Federal Register, Volume 79 Issue 5 (Wednesday, January 8, 2014)[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]

[Proposed Rules]

[Pages 1347-1349]

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

[FR Doc No: 2014-00080]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

Request for Comment on Application of Commission Regulations to

Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties

Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in

the United States

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

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SUMMARY: The Commodity Futures Trading Commission (“Commission”) is

requesting comment on an advisory issued by Commission staff on

November 14, 2013 (the “Staff Advisory”), regarding the applicability

of certain Commission regulations to the activity in the United States

of swap dealers (“SDs”) and major swap participants (“MSPs”)

registered with the Commission that are established in jurisdictions

other than the United States (whether an affiliate or not of a U.S.

person, a “non-U.S. SD” or “non-U.S. MSP”).

DATES: Comments must be received on or before March 10, 2014.

ADDRESSES: You may submit comments 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: Melissa D. Jurgens, 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 may be posted as received to http://www.cftc.gov. You should submit only information that you wish to make

available publicly. If you wish the Commission to consider information

that may be exempt from disclosure under the Freedom of Information

Act, a petition for confidential treatment of the exempt information

may be submitted according to the established procedures in CFTC

Regulation 145.9 (17 CFR 145.9).

The Commission reserves the right, but shall have no obligation, to

review,

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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: Gary Barnett, Director, 202-418-5977,

[email protected], or Frank Fisanich, Chief Counsel, 202-418-5949,

[email protected], Division of Swap Dealer and Intermediary Oversight,

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 Wall Street

Reform and Consumer Protection Act 1 (“Dodd-Frank Act” or “Dodd-

Frank”), which, in Title VII, established a new regulatory framework

for swaps.

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1 Public Law 111-203, 124 Stat. 1376 (2010).

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In the three years since the enactment of Dodd-Frank, the

Commission has finalized 68 rules, orders, and guidance statements in

the process of implementing Title VII of the Dodd-Frank Act. The

finalized rules promulgated under section 4s of the CEA, added by the

Dodd-Frank Act, address registration of SDs and MSPs and other

substantive requirements applicable to SDs and MSPs, while guidance

published by the Commission provided the Commission’s general views

regarding the scope of the cross-border application of such rules.2

Among other things, the Guidance sets forth the Commission’s general

views on how it ordinarily expects to apply, in accordance with section

2(i) of the CEA, the CEA and certain Commission regulations applicable

on a transaction-by-transaction basis (the “transactional

requirements”) to swaps between a non-U.S. SD and a non-U.S. person,

including swaps involving guaranteed or conduit affiliates of U.S.

persons.3 In addition, the Guidance addressed the circumstances under

which the transactional requirements could be satisfied through

substituted compliance.4

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2 See Interpretive Guidance and Policy Statement Regarding

Compliance with Certain Swap Regulations 78 FR 45292 (July 26, 2013)

(hereinafter, the “Guidance”).

3 For purposes of this notice, the Commission would generally

interpret the terms “U.S. person,” “guaranteed affiliate,” and

“affiliate conduit” in the same way as described in the Guidance,

78 FR at 45316-45317, 45350-45359. The Commission uses the term

“non-U.S. person” to refer to any person outside its

interpretation of the term “U.S. person.”

4 The Guidance generally describes the policy and procedural

framework under which the Commission would consider a substituted

compliance program with respect to Commission regulations applicable

to non-U.S. SDs. Specifically, the Commission described

circumstances where it expected that compliance with a comparable

regulatory requirement of a foreign jurisdiction would serve as a

reasonable substitute for compliance with the attendant requirements

of the CEA and the Commission’s regulations, 78 FR at 45342-45344.

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With few exceptions, the delayed compliance dates for the

Commission’s regulations implementing requirements of section 4s of the

CEA have passed and SDs and MSPs are now required to be in full

compliance with such regulations upon registration with the

Commission.5

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5 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.)

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Subsequent to publication of the Guidance, swap market participants

have raised questions with Commission staff regarding compliance by

non-U.S. SDs with the transactional requirements when using personnel

or agents located in the United States to enter into swaps with non-

U.S. persons. In other words, swap market participants have asked

whether the transactional requirements would apply to these swaps (and

if so, whether substituted compliance may be available for these swaps)

even though such swaps are between two non-U.S. persons, regardless of

whether the activities of the non-U.S. SD that lead to such swaps take

place in the United States.

In response to these inquires, the Staff Advisory 6 was issued,

stating that for swaps between a non-U.S. SD and a non-U.S. person, the

transactional requirements either do not apply or, in some cases, may

be subject to substituted compliance if the activities of the non-U.S.

