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2013-17467

2013-17467

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43785
Federal Register
/Vol. 78, No. 140/Monday, July 22, 2013/Rules and Regulations
1
See
17 CFR 145.9.
2
5 U.S.C. 551,
et seq.
3
5 U.S.C. 552.
4
See
Dodd-Frank Wall Street Reform andConsumer Protection Act, Public Law 111–203, 124Stat. 1376 (July 21, 2010).
5
7 U.S.C. 1
et seq.
(amended 2010).
6
7 U.S.C. 2(i).
7
7 U.S.C. 6s.
8
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. (
).The Commission’s regulations arecodified at 17 CFR Ch. 1.
9
These include rules under CEA section 4s(e),7U.S.C. 6s(e) (governing capital and marginrequirements for SDs and MSPs), and CEA section4s(l), 7 U.S.C. 6s(l) (governing segregationrequirements for uncleared swaps).
10
Cross-Border Application of Certain SwapsProvisions of the Commodity Exchange Act, 77 FR41214 (Jul. 12, 2012) (‘‘Proposed Guidance’’).
11
7 U.S.C. 1a(49) (defining the term ‘‘swapdealer’’).
COMMODITY FUTURES TRADINGCOMMISSION17 CFR Chapter I
RIN 3038–AE05
Exemptive Order RegardingCompliance With Certain SwapRegulations
AGENCY
:
Commodity Futures TradingCommission.
ACTION
:
Exemptive order; request forcomments.
SUMMARY
:
On January 7, 2013, theCommodity Futures TradingCommission (‘‘Commission’’ or‘‘CFTC’’) issued a final order (‘‘JanuaryOrder’’) that granted market participantstemporary conditional relief fromcertain provisions of the CommodityExchange Act (‘‘CEA’’), as amended byTitle VII of the Dodd-Frank Wall StreetReform and Consumer Protection Act(‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’)(and Commission regulationsthereunder). The January Order expireson July 12, 2013. In this ExemptiveOrder (‘‘Exemptive Order’’), theCommission provides temporaryconditional relief effective upon theexpiration of the January Order in orderto facilitate transition to the Dodd-Frankswaps regime.
DATES
:
The Exemptive Order is effective July 13, 2013, and will expire December21, 2013, or such earlier date specifiedin the Exemptive Order.
ADDRESSES
:
You may submit comments,identified by RIN number 3038–AE05, by any of the following methods:
The agency’s Web site: 
at
Follow theinstructions for submitting commentsthrough the Web site.
Mail: 
Melissa D. Jurgens, Secretaryof the Commission, Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street NW.,Washington, DC 20581.
Hand Delivery/Courier: 
Same asmail above.
Federal eRulemaking Portal: http://  www.regulations.gov. 
Follow theinstructions for submitting comments.Please submit your comments usingonly one method.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 you believe is exemptfrom disclosure under the Freedom of Information Act, a petition forconfidential treatment of the exemptinformation may be submitted accordingto the procedures established in §145.9of the Commission’s regulations.
1
 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 theproposal will be retained in the publiccomment file and will be considered asrequired under the AdministrativeProcedure Act
2
and other applicablelaws, and may be accessible under theFreedom of Information Act.
3
 
FOR FURTHER INFORMATION CONTACT
:
GaryBarnett, Director, Division of SwapDealer and Intermediary Oversight,(202) 418–5977,
Sarah E. Josephson, Director, Office of International Affairs, (202) 418–5684,
Mark Fajfar,Assistant General Counsel, Office of General Counsel, (202) 418–6636,
Laura B. Badian,Counsel, Office of General Counsel,(202) 418–5969,
EvanH. Winerman, Attorney-Advisor, Officeof General Counsel, (202) 418–5674,
CommodityFutures Trading Commission, ThreeLafayette Centre, 1155 21st Street NW.,Washington, DC 20581.
SUPPLEMENTARY INFORMATION
:
I. Background
On July 21, 2010, President Obamasigned the Dodd-Frank Act,
4
whichamended the CEA
5
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 swapsprovisions 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 a Commissionrulemaking.
6
 In the nearly three years since itsenactment, the Commission hasfinalized 69 actions to implement TitleVII of the Dodd-Frank Act. The finalizedactions include rules promulgatedunder CEA section 4s,
7
which addressregistration of SDs and MSPs and othersubstantive requirements applicable toSDs and MSPs. Notably, many section4s requirements applicable to SDs andMSPs are tied to the date on which aperson is required to register, unless alater compliance date is specified.
8
Anumber of other rules specificallyapplicable to SDs and MSPs have beenproposed but are not finalized.
