2013-30979

Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]

[Notices]

[Pages 78839-78852]

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

[FR Doc No: 2013-30979]

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COMMODITY FUTURES TRADING COMMISSION

Comparability Determination for Canada: Certain Entity-Level

Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Comparability Determination for Certain Requirements

under the Laws of Canada.

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SUMMARY: The following is the analysis and determination of the

Commodity Futures Trading Commission (``Commission'') regarding certain

parts of a joint request by the Canadian Bankers Association (``CBA''),

five individual Canadian banks provisionally-registered with the

Commodity Futures Trading Commission (``Commission'') as swap dealers

(``SDs''), and the Office of the Superintendent of Financial

Institutions (``OSFI'') that the Commission determine that certain laws

and regulations applicable in Canada provide a sufficient basis for an

affirmative finding of comparability with respect to the following

regulatory obligations applicable to 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 Andy Chapin, Associate Director, 202-418-5465,

[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 May 13, 2013, the CBA, five individual Canadian banks

provisionally registered with the Commission as SDs, and OSFI

(collectively hereinafter, the ``applicant'') submitted a request that

the Commission determine that laws and regulations applicable in Canada

provide a sufficient basis for an affirmative finding of comparability

with respect to certain Entity-Level Requirements, including the

Internal Business Conduct Requirements.\4\ The applicants provided

Commission staff with a supplemental submission from the Ontario

Securities Commission (``OSC'') dated June 7, 2013. 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 swap data repository reporting

(``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\ 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

[[Page 78840]]

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

\8\ The compliance dates are summarized on the Compliance Dates

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

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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

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

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\

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\9\ 78 FR 45342-45.

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 U.S. 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\ See supra note 10.

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III. Regulation of SDs and MSPs in Canada

On May 13, 2013, the applicant submitted a request that the

Commission assess the comparability of Canadian laws and regulations

with the requirements of the CEA and the Commission's regulations

promulgated thereunder. OSC provided a supplement to the submission on

June 7, 2013. On November 8, 2013, OSFI further supplemented the

application with corrections and additional materials.

All of the currently registered Canadian SDs are banks regulated

under the Canadian Bank Act (the ``Bank Act''),\15\ relevant

regulations thereunder, and guidelines, advisories, and interpretations

provided by OSFI. As the governing prudential regulator in Canada, OSFI

supervises all Canadian banks on a consolidated basis, including those

provisionally registered with the Commission as SDs (the ``Canadian

Bank SDs''). To implement its ``Supervisory Framework,'' OSFI has

published guidelines, advisories, and interpretations which OSFI

expects each bank to follow. Each of the five Canadian Bank SDs also

has been designated as Domestic Systemically Important Banks

(``DSIBs'') due to the potential impact that failure could have on the

domestic economy based on their size, interconnectedness,

substitutability, and complexity. As DSIBs, these banks are expected to

have advanced practices in terms of the design and operation of

oversight functions and controls, and are subject to continued

supervisory intensity, enhanced disclosure requirements, and a capital

surcharge.\16\

Canada's provincial securities administrators, coordinated by the

Derivatives Committee of the Canadian Securities Administrators

(``CSA''), are responsible for regulating the capital markets.

Harmonized policy recommendations are made at the CSA level, while

regulations are made at the provincial level. Currently, the CSA has

issued a Consultation Paper 91-407 on ``Derivatives Registration''

(comment period closed June 17, 2013).

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\15\ Consolidated Acts of Canada, S.C. 1991, c. 46.

\16\ Because the applicant's request and the Commissions

determinations herein are based on the comparability of Canadian

requirements applicable to banks, an SD or MSP that is not a bank,

or is otherwise not subject to the requirements applicable to banks

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

[[Page 78841]]

basis of the foreign regime as a whole.\17\ 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.\18\

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\17\ 78 FR 45343.

\18\ 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.\19\

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\19\ 78 FR 45343. The Commission's substituted compliance

program would generally be available for 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 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).\20\ This approach 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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\20\ 78 FR 45343.

