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2012-21606

2012-21606

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54355
Federal Register
/Vol. 77, No. 172/Wednesday, September 5, 2012/Rules and Regulations
1
See
Dodd-Frank Wall Street Reform andConsumer Protection Act, Public Law 111–203, 124Stat. 1376 (2010). The text of the Dodd-Frank Actmay be accessed through the Commission’s Website,
2
Pursuant to Section 701 of the Dodd-Frank Act,Title VII may be cited as the ‘‘Wall StreetTransparency and Accountability Act of 2010.’’
3
7 U.S.C. 1
et seq.
(2006). The Commission’sregulations are found at 17 CFR part 1
et seq.
(2012). Both the CEA and the Commission’sregulations also may be accessed through theCommission’s Web site.
4
See
Section 721(a) of the Dodd-Frank Act,which re-organized (and in some cases amended)existing definitions in, and added new definitionsto, Section 1a of the CEA. The CPO and CTAdefinitions, as amended, are codified at CEAsections 1a(11) and 1a(12), respectively.
5
76 FR 11701.
6
76 FR 11701. Part 4 applies to CPOs withrespect to their activities affecting pool participantsand to CTAs with respect to their activities affectingclients. Depending on the nature of its activities, aCPO or CTA may also come within the definitionof the term ‘‘swap dealer’’ or ‘‘major swapparticipant’’ in new CEA Section 1a(49) or 1a(33),respectively. As directed by the Dodd-Frank Act,the Commission has adopted new regulations thatestablish business conduct standards for SDs andMSPs.
See
77 FR 9734 (Feb. 17, 2012). These newregulations apply to SDs and MSPs with respect tothe counterparties with whom they transact swap business, and govern different activity than that towhich the Part 4 regulations apply.
7
These comment letters currently are available onthe Commission’s Web site.
8
Comment letter from Chris Barnard (Mar. 29,2011).
9
Comment letter from Kyle Vandergrift (Apr. 20,2011).
10
See
76 FR 33066, 33069–70 (June 7, 2011).
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Part 4
RIN 3038–AD49
Amendments to Commodity PoolOperator and Commodity TradingAdvisor Regulations Resulting Fromthe Dodd-Frank Act
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Final rules.
SUMMARY
:
The Commodity FuturesTrading Commission (Commission) isamending its regulations governing theoperations and activities of commoditypool operators (CPOs) and commoditytrading advisors (CTAs) in order to havethose regulations reflect changes madeto the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reformand Consumer Protection Act (Dodd-Frank Act).
DATES
:
Effective Date: 
November 5,2012.
FOR FURTHER INFORMATION CONTACT
:
Barbara S. Gold, Associate Director, orChristopher W. Cummings, SpecialCounsel, Division of Swap Dealer andIntermediary Oversight, 1155 21st StreetNW., Washington, DC 20581. Telephonenumber: 202–418–6700 and electronicmail:
or
SUPPLEMENTARY INFORMATION
:
I. Background
A. The Dodd-Frank Act 
On July 21, 2010, President Obamasigned the Dodd-Frank Act.
1
Title VII of the Dodd-Frank Act
2
amended theCEA
3
to establish a comprehensive newregulatory framework for swaps andsecurity-based swaps. The goal of thislegislation was to reduce risk, increasetransparency, and promote marketintegrity within the financial system by,among other things: (1) Providing for theregistration and comprehensiveregulation of swap dealers (SDs) andmajor swap participants (MSPs); (2)imposing clearing and trade executionrequirements on standardized derivativeproducts; (3) creating robustrecordkeeping and real-time reportingregimes; and (4) enhancing theCommission’s rulemaking andenforcement authorities with respect to,among others, all registered entities andintermediaries subject to the oversightof the Commission. Among the changesmade by the Dodd-Frank Act to the CEAwere to include within the CPOdefinition the operator of a collectiveinvestment vehicle that trades swaps,and to include within the CTAdefinition a person who provides adviceconcerning swaps.
