Federal Register, Volume 76 Issue 247 (Friday, December 23, 2011)[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]
[Rules and Regulations]
[Pages 80233-80241]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32841]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter 1
Amendment to July 14, 2011 Order for Swap Regulation
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
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SUMMARY: On October 25, 2011, the Commodity Futures Trading Commission
(``CFTC'' or the ``Commission'') published in the Federal Register a
Notice of Proposed Amendment (``Notice'') to extend the temporary
exemptive relief the Commission granted on July 14, 2011 (``July 14
Order'') from certain provisions of the Commodity Exchange Act
(``CEA'') that otherwise would have taken effect on the general
effective date of title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``the Dodd-Frank Act'')--July 16, 2011. This
final order extends the July 14 Order with certain modifications.
Specifically, it extends the potential latest expiration date of the
July 14 Order from December 31, 2011 to July 16, 2012; and adds
provisions to account for the repeal and replacement (as of December
31, 2011) of part 35 of the Commission's regulations.
DATES: This final order will be effective on December 23, 2011.
FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, (202) 418-
5864, [email protected], Office of the General Counsel; Jocelyn
Partridge, Special Counsel, (202) 418-5926, [email protected],
Division of Clearing and Risk; Ryne Miller, Attorney Advisor, (202)
418-5921, [email protected], Division of Market 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 Act into
law.\1\ Title VII of the Dodd-Frank Act amends the CEA \2\ to establish
a comprehensive new regulatory framework for swaps. The legislation was
enacted to reduce 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 and major swap participants; (2) imposing clearing and trade
execution requirements on standardized derivative products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the rulemaking and enforcement authorities of the Commission
with respect to, among others, all registered entities and
intermediaries subject to the Commission's oversight.\3\
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1 et seq.
\3\ Title VII also includes amendments to the federal securities
laws to establish a similar regulatory framework for security-based
swaps under the authority of the Securities and Exchange Commission
(``SEC'').
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Section 754 of the Dodd-Frank Act states that, unless otherwise
provided, the provisions of subtitle A of title VII of the Dodd-Frank
Act \4\ ``shall take effect on the later of 360 days after the date of
the enactment of this subtitle or, to the extent a provision of this
subtitle requires a rulemaking, not less than 60 days after publication
of the final rule or regulation implementing such provision of this
subtitle.'' Thus, the general effective date for provisions of title
VII that do not require a rulemaking was July 16, 2011. This includes
the provisions that repealed several provisions of the CEA as in effect
prior to the Dodd-Frank Act that excluded or exempted, in whole or in
part, certain transactions from Commission oversight.\5\
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\4\ All of the amendments to the CEA in title VII are contained
in subtitle A. Accordingly, for convenience, references to ``title
VII'' in this Notice shall refer only to subtitle A of title VII.
\5\ These exclusions and exemptions were contained in former CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d, 7 U.S.C. 2(d), 2(e), 2(g),
2(h), and 7a-3.
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Section 712(d)(1) of the Dodd-Frank Act requires the Commission and
the SEC to undertake a joint rulemaking to ``further define'' certain
terms used in title VII, including the terms ``swap,'' ``swap dealer,''
``major swap participant,'' and ``eligible contract participant.'' \6\
Section 721(c) requires
[[Page 80234]]
the Commission to adopt a rule to ``further define'' the terms
``swap,'' ``swap dealer,'' ``major swap participant,'' and ``eligible
contract participant'' to prevent evasion of statutory and regulatory
obligations.\7\ The Commission and the SEC have jointly issued two
notices of proposed rulemaking that address these further
definitions.\8\
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\6\ Section 712(d)(1) provides: ``Notwithstanding any other
provision of this title and subsections (b) and (c), the Commodity
Futures Trading Commission and the Securities and Exchange
Commission, in consultation with the Board of Governors [of the
Federal Reserve System], shall further define the terms `swap',
`security-based swap', `swap dealer', `security-based swap dealer',
`major swap participant', `major security-based swap participant',
and `security-based swap agreement' in section 1a(47)(A)(v) of the
Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''
\7\ Section 721(c) provides: ``To include transactions and
entities that have been structured to evade this subtitle (or an
amendment made by this subtitle), the Commodity Futures Trading
Commission shall adopt a rule to further define the terms `swap',
`swap dealer', `major swap participant', and `eligible contract
participant'.''
\8\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR
80174, Dec. 21, 2010 and Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,
2011.
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The Commission's final rulemakings further defining the terms in
sections 712(d) and 721(c) were not expected to be in effect as of July
16, 2011 (i.e., the general effective date set forth in section 754 of
the Dodd-Frank Act). Accordingly, on July 14, 2011 the Commission
exercised its exemptive authority under CEA section 4(c) \9\ and its
authority under section 712(f) of the Dodd-Frank Act by issuing the
July 14 Order.\10\ In so doing, the Commission sought to address
concerns that had been raised about the applicability of various
regulatory requirements to certain agreements, contracts, and
transactions after July 16, 2011, and thereby ensure that current
practices will not be unduly disrupted during the transition to the new
regulatory regime.\11\
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\9\ 7 U.S.C. 6(c).
\10\ Effective Date for Swap Regulation, 76 FR 42508 (issued and
made effective by the Commission on July 14, 2011; published in the
Federal Register on July 19, 2011). Section 712(f) of the Dodd-Frank
Act states that ``in order to prepare for the effective dates of the
provisions of this Act,'' including the general effective date set
forth in section 754, the Commission may ``exempt persons,
agreements, contracts, or transactions from provisions of this Act,
under the terms contained in this Act.'' Section 754 specifies that
unless otherwise provided in Title VII, provisions requiring a
rulemaking become effective ``not less than 60 days after
publication of the final rule'' (but not before July 16, 2011).
\11\ Concurrent with the July 14 Order, the Commission's
Division of Clearing and Intermediary Oversight and the Division of
Market Oversight (together ``the Divisions'') identified certain
provisions of the Dodd-Frank Act and CEA as amended that would take
effect on July 16, 2011, but that may not be eligible for the
exemptive relief provided by the Commission in its July 14 Order--
specifically, the amendments made to the CEA by Dodd-Frank Act
sections 724(c), 725(a), and 731. On July 14, 2011, the Divisions
issued Staff No-Action Relief addressing the application of these
provisions after July 16, 2011. The Commission staff has informed
the Commission that it is separately considering whether to issue a
no-action letter in which the staff would state that it would not
recommend that the Commission commence an enforcement action against
markets or market participants for failure to comply with the above-
referenced provisions over a period of time co-extensive with that
set forth in this final order.
