Federal Register, Volume 78 Issue 1 (Wednesday, January 2, 2013)[Federal Register Volume 78, Number 1 (Wednesday, January 2, 2013)]
[Rules and Regulations]
[Pages 17-22]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30885]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AC96
Business Conduct and Documentation Requirements for Swap Dealers
and Major Swap Participants; Extension of Compliance Date
AGENCY: Commodity Futures Trading Commission.
ACTION: Extension of compliance dates; request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
changing the compliance dates for certain rules in the Commission's
regulations governing business conduct standards for swap dealers
(``SDs'') and major swap participants (``MSPs''), and certain rules
requiring SDs and MSPs to engage in portfolio reconciliation and to
have certain documentation with their swap counterparties. The
Commission is extending the compliance date for certain rules by four
months, and up to six months for others. The extended compliance dates
are intended to provide SDs and MSPs with additional time to achieve
compliance with certain regulations.
DATES: Compliance Dates: The compliance date for the regulations at 17
CFR 23.201(b)(3)(ii), 23.402; 23.410(c); 23.430; 23.431(a) through (c);
23.432; 23.434(a)(2), (b), and (c); 23.440; 23.450, and 23.505 is
extended until May 1, 2013; the compliance date for the regulations at
17 CFR 23.502 and 23.504 is extended until July 1, 2013.
Comment Date: The Commission will, however, consider any comments
received on or before February 1, 2013 and may revise the modified
compliance dates, if warranted.
ADDRESSES: You may submit comments, identified by RIN number 3038-AC96
and Business Conduct and Documentation Requirements for Swap Dealers
and Major Swap Participants, by any of the following methods:
Agency Web site, www.cftc.gov, via its Comments Online
process at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting
comments through the Web site.
Mail: Secretary of the Commission, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that may be exempt from disclosure under the Freedom of Information
Act, a petition for confidential treatment of the exempt information
may be submitted according to the established procedures in Sec. 145.9
of the Commission's regulation, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Frank Fisanich, Chief Counsel, 202-
418-5949, [email protected], Jason A. Shafer, Attorney-Advisor, 202-
418-5097, [email protected], Division of Swap Dealer and Intermediary
Oversight, or Sayee Srinivasan, Research Analyst, 202-418-5309,
[email protected], Office of the Chief Economist, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\
Title VII of
[[Page 18]]
the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'') \3\
to establish a comprehensive regulatory framework to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of SDs and MSPs; (2) imposing
clearing and trade execution requirements on standardized derivative
products; (3) creating rigorous recordkeeping and real-time reporting
regimes; and (4) enhancing the Commission's rulemaking and enforcement
authorities with respect to all registered entities and intermediaries
subject to the Commission's oversight.
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq.
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In the two years since its enactment, the Commission has finalized
41 rules to implement Title VII of the Dodd-Frank Act. Earlier this
year, the Commission, jointly with the Securities and Exchange
Commission, finalized the main foundational elements of the Dodd-Frank
regulatory framework by adopting regulations further defining the terms
``swap dealer'' and ``major swap participant,'' \4\ as well as the
regulations further defining the term ``swap.'' \5\ The Commission also
adopted regulations setting forth a comprehensive scheme for the
registration process for SDs and MSPs.\6\ Other finalized rules include
various substantive requirements applicable to SDs and MSPs under CEA
section 4s,\7\ which address reporting and recordkeeping,\8\ business
conduct standards,\9\ documentation standards,\10\ duties,\11\ and
designation of chief compliance officers.\12\
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\4\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant,'' and ``Eligible Contract Participant,'' 77 FR
30596 (May 23, 2012).
\5\ See Further Definition of ``Swap,'' ``Security-Based Swap,''
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based
Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).
\6\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613 (Jan. 19, 2012).
\7\ 7 U.S.C 6s.
\8\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128 (Apr. 3, 2012).
\9\ See Business Conduct Standards for Swap Dealers and Major
Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012).
\10\ See Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation
Requirements for Swap Dealers and Major Swap Participants, 77 FR
55904 (Sept. 11, 2012).
\11\ See supra note 8.
