Federal Register, Volume 78 Issue 4 (Monday, January 7, 2013)[Federal Register Volume 78, Number 4 (Monday, January 7, 2013)]

[Proposed Rules]

[Pages 909-913]

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

[FR Doc No: 2012-31734]

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Proposed Rules

Federal Register

________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of

the proposed issuance of rules and regulations. The purpose of these

notices is to give interested persons an opportunity to participate in

the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 78, No. 4 / Monday, January 7, 2013 /

Proposed Rules

[[Page 909]]

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD85

Further Proposed Guidance Regarding Compliance With Certain Swap

Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Further Proposed Guidance.

———————————————————————–

SUMMARY: On July 12, 2012, the Commodity Futures Trading Commission

(“Commission” or “CFTC”) published for public comment, pursuant to

section 4(c) of the Commodity Exchange Act (“CEA”), a proposed order

(“Proposed Order”) that would grant market participants temporary

conditional relief from certain provisions of the CEA, as amended by

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

Act (“Dodd-Frank Act” or “Dodd-Frank”), and the Commission also

published its proposed interpretive guidance and policy statement

(“Proposed Guidance”) regarding the cross-border application of the

swap provisions of the CEA as added by Title VII of the Dodd-Frank Act.

The Commission is proposing further guidance on certain specific

aspects of the Proposed Guidance (“Further Proposed Guidance”). The

Commission has separately determined to finalize the Proposed Order.

DATES: Comments on the Further Proposed Guidance must be received on or

before February 6, 2013.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD85,

by any of the following methods:

Agency Web Site: http://www.cftc.gov.

Mail: 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 instructions for submitting comments.

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 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 procedure established in CFTC regulation

145.9 (17 CFR 145.9).

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

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

applicable laws, and may be accessible under the Freedom of Information

Act.

FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Deputy General

Counsel, (202) 418-5613, [email protected], Terry Arbit, Deputy General

Counsel, (202) 418-5357, [email protected], Mark Fajfar, Assistant

General Counsel, (202) 418-6636, [email protected], Office of General

Counsel; 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:

I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act,1

which amended the CEA 2 to establish 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 (“SDs”) and major swap

participants (“MSPs”); (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. Section 722(d) of the Dodd-Frank Act also

amended the CEA to add section 2(i), which provides that the swap

provisions of the CEA apply to cross-border activities when certain

conditions are met, namely, when such activities have a “direct and

significant connection with activities in, or effect on, commerce of

the United States” or when they contravene Commission rulemaking.3

—————————————————————————

1 See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).

2 7 U.S.C. 1 et seq. (amended 2010).

3 7 U.S.C. 2(i).

—————————————————————————

In the two years since its enactment, the Commission has finalized

41 rules to implement Title VII of the Dodd-Frank Act. The finalized

rules include those promulgated under CEA section 4s,4 which address

registration of SDs and MSPs and other substantive requirements

applicable to SDs and MSPs. Notably, many section 4s requirements

applicable to SDs and MSPs are tied to the date on which a person is

required to register, unless a later compliance date is specified.5 A

number of other rules specifically

[[Page 910]]

applicable to SDs and MSPs have been proposed but not finalized.6

—————————————————————————

4 7 U.S.C. 6s.

5 Examples of section 4s implementing rules that become

effective for SDs and MSPs at the time of their registration include

requirements relating to swap data reporting (Commission regulation

23.204) and conflicts of interest (Commission regulation 23.605 (c)-

(d)). The chief compliance officer requirement (Commission

regulations 3.1 and 3.3) is an example of those rules that have

specific compliance dates. The compliance dates are summarized on

the Compliance Dates page of the Commission’s Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm).

6 These include rules under CEA section 4s(e), 7 U.S.C. 6s(e)

(governing capital and margin requirements for SDs and MSPs).

