Federal Register, Volume 78 Issue 4 (Monday, January 7, 2013)[Federal Register Volume 78, Number 4 (Monday, January 7, 2013)]
[Rules and Regulations]
[Pages 858-882]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31736]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN 3038-AD85
Final Exemptive Order Regarding Compliance With Certain Swap
Regulations
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
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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
[[Page 859]]
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 has determined to finalize the Proposed Order, with certain
modifications and clarifications to address public comments. Under this
final order (``Final Order''), a non-U.S. person that registers as a
swap dealer (``SD'') or major swap participant (``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.
In addition, the Commission is separately proposing further guidance on
certain specific aspects of the Proposed Guidance (``Further Proposed
Guidance'').
DATES: The Final Order is effective on December 21, 2012 and will
expire on July 12, 2013.
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 SDs and 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\
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\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)
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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 applicable to SDs and MSPs have been
proposed but not finalized.\6\
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\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).
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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.
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\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).
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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.
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\11\ ``Exemptive Order Regarding Compliance With Certain Swap
Regulations,'' 77 FR 41110 Jul. 12, 2012.
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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
[[Page 860]]
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\
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\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.
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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.
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\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.
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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\
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\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.
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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 determined to issue the Final Order
as a time-limited exemptive order that is substantially similar to the
Proposed Order, except for the addition of provisions regarding
registration and certain modifications and clarifications addressing
public comments. 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.\16\ The Final Order
continues that process and furthers the same purposes.\17\
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\16\ 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'').
\17\ 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.
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In preparing the Final Order, the Commission has attempted to be
responsive to commenters' concerns and recommendations, so that market
practices will not be unnecessarily disrupted during the transition to
the new swap regulatory regime. At the same time, the Commission also
recognizes the importance of the new SD and MSP regulatory scheme to
the Dodd-Frank swap reforms and, therefore, is mindful that its
implementation should not be subject to undue delay. The Commission
believes that the Final Order strikes the proper balance between
promoting an orderly transition to the new regulatory regime, while
appropriately tailoring relief to ensure that the Commission can
responsibly discharge its statutory duties.
This release is organized in seven sections. Section II provides a
brief overview of the Commission's exemptive authority under section
4(c) of the CEA and the Proposed Order; Section III provides a summary
of the comments received on the Proposed Order and the Commission
determinations regarding the Final Order; Section IV provides the
Commission's findings pursuant to CEA section 4(c); Section V addresses
the Paperwork Reduction Act; Section VI discusses cost benefit
considerations; and Section VII contains the Final Order.
II. Commission's Exemptive Authority and Proposed Order
A. Section 4(c) of the CEA
Section 4(c)(1) of the CEA authorizes the Commission to ``promote
responsible economic or financial innovation and fair competition'' by
exempting any transaction or class of transaction from any of the
provisions of the CEA (subject to certain exceptions) where the
Commission determines that the exemption would be consistent with the
public interest and the purposes of the CEA.\18\ Under section 4(c)(2)
of the CEA, the Commission may not grant exemptive relief unless it
determines that: (1) The exemption is appropriate
[[Page 861]]
for the transaction and consistent with the public interest; (2) the
exemption is consistent with the purposes of the CEA; (3) the
transaction will be entered into solely between ``appropriate
persons''; and (4) the exemption will not have a material adverse
effect on the ability of the Commission or any contract market to
discharge its regulatory or self-regulatory responsibilities under the
CEA.\19\ In enacting section 4(c), Congress noted that the purpose of
the provision is to give the Commission a means of providing certainty
and stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.\20\
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\18\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).
\19\ CEA section 4(c)(2), 7 U.S.C. 6(c)(2).
\20\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
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B. Proposed Order
Under the Proposed Order, the Commission would allow non-U.S. SDs
and MSPs to delay compliance with certain Entity-Level Requirements of
the Dodd-Frank Act (and the Commission's regulations thereunder),
subject to specified conditions described therein.\21\ An exception to
the foregoing relief from the Entity-Level Requirements related to the
swap data repository (``SDR'') reporting requirement \22\ and part 20
of the Commission's regulations relating to large-trader reporting
(``LTR''). Specifically, non-U.S. SDs and MSPs would be required to
comply with the SDR reporting and LTR requirements for all swaps with
U.S. counterparties upon their compliance date. Further, for swaps with
non-U.S. counterparties, the Commission proposed that only those non-
U.S. SDs and MSPs that are not affiliates or subsidiaries of a U.S.-
based SD would be permitted to delay compliance with the SDR reporting
and LTR requirements.
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\21\ The ``Entity-Level Requirements'' and ``Transaction-Level
Requirements'' for purposes of the Proposed Order were the same as
those defined for purposes of the Final Order. See section II.D.1.,
below.
\22\ See 7 U.S.C. 2(a)(13)(G). The Commission believes that the
data reported to, and collected by, SDRs will be important to its
ability to effectively monitor and address the risk exposures of
individual market participants (including SDs and MSPs) and the
concentration of risk within the swaps market more generally.
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With respect to U.S. SDs and MSPs, the Commission proposed to
permit such registrants \23\ to delay compliance with certain Entity-
Level Requirements through January 1, 2013. This relief with respect to
Entity-Level Requirements, however, would not extend to swap data
recordkeeping, SDR reporting or LTR requirements. That is, U.S. SDs and
MSPs would be required to comply with the swap data recordkeeping, SDR
reporting and LTR requirements for all swaps.
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\23\ For purposes of the Final Order, the term ``registrant''
means a registered SD or MSP.
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The Commission also proposed to grant, with respect to certain
Transaction-Level Requirements of the Dodd-Frank Act (and the
Commission's regulations thereunder), temporary relief to non-U.S. SDs
and MSPs, as well as foreign branches of U.S. SDs and MSPs, for swaps
with a non-U.S. counterparty so that they may comply only with the
regulations as may be required in the home jurisdiction of the non-U.S.
registrant (or in the case of a foreign branch of a U.S. registrant,
the foreign location of the branch).\24\ With respect to swaps with any
U.S. counterparty, however, these registrants (as well as foreign
branches of U.S. SDs and MSPs) would be required to comply with all
applicable Transaction-Level Requirements that are in effect. Finally,
the Commission did not propose exemptive relief for swaps between
market participants that are neither SDs nor MSPs.
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\24\ Under the Proposed Guidance, a foreign branch of a U.S.
person would be deemed a U.S. person. Accordingly, swaps entered
into between a foreign branch of a U.S. person and another foreign
branch of a U.S. person would be subject to the Transaction-Level
Requirements.
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The proposed temporary exemptive relief for non-U.S. registrants
(and foreign branches of U.S. registrants with respect to Transaction-
Level Requirements) would become effective on the compliance date for
registration and expire 12 months following the publication of the
Proposed Order in the Federal Register (i.e., July 12, 2013). In the
Proposed Order, the Commission also stated that, in the interest of
promoting an orderly transition to the new swap regulatory regime, it
intends to consider extending the effectiveness of the exemptive relief
at its expiration based on, among other things, whether and when
substituted compliance with foreign regulatory requirements for non-
U.S. persons is available.
A non-U.S. registrant seeking relief under the Proposed Order would
have to satisfy certain conditions. First, a non-U.S. person that is
required to register as an SD or MSP would have to apply to become
registered as such when registration is required. Second, within 60
days of applying for registration, a non-U.S. registrant would have to
submit to the National Futures Association (``NFA'') a compliance plan
addressing how it plans to comply, in good faith, with all applicable
requirements under the CEA and related rules and regulations upon the
effective date of final cross-border interpretive guidance.
The Commission further noted that the proposed relief would
neither: (1) Limit the applicability of any CEA provision or Commission
regulation to any person, entity or transaction except as provided in
the Proposed Order; nor (2) affect any effective date or compliance
date set out in any specific Dodd-Frank Act rulemaking by the
Commission.
III. Comments on the Proposed Order and Commission Determinations
A. Comments Generally
Many commenters expressed general support for the Proposed Order
but urged the Commission to broaden the scope of the relief to give
market participants adequate time to implement necessary operational
and compliance changes and to reflect the fact that certain key aspects
of the Proposed Guidance (particularly those relating to registration
determinations) were not yet final as of the date of the comments.\25\
Many of the commenters supporting temporary exemptive relief also
suggested specific modifications or clarifications of the Proposed
Order concerning the scope and/or timing of the exemptive relief.\26\
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\25\ See e.g., Letters from Security Industry and Financial
Markets Association (``SIFMA'') (Aug. 13, 2012); Institute of
International Bankers (``IIB'') (Aug. 9, 2012); Cleary Gottlieb
Steen & Hamilton LLP (``Cleary'') (Aug. 16, 2012); and Futures
Options Association (``FOA'') (Aug. 13, 2012). Some of the
commenters expressly stated that the Commission should finalize the
exemptive relief as promptly as possible. See e.g., IIB Letter at 1
and Cleary Letter at 3. For example, IIB stated that the proposed
relief should be modified to address ``unrealistic and unwarranted''
compliance burdens related to the Proposed Guidance and certain
aspects of the Commission regulations adopted to date. IIB Letter
(Aug. 9, 2012) at 2. Accordingly, IIB requested limited interim
relief from certain aspects of the Commission's registration and
definitional rules (in particular, the aggregation requirement for
purposes of the de minimis calculation). Id. at 3-7. Similarly, The
Clearing House Association LLC (``The Clearing House'') expressed
concerns that the proposed relief will be ``ultimately ineffective''
in accomplishing its objectives if concepts from the Proposed
Guidance are required to be applied before they are finalized, and
requested exemption from those rules or concepts that are not yet
finalized. The Clearing House (Aug. 13, 2012) at 2.
\26\ See, e.g., SIFMA (Aug. 13, 2012), at 3, 5-6, 10-13, A-50;
Lloyds Banking Group (``Lloyds'') (Aug. 13, 2012) at 1-2; IIB (Aug.
9, 2012), at 5; Canadian Bankers Association (Aug. 13, 2012), at 2;
Credit Suisse (Aug. 27, 2012), at 7; Cleary (Aug. 16, 2012), at 4;
Deutsche Bank AG (``Deutsche Bank'') (Aug. 13, 2012), at 3, 7;
Societe Generale (Aug. 8, 2012), at 2.
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On the other hand, other commenters--namely, public interest groups
such as Americans for Financial Reform (``AFR'') and Public Citizen's
Congress Watch--expressed concerns
[[Page 862]]
about delaying the implementation of the Dodd-Frank Act to overseas
activities.\27\ AFR stated that the Proposed Order would significantly
extend the period where markets lack critical protections against
derivatives risks and expressed concern about taxpayer exposure to
foreign banks, particularly ``foreign affiliates of U.S. banks whose
liabilities are guaranteed (implicitly or explicitly) by the parent
company.'' \28\ Similarly, Public Citizen's Congress Watch expressed
the concern that the Proposed Order would unnecessarily delay
compliance with most entity requirements and transaction requirements
for foreign subsidiaries and affiliates of U.S. financial institutions
and for U.S. subsidiaries and affiliates of foreign banks, further
prolonging exposure of U.S. taxpayers to unnecessary systemic
risks.\29\
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\27\ See AFR (Aug. 13, 2012), at 1-4. AFR stated that, while it
recognized the complexities and challenges the industry faces, ``the
large swap entities designated under the Dodd-Frank Act have been
aware of the general contours of these requirements for several
years, and there have already been significant delays in
implementation.'' AFR Letter at 2. Public Citizen's Congress Watch
expressed concerns that delayed compliance would unnecessarily
prolong American taxpayers' exposure to the systemic risks of U.S.
institutions and interests. See Public Citizen's Congress Watch
(submitted by Professor I. Michael Greenberger) (``Public Citizen's
Congress Watch'') (Aug. 14, 2012) at 1-13.
\28\ AFR (Aug. 13, 2012) at 2.
\29\ See Public Citizen's Congress Watch (Aug. 14, 2012) at 1-2.
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B. Definition of ``U.S. Person''
Although at this time the Commission is not making any
determinations as to the scope of the final interpretive guidance, the
Commission believes that the comments received on the definition of
U.S. person set forth in the Proposed Guidance are nonetheless relevant
and helpful in determining the appropriate scope of exemptive relief in
the Final Order. Taken together, these comments generally support, as
an interim measure, the approach taken by the Commission staff in CFTC
Letter No. 12-22 regarding the initial scope of the application of the
CEA to swaps activities. Accordingly, in light of the Commission's
experience to date with CFTC Letter No. 12-22 and these comments, it is
taking a similar approach to the definition of U.S. person to that set
forth in the staff no-action letter and supported by many commenters.
To be clear, the Commission wishes to emphasize that the discussion
here is not, and should not be construed as, an indication of, or a
limitation on, the definition of the term ``U.S. person'' that the
Commission may adopt in final cross-border interpretive guidance. As
discussed further below, the Commission is seeking further comment on
this issue. However, the Commission is aware that the terms ``U.S.
person'' and ``non-U.S. person'' are commonly used in the discussion of
these issues. For ease of reference, therefore, this release and the
Final Order use the term ``U.S. person'' to refer to a person that is
described by the criteria discussed below, and the term ``non-U.S.
person'' to refer to any other person.\30\
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\30\ A number of commenters voiced concerns regarding potential
expansion of the term ``U.S. person'' that they thought could result
from the prefatory phrase ``includes, but is not limited to'' that
appeared in the Proposed Guidance. These commenters requested that
the Commission affirmatively state that non-U.S. persons are any
persons that do not meet the definition of ``U.S. person.'' See
SIFMA (Aug. 27, 2012) at A-15; IIB (Aug. 27, 2012) at 11-12;
European Commission (``EC'') (Aug. 24, 2012) at 1-2; and Australian
Bankers Association Inc. (``Australian Bankers'') (Aug. 27, 2012) at
4.
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1. Proposed Definition in the Proposed Guidance
Under 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.\31\ As
proposed, the term ``U.S. person'' would encompass both: (1) Persons
(or classes of persons) located within the United States; as well as
(2) persons that may be domiciled or operating outside the United
States, but whose swap activities have a ``direct and significant
connection with activities in, or effect on, commerce of the United
States'' within the meaning of CEA section 2(i).\32\ 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.
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\31\ See Proposed Guidance, 77 FR at 41218.
\32\ 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.
Under the proposal, a ``U.S. person'' would include a foreign
branch of a U.S. person; on the other hand, a non-U.S. affiliate or
subsidiary guaranteed by a U.S. person would not be deemed a ``U.S.
person.''
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2. Comments
In general, commenters stated that the proposed ``U.S. person''
definition presented significant interpretive issues and implementation
challenges.\33\ The commenters contended that it would be difficult to
determine U.S. person status because the proposed definition was, they
said, overly broad, contained ambiguities, and would require collection
of information not readily accessible at this time. The commenters,
therefore, urged the Commission to provide market participants with
sufficient time to implement a final definition of the term ``U.S.
person'' and to reconsider the proposed definition in favor of ``a
simpler, more easily applied'' definition of ``U.S. person.'' \34\
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\33\ See SIFMA (Aug. 27, 2012) at 5; Societe Generale (Aug. 8,
2012) at 4; IIB (Aug. 27, 2012), at 4-14; Deutsche Bank (Aug. 27,
2012), at 1-4; Goldman Sachs Group, Inc. (``Goldman'') (Aug. 27,
2012), at 3; The Hong Kong Association of Banks (``Hong Kong
Banks'') (Aug. 27, 2012), at 4; Australian Bankers (Aug. 27, 2012)
at 4.
\34\ See SIFMA (August 27, 2012) at A-10.
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A number of commenters requested that the Commission adopt an
interim definition of ``U.S. person'' that would allow firms to rely on
their existing systems and classifications and avoid the need to
develop systems to achieve temporary compliance with standards that may
change when a definition of the term ``U.S. person'' is finalized.\35\
IIB explained that applying any definition of ``U.S. person'' that
departs from status based on residence or jurisdiction of organization,
and in some cases principal place of business, will require time to
implement relevant documentation conventions and diligence
procedures.\36\ IIB, therefore, requested that the Commission implement
a phased-in interim approach to the ``U.S. person'' definition that
would encompass, in general, (1) a natural person who is a U.S.
resident; and (2) a corporate entity
[[Page 863]]
that is organized or incorporated under the laws of the United States
or has its place of business in the United States.\37\
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\35\ See e.g., Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27,
2012) at A-8-A9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13,
2012) at 2; State Street Corporation (``State Street'') (Aug. 27,
2012) at 2; and Goldman (Aug. 27. 2012) at 3.
\36\ See IIB (Aug. 9, 2012) at 4.
\37\ Id. For purposes of IIB's suggested definition, a foreign
branch of a U.S. SD would be considered a non-U.S. person. IIB added
that it believed that the Commission should adopt a final definition
of ``U.S. person'' that is consistent with IIB's proposed interim
definition.
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SIFMA also urged the Commission to phase in the ``U.S. person''
definition, citing the implementation difficulties identified by IIB.
Specifically, SIFMA recommended that the Commission allow market
participants to apply an interim definition of ``U.S. person'' until 90
days after the final definition of ``U.S. person'' is published.\38\
SIFMA stated that its interim definition--which was identical to IIB's
interim definition--should identify ``core'' U.S. persons and allow its
members to phase in compliance with the Dodd-Frank requirements without
building new systems that might have to be changed when a final
definition is adopted.
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\38\ See SIFMA (Aug. 25, 2012) at A-8.
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3. Commission Determination on Definition of ``U.S. Person''
The Commission finds merit in the comments suggesting that it
should adopt a phased approach to cross-border activities. The
Commission understands, from the comments, that market participants may
need additional time to assess their businesses in light of the Final
Order and to institute necessary changes to their systems and
operations. Therefore, for purposes of the Final Order, the Commission
will apply a definition of the term ``U.S. person'' based upon the
counterparty criteria set forth in CFTC Letter No. 12-22 \39\ with
certain modifications as described below. With respect to the other
issues raised by commenters regarding the definition of ``U.S.
person,'' the Commission believes that further public comment and
consideration during the effectiveness of the Final Order will be
helpful.
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\39\ The counterparty criteria set forth in CFTC Letter No. 12-
22 are:
(i) A natural person who is a resident of the United States;
(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 organized or incorporated under the laws of the United
States;
(iii) A pension plan for the employees, officers, or principals
of a legal entity described in (ii) above, unless the pension plan
is exclusively for foreign employees of such entity;
(iv) An estate or trust, the income of which is subject to U.S.
income tax, regardless of source; or
(v) An individual account (discretionary or not) where the
beneficial owner is a person described in (i) through (iv) above.