9
 Further, the Commission publishedfor public comment the ProposedGuidance,
10
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 swaps 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,’’
11
as further defined in ajoint release adopted by the Commission
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43786
Federal Register
/Vol. 78, No. 140/Monday, July 22, 2013/Rules and Regulations
12
See
Further Definition of ‘Swap Dealer,’‘Security-Based Swap Dealer,’ ‘Major SwapParticipant,’ ‘Major Security-Based SwapParticipant’ and ‘Eligible Contract Participant,’ 77FR 305969 (May 23, 2012) (‘‘Final Entities Rules’’).
13
7 U.S.C. 1a(33) (defining the term ‘‘major swapparticipant’’).
14
77 FR 41110 (Jul. 12, 2012).
15
78 FR 858 (Jan. 7, 2013).
16
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).
17
See
Interpretive Guidance and PolicyStatement Regarding Compliance with CertainSwap Regulations, (‘‘Guidance’’), adoptedconcurrently with the Exemptive Order.
18
As stated in the Guidance, any comparabilityanalysis will be based on a comparison of specificforeign requirements against specific related CEAprovisions and Commission regulations in 13categories of regulatory obligations, consideringcertain factors described in the Guidance.
19
The Commission notes that of 78 SDs and twoMSPs registered as of June 14, 2013, 33 SDs arefrom six non-U.S. jurisdictions: Twenty from theEuropean Union; five from Australia; five fromCanada; one from Japan; one from Hong Kong; andone from Switzerland.
20
See
5 U.S.C. 553(b)(B).
and the Securities and ExchangeCommission (‘‘SEC’’) (collectively, the‘‘Commissions’’);
12
(2) whether a non-U.S. person’s swap positions aresufficient to require registration as a‘‘major swap participant,’’
13
as furtherdefined in the Final Entities Rules; and(3) the treatment of foreign branches,agencies, affiliates, and subsidiaries of U.S. SDs and U.S. branches of non-U.S.SDs. The Proposed Guidance alsogenerally described the policy basis andprocedural framework underlying theCommission’s determination to allowcompliance with a comparableregulatory requirement of a foreignjurisdiction to substitute for compliancewith the requirements of the CEA andCommission regulations thereunder.Last, the Proposed Guidance set forththe manner in which the Commissionproposed to interpret section 2(i) of theCEA as it applies to the clearing,trading, and certain reportingrequirements under the Dodd-Frank Actwith respect to swaps betweencounterparties that are not SDs or MSPs.Contemporaneously with theProposed Guidance, the Commissionpublished the Exemptive OrderRegarding Compliance With CertainSwap Regulations (‘‘Proposed Order’’)
14
 pursuant to section 4(c) of the CEA, inorder to foster an orderly transition tothe new swaps regulatory regime and toprovide market participants greatercertainty regarding their obligationswith respect to cross-border swapsactivities prior to finalization of theProposed Order. The Proposed Orderwould have granted temporary relief from certain swaps provisions of TitleVII of the Dodd-Frank Act.On January 7, 2013, the Commissionpublished the Final Exemptive OrderRegarding Compliance with CertainSwap Regulations (‘‘January Order’’),
15
 which finalized the Proposed Order,with modifications, and grantedtemporary relief from certain swapsprovisions of Title VII of the Dodd-Frank Act. In particular, the JanuaryOrder: (1) Applies, for purposes of the January Order, a definition of the term‘‘U.S. person’’ based on the counterpartycriteria set forth in CFTC Letter No. 12–22,
16
with certain modifications; (2)provides relief concerning SD deminimis and MSP thresholdcalculations; (3) classifies, for purposesof the January Order, requirements of the CEA and Commission regulations aseither ‘‘Entity-Level Requirements’’ or‘‘Transaction-Level Requirements;’’ (4)allows non-U.S. persons that register asSDs or MSPs to delay compliance withcertain Entity-Level Requirements andTransaction-Level Requirements; and (5)allows foreign branches of U.S. SDs orMSPs to delay compliance with certainTransaction-Level Requirements. The January Order was effective December21, 2012, and expires July 12, 2013.
II. Need for Further Exemptive Relief With Request for Comments
In issuing the January Order, theCommission attempted to be responsiveto industry’s concerns regardingimplementation and thereby ensure thatmarket practices would not beunnecessarily disrupted during thetransition to the new swaps regulatoryregime. At the same time, however, theCommission endeavored to comply withthe Congressional mandate toimplement the new SD and MSPregulatory scheme in a timely manner.Accordingly, the January Order wascarefully tailored both in scope andduration in order to strike the proper balance between these competingdemands.Following the issuance of the JanuaryOrder, Commission staff addressedvarious implementation issues throughno-action letters and interpretativeletters in order to ensure a smoothtransition to the new swaps regulatoryregime. Furthermore, the Commissionand its staff have closely consulted withSEC staff and with foreign regulators inan effort to harmonize cross-borderregulatory approaches. As a result,significant progress has been madetowards implementation of the Dodd-Frank swaps regime. Under thesecircumstances, the Commission doesnot believe that an extension of the January Order is necessary orappropriate. The Commission believes,however, that further transitional relief is necessary in order to avoidunnecessary market disruptions and tofacilitate market participants’ transitionto the new Dodd-Frank swaps regime.Specifically, with the expiration of the January Order, the temporary definitionof the term ‘‘U.S. person’’ will no longer be available. As a result, marketparticipants will need additional time toadjust their operational and compliancesystems in order to incorporate therevised scope of the term ‘‘U.S. person.’’The Commission also recognizes thatimplementation of the Commission’ssubstituted compliance program would benefit from additional time.