—————————————————————————

Further, the Commission published for public comment the Proposed

Guidance,7 which set forth the manner in which it proposed to

interpret section 2(i) of the CEA as it applies to the requirements

under the Dodd-Frank Act and the Commission’s regulations promulgated

thereunder regarding cross-border swap activities. Specifically, in the

Proposed Guidance, the Commission described the general manner in which

it proposed to consider: (1) Whether a non-U.S. person’s swap dealing

activities are sufficient to require registration as a “swap

dealer”,8 as further defined in a joint release adopted by the

Commission and the Securities and Exchange Commission (“SEC”)

(collectively, the “Commissions”); 9 (2) whether a non-U.S.

person’s swap positions are sufficient to require registration as a

“major swap participant,” 10 as further defined in the Final

Entities Rules; 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 Proposed Guidance also generally described 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. Last, the

Proposed Guidance set forth the manner in which the Commission proposed

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 SDs or MSPs.

—————————————————————————

7 “Cross-Border Application of Certain Swaps Provisions of

the Commodity Exchange Act,” 77 FR 41214, Jul. 12, 2012.

8 7 U.S.C. 1a(49).

9 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 (“Final Entities Rules”).

10 7 U.S.C. 1a(33).

—————————————————————————

Contemporaneously with the Proposed Guidance, the Commission

published the Proposed Order pursuant to section 4(c) of the CEA,11

in order to foster an orderly transition to the new swaps regulatory

regime and to provide market participants greater certainty regarding

their obligations with respect to cross-border swap activities during

the pendency of the Proposed Order. The Proposed Order would grant

temporary relief from certain swap provisions of Title VII of the Dodd-

Frank Act.

—————————————————————————

11 “Exemptive Order Regarding Compliance With Certain Swap

Regulations,” 77 FR 41110 Jul. 12, 2012.

—————————————————————————

The public comment periods on the Proposed Order and the Proposed

Guidance ended on August 13, 2012 and August 27, 2012, respectively.

The Commission received approximately 26 letters on the Proposed Order

and approximately 288 letters on the Proposed Guidance from a variety

of market participants and other interested parties, including major

U.S. and non-U.S. banks and financial institutions that conduct global

swaps business, trade associations, clearing organizations, law firms

(representing international banks and dealers), individual citizens,

and foreign regulators.12 The Commission staff also held numerous

meetings and discussions with various market participants, domestic

bank regulators, and other interested parties to discuss the Proposed

Order and the Proposed Guidance.13

—————————————————————————

12 Some of the commenters submitted a single comment letter

addressing both the Proposed Order and the Proposed Guidance. The

comment letters submitted in response to the Proposed Order and

Proposed Guidance may be found on the Commission’s Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234.

Approximately 200 individuals submitted substantially identical

letters to the effect that oversight of the $700 trillion global

derivatives market is the key to meaningful reform. The letters

stated that because the market is inherently global, risks can be

transferred around the world with the touch of a button. Further,

according to these letters, loopholes in the Proposed Guidance could

allow foreign affiliates of Wall Street banks to escape regulation.

Lastly, the letters requested that the Proposed Guidance be

strengthened to ensure that the Dodd-Frank derivatives protections

will directly apply to the full global activities of all important

participants in the U.S. derivatives markets.

13 The records of these meetings and communications can be

found on the Commission’s Web site at: http://cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

—————————————————————————

Further, the Commission staff closely consulted with the staff of

the SEC in an effort to increase understanding of each other’s

regulatory approaches and to harmonize the cross-border approaches of

the two agencies to the greatest extent possible, consistent with their

respective statutory mandates.14 The Commission expects that this

consultative process will continue as each agency works towards

implementing its respective cross-border policy.

—————————————————————————

14 In addition to differences in the applicable statutory

provisions, there are also differences in the markets and products

overseen by each agency, which may lead to divergent approaches to

cross-border activities.

