Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78899-78910]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30978]
[[Page 78899]]
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COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for Switzerland: Certain Entity-Level
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
under Swiss Financial Market Regulation.
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SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a request by UBS AG (``UBS'') that the Commission determine
that laws and regulations applicable in Switzerland provide a
sufficient basis for an affirmative finding of comparability with
respect to the following regulatory obligations applicable to swap
dealers (``SDs'') and major swap participants (``MSPs'') registered
with the Commission: (i) Chief compliance officer; (ii) risk
management; and (iii) swap data recordkeeping (collectively, the
``Internal Business Conduct Requirements'').
DATES: Effective Date: This determination will become effective
immediately upon publication in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,
[email protected], Frank Fisanich, Chief Counsel, 202-418-5949,
[email protected], and Scott Lee, Special Counsel, 202-418-5090,
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 26, 2013, the Commission published in the Federal Register
its ``Interpretive Guidance and Policy Statement Regarding Compliance
with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance,
the Commission set forth its interpretation of the manner in which it
believes that section 2(i) of the Commodity Exchange Act (``CEA'')
applies Title VII's swap provisions to activities outside the U.S. and
informed the public of some of the policies that it expects to follow,
generally speaking, in applying Title VII and certain Commission
regulations in contexts covered by section 2(i). Among other matters,
the Guidance generally described the policy and procedural framework
under which the Commission would consider a substituted compliance
program with respect to Commission regulations applicable to entities
located outside the U.S. Specifically, the Commission addressed a
recognition program where compliance with a comparable regulatory
requirement of a foreign jurisdiction would serve as a reasonable
substitute for compliance with the attendant requirements of the CEA
and the Commission's regulations promulgated thereunder.
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\1\ 78 FR 45292 (July 26, 2013). The Commission originally
published proposed and further proposed guidance on July 12, 2012
and January 7, 2013, respectively. See Cross-Border Application of
Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214
(July 12, 2012) and Further Proposed Guidance Regarding Compliance
with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).
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In addition to the Guidance, on July 22, 2013, the Commission
issued the Exemptive Order Regarding Compliance with Certain Swap
Regulations (the ``Exemptive Order'').\2\ Among other things, the
Exemptive Order provided time for the Commission to consider
substituted compliance with respect to six jurisdictions where non-U.S.
SDs are currently organized. In this regard, the Exemptive Order
generally provided non-U.S. SDs and MSPs in the six jurisdictions with
conditional relief from certain requirements of Commission regulations
(those referred to as ``Entity-Level Requirements'' in the Guidance)
until the earlier of December 21, 2013, or 30 days following the
issuance of a substituted compliance determination.\3\
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\2\ 78 FR 43785 (July 22, 2013).
\3\ The Entity-Level Requirements under the Exemptive Order
consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,
23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the
Commission's regulations.
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On July 11, 2013, UBS (``applicant'') submitted a request that the
Commission determine that laws and regulations applicable in
Switzerland provide a sufficient basis for an affirmative finding of
comparability with respect to certain Entity-Level Requirements,
including the Internal Business Conduct Requirements.\4\ On November
13, 2013, the application was supplemented with corrections and
additional materials. The following is the Commission's analysis and
determination regarding the Internal Business Conduct Requirements, as
detailed below.\5\
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\4\ For purposes of this notice, the Internal Business Conduct
Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606.
\5\ This notice does not address SDR Reporting. The Commission
may provide a comparability determination with respect to the SDR
Reporting requirement in a separate notice.
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II. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act\6\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework
for swaps.
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\6\ Public Law 111-203, 124 Stat. 1376 (2010).
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Section 722(d) of the Dodd-Frank Act amended the CEA by adding
section 2(i), which provides that the swap provisions of the CEA
(including any CEA rules or regulations) 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 rules or regulations as are necessary or
appropriate to prevent evasion of the swap provisions of the CEA
enacted under Title VII of the Dodd-Frank Act.\7\
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\7\ 7 U.S.C. 2(i).
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In the three years since its enactment, the Commission has
finalized 68 rules and orders to implement Title VII of the Dodd-Frank
Act. The finalized rules include those promulgated under section 4s of
the CEA, which address registration of SDs and MSPs and other
substantive requirements applicable to SDs and MSPs. With few
exceptions, the delayed compliance dates for the Commission's
regulations implementing such section 4s requirements applicable to SDs
and MSPs have passed and new SDs and MSPs are now required to be in
full compliance with such regulations upon registration with the
Commission.\8\ Notably, the requirements under Title VII of the Dodd-
Frank Act related to SDs and MSPs by their terms apply to all
registered SDs and MSPs, irrespective of where they are located, albeit
subject to the limitations of CEA section 2(i).
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\8\ The compliance dates are summarized on the Compliance Dates
page of the Commission's Web site available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.
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To provide guidance as to the Commission's views regarding the
scope of the cross-border application of Title VII of the Dodd-Frank
Act, the Commission set forth in the Guidance its interpretation of the
manner in which it believes that Title VII's swap provisions apply to
activities outside the U.S. pursuant to section 2(i) of the CEA. Among
other matters, the Guidance generally described the policy and
procedural framework under which the Commission would consider a
substituted compliance program with respect to Commission regulations
[[Page 78900]]
applicable to entities located outside the U.S. Specifically, the
Commission addressed a recognition program where compliance with a
comparable regulatory requirement of a foreign jurisdiction would serve
as a reasonable substitute for compliance with the attendant
requirements of the CEA and the Commission's regulations. With respect
to the standards forming the basis for any determination of
comparability (``comparability determination'' or ``comparability
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finding''), the Commission stated:
In evaluating whether a particular category of foreign
regulatory requirement(s) is comparable and comprehensive to the
applicable requirement(s) under the CEA and Commission regulations,
the Commission will take into consideration all relevant factors,
including but not limited to, the comprehensiveness of those
requirement(s), the scope and objectives of the relevant regulatory
requirement(s), the comprehensiveness of the foreign regulator's
supervisory compliance program, as well as the home jurisdiction's
authority to support and enforce its oversight of the registrant. In
this context, comparable does not necessarily mean identical.
Rather, the Commission would evaluate whether the home
jurisdiction's regulatory requirement is comparable to and as
comprehensive as the corresponding U.S. regulatory
requirement(s).\9\
\9\ 78 FR 45342-45.
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Upon a comparability finding, consistent with CEA section 2(i) and
comity principles, the Commission's policy generally is that eligible
entities may comply with a substituted compliance regime, subject to
any conditions the Commission places on its finding, and subject to the
Commission's retention of its examination authority and its enforcement
authority.\10\
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\10\ See the Guidance, 78 FR 45342-44.
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In this regard, the Commission notes that a comparability
determination cannot be premised on whether an SD or MSP must disclose
comprehensive information to its regulator in its home jurisdiction,
but rather on whether information relevant to the Commission's
oversight of an SD or MSP would be directly available to the Commission
and any U.S. prudential regulator of the SD or MSP.\11\ The
Commission's direct access to the books and records required to be
maintained by an SD or MSP registered with the Commission is a core
requirement of the CEA\12\ and the Commission's regulations,\13\ and is
a condition to registration.\14\
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\11\ Under Sec. Sec. 23.203 and 23.606, all records required by
the CEA and the Commission's regulations to be maintained by a
registered SD or MSP shall be maintained in accordance with
Commission regulation 1.31 and shall be open for inspection by
representatives of the Commission, the United States Department of
Justice, or any applicable prudential regulator.
In its Final Exemptive Order Regarding Compliance with Certain
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted
that an applicant for registration as an SD or MSP must file a Form
7-R with the National Futures Association and that Form 7-R was
being modified at that time to address existing blocking, privacy,
or secrecy laws of foreign jurisdictions that applied to the books
and records of SDs and MSPs acting in those jurisdictions. See id.
at 871-72 n. 107. The modifications to Form 7-R were a temporary
measure intended to allow SDs and MSPs to apply for registration in
a timely manner in recognition of the existence of the blocking,
privacy, and secrecy laws. In the Guidance, the Commission clarified
that the change to Form 7-R impacts the registration application
only and does not modify the Commission's authority under the CEA
and its regulations to access records held by registered SDs and
MSPs. Commission access to a registrant's books and records is a
fundamental regulatory tool necessary to properly monitor and
examine each registrant's compliance with the CEA and the
regulations adopted pursuant thereto. The Commission has maintained
an ongoing dialogue on a bilateral and multilateral basis with
foreign regulators and with registrants to address books and records
access issues and may consider appropriate measures where requested
to do so.