4
 
B. The Proposed Amendments to Part 4
Part 4 of the Commission’s regulationssets forth a comprehensive regulatoryframework for the operations andactivities of CPOs and CTAs. It includesdisclosure, reporting and recordkeepingrequirements for registered CPOs andCTAs, registration and complianceexemptions for CPOs and CTAs, andother provisions, including anti-fraudprovisions, applicable to CPOs andCTAs, regardless of registration status.To ensure that the Part 4 regulationsapplied to CPOs and CTAs in thecontext of these intermediaries’involvement with swap transactions, onMarch 3, 2011, the Commissionproposed certain amendments to Part 4(Proposal).
5
 As the Commission explained in theProposal, because many of the existingPart 4 regulations generally applied toCPOs and CTAs, they would continue to be applicable to CPOs and CTAs withrespect to their swap activities withoutthe need for amendment thereto. TheCommission noted that in otherinstances, however, the text of certainexisting Part 4 regulations was specificto activities involving futures contracts,commodity options, and off-exchangeretail foreign currency (‘‘commodityinterests’’), and it did not include, referto or otherwise take account of swapactivities. As the Commission stated:‘‘The Proposal [was] intended to clarifyand ensure that the requirementsgoverning the operations and activitiesof CPOs and CTAs continue to apply forthese intermediaries in the context of their involvement with swaptransactions.’’
6
Accordingly, theCommission proposed to amendRegulations 4.7, 4.10, 4.22, 4.23, 4.244.30, 4.33 and 4.34 to include in eachof these regulations a reference to swapsor swap activities.
II. Comments on the Proposal
The Commission received twocomment letters on the Proposal,
7
eachof which supported the Proposal. One of these letters stated that the Proposal‘‘should act to reduce risk and increaseits transparency, and promote marketintegrity by ensuring that all entities areconsistently regulated to the extent thattheir trading and other activities pertainto swaps.’’
8
The other letter urged theCommission ‘‘to work quickly anddiligently on writing these rules andputting them in place as soon aspossible.’’
9
 
III. The Final Regulations
In light of the supportive comments itreceived, with one exception theCommission is adopting theamendments to the Part 4 regulations itproposed. That exception concerns theproposed amendment to Regulation4.10(a) that,
 for the purposes of Part 4,
would have expanded the definition of the term ‘‘commodity interest’’ toinclude ‘‘swaps.’’ This proposal wassuperseded by a proposed amendmentto Regulation 1.3(yy) that,
 for the purposes of all of the Commission’sregulations,
would define the term‘‘commodity interest’’ to include‘‘swaps.’’
10
Accordingly, theCommission is considering theproposed definition of the term‘‘commodity interest’’ in connectionwith its consideration of the commentletters it received on its proposedamendment to Regulation 1.3(yy).
A. Adding ‘‘Swap’’ Terms to Part 4
As proposed, the Commission isinserting ‘‘swap,’’ ‘‘swap transaction’’ ora similar term at various regulationsthroughout Part 4.
See
the amendmentsto Regulations 4.23(a)(1), 4.24(g), (h)(1),and (i)(2) for CPOs and Regulations4.34(g) and 4.34(i)(2) for CTAs. For
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54356
Federal Register
/Vol. 77, No. 172/Wednesday, September 5, 2012/Rules and Regulations
11
76 FR at 11702.
12
See
Regulation 45.2, which requires SDs andMSPs to keep full, complete and systematic records,together with all pertinent data and memoranda, of all activities relating to their business with respectto swaps, as prescribed by the Commission. (Non-SD and non-MSP counterparties subject to theCommission’s jurisdiction have a similarrequirement, but only with respect to each swap towhich they are a counterparty.)
13
76 FR at 11702. In this regard, the Commissionhas proposed regulations addressing thecircumstances in which non-bank SDs may berequired or permitted to accept margin payments inuncleared swap transactions.
See
76 FR 23732 (Apr.28, 2011). Accordingly, this amendment toRegulation 4.30 should not be interpreted to imposeor authorize any such margin requirements.
14
See
77 FR 9734, 9739–40 (Feb. 17, 2012).
15
76 FR at 11702.
16
5 U.S.C. 601
et seq.
17
By its terms, the RFA does not apply to‘‘individuals.’’
