Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78923-78937]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30980]
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COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for the European Union: Certain
Entity-Level Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
under the European Market Infrastructure Regulation.
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SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a joint request by the European Commission (``EC'') and the
European Securities and Markets Authority (``ESMA'') that the
Commission determine that laws and regulations applicable in the
European Union (``EU'') provide a sufficient basis for an affirmative
finding of comparability with respect to the following regulatory
obligations applicable to swap dealers (``SDs'') and major swap
participants (``MSPs'') registered with the Commission: (i) Chief
compliance officer; (ii) risk management; and (iii) swap data
recordkeeping; (collectively, the ``Internal Business Conduct
Requirements'').
DATES: Effective Date: This determination will become effective
immediately upon publication in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,
[email protected], Frank Fisanich, Chief Counsel, 202-418-5949,
[email protected], and Ellie Jester, Special Counsel, 202-418-5874,
[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
[[Page 78924]]
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 7, 2013, the EC and ESMA (collectively, the ``applicant'')
submitted a request that the Commission determine that laws and
regulations applicable in the EU 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 applicant provided Commission staff with an
updated submission on August 6, 2013. On November 11, 2013, the
application was further supplemented with corrections and additional
materials. The following is the Commission's analysis and determination
regarding the Internal Business Conduct Requirements, as detailed
below.\5\
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\4\ For purposes of this notice, the Internal Business Conduct
Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606.
\5\ This notice does not address 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 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\
\9\ 78 FR 45342-45.
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Upon a comparability finding, consistent with CEA section 2(i) and
comity principles, the Commission's policy generally is that eligible
entities may comply with a substituted compliance regime, subject to
any conditions the Commission places on its finding, and subject to the
Commission's retention of its examination authority and its enforcement
authority.\10\
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\10\ See the Guidance, 78 FR 45342-44.
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In this regard, the Commission notes that a comparability
determination cannot be premised on whether an SD or MSP must disclose
comprehensive information to its regulator in its home jurisdiction,
but rather on whether information relevant to the Commission's
oversight of an SD or MSP would be directly available to the Commission
and any U.S. prudential regulator of the SD or MSP.\11\ The
[[Page 78925]]
Commission's direct access to the books and records required to be
maintained by an SD or MSP registered with the Commission is a core
requirement of the CEA\12\ and the Commission's regulations,\13\ and is
a condition to registration.\14\
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\11\ Under Sec. Sec. 23.203 and 23.606, all records required by
the CEA and the Commission's regulations to be maintained by a
registered SD or MSP shall be maintained in accordance with
Commission regulation 1.31 and shall be open for inspection by
representatives of the Commission, the United States Department of
Justice, or any applicable prudential regulator.
In its Final Exemptive Order Regarding Compliance with Certain
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted
that an applicant for registration as an SD or MSP must file a Form
7-R with the National Futures Association and that Form 7-R was
being modified at that time to address existing blocking, privacy,
or secrecy laws of foreign jurisdictions that applied to the books
and records of SDs and MSPs acting in those jurisdictions. See id.
at 871-72 n. 107. The modifications to Form 7-R were a temporary
measure intended to allow SDs and MSPs to apply for registration in
a timely manner in recognition of the existence of the blocking,
privacy, and secrecy laws. In the Guidance, the Commission clarified
that the change to Form 7-R impacts the registration application
only and does not modify the Commission's authority under the CEA
and its regulations to access records held by registered SDs and
MSPs. Commission access to a registrant's books and records is a
fundamental regulatory tool necessary to properly monitor and
examine each registrant's compliance with the CEA and the
regulations adopted pursuant thereto. The Commission has maintained
an ongoing dialogue on a bilateral and multilateral basis with
foreign regulators and with registrants to address books and records
access issues and may consider appropriate measures where requested
to do so.
\12\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the
CEA.
\13\ See e.g., Sec. Sec. 23.203(b) and 23.606.
\14\ See supra note 10.
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III. Regulation of SDs and MSPs in the EU
On May 7, 2013, the EC and ESMA submitted a request that the
Commission assess the comparability of laws and regulations applicable
in the EU with the CEA and the Commission's regulations promulgated
thereunder. The applicant provided Commission staff with an updated
submission on August 6, 2013. On November 11, 2013, the application was
further supplemented with corrections and additional materials.
As represented to the Commission by the applicant, swap activities
in the EU member states is governed primarily by the European Market
Infrastructure Regulation (``EMIR'').\15\
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\15\ EMIR: Regulation (EU) No 648/2012 of the European
Parliament and of the Council of 4 July 2012 on OTC derivatives,
central counterparties and trade repositories. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF
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EMIR and the Regulatory Technical Standards (``RTS'') are
regulations with immediate, binding, and direct effect in all EU member
states (i.e., no transposition into domestic law required). EMIR
entered into force on August 16, 2012.
In addition, as represented to the Commission by the applicant,
swap activities in the EU are also governed by a number of regulatory
requirements other than EMIR.
Markets in Financial Instruments Directive (``MiFID)'':\16\ MiFID
is a directive and in accordance with the Treaty on the Functioning of
the European Union, all Member States of the EU are legally bound to
implement the provisions of MiFID by November 1, 2007, by transposing
them into their national laws. MiFID applies in particular to
investment firms, which comprise any legal person whose regular
occupation or business is the provision of one or more investment
services to third parties and/or the performance of one or more
investment activities on a professional basis. Investment services and
activities means any of the services and activities listed in Section A
of Annex I of MiFID relating to any of the instruments listed in
Section C of Annex I of MiFID. Section C of Annex 1 refers explicitly
to swaps as well as ``other derivative financial instruments''.