\12\ Id.
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Among other things, upon registration, an SD or MSP must submit
documentation demonstrating its compliance with any Commission
regulation issued pursuant to section 4s(e), (f), (g), (h), (i), (j),
(k), or (l) of the CEA that is applicable to it and for which the
compliance date has passed. Such Commission regulations include
business conduct standards under subpart H of part 23 of the
Commission's regulation promulgated under section 4s(h) of the CEA,
documentation standards under subpart I of part 23 of the Commission's
regulations promulgated under section 4s(i) of the CEA, and reporting
and recordkeeping requirements under subpart F of part 23 of the
Commission's regulations promulgated under section 4s(f) of the CEA.
With respect to business conduct standards with counterparties,
section 4s(h) of the CEA provides the Commission with both mandatory
and discretionary rulemaking authority to impose business conduct
standards on SDs and MSPs in their dealings with counterparties,
including Special Entities, and section 4s(i) of the CEA establishes
swap documentation standards for SDs and MSPs.
Pursuant to section 4s(h) of the CEA, on December 22, 2010, the
Commission published in the Federal Register proposed subpart H of part
23 of the Commission's regulations.\13\ There was a 60-day period for
the public to comment on the proposing release. On May 4, 2011, the
Commission published in the Federal Register a notice to re-open the
public comment period for an additional 30 days, which ended on June 3,
2011.\14\ On February 17, 2012, the Commission adopted as final rules
subpart H to part 23, which set forth business conduct standards for
swap dealers and major swap participants in their dealings with
counterparties.\15\ A number of the Commission's rules under subpart H
of part 23 require SDs and MSPs to provide or obtain specific
information from their counterparties prior to entering into (or in
some cases, offering to enter into) a swap with such
counterparties.\16\ Subpart H of part 23 permits SDs and MSPs to rely
on written representations from their counterparties and standardized
disclosures, each of which may require amendments or supplements to an
SD's or MSP's relationship documentation with such counterparties prior
to entering into a swap with such counterparties.\17\
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\13\ Business Conduct Standards for Swap Dealers and Major Swap
Participants With Counterparties, 75 FR 80638 (proposed Dec. 22,
2010).
\14\ Reopening and Extension of Comment Periods for Rulemakings
Implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 75 FR 25274 (May 4, 2011).
\15\ See supra note 9.
\16\ See, e.g., Sec. 23.402(b) (requiring SDs to obtain
essential facts about their counterparty prior to execution of a
transaction); Sec. 23.430(a) (requiring SDs and MSPs to verify that
a counterparty meets the eligibility standards for an eligible
contract participant before offering to enter into or entering into
a swap with such counterparty); and Sec. 23.431(a) (requiring SDs
and MSPs to provide material information concerning a swap to its
counterparty at a reasonably sufficient time prior to entering into
the swap).
\17\ See Sec. 23.402(d), (e), and (f).
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SDs and MSPs are required to comply with the requirements found in
subpart H to part 23 by January 1, 2013.\18\
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\18\ The external business conduct standards final rule required
that swap dealers and major swap participants must comply with the
rules in subpart H of part 23 on the later of 180 days after the
effective date of these rules or the date no which swap dealers or
major swap participants are required to apply for registration
pursuant to Commission rule 3.10. However, in a subsequent
rulemaking, the compliance date for Sec. Sec. 23.402; 23.410(c);
23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c); 23.440;
and 23.450 was deferred until January 1, 2013. See Confirmation,
Portfolio Reconciliation, Portfolio Compression, and Swap Trading
Relationship Documentation Requirements for Swap Dealers and Major
Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012).
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Section 4s(i)(1) of the CEA requires SDs and MSPs to ``conform with
such standards as may be prescribed by the Commission by rule or
regulation that relate to timely and accurate confirmation, processing,
netting, documentation, and valuation of all swaps.'' Under section
4s(i)(2), the Commission is required to adopt rules ``governing
documentation standards for swap dealers and major swap participants.''