\12\ See, e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the
CEA.
\13\ See, e.g., Sec. Sec. 23.203(b) and 23.606.
\14\ Id.
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III. Regulation of SDs and MSPs in Switzerland
On July 11, 2013, UBS submitted a request that the Commission
assess the comparability of laws and regulations applicable in
Switzerland with the CEA and the Commission's regulations promulgated
thereunder. On November 13, 2013, the application was supplemented with
corrections and additional materials.
As represented to the Commission by the applicant, SDs in
Switzerland are primarily regulated by the Swiss Financial Market
Supervisory Authority (``FINMA''). FINMA protects creditors, investors,
and policy holders, ensuring the smooth functioning of the financial
markets and preserving the reputation of Swiss financial institutions.
In its role as state supervisory authority, FINMA acts as an oversight
authority of banks, insurance companies, exchanges, securities dealers,
collective investment schemes, distributors, and insurance
intermediaries. It issues operating licenses for companies in the
supervised sectors. Through its supervisory activities, FINMA's role is
to ensure that supervised institutions comply with the requisite laws,
ordinances, directives and regulations, and continue at all times to
fulfill the licensing requirements.\15\
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\15\ Because the applicant's request and the Commission's
determinations herein are based on the comparability of Swiss
requirements applicable to FINMA supervised institutions, an SD or
MSP that is not supervised by FINMA, or is otherwise not subject to
the requirements applicable to FINMA supervised institutions upon
which the Commission bases its determinations, may not be able to
rely on the Commission's comparability determinations herein.
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IV. Comparable and Comprehensiveness Standard
The Commission's comparability analysis will be based on a
comparison of specific foreign requirements against the specific
related CEA provisions and Commission regulations as categorized and
described in the Guidance. As explained in the Guidance, within the
framework of CEA section 2(i) and principles of international comity,
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as
a whole.\16\ In making its comparability determinations, the Commission
may include conditions that take into account timing and other issues
related to coordinating the implementation of reform efforts across
jurisdictions.\17\
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\16\ 78 FR 45343.
\17\ 78 FR 45343.
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In evaluating whether a particular category of foreign regulatory
requirement(s) is comparable and comprehensive to the corollary
requirement(s) under the CEA and Commission regulations, the Commission
will take into consideration all relevant factors, including, but not
limited to:
The comprehensiveness of those requirement(s);
The scope and objectives of the relevant regulatory
requirement(s);
The comprehensiveness of the foreign regulator's
supervisory compliance program; and
The home jurisdiction's authority to support and enforce
its oversight of the registrant.\18\
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\18\ 78 FR 45343.
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In making a comparability determination, the Commission takes an
``outcome-based'' approach. An ``outcome-based'' approach means that
when evaluating whether a foreign jurisdiction's regulatory
requirements are comparable to, and as comprehensive as, the corollary
areas of the CEA and Commission regulations, the Commission ultimately
focuses on regulatory outcomes (i.e., the home jurisdiction's
requirements do not have to be identical).\19\ This approach
[[Page 78901]]
recognizes that foreign regulatory systems differ and their approaches
vary and may differ from how the Commission chose to address an issue,
but that the foreign jurisdiction's regulatory requirements nonetheless
achieve the regulatory outcome sought to be achieved by a certain
provision of the CEA or Commission regulation.
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\19\ 78 FR 45343. The Commission's substituted compliance
program would generally be available for swap data repository
reporting (``SDR Reporting''), as outlined in the Guidance, only if
the Commission has direct access to all of the data elements that
are reported to a foreign trade repository pursuant to the
substituted compliance program. Thus, direct access to swap data is
a threshold matter to be addressed in a comparability evaluation for
SDR Reporting. Moreover, the Commission explains in the Guidance
that, due to its technical nature, a comparability evaluation for
SDR Reporting ``will generally entail a detailed comparison and
technical analysis.'' A more particularized analysis will generally
be necessary to determine whether data stored in a foreign trade
repository provides for effective Commission use, in furtherance of
the regulatory purposes of the Dodd-Frank Act. See 78 FR 45345.
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In doing its comparability analysis the Commission may determine
that no comparability determination can be made \20\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to
its foreign branches, or non-registrant, to the extent applicable under
the Guidance, may be required to comply with the CEA and Commission
regulations.
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\20\ A finding of comparability may not be possible for a number
of reasons, including the fact that the foreign jurisdiction has not
yet implemented or finalized particular requirements.
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The starting point in the Commission's analysis is a consideration
of the regulatory objectives of the foreign jurisdiction's regulation
of swaps and swap market participants. As stated in the Guidance,
jurisdictions may not have swap specific regulations in some areas, and
instead have regulatory or supervisory regimes that achieve comparable
and comprehensive regulation to the Dodd-Frank Act requirements, but on
a more general, entity-wide, or prudential, basis.\21\ In addition,
portions of a foreign regulatory regime may have similar regulatory
objectives, but the means by which these objectives are achieved with
respect to swaps market activities may not be clearly defined, or may
not expressly include specific regulatory elements that the Commission
concludes are critical to achieving the regulatory objectives or
outcomes required under the CEA and the Commission's regulations. In
these circumstances, the Commission will work with the regulators and
registrants in these jurisdictions to consider alternative approaches
that may result in a determination that substituted compliance
applies.\22\
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\21\ 78 FR 45343.
\22\ As explained in the Guidance, such ``approaches used will
vary depending on the circumstances relevant to each jurisdiction.
One example would include coordinating with the foreign regulators
in developing appropriate regulatory changes or new regulations,
particularly where changes or new regulations already are being
considered or proposed by the foreign regulators or legislative
bodies. As another example, the Commission may, after consultation
with the appropriate regulators and market participants, include in
its substituted compliance determination a description of the means
by which certain swaps market participants can achieve substituted
compliance within the construct of the foreign regulatory regime.
The identification of the means by which substituted compliance is
achieved would be designed to address the regulatory objectives and
outcomes of the relevant Dodd-Frank Act requirements in a manner
that does not conflict with a foreign regulatory regime and reduces
the likelihood of inconsistent regulatory obligations. For example,
the Commission may specify that SDs and MSPs in the jurisdiction
undertake certain recordkeeping and documentation for swap
activities that otherwise is only addressed by the foreign
regulatory regime with respect to financial activities generally. In
addition, the substituted compliance determination may include
provisions for summary compliance and risk reporting to the
Commission to allow the Commission to monitor whether the regulatory
outcomes are being achieved. By using these approaches, in the
interest of comity, the Commission would seek to achieve its
regulatory objectives with respect to the Commission's registrants
that are operating in foreign jurisdictions in a manner that works
in harmony with the regulatory interests of those jurisdictions.''
78 FR 45343-44.
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Finally, the Commission will generally rely on an applicant's
description of the laws and regulations of the foreign jurisdiction in
making its comparability determination. The Commission considers an
application to be a representation by the applicant that the laws and
regulations submitted are in full force and effect, that the
description of such laws and regulations is accurate and complete, and
that, unless otherwise noted, the scope of such laws and regulations
encompasses the swaps activities \23\ of SDs and MSPs\24\ in the
relevant jurisdictions.\25\ Further, as stated in the Guidance, the
Commission expects that an applicant would notify the Commission of any
material changes to information submitted in support of a comparability
determination (including, but not limited to, changes in the relevant
supervisory or regulatory regime) as, depending on the nature of the
change, the Commission's comparability determination may no longer be
valid.\26\
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\23\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\24\ No SD or MSP that is not legally required to comply with a
law or regulation determined to be comparable may voluntarily comply
with such law or regulation in lieu of compliance with the CEA and
the relevant Commission regulation. Each SD or MSP that seeks to
rely on a comparability determination is responsible for determining
whether it is subject to the laws and regulations found comparable.
Currently, there are no MSPs organized outside the U.S. and the
Commission therefore cautions any non-financial entity organized
outside the U.S. and applying for registration as an MSP to
carefully consider whether the laws and regulations determined to be
comparable herein are applicable to such entity.
\25\ The Commission has provided the relevant foreign
regulator(s) with opportunities to review and correct the
applicant's description of such laws and regulations on which the
Commission will base its comparability determination. The Commission
relies on the accuracy and completeness of such review and any
corrections received in making its comparability determinations. A
comparability determination based on an inaccurate description of
foreign laws and regulations may not be valid.
\26\ 78 FR 45345.