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\16\ Directive 2004/39/EC and the relevant implementing measures
(Directive 2006/73/EC and Regulation 1287/2006). http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0039:EN:NOT
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Capital Requirements Directive (``CRD''):\17\ CRD is also a
directive and in accordance with the Treaty on the Functioning of the
European Union, all Member States of the EU are legally bound to
implement the provisions of CRD by December 31, 2006, by transposing
them into their national laws.\18\
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\17\ Directive 2006/48/EC of the European Parliament and of the
Council of 14 June 2006 relating to the taking up and pursuit of the
business of credit institutions.http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=CONSLEG:2006L0048:20100330:EN:PDF.The current
version of CRD will soon be replaced by CRD IV. CRD IV entered into
force on June 28, 2013, and shall apply in most of its parts from
January 1, 2014.
\18\ Because the applicant's request and the Commission's
determinations herein are based on the comparability of EU
requirements applicable to entities subject to EMIR, MiFID, and CRD,
an SD or MSP that is not subject to the requirements of EMIR, MiFID,
or CRD upon which the Commission bases its determinations, may not
be able to rely on the Commission's comparability determinations
herein. The applicant has noted for the Commission that the concept
of an MSP is not explicitly mirrored in EU legislation and so it
cannot be confirmed that MSPs would always be covered by EMIR,
MiFID, or CRD. However, the applicant states that the definition of
an ``investment firm'' under MiFID is considerably wider than that
of an SD, and thus MSP's should, in most cases, be caught within the
definition of ``investment firm.''
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Due to the requirement that each EU Member State transpose MiFID
and CRD into its national law, the comparability determinations in this
notice are based on the representations of the applicant to the
Commission that (i) each Member State of the EU where an SD or MSP
would seek to rely on substituted compliance on the basis of the
comparability of the MiFID or CRD standards has completed the process
of transposing MiFID and CRD into its national law;\19\ (ii) such
national laws have transposed MiFID and CRD without change in any
aspect that is material for a comparability determination contained
herein; and (iii) such transposed law is in full force and effect as of
the time that any SD or MSP seeks to rely on a relevant comparability
determination contained herein. The Commission notes that to the extent
that any of the foregoing representations are incorrect, an affected
comparability determination will not be valid.
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\19\ See the Web site of the European Commission for
confirmation of the transposition of MiFID into the national law of
each Member State, available here: http://ec.europa.eu/internal_market/securities/docs/transposition/table_en.pdf. Note that the
issue of partial implementation in the Netherlands was resolved in
2008, http://ec.europa.eu/eu_law/eulaw/decisions/dec_08_05_06.htm. The Commission notes that the EC has certified to the
Commission that each Member State in which a registered SD or MSP is
organized has completed the transposition process (e.g., Ireland,
UK, France, Spain, and Germany).
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In addition to MiFID and CRD, the applicant noted that there are a
number of proposed laws and regulations that, when implemented, would
affect the regulation of SDs and MSPs in the EU.\20\
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\20\ The applicant provided information regarding MiFID II and
the Markets in Financial Instruments Regulation (``MiFIR''), http://ec.europa.eu/internal_market/securities/isd/mifid/index_en.htm,
stating that these two proposals are part of the legislative package
for the review of MiFID, and that the legislative process may be
concluded with the adoption of the final political agreement by the
end of 2013. The applicant further stated that an additional 18 to
24 months will be needed to adopt implementing measures, with the
overall package to be applied by the end of 2015.
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IV. Comparable and Comprehensiveness Standard
The Commission's comparability analysis will be based on a
comparison of specific foreign requirements against the specific
related CEA provisions and Commission regulations as categorized and
described in the Guidance. As explained in the Guidance, within the
framework of CEA section 2(i) and principles of international comity,
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as
a whole.\21\ In making its comparability determinations, the Commission
may include conditions that take into
[[Page 78926]]
account timing and other issues related to coordinating the
implementation of reform efforts across jurisdictions.\22\
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\21\ 78 FR 45343.
\22\ 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.\23\
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\23\ 78 FR 45343.
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In making a comparability determination, the Commission takes an
``outcome-based'' approach. An ``outcome-based'' approach means that
when evaluating whether a foreign jurisdiction's regulatory
requirements are comparable to, and as comprehensive as, the corollary
areas of the CEA and Commission regulations, the Commission ultimately
focuses on regulatory outcomes (i.e., the home jurisdiction's
requirements do not have to be identical).\24\ 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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\24\ 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 doing its comparability analysis the Commission may determine
that no comparability determination can be made \25\ 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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\25\ 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.\26\ 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.\27\
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\26\ 78 FR 45343.
\27\ 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 \28\ of SDs and MSPs \29\ in the
relevant jurisdictions.\30\ 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.\31\
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\28\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\29\ 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.
\30\ 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.
\31\ 78 FR 45345.
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The Guidance provided a detailed discussion of the Commission's
policy regarding the availability of substituted
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compliance \32\ for the Internal Business Conduct Requirements.\33\
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\32\ 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.
\33\ 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 the EU 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 the EU.
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 \34\ 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.'' \35\
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\34\ 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.
\35\ 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,\36\ provide
for notification upon the occurrence of specified events, memorialize
understandings related to on-site visits,\37\ and include protections
related to the use and confidentiality of non-public information shared
pursuant to the arrangement.
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\36\ 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'').
\37\ The Commission retains its examination authority, both
during the application process as well as upon and after
registration of an SD or MSP. See 78 FR 45342 (stating Commission
policy that ``eligible entities may comply with a substituted
compliance regime under certain circumstances, subject, however, to
the Commission's retention of its examination authority'') and 45344
n. 471 (stating that the ``Commission may, as it deems appropriate
and necessary, conduct an on-site examination of the applicant'').
