorney at $345/hour. To estimate the hourly cost of senior and
junior-level attorney time, Commission staff consulted with a law
firm that has substantial expertise in advising clients on similar
regulations. For the hourly cost of the mid-level attorney,
Commission staff reviewed data contained in Securities Industry and
Financial Markets Association (“SIFMA”), Report on Management and
Professional Earnings in the Securities Industry, Oct. 2011, for New
York, and adjusted by a factor for overhead and other benefits,
which the Commission has estimated to be 1.3.
—————————————————————————
Apart from the direct costs discussed above, the Commission
proposes that the exemptive order may result in indirect costs to the
public, including the costs of delayed compliance with the Entity-Level
Requirements and, to a more limited extent, Transaction-Level
Requirements of the Dodd-Frank Act. The Commission proposes that these
costs are not, however, susceptible to
[[Page 41118]]
meaningful quantification due to a lack of data regarding several key
variables, including the probability of a significant market
disturbance, the impact of that disturbance on the U.S. public and U.S.
entities, and the role of entities subject to the order in creating or
propagating such a disturbance. Nevertheless, the Commission seeks
comment on any such indirect costs, including empirical data from which
to quantify the same.
Benefits
The proposed exemptive order provides a benefit in that it would
allow affected entities additional time to transition into the new
regulatory regime in a more orderly manner, which promotes stability in
the markets as that transition occurs. This, in turn, promotes the
integrity and efficiency of the swap markets during the transition
period. The phased-in process would eliminate the need for affected
persons to file individual applications for exemptive relief and/or no-
action relief, and reduces compliance costs related to the exempted
transactions that occur during the transition period. Another benefit
will be increased international harmonization because the proposed
relief provides U.S. and non-U.S. registrants the latitude necessary to
develop and modify their compliance plans as the regulatory structure
in their home jurisdiction changes, which would promote greater
regulatory consistency and coordination with international regulators.
The primary benefit of the proposed compliance plan condition is
that it ensures that non-U.S. persons claiming the exemption would be
actively and demonstrably considering and planning for compliance with
the Entity-Level and Transaction-Level Requirements under the CEA, as
may be applicable. Absent such a condition and the requirement, a non-
U.S. person could simply claim the exemption, without making a good-
faith effort to comply with the Dodd-Frank Act. Further, the
requirement that the plan be updated to reflect any material change in
the information initially submitted ensures that the planning for
compliance is performed in a thoughtful and continuous manner. Finally,
the compliance plan also would assist NFA and Commission staff in
preparing for the registration of non-U.S. SDs and non-U.S. MSPs as
they develop familiarity with the regulatory regimes of foreign
jurisdictions.
In addition, the relief would allow foreign branches of U.S. SDs
and MSPs to comply only with those requirements as may be required in
the jurisdiction where the foreign branch is located for swaps with
non-U.S. counterparties, effective concurrently with the date upon
which such SDs and MSPs must first apply for registration until 12
months following the publication of the proposed order in the Federal
Register. In addition, U.S. SDs and U.S. MSPs may delay compliance with
certain entity-level requirements of the CEA (and Commission
regulations promulgated thereunder) from the date upon which SDs and
MSPs must apply for registration until January 1, 2013.
The Commission requests comments on all aspects of the
consideration of costs and benefits of the proposed exemptive order
discussed in this Notice and any alternatives to the same. Commenters
should submit estimates of any costs and benefits perceived, together
with any supporting empirical evidence available.
Section 15(a) Factors
Protection of Market Participants and the Public
The Commission expects that the exemptive relief provided in this
proposed order would protect market participants and the public by
facilitating a more orderly transition to the new regulatory regime
than might otherwise occur in the absence of this proposed order. In
particular, non-U.S. persons would be afforded additional time to come
into compliance than would otherwise be the case, which contributes to
greater stability and reliability of the swap markets during the
transition process.
As discussed above, to the extent that non-U.S. persons submit a
plan for compliance regarding Entity-Level and Transaction-Level
Requirements, such persons would experience savings during the interim
period. Reduced costs may occur as the result of delaying decisions
about new systems, operational patterns, legal agreements, or other
business arrangements until such time as a non-U.S. person knows what
its obligations will be with respect to the cross-border application of
Title VII of the Dodd-Frank Act, as well as by reducing the period of
time during which ongoing costs associated with Entity-Level
Requirements are borne by that entity.
As discussed above, non-U.S. SDs and non-U.S. MSPs taking advantage
of this exemption would have to file a compliance plan with NFA and, if
necessary, update the same. The costs of the compliance plan are
discussed above.