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II. Description of Relief Provided in July 14 Order
The July 14 Order groups the relevant provisions of the Dodd-Frank
Act into four categories and provides temporary exemptive relief, set
to expire no later than December 31, 2011, with respect to Categories 2
and 3. A summary of the four categories of provisions follows.
Category 1 covers statutory provisions which by their express terms
require a rulemaking. Because, under section 754 of the Dodd-Frank Act,
these provisions do not become effective until at least 60 days after
the final rule is published, no exemptive relief from the general
effective date is necessary. Category 1 provisions include, among
others, the further definitions of terms regarding swap entities or
instruments as required by the Dodd-Frank Act (such as the terms
``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible
contract participant''). Category 1 also includes, among others: (1)
Registration, capital and margin requirements, and business conduct
standards for swap dealers and major swap participants; (2) provisions
prohibiting agricultural swaps except pursuant to CFTC rules; (3) rules
regarding swap execution facilities; and (4) various swap data
recordkeeping and reporting requirements. A complete list of the
Category 1 provisions is included in the appendix to the July 14 Order.
The first part of the relief provided for in the July 14 Order
reaches those Dodd-Frank Act provisions (``Category 2 provisions'')
that are self-effectuating (i.e., do not require a rulemaking) and that
reference one or more of the terms for which the Commission and SEC are
required to provide further definition, including ``swap,'' ``swap
dealer,'' ``major swap participant,'' ``eligible contract
participant,'' and ``security-based swap agreement'' (collectively, the
``referenced terms''). These Category 2 provisions include, for
example, the trade execution requirement of CEA section 2(h)(8), as
amended by Dodd-Frank Act section 723. A complete list of the Category
2 provisions is included in the appendix to the July 14 Order. Because
the Category 2 provisions would have taken effect on July 16, 2011
pursuant to section 754, the Commission granted temporary relief from
those provisions, but only to the extent that the requirements in such
provisions specifically relate to a referenced term that is not yet
further defined. Thus, if a Category 2 provision also applies to
futures or options on futures, the provision took effect on July 16
with respect to futures or options on futures. The exemption for
Category 2 provisions expires on the earlier of: (1) The effective date
of the applicable final rule further defining the relevant term; or (2)
December 31, 2011.
In part two of the July 14 Order, the Commission provides temporary
exemptive relief from the provisions of the CEA that may apply to
certain agreements, contracts, and transactions in exempt or excluded
commodities (generally, financial, energy and metals commodities) as a
result of the repeal of the CEA exemptions and exclusions in former CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011 pursuant to
sections 723(a)(1) and 734(a) of the Dodd-Frank Act (the ``Category 3
provisions''). As explained in the July 14 Order, this relief is based
on the Commission's existing ``part 35'' exemptive rules.\12\
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\12\ 76 FR at 42514. The July 14 Order did not extend to
agreements, contracts, or transactions that fully met the conditions
of part 35, since in such circumstances further relief was
unnecessary.
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Part 35 originally was promulgated in 1993 pursuant to, among
others, the Commission's general exemptive authority in CEA section
4(c) and its plenary options authority under section 4c(b),\13\ and
provides a broad-based exemption from the CEA for ``swap agreements''
in any commodity. Specifically, part 35 exempts ``swap agreements,'' as
defined therein, from most of the provisions of the CEA if: (1) They
are entered into by ``eligible swap participants'' (``ESPs''); \14\ (2)
they are not part of a fungible class of agreements standardized as to
their material economic terms; (3) the creditworthiness of any party
having an actual or potential obligation under the swap agreement would
be a material
[[Page 80235]]
consideration in entering into or determining the terms of the swap
agreement, including pricing, cost, or credit enhancement terms; and
(4) they are not entered into or traded on a multilateral transaction
execution facility.
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\13\ 7 U.S.C. 6c(b).
\14\ As noted in the July 14 Order, the parties covered under
the ESP definition, while very broad, are not coextensive with those
covered by the terms ``eligible commercial entity'' or ``eligible
contract participant.'' Therefore, it is possible that a small
segment of persons or entities that are currently relying on one or
more of the CEA exclusions or exemptions cited above might not
qualify as an ESP and consequently would not be eligible for part
35. 76 FR at 42511, n. 40.
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Under part two of the relief provided for in the July 14 Order, the
Commission stated that transactions in exempt or excluded commodities
(and persons offering, entering into, or rendering advice or rendering
other services with respect to such transactions) are temporarily
exempt from provisions of the CEA that may apply to such transactions
if such transactions comply with part 35, notwithstanding that: (1) The
transaction may be executed on a multilateral transaction execution
facility; (2) the transaction may be cleared; (3) persons offering or
entering into the transaction may be eligible contract participants as
defined in the CEA (prior to the enactment of the Dodd-Frank Act); (4)
the transaction may be part of a fungible class of agreements that are
standardized as to their material economic terms; and/or (5) no more
than one of the parties to the transaction is entering into the
transaction in conjunction with its line of business, but is neither an
eligible contract participant nor an ESP, and the transaction was not
and is not marketed to the public.\15\
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\15\ 76 FR at 42514. With respect to commodity options, the
Commission clarified that options identified in the swap agreement
definition in paragraph (b)(1)(i) of Sec. 35.1 of the Commission's
regulations and any options captured by the concluding catch-all
language in that paragraph, as well as any options described in
paragraphs (b)(1)(ii) and/or (iii) of Sec. 35.1, involving excluded
or exempt commodities are within the scope of the July 14 Order. 76
FR at 42514-15.
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Thus, for certain transactions, the July 14 Order provides relief
notwithstanding that the transaction may not satisfy certain part 35
requirements (e.g., cleared, executed on a multilateral trade execution
facility, entered into by certain persons that are not eligible
contract participants, etc.). The Commission stated in the July 14
Order that this relief is limited to transactions in exempt and
excluded commodities, and does not extend to transactions in
agricultural commodities, because transactions in agricultural
commodities were not covered by the applicable statutory exclusions and
exemptions in effect prior to July 16, 2011.\16\ The exemption in part
two of the July 14 Order expires on the earlier of: (1) The repeal,
withdrawal or replacement of part 35; or (2) December 31, 2011.
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\16\ The Commission also stated, though, that because part 35
remained in effect at the time of the July 14 Order, market
participants could continue to rely on part 35 with respect to swaps
(other than commodity options) on enumerated agricultural
commodities as defined in CEA section 1a(4) or Sec. 32.2 of the
Commission's regulations, as well as swaps and commodity options on
non-enumerated agricultural commodities, to the extent these
transactions fully comply with part 35. Under the July 14 Order,
market participants also may continue to rely on part 32 for options
on enumerated agricultural commodities to the extent these
transactions are conducted in accordance with Sec. 32.13(g) of the
Commission's regulations. Rule 32.13(g) permits off-exchange options
offered to producers, processors, commercial users or merchants of
the commodity or its products or by-products that have a net worth
of at least $10 million, provided the offeree also has a net worth
of at least $10 million.