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The Guidance provided a detailed discussion of the Commission's
policy regarding the availability of substituted compliance \27\ for
the Internal Business Conduct Requirements.\28\
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\27\ See 78 FR 45348-50. The Commission notes that registrants
and other market participants are responsible for determining
whether substituted compliance is available pursuant to the Guidance
based on the comparability determination contained herein (including
any conditions or exceptions), and its particular status and
circumstances.
\28\ The applicant did not request a compatibility determination
for Sec. 23.608 (Restrictions on counterparty clearing
relationships), therefore, this notice does not address Sec.
23.608. Additionally, this notice does not address Sec. 23.609
(Clearing member risk management). The Commission declines to take
up the request for a comparability determination with respect to
Sec. 23.609 due to the Commission's view that there are not laws or
regulations applicable in Switzerland to compare with the
prohibitions and requirements of Sec. 23.609. The Commission may
provide a comparability determination with respect to this
regulation at a later date in consequence of further developments in
the law and regulations applicable in Switzerland.
This notice also does not address capital adequacy because the
Commission has not yet finalized rules for SDs and MSPs in this
area, nor SDR Reporting. The Commission may provide a comparability
determination with respect to these requirements at a later date or
in a separate notice.
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V. Supervisory Arrangement
In the Guidance, the Commission stated that, in connection with a
determination that substituted compliance is appropriate, it would
expect to enter into an appropriate memorandum of understanding
(``MOU'') or similar arrangement \29\ with the relevant foreign
regulator(s). Although existing arrangements would indicate a foreign
regulator's ability to cooperate and share information, ``going
forward, the Commission and relevant foreign supervisor(s) would need
to establish supervisory MOUs or other arrangements that provide for
[[Page 78902]]
information sharing and cooperation in the context of supervising [SDs]
and MSPs.'' \30\
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\29\ An MOU is one type of arrangement between or among
regulators. Supervisory arrangements could include, as appropriate,
cooperative arrangements that are memorialized and executed as
addenda to existing MOUs or as, e.g., independent bilateral
arrangements, statements of intent, declarations, or letters.
\30\ 78 FR 45344.
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The Commission is in the process of developing its registration and
supervision regime for provisionally-registered SDs and MSPs. This new
initiative includes setting forth supervisory arrangements with
authorities that have joint jurisdiction over SDs and MSPs that are
registered with the Commission and subject to U.S. law. Given the
developing nature of the Commission's regime and the fact that the
Commission has not negotiated prior supervisory arrangements with
certain authorities, the negotiation of supervisory arrangements
presents a unique opportunity to develop close working relationships
between and among authorities, as well as highlight any potential
issues related to cooperation and information sharing.
Accordingly, the Commission is negotiating such a supervisory
arrangement with each applicable foreign regulator of an SD or MSP. The
Commission expects that the arrangement will establish expectations for
ongoing cooperation, address direct access to information,\31\ provide
for notification upon the occurrence of specified events, memorialize
understandings related to on-site visits,\32\ and include protections
related to the use and confidentiality of non-public information shared
pursuant to the arrangement.
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\31\ Section 4s(j)(3) and (4) of the CEA and Commission
regulation 23.606 require a registered SD or MSP to make all records
required to be maintained in accordance with Commission regulation
1.31 available promptly upon request to, among others,
representatives of the Commission. See also 7 U.S.C. Sec. 6s(f); 17
CFR 23.203. In the Guidance, the Commission states that it
``reserves this right to access records held by registered [SDs] and
MSPs, including those that are non-U.S. persons who may comply with
the Dodd-Frank recordkeeping requirement through substituted
compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461
(affirming the Commission's authority under the CEA and its
regulations to access books and records held by registered SDs and
MSPs as ``a fundamental regulatory tool necessary to properly
monitor and examine each registrant's compliance with the CEA and
the regulations adopted pursuant thereto'').
\32\ The Commission retains its examination authority, both
during the application process as well as upon and after
registration of an SD or MSP. See 78 FR 45342 (stating Commission
policy that ``eligible entities may comply with a substituted
compliance regime under certain circumstances, subject, however, to
the Commission's retention of its examination authority'') and 45344
n. 471 (stating that the ``Commission may, as it deems appropriate
and necessary, conduct an on-site examination of the applicant'').
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These arrangements will establish a roadmap for how authorities
will consult, cooperate, and share information. As with any such
arrangement, however, nothing in these arrangements will supersede
domestic laws or resolve potential conflicts of law, such as the
application of domestic secrecy or blocking laws to regulated entities.
VI. Comparability Determination and Analysis
The following section describes the requirements imposed by
specific sections of the CEA and the Commission's regulations for the
Internal Business Conduct Requirements that are the subject of this
comparability determination, and the Commission's regulatory objectives
with respect to such requirements. Immediately following a description
of the requirement(s) and regulatory objective(s) of the specific
Internal Business Conduct Requirements that the requestor submitted for
a comparability determination, the Commission provides a description of
the foreign jurisdiction's comparable laws, regulations, or rules and
whether such laws, regulations, or rules meet the applicable regulatory
objective.
The Commission's determinations in this regard and the discussion
in this section are intended to inform the public of the Commission's
views regarding whether the foreign jurisdiction's laws, regulations,
or rules may be comparable and comprehensive as those requirements in
the Dodd-Frank Act (and Commission regulations promulgated thereunder)
and therefore, may form the basis of substituted compliance. In turn,
the public (in the foreign jurisdiction, in the United States, and
elsewhere) retains its ability to present facts and circumstances that
would inform the determinations set forth in this notice.
As was stated in the Guidance, the Commission recognizes the
complex and dynamic nature of the global swap market and the need to
take an adaptable approach to cross-border issues, particularly as it
continues to work closely with foreign regulators to address potential
conflicts with respect to each country's respective regulatory regime.
In this regard, the Commission may review, modify, or expand the
determinations herein in light of comments received and future
developments.
A. Chief Compliance Officer (Sec. 3.3)
Commission Requirement: Implementing section 4s(k) of the CEA,
Commission regulation 3.3 generally sets forth the following
requirements for SDs and MSPs:
An SD or MSP must designate an individual as Chief
Compliance Officer (``CCO'');
The CCO must have the responsibility and authority to
develop the regulatory compliance policies and procedures of the SD or
MSP;
The CCO must report to the board of directors or the
senior officer of the SD or MSP;
Only the board of directors or a senior officer may remove
the CCO;
The CCO and the board of directors must meet at least once
per year;
The CCO must have the background and skills appropriate
for the responsibilities of the position;
The CCO must not be subject to disqualification from
registration under sections 8a(2) or (3) of the CEA;
Each SD and MSP must include a designation of a CCO in its
registration application;
The CCO must administer the regulatory compliance policies
of the SD or MSP;
The CCO must take reasonable steps to ensure compliance
with the CEA and Commission regulations, and resolve conflicts of
interest;
The CCO must establish procedures for detecting and
remediating non-compliance issues;
The CCO must annually prepare and sign an ``annual
compliance report'' containing: (i) A description of policies and
procedures reasonably designed to ensure compliance; (ii) an assessment
of the effectiveness of such policies and procedures; (iii) a
description of material non-compliance issues and the action taken;
(iv) recommendations of improvements in compliance policies; and (v) a
certification by the CCO or CEO that, to the best of such officer's
knowledge and belief, the annual report is accurate and complete under
penalty of law; and
The annual compliance report must be furnished to the CFTC
within 90 days after the end of the fiscal year of the SD or MSP,
simultaneously with its annual financial condition report.
Regulatory Objective: The Commission believes that compliance by
SDs and MSPs with the CEA and the Commission's rules greatly
contributes to the protection of customers, orderly and fair markets,
and the stability and integrity of the market intermediaries registered
with the Commission. The Commission expects SDs and MSPs to strictly
comply with the CEA and the Commission's rules and to devote sufficient
resources to ensuring such compliance. Thus, through its CCO rule, the
Commission seeks to ensure firms have designated a qualified individual
as CCO that reports directly to the board
[[Page 78903]]
of directors or the senior officer of the firm and that has the
independence, responsibility, and authority to develop and administer
compliance policies and procedures reasonably designed to ensure
compliance with the CEA and Commission regulations, resolve conflicts
of interest, remediate noncompliance issues, and report annually to the
Commission and the board or senior officer on compliance of the firm.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as section 4s(k) of the CEA and
Commission regulation 3.3.
