2016-18210
Federal Register, Volume 81 Issue 151 (Friday, August 5, 2016)
[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Proposed Rules]
[Pages 51824-51828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18210]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
RIN 3038-AE46
Exemption From Registration for Certain Foreign Persons
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend one of its regulations. The proposed amendment would
amend the conditions under which persons located outside the United
States (``U.S.'') acting in the capacity of a futures commission
merchant (``FCM''), an introducing broker (``IB''), commodity trading
advisor (``CTA''), or commodity pool operator (``CPO'') in connection
with commodity interest transactions solely on behalf of persons
located outside the U.S., or on behalf of certain international
financial institutions, would qualify for an exemption from
registration with the Commission.
DATES: Comments must be received on or before September 6, 2016.
ADDRESSES: You may submit comments, identified by RIN number 3038-AE46,
by any of the following methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
[[Page 51825]]
Mail: Send to Christopher Kirkpatrick, 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 of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make publicly available. 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 procedures established in
Sec. 145.9 of the Commission's regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR Chapter I.
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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, or
Andrew Chapin, Associate Chief Counsel, at (202) 418-5430, Division of
Swap Dealer and Intermediary Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,
DC 20581. Electronic mail: [email protected] or [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
Registration and Exemption From Registration of Intermediaries
Part 3 of the Commission's regulations governs the registration of
intermediaries engaged in the offer and sale of, and providing advice
concerning, all commodity interest transactions, including those
futures, options on futures, and swaps traded on U.S. trading
facilities, including both designated contract markets (``DCMs'') and
swap execution facilities (``SEFs''). Commission Regulation 3.10 sets
forth the manner in which intermediaries, including FCMs, IBs, CPOs,
and CTAs, must apply for registration with the Commission. Currently,
Sec. 3.10(c) provides an exemption from registration, subject to
certain conditions, for certain persons located outside the U.S. (such
intermediaries are referred to herein as ``Foreign Intermediaries'')
acting as intermediaries with respect to persons also located outside
the U.S., even though such transactions may be executed bilaterally, or
on or subject to the rules of a DCM or SEF.
As a result of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010,\2\ swaps \3\ became subject to regulation under
the Commodity Exchange Act (``CEA''). Accordingly, the Commission
promulgated conforming amendments to its regulations to include swaps
in the definition of ``commodity interest'' in Regulation 1.3(yy).
Thus, acting as an intermediary for persons located within the U.S. in
connection with swaps, whether executed bilaterally, or on or subject
to the rules of a DCM or SEF, may require Foreign Intermediaries to
register with the Commission. On the other hand, certain Foreign
Intermediaries acting only for persons located outside the U.S. in
connection with swaps may be exempt from registration with the
Commission under Sec. 3.10(c).\4\
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\2\ Pub. L. 111-203, 124 Stat. 137 (2010).
\3\ Swaps are defined in Section 1a(47) of the CEA and
Commission Regulation Sec. 1.3(xxx).
\4\ See Adaptation of Regulations To Incorporate Swaps, 77 FR
66288, 66295 (Nov. 2, 2012) (discussing the modification of the
term, ``commodity interest,'' to include swaps); Registration of
Intermediaries, 77 FR 51898, 51899 (Aug. 28, 2012) (discussing the
conforming amendments to Regulation 3.10(c)).
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With respect to activities involving commodity interest
transactions (which, as explained above, includes swaps) executed
bilaterally, or made on or subject to the rules of any DCM or SEF,
existing Regulation 3.10(c)(3)(i) provides an exemption from
registration as a CPO, CTA, or IB if a person \5\ and the transaction
meet the following conditions:
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\5\ Under Section 1a(38) of the CEA and Regulation 1.3(u), the
term ``person'' imports the plural and singular, and includes
individuals, associations, partnerships, corporations and trusts. 7
U.S.C. 1a(38); 17 CFR 1.3(u).
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1. The person is located outside the U.S.;
2. The person acts only on behalf of persons located outside the
U.S.; and
3. The commodity interest transaction is submitted for clearing
through a registered FCM.
Regulation 3.10(c)(2)(i) provides a similar exemption from
registration for any Foreign Intermediary acting as an FCM.