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Category 4 contains those Dodd-Frank Act provisions for which the
Commission determined not to issue relief, and which therefore went
into effect on July 16, 2011. A complete list of the Category 4
provisions is included in the appendix to the July 14 Order.
The temporary exemptions issued in the July 14 Order are subject to
several conditions. These conditions provide that the July 14 Order
shall not: (1) Limit in any way the Commission's anti-fraud or anti-
manipulation authority under the CEA; (2) apply to any provision of the
Dodd-Frank Act or the CEA that became effective prior to July 16, 2011;
(3) affect any effective date or compliance date set forth in any
rulemaking issued by the Commission to implement provisions of the
Dodd-Frank Act; (4) limit the Commission's authority under Dodd-Frank
Act section 712(f) to issue rules, orders, or exemptions prior to the
effective date of any provision of the Dodd-Frank Act and the CEA, in
order to prepare for such effective date; and (5) affect the
applicability of any provision of the CEA to futures contracts or
options on futures contracts, or to cash markets.\17\
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\17\ 76 FR at 42522.
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III. Discussion of the Proposed Amendments to the July 14 Order
On October 25, 2011, the Commission published in the Federal
Register a Notice to amend the July 14 Order in two ways.\18\ First,
the Commission proposed to amend the July 14 Order to extend the
potential latest expiry dates. With respect to provisions covered in
the first part of the relief in the July 14 Order, the Commission
proposed that the temporary exemptive relief expire upon the earlier
of: (1) The effective date of the applicable final rule further
defining the relevant referenced term; or (2) July 16, 2012.\19\ This
proposed amendment addressed the potential that, as of December 31,
2011, the CFTC-SEC joint rulemakings ``further defining'' the
referenced terms will not yet be effective. The Commission also
proposed to amend the July 14 Order to extend the expiry date of the
second part of the relief in the July 14 Order until the earlier of:
(1) July 16, 2012; or (2) such other compliance date as may be
determined by the Commission. For the same reason stated by the
Commission in issuing the second part of the relief provided in the
July 14 Order, the Commission proposed extending this exemptive relief
to ``allow markets and market participants to continue to operate under
the regulatory regime as in effect prior to July 16, 2011, but subject
to various implementing regulations that the Commission promulgates and
applies to the subject transactions, market participants, or markets.''
\20\
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\18\ Effective Date for Swap Regulation, 76 FR 65999, Oct. 25,
2011.
\19\ The date of July 16, 2012, is consistent with the potential
transitional period provided in section 723(c) of the Dodd-Frank Act
regarding former CEA section 2(h) and section 734(c) of the Dodd-
Frank Act regarding former CEA section 5d (i.e., for ``not longer
than a 1-year period'' following the general effective date of title
VII).
\20\ 76 FR at 42513.
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Second, the Commission proposed to include within the second part
of the relief any agreement, contract or transaction that fully meets
the conditions in part 35 as in effect prior to December 31, 2011. This
proposed amendment addressed the fact that such transactions, which
were not included within the scope of the July 14 Order because the
exemptive rules in part 35 covered them at that time, now require
temporary relief because part 35 will no longer be available as of
December 31, 2011.\21\ Accordingly, to ensure that the exemptive relief
currently available for these transactions continues to be available
after December 31, 2011, the Commission proposed to amend the July 14
Order to incorporate by reference the part 35 relief available prior to
December 31, 2011. Whereas the relief provided in part two of the July
14 Order was (and would remain) limited to transactions in excluded or
exempt
[[Page 80236]]
commodities, the proposed amendment also would include, beginning on
January 1, 2012, transactions in agricultural commodities that fully
meet the conditions in part 35 as in effect prior to December 31,
2011.\22\ The Commission proposed that this further amendment to the
July 14 Order is necessary to ensure that the same scope of the
exemptive relief available before December 31, 2011 is available to all
swaps and extends through July 16, 2012, at the latest.
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\21\ The Commission recently promulgated a rule pursuant to
section 723(c)(3) of the Dodd-Frank Act, and CEA sections 4(c) and
4c(b), that, effective December 31, 2011, will repeal the existing
part 35 relief and replace it with new Sec. 35.1 of the
Commission's regulations. See Agricultural Swaps, 76 FR 49291, Aug.
10, 2011. Rule 35.1 provides, in pertinent part, that ``agricultural
swaps may be transacted subject to all provisions of the CEA, and
any Commission rule, regulation or order thereunder, that is
otherwise applicable to swaps. [It] also clarifies that by issuing a
rule allowing agricultural swaps to transact subject to the laws and
rules applicable to all other swaps, the Commission is allowing
agricultural swaps to transact on [designated contract markets
(``DCMs''), swap execution facilities (``SEFs'')], or otherwise to
the same extent that all other swaps are allowed to trade on DCMs,
SEFs, or otherwise.'' Id. at 49296.
\22\ The Commission also clarified that, by operation of new
Sec. 35.1 of the Commission's regulations, the Commission's
statement in adopting the July 14 Order that a DCM may list and
trade swaps ``under the DCM's rules related to futures contracts,
without exemptive relief,'' 76 FR at 42518, would apply, as of
December 31, 2011, to swaps in agricultural commodities.
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In proposing these amendments, the Commission sought to ensure that
current practices will not be unduly disrupted during the transition to
the new regulatory regime. As stated above, the proposed July 16, 2012
date coincides with the potential transitional period provided in
sections 723(c) and 734(c) of the Dodd-Frank Act.\23\ Further, the
Commission stated that, should the Commission deem it appropriate to
terminate or extend any exemptive relief under part two of the July 14
Order, it would be in a better position to comprehensively evaluate and
consider any tailored exemption at that time.
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\23\ See Order Regarding the Treatment of Petitions Seeking
Grandfather Relief for Exempt Commercial Markets and Exempt Boards
of Trade, 75 FR 56513, Sept. 16, 2010.
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IV. Discussion of the Final Order
The Commission received five comments in response to the Notice
proposing to amend the July 14 Order.\24\ The comments generally
focused upon three issues: (1) The general expiration date of the
relief to be provided by the proposed amendment; (2) the application of
the proposed amendment to agricultural swaps; and, (3) the expiry date
applicable to exempt commercial markets (``ECMs'') operating pursuant
to grandfather relief authorized by section 723(c)(l)-(2) of the Dodd-
Frank Act and their market participants and clearing organizations. The
comments and Commission determinations regarding each of these issues
is discussed in the sections that follow. In addition, the final order
includes other technical, non-substantive changes to the wording of the
proposed amended order.
