[Federal Register Volume 77, Number 134 (Thursday, July 12, 2012)]
[Proposed Rules]
[Pages 41214-41242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16496]



[[Page 41213]]

Vol. 77

Thursday,

No. 134

July 12, 2012

Part II





Commodities Futures Trading Commission





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17 CFR Part 1





Cross-Border Application of Certain Swaps Provisions of the Commodity 
Exchange Act; Proposed Rule

  Federal Register / Vol. 77 , No. 134 / Thursday, July 12, 2012 / 
Proposed Rules  

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD57


Cross-Border Application of Certain Swaps Provisions of the 
Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed interpretive guidance and policy statement.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC) is publishing for public comment this proposed interpretive 
guidance and policy statement regarding the cross-border application of 
the swaps provisions of the Commodity Exchange Act (``CEA'') that were 
enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, and the Commission's regulations promulgated 
thereunder. Specifically, this proposed interpretive guidance and 
policy statement describes the following: The general manner in which 
the Commission will consider whether a person's swap dealing activities 
or swap positions may require registration as a swap dealer or major 
swap participant, respectively, and the application of the related 
requirements under the CEA to swaps involving such persons; and the 
application of the clearing, trade execution, and certain reporting and 
recordkeeping provisions under the CEA, to cross-border swaps involving 
one or more counterparties that are not swap dealers or major swap 
participants. This proposed interpretive guidance and policy statement 
also generally describes the policy and procedural framework under 
which the Commission may permit compliance with a comparable regulatory 
requirement of a foreign jurisdiction to substitute for compliance with 
the requirements of the CEA.

DATES: Comments must be received on or before August 27, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD57, 
by any of the following methods:
     The agency's Web site: at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commodity Futures Trading 
Commission to consider information that you believe is exempt from 
disclosure under the Freedom of Information Act, a petition for 
confidential treatment of the exempt information may be submitted 
according to the procedures established in Sec.  145.9 of the 
Commission's regulations.\1\
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    \1\ 17 CFR 145.9.
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    Throughout this proposed interpretive guidance, the Commission 
requests comment in response to specific questions set out herein. For 
convenience, the Commission has numbered each of these requests for 
comment. The Commission asks that, in submitting responses to these 
requests for comment, commenters kindly identify the specific number of 
each request to which their comments are responsive.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the proposal 
will be retained in the public comment file and will be considered as 
required under the Administrative Procedure Act \2\ and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.\3\
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    \2\ 5 U.S.C. 551, et seq.
    \3\ 5 U.S.C. 552.

FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Assistant General 
Counsel, Office of General Counsel, (202) 418-5613, [email protected]; Gary 
Barnett, Director, Division of Swap Dealer and Intermediary Oversight, 
(202) 418-5977, [email protected]; Jacqueline H. Mesa, Director, Office 
of International Affairs, (202) 418-5386, [email protected]; Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
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NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. The Dodd-Frank Wall Street Reform and Consumer Protection Act
    B. Scope of the Proposed Interpretive Guidance and Policy 
Statement
II. Consideration of Whether a Non-U.S. Person Is a Swap Dealer or 
Major Swap Participant
    A. Analysis of Section 2(i)
    B. Interpretation of the Term ``U.S. Person''
    C. Definitions and Registration Thresholds
    1. Background
    2. Swap Dealer
    i. Aggregation of Swaps
    ii. Regular Business
    3. Major Swap Participant
    i. Aggregation of Positions
    4. Relevance of Guarantees
    5. Summary
    D. Branches, Agencies, Affiliates and Subsidiaries of U.S. Swap 
Dealers and U.S. Branches, Agencies, Affiliates, and Subsidiaries of 
Non-U.S. Swap Dealers
III. Cross-Border Application of the CEA's Swap Provisions
    A. Principles of International Comity
    B. Application of Swap Provisions to Non-U.S. Swap Dealers and 
Foreign Branches, Agencies, Subsidiaries and Affiliates of U.S. Swap 
Dealers
    1. Regulatory Categories
    2. Entity-Level Requirements
    i. Capital Requirements
    ii. Chief Compliance Officer
    iii. Risk Management
    iv. Swap Data Recordkeeping
    v. Swap Data Reporting
    vi. Physical Commodity Swaps Reporting
    3. Transaction-Level Requirements
    i. Clearing and Swap Processing
    ii. Margin and Segregation Requirements for Uncleared Swaps
    iii. Mandatory Trade Execution
    iv. Swap Trading Relationship Documentation
    v. Portfolio Reconciliation and Compression
    vi. Real-Time Public Reporting
    vii. Trade Confirmation
    viii. Daily Trading Records
    ix. External Business Conduct Standards
    4. Application of the Entity-Level Requirements
    5. Application of the Transaction-Level Requirements
    i. Clearing and Swap Processing, Margin (and Segregation), Trade 
Execution, Swap Trading Relationship Documentation, Portfolio 
Reconciliation and Compression, Real-Time Public Reporting, Trade 
Confirmation, and Daily Trading Records
    ii. External Business Conduct Standards
    C. Substituted Compliance
    1. Entity-Level Requirements
    2. Transaction-Level Requirements
    D. Application of Entity-Level and Transaction-Level 
Requirements to Branches, Agencies, Affiliates, and Subsidiaries of 
U.S. Swap Dealers
    1. Foreign Branches and Agencies of U.S. Swap Dealers
    2. Foreign Affiliates and Subsidiaries of U.S. Swap Dealers
IV. Process for Comparability Determinations
    A. Overview
    1. Scope of Review

[[Page 41215]]

    2. Process
    3. Clearing
V. Cross-Border Application of the CEA's Swap Provisions to 
Transactions Involving Other (Non-Swap Dealer and Non-MSP) Market 
Participants
    A. Cross-Border Transactions With U.S. Persons
    B. Clearing, Trade Execution, Real-Time Public Reporting, Large-
Trader Reporting, SDR Reporting, and Swap Data Recordkeeping