Efficiency, Competitiveness, and Financial Integrity of the Markets
The proposed order would promote efficiency by providing additional
time in which eligible persons may implement compliance controls and
new technologies, and adjust operational patterns and legal agreements,
if necessary. This additional time would minimize the risk that certain
entities would withdraw from the market in order to avoid taking steps
necessary for compliance.
Price Discovery
The Commission has not identified any costs or benefits of the
proposed order with respect to price discovery.
Risk Management
Entity level risk-management and capital requirements could be
delayed by operation of the exemptive order, which could weaken risk
management. However, such potential risk is limited by the fact that
the proposed exemptive order is finite in the additional time it
provides eligible persons.
Other Public Interest Considerations
The Commission has not identified any other public interest costs
or benefits of the proposed order.
VIII. Proposed Order
The Commission, in order to provide for an orderly implementation
of Title VII of the Dodd-Frank Act, and consistent with the
determinations set forth above, which are incorporated in the Final
Order by reference, hereby grants, pursuant to section 4(c) of the CEA,
temporary relief to non-U.S. swap dealers (“SDs”) and non-U.S. major
swaps participants (“MSPs”), and to U.S. SDs and U.S. MSPs, including
their foreign branches, from certain swap provisions of the CEA,
subject to the terms and conditions below.67
—————————————————————————
67 As used in this order, the terms “U.S. person,” “Entity-
Level Requirements,” and “Transaction-Level Requirements” have
the same meanings as provided in the Cross-Border Interpretive
Guidance.
—————————————————————————
(1) Non-U.S. Person: A non-U.S. person may delay compliance with
respect to Entity-Level Requirements (subject to the condition in
paragraph (2) below); provided, however, that: (A) such person shall
file with National Futures Association (“NFA”) an application to
register as an SD or MSP, as applicable, pursuant to Commission
Regulation part 3 by the date for which such person must apply for
registration; (B) within 60 days of filing its application for
registration, such person shall file with NFA a compliance plan
addressing how it plans to comply, in
[[Page 41119]]
good faith, with the applicable Entity-Level and Transaction-Level
Requirements under the CEA. At a minimum, such plan would provide, for
each Entity-Level Requirement and Transaction-Level Requirement, a
description of: (i) whether such person would comply with the Entity-
Level and Transaction-Level requirements that are in effect or whether
they would seek a comparability determination and rely on compliance
with one or more of the requirements of the home jurisdiction; and (ii)
to the extent that such person would comply with one or more of the
requirement(s) of the home jurisdiction, a description of such
requirement(s). Such persons may modify or alter the compliance plans
as appropriate, provided that they submit any such amended plan to NFA.
(2) Notwithstanding paragraph (1), non-U.S. SDs and non-U.S. MSPs
shall be required to comply with the SDR reporting and Large Trader
Reporting requirements for all swaps with U.S. counterparties, upon its
compliance date. However, during the pendency of this Order, non-U.S.
SDs and non-U.S. MSPs that are not affiliates or subsidiaries of a U.S.
SD may delay compliance with the SDR reporting and Large Trader
Reporting requirements for swaps with non-U.S. counterparties.
(3) With respect to Transaction-Level Requirements as applied to
transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S.
MSPs may comply with such regulations only as may be required by the
home jurisdiction of such registrants; provided, however, that such
registrants shall comply with such requirements that are in effect for
all swaps with U.S. counterparties.
(4) The relief provided to non-U.S. SDs and non-U.S. MSPs in this
order shall be effective concurrently with the date upon which SDs and
MSPs must first apply for registration and expire 12 months following
the publication of the proposed order in the Federal Register.
(5) U.S Person: A U.S. person shall apply to register as an SD or
MSP by the date such registration is required and shall comply with all
applicable Entity-Level and Transaction-Level Requirements that are in
effect, except as provided: (A) such person may delay compliance with
the Entity-Level Requirements until January 1, 2013, except with
respect to swap data recordkeeping, SDR reporting, and Large Trader
Reporting requirements. Nevertheless, with respect to Transaction-Level
Requirements as applied to swaps with a non-U.S. counterparty, a
foreign branch of a U.S. SD or U.S. MSP may comply with those
requirements only as may be required by the foreign location of such
branches.
(6) A U.S. SD or U.S. MSP whose foreign branch seeks to rely on the
exemptive relief with respect to swaps with non-U.S. counterparties
must submit a compliance plan (as described in paragraph (1) herein)
addressing how it plans to comply, in good faith, with all applicable
Transaction-Level Requirements under the CEA upon the expiration of
this proposed exemptive order.