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\24\ The Commission received comments from Better Markets, CME
Group (CME); LCH.Clearnet Limited (LCH); Nodal Exchange LLC (Nodal
Exchange or Nodal); and the Securities Industry and Financial Market
Association (SIFMA). The comment file is available on the
Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (last visited Dec. 2, 2011).
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A. Expiry Date of July 16, 2012
1. Comments
Commenters were divided on whether the Commission should include an
expiry or ``sunset'' date of July 16, 2012. For example, Better Markets
stated that continuing to set outside dates for the exemptive relief,
rather than granting open-ended exemptive relief, establishes important
deadlines so that work can be prioritized and completed as quickly as
prudently possible.\25\ In contrast, CME Group and SIFMA recommended
the Commission avoid setting a sunset provision date for the expiration
of the temporary exemptive relief.\26\ SIFMA stated that the Commission
should instead provide exemptive relief that lasts on a provision-by-
provision basis until related substantive requirements of the Dodd-
Frank Act are implemented, as the SEC provided for in its parallel
relief under subtitle B of title VII.\27\ SIFMA said that avoiding the
imposition of a sunset date would allow the Commission to adopt its
final rules in a logical order that provides market participants with
necessary legal certainty.\28\
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\25\ Better Markets at 2.
\26\ CME at 2; SIFMA at 2.
\27\ SIFMA at 2.
\28\ SIFMA at 2-3. Although beyond the scope of the Notice,
SIFMA also reiterated its request that the Commission provide a
comprehensive rulemaking schedule and implementation plan, as well
as clear positions on the extraterritorial scope of Title VII and
treatment of inter-affiliate transactions, as set forth in its
November 4 Letter on the Commission's proposed compliance and
implementation schedules for clearing, trade execution,
documentation and margin. SIFMA at 3.
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2. Commission Determination
The Commission has determined to retain, as proposed, an outmost
expiry date of July 16, 2012 for two reasons. First, the Commission
continues to believe that it is appropriate and prudent to periodically
review the extent and scope of any relief provided from the CEA, as
amended by the Dodd-Frank Act.\29\ The Commission anticipates that
additional rulemakings to implement the Dodd-Frank Act will be
completed during the extended period of exemptive relief between
December 31, 2011 and July 16, 2012. During this period the Commission
also will be considering the appropriate phase-in of the various
regulatory requirements under the Dodd-Frank rulemakings. Accordingly,
the Commission believes it appropriate to periodically re-examine the
scope and extent of the proposed exemptive relief in order to ensure
that the scope of relief is appropriately tailored to the schedule of
implementation of the Dodd-Frank Act requirements. Second, particularly
with respect to part two of the July 14 Order, the limitation of this
extension of exemptive relief to no later than July 16, 2012 is
consistent with the transitional relief provided by the Congress in
section 723(c) of the Dodd-Frank Act regarding former CEA section 2(h)
and section 734(c) of the Dodd-Frank Act regarding former CEA section
5d (i.e., for ``not longer than a 1-year period'' following the general
effective date of title VII).\30\ As stated in the Notice, should the
Commission deem it appropriate to terminate or extend any exemptive
relief under part two of the July 14 Order, the Commission will be in a
better position to comprehensively evaluate and consider any tailored
exemption at that time.\31\
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\29\ The Commission's position in this regard is unchanged from
the first Effective Date for Swap Regulation proposal, 76 FR 35372,
35374, June 17, 2011.
\30\ See Orders Regarding the Treatment of Petitions Seeking
Grandfather Relief for Exempt Commercial Markets and Exempt Boards
of Trade, 75 FR 56513, Sept. 16, 2010.
\31\ 76 FR at 66002.
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B. Application to Agricultural Swaps
1. Comments
CME sought clarification on the application of the proposed
amendment to agricultural swaps.\32\ CME stated that it was not clear
from the Notice whether the proposed relief: (1) Would apply only to
agricultural swaps that meet part 35 as in effect prior to December 31,
2011; or (2) includes agricultural swaps that meet part 35 as in effect
prior to December 31, 2011 notwithstanding that: (i) The transaction
may be executed on a multilateral transaction execution facility; (ii)
the transaction may be cleared; (iii) persons offering or entering into
the transaction may be eligible contract participants as defined in the
CEA prior to July 16; (iv) the transaction may be part of a fungible
class of agreements that are standardized as to their material economic
terms; and/or (v) no more than one of the parties to the transaction is
entering into the transaction in conjunction with its line of business,
but is neither an eligible contract participant nor an ESP), and the
transaction was not and is not marketed to the public. CME believes the
latter is consistent with new Commission regulation Sec. 35.1, and
that the Commission should make this clear in
[[Page 80237]]
the text of any final order issued pursuant to the Notice.\33\
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\32\ CME at 2-3.
\33\ Id.
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CME further stated that pursuant to the Notice and new regulation
Sec. 35.1, starting on January 1, 2012, swaps based on agricultural
commodities, like swaps based on exempt and excluded commodities, may
trade on either a DCM, ECM or exempt board of trade (``EBOT'') (until
such time as status as a swap execution facility (``SEF'') is
available). CME believes the Commission should make this clear in the
text of any final order issued pursuant to the Notice.\34\
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\34\ CME at 3.
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2. Commission Determination
Prior to the Dodd-Frank Act, the CEA did not permit transactions in
agricultural commodities on ECMs or EBOTs.\35\ Nothing in the Notice or
the Commission's recently promulgated Sec. 35.1\36\ provide that
agricultural swaps may trade on an ECM or EBOT. Rather, regulation
Sec. 35.1 allows agricultural swaps to transact subject to the laws
and rules applicable to all other swaps, and to transact on DCMs, SEFs,
``or otherwise'' to the same extent that all other swaps are allowed to
trade on DCMs, SEFs, ``or otherwise.'' \37\ To interpret the phrase
``or otherwise'', in conjunction with the exemptive relief issued
herein, as expanding the permissible role for ECMs and EBOTs to
agricultural commodities would be: (1) Contrary to the plain language
of the pre-Dodd-Frank exemptions for ECMs and EBOTs; and (2)
inconsistent with the intent underlying the July 14 Order to preserve
the status quo during implementation of the new swap regulatory
regime.\38\ Accordingly, the Commission now clarifies that new part 35
\39\ and the exemptive relief issued herein, and any interaction of the
two, do not operate to expand the pre-Dodd-Frank scope of transactions
eligible to be transacted on either an ECM or EBOT to include
transactions in agricultural commodities.