—————————————————————————

The Commission also recognizes the critical role of international

cooperation and coordination in the regulation of derivatives in the

highly interconnected global market, where risks are transmitted across

national borders and market participants operate in multiple

jurisdictions. Close cooperative relationships and coordination with

other jurisdictions take on even greater importance given that, prior

to the recent reforms, the swaps market has largely operated without

regulatory oversight and many jurisdictions are in differing stages of

implementing their regulatory reform. To this end, the Commission staff

has actively engaged in discussions with their foreign counterparts in

an effort to better understand and develop a more harmonized cross-

border regulatory framework. The Commission expects that these

discussions will continue as it finalizes the cross-border interpretive

guidance and as other jurisdictions develop their own regulatory

requirements for derivatives.15

—————————————————————————

15 This is one aspect of the Commission’s on-going bilateral

and multilateral efforts to promote international coordination of

regulatory reform. The Commission staff is engaged in consultations

with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada,

Australia, Brazil, and Mexico on derivatives reform. In addition,

the Commission staff is participating in several standard-setting

initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and

has created an informal working group of derivatives regulators to

discuss implementation of derivatives reform. See also Joint Press

Statement of Leaders on Operating Principles and Areas of

Exploration in the Regulation of the Cross-border OTC Derivatives

Market, included in CFTC Press Release 6439-12, Dec. 4, 2012.

—————————————————————————

The Commission has determined not to take further action on the

Proposed Guidance at this time. The Commission believes it will be

beneficial to have further consultations with other domestic and

international regulators in an effort to harmonize cross-border

regulatory approaches prior to taking action with respect to the

Proposed Guidance. The Commission also believes that further

consideration of public comments, including the comments that may be

received on the Further Proposed Guidance regarding the Commission’s

interpretation of the term “U.S. person,” and its guidance regarding

aggregation for purposes of SD registration, will be helpful to the

Commission in issuing final interpretive guidance.

Nonetheless, the Commission has separately determined to finalize

the Proposed Order as a final, time-limited exemptive order (“Final

Order”) that is substantially similar to the Proposed Order, except

for the addition of provisions regarding registration and certain

modifications and clarifications

[[Page 911]]

addressing public comments.16 Under the Final Order, a non-U.S.

person that registers as an SD or MSP may delay compliance with certain

entity-level requirements of the CEA (and Commission regulations

promulgated thereunder), and non-U.S. SDs and MSPs and foreign branches

of U.S. SDs and MSPs may delay compliance with certain transaction-

level requirements of the CEA (and Commission regulations promulgated

thereunder), subject to specified conditions. Recently, the Commission

staff granted time-limited, no-action relief to promote continuity in

the application of Dodd-Frank requirements and facilitate the

transition to those requirements by enabling swap market participants

to apply a uniform and readily ascertainable standard regarding which

swaps must be included in the calculations under the SD and MSP

definitions.17 The Final Order continues that process and furthers

the same purposes.18

—————————————————————————

16 See “Final Exemptive Order Regarding Compliance with

Certain Swap Regulations,” Dec. 21, 2012.

17 See CFTC Division of Swap Dealer and Intermediary

Oversight, Re: Time-Limited No-Action Relief: Swaps Only With

Certain Persons to be Included in Calculation of Aggregate Gross

Notional Amount for Purposes of Swap Dealer De Minimis Exception and

Calculation of Whether a Person is a Major Swap Participant, No-

Action Letter No. 12-22, Oct. 12, 2012 (“CFTC Letter No. 12-22”).

18 The Commission intends that the Final Order is in addition

to any no-action relief issued or to be issued by the Commission

staff. Unless specifically provided in any letter providing no-

action relief, the Final Order does not limit the availability of

any no-action relief.

—————————————————————————

This release sets forth the Further Proposed Guidance.

II. Further Proposed Guidance

The Commission continues to review and consider the comments

received on the Proposed Guidance, and to discuss these issues with

domestic and foreign regulators. In this process, the Commission is

considering several approaches that may further the purposes of the

Proposed Guidance, which include enabling swap market participants to

apply a uniform and readily ascertainable standard regarding which

swaps must be included in the calculations under the SD and MSP

definitions. In order to facilitate the Commission’s further

consideration of these issues, the Commission seeks comment on the

following proposed interpretations.

