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2012-31734

2012-31734

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This section of the FEDERAL REGISTERcontains notices to the public of the proposedissuance of rules and regulations. Thepurpose of these notices is to give interestedpersons an opportunity to participate in therule making prior to the adoption of the finalrules.
Proposed Rules
Federal Register
909
Vol. 78, No. 4Monday, January 7, 2013
1
See
Dodd-Frank Wall Street Reform andConsumer Protection Act, Public Law 111–203, 124Stat. 1376 (July 21, 2010).
2
7 U.S.C. 1
et seq.
(amended 2010).
3
7 U.S.C. 2(i).
4
7 U.S.C. 6s.
5
Examples of section 4s implementing rules that become effective for SDs and MSPs at the time of their registration include requirements relating toswap data reporting (Commission regulation23.204) and conflicts of interest (Commissionregulation 23.605 (c)–(d)). The chief complianceofficer requirement (Commission regulations 3.1and 3.3) is an example of those rules that havespecific compliance dates. The compliance datesare summarized on the Compliance Dates page of the Commission’s Web site. (
). 
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Chapter I
RIN 3038–AD85
Further Proposed Guidance RegardingCompliance With Certain SwapRegulations
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Further Proposed Guidance.
SUMMARY
:
On July 12, 2012, theCommodity Futures TradingCommission (‘‘Commission’’ or‘‘CFTC’’) published for public comment,pursuant to section 4(c) of theCommodity Exchange Act (‘‘CEA’’), aproposed order (‘‘Proposed Order’’) thatwould grant market participantstemporary conditional relief fromcertain provisions of the CEA, asamended by Title VII of the Dodd-FrankWall Street Reform and ConsumerProtection Act (‘‘Dodd-Frank Act’’ or‘‘Dodd-Frank’’), and the Commissionalso published its proposed interpretiveguidance and policy statement(‘‘Proposed Guidance’’) regarding thecross-border application of the swapprovisions of the CEA as added by TitleVII of the Dodd-Frank Act. TheCommission is proposing furtherguidance on certain specific aspects of the Proposed Guidance (‘‘FurtherProposed Guidance’’). The Commissionhas separately determined to finalize theProposed Order.
DATES
:
Comments on the FurtherProposed Guidance must be received onor before February 6, 2013.
ADDRESSES
:
You may submit comments,identified by RIN number 3038–AD85, by any of the following methods:
Agency Web Site: http://  www.cftc.gov. 
Mail: 
Secretary of the Commission,Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581.
Hand Delivery/Courier: 
Same asmail above.
Federal eRulemaking Portal: http://  www.regulations.gov. 
Followinstructions for submitting comments.All comments must be submitted inEnglish, or if not, accompanied by anEnglish translation. Comments will beposted as received to
Youshould submit only information thatyou wish to make available publicly. If you wish the Commission to considerinformation that is exempt fromdisclosure under the Freedom of Information Act, a petition forconfidential treatment of the exemptinformation may be submitted accordingto the procedure established in CFTCregulation 145.9 (17 CFR 145.9).The Commission reserves the right, but shall have no obligation, to review,pre-screen, filter, redact, refuse orremove any or all of your submissionfrom
that it may deem to be inappropriate for publication, such asobscene language. All submissions thathave been redacted or removed thatcontain comments on the merits of therulemaking will be retained in thepublic comment file and will beconsidered as required under theAdministrative Procedure Act and otherapplicable laws, and may be accessibleunder the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT
:
Carlene S. Kim, Deputy GeneralCounsel, (202) 418–5613,
Terry Arbit, DeputyGeneral Counsel, (202) 418–5357,
Mark Fajfar, AssistantGeneral Counsel, (202) 418–6636,
Office of GeneralCounsel; Gary Barnett, Director,Division of Swap Dealer andIntermediary Oversight, (202) 418–5977,
 Jacqueline H. Mesa,Director, Office of International Affairs,(202) 418–5386,
Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581.