17
Underthis ‘‘substituted compliance program,’’the Commission may determine thatcertain laws and regulations of a foreignjurisdiction are comparable to, and ascomprehensive as, a correspondingcategory of U.S. laws and regulations.
18
 A finding of comparability, however,may not be possible at this time for anumber of reasons, including that theforeign jurisdiction has not yetimplemented or finalized particularrequirements and that the Commissiondoes not have sufficient information tomake the comparability determinations(‘‘Substituted ComplianceDeterminations’’). Moreover, theCommission has only recently receivedrequests for Substituted ComplianceDeterminations from parties located inAustralia, Canada, the European Union,Hong Kong, Japan, and Switzerland.
19
 The Commission is issuing theExemptive Order today, with a requestfor comments, as it is cognizant that, inthe absence of immediate exemptiverelief, market participants will be facedwith significant legal uncertainty andthe risk of adverse consequences to theirglobal business, especially in light of theongoing discussions with foreignregulatory entities and their evolvingregulatory regimes. For all of theforegoing reasons, the Commission findsthat public notice and comment on thisExemptive Order would beimpracticable, unnecessary, andcontrary to the public interest.
20
 Because the Commission understandsthat the transition to the Guidance iscomplex and could apply in variedways to different situations, theCommission is seeking public commenton any issues that are not fullyaddressed by the Exemptive Order.Thus, the Exemptive Order is effectiveas of July 13, 2013, and the Commissionis soliciting comments for 30 days. The
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43787
Federal Register
/Vol. 78, No. 140/Monday, July 22, 2013/Rules and Regulations
21
7 U.S.C. 1a(49) and 1a(33).
See
Final EntitiesRules.
22
Section 1a(49)(D) of the CEA, 7 U.S.C.1a(49)(D), provides that ‘‘[t]he Commission shallexempt from designation as a swap dealer an entitythat engages in a de minimis quantity of swapdealing in connection with transactions with or on behalf of its customers. The Commission shallpromulgate regulations to establish factors withrespect to the making of this determination toexempt.’’ This provision is implemented inCommission regulation 1.3(ggg)(4).
23
As used in the Exemptive Order, the meaningof the term ‘‘swap dealing’’ is consistent with thatused in the Final Entities Rules.
24
Under Commission regulations 3.10(a)(1)(v)(C)and 23.21, a person is required to register as an SDwhen, on or after October 12, 2012, the person fallswithin the definition of an SD. However, the ruledefining ‘‘swap dealer’’ includes a de minimisthreshold so that an entity is not an SD if it, togetherwith the entities controlling, controlled by, andunder common control with it, engages in swapdealing activity during the prior 12 months in anaggregate gross notional amount of less than thespecified thresholds. The rule further specifies thatswap dealing activity engaged in before the effectivedate of both the ‘‘swap dealer’’ and ‘‘swap’’definition rules (
i.e.,
 before October 12, 2012) doesnot count toward the de minimis threshold. Therule also provides that an entity that exceeds the deminimis threshold must register as an SD twomonths after the end of the month in which itexceeds the threshold.
See
Commission regulation1.3(ggg)(4).
25
On the other hand, the Commission believesthat it is not appropriate to provide a non-U.S.person with relief from the registration requirementwhen the aggregate level of its swap dealing withU.S. persons, as that term is defined in theGuidance, exceeds the de minimis level of swapdealing, or when the level of its swap positionswith U.S. persons, again as that term is definedabove, exceeds one of the MSP thresholds. In theCommission’s view, such relief from the registrationrequirement is inappropriate when a level of swapsactivities that is substantial enough to requireregistration as an SD or an MSP when conducted by a U.S. person, is conducted by a non-U.S. personwith U.S. persons as counterparties.
26
For this purpose, the Commission construes‘‘affiliates’’ to include persons under commoncontrol as stated in the Commission’s final rulefurther defining the term ‘‘swap dealer,’’ whichdefines control as ‘‘the possession, direct orindirect, of the power to direct or cause thedirection of the management and policies of aperson, whether through the ownership of votingsecurities, by contract or otherwise.’’