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In doing its comparability analysis the Commission may determine

that no comparability determination can be made \21\ 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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\21\ 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.\22\ 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.\23\

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\22\ 78 FR 45343.

\23\ 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 \24\ of SDs and MSPs \25\ in the

relevant jurisdictions.\26\ 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.\27\

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\24\ ``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 Part 23 (17 CFR Part 23) are limited

in scope to the swaps activities of SDs and MSPs.

\25\ 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.

\26\ 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.

\27\ 78 FR 45345.

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The Guidance provided a detailed discussion of the Commission's

policy regarding the availability of substituted

[[Page 78842]]

compliance \28\ for the Internal Business Conduct Requirements.\29\

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\28\ 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.

\29\ This notice does not address Sec. 23.608 (Restrictions on

counterparty clearing relationships). The Commission declines to

take up the request for a comparability determination with respect

to this regulation due to the Commission's view that there are not

laws or regulations applicable in Canada to compare with the

prohibitions and requirements of Sec. 23.608. 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 Canada.

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 \30\ 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

information sharing and cooperation in the context of supervising [SDs]

and MSPs.'' \31\

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\30\ 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, for example, as independent bilateral

arrangements, statements of intent, declarations, or letters.

\31\ 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,\32\ provide

for notification upon the occurrence of specified events, memorialize

understandings related to on-site visits,\33\ and include protections

related to the use and confidentiality of non-public information shared

pursuant to the arrangement.

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\32\ 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. 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'').

\33\ 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 applicant 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;

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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 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as section 4s(k) of the

CEA and Commission regulation 3.3.

OSFI's Legislative Compliance Management Guideline E-13 (``LCM

Guideline'') requires Canadian banks to establish an enterprise-wide

framework of regulatory risk management controls to ensure that

regulatory compliance risks are managed effectively. The required LCM

framework must meet the requirements of the LCM Guideline, which sets

out OSFI's expectations. The Canadian Bank SDs are required to

demonstrate that they satisfy those expectations in particular

circumstances. Pursuant to the LCM Guideline:

The compliance oversight function should be designated to

a member of senior management as the bank's CCO;

Such CCO should have sufficient stature, authority,

resources, and access to achieve compliance with applicable law;

Such CCO should have appropriate skills and knowledge to

effectively fulfill the requirements of the function;

The CCO should approve the content and frequency of

reports and that such reports should be sufficient to enable the CCO,

senior management, and the bank's board to discharge their compliance

responsibilities;

OSFI expects that each bank's LCM framework will include

identification, assessment, communication, and maintenance of

applicable regulatory requirements, compliance procedures, monitoring

procedures, and reporting procedures;

OSFI expects the CCO to be responsible for the LCM

framework and to report issues directly to the board, including any

material compliance issues and their remediation; and

Normal course reports to the board should be made no less

than annually, and contain discussion of material weaknesses, non-

compliance issues, and remedial action plans.

In addition, the OSFI Corporate Governance Guideline of Federally

Regulated Financial Institutions (``OSFI Corporate Governance

Guideline'') states that the bank's board of directors should be

responsible for the selection, performance, management, compensation,

and evaluation of a CCO. Pursuant to the OSFI Supervisory Framework,

OSFI monitors banks' management of compliance risk and reports on

banks' compliance with the Bank Act annually to the Canadian Minister

of Finance.

Commission Determination: The Commission finds that the OSFI

standards 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 the OSFI

standards, specified above, 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.\34\

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\34\ Because the Commission has not determined that the

requirements of the OSFI standards are comparable to and as

comprehensive as Sec. 3.3(f), any SD or MSP to which both Sec. 3.3

and the OSFI standards specified above are applicable would

generally be deemed to be in compliance with Sec. 3.3 if that SD or

MSP complies with the OSFI standards specified above, subject to

certifying and furnishing the Commission with the annual report

required under the OSFI standards 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.