A. Aggregation of Affiliates’ Swaps for Purposes of the De Minimis Test

Commission regulation 1.3(ggg)(4) 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 by its affiliates under common control.19 Under

the Proposed Guidance, a non-U.S. person, in determining whether its

swap dealing transactions exceed the de minimis threshold, would

include the aggregate notional value of swap dealing transactions

entered into by its non-U.S. affiliates under common control but would

not include the aggregate notional value of swap dealing transactions

entered into by its U.S. affiliates.20 The Final Order provides that

a non-U.S. person is not required to include, in its determination of

whether it exceeds the de minimis threshold, the swap dealing

transactions of any of its U.S. affiliates, and a non-U.S. person that

is an affiliate of a person that is registered as an SD is not required

to include in such determination the swap dealing transactions of any

of its non-U.S. affiliates that engage in swap dealing activities, so

long as such excluded affiliates are either (1) engaged in swap dealing

activities with U.S. persons as of the effective date of the Final

Order or (2) registered as an SD.21

—————————————————————————

19 17 CFR 1.3(ggg)(4).

20 Proposed Guidance, 77 FR at 41218-41220. Further, where the

potential non-U.S. SD’s swap obligations are guaranteed by a U.S.

person, the non-U.S. person would be required to register with the

Commission as an SD when the aggregate notional value of its swap

dealing activities (along with the swap dealing activities of its

non-U.S. affiliates that are under common control and also

guaranteed by a U.S. person) with U.S. persons and non-U.S. persons

exceeds the de minimis threshold. Additionally, the Proposed

Guidance clarified that a non-U.S. person without a guarantee from a

U.S. person would not be required to register as an SD if it does

not engage in swap dealing with U.S. persons as part of “a regular

business” with U.S. persons, even if the non-U.S. person engages in

dealing with non-U.S. persons.

21 See Final Order paragraph (3). For this purpose, the

Commission construes “affiliates” to include persons under common

control as stated in the Final Entities Rules with respect to the

term “swap dealer,” which defines control as “the possession,

direct or indirect, of the power to direct or cause the direction of

the management and policies of a person, whether through the

ownership of voting securities, by contract or otherwise.” See

Final Entities Rules, 77 FR at 30631, fn. 437.

—————————————————————————

The Commission also is proposing an alternative interpretation of

the aggregation requirement in Commission regulation 1.3(ggg)(4). Under

this alternative, a non-U.S. person would be required, in determining

whether its swap dealing transactions exceed the de minimis threshold,

to include the aggregate notional value of swap dealing transactions

entered into by all its affiliates under common control (i.e., both

non-U.S. affiliates and U.S. affiliates), but would not be required to

include in such determination the aggregate notional value of swap

dealing transactions of any non-U.S. affiliate under common control

that is registered as an SD.22

—————————————————————————

22 Also, under this alternative, a non-U.S. person would not

be required to include the aggregate notional value of swap dealing

transactions of any of its non-U.S. affiliates under common control

where the counterparty to such affiliate is also a non-U.S. person.

—————————————————————————

Under the aggregation rule stated in Commission regulation

1.3(ggg)(4), any affiliate of a person that is registered as an SD will

also have to register if it engages in any swap dealing transactions,

even if the aggregate amount of such swap dealing transactions among

all the unregistered affiliates is below the de minimis threshold.

Based on comments received, the Commission understands that the

application of this requirement to non-U.S. affiliates of non-U.S. SDs

may, in certain circumstances, impose significant burdens on such non-

U.S. affiliates without advancing significant regulatory interests of

the Commission. Because the conduct of swap dealing business through

locally-organized affiliates may in some cases be required in order to

comply with legal requirements or business practices in foreign

jurisdictions, such non-U.S. affiliates may be numerous and it would be

impractical to require all such non-U.S. affiliates to register as SDs.

Further, the Commission’s interest in registration may be reduced for a

non-U.S. affiliate of a registered non-U.S. SD where the non-U.S.

affiliate (or group of such affiliates) engages in only a small amount

of swap dealing activity with U.S. persons.

On the other hand, the Commission has also considered that given

the borderless nature of swap dealing activities, an SD may conduct

swap dealing activities through various affiliates in different

jurisdictions, which suggests that its interpretation should take into

account the applicable swap dealing transactions entered by all of a

non-U.S. person’s affiliates under common control worldwide. Otherwise,

affiliated persons may not be required to register solely because their

swap dealing activities are divided, such that each affiliate falls

below the de minimis level. The Commission is concerned that permitting

such affiliates whose swap dealing activities individually fall below

the de minimis level, but whose swap dealing activities in the

aggregate exceed the de minimis level, to avoid registration as SDs

would provide an incentive for firms to spread their swap dealing

activities among several unregistered affiliates rather than centralize

their swap dealing in

[[Page 912]]

registered firms. Such a result would increase systemic risks to U.S.

market participants and impede the Commission’s ability to protect U.S.

markets.