I. Background

A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    In the fall of 2008 a series of large financial institution 
failures triggered a financial and economic crisis that threatened to 
freeze U.S. and global credit markets. As a result, unprecedented 
governmental intervention was required to ensure the stability of the 
U.S. financial system.\4\ These failures revealed the vulnerability of 
the U.S. financial system and economy to wide-spread systemic risk 
resulting from, among other things, poor risk management practices of 
financial firms, the lack of supervisory oversight for certain 
financial institutions as a whole, and the interconnectedness of the 
global swap business.\5\
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    \4\ On October 3, 2008, President Bush signed the Emergency 
Economic Stabilization Act of 2008, which was principally designed 
to allow the U.S. Treasury and other government agencies to take 
action to restore liquidity and stability to the U.S. financial 
system (e.g., the Troubled Asset Relief Program--also known as 
TARP--under which the U.S. Treasury was authorized to purchase up to 
$700 billion of troubled assets that weighed down the balance sheets 
of U.S. financial institutions). See Public Law 110-343, 122 Stat. 
3765 (2008).
    \5\ See Financial Crisis Inquiry Commission, ``The Financial 
Crisis Inquiry Report: Final Report of the National Commission on 
the Causes of the Financial and Economic Crisis in the United 
States,'' Jan. 2011, at xxvii, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
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    American International Group (``AIG'') is a prime example of how 
the stability of a large financial institution could be undermined by 
its activities abroad and how the entire U.S. financial system could be 
threatened as a result.\6\ AIG was a regulated U.S. insurance company 
nearly undone by its collateral posting obligations under swaps entered 
into by its subsidiary, AIG Financial Products (``AIGFP''). AIGFP was 
headquartered in Connecticut and had major operations in London, with 
trades routed through Banque AIG, a French bank. AIGFP suffered 
enormous losses from credit default swaps that it issued on certain 
underlying securities, which, because AIGFP's performance on such 
credit default swaps had been guaranteed by its parent, caused credit 
agencies to downgrade the credit rating of the entire AIG corporation. 
The downgrade triggered collateral calls and resulted in a liquidity 
crisis at AIG, which ultimately necessitated over $85 billion of 
indirect assistance from the Federal Reserve Bank of New York to 
prevent AIG's default.
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    \6\ See, e.g., Gretchen Morgenson, ``Behind Insurer's Crisis, 
Blind Eye to a Web of Risk,'' N.Y. Times, Sept. 27, 2008. Corrected 
version published Sept. 30, 2008, available at http://www.nytimes.com/2008/09/28/business/28melt.html?pagewanted=all.
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    The Lehman Brothers Holding Inc. (``LBHI'') bankruptcy offers 
another stark lesson on how risks can spread quickly across the 
affiliated entities of a multinational financial institution, 
ultimately causing the collapse of the entire financial institution. 
LBHI was a U.S.-based multinational corporation, with various 
affiliates and subsidiaries operating globally, including Lehman 
Brothers International (Europe) (``LBIE'').
    The Lehman global business and operations relied on ``highly 
integrated, trading and non-trading relationships across the group.'' 
\7\ The affiliates and subsidiaries within the group provided each 
other with more than equity investments and capital. They provided each 
other with treasury functions, custodial arrangements, depository 
functions, trading facilitation, swaps, funding, management, 
information technology and other operational services. Most notably, 
many of LBIE's obligations under its swaps with certain counterparties 
were guaranteed by the ultimate holding company, LBHI. In fact, at the 
time of default, LBIE had an estimated 130,000 OTC derivatives trades 
outstanding, most of which were guaranteed by LBHI.\8\
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    \7\ ``The global nature of the Lehman business with highly 
integrated, trading and non-trading relationships across the group 
led to a complex series of inter-company positions being outstanding 
at the date of Administration. There are over 300 debtor and 
creditor balances between LBIE and its affiliates representing 
$10.5B of receivables and $11.0B of payables as at September 15 
2008.'' See Lehman Brothers International (Europe) in 
Administration, Joint Administrators' Progress Report for the Period 
15 September 2008 to 14 March 2009, available at: http://www.pwc.co.uk/assets/pdf/Ibie-progress-report-14049.pdf.
    \8\ Id.
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    There are other parallels. In the many events leading up to the 
2008 crisis, Citigroup, like many other financial institutions, 
utilized numerous structured investment vehicles (``SIVs'') to shift 
certain activities off balance sheets and manage both capital 
requirements and reported accounting.\9\ Citigroup stood behind these 
vehicles through liquidity puts, a form of a guarantee. When the SIVs' 
funding was exhausted, Citigroup ultimately assumed approximately $49 
billion of debt directly onto its balance sheet.\10\ Similarly, in 
2007, Bear Stearns found itself exposed to the failings of two overseas 
hedge funds, Bear Stearns High-Grade Structured Credit Strategies 
Master Fund, Ltd. and Bear Stearns High-Grade Structured Credit 
Strategies Enhanced Leverage Master Fund, Ltd.\11\ The funds were 
incorporated in the Cayman Islands as exempted liability companies, 
with registered offices in the Cayman Islands. However, when the funds 
collapsed under the weight of their significant investments in subprime 
mortgages, Bear Stearns bailed out the funds.
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    \9\ See, e.g., Andrew Bary, ``Of Citi and SIVs: Can Banks Plug 
the Leak?,'' Barron's, Oct. 22, 2007, available at http://online.barrons.com/article/SB119284238641065650.html.
    \10\ See, e.g., Financial Times, Citi launches $49bn SIV rescue 
(Dec. 14, 2007), available at http://www.ft.com/intl/cms/s/0/6626b45e-a9dd-11dc-aa8b-0000779fd2ac.html#axzz1yMOOB81bMarketWatch MarketWatch. 
Citigroup says it will absorb SIV assets (Dec. 14, 2007), available 
at http://articles.marketwatch.com/2007-12-14/news/30679845_1_sivs-citigroup-ceo-vikram-pandit.
    \11\ See In Re: Bear Sterns High-Grade Structured Credit 
Strategies Master Funds, LTC, 374 B.R. 122 (Bankr. S.D.N.Y. 2007), 
available at http://www.nysb.uscourts.gov/opinions/brl/158971_25_opinion.pdf.
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    A decade before the AIG and Lehman collapses, a hedge fund advised 
by Long-Term Capital Management L.P. (``LTCM'') nearly failed, leading 
a number of creditors to provide LTCM substantial financial assistance 
under the supervision of the Federal Reserve Bank of New York. LTCM was 
based in Greenwich, Connecticut but managed trades in Long-Term Capital 
Portfolio LP, a partnership registered in the Cayman Islands. This 
hedge fund, with approximately $4 billion in capital and a balance 
sheet of just over $100 billion, had a swap book in excess of $1 
trillion notional. More recently, J.P. Morgan Chase & Co. (``J.P. 
Morgan''), the largest U.S. bank, has disclosed a multi-billion dollar 
trading loss stemming from its Chief Investment Office located in 
London.\12\ The significant reported losses at J.P. Morgan are a 
reminder of a key lesson from the failures of AIG and Lehman: A 
regulatory gap or lapse within any part of a financial institution can 
lead to the failure of the entire institution.
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    \12\ See ``Lehman Brothers International (Europe) in 
Administration, Joint Administrators' Progress Report for the Period 
15 September 2008 to 14 March 2009,'' available at: http://www.pwc.co.uk/assets/pdf/Ibie-progress-report-14049.pdf.
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    As these examples illustrate, corporate structures and inter-
affiliate obligations may cause the activity, regardless of where that 
activity takes place, to have a direct and significant connection with 
activities in, or effect

[[Page 41216]]