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Notwithstanding that the Commission has not determined that the

requirements of the OSFI standards are comparable to and as

comprehensive as Sec. 3.3(f), any SD or MSP to which both Sec. 3.3

and the OSFI standards specified above are applicable would generally

be deemed to be in compliance with Sec. 3.3(f) if that SD or MSP

complies with the OSFI standards specified above, subject to certifying

and furnishing the Commission with the annual report required under the

OSFI standards 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.\35\ The Commission adopted regulations 23.600, 23.601,

23.602, 23.603, 23.605, and 23.606 to implement the statute.\36\ The

[[Page 78844]]

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'').\37\ Collectively, these

requirements help to establish a robust and comprehensive internal risk

management program for SDs and MSPs with respect to their swaps

activities,\38\ 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.\39\

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\35\ 7 U.S.C. 6s(j).

\36\ 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).

\37\ See Customer Documentation Rule, 77 FR 21278. 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.

\38\ ``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 Part 23 (17 CFR Part 23) are limited

in scope to the swaps activities of SDs and MSPs.

\39\ As stated above, this notice does not address Sec. 23.608

(Restrictions on counterparty clearing relationships). The

Commission declines to take up the request for a comparability

determination with respect to this regulation due to the

Commission's view that there are not laws or regulations applicable

in Canada to compare with the prohibitions and requirements of Sec.

23.608. 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

Canada.

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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 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and are comparable to and as comprehensive as section 4s(j)(2)

of the CEA and Commission regulation Sec. 23.600.

The OSFI Corporate Governance Guideline requires that each bank

establish a risk appetite framework (``RAF'') that:

Guides the amount of risk the bank is willing to accept in

pursuit of its strategic and business objectives.

Sets basic goals, benchmarks, parameters, and limits, and

should consider all applicable types of risks.

Contains all elements required by an annex to the

Corporate Governance Guideline, including a risk appetite statement,

specific risk tolerance limits, and processes for implementation of the

RAF.

Further, the OSFI Corporate Governance Guideline states that DSIBs

should establish a dedicated risk committee to oversee risk management

on an enterprise-wide basis, and that the oversight of the risk

management activities of the bank are to be independent from

operational management, adequately resourced, and have appropriate

status and visibility.

The OSFI Derivatives Best Practice Guideline states that each bank

should ensure that each derivative product traded is subject to a

product authorization signed off by senior management, and sets forth

OSFI's expectations with respect to having documented policies and

procedures for risk management, creating risk tolerance limits, and

measuring, reporting, managing, and controlling the risks associated

with the derivatives business, including market, currency, interest

rate, equity price, commodity price, credit, settlement, liquidity,

operational, and legal risks.

Finally, OSFI represents that its oversight pursuant to the

Supervisory Framework will assess the extent to which the risk

management function integrates policies, practices, and limits with

day-to-day business activities and with the bank's strategic, capital,

and liquidity management policies. Under the Supervisory Framework,

OSFI also will assess whether the risk management function effectively

monitors risk positions against approved limits and ensures that

material breaches are addressed on a timely basis. OSFI represents that

it will look at various indicators, including the extent to which the

bank proactively updates its policies, practices, and

[[Page 78845]]

limits in response to changes in the industry and in the institution's

strategy, business activities and risk tolerances.\40\

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\40\ In addition to the foregoing, the applicant notes that the

Canadian Bank SDs may be subject to heightened standards for their

derivatives business in the near future under regulatory

recommendations that would require registrants to establish,

maintain and apply systems, policies and procedures that establish

robust compliance and risk management systems specifically for their

derivatives business. See CSA Consultation Paper 91-407.

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Commission Determination: The Commission finds that the OSFI

standards 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 OSFI

standards specified above would 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 the OSFI standards, 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 the OSFI standards are comparable to and as

comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.