See
48 FR 14933, n. 115 (Apr. 6,1983).
18
5 U.S.C. 601(2), 603, 604 and 605.
19
76 FR at 11703.
example, Regulation 4.23(a)(1) is beingamended to include ‘‘swap type andcounterparty’’ in the itemized dailyrecord that a CPO must make and keepwith respect to a pool’s commodityinterest transactions.At other Part 4 regulations, theCommission has included as proposedthe term ‘‘swap dealer’’ among thepersons for whom a CPO or CTA mustprovide information in its DisclosureDocument and for whom a CPO mustprovide information in a pool’s periodicAccount Statement.
See
theamendments to Regulations 4.22(a)(3),4.24(j)(1), (j)(3), (l)(1), and (l)(2) forCPOs and Regulations 4.34(j)(1), (j)(3),(k)(1) and (k)(2) for CTAs. For example,Regulations 4.24(j) and 4.34(j) are beingamended to include SDs in the group of persons as to which conflicts of interestmust be disclosed by CPOs and CTAs.Similarly, the Commission hasincluded as proposed ‘‘a registered swapdealer’’ among the persons listed inRegulation 4.7(a)(2) that do not have tosatisfy a portfolio requirement in orderto be a qualified eligible person (QEP),such that a CPO or CTA that hasclaimed relief under Regulation 4.7 mayaccept the SD as a pool participant oradvisory client without regard to thesize of its investment portfolio. As theCommission explained, ‘‘this would beconsistent with the current treatment of other financial intermediaries registeredwith the Commission (such as futurescommission merchants [FCMs] andretail foreign exchange dealers [RFEDs])as QEPs under Regulation 4.7(a)(2).’’
11
 
B. Including Books and RecordsRelating to Swap Transactions withinPart 4
The Commission has adopted asproposed amendments to Part 4 thatrequire a CPO or CTA to make and keepcertain books and records generated bythe swap transactions in which itengages on behalf of not only its poolparticipants and clients, but also itself.
See
the amendments to Regulations4.23(a)(7) and (b)(1) for CPOs andRegulations 4.33(a)(6) and (b)(1) forCTAs. The amendments to Regulations4.23(a)(7) and 4.33(a)(6) require CPOsand CTAs to retain eachacknowledgment of a swap transactionreceived from an SD. The amendmentsto Regulations 4.23(b)(1) and 4.33(b)(1)make clear that if a CPO or CTA was acounterparty to a swap transaction, thenit would be subject to the swap datarecordkeeping and reportingrequirements of Part 45 of theCommission’s regulations, asapplicable.
12
 
C. Regulation 4.30
Subject to certain exceptions,Regulation 4.30 provides that no CTAmay solicit, accept or receive from anexisting or prospective client funds,securities or other property in thetrading advisor’s name (or extend creditin lieu thereof) to purchase, margin,guarantee or secure any commodityinterest of the client.The Commission proposed to amendRegulation 4.30 by adding to the list of intermediaries then excepted from theforegoing prohibition—
i.e.,
registeredFCMs, leverage transaction merchantsand RFEDs—a registered SD inconnection with a swap that was notcleared through a derivatives clearingorganization. The Commissionexplained that this amendment toRegulation 4.30 was necessary‘‘[b]ecause swap dealers will generallyfall within the statutory definition of CTA, and because a swap dealerengaging in uncleared swap transactionsmay be accepting funds or otherproperty from its counterparties asvariation and initial marginpayments.’’
13
 Subsequently, the Commissionamended Regulation 4.6 to providetherein for an exclusion from thedefinition of the term ‘‘commoditytrading advisor’’ for an SD,
 provided 
thecommodity interest and swap advisoryactivities of the SD are solely incidentalto the conduct of its business as anSD.
14
Because not all SDs may alwaysmeet the ‘‘solely incidental’’ proviso,the Commission has determined toamend Regulation 4.30 as proposed,such that any registered SD who is aCTA is not subject to the regulation’soperational prohibition.
D. Deleting Regulation 4.32
The Commission has deleted asproposed Regulation 4.32, whichconcerned trading by a registered CTAon or subject to the rules of a derivativestransaction execution facility (DTEF) fornon-institutional customers. As theCommission explained:
Section 734(a) of the Dodd-Frank Actrepeals Section 5a of the CEA, which is thesection establishing and providing for theregulation of DTEFs. Accordingly, becausesubsequent to the effective date of the Dodd-Frank Act Regulation 4.32 will no longerhave a statutory basis or purpose, theProposal would remove and reserveRegulation 4.32.