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For purposes of the Final Order, the Commission will treat as a
``U.S. person'' any person identified by the following five criteria:
\40\
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\40\ The Commission understands that persons may currently be
relying upon the counterparty criteria set forth in CFTC Letter No.
12-22. Thus, until December 31, 2012, persons may continue to apply
those criteria for purposes of the Final Order. In effect, until
December 31, 2012, a person may apply either the counterparty
criteria in CFTC Letter No. 12-22, or the definition set forth
herein for purposes of the Final Order. Beginning on January 1, 2013
(i.e., following the expiration of CFTC Letter No. 12-22), a person
must apply the definition set forth in the Final Order for purposes
of swaps entered into on or after that date.
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(i) A natural person who is a resident of the United States;
(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 (A) organized or incorporated under the laws of a state or other
jurisdiction in the United States or (B) effective as of April 1, 2013
for all such entities other than funds or collective investment
vehicles, having its principal place of business in the United States;
(iii) A pension plan for the employees, officers or principals of a
legal entity described in (ii) above, unless the pension plan is
primarily for foreign employees of such entity;
(iv) An estate of a decedent who was a resident of the United
States at the time of death, or a trust governed by the laws of a state
or other jurisdiction in the United States if a court within the United
States is able to exercise primary supervision over the administration
of the trust; or
(v) An individual account or joint account (discretionary or not)
where the beneficial owner (or one of the beneficial owners in the case
of a joint account) is a person described in (i) through (iv) above.
The modifications made by the Commission to the counterparty
criteria set forth in CFTC Letter No. 12-22 relate to (1) the location
of an entity's principal place of business, (2) the treatment of
pension plans for foreign employees, (3) the treatment of estates and
trusts, and (4) the treatment of joint accounts.\41\
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\41\ Also, the Commission is clarifying that language in the
second counterparty criterion in CFTC Letter No. 12-22 referring to
an entity ``incorporated under the laws of the United States''
includes an entity incorporated under the laws of a state or other
jurisdiction in the United States.
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First, regarding the location of an entity's principal place of
business, the Commission considered that the second counterparty
criterion in CFTC Letter No. 12-22 is generally intended to cover legal
entities that are physically located or incorporated within U.S.
territory. For purposes of the Final Order, the Commission believes it
is appropriate to treat as a ``U.S. person'' a legal entity that is not
incorporated in the United States but that nonetheless has its
``principal place of business'' in the United States.\42\ The
Commission believes that it is appropriate to consider an entity that
is organized outside the United States but nonetheless has its
``principal place of business'' within the United States in the same
manner as an entity organized or incorporated under the laws of the
United States, because the center of direction, control and
coordination of its business activities is located in the United
States.\43\ However, the Commission understands from commenters that
market participants will need a short period of time to implement the
treatment of entities with a principal place of business in the United
States as ``U.S. persons.'' \44\ Therefore, the Commission will not
treat
[[Page 864]]
entities incorporated or organized outside the United States and with a
principal place of business in the United States as U.S. persons until
April 1, 2013 (i.e., approximately 90 days after effectiveness of the
Final Order). The Commission also understands from commenters that the
application of the principal place of business element may be complex
for funds and collective investment vehicles and require further
guidance in this regard; therefore, at this time for purposes of the
Final Order, the Commission has determined that this element will not
apply to funds or collective investment vehicles.\45\
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\42\ For purposes of the Final Order, the Commission will
construe the term ``principal place of business'' as referring to
the single place where a corporation's officers direct, control, and
coordinate the corporation's activities. Typically, the principal
place of business will be where the corporation maintains its
headquarters. See Hertz v Friend, 559 U.S. ----, 130 S.Ct. 1181,
1192, 175 L.Ed. 2d 1029 (2010) (``[I]n practice [a company's
principal place of business] should normally be the place where the
corporation maintains its headquarters--provided that the
headquarters is the actual center of direction, control and
coordination, i.e., the `nerve center' '').
\43\ Commenters supported inclusion of the principal place of
business element in the interim definition. See Cleary (Aug. 16,
2012) at 6 (``the Firms respectfully request that the Commission
adopt an interim `U.S. person' definition based on factors such as
residence, place of organization or incorporation and principal
place of business''); see also IIB (Aug. 27, 2012) at 13 (suggested
definition of ``U.S. person'' that includes ``Any corporation,
partnership, limited liability company, business or other trust,
association, joint stock company or any form of enterprise similar
to the foregoing (other than a collective investment vehicle,
employee benefit plan, estate or trust) that is organized or
incorporated under the laws of the United States or having its
principal place of business in the United States.''); SIFMA (Aug.
13, 2012) at 4 (``The Commission should include as part of the Final
Exemptive Order a workable, uniform definition of U.S. person for
this transitional time period* * *. For most [of our members] this
would consist of Any natural person who is a resident of the U.S.;
and Any corporation, partnership, LLC, business or other trust,
association, joint-stock company, fund, or any form of enterprise
similar to any of the foregoing that is organized or incorporated
under the laws of the United States or has its principal place of
business in the United States* * *. [S]uch a definition would allow
most of our members to identify those counterparties that are U.S.
persons during the Interim Period without the necessity of building
new, interim systems that might have to be changed when a Final
Definition is adopted.'').
\44\ See, e.g., SIFMA (Aug. 25, 2012) at A-8 (suggesting 90-day
period to transition to definition including principal place of
business element).
\45\ See, e.g., Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012
at 6-7. The Commission is separately proposing further guidance
regarding the treatment of funds and other collective investment
vehicles for purposes of the definition of the term ``U.S. person.''
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Second, regarding the treatment of pension plans, the Commission is
refining the third counterparty criterion in CFTC Letter No. 12-22 to
indicate that a pension plan that is ``primarily'' (rather than
exclusively) for the foreign employees of an entity is also a ``U.S.
person'' for purposes of the Final Order.\46\
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\46\ In a letter to the Commissioners dated November 30, 2012
requesting transition relief under Title VII of the Dodd-Frank Act,
the Futures Industry Association (``FIA''), IIB and SIFMA suggested
that this criterion be modified to replace the word ``exclusively''
with ``primarily.'' See joint letter from FIA, IIB and SIFMA (Nov.
30, 2012) at 14, fn. 14.
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Third, regarding the treatment of estates and trusts, the
Commission is refining the fourth counterparty criterion in CFTC Letter
No. 12-22 so that the treatment of an estate or trust for purposes of
this relief does not depend on whether the income of the estate or
trust is subject to U.S. income tax.\47\ The Commission understands
that whether income is subject to U.S. tax can depend on a variety of
factors, including the source of the income, which may not be relevant
for purposes of the Dodd-Frank Act. Accordingly, for purposes of the
Final Order, the Commission is of the view that an estate should be
treated as a ``U.S. person'' if the decedent was a resident of the
United States at the time of death, and a trust should be treated as a
``U.S. person'' if it is governed by the law of a state or other
jurisdiction in the United States and a court within the United States
is able to exercise primary supervision over the administration of the
trust.
---------------------------------------------------------------------------
\47\ See, e.g., IIB Letter (Aug. 27, 2012) at 12 (market
participants do not typically identify an estate's or trust's
regulatory status on the basis of its tax status); see also joint
letter from FIA, IIB and SIFMA at 14, fn. 14 (suggesting that the
fourth criterion from CFTC Letter No. 12-22 be limited to estates
and trusts organized under the laws of the United States).
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The Commission believes that this approach is appropriate in view
of how estates and trusts use swaps, and is consistent with how they
are treated for other purposes under law. For estates, if the decedent
was a party to any swaps at the time of death, then those swaps would
continue to be treated in the same way after the decedent's death, when
the swaps would most likely pass to the decedent's estate. Also, this
test will be predictable and easy to apply for natural persons planning
for how their swaps will be treated after death, for executors and
administrators of estates, and for the swap counterparties to natural
persons and estates.
With respect to trusts, the Commission considered that each trust
is governed by the laws of a particular jurisdiction, which may depend
on steps taken when the trust was created or other circumstances
surrounding the trust. The Commission believes that if a trust is
governed by U.S. law (i.e., the law of a state or other jurisdiction in
the United States), then it is reasonable to treat the trust as a U.S.
person for purposes of the Final Order. The definition also requires
that a court within the United States be able to exercise primary
supervision over the administration of the trust.\48\ Including this
element of the definition will ensure that the treatment of the trust
for purposes of the Final Order will be in line with how the trust is
treated for other legal purposes.
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\48\ The Commission is aware that one element of the test
applied by the Internal Revenue Service to determine if a trust is a
U.S. person for tax purposes depends on whether a court within the
United States is able to exercise primary supervision over the
administration of the trust. See 26 CFR 301.7701-7(a)(1)(ii).
However, the Commission does not intend to formally adopt the
Internal Revenue Service test for this purpose.
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Finally, regarding the treatment of joint accounts, the Commission
is refining the fifth counterparty criterion in CFTC Letter No. 12-22
to include not only individual accounts where the beneficial owner is a
person described in the preceding counterparty criteria, but also joint
accounts where any of the beneficial owners is such a person.
Due Diligence. As described above, many commenters said that the
information necessary to accurately assess the status of their
counterparties as U.S. persons may not be available, or may be
available only through overly burdensome due diligence. For this
reason, these commenters requested that the Commission allow for
reasonable reliance on counterparty representations as to their ``U.S.
person'' status.\49\
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\49\ For example, SIFMA stated that a swap counterparty should
be responsible for determining its own U.S.-person status but in the
alternative, recommended that the Commission allow for reasonable
reliance on counterparty representations. See SIFMA (Aug. 27, 2012)
at A-16-18. SIFMA and Cleary further pointed out that the Commission
has accepted reasonable reliance on counterparty representations in
the context of the external business conduct rules. See SIFMA/AMG
(Aug. 27, 2012) at 4-5; and Cleary (Aug. 16, 2012) at 6.
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The Commission agrees with the commenters that a party to a swap,
in order to rely upon the exemptive relief provided in the Final Order,
should be able to reasonably rely on its counterparty's representation
in determining whether the counterparty is a ``U.S. person.'' In this
context, the Commission interprets the ``reasonable'' standard to mean
that a party to a swap should conduct reasonable due diligence on its
counterparties, with what is reasonable in a particular situation to
depend on the relevant facts and circumstances. The Commission notes
that under its external business conduct rules, an SD or MSP generally
meets its due diligence obligations if it reasonably relies on
counterparty representations, absent indications to the contrary.\50\
Similarly here, the Commission believes that allowing for reasonable
reliance on counterparty representations provides for an objective
standard and avoids subjective evaluations. This, in turn, facilitates
a more consistent and foreseeable determination of whether a person is
a ``U.S. person'' for purposes of relying on temporary exemptive
relief.
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\50\ See 77 FR 9734, Feb. 17, 2012. Consistent with the
``reasonable reliance'' standard in the external business conduct
rules, an SD or MSP may rely on the written representations of a
counterparty in performing its due diligence. However, an SD or MSP
cannot rely on a written representation and continue to claim the
exemptive relief if it has information that would cause a reasonable
person to question the accuracy of the representation. In other
words, an SD or MSP cannot ignore red flags when relying on written
representations in performing its due diligence. Further, if agreed
to by the counterparty, the written representations may be included
in counterparty relationship documentation. However, an SD or MSP
may only rely on such representations in the counterparty
relationship documentation if the counterparty agrees to timely
update any material changes to the representations. In addition, the
Commission expects SDs and MSPs to review the written
representations on a periodic basis to ensure that they remain
appropriate for their intended purpose.
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Finally, the Commission confirms that this definition of ``U.S.
person'' applies only for purposes of the Final Order. Further, the
Commission confirms that the definition of ``U.S. person'' applies only
to Commission regulations promulgated under Title VII's swap
provisions. Thus, for example, it would
[[Page 865]]
not apply to the CEA provisions (and Commission regulations promulgated
thereunder) relating to the futures markets.
Foreign Branch of U.S. Person. The Commission views as a ``U.S.
person'' the foreign branch of a U.S. person. As the Commission
explained in the Proposed Guidance, a branch does not have a legal
identity separate from that of its principal entity. In this respect,
the Commission notes that branches are neither separately incorporated
nor separately capitalized and, more generally, the rights and
obligations of a branch are the rights and obligations of its principal
entity (and vice versa). Under these circumstances, the Commission
views the activities of a foreign branch as the activities of the
principal entity. \51\
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\51\ In the Proposed Guidance, the Commission asked whether a
foreign branch of a U.S. SD should be defined as a ``U.S. person.''
Some commenters recommended that a foreign branch of a U.S. SD be
excluded from the definition of ``U.S. person.'' Sullivan & Cromwell
on behalf of Bank of America, Citigroup, and J.P. Morgan (``S&C'')
argued that a foreign branch should not be considered a U.S. person
solely on the basis that it is a part of a U.S. bank. See S&C (Aug.
13, 2012) at 6-7. Citigroup Inc. (``Citi'') recommended that the
Commission define a foreign branch of a U.S. SD as a non-U.S.
person, so long as the branch remains subject to Entity-Level
Requirements and obtains substituted compliance for Transaction-
Level Requirements for transactions with non-U.S. persons. See Citi
(Aug. 27, 2012) at 2-4. In Citi's view, this would address comments
by the foreign branch's non-U.S. clients that they would have to
register as SDs or MSPs, while assuring that such non-U.S. clients'
swaps with the foreign branch are covered by the Transaction-Level
Requirements or substituted compliance. See also State Street (Aug.
27, 2012) at 3; and IIB (Aug. 27, 2012) at 8.
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Accordingly, the Commission declines to recognize foreign branches
of U.S. persons separately from their U.S. principals for purposes of
the Dodd-Frank swap provisions, including registration and Entity-Level
and Transaction-Level Requirements. Therefore, if a foreign branch were
to be an SD or MSP, as discussed further below, its U.S. principal
would be required to register, and that registration would encompass
the foreign branch. Based on the same rationale, the Dodd-Frank Act
fully applies to a swap between a foreign branch of a U.S. person and a
foreign branch of another U.S. person. Nevertheless, for purposes of
the Final Order, as discussed further below, foreign branches of U.S.
persons may comply only with transaction-level requirements as may be
required in the location of the foreign branch with respect to swaps
with foreign counterparties. Further, non-U.S. persons may exclude
swaps with foreign branches of registered SDs for purposes of
determining whether they have exceeded the de minimis level of swap
dealing activity under the SD definition. Finally, for purposes of the
Final Order, as further discussed below, the Transaction-Level
Requirements will not apply to a swap transaction between foreign
branches of U.S. SDs or foreign branches of U.S. MSPs. The Commission
believes that it is appropriate to extend the foregoing relief on a
temporary basis while the Commission continues to consider, and works
with foreign regulators regarding, the treatment of foreign branches of
U.S. registrants.
C. Registration
1. Timing of Registration for All Prospective SDs and MSPs
i. Comments
The Proposed Order did not include any delay in the timing of the
registration requirement for either U.S. or non-U.S. prospective
registrants. A number of commenters urged the Commission to delay
registration of SDs and MSPs.\52\ Some of these commenters noted that
final regulatory determinations essential to the implementation of
Commission regulations are either still in proposed form or have only
recently been finalized.\53\ As a result, commenters said, firms will
need additional time to assess whether they will be required to
register as an SD or MSP and the consequences of doing so.\54\
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\52\ See e.g., SIFMA (Aug. 13, 2012) at 3, 5; IIB (Aug. 9, 2012)
at 5; Societe Generale (Aug. 9, 2012) at 2, Citi (Aug. 13, 2012) at
2; Goldman (Aug. 27, 2012) at 8-9; and Lloyds (Aug. 13, 2012) at 1-
2.
\53\ See e.g., Goldman (Aug. 27, 2012) at 9 (citing the
Commission's proposed rule on the treatment of inter-affiliate
transactions for purposes of mandatory clearing and the anticipated
Commission action on the status of guarantees of swaps); Societe
Generale (Aug. 9, 2012) at 2; and IIB (Aug. 9, 2012) at 2.
\54\ Without such relief, commenters are concerned that they
will be required to register based on requirements that are subject
to change at a later date. See Cleary (Aug. 16, 2012) at 6; SIFMA
(Aug. 27, 2012) at A1-8; IIB (Aug. 9, 2012) at 4-5).
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SIFMA recommended a delay of at least 90 days following the
publication of final interpretive guidance; \55\ Societe Generale
recommended delaying registration at least until the Proposed Guidance
has been finalized.\56\ Cleary recommended a delay of at least 90 days
after a final exemptive order is issued, explaining that firms will
need additional time to assess and comply with the determinations
therein.\57\ Lloyds suggested that registration be delayed for non-U.S.
SDs for at least 12 months after the publication of final guidance,
with computation of the de minimis threshold starting from that
date.\58\
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\55\ See also Goldman (Aug. 27, 2012) at 9.
\56\ See Societe Generale (Aug. 9, 2012) at 2.
\57\ See Cleary (Aug. 16, 2012) at 4. IIB suggested a delay
until a ``reasonable'' period after the final exemptive order is
issued. See IIB (Aug. 9, 2012) at 9. IIB also noted that this is
particularly important for non-U.S. firms that are required to
coordinate their registration plans with their home country
regulators.
\58\ See Lloyds (Aug. 13, 2012) at 1-2.
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ii. Commission Determination on Timing of Registration
Throughout the Dodd-Frank rulemaking process, the Commission
consistently has strived to strike the proper balance between the need
to implement the new regulatory framework for swaps without undue
delay, and the need to minimize disruption and hardships for market
participants. Consistent with that goal, the Commission has taken steps
to provide greater certainty to market participants regarding
registration determinations and their compliance obligations. The
Commission is also mindful that more than two years have passed since
the Dodd-Frank Act--a comprehensive reform of the swaps market--was
enacted as a direct response to the financial crisis of 2008. A central
element of this reform is the registration and regulation of SDs and
MSPs. For example, registered SDs and MSPs are required to clear swaps
with certain counterparties, are subject to detailed reporting and
recordkeeping requirements and must comply (when final) with new
capital and margin requirements--all of which are designed to enhance
market transparency and protections against systemic risk.
In the Commission's view, any further delay in the registration of
SDs and MSPs would effectively postpone Dodd-Frank's comprehensive new
regulatory regime for swaps, frustrating the congressional mandate
embodied in the Dodd-Frank Act. Further, given the global nature of the
swaps market, an SD or MSP--whether operating in or outside the United
States--plays an important role in the U.S. swaps market. Under these
circumstances, the Commission believes that a further delay in the
compliance date for registration as an SD or MSP would adversely affect
the Commission's ability to discharge its responsibilities under the
CEA and would be contrary to the public interest. Therefore, the
Commission declines to delay the registration requirement for non-U.S.