on, commerce in the U.S. In many of the largest financial institutions, 
the overall business operates as a tightly integrated network of 
business lines and services conducted through various branches or 
affiliated legal entities which are under the unified management of the 
parent entity.\13\ These large financial institutions effectively 
operate their businesses as a single business, by virtue of the 
relationship with the parent company and to each other, with the 
constituent parts inextricably linked to each other. The interconnected 
nature of the relationships among the affiliated entities within a 
corporate group means that a risk in any part of this group, whether in 
the United States or abroad, can quickly spread throughout the 
organization and jeopardize the financial integrity of the entire 
group.
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    \13\ Typically, the various business lines and services--while 
conducted out of separate legal entities--are highly integrated and 
inter-dependent. Key strategic and operational decisions are 
centralized and informed by the firm's global, group-wide 
perspective. The individual legal entities affiliates and 
subsidiaries share common corporate support functions, such as 
treasury, custodial, brokerage and depository services and related 
infrastructures. The affiliated entities within the corporate group 
may also provide funding or credit support for each other and enter 
into trades with each other. In large part, this consolidated 
structure is necessary to allow the firm to address and manage 
customer needs, funding opportunities, capital and other regulatory 
requirements, financial accounting and tax planning, among other 
things.
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    Congress sought to address the deficiencies in the regulatory 
system that contributed to the financial crisis through the enactment 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''), which was signed by President Obama on July 21, 
2010.\14\ Title VII of the Dodd-Frank Act amended the CEA \15\ to 
overhaul the structure and oversight of the over-the-counter 
derivatives market that previously had been subject to little or no 
oversight. One of the cornerstones of this legislation is the 
establishment of a new statutory framework for comprehensive regulation 
of financial institutions that participate in the swaps market as swap 
dealers or major swap participants (``MSPs''), which must register and 
are subject to greater oversight and regulation.\16\ A key goal of this 
new framework for swap dealers and MSPs is to minimize the potential 
for the recurrence of the type of financial and operational stresses 
that contributed to the 2008 financial crisis.
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    \14\ Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \15\ 7 U.S.C. 1, et seq.
    \16\ In this proposed interpretative guidance and policy 
statement, the provisions of the CEA relating to swaps that were 
enacted by Title VII of the Dodd-Frank Act are also referred to 
herein as ``the Dodd-Frank requirements.''
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    Efforts to regulate the swaps market are underway not only in the 
United States, but also abroad in the wake of the 2008 financial 
crisis. In 2009, leaders of the Group of 20 (``G20'') whose membership 
includes the European Union (``EU''), the United States, and 18 other 
countries--agreed that: (i) OTC derivatives contracts should be 
reported to trade repositories; (ii) all standardized OTC derivatives 
contracts should be cleared through central counterparties and traded 
on exchanges or electronic trading platforms, where appropriate, by the 
end of 2012; and (iii) non-centrally cleared contracts should be 
subject to higher capital requirements. In line with the G20 
commitment, much progress has been made to coordinate and harmonize 
international reform efforts, but the pace of reform varies among 
jurisdictions and disparities in regulations remain due to differences 
in cultures, legal and political traditions, and financial systems.\17\
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    \17\ Legislatures and regulators in a number of foreign 
jurisdictions are undertaking significant regulatory reforms over 
the swaps market and its participants. See CFTC and SEC, Joint 
Report on International Swap Regulation Required by Section 719(c) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Jan. 31, 2012, at 23, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf.
    For example, the European Parliament adopted the substance of 
the European Market Infrastructure Regulation (``EMIR'') on March 
29, 2012. See Proposal for a Regulation of the European Parliament 
and of the Council on OTC derivatives, central counterparties and 
trade repositories--Outcome of the European Parliament's first 
reading (Brussels, 28 to 29 March 2012), available at http://register.consilium.europa.eu/pdf/en/12/st06/st06399.en12.pdf.
    In December 2010, the European Commission released a public 
consultation on revising the Markets in Financial Instruments 
Directive (``MiFID''). See ``European Commission Public 
Consultation: Review of the Markets in Financial Instruments 
Directive,'' Dec. 8, 2010, available at http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf.
    In October 2011, the European Commission released two public 
consultations, one to revise MiFID and the other for creating a new 
regulation entitled the Markets in Financial Instruments Regulation 
(``MiFIR''). See ``European Commission Proposal for a Directive of 
the European Parliament and of the Council on markets in financial 
instruments repealing Directive 2004/39/EC of the European 
Parliament and of the Council,'' COM (2011) 656 final (Oct. 20, 
2011), available at http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf; ``European Commission 
Proposal for a Regulation of the European Parliament and of the 
Council on markets in financial instruments and amending regulation 
[EMIR] on OTC derivatives, central counterparties and trade 
repositories,'' COM (2011) 652 final (Oct. 20, 2011), available at 
http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_652_en.pdf.
    The Japanese legislature passed the Amendment to the Financial 
Instruments and Exchange Act (``FIEA'') in May 2010. See Outline of 
the bill for amendment of the Financial Instruments and Exchange 
Act, May 2010, available at http://www.fsa.go.jp/en/refer/diet/174/01.pdf.
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B. The Scope of the Proposed Interpretative Guidance and Policy 
Statement

    In light of the global nature of the swap market, the extent to 
which the Dodd-Frank Act's requirements will apply to cross-border 
activities is critically important. U.S. market participants regularly 
enter into swaps with other market participants that are domiciled 
outside of the U.S. or incorporated in non-U.S. jurisdictions.\18\ Many 
U.S. and non-U.S. domiciled or incorporated financial institutions 
conduct their swaps business across multiple jurisdictions, with swaps 
that are negotiated and executed by a branch or affiliate in one 
jurisdiction while the actual counterparty to the swap is an entity in 
another jurisdiction.
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    \18\ See Bank of International Settlements (BIS), Committee on 
the Global Financial System, No. 46, The macro financial 
implications of alternative configurations for access to central 
counterparties in OTC derivatives markets, Nov. 2011, at 1, 
available at http://www.bis.org/publ/cgfs46.pdf (``The configuration 
of access must take account of the globalized nature of the market, 
in which a significant proportion of OTC derivatives trading is 
undertaken across borders.'').
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    The Commission received numerous comments during the Dodd-Frank Act 
rulemaking process from interested parties concerning the application 
of Title VII of the Dodd-Frank Act and the Commission's implementing 
regulations thereunder to the cross-border activities of non-U.S. and 
U.S. market participants.\19\ The key issues raised by

[[Page 41217]]