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These arrangements will establish a roadmap for how authorities
will consult, cooperate, and share information. As with any such
arrangement, however, nothing in these arrangements will supersede
domestic laws or resolve potential conflicts of law, such as the
application of domestic secrecy or blocking laws to regulated entities.
VI. Comparability Determination and Analysis
The following section describes the requirements imposed by
specific sections of the CEA and the Commission's regulations for the
Internal Business Conduct Requirements that are the subject of this
comparability determination, and the Commission's regulatory objectives
with respect to such requirements. Immediately following a description
of the requirement(s) and regulatory objective(s) of the specific
Internal Business Conduct Requirements that the requestor submitted for
a comparability determination, the Commission provides a description of
the foreign jurisdiction's comparable laws, regulations, or rules and
whether such laws, regulations, or rules meet the applicable regulatory
objective.
The Commission's determinations in this regard and the discussion
in this section are intended to inform the public of the Commission's
views regarding whether the foreign jurisdiction's laws, regulations,
or rules may be comparable and comprehensive as those requirements in
the Dodd-Frank Act (and Commission regulations promulgated thereunder)
and therefore, may form the basis of substituted compliance. In turn,
the public (in the foreign jurisdiction, in the United States, and
elsewhere) retains its ability to present facts and circumstances that
would inform the determinations set forth in this notice.
As was stated in the Guidance, the Commission recognizes the
complex and dynamic nature of the global swap market and the need to
take an adaptable approach to cross-border issues, particularly as it
continues to work closely with foreign regulators to address potential
conflicts with respect to each country's respective regulatory regime.
In this regard, the Commission may review, modify, or expand the
determinations herein in light of comments received and future
developments.
A. Chief Compliance Officer (Sec. 3.3).
Commission Requirement: Implementing section 4s(k) of the CEA,
Commission regulation 3.3 generally sets forth the following
requirements for SDs and MSPs:
An SD or MSP must designate an individual as Chief
Compliance Officer (``CCO'');
The CCO must have the responsibility and authority to
develop the regulatory compliance policies and procedures of the SD or
MSP;
The CCO must report to the board of directors or the
senior officer of the SD or MSP;
Only the board of directors or a senior officer may remove
the CCO;
The CCO and the board of directors must meet at least once
per year;
The CCO must have the background and skills appropriate
for the responsibilities of the position;
The CCO must not be subject to disqualification from
registration under sections 8a(2) or (3) of the CEA;
Each SD and MSP must include a designation of a CCO in its
registration application;
[[Page 78928]]
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 chief executive officer 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as section 4s(k) of the CEA and
Commission regulation 3.3.
MiFID Articles 13(2), 13(3) and 18 set forth the general obligation
for investment firms (which would include SDs) to establish adequate
policies and procedures to ensure compliance with requirements and to
identify and properly manage conflicts of interests.
MiFID implementing measure (Commission Directive ``MiFID L2D'')
Articles 5, 6, 9, 21 to 23 clarify, along with ESMA guidelines, the
application of some aspects of the MiFID articles, to ensure common,
uniform, and consistent application of MiFID and the MiFID L2D across
the EU. The main principles are the following:
Investment firms must appoint a person as compliance
officer (``CO'') responsible for the compliance function (``CF'');
The CO must have sufficiently broad knowledge/experience
and high level of expertise to assume responsibility for the CF and
ensure it is effective;
Written reports must be sent to senior management (which
includes boards of directors) on a regular basis (at least annually as
well as on an ad-hoc basis when significant compliance matters are
discovered);
The CO must only be appointed and replaced by senior
management or supervisory function;
The CO, but also compliance staff, must have specific
knowledge, skills and expertise relevant to the tasks and to the
business of the firm;
Supervisors must ensure compliance with above requirements
in the authorization process of investment firms and during on-going
supervision;
CF, under the responsibility of the CO, must monitor and
assess the adequacy and effectiveness of measures and procedures to
ensure compliance with regulatory obligations and to address any
deficiencies, including the obligation to identify and manage conflicts
of interests and maintain effective conflicts of interest policies;
Written report to address, at least annually: The
description of implementation and effectiveness of the overall control
environment; the summary of major findings of the review of policies
and procedures; the summary of inspections and reviews carried out; the
risk identified; and the advice on any necessary remedial action;
The CF must be involved in all material non-routine
correspondence with supervisors;
The CF must be involved in all significant modifications
of the organization of the investment firm;
The CF must be independent;
Senior management retains ultimate responsibility to
ensure firms' compliance with obligations; and
Investment firms must arrange for all records necessary to
enable supervisors to monitor compliance with requirements.
Commission Determination: The Commission finds that the MiFID
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 MiFID are
comparable to and as comprehensive as Sec. 3.3, with the exception of
Sec. 3.3(f) concerning certifying and furnishing an annual compliance
report to the Commission.
Notwithstanding that the Commission has not determined that the
requirements of MiFID are comparable to and as comprehensive as Sec.
3.3(f), any SD or MSP to which both Sec. 3.3 and the MiFID 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 MiFID
standards specified above, subject to certifying and furnishing the
Commission with the annual report required under the MiFID 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.\38\ The Commission adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to implement the statute.\39\ The
[[Page 78929]]
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'').\40\ Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for SDs and MSPs with respect to their swaps
activities,\41\ 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.\42\
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\38\ 7 U.S.C. 6s(j).
\39\ 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).
\40\ See Customer Documentation Rule, 77 FR 21278. Also, SDs
must comply with Commission regulation 23.608, which prohibits SD
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.
\41\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\42\ 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 the EU 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 the
EU.
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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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as section 4s(j)(2) of the CEA and
Commission regulation 23.600.