SDs and MSPs.
However, the Commission believes it is appropriate to provide
targeted, time-limited exemptive relief with respect to the swap
dealing transactions to be
[[Page 866]]
included in the de minimis threshold calculation that applies for
purposes of the SD definition. The Commission expects that this step,
and the other relief provided in the Final Order, will substantially
address commenters' concerns regarding the complexity of implementing
the swap requirements for the interim period during which the Final
Order is in effect.
2. Scope of Transactions To Be Included in Registration Calculations
The Commission has adopted final rules and interpretive guidance
implementing the statutory definitions of the terms ``swap dealer'' and
``major swap participant'' in CEA sections 1a(49) and 1a(33).\59\ The
Final Entities Rules delineate the activities that cause a person to be
an SD and the level of swap positions that cause a person to be an MSP.
In addition, the Commission has adopted rules concerning the statutory
exceptions from the definition of an SD, including the de minimis
exception.\60\ Commission regulation 1.3(ggg)(4) sets forth a de
minimis threshold of swap dealing, which takes into account the
notional amount of a person's swap dealing activity over the prior 12
months.\61\ When a person engages in swap dealing transactions above
that threshold, the person meets the SD definition in section 1a(49) of
the CEA.\62\ Commission regulations 1.3(jjj)(1) and 1.3(lll)(1) set
forth swap position thresholds for the MSP definition in Commission
regulation 1.3(hhh). When a person holds swap positions above those
thresholds, such person meets the MSP definition in section 1a(39) of
the CEA.
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\59\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.
\60\ Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides
that ``[t]he Commission shall exempt from designation as a swap
dealer an entity that engages in a de minimis quantity of swap
dealing in connection with transactions with or on behalf of its
customers. The Commission shall promulgate regulations to establish
factors with respect to the making of this determination to
exempt.'' This provision is implemented in Commission regulation
1.3(ggg)(4).
\61\ As used in this release, the meaning of the term ``swap
dealing'' is consistent with that used in the Final Entities Rules.
\62\ Under Commission regulation 3.10(a)(1)(v)(C) and Commission
regulation 23.21, a person is required to register as an SD when, on
or after October 12, 2012, the person falls within the definition of
an SD. However, the rule defining ``swap dealer'' includes a de
minimis threshold so that an entity is not an SD if it, together
with the entities controlling, controlled by, and under common
control with it, engages in swap dealing activity during the prior
12 months in an aggregate gross notional amount of less than the
specified thresholds. The rule further specifies that swap dealing
activity engaged in before the effective date of both the ``swap
dealer'' and ``swap'' definition rules (i.e., before October 12,
2012) does not count toward the de minimis threshold. The rule also
provides that an entity that exceeds the de minimis threshold must
register as an SD two months after the end of the month in which it
exceeds the threshold. See Commission regulation 1.3(ggg)(4).
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i. Proposed Guidance
In the Proposed Guidance, the Commission addressed the general
manner in which a person's overseas swap dealing activities or
positions may require registration as an SD or MSP, respectively.
Specifically, under the Proposed Guidance, a non-U.S. person whose swap
dealing transactions with U.S. persons exceed the de minimis threshold
would be required to register as an SD.\63\ Likewise, under the
Proposed Guidance, a non-U.S. person who holds swap positions with U.S.
counterparties that are above the specified MSP thresholds would be
required to register as an MSP.\64\ In determining whether a non-U.S.
person is engaged in more than a de minimis level of swap dealing, the
Proposed Guidance would include the notional value of any swap
transactions between such non-U.S. person (or any of its non-U.S.
affiliates under common control) and a U.S. person, other than foreign
branches of registered SDs.\65\ Following a similar rationale, the
Proposed Guidance stated that in calculating whether a non-U.S. person
meets an MSP threshold, the non-U.S. person would include the notional
value of any swaps entered into between such non-U.S. person and a U.S.
person.\66\
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\63\ See Proposed Guidance, 77 FR at 41218-41219.
\64\ Id. CFTC Letter 12-22 applied a similar approach for both
SD and MSP purposes.
\65\ 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.
\66\ Id. at 41221. The Proposed Guidance also provided that if
the non-U.S. person's swaps are guaranteed by a U.S. person, then
such swaps will be attributed to the U.S. guarantor and not the
potential non-U.S. MSP. Further, the non-U.S. person would be
required to include in its MSP calculation any swaps between another
non-U.S. person and a U.S. person if the potential non-U.S. MSP
guarantees the obligations of the other non-U.S. person thereunder.
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In general, commenters did not raise concerns or objections to the
Commission's interpretation that non-U.S. persons who engage in more
than a de minimis level of swap dealing with U.S. persons would be
required to register as SDs.\67\ A number of commenters argued,
however, that a non-U.S. person should not be required to register as
an SD solely by reason of its swap obligations being guaranteed by a
U.S. person.\68\ SIFMA stated that the ``connection between a non-U.S.
swap dealing entity and its U.S. guarantor creates too tenuous a nexus
to justify registration on the basis of this relationship alone.'' \69\
Other commenters raised various other issues with respect to the
treatment of guarantees.\70\
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\67\ One commenter, Japanese Bankers Association, stated that
the cross-border application of Dodd-Frank is overbroad because it
would capture even hedging transactions of a non-U.S. SD with a U.S.
SD that is making a market. The definition of ``dealing activity''
is ambiguous, this commenter asserted, and might require the non-
U.S. SD to register. See Japanese Bankers Association (``Japanese
Banks'') (Aug. 27, 2012) at 1.
\68\ See e.g., Goldman (Aug. 27, 2012) at 5; ISDA (Aug. 10,
2012) at 12 (in the typical case, an intra-group guarantee allocates
risks and activities within the corporate group and is not a dealing
activity of the non-U.S. person); Commercial Energy Working Group
(``CEWG'') (submitted by Sutherland Asbill) (Aug. 27, 2012), at 6-7
(Proposed Guidance should not include swap guarantees for
aggregation purposes because it is contrary to the Final Entities
Rules; jurisdiction should not be extended to transactions between
two non-U.S. persons if the swap obligations of one party are
guaranteed by a U.S. person because U.S. jurisdiction in these
circumstances is not supported by law or existing international
conventions).
\69\ See SIFMA (Aug. 27, 2012) at A-29. As an alternative, SIFMA
posited that only guarantees by a U.S. person for which there is a
material likelihood of payment by the U.S. guarantor should be
counted towards the de minimis calculation. To implement this
recommendation, SIFMA suggested that the Commission establish a
standard for determining that the likelihood of payment is remote,
such as a comparison of the aggregate contingent liability of the
U.S. person guarantor to the net equity of that guarantor. Id. at A-
29--A-30.
\70\ See Goldman (Aug 27, 2012) at 5 (inconsistent to require SD
registration solely on the basis of guarantees by a U.S. parent,
absent any showing of a ``direct and significant'' jurisdictional
nexus; concerns can be addressed through anti-evasion authority).
See also CEWG (Aug. 27, 2012) at 7 (because there is no legal basis
under CEA section 2(i) for asserting jurisdiction based on a
guaranty, Commission should clarify that a non-U.S. person is not
subject to Commission regulation, even where a U.S. person
guarantees either counterparty); The Hong Kong Association of Banks
(``HKAB'') (Aug. 27, 2012) at 8 (swaps between non-U.S. persons
should be excluded from the de minimis determination regardless of
whether a counterparty is guaranteed); ISDA (Aug. 10, 2012) at 12
(focus should be on whether a U.S. guarantor of a non-U.S. person
should register); Investment Industry Association of Canada
(``IIAC'') (Aug. 27, 2012) at 6 (seeking confirmation that indirect
holding company ownership alone does not constitute a guarantee);
and JP Morgan (Aug. 27, 2012) at 10 (term ``guarantee'' should not
include keepwells and liquidity puts that do not create the same
third-party rights and may be unenforceable by third parties). But
see contra AFR (June 14, 2012) at 2 (failure to include guaranteed
affiliates as U.S. persons and to capture the ``large grey area''
between explicit and informal guarantees creates opportunities to
escape Dodd-Frank regulations by shifting business overseas;
Commission should clarify that it will ``follow through on properly
implementing these principles and will not enable a `race to the
bottom' in which incentives are created for derivatives affiliates
of global banks that are able to relocate to areas of lax regulation
to take advantage of an inadequate `substituted compliance'
regime.'').
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[[Page 867]]
ii. Commission Determination on Exemptive Relief Regarding Registration
Registration Thresholds for Non-U.S. Persons. As noted above, the
Commission is not, at this time, taking action on the Proposed
Guidance. Under CEA sections 1a(49) and 1a(33) and Commission
regulations 1.3(ggg)(4) and 1.3(hhh),\71\ a person is required to take
account of the notional amount of all of its swap dealing activity over
the prior 12 months for purposes of the SD determination, and all of
its swap positions for purposes of the MSP determination. These CEA
provisions and the Commission's regulations apply to activities within
the United States and, as provided in section 2(i), to certain
activities outside the United States.
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\71\ 7 U.S.C. 1a(49) and 1a(33). See Final Entities Rules.
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However, while the Commission continues to consider the comments on
its Proposed Guidance regarding section 2(i), the Commission believes
it appropriate to provide, under the Final Order, relief for non-U.S.
persons (regardless of whether the non-U.S. persons' swap obligations
are guaranteed by U.S. persons) from the requirement that a person
include all its swaps in its calculation of the aggregate gross
notional amount of swaps connected with its swap dealing activity for
SD purposes or in its calculations for MSP purposes. On the other hand,
the Commission believes that it is not appropriate to provide a non-
U.S. person with relief from the registration requirement when the
aggregate level of its swap dealing with U.S. persons, as that term is
defined above, exceeds the de minimis level of swap dealing, or when
the level of its swap positions with U.S. persons, again as that term
is defined above, exceeds one of the MSP thresholds. In the
Commission's view, such relief from the registration requirement is
inappropriate when a level of swap activities that is substantial
enough to require registration as an SD or an MSP when conducted by a
U.S. person, is conducted by a non-U.S. person with U.S. persons as
counterparties.
Therefore, the Final Order provides that a non-U.S. person
(regardless of whether the non-U.S. persons' swap obligations are
guaranteed by U.S. persons) does not need to include in its calculation
of the aggregate gross notional amount of swaps connected with its swap
dealing activity for purposes of Commission regulation 1.3(ggg)(4) or
in its calculation of whether it is an MSP for purposes of Commission
regulation 1.3(hhh), any swaps where the counterparty is a non-U.S.
person.
Exclusion for Swaps with Foreign Branches of U.S. Swap Dealers. The
Proposed Guidance would exclude from a non-U.S. person's de minimis
threshold calculation its swap transactions with foreign branches of
U.S. SDs. This exclusion was intended to allow non-U.S. persons to
continue their swap activities with foreign branches of U.S. SDs
without exceeding the de minimis threshold, thereby triggering a
requirement to register as an SD.
In CFTC Letter 12-22, the Commission staff noted that because the
proposed exclusion would be limited to registered U.S. SDs and many of
the persons who expect to register as U.S. SDs may not do so until
December 31, 2012, or later, market participants had expressed concern
that a non-U.S. person could be required after October 12, 2012, to
begin counting toward the de minimis threshold any swap dealing
transactions with a foreign branch of any person that may meet the
definition of ``U.S. person'' and that is not yet registered (and
consequently be required to register as an SD) even though many U.S.
persons with foreign branches intend to register as SDs later in 2012
or in early 2013.\72\ The Commission staff noted that this potential
outcome would not be consistent with the scope of relief intended to be
provided in the Proposed Guidance.\73\
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\72\ Similarly, if a non-U.S. person must include swaps with
such foreign branches in its calculation of whether it is within the
definition of MSP in Commission regulation 1.3(hhh), it could be
required to register with the Commission in that capacity. Although
the Proposed Guidance did not provide for a similar exclusion with
respect to the consideration of a non-U.S. person's swaps with
foreign branches of U.S. SDs with respect to determining whether the
non-U.S. person must register as an MSP, some commenters requested
that the Commission provide a similar exclusion. See SIFMA (Aug. 27,
2012) at 9, A-28, A-29; Citi (Aug. 27, 2012) at 2-3.
\73\ Commenters, such as Goldman, argued that the rationale for
this exclusion is equally applicable to non-U.S. persons that are
banks or broker-dealers when dealing with U.S. SDs that do not
conduct overseas business through foreign branches. Absent a similar
interpretation in these circumstances, they argued, U.S. SDs would
be at a competitive disadvantage vis-[agrave]-vis foreign branches
of U.S. SDs since non-U.S. persons will limit their dealing
activities to foreign branches of U.S. SDs. See Goldman (Aug. 27,
2012) at 5-6. The Commission does not believe that it would be
appropriate for a non-U.S. person to exclude from the de minimis
calculation swap dealing transactions with U.S. SDs (other than
their foreign branches). By way of comparison, however, for purposes
of the Final Order, a swap that a non-U.S. person enters into with a
non-U.S. affiliate of a U.S. SD (whether guaranteed by a U.S. person
or not) is not a swap with a U.S. person and, thus, need not be
counted towards the de minimis calculation. The Commission proposed
to interpret section 2(i) so as to exclude swap dealing transactions
with a foreign branch of a U.S. SD in order to avoid the otherwise
potential result that foreign entities would cease doing swap
dealing business with foreign branches of U.S. SDs in order to avoid
SD status, while continuing to do business with foreign affiliates
of U.S. SDs located in the same jurisdiction. The Commission does
not believe relief should be provided in a manner that would lead to
such disparate treatment of entities located outside the United
States, i.e., foreign branches and foreign affiliates of U.S. SDs
that are located in the same jurisdiction but that happen to bear a
different legal structure. Similar considerations of potentially
discriminatory results do not apply, however, with respect to swaps
directly with U.S. SDs. Such U.S. SDs are different in kind from a
foreign affiliate of a U.S. SD, and the rationale for the foreign
branch exclusion is inapposite in these circumstances.
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The Commission believes it appropriate to provide, in this Final
Order, the scope of relief afforded in CFTC Letter No. 12-22 while it
considers action on the Proposed Guidance. Accordingly, for purposes of
the Final Order, swap transactions by a non-U.S. person with a foreign
branch of a registered U.S. SD, or with a foreign branch of a U.S.
person that is not yet registered as a U.S. SD but that does intend to
register as such when required, are not required to be included in the
calculations for SD and MSP registration purposes.
Therefore, the Final Order provides that a non-U.S. person does not
need to include in its calculation of the aggregate gross notional
amount of swaps connected with its swap dealing activity for purposes
of Commission regulation 1.3(ggg)(4) or in its calculation of whether
it is an MSP for purposes of Commission regulation 1.3(hhh), any swap
where the counterparty is a foreign branch of a U.S. person that is
registered as an SD or that represents that it intends to register with
the Commission as an SD by March 31, 2013.\74\
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\74\ The representation of the intention to register with the
Commission as a swap dealer need not be obtained prior to execution
of a swap.
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Aggregation for the De Minimis Calculation. 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. Additionally, under the Proposed Guidance, a non-
U.S. person, in determining whether its swap dealing transactions
exceed the de minimis threshold, would include the
[[Page 868]]
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.
Numerous comments on the Proposed Guidance discussed considerations
relating to when the swap dealing activities of affiliates should be
aggregated for purposes of determining if a non-U.S. person is required
to register as an SD. The Commission is considering these comments, and
intends to address them in preparing final guidance on this issue.
However, the Commission believes it is appropriate to provide, in the
Final Order, temporary relief from the requirement in Commission
regulation 1.3(ggg)(4) to include the swap dealing activities of
certain affiliates in the de minimis calculation.
For purposes of the Final Order, the Commission believes that a
non-U.S. person that is engaged in swap dealing activities with U.S.
persons as of the effective date of the Final Order should not be
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.\75\ In addition, the Commission believes it is appropriate
that if the non-U.S. person is an affiliate of a person that is
registered as an SD, it should not be required to include, in its
determination of whether it exceeds the de minimis threshold, the swap
dealing transactions of any of its non-U.S. affiliates that engage in
swap dealing activities, so long as each such excluded affiliate is
either (i) engaged in swap dealing activities with U.S. persons as of
the effective date of the Final Order or (ii) registered as an SD.\76\
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\75\ 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.
\76\ The Commission notes that, in any case, the swap dealing
transactions of a non-U.S. person's non-U.S. affiliates that may
have to be included in the de minimis determination are the
transactions between the non-U.S. affiliates and U.S. person
counterparties. In no case would swap dealing transactions between
the non-U.S. person's non-U.S. affiliates and other non-U.S. person
counterparties need to be included in the determination.
---------------------------------------------------------------------------
Where at least one of the entities in the affiliated group
registers as an SD, the Commission believes that during the transition
period covered by the Final Order, it is not necessary to aggregate the
swap dealing transactions of the various affiliates, even if the
aggregate amount of such swap dealing transactions among all the
unregistered non-U.S. affiliates is above the de minimis threshold.
Thus, where at least one of the entities in the affiliated group
registers as an SD, another entity in the affiliated group would have
to register as an SD only if its own swap dealing transactions with
U.S. persons, considered individually, were above the de minimis
threshold.\77\
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\77\ The Commission wishes to make clear that relief from the
registration requirement is not available to any person or entity
that engages in swap dealing transactions with U.S. persons above
the de minimis threshold. The discussion in this section relates
only to whether and when non-U.S. persons must aggregate their own
swap dealing transactions with the swap dealing of their non-U.S.
affiliates.
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As noted above, however, this limited transitional relief is not
applicable if a non-U.S. affiliate begins to engage in swap dealing
transactions with U.S. persons after the effective date of the Final
Order. The Commission believes that this limitation is appropriate for
the relatively short time period that the Final Order will be in
effect, in order to prevent evasion and abuse of this relief. Without
this limitation, new non-U.S. affiliates could be created simply in
order to engage in further swap dealing activity with U.S. persons.
Moreover, most commenters were clear that limited transitional relief
from the aggregation requirement is necessary with respect to their
existing swap dealing activities, but is not necessary in order to
expand their swap dealing activities in the short term.\78\
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\78\ See, e.g., Cleary (Aug 16, 2012) at 5-6; SIFMA (Aug 13,
2012) at 4-5.
