[Federal Register Volume 75, Number 211 (Tuesday, November 2, 2010)]
[Proposed Rules]
[Pages 67254-67258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27555]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 4

RIN 3038-AD11


Removing Any Reference to or Reliance on Credit Ratings in 
Commission Regulations; Proposing Alternatives to the Use of Credit 
Ratings

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing rules to implement new statutory provisions 
enacted by Title IX of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. These proposed rules apply to futures commission 
merchants, designated clearing organizations and commodity pool 
operators. The proposed rules implement the new statutory framework 
that requires agencies to replace any reference to or

[[Page 67255]]

reliance on credit ratings in their regulations with an appropriate 
alternative standard.

DATES: Submit comments on or before December 2, 2010.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD11 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, 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.
    Please submit your comments using only one method.
    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 available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the established in 
CFTC Regulation 145.9.\1\
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    \1\ 17 CFR 145.9.
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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 http://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: Adrianne Joves, Counsel, Office of 
General Counsel, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 
418-5420. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII 
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'') 
\4\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act may be accessed at http://www.cftc.gov./LawRegulation/
OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
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    In addition, Title IX of the Dodd-Frank Act addresses credit 
ratings agencies. In pertinent part, Title IX requires Federal agencies 
to review, modify and report on their regulations that require the use 
of an assessment of the creditworthiness of a security or money market 
instrument and that rely on or reference credit ratings.\5\ Section 
939A of the Dodd-Frank Act directs that the Commission:
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    \5\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, Sec.  939A (2010).
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    (1) Review Commission regulations that require the use of an 
assessment of the credit-worthiness of a security or money market 
instrument;
    (2) Remove any reference to or reliance on credit ratings in such 
regulations and substitute an appropriate standard of credit-
worthiness;
    (3) Seek to establish, to the extent possible, uniform standards of 
credit-worthiness; and
    (4) Report to Congress after the completion of the rulemaking 
process.\6\
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    \6\ Id.
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    The Dodd-Frank Act contains a statutory deadline of July 21, 2011, 
for completing the required review of Commission regulations for any 
such reference to or reliance on credit ratings.\7\
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    \7\ Id. at Sec.  939A(a).
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    The Commission has completed the required review of its regulations 
\8\ and has identified two categories of regulations that contain any 
reliance on credit ratings: (1) Those that rely on ratings to limit how 
Commission registrants might invest or deposit customer funds; and (2) 
those that require disclosing a credit rating to describe an 
investment's characteristics. However, not every instance identified by 
this review specifically references or relies on credit ratings to 
assess the credit-worthiness of a security or a money market 
instrument. Nonetheless, in keeping with its efforts to fully comply 
with both the spirit and letter of the Dodd-Frank Act, the Commission 
is proposing to amend all of its identified regulations that rely on 
credit ratings regarding financial instruments. Accordingly, the 
Commission proposes amending Rules 1.49 \9\ and 4.24 \10\ to remove any 
references or reliance on credit ratings and replace them with 
alternative standards. Elsewhere in today's Federal Register, the 
Commission is also publishing notice of its proposal to amend 
Commission regulations 1.25 and 30.7, which in part proposes removing 
all references to or reliance on credit ratings in those regulations. 
Finally, the Commission is also publishing in today's Federal Register 
notice of its proposal to amend Part 40 of its regulations. This 
proposal includes removing Appendix A to Part 40,\11\ which contained 
one reference to credit ratings.
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    \8\ Supra note 4.
    \9\ 17 CFR 1.49 (2009).
    \10\ 17 CFR 4.24(h)(1)(i) (2009).
    \11\ 17 CFR app. pt. 40 guideline no. 1 (2009).
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    The Commission requests comment on all aspects of the proposed 
rules, as well as comment on the specific provisions and issues 
highlighted in the discussion below.