The Commission proposed the regulations on swap confirmation, portfolio
reconciliation, and portfolio compression on December 28, 2010.\19\ In
a separate rulemaking, on February 8, 2011, the Commission proposed
regulations governing swap documentation, including what documentation
would be required to be kept by the SD or MSP when it transacts with a
counterparty that exercises its rights under the end-user clearing
exception from the mandatory clearing requirement under section 2(h)(7)
of the CEA.\20\ There was a 60-day comment period for both proposals.
On September 11, 2012, the Commission issued final rules governing swap
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confirmation (Sec. 23.501), portfolio reconciliation (Sec. 23.502),
portfolio compression (Sec. 23.503), and swap trading relationship
documentation (Sec. 23.504), and end user exception documentation
(Sec. 23.505).\21\ Among other things, Sec. 23.502 requires SDs and
MSPs to agree in writing with each counterparty on the terms of
conducting portfolio reconciliation.\22\ Section 23.504 requires that
an SD or MSP execute swap trading relationship documentation meeting
the requirements of the rule with a counterparty prior to or
contemporaneously with entering into a swap transaction with such
counterparty.\23\ Section 23.505 requires, with an exception, that SDs
and MSPs, when transacting with market participants claiming the
exception to clearing under 2(h)(7) of the CEA, obtain documentation
sufficient to provide a reasonable basis on which to believe that its
counterparty meets the statutory conditions required for the
exception.\24\
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\19\ Confirmation, Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap Dealers and Major Swap
Participants, 75 FR 8519 (proposed Dec. 28, 2010).
\20\ Swap Trading Relationship Documentation for Swap Dealers
and Major Swap Participants, 76 FR 6715 (proposed Feb. 8, 2011).
\21\ See supra note 10.
\22\ See Sec. 23.502(a)(1).
\23\ See Sec. 23.504(a)(2).
\24\ See Sec. 23.505(a).
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With regard to the portfolio reconciliation requirements found in
Sec. 23.502, the Commission staggered the compliance dates by
providing extended compliance dates for those SDs and MSPs that have
not been previously regulated by a prudential regulator, and thus are
least likely to have the infrastructure in place to begin regular
reconciliation with their counterparties.\25\ SDs and MSPs that have
been previously regulated by a prudential regulator need not comply
with Sec. 23.502 until December 11, 2012. SDs and MSPs that have not
been previously regulated need not comply with Sec. 23.502 until March
11, 2013. The earliest that an SD or MSP would be required to comply
with the swap trading relationship documentation requirements found in
Sec. 23.504 is January 1, 2013.\26\ Additionally, the earliest that an
SD or MSP would be required to comply with the documentation
requirements found in Sec. 23.505 is December 31, 2012.
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\25\ 77 FR 55904, 55941-42 (Sept. 11, 2012).
\26\ The current compliance schedule associated with Sec.
23.504 is as follows: With respect to swap transactions with SDs,
security-based swap dealers, MSPs, major security-based swap
participants, or any private fund, as defined in section 202(a) of
the Investment Advisers Act of 1940, that is not a third-party
subaccount (defined below) and that executes 200 or more swaps per
month based on a monthly average over the 12 months preceding this
adopting release (active funds), SDs and MSPs must comply with Sec.
23.504 by January 1, 2013. With respect to swap transactions with
commodity pools; private funds as defined in section 202(a) of the
Investment Advisers Act of 1940 other than active funds; or persons
predominantly engaged in activities that are in the business of
banking, or in activities that are financial in nature as defined in
section 4(k) of the Bank Holding Company Act of 1956, provided that
the entity is not an account that is managed by an investment
manager that (1) is independent of and unaffiliated with the
account's beneficial owner or sponsor, and (2) is responsible for
the documentation necessary for the account's beneficial owner to
document swaps as required under section 4s(i) of the CEA (third-
party subaccounts), SDs and MSPs must comply with Sec. 23.504 by
April 1, 2013. With respect to swap transactions with any other
counterparty, SDs and MSPs must comply with Sec. 23.504 by July 1,
2013. 77 FR 55904, 55940 (Sept. 11, 2012). However, in a final rule
recently adopted by the Commission, the compliance schedules for
active funds was amended by requiring private funds to calculate the
number of swaps they enter as a monthly average over the past 12
months preceding November 1, 2012.