the commenters include (i) the nature of the connections to the United 
States that would require a non-U.S. person to register as a swap 
dealer or MSP under the CEA and the Commission's regulations; \20\ (ii) 
which Dodd-Frank Act requirements apply to the swap activities of non-
U.S. persons, U.S. persons, and their branches, agencies, subsidiaries 
and affiliates outside of the United States; \21\ and (iii) to the 
extent that Title VII of the Dodd-Frank requirements would apply, the 
circumstances under which the Commission would consider permitting a 
non-U.S. person to comply with the regulatory regime of its foreign 
jurisdiction instead of complying with the Dodd-Frank Act and the 
Commission's regulations promulgated thereunder.\22\
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    \19\ See, e.g., Institute of International Bankers (``IIB'') 
(Jan. 10, 2011); International Swaps and Derivatives Association 
(``ISDA'') (Feb. 22, 2011), Securities Industry and Financial 
Markets Association (``SIFMA'') (Feb. 3, 2011), Cleary Gottlieb 
Steen & Hamilton LLP (``Cleary'') (Sept. 20, 2011), and Barclays 
Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG, 
HSBC, Nomura Securities International, Inc., Rabobank Nederland, 
Royal Bank of Canada, The Royal Bank of Scotland Group PLC, 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, The Toronto-Dominion 
Bank, and UBS AG (``Twelve Foreign Banks'') (Feb. 17, 2011). In 
total, the Commission received approximately 120 comment letters 
(submitted in response to various proposed rules implementing the 
Dodd-Frank Act) that addressed or raised issues related to cross-
border swap activities. These letters, received by the Commission in 
response to various Commission rulemakings, may be found on the 
Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/index.htm.
    In addition, the Commission and the Securities and Exchange 
Commission (``SEC'') held a joint public roundtable on August 1, 
2011 on international issues relating to the implementation of Title 
VII of the Dodd-Frank Act (``Roundtable''). During the Roundtable, 
commenters discussed the impact of the various requirements on their 
cross-border activities. A copy of the transcript from the 
Roundtable can be found on the Commission's Web site at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission21_080111-trans.pdf.
    \20\ Commenters agreed generally that non-U.S. persons engaged 
in swap dealing activity directly with U.S. counterparties should be 
registered with the Commission as swap dealers. See, e.g., Cleary 
(Sept. 20, 2011). On the other hand, according to commenters, swap 
dealing conducted outside of the U.S. between non-U.S. persons is 
not sufficiently connected to the U.S. to warrant swap dealer 
registration. See, e.g., Twelve Foreign Banks (Feb. 17, 2011); SIFMA 
(Feb. 3, 2011). Commenters also said that a non-U.S. person that 
limits its U.S. swap activity to U.S. persons that are registered as 
swap dealers should not have to register, because regulation of the 
U.S. registered swap dealer is sufficient. See Bank of Tokyo-
Mitsubishi UFJ Ltd., Mizuho Corporate Bank Ltd., Sumitomo Mitsui 
Banking Corporation (``Japanese Banks'') (May 5, 2011) and Twelve 
Foreign Banks (Feb. 17, 2011).
    \21\ See, e.g., Cleary (Sept. 20, 2011) IIB (Jan. 10, 2011) and 
SIFMA (Feb. 3, 2011). Generally speaking, these commenters urged 
that the Commission adopt a framework that preserves the strengths 
of existing market practices and home country supervision, while 
avoiding regulatory duplication, unrealistic extraterritorial 
supervisory responsibilities, and fragmentation of the swap markets. 
See, e.g., IIB (Jan. 10, 2011) and SIFMA (Feb. 3, 2011). According 
to these commenters, entities outside the United States should 
comply with rules adopted under the Dodd-Frank Act with respect to 
requirements applicable to specific swaps, but should be subject to 
home country supervision by their home country regulators with 
respect to requirements applicable at the entity level. On the other 
hand, other commenters said that a U.S. entity must not be able to 
conduct swap business with non-U.S. persons free from regulation 
under the Dodd-Frank Act by establishing a non-U.S. affiliate and 
conducting the swap business through the affiliate. See Better 
Markets, Inc. (Jan. 24, 2011).
    \22\ See, e.g., Seven Foreign Banks (Jan. 11, 2011) and Hess 
(Jan. 24, 2011). Commenters stated that deference to comparable home 
country regulation accords with principles of international comity 
and is consistent with the approach taken by U.S. banking regulators 
with respect to non-U.S. banks. See, e.g., FSR (Feb. 22, 2011), IIB 
(April 11, 2011), Cleary (Sept. 20, 2011). Numerous commenters also 
recommended that comparability should be determined based on whether 
the home country entity-level requirements are reasonably designed 
to achieve the same policy objectives as the corresponding 
requirements under the Dodd-Frank Act. See Cleary (Sept. 20, 2011). 
Commenters said that the Commission should defer to the home 
country, entity-level requirements only when they are comparable. 
Commenters also discussed Dodd-Frank Act requirements that 
potentially apply to all swap market participants, not just 
registered swap dealers and MSPs. For instance, commenters said that 
when a non-U.S. person executes or clears a swap on a U.S.-
registered facility, the non-U.S. person should be subject to the 
Commission's swap position limit requirements. See US Banks (Feb. 
22, 2011). Commenters said that clearing requirements should not 
apply to swaps between two non-U.S. persons, and that the regulators 
in various countries should work together to recognize comparably-
regulated clearinghouses. See SIFMA (Feb. 3, 2011) and Seven Foreign 
Banks (Jan. 11, 2011).
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    In this proposed interpretive guidance and policy statement 
(``proposed interpretive guidance''), the Commission addresses the key 
issues raised by the commenters with respect to the application of 
Title VII of the Dodd-Frank Act and the Commission's rules promulgated 
thereunder to cross-border swaps and activities. Following the 
background discussion in Section I, the Commission sets out its 
proposed interpretive guidance in the subsequent three sections. 
Section II sets forth the Commission's proposed interpretation of its 
authority to apply the Dodd-Frank Act and its regulations 
extraterritorially under section 2(i) of the CEA.\23\ Section II also 
describes the general manner in which the Commission proposes to 
consider the following: (i) Whether a non-U.S. person's swap dealing 
activities are sufficient to require registration as a ``swap dealer,'' 
as further defined in a joint release adopted by the Commission and the 
SEC (collectively, the ``Commissions''); (ii) whether a non-U.S. 
person's swap positions are sufficient to require registration as a 
``major swap participant,'' as further defined in a joint release 
adopted by the Commissions; and (iii) the treatment for registration 
purposes of foreign branches, agencies, affiliates, and subsidiaries of 
U.S. swap dealers and of U.S. branches of non-U.S. swap dealers.\24\
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    \23\ 7 U.S.C. 2(i).
    \24\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant''; Final 
Rule, 77 FR 30596, May 23, 2012.
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    Section III sets forth the manner in which the Commission proposes 
to interpret section 2(i) of the CEA as it applies to the requirements 
under Title VII of the Dodd-Frank Act and the Commission's regulations 
promulgated thereunder to swaps and activities of non-U.S. swap 
dealers, non-U.S. MSPs and foreign branches, agencies, affiliates, and 
subsidiaries of U.S. swap dealers. In section III, the Commission also 
proposes to permit a non-U.S. swap dealer or non-U.S. MSP to comply 
with comparable foreign regulatory requirements in order to satisfy 
applicable statutory and regulatory requirements under Title VII of the 
Dodd-Frank Act.\25\ In section IV, the Commission generally describes a 
process by which a non-U.S. applicant for swap dealer or MSP 
registration may seek the Commission's recognition of substituted 
compliance with a comparable foreign regulatory requirement and the 
general scope of Commission review in making the requisite 
comparability finding. Section V sets forth the manner in which the 
Commission proposes to interpret section 2(i) of the CEA as it applies 
to the clearing, trading, and certain reporting requirements under the 
Dodd-Frank Act with respect to swaps between counterparties that are 
not swap dealers or MSPs.
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    \25\ This proposed interpretative release does not address the 
scope of the Commission's authority under CEA section 2(i) over non-
swap agreements, contracts, transactions or markets within the 
Commission's jurisdiction or persons who participate in or operate 
those markets.
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    The Commission clarifies that this proposed interpretive guidance 
does not establish or modify any person's rights and obligations under 
the CEA or the Commission's regulations promulgated thereunder. The 
Commission notes that the proposed interpretive guidance does not limit 
the applicability of any CEA provision or Commission regulation to any 
person, entity or transaction except as provided herein.

II. Consideration of Whether a Non-U.S. Person Is a Swap Dealer or 
Major Swap Participant

A. Section 2(i) of the CEA

    Section 722(d) of the Dodd-Frank Act amends section 2 of the CEA 
\26\ to add a new paragraph (i) entitled ``Applicability,'' which 
consists of two subsections. Specifically, section 2(i) states that the 
provisions added to the CEA by Title VII of the Dodd-Frank Act shall 
not apply to activities outside the United States unless those 
activities--
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    \26\ 7 U.S.C. 2.
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    (1) have a direct and significant connection with activities in, or 
effect on, commerce of the United States; or
    (2) contravene such rules or regulations as the Commission may 
prescribe or promulgate as are necessary or appropriate to prevent the 
evasion of any provision of this Act that was enacted by the Wall 
Street Transparency and Accountability Act of 2010.\27\
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    \27\ 7 U.S.C. 2(i).

Section 2(i) provides the Commission with express authority over 
activities outside the United States when such swaps and activities 
have a ``direct and significant'' connection with activities

[[Page 41218]]

in, or effect on, commerce of the United States or when they contravene 
such rules as the Commission may promulgate to prevent evasion of the 
provisions of Title VII of the Dodd-Frank Act.\28\ Section 2(i) does 
not, however, require the Commission to extend its reach to the outer 
bounds of that authorization. Rather, in exercising its authority with 
respect to swap activities outside the United States, the Commission 
will be guided by consideration of international comity principles. The 
subsections that follow address the general manner in which the 
Commission will determine the cross-border application of the CEA's 
swap provisions, consistent with section 2(i) of the CEA.
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    \28\ A primary purpose of Title VII of the Dodd-Frank Act is to 
address risk to the U.S. financial system created by 
interconnections in the swaps market. Senator Blanche Lincoln, then 
Chairman of the Senate Agriculture Committee, noted: ``In 2008, our 
Nation's economy was on the brink of collapse. America was being 
held captive by a financial system that was so interconnected, so 
large, and so irresponsible that our economy and our way of life 
were about to be destroyed.'' Congressional Record S5818, July 14, 
2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf. Senator Jeanne Shaheen stated: ``We need to put 
in place reforms to stop Wall Street firms from growing so big and 
so interconnected that they can threaten our entire economy.'' 
Congressional Record S5888, July 15, 2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf. Senator Debbie Stabenow opined: ``For too long the over-
the-counter derivatives market has been unregulated, transferring 
risk between firms and creating a web of fragility in a system where 
entities became too interconnected to fail.'' Congressional Record 
S5905, July 15, 2010, available at http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf. As these legislative 
records indicate, Congress sought to ensure that the Commission 
would be able to effectively regulate activities in the swaps 
marketplace, wherever those activities may occur, that are 
significantly connected with or affect the U.S. financial system.
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B. Proposed Interpretation of the Term ``U.S. Person''

