[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Proposed Rules]
[Pages 35372-35378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-15195]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter 1


Effective Date for Swap Regulation

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: Pursuant to section 754 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act''), the general effective 
date for certain provisions of subtitle A of title VII of the Dodd-
Frank Act (``Title VII'') that do not require a rulemaking is 360 days 
after enactment, or July 16, 2011, unless another effective date is 
specifically provided. Following the general effective date, market 
participants may be subject to certain Commodity Exchange Act (``CEA'' 
or ``Act'') requirements but not others. To provide greater clarity 
regarding the applicability of various statutory and regulatory 
requirements, the Commodity Futures Trading Commission (``CFTC'' or the 
``Commission'') is proposing to grant, pursuant to its section 4(c) 
exemptive authority, temporary relief in two parts with respect to 
various requirements of the CEA that apply or may apply to certain 
agreements, contracts, and transactions. In part one, the Commission is 
proposing to temporarily exempt persons or entities with respect to 
provisions of the CEA added or amended by the Dodd-Frank Act that 
reference one or more terms regarding entities or instruments that 
Title VII requires be ``further defined,'' such as the terms ``swap,'' 
``swap dealer,'' ``major swap participant,'' or ``eligible contract 
participant,'' to the extent that requirements or portions of such 
provisions specifically relate to such referenced terms. In part two, 
the Commission is proposing to grant relief from certain provisions of 
the CEA that will or may apply to certain agreements, contracts, and 
transactions in exempt or excluded commodities as a result of the 
repeal of various CEA exemptions and exclusions as of July 16, 2011.

DATES: Comments must be received on or before July 1, 2011.

ADDRESSES: Comments may be submitted, referenced as ``Effective 
Dates,'' by any of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Send to David A. Stawick, Secretary, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581.
     Courier: Same as mail above.
    Please submit your comments using only one method. ``Effective 
Dates'' must be in the subject field of responses submitted via e-mail, 
and clearly indicated on written submissions. 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 CFTC 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 procedures established in section 145.9 of the CFTC's 
regulations.\1\
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    \1\ 17 CFR 145.9.
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    The CFTC 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, including obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this action 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: Terry Arbit, Deputy General Counsel, 
202-418-5120, [email protected], or Harold Hardman, Deputy General 
Counsel, 202-418-5120, [email protected], Office of the General 
Counsel, or Steven Kane, Consultant, 202-418-5911, [email protected], 
Office of the Chief Economist, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\ 
Title VII of the Dodd-Frank Act amends the CEA \3\ to establish a 
comprehensive new regulatory framework for 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

[[Page 35373]]

requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
rulemaking and enforcement authorities of the Commission with respect 
to, among others, all registered entities and intermediaries subject to 
the Commission's oversight. Title VII also includes amendments to the 
Federal securities laws to establish a similar regulatory framework for 
security-based swaps under the authority of the Securities and Exchange 
Commission (``SEC'').
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ 7 U.S.C. 1 et seq.
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    Section 754 of the Dodd-Frank Act provides that, unless otherwise 
provided, the provisions of subtitle A of Title VII \4\ ``shall take 
effect on the later of 360 days after the date of the enactment of this 
subtitle or, to the extent a provision of this subtitle requires a 
rulemaking, not less than 60 days after publication of the final rule 
or regulation implementing such provisions of this subtitle.'' The date 
360 days after the date of enactment is July 16, 2011.
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    \4\ Subtitle A of Title VII contains two parts. Part I, entitled 
``Regulatory Authority,'' consists of sections 711-720; part II, 
entitled ``Regulation of Swap Markets,'' consists of sections 721-
754. Subtitle B of Title VII is entitled ``Regulation of Security-
Based Swap Markets,'' and consists of sections 761-774. References 
to ``Title VII'' in this Release shall include only subtitle A of 
Title VII.
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    To implement the Dodd-Frank Act, the Commission has to-date issued 
53 advance notices of proposed rulemaking or notices of proposed 
rulemaking, two interim final rules, one final rule, and one proposed 
interpretive order. The regulatory requirements that have been proposed 
by the Commission present a substantially complete mosaic of the 
Commission's proposed regulatory framework under Title VII. In light of 
this substantially complete mosaic, the Commission reopened or extended 
the comment period of many of its proposed rulemakings in order to 
provide the public with an additional opportunity to comment on the 
proposed new regulatory framework for swaps, either in part or as a 
whole.\5\ The extended comment period closed on June 3, 2011. The 
Commission also has solicited public comments on phasing of rule 
implementation (i.e., identifying which requirements can be met sooner 
and which ones will take more time).\6\
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    \5\ See Reopening and Extension of Comment Periods for 
Rulemakings Implementing the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, 76 FR 25274, May 4, 2011.
    \6\ The Commission has noted its ability to phase in 
implementation of the new requirements based on factors such as: The 
type of swap, including by asset class; the type of market 
participants that engage in such trades; the speed with which market 
infrastructures can meet the new requirements; and whether 
registered market infrastructures or participants might be required 
to have policies and procedures in place ahead of compliance with 
such policies and procedures by non-registrants. http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/staffconcepts050211.pdf.
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II. Background and Discussion