The applicant represented that Swiss law and FINMA regulations
require a regulated entity within FINMA's jurisdiction to appoint a
senior management member to act in the capacity of a CCO, with
responsibility for the oversight of all of the entity's regulated
businesses, including its swaps business. The CCO is required by law to
report, directly or indirectly, to senior management of the regulated
entity with respect to any material compliance issues in any of the
banking entity's businesses.
Under Swiss law, compliance entails the adherence to legal,
regulatory and internal policies, as well as the observance of the
customary standards and rules of professional conduct within the
market. The risk of violations of provisions, standards, or rules of
professional conduct and the corresponding legal and regulatory
sanctions, financial losses, or damage to one's reputation are deemed
to be compliance risks.
Accordingly, FINMA Circular 2008/24 of November 20, 2008,
Supervision and Internal Control of Banks,\33\ requires banks to take
the necessary operational measures and precautions to ensure
compliance. Pursuant to such Circular, banks:
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\33\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20081120-FINMA_Circ_08-24.pdf.
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Must designate one member of senior management to act in
the capacity of the CCO with responsibility for oversight of the
compliance function;
Must maintain a compliance function with unrestricted
access to information and independence from profit-generating business
activities;
Must allocate adequate resources and authority to the
compliance function;
Must not permit compensation of employees of the
compliance function to contain incentives that could lead to conflicts
of interest;
Must conduct an annual assessment (at minimum) of
compliance risk and compliance policies, approved by management;
Must timely report to management regarding material
changes to compliance risks, serious violations, and remediation; and
Must prepare an annual report assessing compliance risks
and activities and furnish such report to the board of directors,
internal auditors, and outside auditors.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 3.3 by seeking to ensure firms have designated a qualified
individual as the compliance officer that reports directly to a
sufficiently senior function of the firm and that has the independence,
responsibility, and authority to develop and administer compliance
policies and procedures reasonably designed to ensure compliance with
the CEA and Commission regulations, resolve conflicts of interest,
remediate noncompliance issues, and report annually on compliance of
the firm.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the CCO requirements of Swiss law
and regulations are comparable to and as comprehensive as Sec. 3.3,
with the exception of Sec. 3.3(f) concerning certifying and furnishing
an annual compliance report to the Commission.
Notwithstanding that the Commission has not determined that the
requirements of the Swiss standards specified above are comparable to
and as comprehensive as Sec. 3.3(f), any SD or MSP to which both Sec.
3.3 and the Swiss law and regulations specified above are applicable
would generally be deemed to be in compliance with Sec. 3.3 if that SD
or MSP complies with the Swiss law and regulations specified above,
subject to certifying and furnishing the Commission with the annual
report required under Swiss law and regulations specified above in
accordance with Sec. 3.3(f). The Commission notes that it generally
expects registrants to submit required reports to the Commission in the
English language.
B. Risk Management Duties (Sec. Sec. 23.600--23.609)
Section 4s(j) of the CEA requires each SD and MSP to establish
internal policies and procedures designed to, among other things,
address risk management, monitor compliance with position limits,
prevent conflicts of interest, and promote diligent supervision, as
well as maintain business continuity and disaster recovery
programs.\34\ The Commission adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to implement the statute.\35\ The
Commission also adopted regulation 23.609, which requires certain risk
management procedures for SDs or MSPs that are clearing members of a
derivatives clearing organization (``DCO'').\36\ Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for SDs and MSPs with respect to their swaps
activities,\37\ which is critical to effective systemic risk management
for the overall swaps market. In making its comparability determination
with regard to these risk management duties, the Commission will
consider each regulation individually.
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\34\ 7 U.S.C. 6s(j).
\35\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR
20128 (April 3, 2012) (relating to risk management program,
monitoring of position limits, business continuity and disaster
recovery, conflicts of interest policies and procedures, and general
information availability, respectively).
\36\ See Customer Documentation Rule, 77 FR 21278 (April 9,
2012). Also, SDs must comply with Commission regulation 23.608,
which prohibits SDs providing clearing services to customers from
entering into agreements that would: (i) Disclose the identity of a
customer's original executing counterparty; (ii) limit the number of
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution
of a trade on terms that have a reasonable relationship to the best
terms available; or (v) prevent compliance with specified time
frames for acceptance of trades into clearing.
\37\ See supra note 20.
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1. Risk Management Program for SDs and MSPs (Sec. 23.600)
Commission Requirement: Implementing section 4s(j)(2) of the CEA,
Commission regulation 23.600 generally requires that:
Each SD or MSP must establish and enforce a risk
management program consisting of a system of written risk management
policies and procedures designed to monitor and manage the risks
associated with the swap activities of the firm, including without
limitation, market, credit, liquidity, foreign currency, legal,
operational, and settlement risks, and furnish a copy of such policies
and procedures to the
[[Page 78904]]
CFTC upon application for registration and upon request;
The SD or MSP must establish a risk management unit
independent from the business trading unit;
The risk management policies and procedures of the SD or
MSP must be approved by the firm's governing body;
Risk tolerance limits and exceptions therefrom must be
reviewed and approved quarterly by senior management and annually by
the governing body;
The risk management program must have a system for
detecting breaches of risk tolerance limits and alerting supervisors
and senior management, as appropriate;
The risk management program must account for risks posed
by affiliates and be integrated at the consolidated entity level;
The risk management unit must provide senior management
and the governing body with quarterly risk exposure reports and upon
detection of any material change in the risk exposure of the SD or MSP;
Risk exposure reports must be furnished to the CFTC within
five business days following provision to senior management;
The risk management program must have a new product policy
for assessing the risks of new products prior to engaging in such
transactions;
The risk management program must have policies and
procedures providing for trading limits, monitoring of trading,
processing of trades, and separation of personnel in the trading unit
from personnel in the risk management unit; and
The risk management program must be reviewed and tested at
least annually and upon any material change in the business of the SD
or MSP.
Regulatory Objective: Through the required system of risk
management, the Commission seeks to ensure that firms are adequately
managing the risks of their swaps activities to prevent failure of the
SD or MSP, which could result in losses to counterparties doing
business with the SD or MSP, and systemic risk more generally. To this
end, the Commission believes the risk management program of an SD or
MSP must contain at least the following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as section 4s(j)(2) of the CEA
and Commission regulation 23.600.
Article 9 of the Swiss Banking Ordinance,\38\ FINMA Circular 2008/
24,\39\ and Bank Liquidity Ordinance of the Swiss Federal Council,
address specific forms of risk and detail requirements related to
controls and management of those risks including, but not limited to:
market risk, liquidity risk, operational and settlement risk, credit
risk, reputational risk, and legal risk. Specifically, pursuant to such
Swiss law and regulations, Swiss banks:
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\38\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/de/Library/Legislative-Texts/Documents/pub_20090101-BankO.pdf.
\39\ See supra note 31.
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Must have an internal audit function that annually
assesses the effectiveness of risk management;
Must segregate the risk management function from trading
functions;
Must make the board of directors responsible to regulate,
establish, maintain, monitor, and regularly supervise an appropriate
internal control function in conformity with the bank's risk profile;
Must have internal documentation of the risk management
function sufficient for an outside auditor to form a reliable opinion;
Must keep internal auditors independent from management;
Must have internal controls based on systematic risk
analysis, and must ensure material risks are recorded, limited, and
monitored, including risks posed by affiliates;
Must establish an internal audit function that reports
directly to the board or audit committee;
Must have the board of directors regularly discuss with
management its assessment of the adequacy and effectiveness of internal
controls;
Must maintain and regularly test internal control
functions; and
Must define the bank's capacity to assume liquidity risk
(risk tolerance limits), monitor and manage intra-day liquidity risks,
and monitor assets that are used to generate liquidity.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 23.600 by requiring a system of risk management that seeks to
ensure that firms are adequately managing the risks of their swaps
activities to prevent failure of the SD or MSP, which could result in
losses to counterparties doing business with the SD or MSP, and
systemic risk more generally. Specifically, the Commission finds that
the Swiss law and regulations specified above comprehensively require
SDs and MSPs to establish risk management programs containing the
following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the risk management program
requirements of Swiss law and regulations, as specified above, are
comparable to and as comprehensive as Sec. 23.600, with the exception
of Sec. 23.600(c)(2) concerning the requirement that each SD and MSP
produce a quarterly risk exposure report and provide such report to its
senior management, governing body, and the Commission.
Notwithstanding that the Commission has not determined that the
requirements of Swiss law and regulations are comparable to and as
comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.