    For purposes of this interpretive guidance, the Commission proposes 
to interpret the term ``U.S. person'' by reference to the extent to 
which swap activities or transactions involving one or more such person 
have the relevant effect on U.S. commerce. For example, this 
interpretation would help determine whether non-U.S. persons engaging 
in swap dealing transactions with ``U.S. persons'' in excess of the de 
minimis level would be required to register and regulated as a swap 
dealer. In addition, for the same reasons, the term ``U.S. person'' can 
be helpful in determining the level of U.S. interest for purposes of 
analyzing and applying principles of international comity when 
considering the extent to which U.S. transaction-level requirements 
should apply to swap transactions.
    Specifically, as proposed, the term ``U.S. person'' would include, 
but not be limited to: (i) Any natural person who is a resident of the 
United States; (ii) any corporation, partnership, limited liability 
company, business or other trust, association, joint-stock company, 
fund, or any form of enterprise similar to any of the foregoing, in 
each case that is either (A) organized or incorporated under the laws 
of the United States or having its principal place of business in the 
United States \29\ (``legal entity'') or (B) in which the direct or 
indirect owners thereof are responsible for the liabilities of such 
entity and one or more of such owners is a U.S. person; (iii) any 
individual account (discretionary or not) where the beneficial owner is 
a U.S. person; (iv) any commodity pool, pooled account, or collective 
investment vehicle (whether or not it is organized or incorporated in 
the United States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person(s); (v) any commodity pool, pooled 
account, or collective investment vehicle the operator of which would 
be required to register as a commodity pool operator under the CEA; 
(vi) a pension plan for the employees, officers, or principals of a 
legal entity with its principal place of business inside the United 
States; and (vii) an estate or trust, the income of which is subject to 
United States income tax regardless of source.
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    \29\ The term ``United States'' means the United States, its 
states, the District of Columbia, Puerto Rico, the U.S. Virgin 
Islands, and any other territories or possessions of the United 
States government, its agencies or instrumentalities.
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    Under this interpretation, the term ``U.S. person'' generally means 
that a foreign branch or agency of a U.S. person would be covered by 
virtue of the fact that it is a part, or an extension, of a U.S. 
person. By contrast, a foreign affiliate or subsidiary of a U.S. person 
would be considered a non-U.S. person, even where such an affiliate or 
subsidiary has certain or all of its swap-related obligations 
guaranteed by the U.S. person.
Request for Comment
    Q1. Please provide specific comments regarding the Commission's 
proposed interpretation of the term ``U.S. person.''
    Q1a. In the Commission's view, the concerns regarding risks 
associated with the affiliate group structure are heightened where a 
U.S. person guarantees (or provides similar support) to a foreign 
affiliate or subsidiary. In such situations, the risk of the swaps 
executed abroad are effectively transferred to or incurred by the U.S. 
person. Or stated differently, the risk of the affiliate's swap 
transactions have a direct and significant connection to, or effect on, 
the U.S. person that is the guarantor. Under these circumstances, 
notwithstanding that the U.S. person may be subject to a robust 
regulatory regime, its financial stability may be put at risk by 
activities outside the firm. Accordingly, the Commission is 
considering, and seeks comments on, whether the term ``U.S. person'' 
should be interpreted to include a foreign affiliate or subsidiary 
guaranteed by a U.S. person.
    Q1b.Several commenters have suggested that the Commission adopt the 
definition of ``U.S. person'' in the SEC's Regulation S.\30\ Should the 
Commission interpret the term ``U.S. person'' in a similar manner 
notwithstanding that Regulation S has a different focus?
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    \30\ See 17 CFR 230.902(k); SEC Release No. 33-6863, 55 FR 
18306, May 2, 1990.
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    Q1c. As an alternative to the proposed interpretation of the term 
``U.S. person,'' should the Commission interpret the term to include a 
concept of control under which a non-U.S. person who is controlled by 
or under common control with a U.S. person would also be considered a 
U.S. person? If so, how should the Commission define the term 
``controlled by or under common control?''
    Q1d. Are there other examples of persons or interests that should 
be specifically identified as a ``U.S. person'' in the final 
interpretive guidance?

C. The Definitions and Registration Thresholds

1. Background
    The Commission adopted its final rulemaking further defining the 
terms ``swap dealer'' and ``major swap participant'' jointly with the 
SEC on April 18, 2012 (``Final Entities Rulemaking'').\31\ In the Final 
Entities Rulemaking, the Commissions, among other things, adopted final 
rules and interpretive guidance implementing the statutory definitions 
of the terms ``swap dealer'' and ``major swap participant'' in CEA 
sections 1a(49) and 1a(33).\32\ The final rules and interpretive 
guidance delineate the activities that cause a person to be a swap 
dealer and the level of swap positions that cause a person to be an 
MSP. In addition, the

[[Page 41219]]

Commissions adopted rules concerning the statutory exceptions from the 
definition of swap dealer, including a de minimis exception.\33\
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    \31\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant;'' Final 
Rule, 77 FR 30596, May 23, 2012.
    \32\ 7 U.S.C. 1a(49) and 1a(33).
    \33\ Section 1a(49)(D) of the CEA (7 U.S.C. 1a(49)(D)) provides 
that ``[t]he Commission shall exempt from designation as a swap 
dealer an entity that engages in a de minimis quantity of swap 
dealing in connection with transactions with or on behalf of its 
customers. The Commission shall promulgate regulations to establish 
factors with respect to the making of this determination to 
exempt.'' This provision is implemented in section 1.3(ggg)(4) of 
the Commission's regulations.
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    Section 1.3(ggg)(4) of the Commission's regulations sets forth a de 
minimis threshold of swap dealing, which takes into account the 
notional amount of a person's swap dealing activity over the prior 12 
months.\34\ When a person engages in swap dealing transactions above 
that threshold, such person meets the definition of a swap dealer under 
section 1a(49) of the CEA,\35\ and is required to register as a swap 
dealer with the Commission under CEA section 4s(b).\36\ Sections 
1.3(jjj)(1) and 1.3(lll)(1) of the Commission's regulations set forth 
swap position thresholds for the MSP definition.\37\ When a person 
holds swap positions above those thresholds, such person meets the 
definition of an MSP under section 1a(33) of the CEA,\38\ and is 
required to register as an MSP with the Commission under CEA section 
4s(b).\39\
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    \34\ The limitations associated with the de minimis exception 
apply only in connection with a person's dealing activities. See 
Final Entities Rulemaking at Part II.D. As used in this release, the 
meaning of the term ``swap dealing'' is consistent with that used in 
the Final Entities Rulemaking.
    \35\ 7 U.S.C. 1a(49).
    \36\ 7 U.S.C. 6s(b). See also Registration of Swap Dealers and 
Major Swap Participants, Final Rule 77 FR 2613, 2616, Jan. 19, 2012 
(``Final Registration Rule'').
    \37\ See Final Entities Rulemaking at Parts IV.B. and IV.E.
    \38\ 7 U.S.C. 1a(33).
    \39\ 7 U.S.C. 6s(b). See also Final Registration Rule at 2616, 
Jan. 19, 2012, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-792a.pdf.
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    Once required to register as a swap dealer or MSP, the person 
becomes subject to all of the requirements imposed on swap dealers or 
MSPs under Title VII, respectively, including but not limited to 
sections 2(a)(13), 4r, and 4s of the CEA,\40\ which require swap 
dealers and MSPs to comply with various prudential, business conduct, 
reporting, clearing, and trading requirements. Unless a swap dealer or 
MSP applies for and is granted a limited designation, all of the swap 
dealer's or MSP's swap activities are subject to such requirements, not 
only the swap activities that trigger the registration requirement.
---------------------------------------------------------------------------

    \40\ 7 U.S.C. 2(a)(13), 6r, and 6s.
---------------------------------------------------------------------------