II. Discussion

A. Removing Reliance on or Reference to Credit Ratings To Limit How 
Registrants Might Deposit Customer Funds

    As noted above, after completing the required review of Commission 
regulations for references to or reliance on credit ratings, two 
instances were identified where credit ratings were used to help limit 
how registrants might handle customer funds. Commission regulations 
1.49 and 30.7, which were written to mirror one another,\12\ both 
include a reference to credit ratings. The Commission is proposing to 
remove those references to credit ratings from both 30.7 and 1.49. The 
Commission's proposal to remove the reference to credit ratings from 
regulation 30.7 is

[[Page 67256]]

being published elsewhere in today's Federal Register.
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    \12\ See 68 FR 5549 (Feb. 4, 2003).
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1. Commission Regulation 1.49
    Commission Regulation 1.49 \13\ places qualifications on the types 
of depositories where futures commission merchants (FCMs) and 
designated clearing organizations (DCOs) might place customer funds. 
Similar to 30.7, 1.49 currently requires that an acceptable foreign 
depository must either: (1) Have in excess of $1 billion of regulatory 
capital; or (2) issue commercial paper or a long-term debt instrument 
that is rated in one of the two highest rating categories by at least 
one nationally recognized statistical rating organization (NRSRO).
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    \13\ 17 CFR 1.49(d)(3)(i)(B) (2009).
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    In keeping with the Dodd-Frank Act, the Commission proposes to 
remove all ratings requirements from Regulation 1.49. This proposal is 
based on the Commission's views regarding the uncertain reliability of 
ratings as currently administered. Recent events in the financial 
markets have revealed significant weaknesses in the ratings industry 
and its ability to reliably gauge the safety of debt instruments. 
Further, Congress and other Federal financial regulators have 
considered eliminating or restricting rating requirements with some 
frequency during the past two years.\14\
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    \14\ See 74 FR 63832 (Dec. 4, 2009) (discussing the efforts of 
the Securities Exchange Commission). See also 75 FR 52283 (Aug. 25, 
2010) (discussing the efforts of the Federal banking agencies.)
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    Finally, noting that the requirements regarding the placement of 
customer funds in foreign depositories in the two regulations were 
originally written to mirror one another,\15\ this proposal to remove 
the reference to credit ratings in Commission regulation 1.49 is done 
in concert with proposals found elsewhere in today's Federal Register 
regarding Commission regulation 30.7. That proposal considers the 
reference to credit ratings in Commission regulation 30.7 to be no more 
useful or necessary to gauge the safety of a depository institution 
than similar references found in Commission regulation 1.25. To explain 
its proposal to remove references to credit ratings in Commission 
regulation 1.25, the Commission notes the poor past performance of 
credit ratings in gauging the safety of certain types of investments, 
and its view that credit ratings are not necessary to gauge the future 
ability of certain types of investments to preserve customer funds. As 
a result, this proposal serves to align Commission regulation 1.49 with 
proposed Commission regulations 1.25 and 30.7, and to greater simplify 
the regulatory treatment of investment of customer funds.
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    \15\ See supra note 11.
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Request for Comment
    The Commission requests comment on whether relying on a minimum 
capital requirement of $1 billion dollars in regulatory capital is an 
adequate alternative standard to current Commission regulation 1.49. 
The Commission also requests comment on whether there is another 
standard or measure of solvency and credit-worthiness that might be 
used as an appropriate, additional test of a bank's safety. 
Specifically, the Commission seeks comment on whether a leverage ratio 
or a capital adequacy ratio requirement consistent with or similar to 
those in the Basel III accords\16\ would be an appropriate additional 
safeguard for a bank or trust company located outside the United 
States.
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    \16\ See Press Release, Basel Committee on Banking Supervision, 
Group of Governors and Heads of Supervision Announces Higher Global 
Minimum Capital Standards (Sept. 12, 2010) (http://bis.org/press/p100912.pdf).
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    The Commission welcomes any other comments on this proposal.