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Central Booking Entity. In the event an entity operates a ``central
booking system'' where swaps are booked into a single legal entity,
whether or not such entity is a counterparty to the swap, the Proposed
Guidance stated that the entity that books the swaps would be subject
to any applicable SD registration requirement, as if it had entered
into such swaps directly, regardless of whether such entity is a U.S.
person or whether the booking entity is a counterparty to a swap (has
booked the swap directly) or has booked a swap indirectly by way of a
back-to-back swap or other arrangement with an affiliate. The
Commission noted that a non-U.S. affiliate or subsidiary may also be
required to register as an SD if it independently meets the definition
of an SD.\79\ A number of commenters sought clarification of the
Commission's interpretation with respect to the central booking
model.\80\
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\79\ Section 1.3 (ggg)(3) of the Commission's regulations
permits a person to apply for a limited purpose designation based on
a particular type, class, or category of a swap, or to a particular
business unit within an entity. See Commission regulation
1.3(ggg)(3); Final Entities Rules, 77 FR at 30645-46. Cleary urged
the Commission to recognize limited designation for non-agricultural
firms. Specifically, it argued that limited designation should be
available to an entity that registers as a firm, and not merely a
branch, division, or office. See Cleary (Aug. 16, 2012) at 14.
Regarding the two points raised by Cleary, the Commission clarifies
that a limited designation is available to any registrant that can
demonstrate its ability to comply with applicable requirements; it
is not limited to only agricultural firms, and it could be available
to an entity that registers as a firm. The Commission believes that
further relief at this time regarding limited designations is not
justified under the criteria of CEA section 4(c). As noted in the
Final Entities Rules, the Commission believes that limited
designation is appropriately addressed on a case-by case basis in
the context of individual applications for registration. See Final
Entities Rules, 77 FR at 30646 (``Any particular limited purpose
application will be analyzed in light of the unique circumstances
presented by the applicant.'').
\80\ See e.g., Goldman (Aug. 27, 2012) at 6-7; Credit Suisse
(Aug. 27, 2012) at 9; IIB (Aug. 27, 2012) at 26 (stating that,
although it is not entirely clear, in a central booking arrangement
under which a non-U.S. person dealing in swaps with other non-U.S.
persons ``books'' those swaps to a U.S. affiliate (which either
directly becomes a party to the swap or indirectly enters a back-to-
back arrangement), the Proposed Guidance could be interpreted as
requiring the non-U.S. affiliate to separately register as an SD if
its activities with non-U.S. persons meet the definition of an SD);
and Lloyd's (Aug. 24, 2012) at 2-3 (requesting clarification as to
whether or not non-U.S. institutions (not acting as principal to
swaps with U.S. persons) employing central booking models, would be
required to register as SDs when they centrally manage market risk
for swaps with an affiliated non-U.S. SD and other non-U.S. related
swaps activities).
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In this situation, the Commission clarifies that a non-U.S. person
should not be required to include in its calculation of the aggregate
gross notional amount of swaps connected with its swap dealing activity
for purposes of Commission regulation 1.3(ggg)(4), any swap to which it
is not a party because the swap is entered into by an affiliated
central booking entity.
Summary. For purposes of the transitional relief under this Final
Order, in determining whether a non-U.S. person is engaged in more than
a de minimis level of swap dealing \81\ or
[[Page 869]]
holds swap positions above any of the MSP thresholds, the non-U.S.
person--whether guaranteed or not by a U.S. person--may exclude and not
consider the aggregate notional value of:
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\81\ Cleary and SIFMA have asked the Commission to confirm that
swap activities that are limited to unwinding ``legacy'' swap
portfolios do not constitute swap dealing. See Cleary (Aug. 16,
2012) at 11-12; SIFMA (Aug. 27, 2012) at A-31. See also The Clearing
House (Aug. 13, 2012) at 11. In a related vein, IIB requested that
the Proposed Order be modified to allow certain less active
``Transition Affiliates'' additional time to transfer swap positions
to their principal swap dealing affiliate, see IIB (Aug. 9, 2012) at
7, and Cleary separately asked the Commission to consider whether
the aggregation rule should apply to non-U.S. affiliates whose swap
dealing activity is already subject to local regulation by a G-20
supervisor, see Cleary (Aug. 16, 2012) at 9-10. In general, the
Commission previously concluded that bright-line tests and
categorical exclusions from the term ``swap dealer'' based on the
general nature of a person's business are unwarranted. See Final
Entities Rules, 77 FR at 30615. The Commission believes that this
approach is equally appropriate here, with regard to the exemptive
relief requested in the cross-border context. As noted above, the
Commission believes that registration of non-U.S. persons that are
within the definition of the term ``swap dealer'' is a key element
of the Dodd-Frank swaps reforms. Therefore the Commission believes,
at this time, that blanket relief in this area along the lines
suggested by commenters is not in the public interest, and that the
determination of whether particular activities constitute swap
dealing or otherwise bring a person within the definition of the
term ``swap dealer,'' should proceed along the lines that the
Commission adopted in the Final Entities Rules. Under these
circumstances, the Commission has determined that it would be
inappropriate to provide further relief in this regard under CEA
section 4(c). However, the Commission does not intend to preclude
its staff from considering appropriate relief in this regard on a
case-by-case basis.
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Any swap where the counterparty is a non-U.S. person; and
Any swap where the counterparty is a foreign branch of a
U.S. person that is registered as an SD or that represents that it
intends to register with the Commission as an SD by March 31, 2013; and
For purposes of SD registration only, any swap to which it
is not a party because the swap is entered into by an affiliated
central booking entity.
Further, for purposes of the transitional relief under this Final
Order, in determining whether a non-U.S. person is engaged in more than
a de minimis level of swap dealing, the non-U.S. person may exclude and
not consider the aggregate notional value of: \82\
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\82\ As noted above, this further relief is available only where
the non-U.S. person is engaged in swap dealing activities with U.S.
persons as of the effective date of the Final Order.
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Any swap dealing transaction of its U.S. affiliates under
common control; and
If any of its affiliates under common control is
registered as an SD, any swap dealing transaction of any of its non-
U.S. affiliates that (i) is engaged in swap dealing activities with
U.S. persons as of the effective date of the Final Order or (ii) is
registered as an SD.\83\
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\83\ The foregoing summary is based on the term ``U.S. person''
as it is defined above.
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D. Entity-Level and Transaction-Level Requirements
1. Categorization of Entity- and Transaction-Level Requirements
Title VII of the Dodd-Frank Act establishes a comprehensive new
regulatory framework for SDs and MSPs. This framework is an important
element of the ``improve[d] financial architecture'' that Congress
established in the Dodd-Frank Act to reduce systemic risk and enhance
market transparency.\84\ Among other things, a registered SD or MSP
must comport with certain statutory requirements (and regulations the
Commission may promulgate thereunder) governing risk management,
internal and external business conduct standards, and reporting.
Further, U.S. SDs and MSPs, once registered, are required to comply
with all of the requirements applicable to SDs and MSPs for all their
swaps, not just the swaps that make them an SD or MSP.
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\84\ S. Rep. No. 111-176, at 228 (2010).
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For purposes of the Proposed Order, the Dodd-Frank swap provisions
were divided into two categories: (1) Entity-Level Requirements, which
apply to all the firm's activities or transactions; and (2)
Transactional-Level Requirements, which apply on a transaction-by-
transaction basis. For purposes of the Final Order, the Commission will
apply the Entity-Level and Transaction-Level Requirements as
proposed.\85\
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\85\ To date, the Commission has not adopted final rules
relating to the Entity-Level Requirement of capital adequacy, nor
the Transaction-Level Requirements of margining (and segregation)
for uncleared swaps, and trade execution. See sections 2(h)(8),
4s(e) and 4s(l) of the CEA, 7 U.S.C. 2(h)(8), 6s(e) and 6s(l). No
exemptive relief is necessary with respect to Requirements that are
not yet in effect and, therefore, the Final Order does not apply to
these Requirements. In the event that final rules with respect to
any of these Requirements that are issued by the Commission come
into effect prior to the expiration of this Final Order, the
Commission will consider extending the Final Order to such
Requirements at that time. For further details regarding the Entity-
Level Requirements and the Transaction-Level Requirements, see the
appendices to the Proposed Order.
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The Entity-Level Requirements consist of: (1) Capital adequacy; (2)
chief compliance officer; (3) risk management; (4) swap data
recordkeeping; (5) SDR reporting; and (6) LTR.\86\ The Entity-Level
Requirements apply to registered SDs and MSPs across all their swaps
without distinctions as to the counterparty or the location of the
swap.\87\
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\86\ Specifically, the Entity-Level Requirements are those set
forth in Commission regulations 1.31, 3.3, 23.201, 23.203, 23.600,
23.601, 23.602, 23.603, 23.605, 23.606, 23.607, 23.608 and 23.609
and parts 20, 45 and 46.
\87\ IIB and The Clearing House noted that the Proposed Order
did not address Commission regulation 1.31, which sets forth certain
recordkeeping obligations that apply to all books and records
required to be kept under the Commission's regulations. See IIB
(Aug. 9, 2012) at 10; and The Clearing House (Aug. 16, 2012) at 14.
In the Proposed Order, the Commission proposed generally that
recordkeeping requirements would be Entity-Level Requirements but
did not explicitly list Commission regulation 1.31 as an Entity-
Level Requirement. The Commission clarifies that for purposes of the
Final Order, Commission regulation 1.31 is an Entity-Level
Requirement and, therefore, subject to the exemptive relief under
the Final Order
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The Transaction-Level Requirements consist of: (1) Clearing and
swap processing; (2) margining and segregation for uncleared swaps; (3)
trade execution; (4) swap trading relationship documentation; (5)
portfolio reconciliation and compression; (6) real-time public
reporting; (7) trade confirmation; (8) daily trading records; and (9)
external business conduct standards.\88\
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\88\ Specifically, the Transaction-Level Requirements are those
set forth in CEA section 2(h)(8) and Commission regulations 23.202,
23.400 to 23.451, 23.501, 23.502, 23.503, 23.504(a), 23.504(b)(1),
(b)(2), (b)(3) and (b)(4), 23.506 and 23.610 and part 43. The
Proposed Guidance placed one of the Transaction-Level Requirements--
external business conduct standards--into a ``Subcategory B,'' as
distinguished from the remaining Transaction-Level Requirements in
``Subcategory A.'' This distinction is not relevant for purposes of
the Final Order, in which all Transaction-Level Requirements are
provided the same exemptive relief.
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The Commission intends to consider any reclassification of Entity-
Level and Transaction-Level requirements, including for the reasons
raised by various commenters, in connection with further guidance on
cross-border issues. As described below, however, the Commission has
considered issues raised by commenters regarding the scope of the
proposed exemptive relief from such Requirements--apart from their
ultimate classification.
2. General Comments on the Proposed Order
In response to the Proposed Order, a number of commenters addressed
the proposed exemptive relief from the Entity-Level and Transaction-
Level Requirements. The Clearing House stated that appropriate phase-in
relief requires the Commission to ``provide greater flexibility'' with
respect to the application of the Dodd-Frank requirements to overseas
operations and non-U.S. counterparties.\89\ Several other commenters--
including IIB, Citigroup and Cleary--recommended that the Commission
either delay the compliance date for certain requirements or expand the
scope of relief (particularly as to transactions with non-U.S.
counterparties) to address certain compliance and operational burdens
associated with applying the Dodd-Frank requirements to
[[Page 870]]
transactions outside the United States.\90\ These comments and the
Commission determinations in response thereto are discussed below.
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\89\ See The Clearing House (Aug. 13, 2012) at 13-14. To that
end, The Clearing House recommended that certain rules currently
categorized as entity-level be changed to transaction-level.
\90\ See e.g., IIB (Aug. 13, 2012) at 9-10, Cleary (Aug. 16,
2012) at 14-16; and Citigroup (Aug. 13, 2012) at 4.
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3. SDR Reporting (Part 45 and Part 46) and LTR Requirements
i. Comments
As discussed above, in the Proposed Order, the Commission proposed
to allow non-U.S. SDs and MSPs to delay compliance with Entity-Level
Requirements subject to specified conditions--except for the Entity-
Level Requirements of SDR reporting and LTR requirements. Under the
Proposed Order, non-U.S. SDs and MSPs would be required to comply with
SDR reporting and LTR requirements for all swaps with U.S.
counterparties upon their compliance date. And, with respect to swaps
with non-U.S. counterparties, the Commission proposed that only those
non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a
U.S.-based SD would be permitted to delay compliance with the SDR
reporting and LTR requirements. The Commission is adopting this
temporary exemptive relief generally as proposed, with certain
modifications in response to comments received.
Some commenters requested an extension of the compliance date for
SDR reporting and LTR requirements. IIB stated that due to the
``expansive'' proposed aggregation rule and ambiguities in the proposed
U.S. person definition, non-U.S. registrants may not have their systems
ready to report their U.S.-facing swaps, which they expect to be
relatively few in number.\91\ As an initial step, IIB requested that
the Commission further extend the compliance date for SDR reporting and
LTR requirements with respect to swaps between non-U.S. registrants and
other non-U.S. counterparties (including foreign branches of U.S.
persons) under the exemptive relief, pending final interpretive
guidance and for a ``reasonable'' time thereafter.\92\ Similarly,
cleary stated that compliance with part 45 swap data reporting
requirements would require U.S. operations overseas (i.e., affiliates
and foreign branches) to develop new reporting infrastructures, which
requires additional time for implementation. It requested that
registrants be permitted to comply with SDR reporting with non-U.S.
counterparties by reporting to the Global Trade Repository
(``GTR'').\93\
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\91\ See IIB (Aug. 13, 2012) at 10.
\92\ Id. IIB also said that there may be jurisdictions that
restrict the disclosure of even swaps with U.S. persons, and
additional relief may be necessary for those jurisdictions.
\93\ See Cleary (Aug. 16, 2012) at 15-16.
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Other commenters requested broader relief from the reporting
requirements. SIFMA argued that non-U.S. registrants should be relieved
from complying with SDR reporting for all of their swaps.\94\ SIFMA
explained that because the proposed reporting relief is not available
for swaps with U.S. counterparties, non-U.S. registrants are
effectively required to comply with the full extent of SDR reporting
and LTR requirements upon the effectiveness of the rules, nullifying
the benefit of any transition period. Therefore, SIFMA urged that the
proposed relief for non-U.S. registrants should apply to swaps with all
counterparties.
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\94\ See SIFMA (Aug. 13, 2012) at 8-9.
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The Clearing House stated that potential registrants--whether U.S.
or non-U.S. and irrespective of affiliation or branch status--should
not be required to apply SDR reporting rules or LTR requirements to
transactions with non-U.S. counterparties.\95\ It explained that for
swaps with non-U.S. counterparties, these rules are transaction-
specific and further, the cost of developing the necessary reporting
infrastructure during the exemptive period would create disadvantages
vis-[agrave]-vis those potential registrants for which delayed
implementation of these requirements would be granted under the Final
Order. The Clearing House, like IIB, also cited the fact that under the
Proposed Guidance, many non-U.S. entities may be unexpectedly required
to register as SDs but lack the operational infrastructure to comply
with the reporting requirements.
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\95\ See The Clearing House (Aug. 13, 2012) at 13-14. This
commenter also stated that where the foreign jurisdiction lacks any
parallel transaction-level rules, the registrant should not be
required to apply any Dodd-Frank Transaction-Level Requirements with
respect to any swap with a non-U.S. counterparty. For jurisdictions
with transaction-level requirements, all registrants should be
allowed to comply with the local requirements during the exemptive
period.
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Several commenters also requested additional time for compliance
with part 46 reporting of historical and transition swaps. For example,
Citi stated that data for many historical swaps is not available in the
format necessary, and that many of the relevant swaps have expired or
were terminated.\96\ SIFMA said that allowing additional time for
compliance would not materially hinder the Commission's ability to
assess systemic risk.\97\ SIFMA requested that the Commission delay for
all market participants part 46 historical swap reporting for a
particular counterparty and asset class until 120 days after SDR
reporting under part 45 is effective for that reporting counterparty
and asset class in order to alleviate the difficulties associated with
compliance with both reporting requirements.
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\96\ See Citi (Aug. 13, 2012) at 9.
\97\ See SIFMA (Aug. 13, 2012) at 11.
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Finally, as noted above, the Proposed Order stated that the
exemptive relief for SDR reporting and LTR requirements for non-U.S.
registrants in their swaps with non-U.S. counterparties would not
extend to non-U.S. registrants that are affiliates or subsidiaries of
U.S. registrants. A number of commenters, including Deutsche Bank,
recommended that the Commission eliminate the term ``affiliate'' and
exempt non-U.S. registrants from reporting swaps with non-U.S.
counterparties, except where the non-U.S. registrant is a direct
subsidiary of a U.S. registrant.\98\ Commenters expressed the concern
that this proposed exemptive relief from SDR reporting and LTR
requirements was too narrow in that it would not extend to a non-U.S.
registrant by virtue of its affiliation with a U.S. SD under the common
ownership of a non-U.S. person that is neither an SD nor an MSP.\99\
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\98\ See Deutsche Bank (Aug. 13, 2012) at 3; see also Cleary
(Aug. 16, 2012) at 14-15.
\99\ See id.
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ii. Commission Determination on SDR Reporting and LTR Requirements
SDR reporting is a fundamental component of Dodd-Frank's objective
to reduce risk, increase transparency, and promote market integrity
within the financial system generally, and the swaps market in
particular.\100\ SDR reporting achieves the statutory objectives of
transparency and enhanced price discovery by, among other things,
requiring that market participants report swap transaction and pricing
data to an SDR. SDR reporting also serves as a valuable regulatory
tool. In particular, timely reporting of comprehensive swap transaction
data to SDRs will be important to the Commission's ability to
effectively monitor and address the risk exposures of individual market
participants (including SDs and MSPs) and the concentration of risk
within the swaps market more generally. Similarly, LTR enables the
Commission to promptly and efficiently identify significant traders and
collect data on their trading activity so that the Commission can
reconstruct market events, conduct investigations, and bring
enforcement actions as
[[Page 871]]
appropriate. In short, SDR reporting and LTR requirements are vital to
ensuring that the Commission has a comprehensive and accurate picture
of market activities in order to fulfill its regulatory mandate,
including systemic risk mitigation, market monitoring, and market abuse
prevention.
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\100\ See 7 U.S.C. 2(a)(13)(G).
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The Commission notes that Commission staff has recently granted no-
action relief with respect to certain of these reporting requirements.