15
 
IV. Related Matters
A. Regulatory Flexibility Act 
The Regulatory Flexibility Act(‘‘RFA’’)
16
requires federal agencies toconsider the impact of those rules onsmall businesses.
17
A regulatoryflexibility analysis or certificationtypically is required for ‘‘any rule forwhich the agency publishes a generalnotice of proposed rulemaking pursuantto’’ the notice-and-comment provisionsof the Administrative Procedure Act, 5U.S.C. 553(b).
18
The amendments to thePart 4 regulations contained herein willaffect CPOs and CTAs. The Commissionstated in the Proposal that:
With respect to CPOs, the Commissionpreviously has determined that a CPO is asmall entity for the purpose of the RFA if itmeets the criteria for an exemption fromregistration under Regulation 4.13(a)(2).Thus, because the Proposal applies toregistered CPOs, the RFA is not applicable toit. As for CTAs, the Commission previouslyhas stated that it would evaluate within thecontext of a particular rule proposal whetherall or some affected CTAs would beconsidered to be small entities and, if so, theeconomic impact on them of the particularrule. In this regard, the Commission notesthat the Proposal applies to registered CTAs.Moreover, the Proposal would not have asignificant economic impact on any CPO orCTA who would be affected thereby, becauseit would merely bring within the current Part4 regulatory structure of disclosure, reportingand recordkeeping information with respectto swap activities. It would not impose anyadditional operative requirements orotherwise direct or confine the activities of CPOs and CTAs.
19
 
The Commission did not receive anycomments regarding its RFA analysis inthe Proposal. Accordingly, pursuant to 5U.S.C. 605(b), the Chairman, on behalf of the Commission, certifies that theamendments to the Part 4 regulations being published today by this
FederalRegister
release will not have asignificant economic impact on asubstantial number of small entities.
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54357
Federal Register
/Vol. 77, No. 172/Wednesday, September 5, 2012/Rules and Regulations
20
44 U.S.C. 3501
et seq.
21
See
7 U.S.C. 12(a)(5).
22
As is explained above, when the Dodd-FrankAct extended the statutory definitions of the terms‘‘commodity pool operator’’ and ‘‘commoditytrading advisor,’’ those existing Part 4 regulationsthat applied generally to CPOs and CTAs becameapplicable to CPOs and CTAs captured by theexpanded statutory definitions, without furtheramendment. Certain other existing Part 4regulations, however, spoke specifically to activitiesinvolving commodity interests, but not to swapactivities. Accordingly, this rulemaking amends thislatter subset of Part 4 regulations by making themapplicable to swap activities, thus closing theregulatory gap that would otherwise exist.
23
76 FR 11701, 11703.
B. Paperwork Reduction Act 
The Paperwork Reduction Act of 1995(PRA)
20
imposes certain requirementson Federal agencies (including theCommission) in connection with theirconducting or sponsoring any collectionof information as defined by the PRA.The amendments to the Part 4regulations will not require any newcollection of information from anyentity that is subject to them.Additionally, the Commission did notreceive any comments regarding its PRAanalysis in the Proposal. Accordingly,for purposes of the PRA, the Chairman,on behalf of the Commission, certifiesthat the amendments to the Part 4regulations being published today bythis
Federal Register
release will notimpose any new reporting orrecordkeeping requirements.