In 2015 and 2016, the Commission's Division of Swap Dealer and
Intermediary Oversight (``Division'') issued staff no-action relief
that permitted Foreign Intermediaries to rely on the exemption from
registration in Sec. 3.10(c)(3)(i) if their activities involve swaps
that are not subject to a Commission clearing requirement.\6\ The
Division noted that the CEA and Commission regulations do not require
that all swaps be cleared and some swaps are not yet accepted for
clearing by any Commission-registered derivatives clearing organization
(``DCO''). Thus, the Division stated that it did not believe the
Commission intended that Foreign Intermediaries acting only for persons
located outside the U.S. be required to register if the intermediaries
merely acted for such persons in connection with transactions not
required to be cleared by the CEA or Commission regulations.
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\6\ See CFTC Letters 15-37 (June 4, 2015) and 16-08 (Feb. 12,
2016).
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Similarly, pursuant to additional no-action relief provided in
2015, the Division also provided relief from registration as an IB or
CTA for intermediaries acting for International Financial Institutions
(``IFIs'').\7\ While such institutions may have headquarters or another
significant presence in the U.S.,\8\ the Division recognized that the
unique attributes and multinational status of these institutions did
not warrant treating them as domestic persons.
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\7\ IFIs are those institutions defined in the Commission's
previous rulemakings and staff no-action letters, i.e., Int'l
Monetary Fund, Int'l Bank for Reconstruction and Development,
European Bank for Reconstruction and Development, Int'l Development
Association, Int'l Finance Corp., Multilateral Investment Guarantee
Agency, African Development Bank, African Development Fund, Asian
Development Bank, Inter-American Development Bank, Bank for Economic
Cooperation and Development in the Middle East and North Africa,
Inter-American Investment Corp., Council of Europe Development Bank,
Nordic Investment Bank, Caribbean Development Bank, European
Investment Bank and European Investment Fund (Int'l Bank for
Reconstruction and Development, Int'l Finance Corp. and Multilateral
Investment Guarantee Agency are parts of the World Bank Group). See,
e.g., Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant,'' and ``Eligible Contract Participant,'' 77 FR 30596,
30692 n.1180 (May 23, 2012).
\8\ See CFTC No-Action Letter 15-37 (June 4, 2015).
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[[Page 51826]]
II. The Proposal
A. Proposal Rationale
Given the various execution venues and clearing requirements
applicable to swaps,\9\ the Commission now proposes to amend Sec.
3.10(c)(2)(i) and (3)(i) in tandem to simplify the registration
exemption that is available to Foreign Intermediaries. Specifically,
the proposed amendments would permit a Foreign Intermediary to be
eligible for an exemption from registration with the Commission if the
Foreign Intermediary, in connection with a commodity interest
transaction, only acts on behalf of (1) persons located outside the
U.S., or (2) IFIs (as defined in the proposed rule amendments), without
regard to whether such persons or institutions clear such commodity
interest transaction.
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\9\ E.g., A swap may be executed bilaterally and then performed
bilaterally between those counterparties or could be submitted for
clearing where each counterparty would then face the clearing house
for performance; a swap could be executed on a SEF and then
performed bilaterally between the counterparties or could be
cleared; a swap could be executed on a DCM and cleared. Under Part
50 of the Commission's regulations, some swaps are required to
cleared, but some swaps can be either performed bilaterally or
voluntarily cleared if a clearing house accepts such swaps for
clearing.
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The Commission notes at the outset that the exemptions from
registration in Sec. 3.10(c)(2) and (3) do not in themselves excuse
any person (including any IFI) from compliance with any provision of
the CEA or Commission regulations otherwise applicable to such persons,
including, without limitation, any requirement that a resulting
commodity interest transaction be cleared by a DCO registered or exempt
from registration with the Commission. Commission Regulation 3.10 in
its current form makes it a condition of the Foreign Intermediary's
exemption that its foreign located customer's commodity interest
transactions be cleared through a registered FCM. However, as explained
above, not all commodity interest transactions are subject to a
clearing requirement under the CEA or Commission regulations, and some
are not available for clearing by any DCO registered with the
Commission.