Under MiFID Article 13(5) & MiFID L2D Article 5,
investment firms must have effective procedures for risk assessment,
effective control, and safeguard arrangements for information
processing systems, sound administrative and accounting procedures, and
internal control mechanisms.
Under MiFID L2D Article 6, investment firms (including
SDs) must, subject to a proportionality principle dependent on the size
and nature of a firm's business, establish and maintain an independent
risk management function that is responsible for the implementation of
risk management policies and procedures and that provides reports and
advice to senior management regarding risk management.
MiFID L2D Article 9: Senior management (which includes
boards of directors) must take responsibility for firms' compliance
with regulatory obligations including risk management.
MiFID L2D Article 9: Senior management must receive on a
frequent basis, and at least annually, written reports on risk
management issues, including any appropriate action taken in the event
of deficiencies;
MiFID L2D Article 7: Investment firms must identify the
risks relating to the firms' activities, processes and systems, and set
the level of risk tolerated by the firm in appropriate instances; must
adopt effective arrangements, processes, and mechanisms to manage the
risks relating to the firm's activities, processes and systems, in
light of the established level of risk tolerance; must monitor the
adequacy and effectiveness of its risk management policies and
procedures, the level of compliance with arrangements, processes and
mechanisms for risk management; and must monitor the adequacy and
effectiveness of measures taken to address any deficiencies. The risk
management strategy should address credit and counterparty risk;
residual risk; market risk; interest rate risk; operational risk;
liquidity risk; securitization risk; concentration risk; and risk of
excessive leverage.
Directive 2002/87/EC Article 9: In the case of financial
conglomerates, risk management processes must include
[[Page 78930]]
approval and periodical review of the strategies and policies by
governing bodies with respect to all the risks assumed; adequate
capital adequacy policies to anticipate impacts on risk profiles and
capital requirements; risk monitoring and controls at the level of the
conglomerates.
ESMA Guidelines on compliance function requirements (ESMA/
2012/388) specify that the assessment of compliance risk should involve
the compliance function, including in the case of new business lines or
new financial products. Identified risks should be reviewed on a
regular basis as well as ad-hoc when necessary to ensure that any
emerging risks are taken into consideration. A monitoring program
covering all areas of the investment firm's activities should ensure
that compliance risk is comprehensively monitored. Specific measures
ensure the effectiveness, the permanence and the independence of the
compliance function.
MiFID L2D Articles 21 to 23: Requirements on conflicts of
interests include the obligation to adopt measures to ensure the
appropriate level of independence to any person working in the firm.
This includes measures preventing or controlling the exchange of
information, separating the supervision of relevant persons, preventing
or limiting the possibility for a person to exercise inappropriate
influence over others. Furthermore, firms must ensure that performance
of multiple functions does not prevent persons from acting soundly,
honestly, and professionally.
MiFID Article 50: Supervisors can access documents for the
discharge of their supervisory duties.
CRD Annex V: Credit institutions and investment firms must
have in place risk management procedures that cover credit,
operational, counterparty, market, concentration, securitization,
liquidity and interest rate risk.
CRD Article 22: Credit institution's conformity with
regulation is the responsibility of the institution's management body
and is subject to ongoing supervisory review.\43\
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\43\ The current version of CRD will soon be replaced by CRD IV.
CRD IV entered into force on June 28, 2013, and shall apply in most
of its parts from January 1, 2014. The new reference is Article 74
and there will be additional detailed technical rules specifying the
arrangements, processes and mechanisms that must be adopted to
fulfill this requirement. Article 88 of Directive 2013/36/EU
specifies that '' the management body defines, oversees and is
accountable for the implementation of the governance arrangements
that ensure effective and prudent management of an institution.''
Article 76 specifies tasks assigned to the management body as
regards risk management.http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=;OJ:L:2013:176:0338:0436:EN:PDF.
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Commission Determination: The Commission finds that the MiFID,
ESMA, and CRD 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 MiFID, ESMA, and CRD standards specified above comprehensively
require SDs and MSPs to establish risk management programs containing
the following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the risk management program
requirements of MiFID, ESMA, and CRD, 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 MiFID, ESMA, and CRD are comparable to and as
comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.
23.600 and the MiFID, ESMA, and CRD 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 MiFID, ESMA, and CRD
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 designated contract market (``DCM''),
or a swap execution facility (``SEF'').\44\ 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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\44\ 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as section 4s(j)(1) of the CEA and
Commission regulation 23.601.
The applicant requests that the Commission look to the general risk
management function requirements outlined in subsection VI(B)(1) (Risk
Management Program) above and the general compliance function
requirements outlined in subsection VI(A) (Chief Compliance Officer)
above for comparable EU law and regulations that would require an SD or
MSP to monitor for and comply with applicable position limits. For
example:
MiFID L2D: A firm's compliance function, under the
responsibility of the compliance officer, must monitor and assess the
adequacy and effectiveness of measures and procedures to ensure
compliance with regulatory obligations and to address any deficiencies,
[[Page 78931]]
including obligations to identify and manage conflicts of interests and
maintain effective conflicts of interest policies; and
MiFID L2D Article 9: Senior management (which includes
boards of directors) must take responsibility for firms' compliance
with regulatory obligations including risk management.
The applicant states that the foregoing MiFID standards to monitor
the effectiveness of procedures to ensure compliance with regulatory
obligations includes regulatory obligations of an SD or MSP, that is
subject to such MiFID standards, to comply with applicable standards
under the CEA, Commission regulations, and position limits set by the
Commission, a DCM, or a SEF.
Commission Determination: The Commission finds that the MiFID
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 MiFID 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, which includes monitoring for
compliance with position limits set pursuant to applicable law and the
responsibility of senior management (including the board of directors)
for such compliance.