23.600 and the Swiss law and regulations specified above are applicable
would generally be deemed to be in compliance with Sec. 23.600(c)(2)
if that SD or MSP complies with Swiss law and regulations specified
above, subject to compliance with the requirement that it produce
quarterly risk exposure reports and provide such reports to its senior
management, governing body, and the Commission in accordance with Sec.
23.600(c)(2). The Commission notes that it generally expects reports
furnished to the Commission by registrants to be in the English
language.
2. Monitoring of Position Limits (Sec. 23.601)
Commission Requirement: Implementing section 4s(j)(1) of the CEA,
Commission regulation 23.601 requires each SD or MSP to establish and
enforce written policies and procedures that are reasonably designed
[[Page 78905]]
to monitor for, and prevent violations of, applicable position limits
established by the Commission, a designated contract market (``DCM''),
or a swap execution facility (``SEF'').\40\ The policies and procedures
must include an early warning system and provide for escalation of
violations to senior management (including the firm's governing body).
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\40\ The setting of position limits by the Commission, a DCM, or
a SEF is subject to requirements under the CEA and Commission
regulations other than Sec. 23.601. The setting of position limits
and compliance with such limits is not subject to the Commission's
substituted compliance regime.
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Regulatory Objective: Generally, position limits are implemented to
ensure market integrity, fairness, orderliness, and accurate pricing in
the commodity markets. Commission regulation 23.601 thus seeks to
ensure that SDs and MSPs have established the necessary policies and
procedures to monitor the trading of the firm to prevent violations of
applicable position limits established by the Commission, a DCM, or a
SEF. As part of its Risk Management Program, Sec. 23.601 is intended
to ensure that established position limits are not breached by the SD
or MSP.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as section 4s(j)(1) of the CEA
and Commission regulation 23.601.
The applicant represented that Swiss law and regulations require
banking entities under FINMA's supervision to comply with regulations
in the jurisdictions in which they conduct business, which would
include compliance with the position limit regimes imposed by the
Commission, a DCM, or SEF, as applicable. Specifically, FINMA Circular
2008/24 \41\ requires banking entities whose compliance policies and
procedures govern activities in multiple jurisdictions must ensure that
such policies and procedures ensure compliance in each jurisdiction.
Thus, activities of a Swiss banking entity that have an impact on
United States territory must be in compliance with the Commission's
position limit regime.
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\41\ See supra note 31.
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FINMA Newsletter 31 of December 13, 2011, Unauthorized Trading of
Banks \42\ and Swiss law address specific requirements relating to
monitoring for and complying with applicable position limits. Pursuant
to Swiss law and regulations, Swiss banks:
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\42\ Text of English Translation available at: http://www.finma.ch/e/finma/publikationen/Documents/finma-mitteilung-31-2011-e.pdf.
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Must manage for unauthorized trading and maintain
oversight of trading activities and related risks, including compliance
with applicable position limits; and
Banking entities must devote adequate attention and
management resources to identify, measure, and control compliance
risks.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 23.601 by requiring SDs and MSPs to establish necessary policies
and procedures to monitor the trading of the firm to prevent violations
of applicable position limits established by applicable laws and
regulations, including those of the Commission, a DCM, or a SEF.
Specifically, the Commission finds that the Swiss law and regulations
specified above, comprehensively require SDs and MSPs to monitor for
regulatory compliance with position limits set pursuant to applicable
law and the responsibility of senior management (including the board of
directors) for such compliance.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the compliance monitoring
requirements of Swiss law and regulations, as specified above, are
comparable to and as comprehensive as Sec. 23.601. For the avoidance
of doubt, the Commission notes that this determination may not be
relied on to relieve an SD or MSP from its obligation to strictly
comply with any applicable position limit established by the
Commission, a DCM, or a SEF.
3. Diligent Supervision (Sec. 23.602)
Commission Requirement: Commission regulation 23.602 implements
section 4s(h)(1)(B) of the CEA and requires each SD and MSP to
establish a system to diligently supervise all activities relating to
its business performed by its partners, members, officers, employees,
and agents. The system must be reasonably designed to achieve
compliance with the CEA and CFTC regulations. Commission regulation
23.602 requires that the supervisory system must specifically designate
qualified persons with authority to carry out the supervisory
responsibilities of the SD or MSP for all activities relating to its
business as an SD or MSP.
Regulatory Objective: The Commission's diligent supervision rule
seeks to ensure that SDs and MSPs strictly comply with the CEA and the
Commission's rules. To this end, through Sec. 23.602, the Commission
seeks to ensure that each SD and MSP not only establishes the necessary
policies and procedures that would lead to compliance with the CEA and
Commission regulations, but also establishes an effective system of
internal oversight and enforcement of such policies and procedures to
ensure that such policies and procedures are diligently followed.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as section 4s(h)(1)(B) of the
CEA and Commission regulation 23.602.
FINMA Circular 2008/24 \43\ requires segregation of duties
and control activities. Management is required to ensure an appropriate
segregation of duties and avoids assigning responsibilities which could
lead to conflicting responsibilities or interests.
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\43\ See supra note 31.
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Controlling activities are to be an integral part of all
work processes, e.g., process controls; results monitoring; and review
of conduct of employees and organizational units where no quantitative
results are observable.
As previously stated above, the applicant represents that Swiss law
requires banking entities under FINMA's supervision to comply with
regulations in the jurisdictions in which they conduct business, which
would include compliance with the CEA and Commission regulations as
applicable. Specifically, FINMA Circular 2008/24 requires banking
entities whose compliance policies and procedures govern activities in
multiple jurisdictions must ensure that such policies and procedures
ensure compliance in each jurisdiction. Thus, activities of a Swiss
banking entity that have an impact on United States territory must be
in compliance with the CEA and Commission regulations.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 23.602 because such standards seek to ensure that SDs and MSPs
strictly comply with applicable law, which would include the CEA and
the Commission's regulations. Through the Swiss laws and regulations
specified above, Swiss laws and regulations seek to ensure that each SD
and MSP not only establishes the
[[Page 78906]]
necessary policies and procedures that would lead to compliance with
applicable law, which would include the CEA and Commission regulations,
but also establishes an effective system of internal oversight and
enforcement of such policies and procedures to ensure that such
policies and procedures are diligently followed.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the internal supervision
requirements of Swiss law and regulations, as specified above, are
comparable to and as comprehensive as Sec. 23.602.
4. Business Continuity and Disaster Recovery (Sec. 23.603)
Commission Requirement: To ensure the proper functioning of the
swaps markets and the prevention of systemic risk more generally,
Commission regulation 23.603 requires each SD and MSP, as part of its
risk management program, to establish a business continuity and
disaster recovery plan that includes procedures for, and the
maintenance of, back-up facilities, systems, infrastructure, personnel,
and other resources to achieve the timely recovery of data and
documentation and to resume operations generally within the next
business day after the disruption.
Regulatory Objective: Commission regulation 23.603 is intended to
ensure that any market disruption affecting SDs and MSPs, whether
caused by natural disaster or otherwise, is minimized in length and
severity. To that end, this requirement seeks to ensure that entities
adequately plan for disruptions and devote sufficient resources capable
of carrying out an appropriate plan within one business day, if
necessary.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as Commission regulation 23.603.
Annex 1 of FINMA's Circular on Operational Risk \44\
requires banks to have contingency or business continuity plans to
ensure their ability to operate under exceptional circumstances and to
limit consequences of severe business disruptions.
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\44\ Text of English translation by KPMG available at: http://www.kpmg.com/CH/en/Library/Legislative-Texts/Documents/pub-20130408-finma-circular-***8-21-en.pdf.
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FINMA Circular 2008/10 of November 20, 2008, Self-
regulation as a minimum standard,\45\ and sections 5.4.1 (Business
Impact Analysis) and 5.4.2 (Business Continuity Strategy) of the Swiss
Bankers' Association Recommendations for Business Continuity
Management,\46\ establish minimum business continuity management
standards for banks and securities dealers in Switzerland.
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\45\ Text of English translation available at: http://finma.ch/e/regulierung/Documents/finma-rs-2008-10-e.pdf.
\46\ Text of English translation available at: http://shop.sba.ch/11107_e.pdf.
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Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 23.603 because such standards seek to ensure that any market
disruption affecting SDs and MSPs, whether caused by natural disaster
or otherwise, is minimized in length and severity. To that end, the
Commission finds that the Swiss laws and regulations specified above
seek to ensure that entities adequately plan for disruptions and devote
sufficient resources capable of carrying out an appropriate plan in a
timely manner.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the business continuity and
disaster recovery requirements of Swiss law and regulations, as
specified above, are comparable to and as comprehensive as Sec.