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\35\ Specifically, the statutory provisions authorizing ECMs
(pre Dodd-Frank CEA section 2(h)) applied to transactions in exempt
commodities, and the statutory provisions authorizing EBOTs (pre
Dodd-Frank CEA section 5d) applied to transactions in excluded
commodities. Agricultural commodities are neither exempt nor
excluded commodities.
\36\ See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011.
\37\ Id. at 49296.
\38\ The Notice stated: ``[T]he proposed extension of this
exemptive relief `will allow markets and market participants to
continue to operate under the regulatory regime as in effect prior
to July 16, 2011 * * * ' '' 76 FR 65999, at 66001. The regulatory
regime as in effect prior to July 16, 2011, did not permit
transactions in agricultural commodities on ECMs or EBOTs.
\39\ See footnote 36, above.
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To clarify this point, and as compared to the proposed amended
order, the Commission has reformatted this final order by moving the
text addressing transactions that meet part 35 as in effect prior to
December 31, 2011, to a paragraph separate from the text addressing
transactions that meet part 35 as in effect prior to December 31, 2011
notwithstanding that: (i) The transaction may be executed on a
multilateral transaction execution facility; (ii) the transaction may
be cleared; (iii) persons offering or entering into the transaction may
be eligible contract participants as defined in the CEA prior to July
16; (iv) the transaction may be part of a fungible class of agreements
that are standardized as to their material economic terms; and/or (v)
no more than one of the parties to the transaction is entering into the
transaction in conjunction with its line of business, but is neither an
eligible contract participant nor an ESP, and the transaction was not
and is not marketed to the public.
C. Expiry Date Applicable to ECMs and EBOTs Operating Pursuant to
Grandfather Relief Authorized by Section 723(c)(1)-(2) of the Dodd-
Frank Act and Their Market Participants and Clearing Organizations
1. Comments
Two commenters, Nodal Exchange and LCH, expressed concern with the
expiry date of the second part of the relief contained in the proposed
amended order \40\ as it applies to ECMs that have petitioned for the
grandfather relief authorized by section 723(c)(1)-(2) of the Dodd-
Frank Act \41\ and/or to such ECMs' market participants or clearing
organizations. As set forth above, the Commission proposed to amend the
July 14 Order to extend the expiry date of the second part of the
relief until the earlier of: (1) July 16, 2012; or (2) such other
compliance date as may be determined by the Commission.
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\40\ As noted above, part two of the July 14 Order provides
temporary exemptive relief from the provisions of the CEA that
apply, or may apply, to certain agreements, contracts, and
transactions in exempt or excluded commodities as a result of the
repeal of the exemptions and exclusions contained in former CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011. See
sections 723(a)(1) and 734(a) of the Dodd-Frank Act.
\41\ Section 723(c) of the Dodd-Frank Act permitted persons to
submit to the Commission, within 60 days of the enactment of the
Dodd-Frank Act, a petition to remain subject to former section 2(h)
of the CEA and authorized the Commission to allow such persons to
continue to operate subject to former section 2(h) of the CEA for
not longer than a one year period.
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Nodal Exchange is an ECM that has filed for grandfather relief
under the ECM ``Grandfather Order'' issued by the Commission pursuant
to the authority provided by section 723(c)(1)-(2) of the Dodd-Frank
Act.\42\ The ECM Grandfather Order permits ECMs that satisfy specified
conditions to continue to operate pursuant to the provisions of former
CEA section 2(h)(3)-(7) until July 15, 2012. Among the applicable
conditions are the requirements that the ECM must have filed a formal
SEF or DCM application with the Commission within sixty days after the
effective date of final regulations implementing the provisions of
either section 733 or section 735 of the Dodd-Frank Act,\43\ whichever
is applicable, and that the ECM's SEF or DCM application be pending
before the Commission.
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\42\ See Orders Regarding the Treatment of Petitions Seeking
Grandfather Relief for Exempt Commercial Markets and Exempt Boards
of Trade, 75 FR 56513, Sept. 16, 2010.
\43\ Sections 733 and 735 of the Dodd-Frank Act include Core
Principles and other statutory requirements applicable to SEFs and
DCMs, respectively.
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Nodal Exchange requested that the proposed amended order be
modified in two ways. First, Nodal requested that ``the Commission
provide relief to ECMs compliant with the grandfathering provisions by
extending the second part of the July 14 Order for these compliant ECMs
until the latter of (1) July 16, 2012; or (2) such other compliance
date as may be determined by the Commission.'' \44\ In support of its
request, Nodal stated that ``[s]ince the Dodd-Frank Act eliminates ECMs
by no later than July 16, 2012, it would appear that Nodal Exchange
must become a registered DCM or SEF by July 16, 2012.'' \45\ Nodal
asserted, however, that it ``appears highly unlikely that Nodal
Exchange will be able to be either a registered DCM or SEF by July 16,
2012 because the rules for neither DCMs nor SEFs have been finalized''
and because ``based on the proposed rules for DCMs, the 180-day
statutory review period will probably govern the application review
process.'' \46\
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\44\ Nodal at 2 (emphasis in the original).
\45\ Id. at 1.
\46\ Id. at 2.
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Nodal claimed that its ``markets will be disrupted if Nodal
Exchange cannot be registered as a DCM or SEF by July 16, 2012, unless
Nodal Exchange can be permitted to continue to operate as an ECM until
the Commission grants appropriate registration.'' \47\ Nodal also
claimed that ``[w]ithout further guidance from the Commission
consistent with the ECM transition
[[Page 80238]]
period of section 723(c) of the Dodd-Frank Act,'' the proposed amended
order ``creates unnecessary uncertainty for Nodal Exchange, its
participants, its clearing house LCH.Clearnet,\48\ and the LCH.Clearnet
clearing members for Nodal Exchange participants.'' \49\
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\47\ Id.
\48\ Nodal represents that all of its contracts are cleared by
LCH.Clearnet. Id. at 1, fn. 1.
\49\ Id. at 2.
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Second, Nodal asserted that with respect to non-ECM entities such
as Nodal Exchange participants and their LCH clearing members,
extending the relief in the July 14 Order until the earlier of: (1)
July 16, 2012; or (2) such other compliance date as may be determined
by the Commission ``creates uncertainty in the timeline for compliance
with the new regulatory regime,'' noting that it is ``unclear what
circumstances could cause `such other compliance date' to be determined
by the Commission.'' \50\ Accordingly, Nodal Exchange requested that
the Commission provide exemptive relief to ``non-ECM market
participants'' by extending the second part of the July 14 Order until
July 16, 2012 without qualification.\51\
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\50\ Id.