    Section 712(d)(1) of the Dodd-Frank Act requires the Commission and 
the SEC to further define certain terms used in Title VII, including 
the terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and 
``eligible contract participant.'' \7\ Section 721(c) requires the 
Commission to adopt a rule to further define the terms ``swap,'' ``swap 
dealer,'' ``major swap participant,'' and ``eligible contract 
participant'' to prevent evasion of statutory and regulatory 
obligations.\8\ The Commission has issued two notices of proposed 
rulemaking that address these definitions.\9\
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    \7\ Section 712(d) provides: ``Notwithstanding any other 
provision of this title and subsections (b) and (c), the Commodity 
Futures Trading Commission and the Securities and Exchange 
Commission, in consultation with the Board of Governors [of the 
Federal Reserve System], shall further define the terms `swap', 
`security-based swap', `swap dealer', `security-based swap dealer', 
`major swap participant', `major security-based swap participant', 
and `security-based swap agreement' in section 1a(47)(A)(v) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''
    \8\ Section 721(c) provides: ``To include transactions and 
entities that have been structured to evade this subtitle (or an 
amendment made by this subtitle), the Commodity Futures Trading 
Commission shall adopt a rule to further define the terms `swap', 
`swap dealer', `major swap participant', and `eligible contract 
participant'.''
    \9\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR 
80174, Dec. 21, 2010 (``Entity Definitions'') and Further Definition 
of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap 
Agreement'' Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, 76 FR 29818, May 23, 2011.
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    The Commission's final rulemakings further defining the terms in 
sections 712(d) and 721(c) will not be in place as of July 16, 2011. 
Consequently, concerns have been raised about effects upon the swaps 
market during the period between July 16, 2011 and prior to the date(s) 
that those rulemakings have been completed. The Commission is proposing 
this relief to address these concerns and provide clarity to market 
participants upon the general effective date of the Dodd-Frank Act. The 
Commission reiterates its intent to ``strive to ensure that current 
practices will not be unduly disrupted during the transition to the new 
regulatory regime.'' \10\
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    \10\ See Notice Regarding the Treatment of Petitions Seeking 
Grandfather Relief for Trading Activity Done in Reliance Upon 
Section 2(h)(1)-(2) of the Commodity Exchange Act, 75 FR 56512, 
56513, Sept. 16, 2010 (``Grandfather Notice'').
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    Section 712(f) of the Dodd-Frank Act authorizes the Commission to 
``promulgate rules, regulations, or orders permitted by this [Dodd-
Frank] Act,'' conduct studies and prepare reports, register persons, 
and ``exempt persons, agreements, contracts, or transactions from the 
provisions of the Act, under the terms contained in this Act,'' in 
order to prepare for the effective dates of the provisions of Title 
VII. Section 4(c) of the CEA, as amended by the Dodd-Frank Act, 
provides the Commission with authority to exempt certain agreements, 
contracts, and transactions that may otherwise be subject to the CEA 
from various provisions of the CEA.\11\
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    \11\ 7 U.S.C. 6(c).
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    The provisions of Title VII can be grouped into 4 major categories: 
(1) Provisions that require a rulemaking (for which relief is not being 
proposed); (2) self-effectuating provisions that reference terms that 
require further definition; (3) self-effectuating provisions that do 
not reference terms that require further definition and that repeal 
provisions of current law; and (4) self-effectuating provisions for 
which relief is not being proposed.
    Section 754 specifies that unless otherwise provided in Title VII, 
provisions requiring a rulemaking become effective ``not less than 60 
days after publication of the final rule'' (but not before July 16, 
2011). Category 1 provisions, therefore, are not self-effectuating. A 
significant number of the Title VII provisions fall into this category. 
Examples of such provisions in Category 1 include new CEA section 4s(a) 
(governing registration of swap dealers and major swap participants), 
new CEA section 4s(e) (governing capital and margin requirements for 
swap dealers and major swap participants), and new CEA section 4s(h) 
(external business conduct standards for swap dealers and major swap 
participants).\12\ The requirements in these provisions of the CEA will 
not become effective, at a minimum, until 60 days after publication of 
a final Commission rule (and not before July 16, 2011).
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    \12\ 7 U.S.C. 6s(a), 6s(e) and 6s(h), respectively.
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    Because these provisions are not self-effectuating as of July 16, 
2011, it is not necessary to provide relief with respect to Category 1 
provisions as of July 16, and they are outside the scope of the 
proposed order. Similarly, Category 4 provisions also are outside the 
scope of the proposed order, and will go into

[[Page 35374]]

effect on July 16, 2011.\13\ Lists of Category 1 and Category 4 
provisions prepared by Commission staff will be published on the 
Commission's Web site.
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    \13\ Examples of Category 4 provisions include new CEA section 
5b(c)(2), 7 U.S.C. 7a-1(c)(2) (core principles for derivatives 
clearing organizations (``DCOs'')); new CEA section 5(d), 7 U.S.C. 
7(d) (core principles for designated contract markets); and new CEA 
sections 4c(a)(5)-(6), 7 U.S.C. 6c(a)(5)-(6) (certain anti-
disruptive practices authority). To the extent that the Commission 
has issued proposed rulemakings to implement any Category 4 
provisions, any requirements or guidance in such rulemakings will 
not become effective until the effective date of a final rulemaking.
    In two cases, a Category 4 provision that amends the CEA 
references a term that requires further definition, but 
nevertheless, the Commission does not believe that it is appropriate 
to include the provision in the proposed order. These provisions are 
new CEA section 5b(g), 7 U.S.C. 7a-1(g) (depository institutions and 
SEC-registered clearing agencies clearing swaps prior to enactment 
are ``deemed to be registered'' as DCOs); and amended CEA section 
22(a), 7 U.S.C. 25(a) (private right of action with respect to 
swaps).
    There also are provisions in Category 4 that reference a term 
that requires further definition, but that do not amend the CEA and 
thus are outside the scope of the Commission's exemptive authority 
under CEA Section 4(c). Such provisions in Title VII include, for 
example: (1) Section 711 and much of section 712 (provisions 
regarding certain definitions and regulatory authority of CFTC and 
SEC); and (2) sections 724(b) and 725(g) (amending the Bankruptcy 
Code and the Legal Certainty for Bank Products Act of 2000, 
respectively).
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    The proposed relief discussed herein is considered in two parts, 
each addressing one of the remaining Categories noted above: (1) 
Category 2--provisions that are self-effectuating (i.e., do not require 
rulemaking) and reference terms that require further definition (i.e., 
``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible 
contract participant''); and (2) Category 3--provisions that are self-
effectuating (i.e., do not require rulemaking) and repeal provisions of 
current law, but that do not reference terms that require further 
definition. These parts are discussed, in turn, in the sections that 
follow.