SD take place outside the United States. The Staff Advisory further

stated that, for transactions arranged, executed, or negotiated by

personnel or agents located in the United States of non-U.S. SDs

(whether affiliates or not of a U.S. person) regularly using personnel

or agents located in the U.S. to arrange, negotiate, or execute swaps

with non-U.S. persons (the “Covered Transactions”), the non-U.S. SD

generally would be required to comply with the transactional

requirements. The Staff Advisory further stated that this view would

also apply to a Covered Transaction booked in a non-U.S. branch of the

non-U.S. SD.7

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6 Division of Swap Dealer and Intermediary Oversight,

Applicability of Transaction-Level Requirements to Activity in the

United States, Nov. 14, 2013. Available at: http://www.cftc.gov/idc/groups/public/@1rlettergeneral/documents/letter/13-69.pdf. As stated

in the Staff Advisory, the advisory, and the views expressed

therein, represent the views of the Division of Swap Dealer and

Intermediary Oversight only, and do not represent the position or

view of the Commission or of any other office or division of the

Commission.

7 See the Staff Advisory, supra note 6.

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The Commission notes that subsequent to the Staff Advisory, the

Commission’s Divisions of Swap Dealer and Intermediary Oversight,

Market Oversight, and Clearing and Risk provided non-U.S. SDs time-

limited staff no-action relief from certain transactional requirements

for Covered Transactions,8 and have recently extended such relief

until September 15, 2014, subject to certain terms and conditions

stated in such Divisions’ no-action letter.9

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8 See CFTC Staff Letter 13-71, available on the Commission’s

Web site: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.

9 See CFTC Staff Letter 14-01, available on the Commission’s

Web site.

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II. Request for Comment

In view of the complex legal and policy issues involved with

respect to the Staff Advisory, the Commission is soliciting comment

from all interested parties to further inform the Commission’s and its

staff’s deliberations regarding the subjects addressed in the Staff

Advisory.

Accordingly, the Commission requests comment on all aspects of the

Staff Advisory, including but not limited to the following points. If a

comment relates to one of the specific points noted below, please

identify the point by number and provide a detailed rationale

supporting the response.

1. The Commission invites comment on whether the Commission should

adopt the Staff Advisory as Commission policy, in whole or in part.

2. The Commission invites commenters to provide their views on

whether transactional requirements should apply to Covered Transactions

with non-U.S. persons who are not guaranteed or conduit affiliates of

U.S. persons. Please provide a detailed analysis of any such view and

its effect on other aspects of the Commission’s cross-border policy, if

any.

3. The Commission invites comment on whether there should be any

differentiation in treatment of swaps with non-U.S. counterparties

depending on the nature of the SD (i.e., whether it is a guaranteed

affiliate or a conduit affiliate of a U.S. person).

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4. To the extent a non-U.S. SD must comply with the transactional

requirements when entering a Covered Transaction, should the non-U.S.

SD be able to rely on a substituted compliance program for purposes of

complying with the relevant transactional requirements? If so, should

substituted compliance be available for all transactional requirements

or only specific requirements? Which requirements? Would the response

be different depending on the nature of the counterparty (i.e., whether

the non-U.S. counterparty is a guaranteed affiliate or a conduit

affiliate of a U.S. person)?

5. The Commission invites comment on the meaning of “regularly”

in the phrase “persons regularly arranging, negotiating, or executing

swaps for or on behalf of an SD” and whether such persons are

performing core, front-office activities of that SD’s swap dealing

business. If not, what specific activities would constitute the core,

front-office activities of an SD’s swap dealing business? What

characteristics or factors distinguish a “core, front-office”

activity from other activities? Please be exhaustive in describing such

activities.

6. The Commission invites comment on the scope and degree of

“arranging, negotiating, or executing” swaps as used in this context.

Issued in Washington, DC, on January 3, 2014, by the Commission.

Melissa D. Jurgens,

Secretary of the Commission.

Appendices To Request for Comment on Application of Commission

Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S.

Counterparties Involving Personnel or Agents of the Non-U.S. Swap

Dealers Located in the United States

Appendix 1–Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton and

Wetjen voted in the affirmative. Commissioner O’Malia voted in the

negative.

Appendix 2–Dissenting Statement of Commissioner Scott D. O’Malia

If you thought that the Commission’s approach last year

regarding cross-border issues resulted in an unsound rulemaking

process, the start of 2014 is no better.