23.603.
5. Conflicts of Interest (Sec. 23.605)
Commission Requirement: Section 4s(j)(5) of the CEA and Commission
regulation 23.605(c) generally require each SD or MSP to establish
structural and institutional safeguards to ensure that the activities
of any person within the firm relating to research or analysis of the
price or market for any commodity or swap are separated by appropriate
informational partitions within the firm from the review, pressure, or
oversight of persons whose involvement in pricing, trading, or clearing
activities might potentially bias their judgment or supervision.
In addition, section 4s(j)(5) of the CEA and Commission regulation
23.605(d)(1) generally prohibits an SD or MSP from directly or
indirectly interfering with or attempting to influence the decision of
any clearing unit of any affiliated clearing member of a DCO to provide
clearing services and activities to a particular customer, including:
Whether to offer clearing services to a particular
customer;
Whether to accept a particular customer for clearing
derivatives;
Whether to submit a customer's transaction to a particular
DCO;
Whether to set or adjust risk tolerance levels for a
particular customer; or
Whether to set a customer's fees based on criteria other
than those generally available and applicable to other customers.
Commission regulation 23.605(d)(2) generally requires each SD or
MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
any affiliated clearing member of a DCO to reasonably ensure compliance
with the Act and the prohibitions set forth in Sec. 23.605(d)(1)
outlined above.
The Commission observes that Sec. 23.605(d) works in tandem with
Commission regulation 1.71, which requires futures commission merchants
(``FCMs'') that are clearing members of a DCO and affiliated with an SD
or MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
the FCM to reasonably ensure compliance with the Act and the
prohibitions set forth in Sec. 1.71(d)(1), which are the same as the
prohibitions set forth in Sec. 23.605(d)(1) outlined above.
Finally, Sec. 23.605(e) requires that each SD or MSP have policies
and procedures that mandate the disclosure to counterparties of
material incentives or conflicts of interest regarding the decision of
a counterparty to execute a derivative on a swap execution facility or
DCM or to clear a derivative through a DCO.
Regulatory Objective: Commission regulation 23.605(c) seeks to
ensure that research provided to the general public by an SD or MSP is
unbiased and free from the influence of the interests of an SD or MSP
arising from the SD's or MSP's trading business.
In addition, the Sec. 23.605(d) (working in tandem with Sec.
1.71) seeks to ensure open access to the clearing of swaps by requiring
that access to and the provision of clearing services provided by an
affiliate of an SD or MSP are not influenced by the interests of an
SD's or MSP's trading business.
Finally, Sec. 23.605(e) seeks to ensure equal access to trading
venues and clearinghouses, as well as orderly and fair markets, by
requiring that each SD and MSP disclose to counterparties any material
incentives or conflicts of interest regarding the decision of a
counterparty to execute a derivative on a SEF or DCM, or to clear a
derivative through a DCO.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the
[[Page 78907]]
following provisions of law and regulations applicable in Switzerland
are in full force and effect in Switzerland, and comparable to and as
comprehensive as Commission regulation 23.605(c).
The FINMA Circular on market conduct rules \47\ and the FINMA
Circular on Self-regulation recognize the Swiss Bankers' Association
Directives on the Independence of Financial Research \48\ as minimum
standards. These circulars require information partitions where
necessary to prevent conflicts of interest. In particular, they require
the research unit to be independent from business trading units.
Adherence to information partitions is to be monitored and is a
designated compliance function, while the ultimate responsibility for
handling confidential price-sensitive information and conflicts of
interest lies with executive management.
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\47\ Text of English translation available at: http://www.finma.ch/e/regulierung/Documents/finma-rs-2008-38-e.pdf (stating
that analysis or research departments are to be organized
independently and be segregated as separate areas of
confidentiality).
\48\ Text of English translation available at: http://www.swissbanking.org/12108.pdf.
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More generally, imposing restrictions on particular customers would
contradict the open access principles outlined in art. 33 of the Swiss
National Bank Ordinance. In addition, under Swiss law, a bank must
comply with the Swiss competition laws, including the Federal Act on
Cartels and other Restraints on Competition. An activity that violates
the provision of these laws is a violation of these laws regardless of
where the putative activity took place.
The applicant has represented to the Commission that FINMA, in the
process of its oversight and enforcement of the foregoing Swiss
standards, would require any SD or MSP subject to such standards to
resolve or mitigate conflicts of interests in the provision of clearing
services by a clearing member of a DCO that is an affiliate of the SD
or MSP, or the decision of a counterparty to execute a derivative on a
SEF or DCM, or clear a derivative through a DCO, through appropriate
information firewalls and disclosures.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above with respect to conflicts of interest
that may arise in producing or distributing research are generally
identical in intent to Sec. 23.605(c) because such standards seek to
ensure that research provided to the general public by an SD is
unbiased and free from the influence of the interests of an SD arising
from the SD's trading business.
With respect to conflicts of interest that may arise in the
provision of clearing services by an affiliate of an SD or MSP, the
Commission further finds that although the general conflicts of
interest prevention requirements under the Swiss standards specified
above do not require with specificity that access to and the provision
of clearing services provided by an affiliate of an SD or MSP not be
improperly influenced by the interests of an SD's or MSP's trading
business, such general requirements would require prevention and
remediation of such improper influence when recognized or discovered.
Thus such standards would ensure open access to clearing.
Finally, although not as specific as the requirements of Sec.
23.605(e) (Undue influence on counterparties), the Commission finds
that the general disclosure requirements of the Swiss standards
specified above would ensure equal access to trading venues and
clearinghouses by requiring that each SD and MSP disclose to
counterparties any material incentives or conflicts of interest
regarding the decision of a counterparty to execute a derivative on a
SEF or DCM, or to clear a derivative through a DCO.
6. Availability of Information for Disclosure and Inspection (Sec.
23.606)
Commission Requirement: Commission regulation 23.606 implements
sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to
disclose to the Commission, and an SD's or MSP's U.S. prudential
regulator (if any) comprehensive information about its swap activities,
and to establish and maintain reliable internal data capture,
processing, storage, and other operational systems sufficient to
capture, process, record, store, and produce all information necessary
to satisfy its duties under the CEA and Commission regulations. Such
systems must be designed to provide such information to the Commission
and an SD's or MSP's U.S. prudential regulator within the time frames
set forth in the CEA and Commission regulations and upon request.
Regulatory Objective: Commission regulation 23.606 seeks to ensure
that each SD and MSP captures and maintains comprehensive information
about their swap activities, and is able to retrieve and disclose such
information to the Commission and its U.S. prudential regulator, if
any, as necessary for compliance with the CEA and the Commission's
regulations and for purposes of Commission oversight, as well as
oversight by the SD's or MSP's U.S. prudential regulator, if any.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. 23.606 unless the required information is
available to the Commission and any U.S. prudential regulator under the
foreign legal regime. Thus, a comparability determination with respect
to the information access provisions of Sec. 23.606 would be premised
on whether the relevant information would be available to the
Commission and any U.S. prudential regulator of the SD or MSP, not on
whether an SD or MSP must disclose comprehensive information to its
regulator in its home jurisdiction.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect in Switzerland,
and comparable to and as comprehensive as Commission regulation 23.606.
The Swiss Code of Obligations,\49\ Ordinance of the Swiss Federal
Council on Business Record Keeping,\50\ Swiss Financial Markets
Supervisory Authority Act,\51\ Swiss National Banking Ordinance,\52\
National Bank Act,\53\ and FINMA Circulars impose comprehensive
requirements with respect to data retention and storage, and the
availability of such data to regulatory authorities. These requirements
apply to all of a banking entity's business, including its swaps
business.
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\49\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/19110009/201305280000/220.pdf.
\50\ Text of ordinance available at: http://www.admin.ch/opc/de/classified-compilation/20001467/201301010000/221.431.pdf.
\51\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20052624/201307010000/956.1.pdf.
\52\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20040259/201307010000/951.131.pdf (requiring banks to report OTC derivatives information
biannually to the Bank of Internal Settlement).
\53\ Text of English translation available at: http://www.admin.ch/opc/en/classified-compilation/20021117/201203010000/951.11.pdf (requiring the Swiss National Bank, pursuant to art. 14,
to monitor financial market developments and requiring banks to
provide statistical data about their activities to the Swiss
National Bank).