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Section 4s(f)(1) of the CEA requires SDs and MSPs to ``make such
reports as are required by the Commission by rule or regulation
regarding the transactions and positions and financial condition of the
registered swap dealer or major swap participant.'' Under section
4s(f)(1)(B)(i) and (ii) of the CEA, the Commission was authorized to
prescribe the books and records requirements of ``all activities
related to the business of swap dealers and major swap participants.''
On December 9, 2010, the Commission proposed Sec. 23.201, which set
forth the records SDs and MSPs must maintain.\27\ After a 60-day period
for the public to comment on the proposal, the Commission published a
Federal Register notice that re-opened the comment period for an
additional 30 days ending on June 3, 2011.\28\ On April 3, 2012, the
Commission adopted final rules governing, among other requirements,
general records requirements for SDs and MSPs (Sec. 23.201).\29\ The
earliest that an SD or MSP would be required to comply with Sec.
23.201 is December 31, 2012.\30\
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\27\ Reporting, Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap Participants, 75 FR
76666 (proposed Dec. 9, 2010).
\28\ See supra note 14.
\29\ See supra note 8.
\30\ See 77 FR 20128, 20165 (Apr. 3, 2012). Sec. 23.201(a)(1)
is currently the subject of a staff no-action letter that was
published on October 26, 2012, which provided no-action relief from
compliance with Sec. 23.201(a)(1) until March 31, 2013. See CFTC
Letter No. 12-29, Request for No-Action Relief for Swap Dealers and
Major Swap Participants from Compliance with Certain Internal
Business Conduct Requirements Found in subpart F to part 23 of the
CFTC's Regulations (http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-29.pdf).
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II. Compliance Date Extension for Certain Business Conduct and
Documentation Requirements for Swap Dealers and Major Swap Participants
Subsequent to the issuance of the above-identified rules, the
Commission received requests from a variety of market participants for
additional time to achieve compliance with the documentation
requirements of such rules.\31\ More specifically, market participants
requested that the Commission extend the compliance dates for the
provisions of subpart H of part 23 that involve documentation,\32\ the
compliance dates for the provisions of Sec. 23.502 (Portfolio
Reconciliation), which has a significant documentation component, and
the compliance dates for the provisions of Sec. 23.504 (Swap Trading
Relationship Documentation),\33\ which also has a significant
documentation component, to facilitate an orderly transition to the new
regulatory regime.
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\31\ See, e.g., Letter dated Dec. 4, 2012 from the International
Swaps and Derivatives Association (``ISDA'') requesting exercise of
Commission authority regarding part 23 Compliance Rules, Letter
dated Nov. 27, 2012 (revised Dec. 6, 2012) from ISDA requesting
exercise of Commission authority regarding part 23 compliance rules
(``ISDA Dec. 6 Letter''), and Letter dated Nov. 20, 2012 from ISDA
requesting no-action relief from compliance with Sec. Sec. 23.502
and 23.504.
\32\ The current compliance date for Sec. Sec. 23.402;
23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and
(c); 23.440; and 23.450 is January 1, 2013. See Confirmation,
Portfolio Reconciliation, Portfolio Compression, and Swap Trading
Relationship Documentation Requirements for Swap Dealers and Major
Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012); see also
Business Conduct Standards for Swap Dealers and Major Swap
Participants with Counterparties, 77 FR 9734, 9823-27 (Feb. 17,
2012) (promulgating the relevant provisions of subpart H of part 23
of the Commission's Regulations).
\33\ 77 FR at 55940.
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In their letter, ISDA states that in order to facilitate an
efficient transition to compliance, it has sponsored a number of
documentation protocols for its members and other market participants,
where amendments or supplements required by the Commission's
regulations are effected through delivery of an adherence letter by
each party to the underlying document to be amended (i.e., a master
agreement), and provides for additional bilateral delivery requirements
in order to effectuate the addition of supplemental terms.\34\
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\34\ See http://www2.isda.org/dodd-frank-documentation-initiative/.