In CFTC Letter No. 12-32, Commission staff provided time-limited no-
action relief to SDs ``from certain requirements of the Commission's
swap data reporting rules, in order to allow for a common monthly
compliance date for swap dealers newly falling within the scope of
these rules, and to extend the compliance date for reporting historical
swap transaction data pursuant to Part 46 of the Commission's
regulations.'' \101\ In CFTC Letter No. 12-39, Commission staff granted
time-limited no-action relief to reporting parties from certain
reporting requirements in part 43 and part 45 with respect to bespoke
or complex products.\102\ The no-action relief granted in these letters
is available to both U.S. and non-U.S. persons who may be subject to
these reporting obligations.
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\101\ CFTC Division of Swap Dealer and Intermediary Oversight
and Division of Market Oversight, Time-Limited No-Action Relief for
Swap Dealers from Certain Swap Data Reporting Requirements of Part
43, Part 45, and Part 46 of the Commission's Regulations, No-Action
Letter No. 12-32, dated Nov. 19, 2012.
\102\ CFTC Division of Market Oversight, Time-Limited No-Action
Relief for Bespoke or Complex Swaps from Certain Swap Data Reporting
Requirements of Parts 43 and 45 of the Commission's Regulations, No-
Action Letter No. 12-39, dated Nov. 19, 2012.
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The Commission believes that it is necessary to implement these
reporting requirements as expeditiously as possible, and in a manner
intended to achieve their underlying statutory objectives. Therefore,
in light of the relief provided by the Commission staff, the Commission
has determined that it would not further the public interest or the
purposes of the CEA to further delay compliance with the SDR reporting
or LTR requirements for non-U.S. registrants. For similar reasons, the
Commission has determined to not extend exemptive relief from the SDR
reporting or LTR requirements to U.S. registrants for their
transactions with non-U.S. counterparties. Thus, the Commission has
determined not to provide relief under CEA section 4(c) in this regard.
Finally, the Commission is clarifying its proposal that only those
non-U.S. SDs and MSPs that are not affiliates or subsidiaries of a
U.S.-based SD would be permitted to delay compliance with the SDR
reporting and LTR requirements with respect to swaps with non-U.S.
counterparties. As explained in the preamble of the Proposed Order,
this condition was intended to limit the relief to non-U.S. registrants
that are not ``part of a U.S-based affiliated group.'' \103\
Accordingly, in response to comments received, the Commission is
clarifying that the relief from the SDR reporting and LTR requirements
is reserved for swaps with non-U.S. counterparties that are entered
into by non-U.S. registrants that are not part of an affiliated group
in which the ultimate parent entity is a U.S. registrant, bank,
financial holding company, or bank holding company.\104\ The Commission
believes that this modification strikes the appropriate balance between
facilitating such non-U.S. registrants' phasing in of their reporting
obligations and achieving the critical statutory and regulatory
objectives of the SDR reporting and LTR requirements as discussed
above. Therefore, the Commission has determined that this provision of
the Final Order, as modified, is consistent with the public interest
and the purposes of the CEA and, therefore, is appropriate for
temporary exemptive relief pursuant to CEA section 4(c).
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\103\ 77 FR at 41112.
\104\ Accordingly, swaps with non-U.S. counterparties that are
entered into by non-U.S. registrants that are part of an affiliated
group in which the ultimate parent entity is a U.S. registrant,
bank, financial holding company, or bank holding company, are
subject to the SDR reporting and LTR requirements.
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4. Privacy and Confidentiality Laws
i. Comments
A number of commenters, both market participants and foreign
regulators, stated that certain Dodd-Frank requirements--namely, SDR
reporting and LTR requirements, and U.S. regulators' access to books
and records--may conflict with local privacy and data protection
laws.\105\ They further noted that potential solutions to such blocking
statutes, such as mutual assistance agreements and/or client consents,
may be available but will require time to implement. Certain
commenters, including UBS, Citi, and Societe Generale, specifically
requested that compliance with the reporting requirements for non-U.S.
persons with non-U.S. counterparties, including foreign branches of
U.S. persons, be delayed pending final interpretive guidance (and for a
reasonable time thereafter). As an alternative, SIFMA suggested that at
least during the term of the exemptive relief, all market participants
(including futures commission merchants) should be permitted to mask
client information from any reporting requirements, including SDR
reporting and LTR, where the failure to do so would violate applicable
foreign laws and regulations.
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\105\ See e.g., SIFMA (Aug. 13, 2012) at 14; Citi (Aug. 13,
2012) at 7; UBS AG (``UBS'') (June 13, 2012) at 1; IIB (Aug. 9,
2012) at 10; Societe Generale (Aug. 9, 2012) at 8; ISDA (Aug. 10,
2012) at 7; Swiss Financial Market Supervisory Authority (``FINMA'')
(July 16, 2012) at 2; Hong Kong Banks (Aug. 27, 2012) at 2-3.
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ii. Commission Determination on Privacy and Confidentiality Laws
The Commission believes that, given the importance of the subject
reporting requirements to market transparency and integrity, it is
critical to apply these requirements to all registered SDs and
MSPs.\106\ However, the Commission recognizes the potential challenges
that non-U.S. firms may face in jurisdictions with conflicting privacy
and confidentiality laws. As a result of these challenges, the
Commission staff recently granted time-limited no-action relief from
provisions of parts 20, 45, and 46 of the Commission's regulations that
require the reporting of certain information revealing the identity of
a counterparty or affiliated group where reporting such information
would violate the privacy laws of a non-U.S. jurisdiction.\107\ In
light of the
[[Page 872]]
Commission staff's decision to provide no-action relief with respect to
this issue, the Commission has determined that it would not further the
public interest or the purposes of the CEA to grant further relief with
respect to the reporting requirements solely on the basis of
potentially conflicting privacy and data protection laws. Therefore,
the Commission declines to provide relief under CEA section 4(c) in
this regard.
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\106\ See also the discussion of the importance of SDR reporting
in section III.D.3.ii., above
\107\ See CFTC Division of Market Oversight, Re: Time-Limited
No-Action Relief for Part 20 Reporting Entities Regarding
Identifying Information and Time-Limited No-Action Relief for Part
45 and Part 46 Reporting Counterparties Regarding Legal Entity
Identifiers, Other Enumerated Identifiers, or Other Identifying
Terms, No-Action Letter No.12-46, Dec. 7, 2012. Further, in response
to comments, the Commission is revising Form 7-R. This is the
Commission form that a firm uses to apply for registration with the
Commission. By signing Form 7-R, the firm makes a set of
certifications, acknowledgments and undertakings. In addition, if
the applicant is a foreign firm, the firm agrees to provide its
books and records for inspection by the Commission, NFA, or the U.S.
Department of Justice (``DOJ'') upon request and in a specified
manner. Included is a statement that the foreign firm is not subject
to any blocking, privacy or secrecy laws, and that failure to
provide the books and records in the manner specified could result
in enforcement action, denial or revocation of registration, or
other consequences.
Certain foreign firms that will be required to register with the
Commission as SDs by a date certain may be subject to blocking,
privacy, or secrecy laws in their home jurisdictions that could
limit or prevent production by those firms of their books and
records in accordance with the procedures they would be agreeing to
by signing Form 7-R. In order to permit these firms to register as
required by U.S. law, without violating their home country laws, the
Commission is making the terms of the agreement in Form 7-R that a
firm produce its books and records upon request of the Commission,
NFA, or DOJ, subject to the provisions of any applicable blocking,
privacy or secrecy laws. See Form 7-R at page 42, which may be found
on NFA's Web site at http://www.nfa.futures.org/NFA-registration/templates-and-forms/Form7-R-entire.pdf.
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Similarly, the Commission views its access to a registrant's books
and records as a fundamental regulatory tool necessary to properly
monitor and examine the registrant's compliance with the CEA.
Consistent with existing practice, the Commission intends to exercise
its right to access a registrant's books and records and maintain its
right to examine a registrant, regardless of the registrant's
location.\108\ In this regard, the Commission believes that mutual
cooperation with other regulators is equally important to achieve the
effective and efficient supervision of cross-border activities. In
recognition of the importance of such mutual cooperation, the
Commission will endeavor to achieve an understanding with each relevant
regulator and memorialize such understanding in a supervisory
arrangement. In the Commission's view, this is a balanced and flexible
approach that will ensure that the agency has access to information
critical to fulfilling its statutory responsibilities, but achieved in
a manner designed to ensure continuing cooperative relationships with
its counterparts overseas.
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\108\ Under Commission regulation 23.603(i), a registered SD or
MSP must make all records required to be maintained in accordance
with Commission regulation 1.31 available promptly upon request to
representatives of the Commission. Under the Final Order, the
Commission reserves this right to access records held by registered
SDs and MSPs, regardless of the registrant's location.
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5. Exemptive Relief for U.S. Swap Dealers
i. Comments
The Proposed Order would permit non-U.S. registrants and foreign
branches of U.S. registrants to delay compliance with Transaction-Level
Requirements with respect to swaps with non-U.S. persons.\109\ The
relief would not be available to U.S. SDs (with the exception of
foreign branches). SIFMA requested that the Commission extend the
relief from compliance with the Entity-Level Requirements (including
SDR reporting) to U.S. registrants transacting with non-U.S. persons
since it will be difficult, if not impossible, to collect the
counterparty information that is necessary to effect compliance with
certain of these requirements.\110\ SIFMA also supported granting U.S.
SDs relief from swap data recordkeeping and internal conflicts
requirements for swaps with non-U.S. persons.\111\ ISDA similarly
argued that the rationale for exemptive relief applies equally to a
U.S. SD transacting directly with non-U.S. persons.\112\ Cleary raised
concerns about the disparate treatment extended to U.S. SDs and non-
U.S.-SDs under the Proposed Order in respect to Transaction-Level
Requirements as applied to transactions with non-U.S. persons.\113\
Cleary requested that in the interim, for the duration of the exemptive
relief, the Commission should exempt all SDs from Transaction-Level
Requirements for transactions with non-U.S. persons.
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\109\ The Proposed Order provided that non-U.S. registrants may
comply with Transaction-Level Requirements for transactions with
non-U.S. counterparties only as required by the home jurisdiction
(or in the case of foreign branches of a U.S. registrant, the
foreign location of the branch). Cleary requested that compliance
with the host jurisdiction also be permitted. See Cleary (Aug. 16,
2012) at 16. In response, the Commission is clarifying the Final
Order to allow the non-U.S. registrant (or branch of a U.S.
registrant) to comply with only the applicable requirements of the
local jurisdiction.
\110\ See SIFMA (Aug. 13, 2012) at 10 (arguing that, otherwise,
U.S. SDs would be at a competitive disadvantage and that U.S. SDs
face the same operational difficulties as non-U.S. SDs when
transacting in the U.S. with non-U.S. counterparties).
\111\ Id. at 9.
\112\ See ISDA (Aug. 10, 2012) at 7 (``in the interest of
competitive parity between U.S. and non-U.S. entities, ISDA
recommends that the Commission align the domestic and
extraterritorial compliance dates of all requirements'').
\113\ See Cleary (Aug. 16, 2012) at 11 (``during the exemption's
phase-in period * * * the CFTC should ensure competitive parity by
exempting all [SDs] from transaction-level requirements in
connection with transactions with non-U.S. counterparties'').
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ii. Commission Determination on Relief for U.S. Swap Dealers
The Commission believes that extension of this relief to U.S. SDs'
activities would not only be contrary to the directive in CEA section
2(i), but also detrimental to the Commission's strong supervisory
interests in swap activities occurring inside the United States.
Nevertheless, the Commission has carefully considered the potential
consequences of disparate treatment of U.S. and non-U.S. registrants
and, where possible, has attempted to minimize the disparity between
these registrants. A notable example of this is the relief from the
Transactional-Level Requirements, which applies equally to both non-
U.S. persons and the overseas operations of U.S. persons (i.e., foreign
branches or non-U.S. affiliates).
In the Commission's view, it would be contrary to the public
interest and the purposes of the CEA to address commenters' concerns
about regulatory disparity by diminishing the regulatory requirements
that apply to swap activities inside the United States. Rather, the
Commission believes that this issue is more appropriately addressed by
working closely with its overseas counterparts, including continued
participation in international groups to adopt and enforce robust and
consistent standards across jurisdictions.\114\
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\114\ Where appropriate, however, the Commission has provided
relief to both U.S. and non-U.S. registrants. For example, the
Commission recently approved interim final rules for SDs and MSPs
that would otherwise be required to comply with certain business
conduct and documentation requirements in provisions of subpart F,
subpart H, and subpart I to part 23 of the Commission's Regulations.
Specifically, the compliance date for Commission regulations 23.502
and 23.504 is deferred until July 1, 2013. Additionally, the
compliance date for Commission regulations 23.201(b)(3)(ii); 23.402;
23.401(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and
(c); 23.440; 23.450; and 23.505 is deferred until May 1, 2013. The
compliance dates for all other provisions of subpart F, subpart H,
and subpart I of part 23 remain unchanged. See Business Conduct and
Documentation Requirements for Swap Dealers and Major Swap
Participants, Interim Final Rules, Dec. 18, 2012, available at
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister121812.pdf.
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6. Relief for Transactions Involving Non-Registrants
i. Comments
As noted above, the Proposed Order would not extend relief to swap
counterparties that are neither SDs nor MSPs. Certain commenters, such
as SIFMA and Deutsche Bank, asserted that this would lead to an
anomalous result. By way of illustration, they noted that a swap
between a non-U.S. person and a foreign branch of an SD would be exempt
from applicable Transaction-Level Requirements, but a swap between the
same non-U.S. person and a foreign branch of a U.S. bank that is not a
registered SD would not be eligible for the relief.\115\ They asked
that the Commission extend exemptive relief to non-U.S. persons who
enter into swaps with foreign branches of U.S. persons, regardless of
whether the U.S. person is a registered SD or MSP.
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\115\ See SIFMA (Aug. 13, 2012) at 12; Deutsche Bank (Aug. 13,
2012) at 3-4 (citing SDR reporting as an example of such
disparities).
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[[Page 873]]
ii. Commission Determination on Transactions Involving Non-Registrants
The Commission believes that it would not be appropriate to extend
temporary exemptive relief to swaps by a non-U.S. person with a foreign
branch of a U.S. person that is not a registrant. As explained above,
in crafting the scope of relief to be granted under CEA section 4(c),
the Commission carefully balanced the need to implement the Dodd-Frank
swap provisions as expeditiously as possible and the need to mitigate
undue disruptions to market practices. Consistent with that objective,
the Commission's determination to exclude swaps between non-U.S.
persons and foreign branches of U.S. registrants from certain
requirements was based on the fact that the U.S. registrant (of which
the foreign branch is an integral part, not a separate entity) would be
subject to various prudential requirements as part of the overall
requirements applicable to registrants. In the Commission's view, these
requirements provide a sufficient level of regulatory safeguards with
respect to the U.S. registrants to allow for temporary relief from the
Transactional-Level Requirements with respect to the foreign branches
of those U.S. registrants.
In contrast, where the foreign branch is not part of a U.S.
registrant, the Dodd-Frank requirements applicable to that foreign
branch are greatly reduced and may, in some cases, be absent.
Accordingly, the Commission believes that it would not further the
public interest to grant relief from applicable Transaction-Level
Requirements with respect to foreign branches of other classes of U.S.
persons, and therefore declines to issue such exemptive relief under
CEA section 4(c).
7. Expiration Date for the Relief
i. Comments
A number of commenters, including ISDA and SIFMA, stated that the
expiration of the Final Order should be tied to the publication of the
final guidance, and not simply one year after the publication of the
Proposed Order.\116\ According to SIFMA, any transition period is
meaningful only if measured from the date that the full scope of the
exemptive relief is disclosed, i.e., the date of the publication of the
final guidance.\117\ Cleary recommended that the Commission align the
duration of the exemptive relief with implementation in other G-20
jurisdictions.\118\
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\116\ See ISDA (Aug. 10, 2012) at 17; SIFMA (Aug. 13, 2012) at
14-15.
\117\ See SIFMA (Aug. 13, 2012) at 14-15.
\118\ See Cleary (Aug. 16, 2012) at 17. Cleary suggested, for
example that the Commission consider a jurisdiction-by-jurisdiction
approach under which the relief would expire for non-U.S.
registrants as their home (or host) jurisdictions implement
comparable requirements.
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ii. Commission Determination on Expiration Date for the Relief
The Commission declines to adopt the commenters' suggestion. The
Final Order maintains the expiration date in the Proposed Order.
However, as noted in the Proposed Order, the Commission is committed to
an orderly transition to the Dodd-Frank Act's regulatory regime.\119\
Consistent with this commitment to an orderly phase-in of the cross-
border application of Dodd-Frank requirements, ``[s]hould the
Commission deem it appropriate to extend any exemptive relief, the
Commission will be in a better position to tailor any exemption at that
time.'' \120\
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\119\ See Proposed Order, 77 FR at 41112. The Commission's
commitment in this regard also was recently reflected in the 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, which
is signed by CFTC Chairman Gensler and the leaders of 11 other
regulatory authorities (``We will consider providing appropriate
transitional implementation periods for entities in jurisdictions
that are implementing comparable regulations, supervision, and
comprehensive oversight. In order to facilitate an orderly
transition with respect to new OTC derivatives regulatory
requirements when promulgating regulations with cross-border
applicability, we agree to a reasonable, limited transition period
to facilitate the implementation of such cross-border regulatory
requirements in appropriate circumstances and in consultation with
other jurisdictions.'').
\120\ ``Effective Date for Swap Regulation,'' 76 FR 42508,
42514, Jul. 19, 2011.
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8. Foreign Branches of a U.S. Swap Dealer
i. Comments
SIFMA commented that the Commission should clarify that relief from
the Transaction-Level Requirements is available to a foreign branch of
a U.S. SD that enters into a swap with a non-U.S. SD.\121\ Citi
requested that the Commission extend relief to swaps between foreign
branches of U.S. SDs.\122\
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\121\ See SIFMA (Aug., 13, 2012) at 10 (noting that the Proposed
Order makes clear that a foreign branch of a U.S. SD is eligible for
such relief with respect to swaps with a non-U.S. counterparty, but
the definition of U.S. person (which includes branches) makes the
treatment of swaps between a foreign branch of a U.S. SD and a non-
U.S. SD unclear).
\122\ See Citi (Aug. 13, 2012) at 2-3 (noting that, under the
Proposed Order, relief from the Transaction-Level Requirements would
not be available in this scenario because a branch is deemed a U.S.
person, and arguing that this result would make it difficult for
such branches to hedge risk in local markets, and reduce liquidity
for non-U.S. SDs, because U.S. SDs would be limited in their ability
to make markets abroad via their overseas branches).