A. Part One: Category 2--Self-Effectuating Provisions Referencing Terms 
That Require Further Definition

    Some provisions of Title VII that do not require a rulemaking and 
thus, under section 754, become effective on July 16, 2011, 
specifically reference the terms ``swap,'' ``swap dealer,'' ``major 
swap participant,'' or ``eligible contract participant'' (or other 
entities or instruments) which themselves are the subject of 
rulemakings for further definition under sections 712(d) and 721(c) of 
the Dodd-Frank Act. As discussed above, the final rulemakings on these 
further definitions will not be in place by July 16, 2011.
    In response to requests from market participants for greater 
clarity regarding the applicability of various regulatory requirements 
to certain agreements, contracts, and transactions (referred to 
hereafter collectively as ``transactions'') following the general 
effective date,\14\ the Commission is proposing this temporary 
exemptive order pursuant to section 4(c) of the CEA. Specifically, for 
the Category 2 provisions described above, the Commission proposes to 
exempt persons and entities from the provisions of the CEA, as added or 
amended by the Dodd-Frank Act, that reference one or more of the terms 
regarding entities or instruments subject to further definition under 
sections 712(d) and 721(c) of the Dodd-Frank Act, including the terms 
``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible 
contract participant.'' \15\ The proposed exemptive relief from such 
provisions would apply only with respect to those requirements or 
portions of such provisions that specifically relate to such referenced 
terms.
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    \14\ See, e.g., Futures Industry Association, Petition for 
Exemption Pursuant to Section 4(c) of the Commodity Exchange Act 
(June 1, 2011) (requesting that the Commission ``adopt an order 
pursuant to section 4(c) of the [CEA] exempting such Clearing 
Members from the requirements of section 4d(f) of the CEA, as added 
by section 724 of [the Dodd-Frank Act], for a period of not less 
than 30 calendar days, beginning July 16, 2011, the effective date 
of many provisions of the Dodd-Frank Act, and ending not before 
August 15, 2011'') (footnote omitted). New CEA section 4d(f), 7 
U.S.C. 7d(f), falls within Category 2 discussed above.
    See also (1) Futures Industry Association, Institute of 
International Bankers, International Swaps and Derivatives 
Association, Investment Company Institute, Securities Industry and 
Financial Markets Association, and U.S. Chamber of Commerce, Request 
for Clarification and Relief Under Sections 754 and 739 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act; Petition for 
Exemption Pursuant to Section 4(c) of the Commodity Exchange Act, 
(June 10, 2011); (2) The Financial Services Roundtable, Letter re. 
Automatically Effective Provisions under Title VII of the Dodd-Frank 
Act, Application for Exemption Pursuant to Section 4(c) of the 
Commodity Exchange Act and Section 712(f) Pending Effectiveness of 
Final Rulemaking (June 10, 2011); (3) National Grain and Feed 
Association, Letter re. Status of Options on Agricultural 
Commodities Entered Into After July 16, 2011 (June 7, 2011); and (4) 
Paul Pantano on behalf of Commodity Options and Agricultural Swaps 
Working Group, Letter re. Transition Exemption for Options on 
Agricultural Commodities Entered Into After July 15, 2011 (June 6, 
2011).
    \15\ The Commission's authority to provide exemptive relief 
under CEA section 4(c), as amended by section 721(d) of the Dodd-
Frank Act, may not extend to certain Category 2 provisions of the 
Dodd-Frank Act and the CEA. These provisions include: new CEA 
section 4s(l), 7 U.S.C. 6s(l) (providing for swap dealer segregation 
requirements with respect to uncleared swaps); amended CEA section 
5b(a), 7 U.S.C. 7a-1(a) (prohibiting a DCO from performing the 
functions of a DCO with respect to swaps unless the DCO is 
registered with the Commission); and new CEA section 4s(k), 7 U.S.C. 
6s(k) (providing for the duties and designation of a chief 
compliance officer for swap dealers and major swap participants). As 
such, these provisions will take effect on July 16, 2011, and may 
not be subject to the exemptive relief noted above granted by the 
Commission. The Commission staff has informed the Commission that it 
is separately considering whether to issue a no-action letter in 
which the staff would state that it would not recommend that the 
Commission commence an enforcement action against markets or market 
participants for failure to comply with the above-referenced 
provisions over a similar time period.
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    This proposed relief would not in any way limit the Commission's 
authority with respect to any person, entity, or transaction pursuant 
to CEA sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 
13, or the regulations of the Commission promulgated pursuant to such 
authorities, including CEA section 4c(b) proscribing fraud.\16\ This 
relief would not apply to any provisions of Title VII and the CEA that 
have become effective prior to July 16, 2011 \17\ or Commission 
regulations already issued. Further, this relief would not affect any 
effective date set out in any specific Dodd-Frank Act rulemaking by the 
Commission. In addition, the proposed order would not limit the 
Commission's authority under section 712(f) of the Dodd-Frank Act to 
issue rules, orders, or exemptions prior to the effective date of any 
provision, in order to prepare for the effective date of such 
provision, provided that such rule, order, or exemption shall not 
become effective prior to the effective date of the provision. Finally, 
this proposed order would not affect the applicability of any provision 
of the CEA to futures contracts or options on futures contracts.\18\
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    \16\ The Dodd-Frank Act amended the CEA's anti-fraud and anti-
manipulation provisions, including CEA section 4b, to cover 
``swaps.'' Although these provisions therefore would, under the 
proposed relief, not apply to ``swaps'' under the Dodd-Frank Act 
because that term is subject to further definition, nevertheless, 
they will apply to all transactions other than ``swaps'' (including, 
but not limited to, futures contracts, options on futures contracts, 
transactions with retail customers in foreign currency or other 
commodities pursuant to CEA section 2(c)(2) (7 U.S.C. 2(c)(2)), and 
transactions subject to exemptive relief pursuant to part two of the 
proposed order).
    \17\ See, e.g., section 737(d) of the Dodd-Frank Act (amendments 
regarding position limits effective on the date of enactment). 
Similarly, this relief would not affect the effective date of any 
provision that may become effective after July 16, 2011, such as 
section 716 of the Dodd-Frank Act.
    \18\ Accordingly and by way of non-exclusive example, where a 
provision references both swaps and futures, this relief does not 
affect in any way the application of the provision (and any 
implementing Commission regulations thereunder) insofar as it refers 
to futures.
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    The proposed temporary exemptive relief would expire upon the 
earlier of: (1) The effective date of the applicable final rule further 
defining the relevant term; or (2) December 31, 2011. The