(7) Scope of Relief: The temporary relief provided in this Order:
(A) shall not affect, with respect to any swap within the scope of this
Order, the applicability of any other CEA provision or Commission
regulation (i.e., those outside the Entity-Level and Transaction-Level
Requirements); (B) shall not limit the applicability of any CEA
provision or Commission regulation to any person, entity or transaction
except as provided in this Order; (C) shall not affect the
applicability of any provision of the CEA or Commission regulation to
futures contracts, or options on future contracts; and (D) shall not
affect any effective or compliance date set out in any specific Dodd-
Frank Act rulemaking by the Commission.
Finally, the Commission may, in its discretion, condition, suspend,
terminate, or otherwise modify this Order, as appropriate, on its own
motion.
Issued in Washington, DC, on June 29, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Exemptive Order Regarding Compliance With Certain Swap
Regulations–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 exemptive order regarding the effective dates of
certain Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) provisions.
Today’s exemptive order makes five changes to the exemptive
order issued on December 19, 2011.
First, the proposed exemptive order extends the sunset date from
July 16, 2012, to December 31, 2012.
Second, the Commodity Futures Trading Commission (CFTC) and the
Securities and Exchange Commission (SEC) have now completed the rule
further defining the term “swap dealer” and “securities-based
swap dealer.” Thus, the exemptive order no longer provides relief
as it once did until those terms were further defined.
The Commissions are also mandated by the Dodd-Frank Act to
further define the term “swap” and “securities-based swap.” The
staffs are making great progress, and I anticipate the Commissions
will take up this final definitions rule in the near term. Until
that rule is finalized, the exemptive order appropriately provides
relief from the effective dates of certain Dodd-Frank provisions.
Third, in advance of the completion of the definitions rule,
market participants requested clarity regarding transacting in
agricultural swaps. The exemptive order allows agricultural swaps
cleared through a derivatives clearing organization or traded on a
designated contract market to be transacted and cleared as any other
swap. This is consistent with the agricultural swaps rule the
Commission already finalized, which allows farmers, ranchers,
packers, processors and other end-users to manage their risk.
Fourth, unregistered trading facilities that offer swaps for
trading were required under Dodd-Frank to register as swap execution
facilities (SEFs) or designated contract markets (DCM) by July of
this year. These facilities include exempt boards of trade, exempt
commercial markets and markets excluded from regulation under
section 2(d)(2). Given the Commission has yet to finalize rules on
SEFs, this order gives these platforms additional time for such a
transition.
Fifth, the Commission is providing guidance regarding
enforcement of rules that require that certain off-exchange swap
transactions only be entered into by eligible contract participants
(ECPs). The guidance provides that if a person takes reasonable
steps to verify that its counterparty is an ECP, but the
counterparty turns out not to be an ECP based on subsequent
Commission guidance, absent other material factors, the CFTC will
not bring an enforcement action against the person.
Phased Compliance
I support the proposed release on phased compliance for foreign
swap dealers. The release provides phased compliance for foreign
swap dealers (including overseas affiliates of U.S. swap dealers) of
certain requirements of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act).
Such phased compliance would enable market participants to
comply with the Dodd-Frank Act in an orderly fashion. It would allow
time for the CFTC to receive public comment on interpretive guidance
on the cross-border application of the Dodd-Frank Act.
Under the interpretive guidance, in certain circumstances,
market participants may
[[Page 41120]]
comply with certain Dodd-Frank requirements by complying with
comparable and comprehensive foreign regulatory requirements, or
what we call “substituted compliance.” The release on phased
compliance also allows time for the CFTC, foreign regulators and
market participants to continue to consult and coordinate on
regulation of cross-border swaps activity, as well as the
appropriate implementation of substituted compliance.
In this period, foreign swap dealers must file a plan
demonstrating how they will eventually comply with Dodd-Frank, which
in certain circumstances could be through substituted compliance.
The release provides for phased compliance in the following
manner:
Foreign swap dealers would be required to register with
the CFTC upon the compliance date of the registration requirement;
U.S. and foreign swap dealers must comply with
transaction-level requirements with U.S. persons, including branches
of U.S. persons;
For transaction-level requirements, foreign swap
dealers, as well as overseas branches of U.S. swap dealers,
transacting with non-U.S. persons is phased for one year.
Entity-level requirements (other than reporting to SDRs
and large trader reporting) that might come under substituted
compliance is phased for one year; and
For foreign swap dealers, swaps with U.S. persons,
including branches of U.S. persons, would be required to be reported
to a SDR or the CFTC.
In addition, U.S. swap dealers’ compliance with certain internal
business conduct requirements is phased until January 1, 2013.
The release addresses comments from U.S. and international
market participants, and I look forward to additional input on the
proposal.
[FR Doc. 2012-16498 Filed 7-11-12; 8:45 am]
BILLING CODE P
Last Updated: July 12, 2012
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