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ii. Commission Determination on Foreign Branches of a U.S. Swap Dealer
The Commission clarifies that relief from the Transaction-Level
Requirements is available to a swap between a foreign branch of a U.S.
registrant and a non-U.S. SD. That is, for purposes of this relief, the
non-U.S. SD may treat the foreign branch as a non-U.S. person.
On the other hand, as discussed above, the Commission believes that
a swap between two foreign branches of U.S. registrants is a swap
between two U.S. persons, and such transactions are fully subject to
the Transaction-Level Requirements. Nevertheless, the Commission has
determined that it would be appropriate to provide relief during the
effectiveness of the Final Order so that foreign branches of U.S.
registrants\123\ may comply only with transaction-level requirements as
may be required in the location of the foreign branch while the
Commission further considers, and works with international regulators
regarding, the treatment of foreign branches of U.S. registrants.
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\123\ For purposes of this relief from Transactional-Level
Requirements for a swap between foreign branches of U.S.
registrants, a swap is with the foreign branch of a U.S. person when
(i) the personnel negotiating and agreeing to the terms of the swap
are located in the jurisdiction of such foreign branch; (ii) the
documentation of the swap specifies that the counterparty or
``office'' for the U.S. person is such foreign branch and (iii) the
swap is entered into by such foreign branch in its normal course of
business. If the swap does not meet these three criteria, it will be
treated as a swap of the U.S. person and not as a swap of the
foreign branch of the U.S. person, and the swap will not be eligible
for this relief from Transaction-Level Requirements.
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As part of its further consideration of this issue, the Commission
is considering additional requirements to determine if a swap is with
the foreign branch of a U.S. person. These requirements could include,
for example, that the foreign branch is the location of employment of
the employees negotiating the swap for the U.S. person or, if the swap
is executed electronically, the employees managing the execution of the
swap, that the U.S. person treats the swap as a swap of the foreign
branch for tax purposes, that the foreign branch operates for valid
business reasons and is not only a representative office if the U.S.
person, and that the branch is engaged in the business of banking or
financing and is subject to substantive regulation in the jurisdiction
where it is located. The Commission seeks comment from
[[Page 874]]
market participants and other interested parties regarding whether it
is appropriate to include these or other requirements in the
determination of when a swap is with the foreign branch of a U.S.
person.
9. Compliance Plans and Good-Faith Compliance
The Proposed Order required that a person seeking relief under the
order would submit to the NFA a compliance plan addressing how it plans
to comply with applicable requirements under the CEA and related
regulations. Commenters on this aspect of the Proposed Order questioned
the value of the compliance plan and requested clarifications of the
Commission's expectations concerning compliance plans.\124\ Upon
further consideration of the regulatory implementation process, the
Commission has determined that the submission of a compliance plan
should not be necessary in connection with phasing in compliance with
the Dodd-Frank requirements in the cross-border context during the
limited time frame in which the Final Order will be in effect.
Therefore, the Final Order does not require submission of a compliance
plan.
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\124\ See, e.g., SIFMA (Aug. 27, 2012), at A-52--A-53; IIB (Aug.
9, 2012) at 9.
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Market participants have raised the concern that, despite their
best efforts at compliance, there could be ``practical or technical
limitation or interpretive uncertainty'' that might need to be resolved
before an SD's or MSP's full compliance with the Dodd-Frank
requirements is practically feasible.\125\ In light of these concerns,
the Commission believes it is appropriate to provide market
participants guidance regarding its intentions concerning its
enforcement authority when an SD or MSP is making diligent, good faith
implementation efforts in this period of transition. The Commission
does not intend to bring an enforcement action against an SD or MSP for
failing to fully comply with applicable Dodd-Frank requirements prior
to July 12, 2013, provided that there is a practical or technical
impediment to compliance that results in an inability to comply with
relevant compliance deadlines, or uncertainty in interpreting,
particular Dodd-Frank requirement(s) and the SD or MSP is acting
reasonably and in good faith to fully comply with the applicable Dodd-
Frank requirements, which would include, at a minimum, (i) material
progress toward timely implementation and compliance; (ii)
identification of any implementation or interpretive issue as soon as
reasonably possible; (iii) timely elevation of such issue(s) to the
SD's or MSP's senior management for consideration and resolution; and
(iv) timely consultation with other industry participants and the
Commission as necessary to seek resolution of any such issue(s).\126\
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\125\ See joint letter from FIA, IIB and SIFMA (Nov. 30, 2012)
at 11; see also SIFMA (Aug. 27, 2012) at A-25, A-44; Cleary (Aug.
16, 2012) at 4.
\126\ This expression of intent does not confer upon any party
any rights or defenses in any investigation or in any action that
may be brought by the Commission. As always, the Commission will
weigh all facts and circumstances in determining whether to commence
an enforcement action.
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10. Relief for Principals/Associated Persons
i. Comments
Under Commission regulation 3.10(a)(2), each applicant for SD or
MSP registration must file, together with Form 7-R, a Form 8-R executed
by each natural person that qualifies as a ``principal'' of the
applicant. As part of this process, each principal is required to
submit a fingerprint card, as well as submit to a detailed background
check. Commission regulation 23.22 prohibits an SD or MSP from
permitting an associated person subject to statutory disqualification
(as defined by the CEA) from being involved in effecting swaps on
behalf of such registrant. Citing difficulties associated with
differences in the standards for statutory disqualification among
jurisdictions and privacy issues associated with collecting information
about individuals, commenters requested that only those individuals
directly involved in the solicitation or acceptance of swaps (or
supervising such individuals) be regarded as ``associated persons.''
\127\
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\127\ See e.g., Cleary (Aug. 16, 2012) at 13.
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Commenters, such as IIB and Societe Generale, urged the Commission
to exclude directors and senior officers (but not those in charge of
the business unit subject to regulation by the Commission) from
principal status.\128\ Cleary contended that globally active banks
operate under a paradigm that differs from traditional Commission
registrants and noted the differences in governance structures and the
roles of boards of directors in foreign jurisdictions.\129\ Under these
circumstances, Cleary requested that the Commission grant relief, on an
interim basis, from registration for associated persons, and from
requirements applicable to principals, of non-U.S. registrants.
Specifically, Cleary said, the Commission should treat as principals
only those individuals directly engaged in the activities giving rise
to registration.\130\
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\128\ See IIB (Aug. 9, 2012) at 7-8; and Societe Generale (Aug.
9, 2012) at 11.
\129\ See Cleary (Aug. 16, 2012) at 13. Cleary stated that, in
this connection, the Commission may wish to consider recognizing
comparable foreign requirements for principal and associated person
registration and obligations.
\130\ See id.
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ii. Commission Determination on Relief for Principals/Associated
Persons
The Commission does not believe, at this time, that blanket relief
from requirements applicable to principals or from associated person
registration to address these concerns is appropriate pursuant to the
standards required for exemptive relief under CEA section 4(c). Rather,
the Commission believes that any relief from these requirements is
appropriately addressed through staff action.\131\ The Commission views
the registration of individuals to be an important facet of ensuring
the integrity of the firm itself, and a staff process will permit
Commission staff to tailor relief as appropriate and necessary.
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\131\ See CFTC Division of Swap Dealer and Intermediary
Oversight, Re: Relief for Swap Dealers and Major Swap Participants
from Compliance with Regulation 23.22(b) with Respect to: (1) Non-
Domestic Associated Persons who Deal only with Non-Domestic Swap
Counterparties; and (2) Persons Employed in a Clerical or
Ministerial Capacity, No-Action Letter No. 12-43, Dec. 7, 2012.
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IV. Section 4(c) of the CEA
After considering the complete record in this matter, the
Commission has determined that the requirements of CEA section 4(c)
have been met with respect to the exemptive relief described above.
First, in enacting section 4(c), Congress noted that the purpose of the
provision ``is to give the Commission a means of providing certainty
and stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.'' \132\ As noted in the Proposed Order, the
Commission is issuing this relief in order to ensure an orderly
transition to the Dodd-Frank regulatory regime and to provide greater
legal certainty to market participants regarding their obligations
under the CEA with respect to their cross-border swap activities.
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\132\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
---------------------------------------------------------------------------
This exemptive relief also will advance the congressional mandate
concerning harmonization of international standards with respect to
swaps, consistent with section 752(a) of the Dodd-Frank Act. In that
section, Congress directed that, in order to ``promote effective and
consistent global regulation of swaps and security-based swaps,'' the
Commission, ``as appropriate, shall consult and coordinate with foreign
regulatory
[[Page 875]]
authorities on the establishment of consistent international standards
with respect to the regulation'' of swaps and security-based
swaps.\133\ This relief, by providing non-U.S. registrants the latitude
necessary to develop and modify their compliance plans as the
regulatory structure in their respective home jurisdiction changes,
will promote the adoption and enforcement of robust and consistent
standards across jurisdictions.
---------------------------------------------------------------------------
\133\ See section 752(a) of the Dodd-Frank Act.
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The Commission emphasizes that the Final Order is temporary in
duration and reserves the Commission's enforcement authority, including
its anti-fraud and anti-manipulation authority. As such, the Commission
has determined that the Final Order is consistent with the public
interest and purposes of the CEA. For similar reasons, the Commission
has determined that the Final Order will not have a material adverse
effect on the ability of the Commission or any contract market to
discharge its regulatory or self-regulatory duties under the CEA.
Finally, the Commission has determined that the Final Order is limited
to appropriate persons within the meaning of CEA section 4c(3), since
the SDs and MSPs eligible for the relief are likely to be the types of
entities enumerated in that section and active in the swaps market.
Therefore, upon due consideration, pursuant to its authority under
section 4(c) of the CEA, the Commission hereby issues the Final Order.
V. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \134\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number.
---------------------------------------------------------------------------
\134\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
In connection with the Proposed Order, the Commission requested
review and approval by OMB of a new collection of information titled
``Exemptive Order Regarding Compliance with Certain Swap Regulations.''
\135\ This collection of information would have related to the
compliance plans to be submitted to the NFA by persons seeking relief
under the exemptive order. No comments were received on the paperwork
burden associated with this information collection request. Because the
Final Order does not require the submission of a compliance plan, it
does not require a collection of information from any persons or
entities.\136\
---------------------------------------------------------------------------
\135\ The Commission's notice was published in the Federal
Register. See 77 FR 43271, Jul. 24, 2012. On August 13, 2012, OMB
approved the Commission's initial information collection request
until February 28, 2013, and assigned OMB control number 3038-0098.
\136\ On November 7, 2012, the Commission, by separate notice in
the Federal Register, announced an opportunity for public comment on
the proposed extension of OMB approval of the prior information
collection request, with a 60-day comment period that expires on
January 7, 2013. See 77 FR 66819 Nov. 7, 2012. Because the Final
Order does not require submission of a compliance plan, this
extension is no longer relevant.
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VI. Cost-Benefit Considerations Relating to the Final Order
Section 15(a) of the CEA \137\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
---------------------------------------------------------------------------
\137\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
A. Background
Throughout the Dodd-Frank rulemaking process, the Commission has
strived to ensure that new regulations designed to achieve Dodd-Frank's
protections be implemented in a manner that is both timely and also
minimizes unnecessary market disruption. In its effort to implement the
Dodd-Frank regulations on a cross-border basis, the Commission's
approach has not been different. In this respect, the Commission has
attempted to be responsive to industry's concerns regarding
implementation and the timing of new compliance obligations, and
thereby ensure that market practices would not be unnecessarily
disrupted during the transition to the new swap regulatory regime. At
the same time, however, the Commission has endeavored to comply with
the Congressional mandate to implement the new SD and MSP regulatory
scheme in a timely manner. The Commission, therefore, also seeks to
ensure that the implementation of these requirements is not subject to
undue delay. The Commission believes that the Final Order strikes the
proper balance between promoting an orderly transition to the new
regulatory regime under the Dodd-Frank Act, while appropriately
tailoring relief to ensure that market practices are not unnecessarily
disrupted during such transition.
The Final Order also reflects the Commission's recognition that
international coordination is essential in this highly interconnected
global market, where risks are transmitted across national borders and
market participants operate in multiple jurisdictions.\138\ The Final
Order would allow market participants to implement the calculations
related to SD and MSP registration on a uniform basis and to delay
compliance with certain Dodd-Frank requirements while the Commission
continues to work closely with other domestic financial regulatory
agencies and its foreign counterparts in an effort to further harmonize
the cross-border regulatory framework.
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\138\ See generally CFTC-SEC Joint Report on International Swap
Regulation Required by Section 719(c) of the Dodd Frank Act (Jan.
31, 2012) at 105-09.
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B. Summary of Proposed Consideration of the Costs and Benefits of the
Exemptive Order
In terms of costs, in the Proposed Order the Commission considered
the potential costs incurred by swap entities to submit a compliance
plan in order to obtain exemptive relief. As noted above, the Final
Order does not require submission of a compliance plan and therefore
these potential costs are no longer relevant to the Final Order.
Apart from the direct costs of submitting a compliance plan, the
Commission noted in the Proposed Order that it may result in indirect
costs to the public, including the costs of continuing systemic risk to
U.S. taxpayers due to delayed compliance with the Entity-Level
Requirements and, to a more limited extent, Transaction-Level
Requirements of the Dodd-Frank Act. The Commission proposed that these
costs are not, however, susceptible to meaningful quantification due to
a lack of data regarding several key variables.
In terms of benefits, the proposal stated that the exemptive order
would provide a benefit in that it would allow affected entities
additional time to transition into the new regulatory regime in a more
orderly manner, which promotes stability in the markets as that
transition occurs. Another benefit proposed was the increase in
international harmonization because the
[[Page 876]]
proposed relief provided U.S. and non-U.S. registrants the latitude
necessary to develop and modify their compliance plans as the
regulatory structure in their home jurisdiction changes, which would
promote greater regulatory consistency and coordination with
international regulators.
The Commission explained that one of the key benefits of the
proposed compliance plan condition is that it would ensure that non-
U.S. persons claiming the exemption would be actively and demonstrably
considering and planning for compliance with the Entity-Level and
Transaction-Level Requirements under the CEA, as may be applicable. In
addition, the Commission stated that relief as proposed would allow
foreign branches of U.S. SDs and MSPs to comply only with those
requirements as may be required in the jurisdiction where the foreign
branch is located for swaps with non-U.S. counterparties, effective
concurrently with the date upon which such SDs and MSPs must first
apply for registration until 6 months following the publication of the
proposed order in the Federal Register.
C. Comments
The Commission requested comments on all aspects of its proposed
consideration of costs and benefits and any alternatives to the same.
As discussed and considered throughout this release, the Commission
received 26 comments on the Proposed Order, many addressing the
potential economic and competitive effects of the proposed exemption in
qualitative terms. None, however, provided additional data or
information from which the Commission could modify and/or expand upon
its dollar cost estimates of the conditions to the exemption.
In the paragraphs that follow, the Commission summarizes and
responds to the comments received that relate to the enumerated cost
and benefit considerations set forth in CEA section 15(a), most notably
considerations of protection of the market participants and the public,
and considerations of competitiveness. The Commission believes that,
while it is possible that the estimated dollar costs will increase or
decrease as a result of the modifications to the proposal in this final
order, the Commission does not expect any such changes to be
significant.
While most commenters expressed support for the Commission's
objective in the Proposed Order--that is, ensuring an orderly
transition to Dodd-Frank's regulatory framework and providing greater
legal certainty for market participants by providing a phase-in of
certain requirements, other commenters expressed caution that delayed
implementation could leave the public unprotected from the types of
risk the Dodd-Frank Act and the Commission's implementing regulations
are intended to address.
Public interest groups including Americans for Financial Reform,
Public Citizen's Congress Watch, and Better Markets stated that the
proposed delayed implementation of the Dodd-Frank derivatives regime,
where there is a clear and direct U.S. taxpayer exposure, would deprive
taxpayers of the protections required by the statute, such as clearing
and margin, which these commenters believe should go into effect as
rapidly as possible. AFR further states that although the risk to U.S.
taxpayers related to European banks is somewhat less direct, it is real
and has been significant, as shown by the U.S. taxpayer bailouts that
benefitted foreign counterparties to AIG Financial Products during the
2008 crisis.\139\
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\139\ See AFR (Aug. 13, 2012) at 2. See also Better Markets
(Aug. 16, 2012) at 1.
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Industry commenters urged the Commission to avoid potential undue
disruption and market dislocation by carefully phasing in
implementation in a manner that ``appropriately balances the competing
objectives and obstacles facing the Commission and the private sector
and that avoids adverse market and economic impacts.'' \140\ IIB, for
example, said that requiring non-U.S. SDs and MSPs to comply with all
applicable Dodd Frank requirements at the time of registration or
shortly thereafter would ``create unrealistic and unwarranted
compliance burdens'' and therefore the Commission should provide
additional time for compliance.\141\ Commenters also said that if the
Commission adopts interim requirements that would apply for only a
short time, it should take care that market participants would not be
unnecessarily required to incur costs to comply with requirements that
are subject to change.\142\
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\140\ Cleary (Aug.16, 2012) at 3.
\141\ IIB (Aug. 9, 2012) at 2.
\142\ See SIFMA (Aug. 13, 2012) at 5. See also letter to
Chairman Gensler from Reps. Scott Garrett and Randy Neugebauer (June
20, 2012) at 2 (requesting that the Commission formalize any cross
border guidance through a rule making that includes the appropriate
cost-benefit analysis that the law requires).
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Commenters also addressed the perceived competitive effects of the
Proposed Order. Better Markets stated that, as a general matter, it
would be inappropriate and contrary to law for the Commission to delay
implementation of the Dodd-Frank Act to allow ``the rest of the world
to catch up'' to the U.S.\143\ In contrast, ISDA believes that the
Commission should align the compliance dates for U.S. and non-U.S. SDs
and MSPs in order to avoid the ``profound effect[s] on transactional
relationships'' that may result from ``a framework under which the
Commission imposes on [U.S. SDs and MSPs] a substantially earlier
rollout of Entity-level requirements and Transaction level requirements
with non-U.S. persons in certain cases.'' \144\ This view was shared by
other industry commenters, which recommended that ``during the
exemption's phase-in period, while transaction-level requirements have
not yet come into effect outside the U.S., the Commission should ensure
competitive parity by exempting all SDs from transaction level
requirements in connection with transactions with non-U.S.
counterparties.'' \145\
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\143\ Better Markets (Aug. 16, 2012) at 2.