[[Page 35375]]

Commission is proposing to limit this proposed relief to no more than a 
fixed period--i.e. December 31, 2011--for several reasons.
    First, the Commission believes it appropriate and prudent to 
periodically review the extent and scope of any relief provided from 
the CEA, as amended by the Dodd-Frank Act. The Commission anticipates 
that additional rulemakings to implement the Dodd-Frank Act will be 
completed during this period of transitional relief. During this period 
the Commission also will be considering the appropriate phase-in of the 
various regulatory requirements under the Dodd-Frank rulemakings. 
Accordingly, the Commission believes it would be appropriate to 
periodically re-examine the scope and extent of the proposed exemptive 
relief in order to ensure that the scope of relief is appropriately 
tailored to the schedule of implementation of the Dodd-Frank Act 
requirements.\19\
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    \19\ The Commission adopted a similar approach in not granting 
``grandfather'' relief with respect to transactions being conducted 
under CEA sections 2(h)(1) and (2), 7 U.S.C, 2(h)(1) and (2): 
``Until the contents and timing of the Commission's regulations 
affecting bilateral swaps are better known, however, the Commission 
has determined not to grant grandfather relief as it is impossible 
to know at this time whether such relief will be necessary.'' See 
Grandfather Notice, 75 FR at 56513.
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    Second, the limitation of this exemptive relief to no more than a 
fixed period of time is consistent with similar limitations on 
transitional relief provided by the Congress elsewhere in Title VII. 
Section 723(c) of the Dodd-Frank Act allows persons to submit petitions 
to the Commission ``to remain subject to section 2(h) of the [CEA].'' 
\20\ In acting upon such petitions, the Commission may allow persons to 
``continue operating subject to section 2(h) [of the CEA] for not 
longer than a 1-year period.'' Similarly, section 734 authorizes the 
Commission to grant petitions for persons to remain subject to the 
provisions of section 5d of the CEA governing the operation of exempt 
boards of trade (``EBOTs'') ``for up to 1 year after the effective date 
of this subtitle.'' \21\ In light of these provisions authorizing the 
Commission to provide transitional relief for no longer than a fixed 
period of time, the Commission believes it would be appropriate to 
provide transitional relief consistent with section 712(f) of the Dodd-
Frank Act and CEA section 4(c) under this proposed order for no longer 
than a fixed time period.
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    \20\ 7 U.S.C. 2(h).
    \21\ 7 U.S.C. 7a-3.
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    The Commission nonetheless reiterates its intent that existing 
practices should not be unduly disrupted during any transition period. 
Moreover, the Commission reiterates its intent to deliberatively and 
efficiently proceed to complete the rulemakings to implement the Dodd-
Frank Act. In the event that a further definitions rulemaking is 
completed prior to December 31, 2011, the Commission will at that time 
address the appropriate phase-in and implementation dates of the 
resulting regulatory requirements. Alternatively, should the proposed 
order expire at the end of the fixed time period--December 31, 2011--
such expiration will not affect the Commission's ability to provide 
further relief, as appropriate, to avoid undue disruption or costs to 
market participants.