B. Removing Reliance on Credit Ratings To Help Disclose the 
Characteristics of an Investment

    After completing the required review of Commission regulations for 
references to or reliance on credit ratings, two instances were 
identified where credit ratings were used to help disclose the 
characteristics of an investment. Commission regulation 4.24 \17\ and 
Appendix A to Part 40 \18\ both include a reference to credit ratings. 
As a result, while the references to credit ratings are not 
specifically related to the credit-worthiness of securities or money 
market instruments, in keeping with the spirit of the Dodd-Frank Act 
the Commission is proposing to remove the references to credit ratings 
from 4.24. Elsewhere in today's Federal Register the Commission is 
proposing amendments to Part 40 of the Commission's regulations, 
including the removal of Appendix A to Part 40.
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    \17\ 17 CFR 4.24(h)(1)(i) (2009).
    \18\ 17 CFR app. pt. 40 guideline no. 1 (2009).
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1. Commission Regulation 4.24
    Commission Regulation 4.24 requires commodity pool operators (CPOs) 
to disclose the characteristics of the commodity and other interests 
that the pool will trade including, if applicable, their investment 
rating. In keeping with its stated goal of complying fully with the 
spirit and letter of the Dodd-Frank Act, the Commission proposes 
removing the references to ratings Commission regulation 4.24 and 
replacing that reference with the phrase ``credit-worthiness.'' While 
CPOs may still choose to reference an investment rating to describe the 
credit-worthiness of an investment in its disclosures, the Commission 
notes that the CPO as appropriate should make an independent assessment 
of the credit-worthiness of those investments.
Request for Comment
    The Commission requests comment on what effect removing credit 
ratings as one characteristic included in Commission regulation 4.24 
might have on the ability of investors and others to understand the 
disclosures of commodity pool operators (CPOs) regarding the 
characteristics of a commodity pool. The Commission also requests 
comment on the ability of CPOs to make independent assessments of the 
credit-worthiness of their pool's investments.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \19\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small businesses. The rule amendments proposed herein will affect 
FCMs, DCOs and CPOs. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on small entities in accordance with 
the RFA.\20\ The Commission has previously determined that registered 
FCMs,\21\ DCOs \22\ and CPOs \23\ are not small entities for the 
purpose of the RFA. Accordingly, pursuant to 5 U.S.C. 605(b), the 
Chairman, on behalf of the Commission, certifies that the proposed 
rules will not have a significant economic impact on a substantial 
number of small entities.
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    \19\ 5 U.S.C. 601 et seq.
    \20\ 47 FR 18618 (Apr. 30, 1982).
    \21\ Id. at 18619.
    \22\ 66 FR 45604, 45609 (Aug. 29, 2001).
    \23\ 47 FR 18618-21 (Apr. 30, 1982).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \24\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The proposed rule amendments do not 
require a new collection of information on the part of any entities 
subject to the

[[Page 67257]]

proposed rule amendments. Accordingly, for purposes of the PRA, the 
Commission certifies that these proposed rule amendments, if 
promulgated in final form, would not impose any new reporting or 
recordkeeping requirements.
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    \24\ 44 U.S.C. 3501 et seq.
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C. Costs and Benefits of the Proposed Rules