Today’s announcement of the request for comment on a staff

Advisory abrogates the Commission’s fundamental legal obligations

under the Administrative Procedure Act (“APA”) and provides

another example of the Commission’s unsound rule implementation

process.

Making matters worse, today’s request for comment is completely

outside the scope of the cross-border Guidance and the Exemptive

Order as the Commission did not address the issue relating to swaps

negotiated between non-U.S. swap dealers (“SDs”) and non-U.S.

counterparties acting through agents of the non-U.S. SDs located in

the United States. This is simply a strategic move by the Commission

to try to duck blame for consistently circumventing the fundamental

tenets of the APA and failing to adhere faithfully to the express

congressional directive to limit the extraterritorial application of

the Dodd-Frank Act to foreign transactions that “have a direct and

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

the United States.” 1

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1 7 U.S.C. 2(i).

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Moreover, I question why the Commission has decided to request

comment on a narrow issue of the extraterritorial application of

Dodd-Frank, while essentially ignoring the dozens of comments

already filed as part of the Commission’s cross-border Exemptive

Order.2 Simply requesting comment on a staff Advisory does not

endorse the validity of the cross-border Guidance or the staff

Advisory issued based on the Guidance.

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2 See Statement of Dissent by Commissioner Scott D. O’Malia,

Interpretive Guidance and Policy Statement Regarding Compliance With

Certain Swap Regulations and Related Exemptive Order, July 12, 2013,

http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

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Additionally, I have serious concerns with the evolving

jurisdictional application of the Commission’s authority over cross-

border trades. It appears based on the staff Advisory, that the

Commission is applying a “territorial” jurisdiction test to

elements of a trade between non-U.S. entities. To better understand

the legal underpinnings of this position, I have included several

additional questions to be considered as part of the overall comment

file. It is my hope that public comments will provide greater

clarity regarding our cross-border authority and identify areas

where we must harmonize global rules with our international

regulatory partners in the near future. It makes no sense to apply

guidance or staff advisories that do not enjoy the full support and

authority provided through rulemakings based on the Commodity

Exchange Act (“CEA”).

Looking forward into this year, the CFTC needs to do away with

the reflexive rule implementation process via staff no-action and

advisories that are not voted on by the Commission. It should be the

goal of the Commission to develop rules that adhere to the APA and

ensure proper regulatory oversight, transparency and promote

competition in the derivatives space.

In this regard, I would like to seek additional comment on the

following points:

1. Please provide your views on whether Covered Transactions

with non-U.S. persons who are not guaranteed or conduit affiliates

of U.S. persons meet the direct and significant test under CEA

section 2(i).3 Please provide a detailed analysis of any such view

and its effect on other aspects of the Commission’s cross-border

policy, if any. Would your view change depending on whether a non-

U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S.

person?

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

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2. CEA section 2(a)(1) 4 provides for the general

jurisidiction of the Commission. Please provide your views on

whether Covered Transactions with non-U.S. persons who are not

guaranteed or conduit affiliates of U.S. persons fall within the

Commission’s jurisdiction under CEA section 2(a)(1) or any other

provision of the CEA providing for Commission jurisdiction. Please

provide a detailed analysis of any such view and its effect on other

aspects of the Commission’s cross-border policy, if any. Would your

view change depending on the nature of the non-U.S. SD (i.e.,

whether it is a guaranteed affiliate or a conduit affiliate of a

U.S. person)?

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4 7 U.S.C. 2(a)(1).

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3. To the extent that Covered Transactions fall within the

Commission’s jurisdiction, should a non-U.S. SD be required to

comply with all, or only certain, Transaction-Level Requirements?

Please provide a detailed analysis of any such view and its effect

on other aspects of the Commission’s cross-border policy, if any.

Would your view change depending on the nature of the non-U.S. SD

(i.e., whether it is a guaranteed affiliate or a conduit affiliate

of a U.S. person)?

4. In the open meeting to consider the cross-border final

guidance and cross-border phase-in exemptive order, I asked about

the Commission’s enforcement and legal authority under the cross-

border guidance. The Commission’s General Counsel replied, “[T]he

guidance itself is not binding strictly. We couldn’t go into court

and, in a count of the complaint, list a violation of the guidance

as an actionable claim.” 5 If the Commission adopts the staff

Advisory as Commission policy (and not through the rulemaking

process), please provide your views on the Commission’s ability to

enforce such policy.

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5 Transcript of Open Meeting to Consider Cross-Border Final

Guidance and Cross-Border Phase-In Exemptive Order (July 12, 2013),

page 79.

[FR Doc. 2014-00080 Filed 1-7-14; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: January 8, 2014