B. Part Two: Category 3--Provisions That are Self-Effectuating and 
Repeal Provisions of Current Law But That Do Not Reference Terms That 
Require Further Definition

    Currently, the CEA includes provisions that exclude or exempt, in 
whole or in part, certain transactions from Commission oversight under 
the CEA. These are as follows:
    i. Section 2(d)(1),\22\ transactions in excluded commodities \23\ 
between eligible contract participants and not executed or traded on a 
trading facility;
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    \22\ 7 U.S.C. 2(d)(1).
    \23\ The term ``excluded commodity'' is defined in CEA section 
1a(13), 7 U.S.C. 1a(13), to include, among other things, financial 
instruments such as a currency, interest rate, or exchange rate, or 
any economic or commercial index based on prices, rates, values, or 
levels that are not within the control of any party to the 
transaction.
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    ii. Section 2(d)(2),\24\ principal-to-principal transactions in 
excluded commodities between certain eligible contract participants and 
executed or traded on an electronic trading facility;
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    \24\ 7 U.S.C. 2(d)(2).
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    iii. Section 2(g),\25\ transactions subject to individual 
negotiation between eligible contract participants in commodities other 
than agricultural commodities and not executed or traded on a trading 
facility;
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    \25\ 7 U.S.C. 2(g).
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    iv. Sections 2(h)(1)-(2),\26\ transactions in exempt commodities 
\27\ between eligible contract participants and not entered into on a 
trading facility;
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    \26\ 7 U.S.C. 2(h)(1)-(2).
    \27\ The term ``exempt commodity'' is defined in CEA section 
1a(14), 7 U.S.C. 1a(14), as a commodity other than an excluded or 
agricultural commodity, and includes energy and metals commodities.
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    v. Sections 2(h)(3)-(7),\28\ principal-to-principal transactions in 
exempt commodities between eligible commercial entities (``ECEs'') \29\ 
and executed or traded on an electronic trading facility (called exempt 
commercial markets, or ``ECMs'');
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    \28\ 7 U.S.C. 2(h)(3)-(7).
    \29\ The term ``eligible commercial entity'' is defined in CEA 
section 1a (11), 7 U.S.C. 1a(11).
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    vi. Section 5d,\30\ transactions in commodities, among other 
things, having a nearly inexhaustible deliverable supply or no cash 
market, between eligible contract participants and traded on an EBOT; 
and
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    \30\ 7 U.S.C. 7a-3.
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    vii. Section 2(e),\31\ which generally provides that nothing in the 
CEA governs or is applicable to an electronic trading facility that 
limits transactions authorized to be conducted on its facilities to 
those satisfying the requirements of sections 2(d)(2), 2(g) or 2(h)(3).
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    \31\ 7 U.S.C. 2(e).
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    Under the Dodd-Frank Act, these provisions all will be removed from 
the CEA as of July 16, 2011. However, part 35 of the Commission's 
regulations will continue to be available with respect to transactions 
that meet the conditions therein, until such time as it may be 
withdrawn, amended, or replaced by the Commission.
    Part 35 originally was promulgated in 1993 pursuant to the 
Commission's general exemptive authority in CEA section 4(c), and 
provides a broad-based exemption from the CEA for ``swap agreements'' 
in any commodity. Specifically, part 35 exempts ``swap agreements,'' as 
defined therein, from most of the provisions of the CEA if: (1) They 
are entered into by ``eligible swap participants'' (``ESPs''); \32\ (2) 
they are not part of a fungible class of agreements standardized as to 
their material economic terms; \33\ (3) the creditworthiness of any 
party having an actual or potential obligation under the swap agreement 
would be a material consideration in entering into or determining the 
terms of the swap agreement, including pricing, cost, or credit 
enhancement terms; \34\ and (4)

[[Page 35376]]