    The statutory definitions of swap dealer and MSP do not contain any 
geographic limitations and do not distinguish between U.S. and non-U.S. 
swap dealers or non-U.S. MSPs.\41\ Similarly, the Final Entities 
Rulemaking does not contain any such limitations or distinctions. In 
this proposed interpretive guidance, the Commission interprets section 
2(i) of the CEA as it applies to the provisions in the CEA related to 
swap dealers and MSPs and, accordingly, proposes the general manner in 
which the swap dealer and MSP registration and related requirements 
apply to the activities of non-U.S. persons, and to the foreign 
branches, agencies, subsidiaries and affiliates of U.S. persons and 
U.S. branches of non-U.S. persons.
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    \41\ The statutory definition of MSP in CEA section 1a(33)(B) (7 
U.S.C. 1a(33)(B)) does state, however, that the Commission should 
consider the impact on ``the financial system of the United States'' 
in defining what constitutes a ``substantial position'' for purposes 
of the definition. The Commission believes that this proposed 
interpretative guidance, which focuses on a non-U.S. person's swap 
positions with U.S. persons, is consistent with this statutory 
directive.
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2. Swap Dealer
    In enacting the swap dealer definition and the associated 
requirements for swap dealers Congress sought to ensure that those 
entities that engage in more than a de minimis level of swap dealing be 
considered swap dealers, register, and be regulated as swap 
dealers.\42\ In the Final Entities Rulemaking, the Commission 
established a notional threshold for determining whether a person 
engages in more than a de minimis level of swap dealing and therefore 
must register as a swap dealer. The Commission proposes that the level 
of swap dealing that is substantial enough to require a person to 
register as a swap dealer when conducted by a U.S. person also 
constitutes a ``direct and significant connection'' within the meaning 
of section 2(i)(1) of the CEA when such dealing activities are 
conducted by a non-U.S. person with U.S. persons as counterparties. 
Accordingly, consistent with this interpretation and the Commission's 
Final Entities Rulemaking, the Commission proposes that non-U.S. 
persons who engage in more than a de minimis level of swap dealing with 
U.S. persons would be required to register as swap dealers.\43\
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    \42\ The Commission does not believe it is necessary for 
purposes of this proposed interpretive guidance to determine whether 
such swaps or activities between a non-U.S. person and a U.S. person 
are located within or outside of the United States. Regardless of 
whether the location of any particular swap or activity is within or 
outside the United States, the Commission proposes that it is the 
aggregate notional amount of such swap dealing activities that is 
relevant for registration. Accordingly, the consideration of such 
swaps within the meaning of CEA section 2(i) for the purposes of 
this proposed guidance does not necessarily mean that the Commission 
considers such activities to be outside of the United States. See 
Final Entities Rulemaking at Part II.B.4. for what constitutes 
``swap dealing activities.''
    \43\ In the Final Entities Rulemaking, the Commissions codified 
exclusions from the dealer definition for swaps and security-based 
swaps between majority-owned affiliates. The Commission construes 
section 2(i) to apply such inter-affiliates exclusion to swaps 
between a non-U.S. person and its U.S. affiliate or between two 
affiliated non-U.S. persons. See section 1.3(ggg)(6)(i) of the 
Commission's regulations.
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    The Commission does not propose, however, that a non-U.S. person 
should include, in determining whether the de minimis threshold is met, 
the notional value of dealing transactions with foreign branches of 
registered U.S. swap dealers. This is intended to address the concerns 
of non-U.S. persons who may be required to register as a swap dealer, 
notwithstanding the fact that their dealing activities with U.S. 
persons as counterparties are limited to foreign branches of registered 
U.S. swap dealers. In such cases, the Dodd-Frank Act transactional 
requirements (or comparable requirement) would nevertheless apply to 
swaps with those foreign branches and, thus, there is little concern 
that this exclusion could be used to engage in swap activities outside 
of the Dodd-Frank Act (comparable) requirements. Accordingly, the 
Commission believes that it would be appropriate and consistent with 
section 2(i) to allow non-U.S. persons to conduct swap dealing 
activities with registered U.S. swap dealers outside the United States 
(through their foreign branches), without triggering registration as a 
swap dealer as a result.
i. Aggregation of Swaps
    The Commission notes that section 1.3(ggg)(4) of the Commission's 
regulations requires that a person include, in determining whether its 
swap dealing activities exceed the de minimis threshold, the aggregate 
notional value of swap dealing transactions entered into by its 
affiliates under common control. It is the Commission's view that this 
provision would require that a non-U.S. person, in determining whether 
its swap dealing transactions exceed the de minimis threshold, include 
the aggregate notional value of any swap dealing transactions between 
U.S. persons and any of its non-U.S. affiliates under common control, 
and any swap dealing transactions of any of its non-U.S. affiliates 
under common control where

[[Page 41220]]

