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2012-25764

2012-25764

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Vol. 77 Friday,No. 213 November 2, 2012Part III
Commodity Futures Trading Commission
17 CFR Parts 1, 4, 5, et al.Adaptation of Regulations to Incorporate Swaps; Final Rule
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66288
Federal Register
/Vol. 77, No. 213/Friday, November 2, 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 Actis available at
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).
4
Adaptation of Regulations to Incorporate Swaps,76 FR 33066 (June 7, 2011) (‘‘Proposing Release’’).
5
Comment letters are available in the commentfile on
6
All Commission regulations are in Chapter I of Title 17 of the CFR.
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Parts 1, 4, 5, 7, 8, 15, 16, 18,21, 22, 36, 38, 41, 140, 145, 155, and166
RIN Number 3038–AD53
Adaptation of Regulations ToIncorporate Swaps
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Final rules.
SUMMARY
:
The Dodd-Frank Wall StreetReform and Consumer Protection Act(‘‘Dodd-Frank Act’’ or ‘‘DFA’’)established a comprehensive newstatutory framework for swaps andsecurity-based swaps. The Dodd-FrankAct repeals some sections of theCommodity Exchange Act (‘‘CEA’’ or‘‘Act’’), amends others, and adds anumber of new provisions. The DFAalso requires the Commodity FuturesTrading Commission (‘‘CFTC’’ or‘‘Commission’’) to promulgate a numberof rules to implement the newframework. The Commission hasproposed and finalized numerous rulesto satisfy its obligations under the DFA.This rulemaking makes a number of conforming amendments to integrate theCFTC’s regulations more fully with thenew framework created by the Dodd-Frank Act.
DATES
:
Effective January 2, 2013.
FOR FURTHER INFORMATION CONTACT
:
Peter A. Kals, Special Counsel, 202–418–5466,
Division of Clearing and Risk; Elizabeth Miller,Attorney-Advisor, 202–418–5450,
Division of SwapDealer and Intermediary Oversight;David E. Aron, Counsel, 202–418–6621,
Office of GeneralCounsel; Alexis Hall-Bugg, Attorney-Advisor, 202–418–6711,
Division of MarketOversight; Katherine Driscoll, SeniorTrial Attorney, 202–418–5544,
Division of Enforcement, Commodity FuturesTrading Commission, Three LafayetteCentre, 1151 21st Street NW.,Washington, DC 20581.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. BackgroundII. Amended RegulationsA. Part 11. Regulation 1.3: Definitionsa. General Changes b. Various Amended and New Definitions(Regulation 1.3)c. Regulation 1.3(t): Open Contractd. Regulation 1.3(ll): Physicale. Regulation 1.3(ss): Foreign Board of Tradef. Regulation 1.3(yy): Commodity Interestg. Regulation 1.3(z): Bona Fide HedgingTransactions and Positionsh. Lack of a Definition of ‘‘End-User’’ inRegulation 1.32. Regulation 1.4: Use of ElectronicSignatures3. Regulation 1.31: Books and Records;Keeping and Inspection4. Regulations 1.33: Monthly andConfirmation Statements5. Regulation 1.35: Records of CashCommodity, Futures and OptionTransactions6. Regulation 1.37: Customer’s or OptionCustomer’s Name, Address, andOccupation Recorded; Record of Guarantor or Controller of Account7. Regulation 1.39: Simultaneous Buyingand Selling Orders of DifferentPrincipals; Execution of, for andBetween Principals8. Regulation 1.40: Crop, MarketInformation Letters, Reports; CopiesRequired9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing BoardMembers, Committee Members andConsultants10. Regulation 1.63: Service on Self-Regulatory Organization GoverningBoards or Committees by Persons WithDisciplinary Histories11. Regulation 1.67: Notification of FinalDisciplinary Action Involving FinancialHarm to a Customer12. Regulation 1.68: Customer Election NotTo Have Funds, Carried by a FuturesCommission Merchant for Trading on aRegistered Derivatives Trading ExecutionFacility, Separately Accounted for andSegregated13. Regulations 1.44, 1.53, and 1.62—Deletion of Regulations Inapplicable toDesignated Contract Markets14. Technical Changes to Part 1 in Orderto Accommodate Recently Finalized Part22 and Corresponding Changes to Part 22B. Part 7C. Part 8D. Parts 15, 18, 21, and 36E. Parts 41, 140 and 145F. Parts 155 and 156G. Other General Changes to CFTCRegulations1. Removal of References to DTEFs2. Other Conforming ChangesIII. Administrative ComplianceA. Paperwork Reduction ActB. Regulatory Flexibility ActC. Consideration of Costs and Benefits
I. Background
On July 21, 2010, President Obamasigned the Dodd-Frank Act into law.