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ISDA published its first Dodd-Frank protocol in August 2012,
focused on facilitating compliance with several new Commission
regulations, including those found in part 23.\35\ Pursuant to
[[Page 20]]
this first protocol, each party that submits an adherence letter must
also deliver a completed questionnaire to another protocol participant
for the addition of supplemental terms to be effective with respect to
that protocol participant. To facilitate the delivery of completed
questionnaires, ISDA, together with Markit, have developed a
technology-based solution to automate the information-gathering process
and provide sharing of submitted data and documents to permissioned
counterparties.
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\35\ ISDA's first Dodd-Frank protocol is intended to facilitate
compliance with the following Final Rules: Business Conduct
Standards for Swap Dealers and Major Swap Participants With
Counterparties, 77 FR 9734 (Feb. 17, 2012); Large Trader Reporting
for Physical Commodity Swaps, 76 FR 43851 (July 22, 2011); Position
Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011); Real-Time
Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9,
2012); Swap Data Recordkeeping and Reporting Requirements, 77 FR.
2136 (Jan. 13, 2012); Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules; Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3,
2012); and Swap Data Recordkeeping and Reporting Requirements: Pre-
Enactment and Transition Swaps, 77 FR 35200 (June 12, 2012).
However, the changes to compliance dates affected in this release do
not address compliance with rules other than those specifically
stated in the text above.
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ISDA has represented to the Commission that, despite an extensive
counterparty outreach and education effort by its members, only 17.5%
of counterparties to prospective SDs and MSPs have submitted an
adherence letter for its first Dodd-Frank protocol and less than 1%
have submitted the completed questionnaires necessary for SDs and MSPs
to make use of the protocol and integrate necessary counterparty
information into their compliance systems. ISDA has represented that
more time is needed for these counterparties to understand the
Commission's requirements, to understand the legal consequences of
adhering to the protocol, and to gather the information needed to
complete the questionnaire from principals and beneficial owners.
In addition, ISDA states that Hurricane Sandy has hampered the
ability of SDs, MSPs, and their counterparties to complete the
documentation process necessary to comply with the Commission's
regulations within the original compliance periods. ISDA states that
Hurricane Sandy shut down institutions and vendors, depleted staff and
severely damaged development efforts in a number of compliance areas--
producing a knock-on effect across institutional (and vendor)
compliance efforts (including delays at Markit--the provider of
protocol automation mechanisms). Further, specifically with respect to
the January 1, 2013 compliance date for subpart H of part 23 of the
Commission's regulations, ISDA has represented that compliance
obstacles are compounded by industry code freezes, which are typically
put into effect near the calendar year-end to ensure a stable IT
environment for the closing of books and records. The freezes limit the
ability of firms to make adjustments to IT infrastructure related to
the delivery of required disclosure and the re-onboarding of
counterparties in accordance with the counterparty characteristics
provided in response to the first Dodd-Frank protocol.
Absent completion of the protocol process by a counterparty, or
completion of bilateral amendments to trading documentation with the
equivalent effect, an SD or MSP that continues to enter into swaps with
such counterparty would be in violation of multiple Commission
regulations contained in part 23. In order to avoid such violations of
Commission regulations, ISDA has represented that many SDs and MSPs
will stop entering into swaps with counterparties that have not
completed the protocol process by December 31, 2012, which could result
in a sudden and dramatic drop in the number of participants in the swap
markets. ISDA states that the resulting decrease in liquidity would
damage all market participants as well as the broader economy.
ISDA has further represented that market participants are working
diligently toward publishing a second Dodd-Frank protocol covering
other Commission rules requiring documentation supplements, including
Sec. Sec. 23.502 and 23.504, but require additional time to complete
the review process and implement the protocol. ISDA states that the
pace of implementation of its second Dodd-Frank protocol has been
adversely affected by the difficulty of reaching agreement on the
valuation methodologies required by Sec. 23.504(b)(4),\36\ the
developmental challenges to reaching the agreement on reconciliation
processes required by Sec. 23.502(a)(1), the consumption of legal and
operational resources by the implementation of the first Dodd-Frank
protocol, and the effects of Hurricane Sandy discussed above.