C. Cost-Benefit Analysis
Prior to the passage of the Dodd-FrankAct, the Part 4 regulations did not applyto swap-related activities. This pre-Dodd-Frank Act construct provides auseful reference point from which tocompare the costs and benefits of theproposed regulations to the alternativewhere the Commission would not betaking any action to incorporate swap-related information into Part 4.As a result of the Dodd-Frank Actincluding swap-related activities amongthe activities on which the CPO andCTA definitions are based, CPOs andCTAs who engage in swap-relatedactivities are now subject to Part 4. Invarious places, however, the wording of particular provisions of Part 4 wasincomplete or inconsistent in thecontext of CPOs and CTAs involvedwith swap transactions; there is noregulatory need for the prohibition inRegulation 4.30 against directlyaccepting margin payments to apply toan SD; and the subject matter of Regulation 4.32 (trading on DTEFs) wasrendered moot by the Dodd-Frank Act.Under such a scenario, the costs to thepublic of inaction would be, inqualitative terms, failure to receive Part4 disclosure, reporting andrecordkeeping protections from theirCPOs and CTAs with regard to theirswap activities, an unnecessary burdenon SDs, and regulatory text that isobsolete. The costs of theseamendments, if any, will be minimal—limited to the costs associated withincluding information related to swapsin the Disclosure Documents, AccountStatements and books and recordsalready required of CPOs and CTAsunder existing Part 4 regulations.Moreover, this information should bereadily available to CPOs and CTAs.The costs cannot be feasibly quantifiedor estimated, because they will varyaccording to each registrant’s internalprocesses and registration category. Incontrast, the amendments will yieldsignificant if unquantifiable benefit tothe public, relative to inaction, byclarifying the application of Part 4 andthe obligations of CPOs and CTAs totheir participants and clients,respectively.In the CEA,
21
Congress provided theCommission with the authority topromulgate regulations that, amongother things, are reasonably necessary toeffectuate any of the provisions or toaccomplish any of the purposes of theCEA. In accordance with Section 15(a)of the CEA, it is in this post-Dodd-FrankAct environment that the Commissionconsiders the costs and benefits of itsactions before promulgating a regulationunder the CEA or issuing an order.Section 15(a) specifies that the costsand benefits shall be evaluated in lightof the following five broad areas of market and public concern: (1)Protection of market participants andthe public; (2) efficiency,competitiveness, and financial integrityof futures markets; (3) price discovery;(4) sound risk management practices;and (5) other public interestconsiderations.In light of the provisions of the Dodd-Frank Act that expand the ‘‘commoditypool operator’’ and ‘‘commodity tradingadvisor’’ definitions to include swap-related activities, these amendmentsincorporate into the existing Part 4framework regulations to take accountof the swap-related activities of CPOsand CTAs. Specifically, theamendments subject CPOs and CTAswhen involved with swap transactionsto the same Part 4 requirements thatapply when they are involved withcommodity interest transactions, to theextent regulations in place at the time of the enactment of the Dodd-Frank Actdid not clearly do so.
22
The revision toRegulation 4.30 excepts SDs from theprohibition on accepting margin to treatthem equivalently with FCMs andRFEDs. In addition, these amendmentsdelete Regulation 4.32, pertaining totrading by registered CTAs on DTEFs,given the repeal by the Dodd-Frank Actof CEA Section 5a, which authorizedsuch trading facilities.In the Proposal the Commissionsought public comment on the costs and benefits of its contemplatedamendments to Part 4.
23
TheCommission did not receive anycomments in response to this request.Section 15(a) Factors(1) Protection of market participantsand the public.The Commission believes theamendments to the Part 4 regulationswill provide protection to marketparticipants and the public by requiringCPOs and CTAs to include informationon swap intermediaries and activities inthe disclosure, reporting andrecordkeeping framework under Part 4.For example, Regulation 4.24(j) hasprovided protections to commodity poolparticipants by requiring their CPO todisclose any actual or potential conflictof interest with any FCM with whomtheir pool was required to maintain itsaccount. The amendment to Regulation4.24(j) the Commission has adopted willprovide similar protections, by requiringthe CPO to disclose any actual orpotential conflict of interest with anySD with whom their pool maintains itsswap positions.(2) Efficiency, competitiveness, andfinancial integrity of the futuresmarkets.The Commission does not expect theamendments to Part 4 to have an impacton the efficiency, competitiveness andfinancial integrity of the commodityinterest markets.(3) Price Discovery.The Commission does not expect theamendments to Part 4 to have an impacton the market’s price discoveryfunctions.(4) Sound risk management practices.The Commission does not expect theamendments to Part 4 to have an impacton risk management practices by CPOs,CTAs and other Commission registrants.However, the requirement that CPOsand CTAs account for SD, MSP andswap activities when complying withtheir disclosure, reporting andrecordkeeping requirements under Part4 will benefit prospective and actualpool participants and clients byensuring that these participants andclients are afforded the same customerprotections as participants and clients
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