23.600 and the OSFI standards 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 the OSFI standards 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 to

monitor for, and prevent violations of, applicable position limits

established by the Commission, a DCM, or a SEF.\41\ 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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\41\ 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as section 4s(j)(1) of

the CEA and Commission regulation Sec. 23.601.

OSFI states that the monitoring of position limits is an aspect of

the risk management and compliance framework for each bank.

Specifically:

OSFI's LCM Guideline requires Canadian banks to establish

an enterprise-wide framework of regulatory risk management controls to

ensure that regulatory compliance risks are managed effectively. The

required LCM framework sets out OSFI's expectations and banks are

required to demonstrate that they satisfy those expectations in

particular circumstances; and

OSFI expects that each bank's LCM framework will include

identification, assessment, communication, and maintenance of

applicable regulatory requirements, compliance procedures, monitoring

procedures, and reporting procedures.\42\

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\42\ In addition to the foregoing, the applicant also submitted

various guidelines and required best practices concerning the

setting of internal risk tolerance limits and monitoring for

compliance with such internal limits. Although the Commission

recognizes these as prudent risk management practices, the

Commission does not believe that these provisions are relevant for a

comparability determination with respect to Sec. 23.601 because

Sec. 23.601 requires monitoring for compliance with external

position limits set by the Commission, a DCM, or a SEF.

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The applicants represent to the Commission that the OSFI

requirement to monitor the effectiveness of procedures to ensure

compliance with regulatory obligations includes applicable regulatory

obligations of an SD or MSP under the CEA, Commission regulations, and

position limits set by the Commission, a DCM, or a SEF. OSFI expects

banks to comply with all applicable regulatory requirements, which

includes legislation, regulations, and regulatory directives applicable

to the activities of the bank or its subsidiaries worldwide.

Commission Determination: The Commission finds that the OSFI

standards 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 OSFI standards specified

above, while not specific to the issue of position limit compliance,

nevertheless comprehensively require SDs and MSPs to monitor for

regulatory compliance generally, including monitoring for compliance

with position limits set pursuant to applicable law (including the CEA

and Commission regulations) 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 the OSFI standards, 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

[[Page 78846]]

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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as section 4s(h)(1)(B)

of the CEA and Commission regulation 23.602.

Section 157 of the Bank Act imposes a duty on the board of

directors of a bank to manage or supervise the management of the

business and affairs of the bank.

OSFI's Supervisory Framework states that the board and

senior management are designated as ultimately accountable for the

safety and soundness of the bank.

OSFI's Corporate Governance Guideline states that banks

should appoint a senior officer, identified as the Chief Risk Officer

(``CRO''), who has responsibility for the oversight of all relevant

risks across the firm. The CRO must be identified in the bank's license

application along with a description of the resources and authority

allocated to discharge his duties. Like the CCO, the CRO should have

sufficient stature and authority within the organization, be

independent from operational management, have unfettered access and,

for functional purposes, a direct reporting line to the board of

directors or risk committee.

In addition, the applicant states that diligent supervision is an

aspect of the risk management and compliance framework for each bank,

which includes requirements for controls and monitoring. Specifically:

OSFI's LCM Guideline requires Canadian banks to establish

an enterprise-wide framework of regulatory risk management controls to

ensure that regulatory compliance risks are managed effectively. The

required LCM framework sets out OSFI's expectations and banks are

required to demonstrate that they satisfy those expectations in

particular circumstances; and

OSFI expects that each bank's LCM framework will include

identification, assessment, communication, and maintenance of

applicable regulatory requirements, compliance procedures, monitoring

procedures, and reporting procedures.

The applicants represent to the Commission that the OSFI

requirement to monitor the effectiveness of procedures to ensure

compliance with regulatory obligations includes applicable regulatory

obligations of an SD or MSP under the CEA and Commission regulations.

OSFI expects banks to comply with all applicable regulatory

requirements, which includes legislation, regulations, and regulatory

directives applicable to the activities of the bank or its subsidiaries

worldwide.