See
FinalEntities Rules, 77 FR at 30631 n. 437.
Commission will take into considerationarguments made in all commentsreceived and make adjustments to theExemptive Order, as necessary.In summary, like the January Order,the Exemptive Order will providetargeted, time-limited relief from certainDodd-Frank requirements to facilitate anorderly transition to the Dodd-Frankregulatory regime, while, at the sametime, ensuring that the Dodd-Frankswaps market reform is implementedwithout undue delay.
III. Scope of Exemptive Order
A. Definition of ‘‘U.S. Person’’ and Phase-In of Guaranteed Affiliates and ‘‘Affiliate Conduits’’ 
As discussed above, the Commissionrecognizes that market participants mayneed additional time to facilitate theirtransition to the interpretation of theterm ‘‘U.S. person.’’ Accordingly, underthe Exemptive Order, the definition of the term ‘‘U.S. person’’ contained in the January Order will continue to applyfrom July 13, 2013 (the date on whichthe Exemptive Order is effective) until75 days after the Final Guidance ispublished in the
Federal Register
. TheCommission expects that this step, andthe other relief provided in thisExemptive Order, will substantiallyaddress concerns regarding thecomplexity of implementing the swaprequirements for the interim periodduring which the Exemptive Order is ineffect. In addition, guaranteed affiliatesand affiliate conduits do not need tocomply with Transaction-LevelRequirements relating to swaps withnon-U.S. persons and foreign branchesof U.S. swap dealers and MSPs until 75days after the Final Guidance ispublished in the
Federal Register
.
B. De Minimis Calculation
The Commission has adopted finalrules and interpretive guidanceimplementing the statutory definitionsof the terms ‘‘swap dealer’’ and ‘‘majorswap participant’’ in CEA sections1a(49) and 1a(33).
21
The Final EntitiesRules delineate the activities that causea person to be an SD and the level of swap positions that cause a person to bean MSP. In addition, the Commissionhas adopted rules concerning thestatutory exceptions from the definitionof an SD, including the de minimisexception.
22
Commission regulation1.3(ggg)(4) sets forth a de minimisthreshold of swap dealing, which takesinto account the notional amount of aperson’s swap dealing activity over theprior 12 months.
23
When a personengages in swap dealing transactionsabove that threshold, the person meetsthe SD definition in section 1a(49) of theCEA.
24
Commission regulations1.3(jjj)(1) and 1.3(lll)(1) set forth swapposition thresholds for the MSPdefinition in Commission regulation1.3(hhh). When a person holds swappositions above those thresholds, suchperson meets the MSP definition insection 1a(39) of the CEA.As described in the January Order, theCommission believed it appropriate toprovide, during the pendency of theCommission’s cross-border interpretiveguidance, temporary relief for non-U.S.persons (regardless of whether the non-U.S. persons’ swap obligations areguaranteed by U.S. persons) from therequirement that a person include all itsswaps in its calculation of the aggregategross notional amount of swapsconnected with its swap dealing activityfor SD purposes or in its calculations forMSP purposes.
25
In order to facilitate anorderly transition to the revised scope of the term ‘‘U.S. person,’’ the ExemptiveOrder provides that until 75 days afterthe Guidance is published in the
Federal Register
, a non-U.S. person(regardless of whether the non-U.S.person’s swaps obligations areguaranteed by U.S. persons) does notneed to include in its calculation of theaggregate gross notional amount of swaps connected with its swap dealingactivity for purposes of Commissionregulation 1.3(ggg)(4) or in itscalculation of whether it is an MSP forpurposes of Commission regulation1.3(hhh), any swaps where thecounterparty is a non-U.S. person, orany swap where the counterparty is aforeign branch of a U.S. person that isregistered as a swap dealer.
C. Aggregation
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.Under the January Order, a non-U.S.person that is engaged in swap dealingactivities with U.S. persons as of theeffective date of the January Order is notrequired to include, in its calculation of the aggregate gross notional amount of swaps connected with its swap dealingactivity for purposes of Commissionregulation 1.3(ggg)(4), the aggregategross notional amount of swapsconnected with the swap dealingactivity of its U.S. affiliates undercommon control.
26
Further, a non-U.S.person that is engaged in swap dealingactivities with U.S. persons as of theeffective date of the January Order andis an affiliate under common controlwith a person that is registered as an SDis also not required to include, in itscalculation of the aggregate grossnotional amount of swaps connectedwith its swap dealing activity forpurposes of Commission regulation1.3(ggg)(4), the aggregate gross notionalamount of swaps connected with theswap dealing activity of any non-U.S.affiliate under common control that iseither (i) engaged in swap dealingactivities with U.S. persons as of theeffective date of the January Order or (ii)registered as an SD. Also, under the January Order, a non-U.S. person is notrequired to include, in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing
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