SUPPLEMENTARY INFORMATION
:
I. Background
On July 21, 2010, President Obamasigned the Dodd-Frank Act,
1
whichamended the CEA
2
to establish a newregulatory framework for swaps. Thelegislation was enacted to reducesystemic risk, increase transparency,and promote market integrity within thefinancial system by, among other things:(1) Providing for the registration andcomprehensive regulation of swapdealers (‘‘SDs’’) and major swapparticipants (‘‘MSPs’’); (2) imposingclearing and trade executionrequirements on standardized derivativeproducts; (3) creating rigorousrecordkeeping and data reportingregimes with respect to swaps,including real-time public reporting;and (4) enhancing the Commission’srulemaking and enforcement authoritiesover all registered entities,intermediaries, and swap counterpartiessubject to the Commission’s oversight.Section 722(d) of the Dodd-Frank Actalso amended the CEA to add section2(i), which provides that the swapprovisions of the CEA apply to cross- border activities when certainconditions are met, namely, when suchactivities have a ‘‘direct and significantconnection with activities in, or effecton, commerce of the United States’’ orwhen they contravene Commissionrulemaking.
3
 In the two years since its enactment,the Commission has finalized 41 rulesto implement Title VII of the Dodd-Frank Act. The finalized rules includethose promulgated under CEA section4s,
4
which address registration of SDsand MSPs and other substantiverequirements applicable to SDs andMSPs. Notably, many section 4srequirements applicable to SDs andMSPs are tied to the date on which aperson is required to register, unless alater compliance date is specified.
5
Anumber of other rules specifically
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910
Federal Register
/Vol. 78, No. 4/Monday, January 7, 2013/Proposed Rules
6
These include rules under CEA section 4s(e), 7U.S.C. 6s(e) (governing capital and marginrequirements for SDs and MSPs).
7
‘‘Cross-Border Application of Certain SwapsProvisions of the Commodity Exchange Act,’’ 77 FR41214, Jul. 12, 2012.
8
7 U.S.C. 1a(49).
9
See
‘‘Further Definition of ‘Swap Dealer,’‘Security-Based Swap Dealer,’ ‘Major SwapParticipant,’ ‘Major Security-Based SwapParticipant’ and ‘Eligible Contract Participant,’’’ 77FR 30596, May 23, 2012 (‘‘Final Entities Rules’’).
10
7 U.S.C. 1a(33).
11
‘‘Exemptive Order Regarding Compliance WithCertain Swap Regulations,’’ 77 FR 41110 Jul. 12,2012.
12
Some of the commenters submitted a singlecomment letter addressing both the Proposed Orderand the Proposed Guidance. The comment letterssubmitted in response to the Proposed Order andProposed Guidance may be found on theCommission’s Web site at
Approximately 200 individuals submittedsubstantially identical letters to the effect thatoversight of the $700 trillion global derivativesmarket is the key to meaningful reform. The lettersstated that because the market is inherently global,risks can be transferred around the world with thetouch of a button. Further, according to theseletters, loopholes in the Proposed Guidance couldallow foreign affiliates of Wall Street banks toescape regulation. Lastly, the letters requested thatthe Proposed Guidance be strengthened to ensurethat the Dodd-Frank derivatives protections willdirectly apply to the full global activities of allimportant participants in the U.S. derivativesmarkets.
13
The records of these meetings andcommunications can be found on the Commission’sWeb site at:
14
In addition to differences in the applicablestatutory provisions, there are also differences inthe markets and products overseen by each agency,which may lead to divergent approaches to cross- border activities.
15
This is one aspect of the Commission’s on-going bilateral and multilateral efforts to promoteinternational coordination of regulatory reform. TheCommission staff is engaged in consultations withEurope, Japan, Hong Kong, Singapore, Switzerland,Canada, Australia, Brazil, and Mexico onderivatives reform. In addition, the Commissionstaff is participating in several standard-settinginitiatives, co-chairs the IOSCO Task Force on OTCDerivatives, and has created an informal workinggroup of derivatives regulators to discussimplementation of derivatives reform.