\51\ Id.
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In a related comment, LCH similarly requested that the Commission
extend the exemptive relief in the second part of the July 14 Order to
July 16, 2012 ``without any qualification.'' \52\ LCH.Clearnet Limited,
one of the LCH's operating companies, is registered with the Commission
as a derivatives clearing organization (``DCO'') and provides clearing
services for Nodal Exchange. According to LCH, the second part of the
Commission's July 14 Order permits LCH.Clearnet Limited to continue to
clear transactions for Nodal Exchange.\53\ LCH acknowledged that
LCH.Clearnet's ``DCO designation must be amended before Nodal
Exchange's change in registration [to a DCM or SEF] occurs.'' \54\
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\52\ LCH at 1.
\53\ Id. at 2.
\54\ Id.
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LCH commented that the Commission ``created unnecessary uncertainty
for LCH.Clearnet Limited, Nodal, and LCH.Clearnet clearing members for
firms trading on Nodal by proposing that the extension of the July 14
Order would expire `upon the earlier of: (I) July 16, 2012; or (II)
such other compliance date as may be determined by the Commission.' ''
\55\ Stating that ``no explanation for the `other compliance date'
language'' was provided, LCH maintained that the addition of this
language ``raises the spectre that the Commission could rescind the
exemptive relief at any time for any reason or without allowing
sufficient time for LCH.Clearnet Limited to apply for and receive an
amended order of registration.'' \56\ LCH stated that extending the
expiration date of the second part of the July 14 Order to July 16,
2012 without qualification would be ``consistent with the transitional
period for ECMs provided in section 723(c) of Dodd-Frank'' and the
Commission's goal of striving ``to ensure that current practices will
not be unduly disrupted during the transition to the new regulatory
regime.'' \57\
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\55\ Id. (emphasis in the original).
\56\ Id.
\57\ Id.
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2. Commission Determination
Although these comments came from an ECM and its clearing
organization, the points raised in these comments also are applicable
to EBOTs that are operating under essentially the same Grandfather
Order requirements as ECMs.\58\ Accordingly, in modifying the proposed
amended order to address the comments received regarding ECMs, the
Commission also has determined to modify the proposed amended order to
address EBOTs.
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\58\ See Orders Regarding the Treatment of Petitions Seeking
Grandfather Relief for Exempt Commercial Markets and Exempt Boards
of Trade, 75 FR 56513, Sept. 16, 2010.
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While the final order continues to provide that the exemption set
forth in the second part of the order generally shall expire upon the
earlier of July 16, 2012 or such other compliance date as may be
determined by the Commission, it has been modified to provide that the
exemption will not expire prior to July 16, 2012 in certain
circumstances. Specifically, no other compliance date will be
determined (and thus, the exemption will remain in effect until July
16, 2012) for agreements, contracts, and transactions (and for persons
offering, entering into, or rendering advice or rendering other
services with respect to, such agreements, contracts or transactions)
that: (1) Are executed on an ECM or EBOT that is operating under the
terms of the Commission's ECM/EBOT Grandfather Order and that complies
with all of the applicable conditions of the ECM/EBOT Grandfather
Order; and (2) are cleared by a Commission-registered DCO. This
modification is narrow. It applies only to agreements, contracts, and
transactions that are executed on a grandfathered ECM or EBOT and are
cleared by a registered DCO, and it is restricted in scope to those
specific requirements or provisions of the CEA (and relevant
implementing regulations) that otherwise would apply to such
agreements, contracts, and transactions and that are inconsistent with
the ECM or EBOT Grandfather Order.\59\
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\59\ This modification does not affect the applicability of
general provisions applicable to DCOs or clearing requirements that
the Commission may promulgate under the Dodd-Frank Act that may
become effective before July 16, 2012. Such requirements would still
apply to the DCO and transactions that are not executed on an ECM or
EBOT.
---------------------------------------------------------------------------
As noted by the commenters, the Commission, in proposing the
amendments to the July 14 Order, sought to ensure that current
practices will not be unduly disrupted during the transition to the new
regulatory regime.\60\ The Commission also stated that it believes it
is in the interest of the public and market participants to continue to
provide regulatory certainty regarding the applicability of title VII
of the Dodd-Frank Act.\61\ The modification contained in the final
order will further these objectives by providing greater consistency
between the expiration of this exemptive relief and the terms of the
ECM/EBOT Grandfather Order authorized by Congress in sections 723(c)
and 734(c) of the Dodd-Frank Act. It also will reduce the likelihood of
legal uncertainty that could arise were the exemptive relief applicable
to grandfathered ECMs and EBOTs that execute particular transactions
and the DCOs that clear those same transactions subject to disparate
expiration dates. In this way, ECMs and EBOTs that are compliant with
the conditions contained in the ECM/EBOT Grandfather Order, their
market participants, and their DCOs and clearing members, are more
likely to operate without disruption through the end of the grandfather
relief period authorized by the Dodd-Frank Act--July 16, 2012.
---------------------------------------------------------------------------
\60\ See, e.g., 76 FR at 66002.
\61\ Id.
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The Commission, though, has determined not to modify the expiration
date of the second part of the proposed amended order to permit the
relief to expire later than July 16, 2012 for the same reasons that it
has decided to retain a ``sunset'' or expiration provision generally.
First, the Commission continues to believe that it is appropriate and
prudent to periodically review the extent and scope of any exemptive
relief provided from the CEA, as amended by the Dodd-Frank Act. Second,
the limitation of this exemptive relief to no later than July 16, 2012
is consistent with the transitional relief provided by Congress (i.e.,
for ``not longer than a 1-year period''). Finally, should the
Commission deem it
[[Page 80239]]
appropriate to terminate or extend any exemptive relief under part two
of the July 14 Order, the Commission will be in a better position to
comprehensively evaluate and consider any tailored exemption at that
time.\62\
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\62\ See 76 FR at 66002.
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V. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \63\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with conducting or sponsoring any collection of information
as defined by the PRA. These amendments to the July 14 Order will not
require a new collection of information from any persons or entities
that will be subject to the final order.
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\63\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Considerations
Section 15(a) of the CEA \64\ requires the Commission to consider
the costs and benefits of its action before issuing an order under the
CEA. CEA section 15(a) further specifies that 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 may in its discretion give
greater weight to any one of the five enumerated areas and could in its
discretion determine that, notwithstanding its costs, a particular
order is necessary or appropriate to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the CEA.