Commission Determination: The Commission finds that the provisions

of the Bank Act and the OSFI standards 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

provisions of the Bank Act and the OSFI standards specified above,

Canadian laws and regulations seek to ensure that each SD and MSP not

only establishes the 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 the Bank Act and the OSFI standards, 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as Commission regulation

23.603.

The applicant has represented that business continuity and disaster

recovery are aspects of the risk management framework for each bank.

Specifically:

OSFI's Derivatives Best Practice Guideline requires banks

to regularly assess contingency plans to deal with operations and

systems risks.

OSFI's Outsourcing of Business Activities, Functions and

Processes Guideline requires banks that outsource functions to ensure

that adequate continuity and disaster recovery are in place.

OSFI's Supervisory Framework subjects each bank to a

``Business Continuity & Disaster Recovery Preparedness Cross Sector

Review'' that is divided into three broad sections: Structure,

Operational Management, and Controls & Oversight. Pursuant to such

review, OSFI ensures: the existence of a plan for both business

continuity and disaster recovery; that such plans have essential

components related to identification of documents, data, staff,

supervisory personnel, back-up locations, third party disruptions,

[[Page 78847]]

etc.; that plans are distributed to all employees; that appropriate

emergency contacts are identified; that plans are reviewed at least

annually; that plans are subject to comprehensive testing and audit;

and that records related to developing and maintaining the plans are

maintained in accordance with banking supervisory guidelines and are

accessible to OSFI.

Commission Determination: The Commission finds that the OSFI

standards 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 OSFI standards 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 the OSFI standards, 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 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as Commission regulation

23.605(c).

The Bank Act subsection 157(2)(c), as well as the Competition Act,

requires that directors of a bank establish procedures to resolve

conflicts of interest, including techniques for the identification and

remediation of potential conflict situations, tied selling, exclusive

dealing, and refusal to deal, and for restricting the use of

confidential information.

The Bank Act subsection 157(2)(b) requires the directors of a bank

to have a review committee to ensure compliance with the self-dealing

provisions of the Bank Act, while 157(2)(d) requires that banks

designate a committee of the board of directors to monitor the conflict

of interest procedures.

The Bank Act subsection 459.1(1) prohibits a bank from imposing

undue pressure on, or coercing a person to obtain a product or service

from a particular person, including the bank and any of its affiliates,

as a condition for obtaining another product or service from the bank.

The Bank Act subsection 459.1(4.1) requires a bank to disclose

coercive tied selling arrangements.

OSFI's Supervisory Framework requires monitoring of conflicts of

interest through a bank's risk management program.

The applicants have represented to the Commission that OSFI, in the

process of its oversight and enforcement of the foregoing Canadian

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 Bank Act

standards 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 Bank Act standards specified

above

[[Page 78848]]

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 Bank Act 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.

Based on the foregoing and the representations of the applicants,

the Commission hereby determines that the requirements found in the

Bank Act standards specified above in relation to conflicts of interest

are comparable to and as comprehensive as Sec. 23.605.

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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as Commission regulation

23.606.

OSFI relies on general reporting obligations of Canadian banks and

OSFI's monitoring function under the OSFI Supervisory Framework with

respect to availability of information for disclosure and inspection.

Specifically, banks are expected to have appropriate policies and

procedures in place to ensure that all regulatory filings are received

by OSFI within specified timeframes and are error free. Banks are

subject to penalties for late or erroneous filings pursuant to OSFI's

Late and Erroneous Filing Penalty Framework.

With respect to data capture and retention, as part of the bank

licensing process, OSFI must approve a bank's operational risk

management policies, including policies related to information

technology, information management and security, and records retention.