the obligations of such non-U.S. affiliates are guaranteed by U.S. 
persons.\44\
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    \44\ See Final Entities Rulemaking at Part II.D.4.
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    The Commission is not proposing, however, that a non-U.S. person 
should include, in this determination, the notional value of dealing 
transactions in which its U.S. affiliates engage. Again, the 
Commission's proposed interpretation is that a direct and significant 
connection with activities in, or effect on, U.S. commerce, in these 
circumstances, exists when non-U.S. persons conduct more than a de 
minimis level of swap dealing activities with U.S. persons. In the case 
of an affiliated group of non-U.S. persons under common control, the 
Commission believes that all of the affiliated non-U.S. persons should 
aggregate the notional value of their swap dealing transactions with 
U.S. persons (and their swap dealing transactions with non-U.S. persons 
in which such person's obligations are guaranteed by U.S. persons), in 
order to determine, in effect, the level of swap dealing activities 
conducted by the affiliated group of non-U.S. persons in the aggregate. 
However, since the focus is on the level of activity conducted by non-
U.S. persons, swap dealing transactions of affiliated U.S. persons 
should not be included.\45\
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    \45\ See also 77 FR at 2616.
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ii. Regular Business
    As stated in the Final Entities Rulemaking, a person is required to 
apply the de minimis test only if it determines it is engaged in swap 
dealing activity under the rule further defining the term ``swap 
dealer,'' which excludes swap activities that are not part of ``a 
regular business.'' A person that is not engaged in swap dealing as 
part of ``a regular business'' is not required to apply the de minimis 
test and is not a swap dealer under the CEA.
    The Commission proposes that a non-U.S. person without a guarantee 
from a U.S. person applying the swap dealer definition should determine 
first whether its swap activities with respect to U.S. persons as 
counterparties qualify as swap dealing activity under the rule further 
defining the term ``swap dealer'' and the exclusion of swap activities 
that are not part of ``a regular business.'' Thus, for example, a non-
U.S. person without a guarantee that determines it is not engaged in 
swap dealing as part of ``a regular business'' with respect to U.S. 
persons as counterparties is not required to apply the de minimis test 
or to register as a swap dealer. This would be true even if the non-
U.S. person were engaged in swap dealing as part of ``a regular 
business'' with respect to non-U.S. persons as counterparties.
    The determination of whether a person is engaged in swap dealing 
activity involves application of the interpretive guidance in Part 
II.A.4. of the Final Entities Rulemaking, which provides for 
consideration of the relevant facts and circumstances. Similarly, the 
Commission proposes that the determination by a non-U.S. person without 
a guarantee of whether it is engaged in swap dealing as part of ``a 
regular business'' with respect to U.S. persons as counterparties (as 
opposed to its swap dealing activity with respect to non-U.S. persons 
as counterparties) will depend on consideration of the relevant facts 
and circumstances in light of the interpretive guidance in the Final 
Entities Rulemaking.
Request for Comment
    Q2. Do commenters agree that in determining whether it is a swap 
dealer, a non-U.S. person without a guarantee from a U.S. person should 
consider whether it is engaged in swap dealing as part of ``a regular 
business'' only with respect to U.S. persons (as opposed to non-U.S. 
persons)? Why or why not? In such an analysis, would it generally be 
feasible for the non-U.S. person to distinguish swap dealing activities 
with U.S. persons from swap dealing activities with non-U.S. persons 
and are there any practical difficulties in this approach?
3. Major Swap Participant
    The MSP definition and associated requirements for MSPs reflect 
Congress' direction that any entity that holds swap positions above a 
level that could, among other things, ``significantly impact the 
financial system of the United States,'' be considered an MSP and 
register and be regulated as an MSP.\46\ In the Final Entities 
Rulemaking, the Commission further defined MSP to clarify when a person 
must register. The Commission believes that the level of swap positions 
that is substantial enough to require a person to register as an MSP 
when held by a U.S. person, also constitutes a ``direct and significant 
connection'' within the meaning of section 2(i) of the CEA when such 
positions reflect swaps between a non-U.S. person and U.S. persons. 
Consistent with this interpretation and the Commission's Final Entities 
Rulemaking, a non-U.S. person who holds swap positions where a U.S. 
person is a counterparty above the specified MSP thresholds would 
qualify and register as an MSP.
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    \46\ CEA section 1a(33)(B), 7 U.S.C. 1a(33)(B). As is the case 
with respect to swap dealers, the Commission does not believe it is 
necessary, for purposes of this proposed interpretative guidance, to 
determine whether such swaps or activities between a non-U.S. person 
and a U.S. person are located within or outside of the United 
States.
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i. Aggregation of Positions
    In determining whether it is an MSP, a non-U.S. person would 
``count'' all of its swap positions where its counterparty is a U.S. 
person, but would not ``count'' any swap position where its 
counterparty is a non-U.S. person. As with swap dealing transactions, a 
swap between a non-U.S. person and a U.S. person, or a swap between a 
non-U.S. person and another non-U.S. person under which the first non-
U.S. person's obligations are guaranteed by a U.S. person, in and of 
itself may have a direct and significant connection with activities in, 
or effect on, commerce of the United States within the meaning of 
section 2(i) of the CEA. Similarly, for purposes of applying section 
2(i) of the CEA to the MSP definition and associated requirements, the 
Commission believes the appropriate focus is on whether in the 
aggregate such swaps have a direct and significant connection with 
activities in, or effect on, U.S. commerce, rather than whether each 
particular swap has such a connection or effect.
4. Relevance of Guarantees
    In the event of a default or insolvency of a non-U.S. swap dealer 
with more than a de minimis level of swap dealing with U.S. persons or 
a non-U.S. MSP with more than the threshold level of swap positions 
with U.S. persons, the swap dealer's or MSP's U.S. counterparties could 
be adversely affected. Such an event may adversely affect numerous 
persons engaged in commerce within the United States, disrupt such 
commerce, and increase risks of a widespread disruption to the 
financial system in the United States. For that reason, the Commission 
has a significant regulatory interest in ensuring that the swap dealer 
or MSP is managing the risks of such swaps appropriately and ensuring 
that its U.S. counterparties receive the appropriate protections under 
the CEA.
    Similar effects on U.S. persons and on the U.S. financial system 
may occur in the event of a default or insolvency of a non-U.S. person 
with respect to a non-de minimis level of swap dealing transactions, or 
swap positions above the MSP threshold, of the non-U.S. person that are 
guaranteed by a U.S. person. In these circumstances, and regardless of 
whether the non-U.S. person's counterparty is a U.S. person or

[[Page 41221]]

a non-U.S. person, the risk of default by the non-U.S. person with 
respect to its guaranteed swaps ultimately rests with a U.S. person. If 
there is a default by the non-U.S. person, the U.S. person would be 
held responsible to settle those obligations. However, the Commission's 
interpretive guidance with respect to guarantees differs slightly for 
swap dealers and MSPs.\47\ We therefore discuss the two cases 
separately here.
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    \47\ For purposes of this interpretive guidance, references to a 
guarantee are intended to refer not only to traditional guarantee of 
payment or performance of the related swaps, but would also include 
other formal arrangements to support the non-U.S. person's ability 
to pay or perform its obligations, including without limitation, 
liquidity puts and keepwell agreements.
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    Accordingly, the Commission proposes to interpret CEA section 2(i) 
as requiring a non-U.S. person to register with the Commission as a 
swap dealer when the aggregate notional value of its swap dealing 
activities with U.S. persons, or of its swap dealing activities with 
non-U.S. persons where the dealing non-U.S. person's obligations are 
guaranteed, or its ability to pay or perform its obligations thereunder 
are otherwise formally supported, by a U.S. person, exceed the de 
minimis level of swap dealing as set forth in section 1.3(ggg)(4) of 
the Commission's regulations. The Commission believes that when the 
aggregate level of swap dealing by a non-U.S. person, considering both 
swaps directly with U.S. persons and swaps with non-U.S. persons under 
which the dealing non-U.S. person's obligations are guaranteed by a 
U.S. person, exceeds the de minimis level of swap dealing, the dealing 
non-U.S. person's activities have the requisite ``direct and 
significant connection with activities in, or effect on, commerce of 
the United States.''
    With respect to whether a person is an MSP, the Commission's 
interpretive guidance in the Final Entities Rulemaking provides that a 
person's swap positions are attributed to a parent, other affiliate or 
guarantor to the extent that the counterparties to those positions 
would have recourse to the other entity in connection with the position 
unless the first person is itself subject to capital regulation by the 
CFTC or SEC (e.g., including where the first person is a swap dealer or 
MSP) or is a U.S. entity regulated as a bank in the United States.\48\ 
In accordance with this guidance, the Commission proposes that swap 
positions between a non-U.S. person, where the obligations of such non-
U.S. person thereunder are guaranteed by a U.S. person, should be 
attributed to the U.S. person (and not the non-U.S. person) in 
determining whether either person is an MSP. In other words, the 
Commission proposes to interpret CEA section 2(i) as requiring non-U.S. 
persons to register with the Commission as MSPs when their swaps with 
U.S. persons, disregarding any such positions where their obligations 
thereunder are guaranteed by U.S. persons, exceed a relevant MSP 
threshold as set forth in the Final Entities Rulemaking.
---------------------------------------------------------------------------

    \48\ See Final Entities Rulemaking at part IV.H.
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5. Summary
    This proposed interpretation may be summarized as follows. In 
determining whether a non-U.S. person is engaged in more than a de 
minimis level of swap dealing, the person should consider the aggregate 
notional value of:
     Swap dealing transactions between it (or any of its non-
U.S. affiliates under common control) and a U.S. person (other than 
foreign branches of U.S. persons that are registered swap dealers); and
     Swap dealing transactions (or any swap dealing 
transactions of its non-U.S. affiliates under common control) where its 
obligations or its non-U.S. affiliates' obligations thereunder are 
guaranteed by U.S. persons.
    In determining whether a non-U.S. person holds swap positions above 
the MSP thresholds, the person should consider the aggregate notional 
value of:
     Any swap position between it and a U.S. person (but its 
swap positions where its obligations thereunder are guaranteed by a 
U.S. person generally should be attributed to that U.S. person and not 
included in the non-U.S. person's determination); and
     Any swap between another non-U.S. person and a U.S. 
person, where it guarantees the obligations of the non-U.S. person 
thereunder.