The Commission requests comment on all aspects of this proposed

alternative approach. In particular, should this interpretation apply

to non-U.S. persons that are guaranteed by a U.S. person with respect

to their swap obligations in the same way that it applies to non-U.S.

persons that are not so guaranteed? If so, should the Commission

continue to construe the term “guarantee” for this purpose to mean

any collateral promise by a guarantor to answer for the debt or

obligation of an obligor under a swap? 23 Should the term

“guarantee” include arrangements such as keepwells and liquidity

puts?

—————————————————————————

23 See “Further Definition of `Swap,’ `Security-Based Swap,’

and `Security-Based Swap Agreement’; Mixed Swaps; Security-Based

Swap Agreement Recordkeeping,” 77 FR 48207, 48225 fn. 185, Aug. 13,

2012.

—————————————————————————

Would it be appropriate that non-U.S. persons are not required to

include in the de minimis calculation the swap dealing transactions of

their U.S. affiliates under common control? Alternatively, should non-

U.S. persons be permitted to exclude from the de minimis calculation

the swap dealing transactions of their U.S. affiliates under common

control that are registered as SDs?

To the extent that the Commission adopts a final interpretation

that does not require a person to include the swap dealing activities

of one or more of its affiliates under common control in its

determination of whether its swap dealing activity exceeds the de

minimis threshold, the Commission is interested in commenters’ views as

to whether a person engaged in swap dealing activities could take

advantage of such an interpretation to spread its swap dealing

activities into multiple affiliates, each under the de minimis

threshold, and therefore avoid the registration requirement, even

though its aggregate level of swap dealing by the affiliates exceeds

the de minimis threshold. Accordingly, if the Commission were to adopt

such an interpretation with respect to aggregation, should the

Commission include any conditions or limits in any such interpretation

on the overall amount of swap dealing engaged in by unregistered

persons within an affiliated group?

B. Definition of “U.S. Person”

As noted above, in the Proposed Guidance the term “U.S. person”

would be defined by reference to the extent to which swap activities or

transactions involving one or more such persons have the relevant

connection with activities in, or effect on, U.S. commerce.24 That

is, the term “U.S. person” identifies those persons whose swap

activities–either individually or in the aggregate–satisfy the

jurisdictional nexus under section 2(i) of the CEA.

—————————————————————————

24 See Proposed Guidance, 77 FR at 41218. Specifically, as set

forth in the Proposed Guidance, the definition of 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 (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 U.S.

income tax regardless of source.

—————————————————————————

The Commission is proposing alternatives for two “prongs” of the

proposed definition of the term “U.S. person” in the Proposed

Guidance: Prong (ii)(B), which relates to U.S. owners that are

responsible for the liabilities of a non-U.S. entity; and prong (iv),

which relates to commodity pools and funds with majority-U.S.

ownership.

The Commission’s proposed alternative version of prong (ii)(B)

would limit its scope to a legal entity that is directly or indirectly

majority-owned by one or more natural persons or legal entities that

meet prong (i) or (ii) of the definition of the term “U.S. person” in

the Final Order, in which such U.S. person(s) bears unlimited

responsibility for the obligations and liabilities of the legal entity.

This alternative prong (ii)(B) would not include an entity that is a

limited liability company or limited liability partnership where

partners have limited liability. Further, the majority-ownership

criterion would avoid capturing those legal entities that have

negligible U.S. ownership interests. Unlimited liability corporations

where U.S. persons have majority ownership and where such U.S. persons

have unlimited liability for the obligations and liabilities of the

entity would be covered under this alternative to prong (ii)(B).25

—————————————————————————

25 Unlimited liability corporations include, solely by way of

example, entities such as an unlimited company formed in the U.K.

(see Brian Stewart, Doing Business in the United Kingdom Sec.

18.02[2][c]) or an unlimited liability company formed under the law

of Alberta, British Columbia or Nova Scotia (see Richard E.