As part of the OSFI Supervisory Framework, OSFI generally requires

banks to establish and maintain an enterprise-wide LCM framework. OSFI

expects the LCM framework to include ``Adequate Documentation'' as one

of its key controls. As set forth in the OSFI Derivatives Best Practice

Guideline, each bank should have mechanisms in place to assure the

confirmation, maintenance and safeguarding of derivatives contract

documentation. In particular, it states:

[t]he design of information systems will vary according to the

risks demanded by the scope and complexity of an institution's

involvement in derivatives. The degree of accuracy and timeliness of

information processing should be sufficient to meet an institution's

risk exposure monitoring needs. Appropriate information processing

and reporting capabilities should be put in place and fully

operational.

Commission Determination: The Commission finds that the OSFI

standards 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 OSFI standards 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 U.S. prudential regulator. The applicant has

not submitted any provision of law or regulations applicable in Canada

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 the OSFI standards are comparable to and as

comprehensive as Sec. 23.606(a)(2), any SD or MSP to which both Sec.

23.606 and the OSFI 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 OSFI 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).

7. Clearing Member Risk Management (Sec. 23.609)

Commission Requirement: Commission regulation 23.609 generally

requires each SD or MSP that is a clearing member of a DCO to:

Establish risk-based limits based on position size, order

size, margin requirements, or similar factors;

Screen orders for compliance with the risk-based limits;

[[Page 78849]]

Monitor for adherence to the risk-based limits intra-day

and overnight;

Conduct stress tests under extreme but plausible

conditions of all positions at least once per week;

Evaluate its ability to meet initial margin requirements

at least once per week;

Evaluate its ability to meet variation margin requirements

in cash at least once per week;

Evaluate its ability to liquidate positions it clears in

an orderly manner, and estimate the cost of liquidation; and

Test all lines of credit at least once per year.

Regulatory Objective: Through Commission regulation 23.609, the

Commission seeks to ensure the financial integrity of the markets and

the clearing system, to avoid systemic risk, and to protect customer

funds. Effective risk management by SDs and MSPs that are clearing

members is essential to achieving these objectives. A failure of risk

management can cause a clearing member to become insolvent and default

to a DCO. Such default can disrupt the markets and the clearing system

and harm customers.

Comparable Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, and comparable to and as comprehensive as Commission regulation

23.609.

OSFI stated that, to the extent that any bank is a clearing member,

risk management specifically for clearing members is an aspect of the

risk management framework.

OSFI Derivatives Best Practice Guideline states that banks should

have knowledgeable individuals or units responsible for risk monitoring

and control functions, including the responsibility for actively

monitoring transactions and positions for adherence to internal policy

limits. Moreover, stress tests should be performed regularly and should

account for abnormally large market swings and periods of prolonged

inactivity, while considering the effect of price changes on the ``mid-

market value'' of the portfolio.

More generally, the OSFI Corporate Governance Guideline requires

that each bank establish a risk appetite framework (``RAF'') that:

Guides the amount of risk the bank is willing to accept in

pursuit of its strategic and business objectives.

Sets basic goals, benchmarks, parameters, and limits, and

should consider all applicable types of risks.

Contains all elements required by an annex to the

Corporate Governance Guideline, including a risk appetite statement,

specific risk tolerance limits, and processes for implementation of the

RAF.

Further, the OSFI Corporate Governance Guideline states that DSIBs

should establish a dedicated risk committee to oversee risk management

on an enterprise-wide basis, and that the oversight of the risk

management activities of the bank are to be independent from

operational management, adequately resourced, and have appropriate

status and visibility.

The OSFI Derivatives Best Practice Guideline states that each bank

should ensure that each derivative product traded is subject to a

product authorization signed off by senior management, and sets forth

OSFI's expectations with respect to having documented policies and

procedures for risk management, creating risk tolerance limits, and

measuring, reporting, managing, and controlling the risks associated

with the derivatives business, including market, currency, interest

rate, equity price, commodity price, credit, settlement, liquidity,

operational, and legal risks.