1
 Title VII of the Dodd-Frank Act
2
(‘‘TitleVII’’) amended the CEA
3
to establish acomprehensive new regulatoryframework for swaps and security-basedswaps. The legislation was enacted,among other reasons, to reduce risk,increase transparency, and promotemarket integrity within the financialsystem by, among other things: (1)Providing for the registration andcomprehensive regulation of swapdealers (‘‘SDs’’), security-based swapdealers, major swap participants(‘‘MSPs’’), and major security-basedswap participants; (2) imposing clearingand trade execution requirements onswaps and security-based swaps, subjectto certain exceptions; (3) creatingrigorous recordkeeping and real-timereporting regimes; and (4) enhancing therulemaking and enforcement authoritiesof the Commissions with respect to,among others, all registered entities andintermediaries subject to theCommission’s oversight.To apply its regulatory regime to theswap activity of intermediaries, theCommission must make a number of changes to its regulations to conformthem to the Dodd-Frank Act. On June 7,2011, the Commission published in the
Federal Register
a proposal to makesuch changes (‘‘the Proposal’’).
4
Therewas a 60-day period for the public tocomment on the Proposal, which endedon August 8, 2011. The Commissionreceived 39 comment letters from avariety of institutions, includingdesignated contract markets (‘‘DCMs’’),agricultural trade associations, andagricultural cooperatives.
5
TheCommission has determined to adoptthe proposed rules primarily in the formproposed with certain modifications,discussed below, to address thecomments the Commission received.With respect to certain of the proposedchanges to regulation 1.35
6
(regardingrecording of oral communications andthe scope of written communications)and related amendments to regulation1.31, the Commission has determined toaddress those changes in a final rule ina separate release.The Commission is mindful of, andcontinues to consider, the commentsreceived on the Proposal’s amendmentsto regulation 1.35 (records of commodity interest and cashcommodity transactions). Thosecomments were submitted by variousgroups, including DCMs, representativesof the FCM and IB communities, energy
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66289
Federal Register
/Vol. 77, No. 213/Friday, November 2, 2012/Rules and Regulations
7
Commenters on this issue include: AmericanCotton Shippers Association; AgribusinessAssociation of Iowa; Agribusiness Association of Ohio; Agribusiness Council of Indiana; TradeAssociation of American Cotton Cooperatives;Commodity Markets Council; Falmouth FarmSupply; American Feed Industry Association; Grainand Feed Association of Illinois; Minnesota Grainand Feed Association; National Grain and FeedAssociation; Oklahoma Grain and Feed Association;Rocky Mountain Agribusiness Association; SouthDakota Grain and Feed Association; Land O’Lakes;National Council of Farmer Cooperatives; AmericanGas Association; National Gas Supply Association;Fertilizer Institute; American Petroleum Institute;Electric Power Supply Association; National RuralElectric Cooperative Association; American PublicPower Association; Large Public Power Council;Edison Electric Institute; Working Group of Commercial Energy Firms;IntercontinentalExchange Inc.; Kansas City Board of Trade; Minneapolis Grain Exchange; CME Group;Futures Industry Association; Barclays Capital;Henderson & Lyman; National Introducing BrokersAssociation; and National Futures Association.
8
Public Law 106–554, 114 Stat. 2763 (2000).
9
See
Swap Dealer and Major Swap ParticipantRecordkeeping, Reporting, and Duties Rules;Futures Commission Merchant and IntroducingBroker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, MajorSwap Participants, and Futures CommissionMerchants, 77 FR 20128 (Apr. 3, 2012) (adopting forSDs and MSPs reporting and recordkeepingstandards now found in 17 CFR 23.201–23.203).
10
The redline does not, in and of itself, have anylegal authority.
11
A joint letter by the American Gas Association,Commodity Markets Council, National Gas SupplyAssociation, and the Fertilizer Institute (‘‘AGA etal.’’); Commodity Markets Council (‘‘CMC’’);Electric Power Supply Association; certain ElectricUtility Trade Associations; and the Working Groupof Commercial Energy Firms (‘‘Working Group’’).
12
See
ETA Letter (claiming that ‘‘[t]he [Proposal]cannot fairly apprise interested persons of thenature of the Commission’s rulemaking, nor can itprovide notice of ‘the terms of substance of theproposed rule or a description of the subjects andissues involved,’ as required by the [APA], whenthe proposed rules purport to adapt to a movingtarget.’’).
end-users, and agricultural tradeassociations and cooperatives.