they are not entered into or traded on a multilateral transaction 
execution facility.\35\ Accordingly, transactions that fully meet the 
conditions of part 35 are outside the scope of the proposed order.\36\
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    \32\ The parties covered under the ESP definition, while very 
broad, are not coextensive with those covered by the terms ``ECE'' 
or ``eligible contract participant.'' Therefore, it is possible that 
a small segment of persons or entities that are currently relying on 
one or more of the CEA exclusions or exemptions cited above might 
not qualify as an ESP and consequently would not be eligible for 
exemptive relief under part 35.
    \33\ This condition was designed so that the exemption would not 
establish ``a market in swap agreements, the terms of which are 
fixed and are not subject to negotiation that functions essentially 
in the same manner as an exchange but for the bilateral execution of 
transactions.'' See Exemption for Certain Swap Agreements, 58 FR 
5587, at 5590, Jan. 22, 1993.
    \34\ By this condition, the exemption does not extend to 
transactions that are subject to a clearing system where the credit 
risk of individual members of the system to each other in a 
transaction to which each is a counterparty is effectively 
eliminated and replaced by a system of mutualized risk of loss that 
binds members generally whether or not they are counterparties to 
the original transaction. Id. at 5591.
    \35\ In this context, a multilateral transaction execution 
facility is a physical or electronic facility in which all market 
makers and other participants that are members simultaneously have 
the ability to execute transactions and bind both parties by 
accepting offers which are made by one member and open to all 
members of the facility. Id.
    \36\ Similarly, part 32 of the Commission's regulations will 
continue to be available with respect to commodity option 
transactions that meet the conditions therein, until such time as 
part 32 may be withdrawn, amended, or replaced by the Commission. 
See Commodity Options and Agricultural Swaps, 76 FR 6095, Feb 3, 
2011.
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    However, because part 35 covers essentially non-standardized, non-
cleared, non-exchange traded transactions, certain persons or entities 
that currently rely on the CEA exclusions or exemptions cited above may 
not qualify for part 35. In response to requests from market 
participants for greater clarity regarding the applicability of various 
statutory and regulatory requirements to certain transactions following 
the general effective date, the Commission, pursuant to its authority 
under section 4(c) of the CEA, is proposing to grant relief for those 
transactions that satisfy the conditions specified below.
    Specifically, the Commission is proposing to temporarily exempt a 
transaction in exempt or excluded commodities (and any person or entity 
offering or entering into such transaction) from the CEA (other than 
the anti-fraud and anti-manipulation enforcement provisions identified 
below) following the general effective date if the transaction 
otherwise would comply with part 35, notwithstanding that: (1) The 
transaction may be executed on a multilateral transaction execution 
facility; (2) the transaction may be cleared; (3) persons offering or 
entering into the transaction may be eligible contract participants as 
defined in the CEA (prior to July 16, 2011); (4) the transaction may be 
part of a fungible class of agreements that are standardized as to 
their material economic terms; and/or (5) no more than one of the 
parties to the transaction is entering into the transaction in 
conjunction with its line of business, but is neither an eligible 
contract participant nor an ESP, and the transaction was not and is not 
marketed to the public (the ``line of business provision'').\37\
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    \37\ Commenters responding to the Commission's proposed Entity 
Definitions have suggested that the Commission should exercise its 
authority to further define the term ``eligible contract 
participant'' to encompass the ``line of business'' provision that 
was a part of the Commission's Policy Statement Concerning Swap 
Transactions, 54 FR 30694, 30696-30697, July 21, 1989. The staff is 
evaluating these comments in the context of the Commission's 
rulemaking to further define the term ``eligible contract 
participant.''
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    As noted above, this proposed temporary exemptive relief would not 
affect the availability of either part 35 or part 32 with respect to 
transactions that fully meet the conditions therein.\38\ For 
transactions that fall outside of existing part 35 or part 32, this 
relief would only be available to the extent those transactions (and 
persons offering or entering into such transactions) fall within the 
scope of any of the existing CEA sections 2(d), 2(e), 2(g), 2(h), and 
5d as in effect prior to July 16, 2011 \39\ or the line of business 
provision.
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    \38\ In September 2010, the Commission published an order in the 
Federal Register providing that it would extend grandfather relief 
to ECMs and EBOTs provided that certain conditions are met. See 
Order Regarding the Treatment of Petitions Seeking Grandfather 
Relief for Exempt Commercial Markets and Exempt Boards of Trade, 75 
FR 56513, Sept. 16, 2010. Nothing in this proposed order is intended 
to impact the availability of this grandfather relief.
    \39\ This exemptive relief would not be available to an 
electronic trading facility that, as of July 15, 2011, is not 
already operating as an ECM pursuant to CEA sections 2h(3)-(7), or 
to an EBOT that, as of July 15, 2011, is not already operating 
pursuant to CEA section 5d, or not compliant with the conditions set 
forth in such provisions.
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    With respect to any transaction within the scope of the proposed 
order, the proposed exemptive relief would not in any way limit the 
Commission's authority with respect to any person, entity, or 
transaction pursuant to CEA sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d), 
6c, 8(a), 9(a)(2) or 13, or the regulations of the Commission 
promulgated pursuant to such authorities, including CEA section 4c(b) 
proscribing fraud.\40\ Additionally, this proposed relief would not 
affect any Dodd-Frank Act implementing regulations (and any 
implementation period contained therein) that the Commission 
promulgates and applies to the subject transactions, market 
participants, or markets.\41\ This proposed temporary exemptive relief 
would expire upon the earlier of: (1) December 31, 2011; or (2) the 
repeal or replacement of part 35 or part 32, as applicable. The 
Commission is proposing to provide this exemptive relief in part two of 
the proposed order for no longer than a fixed period of time for the 
same reasons as described above with respect to part one of the 
proposed order.
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    \40\ As discussed above, the addition of the term ``swap'' to 
some of these provisions would not in any way affect the 
applicability of these anti-fraud and anti-manipulation enforcement 
provisions to transactions subject to relief pursuant to part two of 
the proposed order.
    \41\ Further, the proposed order would not affect any Commission 
rulemaking authority over agreements, contracts, or transactions 
that may not depend on the terms subject to further definition under 
sections 712(d) or 721(c) of the Dodd-Frank Act. This relief also 
would not affect any provisions of the Dodd-Frank Act or the CEA 
that have become effective prior to July 16, 2011 or regulations 
already issued.
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III. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA \42\ authorizes the CFTC to exempt any 
transaction or class of transactions (including any person or class of 
persons offering, entering into, rendering advice or rendering other 
services with respect to, the transaction) from any of the provisions 
of the CEA (subject to certain exceptions). Pursuant to section 
4(c)(2), the Commission must determine that: (1) The exemption is 
appropriate for the transactions and consistent with the public 
interest; (2) the exemption is consistent with the purposes of the CEA; 
(3) the transaction will be entered into solely between ``appropriate 
persons;'' \43\ and (4) the exemption will not have a material adverse 
effect on the ability of the Commission or any contract market to 
discharge its regulatory or self-regulatory responsibilities under the

[[Page 35377]]