See also
 JointPress Statement of Leaders on Operating Principlesand Areas of Exploration in the Regulation of theCross-border OTC Derivatives Market, included inCFTC Press Release 6439–12, Dec. 4, 2012.
applicable to SDs and MSPs have beenproposed but not finalized.
6
 Further, the Commission publishedfor public comment the ProposedGuidance,
7
which set forth the mannerin which it proposed to interpret section2(i) of the CEA as it applies to therequirements under the Dodd-Frank Actand the Commission’s regulationspromulgated thereunder regardingcross-border swap activities.Specifically, in the Proposed Guidance,the Commission described the generalmanner in which it proposed toconsider: (1) Whether a non-U.S.person’s swap dealing activities aresufficient to require registration as a‘‘swap dealer’’,
8
as further defined in ajoint release adopted by the Commissionand the Securities and ExchangeCommission (‘‘SEC’’) (collectively, the‘‘Commissions’’);
9
(2) whether a non-U.S. person’s swap positions aresufficient to require registration as a‘‘major swap participant,’’
10
as furtherdefined in the Final Entities Rules; and(3) the treatment of foreign branches,agencies, affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-U.S. SDs. The Proposed Guidance alsogenerally described the policy andprocedural framework under which theCommission may permit compliancewith a comparable regulatoryrequirement of a foreign jurisdiction tosubstitute for compliance with therequirements of the CEA. Last, theProposed Guidance set forth the mannerin which the Commission proposed tointerpret section 2(i) of the CEA as itapplies to the clearing, trading, andcertain reporting requirements underthe Dodd-Frank Act with respect toswaps between counterparties that arenot SDs or MSPs.Contemporaneously with theProposed Guidance, the Commissionpublished the Proposed Order pursuantto section 4(c) of the CEA,
11
in order tofoster an orderly transition to the newswaps regulatory regime and to providemarket participants greater certaintyregarding their obligations with respectto cross-border swap activities duringthe pendency of the Proposed Order.The Proposed Order would granttemporary relief from certain swapprovisions of Title VII of the Dodd-Frank Act.The public comment periods on theProposed Order and the ProposedGuidance ended on August 13, 2012 andAugust 27, 2012, respectively. TheCommission received approximately 26letters on the Proposed Order andapproximately 288 letters on theProposed Guidance from a variety of market participants and other interestedparties, including major U.S. and non-U.S. banks and financial institutionsthat conduct global swaps business,trade associations, clearingorganizations, law firms (representinginternational banks and dealers),individual citizens, and foreignregulators.
12
The Commission staff alsoheld numerous meetings anddiscussions with various marketparticipants, domestic bank regulators,and other interested parties to discussthe Proposed Order and the ProposedGuidance.
13
 Further, the Commission staff closelyconsulted with the staff of the SEC in aneffort to increase understanding of eachother’s regulatory approaches and toharmonize the cross-border approachesof the two agencies to the greatest extentpossible, consistent with theirrespective statutory mandates.
14
TheCommission expects that thisconsultative process will continue aseach agency works towardsimplementing its respective cross- border policy.The Commission also recognizes thecritical role of international cooperationand coordination in the regulation of derivatives in the highly interconnectedglobal market, where risks aretransmitted across national borders andmarket participants operate in multiplejurisdictions. Close cooperativerelationships and coordination withother jurisdictions take on even greaterimportance given that, prior to therecent reforms, the swaps market haslargely operated without regulatoryoversight and many jurisdictions are indiffering stages of implementing theirregulatory reform. To this end, theCommission staff has actively engagedin discussions with their foreigncounterparts in an effort to betterunderstand and develop a moreharmonized cross-border regulatoryframework. The Commission expectsthat these discussions will continue asit finalizes the cross-border interpretiveguidance and as other jurisdictionsdevelop their own regulatoryrequirements for derivatives.