Based on the foregoing and the representations of the applicant,
the Commission hereby determines that the compliance monitoring
requirements of MiFID, as specified above, are comparable to and as
comprehensive as Sec. 23.601. For the avoidance of doubt, the
Commission notes that this determination may not be relied on to
relieve an SD or MSP from its obligation to strictly comply with any
applicable position limit established by the Commission, a DCM, or a
SEF.
3. Diligent Supervision (Sec. 23.602)
Commission Requirement: Commission regulation 23.602 implements
section 4s(h)(1)(B) of the CEA and requires each SD and MSP to
establish a system to diligently supervise all activities relating to
its business performed by its partners, members, officers, employees,
and agents. The system must be reasonably designed to achieve
compliance with the CEA and CFTC regulations. Commission regulation
23.602 requires that the supervisory system must specifically designate
qualified persons with authority to carry out the supervisory
responsibilities of the SD or MSP for all activities relating to its
business as an SD or MSP.
Regulatory Objective: The Commission's diligent supervision rule
seeks to ensure that SDs and MSPs strictly comply with the CEA and the
Commission's rules. To this end, through Sec. 23.602, the Commission
seeks to ensure that each SD and MSP not only establishes the necessary
policies and procedures that would lead to compliance with the CEA and
Commission regulations, but also establishes an effective system of
internal oversight and enforcement of such policies and procedures to
ensure that such policies and procedures are diligently followed.
Comparable EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as section 4s(h)(1)(B) of the CEA
and Commission regulation 23.602.
Under MiFID Article 13, MiFID L2D Articles 5, 6, 11, and 12, and
ESMA/2012/388, firms must establish policies and procedures sufficient
to ensure compliance of the firm, as well as its managers, employees
and agents, with all of their compliance obligations as well as rules
on personal transactions by these persons. The applicant represents to
the Commission that the compliance obligations of firms that are
subject to MiFID would cover those of an SD or MSP under the CEA and
the Commission's regulations.
Under MiFID Article 9, directors are subject to fit and proper
criteria. Under MiFID Article 13, firms must establish and maintain
decision-making processes and an organizational structure specifying
reporting lines and allocate functions and responsibilities; personnel
must have skills, knowledge and expertise necessary for the discharge
of their responsibilities; and internal control mechanisms must be
maintained to secure compliance as well as internal reporting and
communication of information at all relevant levels of the firm.
Commission Determination: The Commission finds that the MiFID
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 MiFID standards specified above,
EU 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 MiFID, 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as Commission regulation 23.603.
Under MiFID L2D Article 5(3), firms must establish,
implement, and maintain an adequate business continuity policy aimed at
insuring the preservation of essential data and functions, the
maintenance of services, and the timely recovery of such data and
functions and timely resumption of services.
Under MiFID Article 13(4), firms must take reasonable
steps to ensure continuity and regularity in the
[[Page 78932]]
performance of investment services and activities, including employing
appropriate systems, resources, and procedures to accomplish this
requirement.
Commission Determination: The Commission finds that the MiFID
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 MiFID 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 MiFID, as specified above, are
comparable to and as comprehensive as Sec. 23.603.
5. Conflicts of Interest (Sec. 23.605)
Commission Requirement: Section 4s(j)(5) of the CEA and Commission
regulation 23.605(c) generally require each SD or MSP to establish
structural and institutional safeguards to ensure that the activities
of any person within the firm relating to research or analysis of the
price or market for any commodity or swap are separated by appropriate
informational partitions within the firm from the review, pressure, or
oversight of persons whose involvement in pricing, trading, or clearing
activities might potentially bias their judgment or supervision.
In addition, section 4s(j)(5) of the CEA and Commission regulation
23.605(d)(1) generally prohibits an SD or MSP from directly or
indirectly interfering with or attempting to influence the decision of
any clearing unit of any affiliated clearing member of a DCO to provide
clearing services and activities to a particular customer, including:
Whether to offer clearing services to a particular
customer;
Whether to accept a particular customer for clearing
derivatives;
Whether to submit a customer's transaction to a particular
DCO;
Whether to set or adjust risk tolerance levels for a
particular customer; or
Whether to set a customer's fees based on criteria other
than those generally available and applicable to other customers.
Commission regulation 23.605(d)(2) generally requires each SD or
MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
any affiliated clearing member of a DCO to reasonably ensure compliance
with the Act and the prohibitions set forth in Sec. 23.605(d)(1)
outlined above.
The Commission observes that Sec. 23.605(d) works in tandem with
Commission regulation 1.71, which requires futures commission merchants
(``FCMs'') that are clearing members of a DCO and affiliated with an SD
or MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
the FCM to reasonably ensure compliance with the Act and the
prohibitions set forth in Sec. 1.71(d)(1), which are the same as the
prohibitions set forth in Sec. 23.605(d)(1) outlined above.
Finally, Sec. 23.605(e) requires that each SD or MSP have policies
and procedures that mandate the disclosure to counterparties of
material incentives or conflicts of interest regarding the decision of
a counterparty to execute a derivative on a SEF 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, 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as Commission regulation 23.605(c).
MiFID Articles 13(3) and 18 require that SDs maintain and
operate effective organizational and administrative arrangements with a
view to preventing conflicts of interest from adversely affecting the
interests of its clients.
Under MiFID L2D Articles 21 to 23, SDs are obligated to
adopt measures to ensure the appropriate level of independence of any
person working in the firm. This includes measures preventing or
controlling the exchange of information, separating the supervision of
relevant persons, and preventing or limiting the possibility for a
person to exercise inappropriate influence over others. Furthermore,
firms must ensure that performance of multiple functions does not
prevent persons from acting soundly, honestly, and professionally.