CEA.\44\ The Commission may grant such an exemption by rule, regulation 
or order, after notice and opportunity for hearing, and may do so on 
application of any person or on its own initiative. Further, the 
Commission may grant such an exemption either conditionally or 
unconditionally, or for stated periods within the Commission's 
discretion. Finally, section 712(f) of the Dodd-Frank Act authorizes 
the Commission to ``exempt persons, agreements, contracts, or 
transactions from the provisions of the [Dodd-Frank] Act, under the 
terms contained in'' the Dodd-Frank Act, in order to prepare for the 
effective dates of the provisions of Title VII.
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    \42\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in 
full that:
    In order to promote responsible economic or financial innovation 
and fair competition, the Commission by rule, regulation, or order, 
after notice and opportunity for hearing, may (on its own initiative 
or on application of any person, including any board of trade 
designated or registered as a contract market or derivatives 
transaction execution facility for transactions for future delivery 
in any commodity under section 5 of this Act) exempt any agreement, 
contract, or transaction (or class thereof) that is otherwise 
subject to subsection (a) (including any person or class of persons 
offering, entering into, rendering advice or rendering other 
services with respect to, the agreement, contract, or transaction), 
either unconditionally or on stated terms or conditions or for 
stated periods and either retroactively or prospectively, or both, 
from any of the requirements of subsection (a) of this section, or 
from any other provision of this chapter (except subparagraphs 
(C)(ii) and (D) of section 2(a)(1), except that the Commission and 
the Securities and Exchange Commission may by rule, regulation, or 
order jointly exclude any agreement, contract, or transaction from 
section 2(a)(1)(D)), if the Commission determines that the exemption 
would be consistent with the public interest.
    \43\ CEA Section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the 
term ``appropriate persons'' a number of specified categories of 
persons deemed appropriate under the CEA for entering into 
transactions exempted by the Commission under section 4(c). This 
includes persons the Commission determines to be appropriate in 
light of their financial or other qualifications, or the 
applicability of appropriate regulatory protections.
    \44\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2), provides in full 
that:
    The Commission shall not grant any exemption under paragraph (1) 
from any of the requirements of subsection (a) of this section 
unless the Commission determines that--
    (A) The requirement should not be applied to the agreement, 
contract, or transaction for which the exemption is sought and that 
the exemption would be consistent with the public interest and the 
purposes of this Act; and
    (B) the agreement, contract, or transaction--
    (i) Will be entered into solely between appropriate persons; and
    (ii) Will not have a material adverse effect on the ability of 
the Commission or any contract market or derivatives transaction 
execution facility to discharge its regulatory or self-regulatory 
duties under this Act.
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    In enacting section 4(c), Congress noted that the goal of the 
provision ``is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner.'' \45\ The proposed relief is intended to provide 
clarity and stability to the markets and market participants concerning 
the applicability of the provisions of the CEA, as added or amended by 
the Dodd-Frank Act (in part one), and the current provisions of the CEA 
as repealed by the Dodd-Frank Act (in part two), upon the general 
effective date of the Dodd-Frank Act, thereby avoiding or minimizing 
undue and unwarranted disruptions to the markets.
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    \45\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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    The Commission notes that the proposed order is temporary in scope 
and reserves the Commission's anti-fraud and anti-manipulation 
enforcement authority. As such, the Commission believes that the 
proposed order would be consistent with the public interest and 
purposes of the CEA. The Commission also believes the order to be 
limited to appropriate persons, including persons in current 
registration categories for which the Dodd-Frank Act expanded the 
definition to include activities relating to swaps (e.g., introducing 
brokers, commodity pool operators, commodity trading advisors, and 
associated persons thereof).\46\ The proposed order will not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory duties 
under the CEA.
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    \46\ See CEA section 4(c)(3)(K), 7 U.S.C. 6(c)(3)(K) 
(appropriate persons may include such ``other persons that the 
Commission determines to be appropriate in light of their financial 
or other qualifications, or the applicability of appropriate 
regulatory protections'').
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    The Commission seeks comment on whether the proposed temporary 
exemptions are consistent with the public interest and other 
requirements of CEA section 4(c).

IV. Request for Comment

    The Commission requests comment on all aspects of this proposed 
temporary exemptive order.

V. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \47\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with conducting or sponsoring any collection of information 
as defined by the PRA. This proposed temporary exemptive order, if 
approved, would not require a new collection of information from any 
persons or entities that would be subject to the proposed order.
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    \47\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA \48\ requires the Commission to consider 
the costs and benefits of its action before issuing an order under the 
CEA. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs. Rather, section 15(a) simply 
requires the Commission to ``consider the costs and benefits'' of its 
action.
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    \48\ 7 U.S.C. 19(a).
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    Section 15(a) of the CEA further specifies that 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 order is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
1. Protection of Market Participants and the Public
    As discussed above, the Commission is proposing that the scope of 
this temporary exemptive relief be limited to persons who are 
``appropriate persons'' as set forth in section 4(c) of the Act. 
Further, this proposal does not affect the Commission's existing and 
future anti-fraud and anti-manipulation authorities, including CEA 
sections 2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or 
the regulations of the Commission promulgated pursuant to such 
authorities, including section 4c(b) proscribing fraud. The Commission 
believes that market participants and the public will benefit from the 
clarity offered by the proposed temporary exemptive relief, while 
maintaining the Commission's authorities regarding the prevention and 
deterrence of fraud and manipulation. With respect to costs, the 
Commission believes that the exemptive relief imposes no affirmative 
duties or obligations on market participants and the public. The 
temporary exemptive relief does not contain any requirement to create, 
retain, submit, or disclose any information. Furthermore, the exemptive 
relief imposes no recordkeeping or related data retention or disclosure 
requirements on any person, including small businesses. Consequently, 
the Commission finds it unlikely that the exemptive relief will impose 
any additional costs beyond the existing costs associated with ongoing 
operations, including those that ensure that behavior and statements 
are not fraudulent or manipulative.
2. Efficiency, Competition, and Financial Integrity
    Although the Dodd-Frank Act establishes a comprehensive new 
regulatory framework for swaps, the Commission's work to implement that 
framework will not be complete as of July 16, 2011. Accordingly, this 
relief offers the benefit of greater clarity in the swaps market that 
is in the interest of both the markets and the public. Accordingly, the 
Commission believes that this temporary exemptive relief is an 
appropriate measure to facilitate a transition to the comprehensive new 
regulatory framework for swaps set out in Title VII of the Dodd-Frank 
Act. Such an orderly transition will promote