\144\ ISDA (Aug. 10, 2012) at 7.
\145\ Cleary (Aug 16, 2012) at 11.
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Regarding the Proposed Order's treatment of SDR Reporting and LTR
requirements, The Clearing House stated that differential treatment
between foreign SDs and non-U.S. affiliates or subsidiaries of U.S. SDs
would create a competitive disadvantage for overseas branches and
affiliates of U.S. entities and would not serve the Commission's
purpose of mitigating risk to the U.S.\146\ Deutsche Bank pointed out
that because the Proposed Order would not provide relief to non-U.S.
SDs and MSPs that are affiliates of U.S. SDs, members of an affiliated
group that is based outside the U.S. but in which one of the members is
a U.S. SD (such as, potentially, the Deutsche Bank group) would not
benefit from the Proposed Order.\147\ In this context, Deutsche Bank
stated that affiliates, particularly in different countries, frequently
use different and unrelated technology systems, and therefore a non-
U.S. SD or MSP with a U.S. SD affiliate may not be able to easily use
the reporting systems of its U.S. SD affiliate.\148\
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\146\ See The Clearing House (Aug. 13, 2012) at 16.
\147\ See Deutsche Bank (Aug. 13, 2012) at 3.
\148\ Id.
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D. Consideration of Costs and Benefits of the Final Order
The Final Order permits, subject to the conditions specified
therein, market participants outside the United States (i) to apply a
limited, interim definition of the term ``U.S. person'' for a period of
six months, (ii) to determine SD and
[[Page 877]]
MSP registration requirements in a uniform manner, (iii) to apply the
SD de minimis aggregation requirements in a limited manner, an (iv) to
delay compliance with certain Dodd Frank requirements specified in the
Final Order until July 12, 2013. The Final Order reflects the
Commission's determination to protect U.S. persons and markets through
the cross-border application of the provisions of the Dodd-Frank Act
and the Commission's regulations in a manner consistent with section
2(i) of the CEA and longstanding principles of international comity. By
carefully tailoring the scope and extent of the phasing-in provided by
the Final Order, the Commission believes that it achieves an
appropriately balanced approach to implementation that mitigates the
costs of compliance while avoiding open-ended delay in protecting the
American public from swaps activities overseas. To be sure, the
conditions attached to the Final Order are not without cost, but the
Commission believes that phasing-in of certain Dodd-Frank requirements
as permitted by the Final Order will reduce overall costs to market
participants.
In the absence of the Final Order, non-U.S. SDs or MSPs would be
required to be fully compliant with the Dodd-Frank regulatory regime
without further delay. The Final Order delays compliance with a number
of these requirements until July 12, 2013. With respect to these
entities, therefore, the benefits include not only the avoided costs of
compliance with certain requirements during the time that the Final
Order is in effect, but also increased efficiency because the
additional time allowed to phase in compliance will allow market
participants more flexibility to implement compliance in a way that is
compatible with their systems and practices. The additional time
provided by the Final Order will also give foreign regulators more time
to adopt regulations covering similar topics, which could increase the
likelihood that substituted compliance will be an option for market
participants. Thus, the Final Order is expected to help reduce the
costs to market participants of implementing compliance with certain
Dodd Frank requirements. These and other costs and benefits are
considered below.
1. Costs
A potential cost of the Final Order, albeit one that is difficult
to quantify, is the potential that the relief from certain SD de
minimis aggregation requirements and the delay in compliance permitted
by the Final Order will leave market participants without certain
protections flowing from the Dodd Frank Act for the period during which
the Final Order applies. The Final Order may also, as discussed above,
leave U.S. taxpayers exposed to systemic risks during that time
period.\149\ The Commission believes that these costs are mitigated,
however, by the relatively short time period of the Final Order's
application, by the fact that certain key Dodd Frank requirements will
apply during this time, and by the limitation of the Final Order's
scope to non-U.S. persons. The Commission notes, however, that concerns
about these costs are one of the bases for the limited nature of the
Final Order, and that adoption of many of the modifications suggested
by commenters to expand the order would potentially increase such
costs.
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\149\ In this context, the Commission considered whether
additional costs could result from the provisions of the exemptive
order that provide additional time for historical swap reporting.
The Commission does not believe that providing additional time for
historical swap reporting will result in any significant costs
because the required data will still be provided within a relatively
short period of time.
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The Commission has also considered the possibility, raised by
commenters, that competitive disparities will result from the delay in
compliance permitted to non-U.S. market participants during the
effectiveness of the Final Order. In general, the effect of the Final
Order is that while U.S. SDs and MSPs will begin to comply with certain
Dodd Frank requirements when they apply to be registered (which will
begin at the end of 2012 and continue through the first part of
2013),\150\ non-U.S. market participants will not have to comply with
such requirements, to the extent provided under the Final Order, until
July 12, 2013. This delay raises the potential that the earlier
imposition of certain requirements on U.S. SDs and MSPs could also
impose a competitive disadvantage on them. The Commission believes,
however, that any potential competitive disadvantage from the Final
Order is uncertain, and there are factors indicating it is unlikely to
be significant. Moreover, the Commission's staff is minimizing, through
a variety of no-action letters and staff guidance, the potential for
competitive disparities by affording U.S. and non-U.S. market
participants time-limited relief to achieve compliance with certain
regulatory requirements before staff would recommend enforcement action
by the Commission.\151\ For example, CFTC Letter No. 12-32 provides
relief regarding compliance with certain requirements of the
Commission's swap data reporting rules. In so doing, Commission staff
allows for a common monthly compliance date for SDs newly within the
scope of those rules, and to extend the compliance date for reporting
historical swap transaction data pursuant to Part 46 of the
Commission's regulations.\152\
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\150\ See CFTC Staff Responds to Questions on Timing of Swap
Dealer Registration Rules, CFTC Press Release 6348-12, September 10,
2012.
\151\ For a listing of all relevant no-action letters and staff
guidance, see: http://www.cftc.gov/LawRegulation/DoddFrankAct/GuidanceQandA/index.htm.
\152\ See CFTC Letter No. 12-32.
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The potential disadvantage is uncertain because it is unknown
whether the Dodd Frank requirements imposed on U.S. SDs and MSPs in the
first half of 2013 will discourage potential counterparties from
engaging in swaps with them.\153\ Specifically, it is unknown whether
the compliance expenses incurred during that time will directly affect
swap terms in a manner that would impose a significant
disadvantage.\154\ Also, the Commission cannot estimate with certainty
the likelihood that potential competitive disadvantages arising from
the Final Order will be significant for U.S. SDs and MSPs. A variety of
factors influence a person's choice of potential swap counterparties,
and therefore whether the earlier imposition of certain Dodd Frank
requirements on U.S. SDs and MSPs will cause a significant shift of
swap business away from them is uncertain. It may be that a person
seeking to enter into relatively few swaps would perceive a transitory
advantage in dealing with a more lightly regulated non-U.S. person
while the exemptive order is in effect. The Commission also considered
that if a person has in place relationships with multiple
counterparties (both U.S. and non-U.S.), the person may be more likely
to enter into swaps with the non-U.S. counterparties while the Final
Order is in effect, and the higher level of swap activity with non-U.S.
counterparties may continue after the order expires. Also, U.S. SDs and
MSPs
[[Page 878]]
may be driven to accept lower profit margins on swaps in order to
prevent such shifts to non-U.S. counterparties.
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\153\ The Commission notes, for example, that certain Dodd Frank
requirements, such as margin and capital rules, have not been
finalized and are unlikely to apply to U.S. SDs and MSPs in the
first half of 2013. Also, other requirements, such as the clearing
requirement, will be phased in during that time.
\154\ For example, while the Commission acknowledges that the
requirement to have a chief compliance officer in place does impose
costs, it is unknown whether shifting the time that this requirement
will go into effect by approximately six months will significantly
alter the financial terms at which SDs and MSPs subject to that
requirement would enter into swaps.
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These negative competitive effects on U.S. SDs and MSPs would be
more likely if compliance expenses incurred by U.S. SDs and MSPs in the
first half of 2013 negatively affect the swap terms they offer, and if
swap users are more sensitive to such changes in swap terms. On the
other hand, many relationships between SDs and their counterparties are
connected with other financial arrangements that are reflected in
complex documentation and are difficult to modify quickly.\155\ This
difficulty would attenuate the likelihood of a significant shift of
swap counterparties away from U.S. SDs and MSPs during the relatively
short period that the Final Order is in effect.
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\155\ In fact, the complexity of these arrangements and
documentation is one of the reasons that foreign potential
registrants have requested more time to come into compliance with
the Dodd Frank requirements.
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The Commission has considered the potential negative competitive
effects of the Final Order on U.S. SDs and MSPs. However, since it is
difficult to isolate the effects of the Final Order from all other
factors that may affect how swap users choose counterparties and the
terms at which they enter into swaps, it is difficult to estimate on a
quantitative basis the potential costs that could result for U.S. SDs
and MSPs from the potential negative competitive effects of the Final
Order. Thus, the Commission cannot reach a definitive conclusion about
the effect of the Final Order on competition. In any event, commenters
who raised the potential competitive effect of the Proposed Order did
not provide any specific facts, examples or analysis to facilitate a
detailed consideration of these concerns.
Regarding the comments on the Proposed Order's treatment of the SDR
reporting and LTR requirements, the Commission believes that allowing
non-U.S. SDs and MSPs that are not part of an affiliated group in which
the ultimate parent entity is a U.S. registrant, bank, or financial or
bank holding company to forego reporting of swaps with non-U.S.
counterparties during the effectiveness of the Final Order is not
likely to impose a significant competitive disadvantage on those SDs
and MSPs that are required to report such swaps with non-U.S.
counterparties. Although it is possible that some non-U.S.
counterparties may have concerns about reporting of their swap
activities and may therefore prefer to enter into swaps with SDs and
MSPs that are not subject to these requirements, any resulting
advantage to those SDs and MSPs will last only until the Final Order
expires on July 12, 2013, and as noted above the likelihood of
significant customer shifts during that time is uncertain. As for the
point that the relief in the Final Order should be available to members
of an affiliated group that is based outside the U.S. but in which one
of the members is a U.S. SD, the Final Order has been modified to
provide this availability. Last, the commenter's point that affiliates
in different countries may use different and unrelated technology
systems illustrates one of the reasons that the Commission is providing
the relief in the Final Order--i.e., to give affiliates in different
countries time to mitigate any incompatibilities in their systems.
In connection with the interim definition of the term ``U.S.
person'' which may be applied by non-U.S. market participants covered
by the Final Order, the Commission has considered the potential that
costs could arise from applying this interim definition and then
transitioning to a different definition at expiration of the Final
Order. To mitigate transition costs, the Commission intends that during
the transitional period during which the Final Order is in effect,
market participants will make the system and operational changes
necessary to implement any final definition of U.S. person.
2. Benefits
The primary benefit of this Final Order is that it affords entities
additional time to come into compliance with certain of the
Commission's regulations. The Commission has considered the comments
regarding the complex issues faced by non-U.S. SDs and MSPs in
complying with the applicable Dodd-Frank requirements, and it believes
that this additional time will be of benefit to market participants
beyond simply delaying the time at which they will have to incur the
costs of complying with the regulations. More importantly, this
additional time will permit market participants to implement the
Commission's regulations more flexibly, so that each market
participant's implementation activities can be more closely coordinated
with its particular situation, including factors such as the type of
swaps it uses, the characteristics of its counterparties, and the
nature of its internal swap processes and systems. Reduced costs may
occur as the result of phasing in new systems, operational patterns,
legal agreements, or other business arrangements over a longer period
of time, particularly for SDs and MSPs outside the U.S. For example,
different jurisdictions may have varying documentation requirements or
business practices that would lengthen the time needed to come into
compliance. The Final Order provides time for this.
The Commission understands that if all market participants world-
wide were required to comply with all applicable requirements upon
applying to register as SDs and MSPs (which will begin at the end of
2012), some market participants would have to rush to implement
compliance. The Commission is cognizant that compliance costs may be
increased simply by the need to implement compliance quickly, which
could entail, for example, retaining outside consultants rather than
having in-house employees effect the necessary implementation steps.
Thus, the Commission believes that by giving non-U.S. market
participants additional time to come into compliance with certain of
its regulations, the overall cost of compliance implementation will be
reduced, not just delayed.
The Final Order also benefits entities by providing categories of
entities the same relief, which eliminates the need for entities to
seek individualized determinations by the Commission's staff regarding
their particular transactions or operations. Providing additional time
to all the non-U.S. market participants covered by the Final Order may
facilitate action by industry groups to assist in compliance efforts
and encourage cooperation among market participants.
In addition, the Commission believes that the delay provided by the
Final Order may permit some non-U.S. jurisdictions to adopt regulatory
requirements that are similar to certain of the Commission regulations
and therefore may potentially be the basis for substituted compliance
by market participants in those jurisdictions. Based on discussions
with market participants, the Commission expects that substituted
compliance would in some circumstances be less costly than compliance
with Commission regulations, and therefore the Final Order has the
potential to reduce costs by providing a greater opportunity for
substituted compliance.
E. Section 15(a) Factors
1. Protection of Market Participants and the Public
The exemptive relief provided in this Final Order will protect
market participants and the public by facilitating a more orderly
transition to the new regulatory regime than might
[[Page 879]]
otherwise occur in the absence of this order. In particular, non-U.S.
persons are afforded additional time to come into compliance than would
otherwise be the case, which contributes to greater stability and
reliability of the swap markets during the transition process.
2. Efficiency, Competitiveness, and Financial Integrity of the Markets
The Commission believes that the efficiency and integrity of the
markets will be furthered by the additional compliance time provided in
this order and the condition that entities submit a compliance plan. As
discussed above, the Commission is mindful of the claims that the final
order could potentially cause competitive disparities, and has taken
steps to mitigate those potential costs where doing so would be
consistent with the Dodd-Frank Act and the Commission's policy
objectives.
3. Price Discovery
The Commission has not identified any costs or benefits of the
proposed order with respect to price discovery.
4. Risk Management
Entity level risk-management and capital requirements could be
delayed by operation of the Final Order, which could weaken risk
management. However, such potential risk is limited by the fact that
the exemptive order is applicable for a finite time.
5. Other Public Interest Considerations
The Commission has not identified any other public interest costs
or benefits of the proposed order.
VII. Final Order
The Commission, in order to provide for an orderly implementation
of Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''), and consistent with the
determinations set forth above, which are incorporated in this Final
Order by reference, hereby grants, pursuant to section 4(c) of the
Commodity Exchange Act (``CEA''), time-limited relief to non-U.S. swap
dealers (``SDs'') and major swaps participants (``MSPs'') and to
foreign branches of U.S. SDs and MSPs, from certain swap provisions of
the CEA, subject to the terms and conditions below.\156\
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\156\ As used in this Order, the terms ``Entity-Level
Requirements'' refer to the requirements set forth in Commission
regulations 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,
23.603, 23.605, 23.606, 23.607, 23.608 and 23.609 and parts 20, 45
and 46 and ``Transaction-Level Requirements'' refer to the
requirements set forth in CEA section 2(h)(8) and Commission
regulations 23.202, 23.400 to 23.451, 23.501, 23.502, 23.503,
23.504(a), 23.504(b)(1), (b)(2), (b)(3) and (b)(4), 23.506 and
23.610 and part 43. To date, the Commission has not adopted final
rules relating to the Entity-Level Requirements of capital adequacy,
nor the Transaction-Level Requirements of margining (and
segregation) for uncleared swaps. See sections 4s(e) and 4s(l) of
the CEA, 7 U.S.C. 6s(e), 6s(l).
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(1) Phase-in of ``U.S. Person'' Definition: All market
participants, including a prospective or registered SD or MSP, must
apply for purposes of this Final Order a ``U.S. person'' definition
which would define the term as:
(i) A natural person who is a resident of the United States;
(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 (A) organized or incorporated under the laws of a state or other
jurisdiction in the United States or (B) effective as of April 1, 2013
for all such entities other than funds or collective investment
vehicles, having its principal place of business in the United States;
(iii) A pension plan for the employees, officers or principals of a
legal entity described in (ii) above, unless the pension plan is
primarily for foreign employees of such entity;
(iv) An estate of a decedent who was a resident of the United
States at the time of death, or a trust governed by the laws of a state
or other jurisdiction in the United States if a court within the United
States is able to exercise primary supervision over the administration
of the trust; or
(v) An individual account or joint account (discretionary or not)
where the beneficial owner (or one of the beneficial owners in the case
of a joint account) is a person described in (i) through (iv) above.
Any person not listed in (i) to (v) above is a ``non-U.S. person''
for purposes of this Final Order.
(2) De Minimis and MSP Threshold Calculations. A non-U.S. person is
not required to include, in its calculation of the aggregate gross
notional amount of swaps connected with its swap dealing activity for
purposes of Commission regulation 1.3(ggg)(4), or in its calculation of
whether it is an MSP for purposes of Commission regulation 1.3(hhh),
(i) any swap where the counterparty is not a U.S. person, or (ii) any
swap where the counterparty is a foreign branch of a U.S. person that
is registered as an SD or that represents that it intends to register
with the Commission as an SD by March 31, 2013. A non-U.S. person is
not required to include, in its calculation of the aggregate gross
notional amount of swaps connected with its swap dealing activity for
purposes of Commission regulation 1.3(ggg)(4), any swap to which it is
not a party because the swap is entered into by an affiliated central
booking entity.
(3) Aggregation for Purposes of the De Minimis Calculation. A non-
U.S. person that is engaged in swap dealing activities with U.S.
persons as of the effective date of this Order is not required to
include, in its calculation of the aggregate gross notional amount of
swaps connected with its swap dealing activity for purposes of
Commission regulation 1.3(ggg)(4), the aggregate gross notional amount
of swaps connected with the swap dealing activity of its U.S.
affiliates under common control.\157\ Further, a non-U.S. person that
is engaged in swap dealing activities with U.S. persons as of the
effective date of this Order and is an affiliate under common control
with a person that is registered as an SD is also not required to
include, in its calculation of the aggregate gross notional amount of
swaps connected with its swap dealing activity for purposes of
Commission regulation 1.3(ggg)(4), the aggregate gross notional amount
of swaps connected with the swap dealing activity of any non-U.S.
affiliate under common control that is either (i) engaged in swap
dealing activities with U.S. persons as of the effective date of this
Order or (ii) registered as an SD. Also, a non-U.S. person is not
required to include, in its calculation of the aggregate gross notional
amount of swaps connected with its swap dealing activity for purposes
of Commission regulation 1.3(ggg)(4), the aggregate gross notional
amount of swaps connected with the swap dealing activity of its non-
U.S. affiliates under common control with other non-U.S. persons as
counterparties.