Under MiFID L2D Articles 24 to 25, SDs must maintain and
operate effective organizational and administrative arrangements and
take all reasonable steps designed to prevent conflicts of interest
from adversely affecting the interests of its clients.
Under MiFID Articles 18 and MiFID L2D Article 22, SDs must
develop a written conflicts of interest policy appropriate to the size
and organization of the firm that identifies circumstances that might
give rise to conflicts entailing a material risk of damage to the
interests of one or more clients and specify procedures to be followed
to manage such conflicts. The general conflicts policy has to be
disclosed to clients. Disclosure is also needed when organizational
arrangements to manage conflicts are not sufficient to ensure, with
reasonable confidence, that the risk of damage to client interests will
be prevented.
Under MiFID L2D Article 25, an SD that prepares or
disseminates research recommendations must take reasonable care to
ensure that research recommendations are fairly presented and must
disclose its interests or indicate conflicts of interest concerning
relevant investments.
Under MiFID L2D Article 25, in addition to the conflicts
of interest requirements set out above, steps must be taken to ensure
that restrictions are in place to avoid conflicts with respect to
research personnel (e.g., financial analysts), including restrictions
on personal account dealing and inducements.
Under MiFID L2D Article 24, research recommendations must
also include a disclosure of interests or indicate conflicts of
interests concerning the relevant investments.
The applicant states that the foregoing MiFID standards would
require any SD or MSP that is subject to such MiFID standards to
resolve or mitigate conflicts of interests in the provision of clearing
services by a clearing member that is linked to that SD or MSP, or
conflicts of interests in the execution of a derivative
[[Page 78933]]
by a client on a particular execution venue, including an eligible SEF
or DCM, or conflicts of interests in the clearing of a derivative
through a CCP, including an eligible DCO, through measures including
appropriate information firewalls and disclosures.
Commission Determination: The Commission finds that the MiFID
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 MiFID standards specified
above do not require with specificity that access to and the provision
of clearing services provided by an affiliate of an SD or MSP not be
improperly influenced by the interests of an SD's or MSP's trading
business, such general requirements would require prevention and
remediation of such improper influence when recognized or discovered.
Thus such standards would ensure open access to clearing.
Finally, although not as specific as the requirements of Sec.
23.605(e) (Undue influence on counterparties), the Commission finds
that the general disclosure requirements of the MiFID 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 applicant,
the Commission hereby determines that the requirements found in the
MiFID 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as Commission regulation 23.606.
Under MiFID Article 13(6) & 25(2) & 50, investment firms are
required to maintain adequate and orderly records of their business and
internal organization. Firms must maintain at the disposal of the
regulator, for at least five years, the relevant data relating to their
transactions in financial instruments. Among other things, supervisors
have the authority to access any document in any form whatsoever and to
receive a copy of it, to demand information from any person, and to
carry out on-site inspections.
Commission Determination: The Commission finds that the MiFID
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 requirements of MiFID with
respect to the availability of information for inspection and
disclosure, as specified above, are comparable to, and as comprehensive
as, Sec. 23.606, with the exception of Sec. 23.606(a)(2) concerning
the requirement that an SD or MSP make information required by Sec.
23.606(a)(1) available promptly upon request to Commission staff and
the staff of an applicable prudential regulator. The applicant has not
submitted any provision of law or regulations applicable in the EU 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 MiFID are comparable to and as comprehensive as Sec.
23.606(a)(2), any SD or MSP to which both Sec. 23.606 and the MiFID
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 MiFID 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;
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;
[[Page 78934]]
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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, and
comparable to and as comprehensive as Commission regulation 23.609.
Under MiFID Article 13(5) & MiFID L2D Article 5,
investment firms must have effective procedures for risk assessment,
effective control, and safeguard arrangements for information
processing systems, sound administrative and accounting procedures, and
internal control mechanisms.
Under MiFID L2D Article 6, investment firms must, subject
to a proportionality principle dependent on the size and nature of a
firm's business, establish and maintain an independent risk management
function that is responsible for the implementation of risk management
policies and procedures and that provides reports and advice to senior
management regarding risk management.
MiFID L2D Article 9: Senior management (which includes
boards of directors) must take responsibility for firms' compliance
with regulatory obligations including risk management.
MiFID L2D Article 9: Senior management must receive on a
frequent basis, and at least annually, written reports on risk
management issues, including any appropriate action taken in the event
of deficiencies;
MiFID L2D Article 7: Investment firms must identify the
risks relating to the firms' activities, processes and systems, and set
the level of risk tolerated by the firm in appropriate instances; must
adopt effective arrangements, processes, and mechanisms to manage the
risks relating to the firm's activities, processes and systems, in
light of the established level of risk tolerance; must monitor the
adequacy and effectiveness of its risk management policies and
procedures, the level of compliance with arrangements, processes and
mechanisms for risk management; and must monitor the adequacy and
effectiveness of measures taken to address any deficiencies. The risk
management strategy should address credit and counterparty risk;
residual risk; market risk; interest rate risk; operational risk;
liquidity risk; securitization risk; concentration risk; and risk of
excessive leverage.
Directive 2002/87/EC Article 9: In the case of financial
conglomerates, risk management processes must include approval and
periodical review of the strategies and policies by governing bodies
with respect to all the risks assumed; adequate capital adequacy
policies to anticipate impacts on risk profiles and capital
requirements; risk monitoring and controls at the level of the
conglomerates.