Accordingly, ISDA has represented that an extension of the compliance
dates for Sec. Sec. 23.502 and 23.504 would allow for a smooth and
orderly progression to compliance with such rules and avoid unnecessary
market disruption.
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\36\ Commission regulation Sec. 23.504(b)(4) requires SDs and
MSPs to agree with their counterparties, prior to the execution of a
swap, on the process for determining the value of such swap at any
time from execution to the termination, maturity, or expiration of
such swap.
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For reasons described above, the Commission has decided to defer
the compliance dates for Sec. Sec. 23.201(b)(3)(ii), 23.402;
23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c);
23.440; 23.450; and 23.505 of subpart F, subpart H, and subpart I of
part 23 until May 1, 2013. In addition, the Commission has decided to
defer the compliance dates for Sec. 23.502 (Portfolio Reconciliation)
and Sec. 23.504 (Swap Trading Relationship Documentation) \37\ of
subpart I of part 23 until July 1, 2013.\38\ Compliance dates for all
other provisions of subpart F, subpart H, and subpart I of part 23
remain unchanged. All market participants are subject to the new
compliance dates regardless of whether they participate in any protocol
sponsored by ISDA.
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\37\ As discussed in note 26 supra, the Commission imposed a
staggered compliance schedule for Sec. 23.504, establishing three
separate compliance dates based on the type of counterparty. The
compliance date established herein--July 1, 2013--provides SDs and
MSPs with a single compliance date for Sec. 23.504, that is
applicable for all types of counterparties.
\38\ The Commission's decision to defer compliance does not
reflect an endorsement of the industry-led effort, nor does it imply
that the Commission has reviewed the documentation protocol for
compliance with Commission rules.
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III. Related Matters
A. Administrative Law Matters and Request for Comments
The Administrative Procedure Act \39\ (``APA'') generally requires
an agency to publish a notice of a proposed rulemaking in the Federal
Register.\40\ This requirement does not apply, however, when the agency
``for good cause finds * * * that notice and public procedure are
impracticable, unnecessary, or contrary to the public interest.'' \41\
Moreover, while the APA requires generally that an agency publish an
adopted rule in the Federal Register 30 days before it becomes
effective, this requirement does not apply if the agency finds good
cause to make the rule effective sooner.\42\
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\39\ 5 U.S.C. 553.
\40\ 5 U.S.C. 553(b).
\41\ Id.
\42\ 5 U.S.C. 553(d).
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The Commission, for good cause, finds that notice and solicitation
of comment regarding the amendments is impracticable, unnecessary and
contrary to the public interest. As of December 3, 2012, the CFTC has
finalized over 41 new rulemakings pursuant to the Dodd-Frank Act, with
each rulemaking imposing significant new regulatory requirements on
market participants. In the aggregate, the rulemakings establish
[[Page 21]]
a robust and comprehensive registration and regulatory framework
intended to achieve the overarching goals of the Dodd-Frank Act, as
detailed in Section I above. In promulgating the final rules, the
Commission constructed a phased implementation schedule that was
intended to allow market participants to achieve full compliance
through an orderly and effective process over a period of time. Market
participants, including a trade association, buy-side firms and sell-
side dealers, have represented to the Commission that they have been
diligently preparing to comply with the part 23 rules, in accordance
with the phased implementation schedule. The Commission anticipates
that the phased implementation schedule for most rules promulgated
under part 23 will continue, on schedule, without need for delay.
Notwithstanding the Commission's efforts to implement the business
conduct standards rules required under the Dodd-Frank Act in a timely
manner, the Commission has determined that, due to circumstances beyond
the Commission's control, a short delay in the implementation schedule
for a limited set of part 23 rules is necessary. As discussed in
greater detail in Section II above, ISDA has represented that, despite
an extensive counterparty outreach and education effort by its members,
a relatively small percentage of counterparties have fully executed the
necessary documentation to comply with the provisions of subpart H of
part 23 that involve documentation. ISDA has represented that more time
is needed for these counterparties to understand the Commission's
requirements, to understand the legal consequences of adhering to the
required documentation, and to gather the information needed to
complete the questionnaire from principals and beneficial owners. ISDA
further represented that without additional time to address that
relatively narrow scope of documentation rules, a sudden and dramatic
drop in the number of participants in the swap markets could occur, and
the resulting decrease in liquidity would damage all market
participants as well as the broader economy.