7
Thesecommenters focused primarily on: theproposed oral communicationsrecordkeeping requirement, in general;the proposed requirement that allmembers of a DCM or SEF, includingunregistered commercial end-users andnon-intermediaries, keep records of theoral communications that lead to theexecution of a cash commoditytransaction; and the proposedrequirement that each record bemaintained in a separately identifiableelectronic file identifiable by transactionand counterparty. Many of thecomments were directed specificallytoward narrowing the scope of theproposed changes to regulation 1.35regarding recording of oralcommunications and writtencommunications (and relatedamendments to regulation 1.31).The amendments adopted by thisrulemaking primarily affect part 1 of theCommission’s regulations, but alsoaffect parts 4, 5, 7, 8, 15, 16, 18, 21, 22,36, 41, 140, 145, 155, and 166. Thisrulemaking contains amendments of three different types: ministerial,accommodating, and substantive. Manyof the amendments are purelyministerial—for instance, severalchanges update definitions to conformthem to the CEA as amended by theDodd-Frank Act; add to theCommission’s regulations new termscreated by the Dodd-Frank Act; removeall regulations and references pertainingto derivatives transaction executionfacilities (‘‘DTEFs’’), a category of trading facility added to the CEA bysection 111 of the Commodity FuturesModernization Act of 2000 (‘‘CFMA’’),
8
 which the DFA eliminated; correctvarious statutory cross-references to theCEA in the regulations; and removeregulations in whole or in part that wererendered moot by the CFMA.The accommodating amendments areessential to the implementation of theDFA in that they propose to add swaps,swap markets, and swap entities tonumerous definitions and regulations, but are more than ministerial becausethey require some judgment in drafting.Accommodating amendments include,among other things, amendingnumerous definitions in regulation 1.3to reference or include swaps; creatingnew definitions as necessary inregulation 1.3; amending recordkeepingrequirements to include information onswap transactions; adding references toswaps and swap execution facilities(‘‘SEFs’’) in various part 1 regulations;and amending parts 15, 18, 21, and 36to implement the DFA’s grandfatheringand phase-out of exempt boards of tradeand exempt commercial markets.The substantive amendments arechanges that align requirements orprocedures across futures and swapmarkets. They consist of amendments toregulation 1.31 that harmonize some of the current part 1 recordkeepingrequirements with some of thoseapplicable to SDs and MSPs under part23 regulations
9
and amend procedurespertaining to the post-executionallocation of bunched orders (regulation1.35(a)). Under the amendments to the bunched orders provisions, ‘‘eligibleaccount managers’’ can allocate suchorders post-execution similarly to howthey currently do so with futures.To aid the public in understandingthe numerous changes to different partsof the CFTC’s regulations adopted bythis release, the Commission will alsopublish on its Web site a ‘‘redline’’ of the affected regulations which willclearly reflect the additions anddeletions.
10
 
II. Comments Received and AmendedRegulations
A. General Comments
Several commenters argued that theProposal was premature because manyother rules remained to be proposed andfinalized,
11
and subsequent finalrulemakings may dictate whichconforming amendments will benecessary. A joint letter by certainElectric Utility Trade Associations (‘‘theETA’’) contended that the incompletenature of the swap regulatory regimerenders it unable to ‘‘effectivelycomment,’’ because it lacks a fullunderstanding of the entire swapregulatory landscape. In the ETA’s view,the ‘‘premature’’ nature of the Proposalrises to the level of a violation of theAdministrative Procedures Act(‘‘APA’’).
12
The ETA commented furtherthat because the Proposal updatedcertain regulations by treating swapsequivalently to futures, the Proposal‘‘represents a fundamentalmisunderstanding’’ of the executingelectric industry swap market, and,consequently, should be withdrawn.The ETA also noted that, ‘‘[f]rom timeto time, the Commission’s staff hasdeclined to consider whethernonfinancial commodity and relatedswap markets are indeed different inany meaningful way from othermarkets,’’ and that the ETA ‘‘continuesto urge the Commission to engage in aconsidered analysis of such differencesand the implications of such differencesfor its rulemaking process.’’ The CMEGroup (‘‘CME’’) argued that theCommission should have waited topropose the voice and electronicrecordkeeping requirements inregulation 1.35(a) until SEFs register,the Dodd-Frank Act clearing andexchange trading requirements takeeffect, and Dodd-Frank Actrecordkeeping and reportingrequirements take effect. The ElectricPower Supply Association (‘‘EPSA’’)commented that final rules definingswap, SD, and MSP must be publishedprior to proposing a rule conforming theCommission’s regulations to the Dodd-Frank Act and related regulations.Therefore, EPSA argued, the Proposalshould be withdrawn. Mr. Chris Barnardgenerally supported the Proposal,commenting that the proposed changeswere either common sense or required by the DFA.The Commission believes it wasappropriate to have published theProposal when it did. The purpose of this rulemaking is to conform theCommission’s regulations to the CEA as
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