ESMA Guidelines on compliance function requirements (ESMA/
2012/388) specify that the assessment of compliance risk should involve
the compliance function, including in the case of new business lines or
new financial products. Identified risks should be reviewed on a
regular basis as well as ad-hoc when necessary to ensure that any
emerging risks are taken into consideration. A monitoring program
covering all areas of the investment firm's activities should ensure
that compliance risk is comprehensively monitored. Specific measures
ensure the effectiveness, the permanence and the independence of the
compliance function.
MiFID L2D Articles 21 to 23: Requirements on conflicts of
interests include the obligation to adopt measures to ensure the
appropriate level of independence to any person working in the firm.
This includes measures preventing or controlling the exchange of
information, separating the supervision of relevant persons, preventing
or limiting the possibility for a person to exercise inappropriate
influence over others. Furthermore, firms must ensure that performance
of multiple functions does not prevent persons from acting soundly,
honestly, and professionally.
MiFID Article 50: Supervisors can access documents for the
discharge of their supervisory duties.
CRD Annex V: Credit institutions and investment firms must
have in place risk management procedures that cover credit,
operational, counterparty, market, concentration, securitization,
liquidity and interest rate risk.
CRD Article 22: Credit institution's conformity with
regulation is the responsibility of the institution's management body
and is subject to ongoing supervisory review.\45\
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\45\ The current version of CRD will soon be replaced by CRD IV.
CRD IV entered into force on June 28, 2013, and shall apply in most
of its parts from January 1, 2014. The new reference is Article 74
and there will be additional detailed technical rules specifying the
arrangements, processes and mechanisms that must be adopted to
fulfill this requirement. Article 88 of Directive 2013/36/EU
specifies that '' the management body defines, oversees and is
accountable for the implementation of the governance arrangements
that ensure effective and prudent management of an institution.''
Article 76 specifies tasks assigned to the management body as
regards risk management. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0338:0436:EN:PDF.
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Specifically, the applicants state that any SD or MSP subject to
MiFID and CRD that is a clearing member of a CCP, including an eligible
DCO, would be required under the foregoing EU law and regulations 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;
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.
Commission Determination: The Commission finds that the MiFID,
ESMA, and CRD 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 MiFID, ESMA, and CRD 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.
[[Page 78935]]
Nevertheless, the Commission finds that the general requirements under
the MiFID, ESMA, and CRD standards specified above, implemented in the
context of clearing member risk management and pursuant to the
statements of the applicants, meet the Commission's regulatory
objective specified above.
Based on the foregoing and the statements of the applicants above,
the Commission hereby determines that the clearing member risk
management requirements of the MiFID, ESMA, and CRD standards 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 two years of the five year
retention period (consistent with Sec. 1.31).
The Commission notes that the comparability determination below
with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data
recordkeeping generally and swap data recordkeeping relating to
complaints and marketing and sales materials in accordance with Sec.
23.201(b)(3) and (4).\46\
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\46\ 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 EU Law and Regulations: The applicant has represented to
the Commission that the following provisions of law and regulations
applicable in the EU are in full force and effect in the EU, 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.
MiFID Article 13(6): Firms are required to maintain
records of all services and transactions undertaken by the firm that
are sufficient to enable regulatory authorities to monitor compliance
with MiFID and to ascertain whether the firm has complied with all
obligations with respect to clients or potential clients.
MiFID L2R Article 7: Firms are required to keep detailed
records in relation to every client order and decision to deal, and
every client order executed or transmitted.
MiFID L2D Article 51: All required records must be
retained in a medium available for future reference by the regulator,
and in a form/manner that:
o Allows the regulator to access them readily and reconstitute each
key stage of processing each transaction;
o Allows corrections or other amendments, and the contents of the
records prior to such corrections or amendments, to be easily
ascertained; and
o Ensures that records are not manipulated or altered.
MiFID Article 25(2): Firms must keep at the disposal of
the regulator, for at least five years, the relevant data relating to
all transactions in financial instruments which they have carried out,
whether on their own account or on behalf of a client.
CESR (now ESMA) developed recommendations on the list of
minimum records to be kept by firms in accordance with MiFID L2D and
the point in time at which the record should be created. It includes
marketing communications, client information, internal procedures,
complaints records, complaints handling, etc.
Commission Determination: The Commission finds that the MiFID and
ESMA 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 MiFID and ESMA 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 MiFID and ESMA 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 MiFID and
ESMA 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 the EU 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
[[Page 78936]]
requirements of MiFID and ESMA are comparable to and as comprehensive
as Sec. 23.203(b)(2), any SD or MSP to which both Sec. 23.203 and the
MiFID and ESMA 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 MiFID and ESMA 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 the European Union:
Certain Entity-Level Requirements
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative. Commissioner O'Malia voted in the
negative.
Appendix 2--Joint Statement of Chairman Gary Gensler and Commissioners
Bart Chilton and Mark Wetjen
We support the Commission's approval of broad comparability
determinations that will be used for substituted compliance
purposes. For each of the six jurisdictions that has registered swap
dealers, we carefully reviewed each regulatory provision of the
foreign jurisdictions submitted to us and compared the provision's
intended outcome to the Commission's own regulatory objectives. The
resulting comparability determinations for entity-level requirements
permit non-U.S. swap dealers to comply with regulations in their
home jurisdiction as a substitute for compliance with the relevant
Commission regulations.
These determinations reflect the Commission's commitment to
coordinating our efforts to bring transparency to the swaps market
and reduce its risks to the public. The comparability findings for
the entity-level requirements are a testament to the comparability
of these regulatory systems as we work together in building a strong
international regulatory framework.
In addition, we are pleased that the Commission was able to find
comparability with respect to swap-specific transaction-level
requirements in the European Union and Japan.
The Commission attained this benchmark by working cooperatively
with authorities in Australia, Canada, the European Union, Hong
Kong, Japan, and Switzerland to reach mutual agreement. The
Commission looks forward to continuing to collaborate with both
foreign authorities and market participants to build on this
progress in the months and years ahead.