    Section 15(a) of the CEA \25\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of rule or to determine whether the 
benefits of the rulemaking outweigh its costs; rather, it requires that 
the Commission ``consider'' the costs and benefits of its actions. 
Section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of 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 one of the five enumerated areas and could 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 accomplish any of the purposes of 
the Act.
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    \25\ 7 U.S.C. 19(a).
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    Summary of proposed requirements. Proposed rule 1.49 would 
facilitate greater protection of customer funds. The proposed 
amendments align proposed regulation 1.49 with proposals made elsewhere 
in today's Federal Register regarding Commission regulations 1.25 and 
30.7. Like those proposals, the proposed amendments to Commission 
regulation 1.49 are made with the primary purpose of safeguarding the 
funds of customers.
    Proposed amendments to Commission regulation 4.24 would lessen 
reliance on credit ratings and will reduce risk in the financial system 
by placing more responsibility on CPOs to fully understand the credit-
worthiness of their investments .
    Costs. With respect to costs, the Commission has determined that 
its proposals present minimal costs while providing the great benefits 
of safeguarding customer funds and decreasing the risks associated with 
CPOs not evaluating the credit-worthiness of their investments. There 
may be some minimal costs associated with transferring customer funds, 
if necessary, to more sound foreign depository institutions and with 
CPOs improving their ability to make independent assessments regarding 
the credit-worthiness of their investments.
    Benefits. With respect to benefits, the Commission has determined 
that the proposed rules will help safeguard customer funds and will 
result in CPOs improving their understanding of the credit-worthiness 
of their investments. The proposed rules help protect market 
participants and the public by safeguarding customer funds and 
highlighting the accountability CPOs have for understanding the credit-
worthiness of their investments. The proposed rules will not hinder the 
efficiency or competitiveness of futures markets, and may improve the 
financial integrity of the markets by helping to safeguard customer 
funds and encourage CPOs to better understand the credit-worthiness of 
their investments. The proposed rules will not have any effect on price 
discovery, and may help improve sound risk management practices.
    Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the Proposal with their comment letters.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection.

17 CFR Part 4

    Advertising, Commodity futures, Commodity pool operators, Commodity 
trading advisors, Consumer protection, Disclosure, Principals, 
Reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission proposed to amend 17 CFR parts 1 and 4 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1, 
16, 16a, 19, 21, 23, and 24, as amended by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 
Stat. 1376 (2010) and the Commodity Futures Modernization Act of 
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

    2. Section 1.49 is amended by revising paragraph (d)(3) to read as 
follows:


Sec.  1.49  Denomination of customer funds and location of 
depositories.

* * * * *
    (d) * * *
    (3) A depository, if located outside the United States, must be:
    (i) A bank or trust company that has in excess of $1 billion of 
regulatory capital; or
    (ii) A futures commission merchant that is registered as such with 
the Commission; or
    (iii) A derivatives clearing organization.
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a 
and 23 as amended by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    2. Section 4.24 is amended by revising paragraph (h)(1)(i) to read 
as follows:


Sec.  4.24  General disclosures required.

* * * * *
    (h) * * *
    (1) * * *
    (i) The approximate percentage of the pool's assets that will be 
used to trade commodity interests, securities and other types of 
interests, categorized by type of commodity or market sector, type of 
security (debt, equity, preferred equity), whether traded or listed on 
a regulated exchange market, maturity ranges and by credit worthiness, 
as applicable;
* * * * *

    By the Commodity Futures Trading Commission.

    Dated: October 27, 2010.
David A. Stawick,
Secretary.

Statement of Chairman Gary Gensler Removing Any Reference to or 
Reliance on Credit Ratings in Commission Regulations; Proposing 
Alternatives to the Use of Credit Ratings

    October 26, 2010
    I support the proposal to remove any reliance on credit ratings 
within the Commission's regulations. Under Title IX of the Dodd-Frank 
Act, Congress required that the Commission review references to credit 
ratings in our

[[Page 67258]]

existing regulations and to specifically remove them if they were 
regarding certain financial instruments. The Commission has completed 
the required review of its regulations and has identified seven 
instances of references to credit ratings, five of which were regarding 
those financial instruments. Today, we are proposing removing these 
five references and reliance to credit ratings. This rule addresses two 
of those references in Regulation 1.49, which limits the types of banks 
in which futures commission merchants and derivatives clearing 
organizations may place customer funds, and 4.24, which requires 
commodity pool operators to disclose to their customers where they are 
putting customer money. The other actions we are taking today regarding 
rule certifications in Part 40 and investment of customer funds in 
Regulation 1.25 and 30.7 will address the remaining instances of credit 
ratings.

[FR Doc. 2010-27555 Filed 11-1-10; 8:45 am]
BILLING CODE P