Thus, the Commission is proposing to amend the language of the
exemptions by removing the clearing requirement because persons located
outside the U.S. that are subject to any applicable clearing
requirement for futures or swaps, or any other applicable provision of
the CEA or Commission regulations, must comply with those requirements
regardless of any registration exemption for a Foreign Intermediary.
The Commission has come to the view that the focus of the exemption
should be the activity of the Foreign Intermediary, not its customer.
Accordingly, the Commission believes that the proposed amendments are
consistent with its longstanding policy to focus its customer
protection activities upon domestic firms and upon firms soliciting or
accepting orders from domestic participants. Where a Foreign
Intermediary's customers are located outside the U.S., the Commission
believes the jurisdiction where the customer is located has the
preeminent interest in protecting such customers.
B. Proposed Amended Rule Text
Further to the foregoing, with respect to the amended rule text,
the Commission is proposing to eliminate from Sec. 3.10(c)(2)(i) and
(3)(i) both the clearing requirement and references to DCMs and SEFs.
The Commission is retaining the reference to the definition of
``foreign broker'' in paragraph (c)(2)(i) because ``foreign broker'' is
not a Commission intermediary registration category (as are IB, CTA,
and CPO) and the definition is necessary to make clear that a foreign
broker is one who is ``engaged in soliciting or in accepting orders
only from persons located outside the United States, its territories or
possessions.'' This definitional reference also maintains symmetry with
paragraph (c)(3)(i), which specifies that the exemption from
registration applies to intermediary activity, as described in the IB,
CTA, and CPO definitions, on behalf of IFIs or persons located outside
the U.S., its territories, or possessions.
Finally, because the Commission is proposing to codify the
registration relief in No-Action Letter 15-37 with respect to
intermediary activities on behalf of IFIs, the Commission proposes to
add a new Sec. 3.10(c)(6) to define IFIs for the purposes of Sec.
3.10 in order to provide legal clarity on the scope of the registration
exemption.
The Commission requests comment on all aspects of this proposed
rulemaking.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies,
in promulgating regulations, to consider whether the rules they propose
will have a significant economic impact on a substantial number of
small entities and, if so, to provide a regulatory flexibility analysis
regarding the economic impact on those entities. Each Federal agency is
required to conduct an initial and final regulatory flexibility
analysis for each rule of general applicability for which the agency
issues a general notice of proposed rulemaking.\10\
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\10\ 5 U.S.C. 601 et seq.
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The rule proposed by the Commission would affect only FCMs, IBs,
CTAs, and CPOs. The Commission has previously determined that FCMs and
CPOs are not small entities for purposes of the RFA. Therefore, the
requirements of the RFA do not apply to those entities.\11\ The
Commission notes that the foreign persons affected by the proposed
changes would be registered FCMs and CPOs if not for the exemption
provided therein. Further, the Commission notes that the proposed rule
would impose no new obligation, significant or otherwise, on any of the
entities remaining entities.
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\11\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18620 (Apr. 30, 1982) (FCMs and CPOs).
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With respect to CTAs and IBs, the Commission has found it
appropriate to consider whether such registrants should be deemed small
entities for purposes of the RFA on a case-by-case basis, in the
context of the particular Commission regulation at issue.\12\ As
certain of these registrants may be small entities for purposes of the
RFA, the Commission considered whether this rulemaking would have a
significant economic impact on such registrants. This proposal would
clarify in what circumstances certain foreign persons acting in the
capacity of a FCM or an IB, CTA, or CPO would be exempt from
registration, in connection with commodity interest transactions solely
on behalf of persons located outside the U.S. This proposal is not
expected to impose any new burdens on market participants. Rather, to
the extent that this proposal provides an exemption to the intermediary
registration requirement, the Commission believes it is reasonable to
infer that the exemption would be less burdensome to such participant.
The Commission does not, therefore, expect small entities to incur any
additional costs as a result of this proposal. Therefore, the
Commission has determined that the proposed rule will not create a
significant economic impact on a substantial number of small entities.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the proposed rule will not
have a
[[Page 51827]]
significant impact on a substantial number of small entities.
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\12\ See 47 FR at 18620 (CTAs); and Introducing Brokers and
Associated Persons of Introducing Brokers, Commodity Trading
Advisors and Commodity Pool Operators; Registration and Other
Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983) (IBs).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined the PRA.\13\ 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. The
proposed rules 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 (``OMB'') under
the PRA.