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Collectively, these Swiss laws and regulations require a firm to
maintain swaps data and related books and records in a systematic,
logical, and chronological format so that the data cannot be damaged,
altered, or deleted. Further, a firm is required to maintain account
records, accounting records, and business correspondence for ten years.
These records must contain all
[[Page 78908]]
necessary information to establish, review, and reconstruct the
financial situation of the firm by FINMA, regulatory authorities, audit
firms, and persons or companies legally authorized to review such
records.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. 23.606 because such standards seek to ensure that each SD and MSP
captures and stores comprehensive information about their swap
activities, and are able to retrieve and disclose such information as
necessary for compliance with applicable law and for purposes of
regulatory oversight.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the requirements of Swiss law and
regulations with respect to the availability of information for
inspection and disclosure, as specified above, are comparable to, and
as comprehensive as, Sec. 23.606, with the exception of Sec.
23.606(a)(2) concerning the requirement that an SD or MSP make
information required by Sec. 23.606(a)(1) available promptly upon
request to Commission staff and the staff of an applicable prudential
regulator. The applicant has not submitted any provision of law or
regulations applicable in Switzerland, upon which the Commission could
make a finding that SDs and MSPs would be required to retrieve and
disclose comprehensive information about their swap activities to the
Commission or any U.S. prudential regulator as necessary for compliance
with the CEA and Commission regulations, and for purposes of Commission
oversight and the oversight of any U.S. prudential regulator.
Notwithstanding that the Commission has not determined that the
requirements of Swiss law and regulations are comparable to and as
comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both Sec.
23.606 and the Swiss standards specified above are applicable would
generally be deemed to be in compliance with Sec. 23.606(a)(2) if that
SD or MSP complies with the Swiss standards specified above, subject to
compliance with the requirement that it produce information to
Commission staff and the staff of an applicable U.S. prudential
regulator in accordance with Sec. 23.606(a)(2).
C. Swap Data Recordkeeping (Sec. Sec. 23.201 and 23.203)
Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the
CEA, and Commission regulation 23.201 generally require SDs and MSPs to
retain records of each transaction, each position held, general
business records (including records related to complaints and sales and
marketing materials), records related to governance, financial records,
records of data reported to swap data repositories (``SDRs''), and
records of real-time reporting data along with a record of the date and
time the SD or MSP made such reports. Transaction records must be kept
in a form and manner identifiable and searchable by transaction and
counterparty.
Commission regulation 23.203, requires SDs and MSPs to maintain
records of a swap transaction until the termination, maturity,
expiration, transfer, assignment, or novation date of the transaction,
and for a period of five years after such date. Records must be
``readily accessible'' for the first 2 years of the 5 year retention
period (consistent with Sec. 1.31).
The Commission notes that the comparability determination below
with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data
recordkeeping generally and swap data recordkeeping relating to
complaints and marketing and sales materials in accordance with Sec.
23.201(b)(3) and (4).\54\
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\54\ See the Guidance for a discussion of the availability of
substituted compliance with respect to swap data recordkeeping, 78
FR 45332-33.
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Regulatory Objective: Through the Commission's regulations
requiring SDs and MSPs to keep comprehensive records of their swap
transactions and related data, the Commission seeks to ensure the
effectiveness of the internal controls of SDs and MSPs, and
transparency in the swaps market for regulators and market
participants.
The Commission's regulations require SDs and MSPs to keep swap data
in a level of detail sufficient to enable regulatory authorities to
understand an SD's or MSP's swaps business and to assess its swaps
exposure.
By requiring comprehensive records of swap data, the Commission
seeks to ensure that SDs and MSPs employ effective risk management, and
strictly comply with Commission regulations. Further, such records
facilitate effective regulatory oversight.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. Sec. 23.201 and 23.203 unless the
required information is available to the Commission and any U.S.
prudential regulator under the foreign legal regime. Thus, a
comparability determination with respect to the information access
provisions of Sec. 23.203 would be premised on whether the relevant
information would be available to the Commission and any U.S.
prudential regulator of the SD or MSP, not on whether an SD or MSP must
disclose comprehensive information to its regulator in its home
jurisdiction.
Comparable Swiss Law and Regulations: The applicant has represented
to the Commission that the following provisions of law and regulations
applicable in Switzerland are in full force and effect Switzerland, and
comparable to and as comprehensive as sections 4s(f)(1)(B) and 4s(g)(1)
of the CEA and Sec. Sec. 23.201 and 23.203.
Under Swiss law and FINMA Circulars, a banking entity is subject to
extensive requirements regarding accounting records, which cover
records of transactions in all areas of the bank's business, including
its swaps business. Under the Swiss Code of Obligations,\55\ for
example:
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\55\ See supra note 51.
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According to art. 957, a Swiss firm has to properly
capture and maintain its books necessary to provide a fair view of its
kind and size of business. Accounting records and business
correspondence can be maintained in written or electronic format,
provided the format ensures that the records adequately reflect
business transactions;
According to art. 962, accounts, accounting records, and
business correspondence have to be retained for ten years;
Pursuant to art. 713, all deliberations and decisions by
the supervisory body have to be recorded in a protocol, signed by the
Chairman and the secretary; and
Pursuant to art. 747, the accounting records of a
dissolved company are kept for ten years at a location designated by
the liquidators or, if the liquidators cannot reach agreement, by the
commercial registry.
Commission Determination: The Commission finds that the Swiss law
and regulations specified above are generally identical in intent to
Sec. Sec. 23.201 and 23.202 because such standards seek to ensure the
effectiveness of the internal controls of SDs and MSPs, and
transparency in the swaps market for regulators and market
participants.
In addition, the Commission finds that the Swiss laws and
regulations specified above require SDs and MSPs to keep swap data in a
level of detail sufficient to enable regulatory authorities to
understand an SD's or MSP's swaps business and to assess its swaps
exposure.
[[Page 78909]]
Finally, the Commission finds that Swiss laws and regulations
specified above, by requiring comprehensive records of swap data, seek
to ensure that SDs and MSPs employ effective risk management, seek to
ensure that SDs and MSPs strictly comply with applicable regulatory
requirements (including the CEA and Commission regulations), and that
such records facilitate effective regulatory oversight.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the requirements of Swiss law and
regulations with respect to the swap data recordkeeping, as specified
above, are comparable to, and as comprehensive as, Sec. Sec. 23.201
and 23.203, with the exception of Sec. 23.203(b)(2) concerning the
requirement that an SD or MSPs make records required by Sec. 23.201
open to inspection by any representative of the Commission, the United
States Department of Justice, or any applicable U.S. prudential
regulator. The applicant has not submitted any provision of law or
regulations applicable in Switzerland, upon which the Commission could
make a finding that SDs and MSPs would be required to make records
required by Sec. 23.201 open to inspection by any representative of
the Commission, the United States Department of Justice, or any
applicable U.S. prudential regulator.
Notwithstanding that the Commission has not determined that the
requirements of Swiss law and regulations are comparable to and as
comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both Sec.
23.203 and the Swiss law and regulations specified above are applicable
would generally be deemed to be in compliance with Sec. 23.203(b)(2)
if that SD or MSP complies with the Swiss law and regulations specified
above, subject to compliance with the requirement that it make records
required by Sec. 23.201 open to inspection by any representative of
the Commission, the United States Department of Justice, or any
applicable U.S. prudential regulator in accordance with Sec.
23.203(b)(2).
Issued in Washington, DC on December 20, 2013, by the
Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.
Appendices to Comparability Determination for Switzerland: Certain
Entity-Level Requirements
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative. Commissioner O'Malia voted in the
negative.
Appendix 2--Joint Statement of Chairman Gary Gensler and Commissioners
Bart Chilton and Mark Wetjen
We support the Commission's approval of broad comparability
determinations that will be used for substituted compliance
purposes. For each of the six jurisdictions that has registered swap
dealers, we carefully reviewed each regulatory provision of the
foreign jurisdictions submitted to us and compared the provision's
intended outcome to the Commission's own regulatory objectives. The
resulting comparability determinations for entity-level requirements
permit non-U.S. swap dealers to comply with regulations in their
home jurisdiction as a substitute for compliance with the relevant
Commission regulations.
These determinations reflect the Commission's commitment to
coordinating our efforts to bring transparency to the swaps market
and reduce its risks to the public. The comparability findings for
the entity-level requirements are a testament to the comparability
of these regulatory systems as we work together in building a strong
international regulatory framework.