The extended compliance dates provided herein do not include all
business conduct standards promulgated by the Commission. Specifically,
compliance dates for Sec. 23.410(a) and (b), Sec. 23.433, and Sec.
23.434(a)(1) are not being extended. Consequently, fundamental
counterparty protections relating to (i) prohibitions on fraud,
manipulation and abusive practices, (ii) fair dealings in
communications, and (iii) reasonable diligence regarding recommended
swaps would not be affected by delayed compliance.
Accordingly, for the reasons discussed above, the Commission finds
good cause to extend the compliance dates for a short period, for a
limited number of rules promulgated under part 23, to enable market
participants to continue the work necessary to achieve full compliance.
Specifically, the compliance date for Sec. Sec. 23.201(b)(3)(ii),
23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2),
(b), and (c); 23.440; 23.450, and 23.505 is delayed until May 1, 2013,
providing an additional 4 months from the original compliance date.
Likewise, the compliance date for Sec. 23.502 and Sec. 23.504 is
deferred until July 1, 2013, providing an additional 6 months from the
original date.\43\ Compliance dates for all other provisions of part 23
remain unchanged. The Commission anticipates that the amended
compliance dates will enable market participants to achieve full
compliance with the affected rules prior to the expiration of the
amended compliance period.
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\43\ The Commission's decision to defer compliance does not
reflect an endorsement of the industry-led effort, nor does it imply
that the Commission has reviewed the documentation protocol for
compliance with Commission rules. All market participants are
subject to the new compliance dates regardless of whether they
participate in the protocol.
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Although the Commission is dispensing with prior notice of proposed
rulemaking, the Commission is soliciting written comments on the
changes to compliance dates affected by this release within 30 days
after publication of this release in the Federal Register. The
Commission will consider those comments and make changes to the
amendments if necessary.
B. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.\44\ The changes to compliance dates affected by this release
will not impose any new recordkeeping or information collection
requirements, or other collections of information that require approval
of the Office of Management and Budget under the PRA. The Commission
invites public comment on the accuracy of its estimate that no
additional information collection requirements or changes to existing
collection requirements would result from the rules proposed herein.
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\44\ 44 U.S.C. 3501 et seq.
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C. Considerations of the Costs and Benefits
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations.
1. Background
The Commission is changing its compliance dates for amendments to
specific sections of subparts H, I and F of part 23 of the Commission
regulations. Subpart H to part 23 sets forth business conduct standards
for SDs and MSPs in their dealings with counterparties. SDs and MSPs
are required to comply with the requirements found in subpart H to part
23 by January 1, 2013. The changes to compliance dates for Sec. Sec.
23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2),
(b), and (c); 23.440; and 23.450 contained in subpart H rules will
extend the compliance dates for these provisions until May 1, 2013.
Compliance dates for all other provisions of subpart H of part 23
remain unchanged.
With regard to the portfolio reconciliation requirements found in
Sec. 23.502, for those SDs and MSPs that have been previously
regulated by a prudential regulator, the Commission had provided for a
compliance date of December 11, 2012. The compliance date for SDs and
MSPs that have not been previously regulated was March 11, 2013. The
earliest that an SD or MSP would be required to comply with the swap
trading relationship documentation requirements of Sec. 23.504 is
January 1, 2013. The earliest that an SD or MSP would be required to
comply with the end user documentation requirements of Sec. 23.505 is
December 31, 2012. The changes to compliance dates for Sec. Sec.
23.502 and 23.504 contained in subpart I will extend the compliance
dates for these provisions until July 1, 2013. The changes to
compliance dates for Sec. 23.505 will extend the compliance date for
this rule until May 1, 2013.
With regard to the general records requirements found in Sec.