[[Page 35378]]

market efficiency, competition, and financial integrity.
3. Price Discovery
    As stated above, the temporary relief proposed here is designed to 
maintain the functioning of the markets until such time as the 
comprehensive new regulatory framework for swaps set forth in the Dodd-
Frank Act is in place. With the clarity offered by the proposed 
exemptive relief, markets would function better as venues for price 
discovery.
4. Sound Risk Management Practices
    Appropriate persons covered by this proposal would be subject to 
the Commission's full array of existing anti-fraud and anti-market 
manipulation provisions and certain new authorities provided under the 
Dodd-Frank Act. Market participants and the public will benefit 
substantially from the continuing protection through the prevention and 
deterrence of fraud and manipulation. Markets protected from fraud and 
manipulation function better as venues for price discovery and risk 
management.
5. Other Public Interest Considerations
    The proposed exemptive order is temporary and limited. It would not 
affect the applicability of any provision of the CEA to futures 
contracts, options on futures contracts, or transactions with retail 
customers in foreign currency or other commodities pursuant to CEA 
section 2(c)(2). Further, it would expire at an appropriate date, as 
discussed above. The expiration provision would permit the Commission 
to ensure that the scope and extent of exemptive relief is 
appropriately tailored to the schedule of implementation of the Dodd-
Frank Act requirements.
    After considering these factors, the Commission has determined to 
seek comment on the proposed temporary exemptive order, as discussed 
above. The Commission seeks comment on all aspects of the foregoing 
proposed application of the cost-benefit considerations set forth in 
CEA section 15(a). Commenters also are 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.

    Issued in Washington, DC, on June 14, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Effective Date for Swap Regulation--Commission Voting 
Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, Chilton and O'Malia voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed order regarding the effective dates of 
certain Dodd-Frank Act provisions.
    The Dodd-Frank Act has a deadline of 360 days after enactment 
for completion of the bulk of our rulemakings--July 16, 2011. Both 
the Dodd-Frank Act and the Commodity Exchange Act (CEA) give the 
CFTC the flexibility and authority to address the issues relating to 
the effective dates of Title VII. We have coordinated closely with 
the SEC on these issues.
    Section 754 of the Dodd-Frank Act states that Subtitle A of 
Title VII--the Subtitle that provides for the regulation of swaps--
``shall take effect on the later of 360 days after the date of the 
enactment of this subtitle or, to the extent a provision of this 
subtitle requires a rulemaking, not less than 60 days after 
publication of the final rule or regulation implementing such 
provisions of this subtitle.''
    Thus, those provisions that require rulemakings will not go into 
effect until the CFTC finalizes the respective rules. This is a 
substantial portion of the derivatives provisions under Dodd-Frank. 
Furthermore, they will only go into effect based on the phased 
implementation dates included in the final rules. Today we are 
releasing a list of the provisions of the swaps subtitle that 
require rulemakings.
    There are other provisions of Title VII that do not require 
rulemaking and will take effect on July 16. The proposed order that 
we are considering today would provide relief until December 31, 
2011, or when the definitional rulemakings become effective, 
whichever is sooner, from certain provisions that would otherwise 
apply to swaps or swap dealers on July 16. This includes provisions 
that do not directly rely on a rule to be promulgated, but do refer 
to terms that must be further defined by the CFTC and SEC, such as 
``swap'' and ``swap dealer.''
    The proposed order also would provide relief through no later 
than December 31, 2011, from certain CEA requirements that may 
result from the repeal, effective on July 16, 2011, of some of 
sections 2(d), 2(e), 2(g), 2(h) and 5d.
    There have been suggestions to delay implementation of the 
derivatives reforms included in the Dodd-Frank Act. That is not what 
today's proposed order is. Instead, it provides the time necessary 
for the Commission to complete the rulemaking process to implement 
the Dodd-Frank Act.
    Some might ask: Why six months? Six months will provide the 
Commission with the opportunity to re-examine the status of final 
rulemaking in light of the changed regulatory landscape at the time. 
It would allow us, if appropriate at the time, to tailor relief from 
certain provisions of the Dodd-Frank Act at the end of the year.
    It is important to note, however, that until the CFTC completes 
its rule-writing process and implements and enforces those new 
rules, the public remains unprotected.

Appendix 3--Statement of Commissioner Bart Chilton

    I concur with the Commission's decision today to provide needed 
relief with regard to provisions of the Wall Street Reform and 
Consumer Protection Act that go into effect on July 16, 2011. I 
believe, however, that the precise nature of this relief must be 
developed utilizing an iterative process with affected parties to 
ensure that essential legal certainty is provided to the markets and 
to market participants. I will not support any final rule on this 
issue that does not provide clear and unequivocal guidance regarding 
the legality of transactions and the required responsibilities under 
the Act. In addition, this relief must be issued promptly, in order 
to ensure that there is no gap in the effective date of the Act's 
provisions and the common understanding of the effectiveness of 
those dates.

[FR Doc. 2011-15195 Filed 6-15-11; 4:15 pm]
BILLING CODE 6351-01-P