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\64\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Commission requested but received no comments on the
consideration of costs and benefits of the proposed amendments
discussed in the Notice. In the Notice, the Commission stated that the
proposed amendments to the existing July 14 Order would not change the
nature or limit the scope of relief granted.\65\ The Commission
continues to believe that these amendments do not change the nature or
scope of the relief granted and, as such, impose no costs beyond the
costs imposed by the July 14 Order. Rather, this final order confers an
added benefit to market participants and the public by extending the
relief provided for in the July 14 Order through no later than July 16,
2012. Accordingly, the consideration of costs and benefits set forth in
the July 14 Order may be incorporated by reference in this final order.
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\65\ See 76 FR 42521.
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VI. Amendments to the July 14 Order
The Commission amends the July 14 Order to read as follows:
The Commission, to provide for the orderly implementation of the
requirements of Title VII of the Dodd-Frank Act, pursuant to sections
4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,
hereby issues this Order consistent with the determinations set forth
above, which are incorporated in this final order, as amended, by
reference, and:
(1) Exempts, subject to the conditions set forth in paragraph (4),
all agreements, contracts, and transactions, and any person or entity
offering, entering into, or rendering advice or rendering other
services with respect to, any such agreement, contract, or transaction,
from the provisions of the CEA, as added or amended by the Dodd-Frank
Act, that reference one or more of the terms regarding entities or
instruments subject to further definition under sections 712(d) and
721(c) of the Dodd-Frank Act, which provisions are listed in Category 2
of the Appendix to this Order; provided, however, that the foregoing
exemption:
a. Applies only with respect to those requirements or portions of
such provisions that specifically relate to such referenced terms; and
b. With respect to any such provision of the CEA, shall expire upon
the earlier of: (i) the effective date of the applicable final rule
further defining the relevant term referenced in the provision; or (ii)
July 16, 2012.
(2) Exempts, subject to the conditions set forth in paragraph (4),
all agreements, contracts, and transactions, and any person or entity
offering, entering into, or rendering advice or rendering other
services with respect to, any such agreement, contract, or transaction,
from the provisions of the CEA, if the agreement, contract, or
transaction complies with part 35 of the Commission's regulations as in
effect prior to December 31, 2011. This exemption shall expire upon the
earlier of (i) July 16, 2012; or (ii) such other compliance date as may
be determined by the Commission.
(3) Exempts, subject to the conditions set forth in paragraph (4),
all agreements, contracts, and transactions, and any person or entity
offering, entering into, or rendering advice or rendering other
services with respect to, any such agreement, contract, or transaction,
from the provisions of the CEA, if the agreement, contract, or
transaction complies with part 35 of the Commission's regulations as in
effect prior to December 31, 2011, including any agreement, contract,
or transaction in an exempt or excluded (but not agricultural)
commodity that complies with such provisions then in effect
notwithstanding that:
a. The agreement, contract, or transaction may be executed on a
multilateral transaction execution facility;
b. The agreement, contract, or transaction may be cleared;
c. Persons offering or entering into the agreement, contract or
transaction may not be eligible swap participants, provided that all
parties are eligible contract participants as defined in the CEA prior
to the date of enactment of the Dodd-Frank Act;
d. The agreement, contract, or transaction may be part of a
fungible class of agreements that are standardized as to their material
economic terms; and/or
e. No more than one of the parties to the agreement, contract, or
transaction is entering into the agreement, contract, or transaction in
conjunction with its line of business, but is neither an eligible
contract participant nor an eligible swap participant, and the
agreement, contract, or transaction was not and is not marketed to the
public;
Provided, however, that:
a. Such agreements, contracts, and transactions in exempt or
excluded commodities (and persons offering, entering into, or rendering
advice or rendering other services with respect to, any such agreement,
contract, or transaction) fall within the scope of any of the CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of
business provision as in effect prior to July 16, 2011; and
b. This exemption shall expire upon the earlier of: (i) July 16,
2012; or (ii) such other compliance date as may be determined by the
Commission, except that the exemption shall not expire prior to July
16, 2012 with limited respect to the specific requirements or
provisions of the CEA and regulations promulgated thereunder that
otherwise would apply to such agreements, contracts, and transactions
(and the persons offering, entering into, or rendering advice or
rendering other services with respect to them) and that are
inconsistent with the exempt commercial market (``ECM'')/exempt board
of trade (``EBOT'') Grandfather Order if (I) such agreements,
contracts, and transactions are executed on an ECM or an EBOT that is
operating under the terms of, and
[[Page 80240]]
compliant with the applicable conditions of, the Commission's ECM/EBOT
Grandfather Order which became effective September 20, 2010; (II) such
agreements, contracts, and transactions are cleared by a registered
derivatives clearing organization; and (III) such ECM or EBOT complies
with all other Commission regulations implementing the provisions of
the Dodd-Frank Act that are listed in Category 1 of the Appendix to
this Order.
(4) Provides that the foregoing exemptions in paragraphs (1), (2)
and (3) above shall not:
a. Limit in any way the Commission's authority with respect to any
person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b,
4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the
Commission promulgated pursuant to such authorities, including
regulations pursuant to CEA section 4c(b) proscribing fraud;
b. Apply to any provision of the Dodd-Frank Act or the CEA that
became effective prior to July 16, 2011;
c. Affect any effective or compliance date set forth in any
rulemaking issued by the Commission to implement provisions of the
Dodd-Frank Act;
d. Limit in any way the Commission's authority under section 712(f)
of the Dodd-Frank Act to issue rules, orders, or exemptions prior to
the effective date of any provision of the Dodd-Frank Act and the CEA,
in order to prepare for the effective date of such provision, provided
that such rule, order, or exemption shall not become effective prior to
the effective date of the provision; and
e. Affect the applicability of any provision of the CEA to futures
contracts or options on futures contracts, or to cash markets.
In its discretion, the Commission may condition, suspend,
terminate, or otherwise modify this Order, as appropriate, on its own
motion. This final order, as amended, shall be effective immediately.
Issued in Washington, DC, on December 19, 2011 by the
Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Statement of Commissioner Scott D. O'Malia
For the fourth time this year,\66\ I am concurring with the
Commission's decision to provide market participants with temporary
relief from certain provisions of the Dodd-Frank Act.\67\ Again, I am
concurring despite my belief that this iteration of the final exemptive
order (the ``Second Iteration'') is deeply flawed--just like the July
14, 2011 final order (the ``First Iteration''). By now, it is well
known that I object to arbitrary sunsets. It is also well known that I
object to the Commission's recalcitrance--despite Congressional
direction--to set forth comprehensive rulemaking and implementation
schedules.\68\ I will not expound upon such objections here. Instead, I
would like to focus on the Commission's dogmatic adherence to the
exemptive approach taken by the First Iteration, even in light of known
facts. Such adherence sets a troubling precedent for our Dodd-Frank
outstanding proposals.