15
 The Commission has determined notto take further action on the ProposedGuidance at this time. The Commission believes it will be beneficial to havefurther consultations with otherdomestic and international regulators inan effort to harmonize cross-borderregulatory approaches prior to takingaction with respect to the ProposedGuidance. The Commission also believes that further consideration of public comments, including thecomments that may be received on theFurther Proposed Guidance regardingthe Commission’s interpretation of theterm ‘‘U.S. person,’’ and its guidanceregarding aggregation for purposes of SDregistration, will be helpful to theCommission in issuing final interpretiveguidance.Nonetheless, the Commission hasseparately determined to finalize theProposed Order as a final, time-limitedexemptive order (‘‘Final Order’’) that issubstantially similar to the ProposedOrder, except for the addition of provisions regarding registration andcertain modifications and clarifications
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911
Federal Register
/Vol. 78, No. 4/Monday, January 7, 2013/Proposed Rules
16
See
‘‘Final Exemptive Order RegardingCompliance with Certain Swap Regulations,’’ Dec.21, 2012.
17
See
CFTC Division of Swap Dealer andIntermediary Oversight, Re: Time-Limited No-Action Relief: Swaps Only With Certain Persons to be Included in Calculation of Aggregate GrossNotional Amount for Purposes of Swap Dealer DeMinimis Exception and Calculation of Whether aPerson is a Major Swap Participant, No-ActionLetter No. 12–22, Oct. 12, 2012 (‘‘CFTC Letter No.12–22’’).
18
The Commission intends that the Final Orderis in addition to any no-action relief issued or to be issued by the Commission staff. Unlessspecifically provided in any letter providing no-action relief, the Final Order does not limit theavailability of any no-action relief.
19
17 CFR 1.3(ggg)(4).
20
Proposed Guidance, 77 FR at 41218–41220.Further, where the potential non-U.S. SD’s swapobligations are guaranteed by a U.S. person, thenon-U.S. person would be required to register withthe Commission as an SD when the aggregatenotional value of its swap dealing activities (alongwith the swap dealing activities of its non-U.S.affiliates that are under common control and alsoguaranteed by a U.S. person) with U.S. persons andnon-U.S. persons exceeds the de minimis threshold.Additionally, the Proposed Guidance clarified thata non-U.S. person without a guarantee from a U.S.person would not be required to register as an SDif it does not engage in swap dealing with U.S.persons as part of ‘‘a regular business’’ with U.S.persons, even if the non-U.S. person engages indealing with non-U.S. persons.
21
See
Final Order paragraph (3). For this purpose,the Commission construes ‘‘affiliates’’ to includepersons under common control as stated in theFinal Entities Rules with respect to the term ‘‘swapdealer,’’ which defines control as ‘‘the possession,direct or indirect, of the power to direct or causethe direction of the management and policies of aperson, whether through the ownership of votingsecurities, by contract or otherwise.’’
See
FinalEntities Rules, 77 FR at 30631, fn. 437.
22
Also, under this alternative, a non-U.S. personwould not be required to include the aggregatenotional value of swap dealing transactions of anyof its non-U.S. affiliates under common controlwhere the counterparty to such affiliate is also anon-U.S. person.
addressing public comments.
16
Underthe Final Order, a non-U.S. person thatregisters as an SD or MSP may delaycompliance with certain entity-levelrequirements of the CEA (andCommission regulations promulgatedthereunder), and non-U.S. SDs andMSPs and foreign branches of U.S. SDsand MSPs may delay compliance withcertain transaction-level requirements of the CEA (and Commission regulationspromulgated thereunder), subject tospecified conditions. Recently, theCommission staff granted time-limited,no-action relief to promote continuity inthe application of Dodd-Frankrequirements and facilitate thetransition to those requirements byenabling swap market participants toapply a uniform and readilyascertainable standard regarding whichswaps must be included in thecalculations under the SD and MSPdefinitions.
17
The Final Order continuesthat process and furthers the samepurposes.
18
 This release sets forth the FurtherProposed Guidance.