Johnston, Doing Business in Canada Sec. 15.04[5]).

—————————————————————————

The alternative prong (ii)(B) would be as follows:

(ii) A 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 a

state or other jurisdiction in the United States or having its

principal place of business in the United States or (B) directly or

indirectly majority-owned by one or more persons described in prong

(i) or (ii)(A) and in which such person(s) bears unlimited

responsibility for the obligations and liabilities of the legal

entity (other than a limited liability company or limited liability

partnership where partners have limited liability);

This alternative proposed prong would treat an entity as a U.S.

person if one or more of its U.S. majority owners has unlimited

responsibility for losses of, or nonperformance by, the entity. This

would reflect that when the structure of an entity is such that the

U.S. direct or indirect owners are ultimately liable for the entity’s

obligations and liabilities, the connection to activities in, or effect

on, U.S. commerce satisfies the requisite jurisdictional nexus. This

“look-through” requirement also would serve to prevent persons from

creating such indirect ownership structures for the purpose of evading

the Dodd-Frank regulatory regime. However, this alternative proposed

prong would not cover a legal entity organized or domiciled in a

foreign jurisdiction simply because the entity’s swap obligations are

guaranteed by a U.S. person.

The Commission requests comment on all aspects of this alternative

prong (ii)(B).

With respect to prong (iv) of the definition of the term “U.S.

person” in the Proposed Guidance, which relates to majority direct- or

indirect-owned commodity pools, pooled accounts, or collective

investment vehicles, the Commission is proposing an alternative under

which any commodity pool, pooled account, investment fund or other

collective investment vehicle would be deemed a U.S. person if it is

[[Page 913]]

(directly or indirectly) majority-owned by one or more natural persons

or legal entities that meet prong (i) or (ii) of the definition of the

term “U.S. person” in the Final Order. For purposes of this

alternative prong (iv), majority-owned would mean the beneficial

ownership of 50 percent or more of the equity or voting interests in

the collective investment vehicle. The alternative prong (iv) would

include a minor modification to clarify that it applies regardless of

whether the collective investment vehicle is organized or incorporated

in the United States. Similar to the alternative prong (ii)(B)

discussed above, the collective investment vehicle’s place of

organization or incorporation would not be determinative of its status

as a U.S. person.

The alternative prong (iv) would clarify that a pool, fund, or

other collective investment vehicle that is publicly traded will be

deemed a U.S. person only if it is offered, directly or indirectly, to

U.S. persons. This would address concerns expressed by commenters that

ownership verification is particularly difficult for pools, funds, and

other collective investment vehicles that are publicly traded.26

—————————————————————————

26 See Letter from Security Industry and Financial Markets

Association (Aug. 27, 2012) at A-20.

—————————————————————————

The alternative prong (iv) would be as follows:

(iv) A commodity pool, pooled account, investment fund, or other

collective investment vehicle that is not described in prong (ii)

and that is directly or indirectly majority-owned by one or more

persons described in prong (i) or (ii), except any commodity pool,

pooled account, investment fund, or other collective investment

vehicle that is publicly-traded but not offered, directly or

indirectly, to U.S. persons.

This alternative proposed prong (iv) is intended to capture

collective investment vehicles that are created for the purpose of

pooling assets from U.S. investors and channeling these assets to trade

or invest in line with the objectives of the U.S. investors, regardless

of the place of the vehicle’s organization or incorporation. These

collective investment vehicles may serve as a means to achieve the

investment objectives of their beneficial owners, rather than being

separate, active operating businesses. As such, the beneficial owners

would be directly exposed to the risks created by the swaps that their

collective investment vehicles enter into. The Commission requests

comment on all aspects of this alternative prong (iv).

Issued in Washington, DC, on December 21, 2012, by the

Commission.

Sauntia S. Warfield,

Assistant Secretary of the Commission.

Appendices to Further Proposed Guidance Regarding Compliance With

Certain Swap Regulations–Commission Voting Summary

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 Chilton,

O’Malia and Wetjen voted in the affirmative; Commissioner Sommers

voted in the negative.

[FR Doc. 2012-31734 Filed 1-4-13; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: January 7, 2013