Appendix 3--Statement of Dissent by Commissioner Scott D. O'Malia
I respectfully dissent from the Commodity Futures Trading
Commission's (``Commission'') approval of the Notices of
Comparability Determinations for Certain Requirements under the laws
of Australia, Canada, the European Union, Hong Kong, Japan, and
Switzerland (collectively, ``Notices''). While I support the narrow
comparability determinations that the Commission has made, moving
forward, the Commission must collaborate with foreign regulators to
harmonize our respective regimes consistent with the G-20 reforms.
However, I cannot support the Notices because they: (1) Are
based on the legally unsound cross-border guidance (``Guidance'');
\1\ (2) are the result of a flawed substituted compliance process;
and (3) fail to provide a clear path moving forward. If the
Commission's objective for substituted compliance is to develop a
narrow rule-by-rule approach that leaves unanswered major regulatory
gaps between our regulatory framework and foreign jurisdictions,
then I believe that the Commission has successfully achieved its
goal today.
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\1\ Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013).
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Determinations Based on Legally Unsound Guidance
As I previously stated in my dissent, the Guidance fails to
articulate a valid statutory foundation for its overbroad scope and
inconsistently applies the statute to different activities.\2\
Section 2(i) of the Commodity Exchange Act (``CEA'') states that the
Commission does not have jurisdiction over foreign activities unless
``those activities have a direct and significant connection with
activities in, or effect on, commerce of the United States * * *''
\3\ However, the Commission never properly articulated how and when
this limiting standard on the Commission's extraterritorial reach is
met, which would trigger the application of Title VII of the Dodd-
Frank Act \4\ and any Commission regulations promulgated thereunder
to swap activities that are outside of the United States. Given this
statutorily unsound interpretation of the Commission's
extraterritorial authority, the Commission often applies CEA section
2(i) inconsistently and arbitrarily to foreign activities.
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\2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
\3\ CEA section 2(j); 7 U.S.C. 2(j).
\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
[[Page 78937]]
legal framework to be comparable to the U.S. framework. While the
Commission has declined to provide even a partial comparability
determination, at least in this instance the Commission has provided
a reason: the differences in the scope of entities and products
subject to the clearing requirement.\8\ Such treatment creates
uncertainty and is contrary to increased global harmonization
efforts.
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\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
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Third, in the Commission's rush to meet the artificial deadline
of December 21, 2013, as established in the Exemptive Order
Regarding Compliance with Certain Swap Regulations (``Exemptive
Order''),\9\ the Commission failed to complete an important piece of
the cross-border regime, namely, supervisory memoranda of
understanding (``MOUs'') between the Commission and fellow
regulators.
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\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
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I have previously stated that these MOUs, if done right, can be
a key part of the global harmonization effort because they provide
mutually agreed-upon solutions for differences in regulatory
regimes.\10\ Accordingly, I stated that the Commission should be
able to review MOUs alongside the respective comparability
determinations and vote on them at the same time. Without these
MOUs, our fellow regulators are left wondering whether and how any
differences, such as direct access to books and records, will be
resolved.
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\10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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Finally, as I have consistently maintained, the substituted
compliance process should allow other regulatory bodies to engage
with the full Commission.\11\ While I am pleased that the Notices
are being voted on by the Commission, the full Commission only
gained access to the comment letters from foreign regulators on the
Commission's comparability determination draft proposals a few days
ago. This is hardly a transparent process.
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\11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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Unclear Path Forward
Looking forward to next steps, the Commission must provide
answers to several outstanding questions regarding these
comparability determinations. In doing so, the Commission must
collaborate with foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the timing and outcome
of the MOUs. Critical questions regarding information sharing,
cooperation, supervision, and enforcement will remain unanswered
until the Commission and our fellow regulators execute these MOUs.
Second, the Commission has issued time-limited no-action relief
for the swap data repository reporting requirements. These
comparability determinations will be done as separate notices.
However, the timing and process for these determinations remain
uncertain.
Third, the Commission has failed to provide clarity on the
process for addressing the comparability determinations that it
declined to undertake at this time. The Notices only state that the
Commission may address these requests in a separate notice at a
later date given further developments in the law and regulations of
other jurisdictions. To promote certainty in the financial markets,
the Commission must provide a clear path forward for market
participants and foreign regulators.
The following steps would be a better approach: (1) The
Commission should extend the Exemptive Order to allow foreign
regulators to further implement their regulatory regimes and
coordinate with them to implement a harmonized substituted
compliance process; (2) the Commission should implement a flexible,
outcomes-based approach to the substituted compliance process and
apply it similarly to all jurisdictions; and (3) the Commission
should work closely with our fellow regulators to expeditiously
implement MOUs that resolve regulatory differences and address
regulatory oversight issues.
Conclusion
While I support the narrow comparability determinations that the
Commission has made, it was my hope that the Commission would work
with foreign regulators to implement a substituted compliance
process that would increase the global harmonization effort. I am
disappointed that the Commission has failed to implement such a
process.
I do believe that in the longer term, the swaps regulations of
the major jurisdictions will converge. At this time, however, the
Commission's comparability determinations have done little to
alleviate the burden of regulatory uncertainty and duplicative
compliance with both U.S. and foreign regulations.
The G-20 process delineated and put in place the swaps market
reforms in G-20 member nations. It is then no surprise that the
Commission must learn to coordinate with foreign regulators to
minimize confusion and disruption in bringing much needed clarity to
the swaps market. For all these shortcomings, I respectfully dissent
from the Commission's approval of the Notices.
[FR Doc. 2013-30980 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 27, 2013