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\13\ 44 U.S.C. 3501 et seq.
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The Commission invites the public and other interested parties to
comment on any aspect of the reporting burdens. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission generally solicits comments in order to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) mitigate the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology. The Commission specifically 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.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by email at
[email protected]. Please provide the Commission with a copy
of submitted comments so that all comments can be summarized and
addressed in the final rule preamble. Refer to the ADDRESSES section of
this proposed rule for comment submission instructions to the
Commission. A copy of the supporting statement for the collection of
information discussed above may be obtained by visiting http://reginfo.gov/. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this document in the Federal Register. Therefore, a comment is best
assured of having its full effect if OMB receives it within 30 days of
publication.
C. Cost-Benefit Analysis
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act.\14\ By its terms, it does not require the Commission to
quantify the costs and benefits of new rules or to determine whether
the benefits of the proposed rules outweigh their costs; it requires
the Commission to ``consider'' the cost and benefits of its actions.
Section 15(A) of the CEA further specifies that the costs and benefits
of the proposed rules shall be evaluated in light of five broad areas
of market public concern: (1) Protection of market participants and the
public; (2) efficiency, competitiveness and financial integrity of the
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
may, in its discretion, give greater weight to any of the five
enumerated areas of concern and may, in its discretion, determine that,
notwithstanding its costs, a particular rule is necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the CEA.
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\14\ 7 U.S.C. 19(a).
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The proposed regulation should foster: (1) The protection of market
participants and the public by providing greater legal certainty to the
commodity interest activities of persons located outside the U.S.; and
(2) greater efficiency, competitiveness and financial integrity of
financial markets; price discovery; and sound risk management practices
by ensuring greater depth in swaps markets accessed by U.S. persons.
The Commission invites public comment on its cost-benefit
considerations.
List of Subjects in 17 CFR Part 3
Definitions, Consumer protection, Foreign futures, Foreign options,
Registration requirements.
For the reasons set forth in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 3 as follows:
PART 3--REGISTRATION
0
1. The authority citation for part 3 continues to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,
13b, 13c, 16a, 18, 19, 21, 23.
0
2. Amend Sec. 3.10 as follows:
0
a. Revise paragraphs (c)(2)(i) and (c)(3)(i); and
0
b. Add paragraph (c)(6).
The revisions and addition to read as follows:
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.
* * * * *
(c) * * *
(2)(i) A person located outside the United States, its territories,
or possessions (a ``foreign located person'') engaged in activity that
meets the definition of a futures commission merchant in the Act and
Sec. 1.3(p) of this chapter is not required to register as a futures
commission merchant if such activity is either solely that of a foreign
broker as defined in Sec. 1.3(xx) of this chapter or solely on behalf
of international financial institutions.
* * * * *
(3)(i) A foreign located person engaged in activity that meets the
definition of an introducing broker, commodity trading advisor, or
commodity pool operator, as defined in the Act and in Sec. 1.3(mm),
(bb), and (nn) of this chapter, respectively, is not required to
register as an introducing broker, commodity trading advisor, or
commodity pool operator if such activity is either solely on behalf of
foreign located persons or international financial institutions.
* * * * *
(6) For the purposes of this section, ``international financial
institution'' means each of the following and any other international
financial institution that the Commission may designate: Int'l Monetary
Fund, Int'l Bank for Reconstruction and Development, European Bank for
Reconstruction and Development, Int'l Development Association, Int'l
Finance Corp., Multilateral Investment Guarantee Agency, African
Development Bank, African Development Fund, Asian Development Bank,
Inter-American Development Bank, Bank for Economic Cooperation and
Development in the Middle East and North Africa, Inter-American
Investment Corp., Council of Europe Development Bank, Nordic Investment
Bank, Caribbean Development Bank, European
[[Page 51828]]
Investment Bank and European Investment Fund.
* * * * *
Issued in Washington, DC, on July 27, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Amendment to Commission Regulation 3.10(c): Exemption From
Registration for Certain Foreign Persons--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2016-18210 Filed 8-4-16; 8:45 am]
BILLING CODE 6351-01-P