23.201 of
[[Page 22]]
subpart F of part 23, the earliest that an SD or MSP would be required
to comply with such requirements is December 31, 2012. The changes to
compliance dates for Sec. 23.201 will extend the compliance date for
certain provisions of this rule until May 1, 2013.
The changes to compliance dates being adopted do not change the
substance of the rules; rather, they merely provide additional time by
which parties can comply. As such, the costs and benefits of the
Commission's action relate only to the additional time provided.
2. Costs
The Commission does not anticipate there being any new,
quantifiable costs attributable to these changes to compliance dates
being adopted because it is only extending the compliance dates for
certain requirements in part 23 of the Commission's regulations. At the
same time, however, the Commission is mindful that a delay in the
protections afforded by the regulations could result in costs to the
public, even if the same is not amenable to quantification. The
Commission believes, however, that these costs are mitigated by the
maintenance of various other provisions relating to (i) prohibitions on
fraud, manipulation and abusive practices, (ii) fair dealings in
communications, and (iii) reasonable diligence regarding recommended
swaps. These provisions are unaffected by delayed compliance from this
extension. The Commission invites comments from the public on any
costs, quantitative and qualitative, arising from the delay granted by
the changes to compliance dates being adopted.
3. Benefits
The additional time for compliance provided for in this release
will yield substantial benefit for market participants and the public
alike. Absent this extension, market participants would be required to
implement temporary solutions while the more permanent, industry wide
solutions described earlier are finalized. The Commission believes that
this duplication of efforts to achieve compliance would impose
extensive burdens and costs on parties without any concomitant benefit
to the public. Moreover, the Commission is concerned that based on the
representations made by market participants, absent the changes to
compliance dates being adopted, market participants might exit the
market or curtail their swaps activity due to a lack of legal certainty
and protection afforded by Commission relief. If that were to occur,
the Commission expects that reduced market liquidity would increase the
costs of hedging, which would then be passed on the public in the form
of higher costs.
4. Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
The Commission believes that by extending the compliance date for
certain regulations in part 23, market participants will be able to
continue to participate in the swaps market without concerns about
potential consequences of failure to comply with the specified
regulations. This will, in turn, protect the public by ensuring that
the economy does not suffer as a result of any unintended consequences
that may have arisen if market participants exited the swaps market.
The Commission recognizes that any delay in compliance with the
aforementioned business conduct and documentation requirements
continues to leave the public without the protections and attendant
benefits of those requirements. However, the Commission believes that
delaying compliance for only certain business conduct and documentation
requirements, while retaining the original compliance dates for
fundamental counterparty protections relating to (i) prohibitions on
fraud, manipulation and abusive practices, (ii) fair dealings in
communications, and (iii) reasonable diligence regarding recommended
swaps, will mitigate those effects while avoiding this risk that market
participants will exit the market due to legal uncertainty.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission believes that extending the compliance dates for the
aforementioned rules will help protect the efficiency and
competitiveness of the markets by obviating the need to stop
transacting in swaps due to delay in complying with specific Commission
regulations. It will also strengthen the financial integrity of markets
by ensuring that market participants do not transact in the swaps
markets while not being in full compliance with these regulations.
c. Price Discovery
If concerns regarding non-compliance results in a reduction in
participation by a large number of market participants, such a decrease
in swaps activity will adversely impact the price discovery process of
the swaps markets.
d. Sound Risk Management
If counterparties refrain from transacting in swaps, the ability of
other market participants to hedge their risks using these instruments
may suffer. By mitigating the concerns of market participants regarding
compliance with Commission rules, the changes to compliance dates being
adopted herein help ensure that, while firms diligently complete the
compliance requirements, they can continue entering into swap
transactions to hedge their business and investment risks.
e. Other Public Interest Considerations
The Commission has not identified an impact on other public
interest considerations, other than those mentioned above, as a result
of the changes to compliance dates being adopted herein, but seeks
comment as to any potential impact on this and other 15(a) factors.
Issued in Washington, DC on December 18, 2012, by the
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Appendix to Business Conduct and Documentation Requirements for Swap
Dealers and Major Swap Participants--Commission Voting Summary
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
[FR Doc. 2012-30885 Filed 12-31-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: January 2, 2013