II. Further Proposed Guidance
The Commission continues to reviewand consider the comments received onthe Proposed Guidance, and to discussthese issues with domestic and foreignregulators. In this process, theCommission is considering severalapproaches that may further thepurposes of the Proposed Guidance,which include enabling swap marketparticipants to apply a uniform andreadily ascertainable standard regardingwhich swaps must be included in thecalculations under the SD and MSPdefinitions. In order to facilitate theCommission’s further consideration of these issues, the Commission seekscomment on the following proposedinterpretations.
A. Aggregation of Affiliates’ Swaps for Purposes of the De Minimis Test 
Commission regulation 1.3(ggg)(4)requires that a person include, indetermining whether its swap dealingactivities exceed the de minimisthreshold, the aggregate notional valueof swap dealing transactions entered byits affiliates under common control.
19
 Under the Proposed Guidance, a non-U.S. person, in determining whether itsswap dealing transactions exceed the deminimis threshold, would include theaggregate notional value of swap dealingtransactions entered into by its non-U.S.affiliates under common control butwould not include the aggregatenotional value of swap dealingtransactions entered into by its U.S.affiliates.
20
The Final Order providesthat a non-U.S. person is not required toinclude, in its determination of whetherit exceeds the de minimis threshold, theswap dealing transactions of any of itsU.S. affiliates, and a non-U.S. personthat is an affiliate of a person that isregistered as an SD is not required toinclude in such determination the swapdealing transactions of any of its non-U.S. affiliates that engage in swapdealing activities, so long as suchexcluded affiliates are either (1) engagedin swap dealing activities with U.S.persons as of the effective date of theFinal Order or (2) registered as an SD.
21
 The Commission also is proposing analternative interpretation of theaggregation requirement in Commissionregulation 1.3(ggg)(4). Under thisalternative, a non-U.S. person would berequired, in determining whether itsswap dealing transactions exceed the deminimis threshold, to include theaggregate notional value of swap dealingtransactions entered into by all itsaffiliates under common control (i.e., both non-U.S. affiliates and U.S.affiliates), but would not be required toinclude in such determination theaggregate notional value of swap dealingtransactions of any non-U.S. affiliateunder common control that is registeredas an SD.
22
 Under the aggregation rule stated inCommission regulation 1.3(ggg)(4), anyaffiliate of a person that is registered asan SD will also have to register if itengages in any swap dealingtransactions, even if the aggregateamount of such swap dealingtransactions among all the unregisteredaffiliates is below the de minimisthreshold. Based on comments received,the Commission understands that theapplication of this requirement to non-U.S. affiliates of non-U.S. SDs may, incertain circumstances, imposesignificant burdens on such non-U.S.affiliates without advancing significantregulatory interests of the Commission.Because the conduct of swap dealing business through locally-organizedaffiliates may in some cases be requiredin order to comply with legalrequirements or business practices inforeign jurisdictions, such non-U.S.affiliates may be numerous and it would be impractical to require all such non-U.S. affiliates to register as SDs. Further,the Commission’s interest in registrationmay be reduced for a non-U.S. affiliateof a registered non-U.S. SD where thenon-U.S. affiliate (or group of suchaffiliates) engages in only a smallamount of swap dealing activity withU.S. persons.On the other hand, the Commissionhas also considered that given the borderless nature of swap dealingactivities, an SD may conduct swapdealing activities through variousaffiliates in different jurisdictions,which suggests that its interpretationshould take into account the applicableswap dealing transactions entered by allof a non-U.S. person’s affiliates undercommon control worldwide. Otherwise,affiliated persons may not be required toregister solely because their swapdealing activities are divided, such thateach affiliate falls below the de minimislevel. The Commission is concernedthat permitting such affiliates whoseswap dealing activities individually fall below the de minimis level, but whoseswap dealing activities in the aggregateexceed the de minimis level, to avoidregistration as SDs would provide anincentive for firms to spread their swapdealing activities among severalunregistered affiliates rather thancentralize their swap dealing in
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