[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