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\66\ See ``Do What You Can'', Opening Statement for the June 14,
2011 Commission Meeting, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement061411; Concurring
Statement on the Order Regarding the Effective Date for Swap
Regulation, dated July 14, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071411; Concurring
Statement, Second Extension of Temporary Exemptive Relief, dated
October 18, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement101811c.
\67\ To provide such relief, the Commission is relying on its
exemptive authority under section 4(c) of the Commodity Exchange Act
and its authority under section 712(f) of the Dodd-Frank Act.
\68\ See H.R. Rep. No. 112-101, at 54 (2011), available at
http://www.gpo.gov/fdsys/pkg/CRPT-112hrpt101/pdf/CRPT-112hrpt101.pdf.
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The Goal
The First Iteration provided for the termination of exemptive
relief on December 31, 2011, absent further Commission action (the
``December Sunset''). The primary reason that the Commission advanced
for the December Sunset was that ``it would be appropriate to
periodically re-examine the scope and extent of the proposed exemptive
relief in order to ensure that the scope of relief is appropriately
tailored to the schedule of implementation of the Dodd-Frank Act
requirements.'' \69\
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\69\ The proposed order for Effective Date for Swap Regulation,
76 FR 35372, 35375 (Jun. 17, 2011). See the final order for
Effective Date for Swap Regulation, 76 FR 42508, 42514 (Jul. 19,
2011) (stating that ``[t]he Commission has determined, for the
reasons discussed in the proposed order, not to alter the expiration
date(s) contained in the proposed order.'').
In both the First and Second Iterations, the Commission advanced
another reason for a sunset. Essentially, the Commission argued
that, with respect to the Category 3 provisions, ``limiting
exemptive relief to a fixed period is consistent with the approach
to transitional relief provided in sections 723(c) and 734 of the
Dodd-Frank Act.'' 76 FR at 42514. See Section IV(A)(2) of the Second
Iteration. With respect to the First Iteration, this statement was
somewhat odd, since the December Sunset was earlier--by six months--
than the end date for transitional relief specified by those two
Dodd-Frank sections. With respect to the Second Iteration, this
statement is accurate. However, the transitional relief specified by
those two Dodd-Frank sections may have been predicated on the
Commission completing its Dodd-Frank rulemakings by the general
effective date of July 16, 2011. If the Commission assumes
otherwise, then it would be imputing to Congress the intent to place
market participants in a Catch-22. Specifically, the Commission
would be stating that Congress intended to withdraw transitional
relief from market participants before the Commission completes the
Dodd-Frank structures to which market participants are explicitly
supposed to transition. This imputation may be somewhat ungenerous.
I believe that sections 723(c) and 734(c) of the Dodd-Frank Act,
when interpreted in the proper context, do not support a sunset in
the Second Iteration.
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The Facts
Let us now examine the facts. After all, hindsight should be 20/20.
First, the December Sunset has done nothing to ensure that the
Commission completes its Dodd-Frank rulemakings more expeditiously.
Specifically, the Commission has not completed the definitional
rulemakings that Category 2 provisions (as the First and Second
Iterations define such term) require to become effective. Additionally,
the Commission has not completed the rulemakings on designated contract
markets and swap execution facilities that would enable Category 3
provisions (as the First and Second Iterations define such term) to
become effective without disrupting existing markets.
Second, the December Sunset has not permitted the Commission to
tailor the scope and extent of the current exemption. This is
unsurprising. Market participants cannot reasonably comply with
Category 2 or 3 provisions unless the Commission completes predicate
rulemakings. An arbitrary sunset cannot change this fact. Hence, the
Second Iteration emphasizes that ``the proposed amendments to the
existing July 14 Order would not change the nature or limit the scope
of relief granted.'' \70\
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\70\ Section V(B) of the Second Iteration.
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Commission Response
As demonstrated above, the December Sunset achieved none of its
goals. However, in formulating the Second Iteration, the Commission
appears to have ignored inconvenient truths. The Second Iteration
extends the December Sunset to July 16, 2012. Simultaneously, the
Commission continues its refusal to provide market participants with
its plan for the completion of Dodd-Frank rulemakings by July 16, 2012.
In fact, at least one market participant has already indicated that--
based on reasonable estimates of Commission progress--it would need
exemptive relief beyond the
[[Page 80241]]
new sunset.\71\ I am already anticipating fifth and sixth votes on
exemptive relief.
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\71\ See comment letter from Nodal Exchange, LLC, dated November
23, 2011, to the proposed order on Effective Date for Swap
Regulation, 76 FR 65999 (Oct. 25, 2011), available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (stating
``[i]t appears highly unlikely that Nodal Exchange will be able to
be either a registered DCM or SEF by July 16, 2012 because the rules
for neither DCMs nor SEFs have been finalized. Furthermore, based on
the proposed rules for DCMs, the 180-day statutory review period
will probably govern the application review process. Without further
guidance from the Commission * * * the CFTC Proposed Release created
unnecessary uncertainty for Nodal Exchange, its participants, its
clearing house LCH.Clearnet, and the LCH.Clearnet clearing members
for Nodal Exchange participants.'').
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Let's Figure Out the Best Way to Reach the Goal
I support the Second Iteration because some certainty is better
than no certainty. However, if the Commission is truly open to
reconsidering its Dodd-Frank proposals--as some have indicated--the
Second Iteration should have contained no arbitrary sunset. In the
Second Iteration, the Commission displays a troubling willingness to
adhere to prior convention.\72\ By the fifth and sixth times I have to
vote on temporary relief, I hope that the Commission will have agreed
to grant market participants much-deserved certainty until applicable
rulemakings become effective. Additionally, I hope that the Commission
will have provided rulemaking and implementation schedules to market
participants, so that they can plan to be in compliance when such
rulemakings become effective. As Martin Luther King, Jr. has said: ``We
must accept finite disappointment, but never lose infinite hope.''
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\72\ According to the Office of Management and Budget, we have
promulgated five final rulemakings that would each result in an
annual effect on the American economy of more than $100 million a
year. If the Commission continues to adhere to its Dodd-Frank
approach, without consideration of new and applicable facts, then
the Commission may impose substantial and unnecessary costs on the
American economy--costs that we all can ill-afford.
[FR Doc. 2011-32841 Filed 12-22-11; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 23, 2011