In addition, we are pleased that the Commission was able to find
comparability with respect to swap-specific transaction-level
requirements in the European Union and Japan.
The Commission attained this benchmark by working cooperatively
with authorities in Australia, Canada, the European Union, Hong
Kong, Japan, and Switzerland to reach mutual agreement. The
Commission looks forward to continuing to collaborate with both
foreign authorities and market participants to build on this
progress in the months and years ahead.
Appendix 3--Statement of Dissent by Commissioner Scott D. O'Malia
I respectfully dissent from the Commodity Futures Trading
Commission's (``Commission'') approval of the Notices of
Comparability Determinations for Certain Requirements under the laws
of Australia, Canada, the European Union, Hong Kong, Japan, and
Switzerland (collectively, ``Notices''). While I support the narrow
comparability determinations that the Commission has made, moving
forward, the Commission must collaborate with foreign regulators to
harmonize our respective regimes consistent with the G-20 reforms.
However, I cannot support the Notices because they: (1) Are
based on the legally unsound cross-border guidance (``Guidance'');
\1\ (2) are the result of a flawed substituted compliance process;
and (3) fail to provide a clear path moving forward. If the
Commission's objective for substituted compliance is to develop a
narrow rule-by-rule approach that leaves unanswered major regulatory
gaps between our regulatory framework and foreign jurisdictions,
then I believe that the Commission has successfully achieved its
goal today.
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\1\ Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013).
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Determinations Based on Legally Unsound Guidance
As I previously stated in my dissent, the Guidance fails to
articulate a valid statutory foundation for its overbroad scope and
inconsistently applies the statute to different activities.\2\
Section 2(i) of the Commodity Exchange Act (``CEA'') states that the
Commission does not have jurisdiction over foreign activities unless
``those activities have a direct and significant connection with
activities in, or effect on, commerce of the United States * * *.''
\3\ However, the Commission never properly articulated how and when
this limiting standard on the Commission's extraterritorial reach is
met, which would trigger the application of Title VII of the Dodd-
Frank Act \4\ and any Commission regulations promulgated thereunder
to swap activities that are outside of the United States. Given this
statutorily unsound interpretation of the Commission's
extraterritorial authority, the Commission often applies CEA section
2(i) inconsistently and arbitrarily to foreign activities.
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\2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
\3\ CEA section 2(i); 7 U.S.C. 2(i).
\4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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Accordingly, because the Commission is relying on the legally
deficient Guidance to make its substituted compliance
determinations, and for the reasons discussed below, I cannot
support the Notices. The Commission should have collaborated with
foreign regulators to agree on and implement a workable regime of
substituted compliance, and then should have made determinations
pursuant to that regime.
Flawed Substituted Compliance Process
Substituted compliance should not be a case of picking a set of
foreign rules identical to our rules, determining them to be
``comparable,'' but then making no determination regarding rules
that require extensive gap analysis to assess to what extent each
jurisdiction is, or is not, comparable based on overall outcomes of
the regulatory regimes. While I support the narrow comparability
determinations that the Commission has made, I am concerned that in
a rush to provide some relief, the Commission has made substituted
compliance determinations that only afford narrow relief and fail to
address major regulatory gaps between our domestic regulatory
framework and foreign jurisdictions. I will address a few examples
below.
First, earlier this year, the OTC Derivatives Regulators Group
(``ODRG'') agreed to a number of substantive understandings to
improve the cross-border implementation of over-the-counter
derivatives reforms.\5\ The ODRG specifically agreed that a
flexible, outcomes-based approach, based on a broad
[[Page 78910]]
category-by-category basis, should form the basis of comparability
determinations.\6\
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\5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.
\6\ http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.
Understanding number 2 states that ``[a] flexible, outcomes-based
approach should form the basis of final assessments regarding
equivalence or substituted compliance.''
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However, instead of following this approach, the Commission has
made its comparability determinations on a rule-by-rule basis. For
example, in Japan's Comparability Determination for Transaction-
Level Requirements, the Commission has made a positive comparability
determination for some of the detailed requirements under the swap
trading relationship documentation provisions, but not for other
requirements.\7\ This detailed approach clearly contravenes the
ODRG's understanding.
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\7\ The Commission made a positive comparability determination
for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),
(b)(4), (c), and (d), but not for Commission regulations
23.504(b)(5) and (b)(6).
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Second, in several areas, the Commission has declined to
consider a request for a comparability determination, and has also
failed to provide an analysis regarding the extent to which the
other jurisdiction is, or is not, comparable. For example, the
Commission has declined to address or provide any clarity regarding
the European Union's regulatory data reporting determination, even
though the European Union's reporting regime is set to begin on
February 12, 2014. Although the Commission has provided some limited
relief with respect to regulatory data reporting, the lack of
clarity creates unnecessary uncertainty, especially when the
European Union's reporting regime is set to begin in less than two
months.
Similarly, Japan receives no consideration for its mandatory
clearing requirement, even though the Commission considers Japan's
legal framework to be comparable to the U.S. framework. While the
Commission has declined to provide even a partial comparability
determination, at least in this instance the Commission has provided
a reason: the differences in the scope of entities and products
subject to the clearing requirement.\8\ Such treatment creates
uncertainty and is contrary to increased global harmonization
efforts.
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\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
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Third, in the Commission's rush to meet the artificial deadline
of December 21, 2013, as established in the Exemptive Order
Regarding Compliance with Certain Swap Regulations (``Exemptive
Order''),\9\ the Commission failed to complete an important piece of
the cross-border regime, namely, supervisory memoranda of
understanding (``MOUs'') between the Commission and fellow
regulators.
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\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
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I have previously stated that these MOUs, if done right, can be
a key part of the global harmonization effort because they provide
mutually agreed-upon solutions for differences in regulatory
regimes.\10\ Accordingly, I stated that the Commission should be
able to review MOUs alongside the respective comparability
determinations and vote on them at the same time. Without these
MOUs, our fellow regulators are left wondering whether and how any
differences, such as direct access to books and records, will be
resolved.
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\10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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Finally, as I have consistently maintained, the substituted
compliance process should allow other regulatory bodies to engage
with the full Commission.\11\ While I am pleased that the Notices
are being voted on by the Commission, the full Commission only
gained access to the comment letters from foreign regulators on the
Commission's comparability determination draft proposals a few days
ago. This is hardly a transparent process.
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\11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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Unclear Path Forward
Looking forward to next steps, the Commission must provide
answers to several outstanding questions regarding these
comparability determinations. In doing so, the Commission must
collaborate with foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the timing and outcome
of the MOUs. Critical questions regarding information sharing,
cooperation, supervision, and enforcement will remain unanswered
until the Commission and our fellow regulators execute these MOUs.
Second, the Commission has issued time-limited no-action relief
for the swap data repository reporting requirements. These
comparability determinations will be done as separate notices.
However, the timing and process for these determinations remain
uncertain.
Third, the Commission has failed to provide clarity on the
process for addressing the comparability determinations that it
declined to undertake at this time. The Notices only state that the
Commission may address these requests in a separate notice at a
later date given further developments in the law and regulations of
other jurisdictions. To promote certainty in the financial markets,
the Commission must provide a clear path forward for market
participants and foreign regulators.
The following steps would be a better approach: (1) The
Commission should extend the Exemptive Order to allow foreign
regulators to further implement their regulatory regimes and
coordinate with them to implement a harmonized substituted
compliance process; (2) the Commission should implement a flexible,
outcomes-based approach to the substituted compliance process and
apply it similarly to all jurisdictions; and (3) the Commission
should work closely with our fellow regulators to expeditiously
implement MOUs that resolve regulatory differences and address
regulatory oversight issues.
Conclusion
While I support the narrow comparability determinations that the
Commission has made, it was my hope that the Commission would work
with foreign regulators to implement a substituted compliance
process that would increase the global harmonization effort. I am
disappointed that the Commission has failed to implement such a
process.
I do believe that in the longer term, the swaps regulations of
the major jurisdictions will converge. At this time, however, the
Commission's comparability determinations have done little to
alleviate the burden of regulatory uncertainty and duplicative
compliance with both U.S. and foreign regulations.
The G-20 process delineated and put in place the swaps market
reforms in G-20 member nations. It is then no surprise that the
Commission must learn to coordinate with foreign regulators to
minimize confusion and disruption in bringing much needed clarity to
the swaps market. For all these shortcomings, I respectfully dissent
from the Commission's approval of the Notices.
[FR Doc. 2013-30978 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 27, 2013