OSFI represents that its oversight pursuant to the Supervisory

Framework will assess the extent to which the risk management function

integrates policies, practices, and limits with day-to-day business

activities and with the bank's strategic, capital, and liquidity

management policies. Under the Supervisory Framework, OSFI also will

assess whether the risk management function effectively monitors risk

positions against approved limits and ensures that material breaches

are addressed on a timely basis. OSFI represents that it will look at

various indicators, including the extent to which the bank proactively

updates its policies, practices, and limits in response to changes in

the industry and in the institution's strategy, business activities and

risk tolerances.\43\

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\43\ In addition to the foregoing, the applicant notes that the

Canadian Bank SDs may be subject to heightened standards for their

derivatives business in the near future under regulatory

recommendations that would require registrants to establish,

maintain and apply systems, policies and procedures that establish

robust compliance and risk management systems specifically for their

derivatives business. See CSA Consultation Paper 91-407.

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Specifically, OSFI has represented to the Commission that, in the

process of its oversight and enforcement of the foregoing Canadian law

and regulations, any SD or MSP subject to such standards that is a

clearing member of a DCO would be required to comply with clearing

member risk management requirements comparable to Commission regulation

23.609.

Commission Determination: The Commission finds that the OSFI

standards specified above are generally identical in intent to Sec.

23.609 because such standards seek to ensure the financial integrity of

the markets and the clearing system, to avoid systemic risk, and to

protect customer funds.

The Commission notes that the OSFI standards specified above are

not as specific as Sec. 23.609 with respect to ensuring that SDs and

MSPs that are clearing members of a DCO establish detailed procedures

and limits for clearing member risk management purposes. Nevertheless,

the Commission finds that the general requirements under the OSFI

standards specified above, implemented in the context of clearing

member risk management and pursuant to the representations of OSFI,

meet the Commission's regulatory objective specified above.

Based on the foregoing and the representations above, the

Commission hereby determines that the clearing member risk management

requirements of the Canadian law and regulations specified above are

comparable to and as comprehensive as Sec. 23.609.

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 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

[[Page 78850]]

and marketing and sales materials in accordance with Sec. 23.201(b)(3)

and (4).\44\

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\44\ 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 Canadian Law and Regulations: The applicant has

represented to the Commission that the following provisions of law and

regulations applicable in Canada are in full force and effect in

Canada, 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.

OSFI's Supervisory Framework requires banks to establish and

maintain an enterprise-wide LCM framework of regulatory risk management

controls, and these controls include oversight functions that are

independent of the activities they oversee. OSFI expects the LCM

framework to include ``Adequate Documentation'' as one of its key

controls.

As set forth in the OSFI Derivatives Best Practice Guideline, each

bank should have mechanisms in place to assure the confirmation,

maintenance, and safeguarding of derivatives contract documentation. In

particular, it states:

[t]he design of information systems will vary according to the risks

demanded by the scope and complexity of an institution's involvement

in derivatives. The degree of accuracy and timeliness of information

processing should be sufficient to meet an institution's risk

exposure monitoring needs. Appropriate information processing and

reporting capabilities should be put in place and fully operational.

Finally, Sections 238, 239 and 597 of the Bank Act generally

require banks carrying on business in Canada to maintain records in

Canada and to ensure that OSFI can access in Canada any records

necessary to enable OSFI to fulfill its supervisory mandate.

Commission Determination: The Commission finds that the Bank Act

and OSFI standards specified above are generally identical in intent to

Sec. Sec. 23.201 and 23.203 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 Bank Act and OSFI

standards 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.

Finally, the Commission finds that the Bank Act and OSFI standards

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 the Bank Act

and the OSFI standards with respect to 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 Canada 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 the Bank Act and the OSFI standards are comparable to

and as comprehensive as Sec. 23.203(b)(2), any SD or MSP to which both

Sec. 23.203 and the Bank Act and OSFI standards 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 Bank Act and OSFI

standards 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 Canada: 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-

[[Page 78851]]

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 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

[[Page 78852]]

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. 2013-30979 Filed 12-26-13; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 27, 2013