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\157\ For this purpose, the Commission construes ``affiliates''
to include persons under common control as stated in the
Commission's final rule further defining 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.
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(4) Non-U.S. SDs and MSPs: A non-U.S. SD or non-U.S. MSP may delay
compliance with respect to Entity-Level Requirements that are in effect
as of the effective date of this Order (subject to the condition in
paragraph (5) below).
(5) Notwithstanding paragraph (4), (i) non-U.S. SDs and non-U.S.
MSPs shall be required to comply with the swap data repository
(``SDR'') reporting and LTR requirements for all swaps with
[[Page 880]]
U.S. counterparties, upon their respective compliance dates; and (ii)
non-U.S. SDs and Non-U.S. MSPs that are part of an affiliated group in
which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank,
U.S. financial holding company, or U.S. bank holding company shall be
required to comply with the SDR reporting and Large Trader Reporting
requirements for swaps with non-U.S. counterparties, upon their
respective compliance dates. However, during the pendency of this Final
Order, non-U.S. SDs and non-U.S. MSPs that are not part of an
affiliated group in which the ultimate parent entity is a U.S. SD, U.S.
MSP, U.S. bank, U.S. financial holding company or U.S. bank holding
company may delay compliance with the SDR reporting and LTR
requirements for swaps with non-U.S. counterparties in accordance with
paragraph (4).
(6) With respect to Transaction-Level Requirements as applied to
transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S.
MSPs may comply with such Requirements only as may be required by the
local jurisdiction of such registrants; provided, however, that such
registrants shall comply with such requirements that are in effect for
all swaps with U.S. counterparties.
(7) U.S Registrant: A U.S. person shall apply to register as an SD
or MSP by the date such registration is required and shall comply with
all applicable Entity-Level and Transaction-Level Requirements that are
in effect, except that: (A) with respect to Transaction-Level
Requirements as applied to swaps with a non-U.S. counterparty
(including a non-U.S. SD or non-U.S. MSP), a foreign branch of a U.S.
SD or U.S. MSP may comply with those requirements only as may be
required by the local jurisdiction of such branches and (B) with
respect to Transaction-Level Requirements as applied to swaps between
foreign branches of U.S. SDs or foreign branches of U.S. MSPs,\158\
such foreign branches may comply with those requirements only as may be
required by the local jurisdiction of such foreign branches.
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\158\ For purposes of this relief from Transactional-Level
Requirements with respect to a swap between foreign branches of U.S.
registrants, a swap is with the foreign branch of a U.S. person when
(i) the personnel negotiating and agreeing to the terms of the swap
are located in the jurisdiction of such foreign branch; (ii) the
documentation of the swap specifies that the counterparty or
``office'' for the U.S. person is such foreign branch and (iii) the
swap is entered into by such foreign branch in its normal course of
business.
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(8) Expiration of Relief: The relief provided to non-U.S. SDs and
non-U.S. MSPs (and foreign branches of a U.S. SD or MSP) in this order
shall be effective upon approval by the Commission and expire on July
12, 2013.
(9) Scope of Relief: The time-limited relief provided in this
Order: (A) Shall not affect, with respect to any swap within the scope
of this Order, the applicability of any other CEA provision or
Commission regulation (i.e., those outside the Entity-Level and
Transaction-Level Requirements); (B) shall not limit the applicability
of any CEA provision or Commission regulation to any person, entity or
transaction except as provided in this Order; (C) shall not affect the
applicability of any provision of the CEA or Commission regulations to
futures contracts, or options on future contracts; and (D) shall not
affect any effective or compliance date set forth in any Dodd-Frank Act
rulemaking by the Commission.
Finally, the Commission may, in its discretion, condition, suspend,
terminate, or otherwise modify this Final Order, as appropriate, on its
own motion.
Issued in Washington, DC on December 21, 2012, by the
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Appendices to Final Exemptive Order Regarding Compliance With Certain
Swap Regulations--Commission Voting Summary and Statements of
Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton,
O'Malia and Wetjen voted in the affirmative; Commissioner Sommers
voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the Final Exemptive Order Regarding Compliance with
Certain Swap Regulations (Final Order). With this Commission action
another important step has been taken to make swaps market reform a
reality.
Starting at the end of this month, domestic and foreign swap
dealers will register. Once registered, swap dealers will report
their trades to both regulators and the public. Foreign swap dealers
will report their trades with U.S. persons. With these steps, the
bright lights of transparency will, for the first time, shine on the
swaps market. Swap dealers also will be required to implement sales
practice standards that prohibit fraud, treat customers fairly and
improve transparency. The public and our economy will benefit.
The Final Order provides phased compliance for foreign swap
dealers (including overseas affiliates of U.S. persons) and overseas
branches of U.S. swap dealers with respect to certain requirements
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act).
Since the enactment of the Dodd-Frank Act, the Commission has
worked steadfastly toward a transition from an opaque unregulated
marketplace to a transparent, regulated swaps marketplace and has
phased in the timing for compliance to give market participants time
to adjust to the new regulatory regime and smooth the transition.
Today's Order is a continuation of the Commission's commitment
to this phasing of compliance--in this case for foreign market
participants--and is consistent with the phase-in order proposed in
July 2012.
The Order will remain in effect until July, 2013, as proposed in
the July 12 order, and is intended to complement other Commission
and staff actions that facilitate an orderly transition.
During this transition period, a foreign swap dealer may phase
in compliance with certain entity-level requirements. In addition,
those entities (as well as foreign branches of U.S. swap dealers)
are provided time-limited relief from specified transaction-level
requirements when transacting with overseas affiliates guaranteed by
U.S. entities (as well as with foreign branches of U.S. swap
dealers).
The relief period provides time for the Commission to work with
foreign regulators as they implement comparable requirements and as
the Commission develops a substituted compliance program.
Substituted compliance, where appropriate, would allow for foreign
swap dealers to meet the reform requirements of the Dodd Frank Act
by complying with comparable and comprehensive foreign regulatory
requirements.
With respect to any transaction with a U.S. person, though,
compliance will be required in accordance with previously issued
rules and staff guidance.
The Order incorporates a definition of ``U.S. person,'' that
benefits from helpful comments of market participants to our initial
proposal and continuing discussions with the international
regulatory community.
Under the Order, a foreign person will not be required to
include in its calculation of swap dealing activities any swap with
a non-U.S. person, as well as with foreign branches of U.S. swap
dealers.
In addition, based upon comments received on the cross-border
interpretive guidance proposed last July, the Final Order also
provides time-limited relief from aggregation requirements with
respect to the de-minimis calculation for swap dealer registration.
Specifically, the Final Order provides time-limited relief from the
requirement that a non-U.S. person include the swap dealing
transactions of its U.S. affiliates under common control (or any of
its foreign affiliates that are currently dealing) in its
calculation for determining whether or not it has exceeded the de
minimis threshold.
The Commission is separately seeking additional public comment
on cross-border issues related to the term ``U.S. person,'' the
aggregation requirements for foreign persons,
[[Page 881]]
as well as the definition of a ``foreign branch''.
Today's Commission action assists foreign swap dealers to comply
with the Dodd-Frank Act in an orderly fashion.
Earlier this week in a separate action, the Commission issued an
interim final rule allowing for more time to come into compliance on
specific documentation requirements, providing swap dealers an
additional four months with respect to sales practice documentation
and six months with respect to relationship documentation.
The Commission recognizes the importance of international
cooperation and coordination in the regulation of this highly
interconnected global market. To this end, the Commission staff has
actively engaged in substantive discussions with foreign
counterparts in an effort to better understand and develop a more
harmonized cross-border regulatory framework.
The Final Order also reflects comments from foreign market
participants. For example, foreign banks requested a phase-in for
the application of entity-level requirements. At the same time,
foreign banks stated that the transaction-level requirements would
apply to their transactions with U.S. persons.
This Final Order reflects this on-going consultation with
foreign regulatory counterparts who provided comments on the
proposed exemptive order issued in July 2012. During this period of
phased compliance, the Commission will continue to engage with
foreign counterparts. As set forth in a December 4 joint press
statement of market regulators, the Commission will meet regularly
with foreign regulators to consult on, among other topics, the basis
for substituted compliance, timing and sequencing of rules, clearing
determinations, and options to address potential conflicting,
inconsistent, and duplicative rules.
As the Commission and the international regulatory community
move forward, we all recognize that risk has no geographic boundary
and money can move in and out of markets and jurisdictions in
milliseconds. For the public to be protected, swaps market reform
must cover transactions of overseas branches and overseas affiliates
guaranteed by U.S. entities.
The 2008 financial crisis demonstrated this when financial
aftershocks spread throughout the globe and swaps executed offshore
by U.S. financial institutions sent risk straight back to our
shores. As a result of the crisis, eight million Americans lost
their jobs, millions of families lost their homes, and small
businesses across the country folded.
Congress and the President responded with the Dodd-Frank Act,
including the cross-border provisions of the law. Section 722(d) of
the Dodd-Frank Act states that swaps reforms shall not apply to
activities outside the United States unless those activities have
``a direct and significant connection with activities in, or effect
on, commerce of the United States.'' Congress provided that reforms
should account for risks that may come from abroad.
Failing to bring swaps market reform to transactions with
overseas branches and overseas affiliates guaranteed by U.S.
entities would mean American jobs and markets would likely move
offshore, but, particularly in times of crisis, risk would come
crashing back to our economy.
The nature of modern finance is that large financial
institutions set up hundreds, if not thousands of ``legal entities''
around the globe.
They do so in an effort to respond to customer needs, funding
opportunities, risk management and compliance with local laws. They
do so as well, though, to lower their taxes, manage their reported
accounting, and to minimize regulatory, capital and other
requirements, so-called ``regulatory arbitrage.'' Many of these far-
flung legal entities, however, are still directly connected back to
their U.S. affiliates.
During a default or crisis, the risk that builds up offshore
inevitably comes crashing back onto U.S. shores. When an affiliate
of a large, international financial group has problems, the markets
accept this will infect the rest of the group.
This was true with AIG. Its subsidiary, AIG Financial Products,
brought down the company and nearly toppled the U.S. economy. It was
run out of London as a branch of a French-registered bank, though
technically was organized in the United States.
Lehman Brothers was another example. Among its complex web of
affiliates was Lehman Brothers International (Europe) in London.
When Lehman failed, the London affiliate had more than 130,000
outstanding swaps contracts, many of them guaranteed by Lehman
Brothers Holdings back in the United States.
Yet another example was Citigroup, which set up numerous
structured investment vehicles (SIVs) to move positions off its
balance sheet for accounting purposes, as well as to lower its
regulatory capital requirements. Yet, Citigroup had guaranteed the
funding of these SIVs through a mechanism called a liquidity put.
When the SIVs were about to fail, Citigroup in the United States
assumed the huge debt, and taxpayers later bore the brunt with two
multi-billion dollar infusions. The SIVs were launched out of London
and incorporated in the Cayman Islands.
Bear Stearns is another case. Bear Stearns' two sinking hedge
funds it bailed out in 2007 were incorporated in the Cayman Islands.
Yet again, the public assumed part of the burden when Bear Stearns
itself collapsed nine months later.
A decade earlier, the same was true for Long-Term Capital
Management. When the hedge fund failed in 1998, its swaps book
totaled in excess of $1.2 trillion notional. The vast majority were
booked in its affiliated partnership in the Cayman Islands.
This year's events of JPMorgan Chase, where it executed swaps
through its London branch, are a stark reminder of this reality of
modern finance.
As there have been these and other financial institution
failures in the past, in our free markets, we must be prepared for
when other firms fail in the future. Dodd-Frank reform is about
protecting the public from such failures in the future.
It's my firm belief that if reforms were not to cover the
branches and overseas affiliates of U.S. entities, either directly
or through substituted compliance, the public will be left without
the benefits and protections that Congress intended with Dodd-Frank.
Foreign governments and their taxpayers also will be concerned
about the risks engendered by the cross-border activities of
financial institutions.
The Final Order approved today benefitted from consultation with
foreign regulatory counterparts. The Commission also received
constructive comment from the public and Members of Congress.
I am grateful to the staff of the Commission for their tireless
work on this Order and the Commission's broader effort to implement
swaps market reform. In accordance the directives of Congress and
the Commission's final rules, swaps market reform is taking shape. I
look forward to working with my colleagues to complete this
important task.
Appendix 3--Statement of Commissioner Jill E. Sommers
Although I am very supportive of granting temporary relief from
certain provisions of the Dodd-Frank Act, I disagree with the
approach and am concerned that the Commission continues to insert
unnecessary complexities into the cross-border determinations. As I
have said a number of times, the Commission has worked for decades
to establish relationships with our foreign counterparts based on
respect, trust and information sharing, which has resulted in a long
and successful history of mutual recognition. All G20 nations have
agreed to a comprehensive set of principles for regulating the over-
the-counter derivatives markets. Instead of recognizing these
commitments and resolving to work towards mutual recognition of
comparable regulatory regimes, keeping in mind the core policy
objectives of the G20 commitments, the Commission has embarked on a
cross-border analysis that I fear is taking us down a path of
regulatory detail that is overly burdensome, complicated, and
unnecessary.
Moreover, it is a mistake to require registration and compliance
with certain regulations before our final guidance has been issued.
Foreign entities will not have the basic information they need to
make informed decisions regarding the ultimate obligations of
engaging in swaps activities with U.S. persons (the definition of
which continues to shift) prior to having to make the decision to
register. There is no reason why the Commission could not have
issued broader relief until these issues are settled. We have simply
chosen not to.
I have consistently supported harmonization with both foreign
and domestic regulators. Over the past few months we have received
invaluable input from many global regulators, who have agreed to
meet in early 2013 to inform each other on the progress made in
finalizing reforms in their respective jurisdictions and to consult
on possible transition periods. Future meetings will explore options
for addressing conflicts, inconsistencies, and duplicative rules and
examine ways in which comparability assessments and appropriate
[[Page 882]]
cross-border supervisory and enforcement arrangements may be made.
It is my hope that these meetings will lead the Commission to listen
to the concerns being raised by regulators around the world and to
adopt a more reasonable approach when it finalizes the cross-border
guidance.
Appendix 4--Statement of Commissioner Bart Chilton
As we have set out to do from the beginning of the Dodd-Frank
rulemaking process, we are cognizant of the need for regulators
around the globe to harmonize rules to the extent possible in order
to avoid market disruption and regulatory arbitrage.
In responding to a letter from Members of the House Agriculture
Committee's Subcommittee on General Farm Commodities and Risk
Management, I pointed out that I expect the Commission will act
imminently to ensure the following three broad objectives:
Narrow the definition of U.S. person so that our
extraterritorial reach is not too broad;
Provide sensible aggregation requirements so that
foreign banks won't automatically have to become U.S. swaps dealers
just because they do business with foreign affiliates of U.S. banks;
Provide for a phased-in compliance to July 2013 to
allow time for other jurisdictions to implement derivative market
reforms.
In addition, we must ensure that, in this interim period, U.S.
swap dealers and major swap participants can avoid a Dodd-Frank
compliance-related enforcement action by working to comply
reasonably and in good faith.
Derivatives reform in the U.S. isn't taking place in a vacuum.
And, regulators on several continents are moving at different
speeds. Like an orchestra playing holiday music, not all sections of
instruments necessarily start a number at the same time. Yet, they
wind up in harmony. So too it must be in global financial reform.
Ending up in harmony is critical to achieving our overarching
purpose: making global financial markets safer, more transparent,
and more effective.
Appendix 5--Statement of Commissioner Scott D. O'Malia
I respectfully concur with the Commission's approval of this
Order. The relief provided in the Order is timely and helps provide
some level of clarity in the short term to market participants as
they transition to the Commission's new swap regulatory regime.
Crucially, it also provides time for the Commission to engage with
foreign regulators in order to develop a coordinated, harmonized
approach to regulating the global swap markets in the long term.
While I generally support the relief provided, the Order should
have done much more to provide clarity and consistency and to ensure
a level playing field for market participants. In particular, I
would like to note that the definition of ``U.S. Person'' contained
in this Order is the third different definition articulated by the
Commission within the past six months: The expansive definition in
the Commission's July proposed guidance,\159\ the narrower
``territorial'' definition in an October staff no-action
letter,\160\ and now this modified territorial definition. The
industry cannot get too used to this definition either, as there
will be, remarkably, a fourth definition next year when the
Commission finalizes its cross-border guidance. This is a
regrettable lack of consistency for a concept that is so central to
foreign swap market participants' ability to determine their
compliance obligations.
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\159\ Cross-Border Application of Certain Swaps Provisions of
the Commodity Exchange Act, 77 FR 41214 (July 12, 2012).
\160\ 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.
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This Order expires July 12, 2013. The Commission should use the
time between now and then to do two things. First, as mentioned
above, it should actively engage with other regulators. I was
encouraged by the joint statement released earlier this month by a
group of international derivatives regulators (including the
Commission),\161\ which emphasized the importance of coordination
and committed the signatories to consult one another with regard to
the timing and sequencing of regulation; comparability
determinations; clearing determinations; and conflicting,
inconsistent and duplicative rules. But these consultations over the
next several months cannot merely be an exercise in going through
the motions. Rather, they must be substantive, and they should
ultimately lead to a final Commission cross-border guidance that
addresses the strong concerns raised by fellow regulators about the
Commission's July proposal. For their part, fellow regulators can
make this engagement process more effective by providing detailed
plans of their existing and upcoming regulations as well as
concrete, specific blueprints for potential comparability and
substituted compliance determinations.
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\161\ Joint Press Statement of Leaders on Operating Principles
and Areas of Exploration in the Regulation of the Cross-border OTC
Derivatives Market, December 4, 2012.
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Second, the Commission should use the next several months to
revisit and revise the grossly overbroad conception of
extraterritorial reach that it argued for in the July proposed
guidance. Most important, the Commission needs to articulate a
clear, logical interpretation of the ``direct and significant''
connection required by the statute as a prerequisite to applying our
regulations to entities and activities abroad.\162\ As I have noted
before, the statutory language is a limitation on the Commission's
authority, but the proposed guidance interpreted it as the opposite.
If the Commission develops a sufficient rationale for the ``direct
and significant'' standard, it will have gone a long way toward
appropriately determining the scope of its extraterritorial reach.
\162\ 7 U.S.C. 2(i).
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[FR Doc. 2012-31736 Filed 1-4-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: January 7, 2013