D. Foreign Branches, Agencies, Affiliates, and Subsidiaries of U.S. 
Swap Dealers and U.S. Branches, Agencies, Affiliates, and Subsidiaries 
of Non-U.S. Swap Dealers

1. Foreign \49\ Branches and Agencies of U.S. Swap Dealers
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    \49\ In this release, the term ``foreign'' is used 
interchangeably with the term ``non-U.S.''
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    The Commission understands that branches and agencies are not 
separate legal entities; rather, a branch or agency is a corporate 
extension of its principal entity.\50\ Given that a foreign branch or 
agency has no legal existence separate from a U.S. principal entity 
that is the legal counterparty to swaps, the Commission would apply the 
Dodd-Frank Act registration requirements to a U.S. person and its 
foreign branches and agencies on an entity-wide basis.\51\ Under this 
approach, the Commission would require the U.S. person (principal 
entity) to register as the swap dealer. Although certain duties and 
obligations may be performed by the foreign branches and agencies, the 
U.S. person (principal entity) would remain responsible for compliance 
with all of the applicable responsibilities.\52\
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    \50\ See, e.g., Federal Reserve Bank of New York, Foreign Banks 
and the Federal Reserve, at http://www.ny.frb.org/aboutthefed/fedpoint/fed26.html (last visited Feb. 26, 2012). See also Federal 
Reserve Board, ``Policy Statement on the Supervision and Regulation 
of Foreign Banking Organizations,'' Feb. 23, 1979, Federal Reserve 
Regulatory Service 4-835; Federal Reserve Board Supervisory Letter 
SR 08-09 re: Consolidated Supervision of Bank Holding Companies and 
the Combined U.S. Operations of Foreign Banking Organizations, Oct. 
16, 2008. See also Institute of International Bankers, Comment 
Letter at 15-16, Jan. 10, 2011 (acknowledging the principal-agency 
relationship and advocating for the Commission to adopt a 
registration regime predicated on the intermediating activities of 
U.S. branches and agencies).
    \51\ The Commission notes that the supervisory authority of the 
Office of the Comptroller of the Currency extends to foreign branch 
offices of national banks under its jurisdiction.
    \52\ Under this model, the foreign branch or agency of the U.S. 
person would not register separately as a swap dealer.
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2. Foreign Affiliates or Subsidiaries of U.S. Persons
    A number of large financial institutions operate a ``central 
booking'' model under which swaps are solicited or negotiated through 
their branches, agencies, affiliates or subsidiaries but are booked, 
directly or indirectly, in a single legal entity (typically the parent 
company) for balance sheet and financial reporting purposes.\53\ In 
some cases, the affiliate which has negotiated the swap may be acting 
as a principal and may transfer the exposure to the central booking 
entity by back-to-back transactions or other arrangements. In other 
cases, the affiliate that has arranged or negotiated the trade may be 
acting as an agent for the central booking entity, in which case the 
central booking entity may enter into the swap transaction so that the 
central booking entity is, as a contractual matter, directly facing the 
third-party counterparty in the swap transaction. Given these various 
ways of implementing a central booking arrangement, the question arises 
as to how the Dodd-Frank Act registration

[[Page 41222]]

requirement would apply to the affiliate facing the third party 
counterparty and the central booking entity or guarantor. The following 
subsection addresses which entity must register as a swap dealer in 
such central ``booking'' model.
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    \53\ See Seven Foreign Banks (``Many foreign banks operate and 
manage their global swaps businesses out of a single entity * * *. 
[T]his entity is the central booking vehicle, acting as principal to 
counterparties in the U.S. and other jurisdictions.'') (Jan. 11, 
2011); IIB (Jan. 10, 2011). These comment letters are available on 
the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=903.
---------------------------------------------------------------------------

    The Commission proposes to interpret section 2(i) of CEA so that 
the U.S. person who books the swaps would be required to register as a 
swap dealer, regardless of whether the swaps were directly booked by 
the U.S. person (by such person becoming a party to the swap) or 
indirectly transferred to the U.S. person (by way of a back-to-back 
swap or other arrangement). In either case, the affiliate may also be 
required to register as a swap dealer if by its activities it 
independently meets the definition of swap dealer.
3. U.S. Branches, Agents, Affiliates, or Subsidiaries of Non-U.S. 
Persons
    A similar analysis applies when a non-U.S. person is the booking 
entity (i.e., the legal counterparty) to swaps.\54\ Under these 
circumstances, even if the U.S. branch, agency, affiliate, or 
subsidiary of a non-U.S. person engages in solicitation or negotiation 
in connection with the swap entered into by the non-U.S. person, the 
Commission proposes to interpret section 2(i) of CEA such that the 
Dodd-Frank Act requirements, including the registration requirement, 
applicable to swap dealers also apply to the non-U.S. person.
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    \54\ As further described below (in subsection E), a number of 
commenters urge the Commission to treat a branch of a non-U.S. bank 
as a separate legal entity. Extending this logic to the registration 
context, these commenters support the registration and regulation of 
the branch. The Commission notes CEA section 1a(39) (7 U.S.C. 
1a(39)) states that the term ``prudential regulator'' shall mean the 
Board of Governors of the Federal Reserve System in the case of a 
swap dealer, MSP, security-based swap dealer, or major security-
based swap participant that is--
    (v) any bank holding company [citation omitted], any foreign 
bank (as defined in section 1(b)(7) of the International Banking Act 
of 1978 (12 U.S.C. 3101(b)(7)) that is treated as a bank holding 
company under section 8(a) of the International Banking Act of 1978 
(12 U.S.C. 3106(a)), and any subsidiary of such a company or foreign 
bank (other than a subsidiary that is described in subparagraph (A) 
or (B) or that is required to be registered with the Commission as a 
swap dealer or major swap participant under this Act or with the 
[SEC] as a security-based swap dealer or major security-based swap 
participant).
    Clearly, Congress contemplated that foreign banks that become 
bank holding companies by virtue of the presence of a branch or a 
subsidiary in the United States may be regulated as swap dealers.
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Request for Comment
    Q3. Please provide comments regarding all aspects of the 
Commission's proposed interpretation, including particular alternative 
interpretations the Commission should consider in assessing whether a 
non-U.S. person should be required to register as a swap dealer or MSP.
    Q3a. Do commenters agree that the Commission should determine 
whether a non-U.S. person, without a guarantee from a U.S. affiliate, 
is a swap dealer based solely upon the aggregate notional amount of 
swap dealing activities with U.S. persons as counterparties? Why or why 
not?
    Q3b. Do commenters agree that the Commission should determine 
whether a non-U.S. person is a swap dealer based on the aggregate 
notional amount of swap dealing activities when the swap dealing 
obligations of such non-U.S. person are guaranteed by a U.S. person? 
Why or why not?
    Q3c. Do commenters agree that in determining whether a non-U.S. 
person is a swap dealer, the notional amount of swap dealing activities 
conducted by it and all of its non-U.S. affiliates under common control 
should be aggregated together? Why or why not? Should the Commission 
further interpret the phrase ``under common control'' and, if so, how 
should the Commission define ``common control'' for aggregation 
purposes? Should the notional amount of swap dealing activities 
conducted by its U.S. affiliates also be included?
    Q3d. Are any other aspects of a swap--such as, for example, the 
place of execution or clearing--relevant to the determination of 
whether a non-U.S. person is a swap dealer?
    Q3e. Do commenters agree that the Commission should determine 
whether a non-U.S. person is an MSP based solely on its swap positions 
with U.S. persons as counterparties? If not, why?
    Q3f. Do commenters agree that, in determining whether a non-U.S. 
person is an MSP, its swap positions guaranteed by a U.S. person should 
be attributed to such U.S. person and not the non-U.S. person? If not, 
why? How should the Commission's determination change when some but not 
all of the non-U.S. person's swap obligations are guaranteed by a U.S. 
person?
    Q3g. Are any other aspects of a swap--such as the place of 
execution or clearing--relevant to the determination of whether a non-
U.S. person is an MSP?
    Q4. As noted above, the Commission does not propose that a non-U.S. 
person should include, in determining whether the swap dealer de 
minimis threshold is met, the notional value of swap dealing 
transactions with foreign branches of U.S. swap dealers. Noting the 
risk-based, as opposed to activities-based, nature of the MSP 
registration category and related calculations, the Commission seeks 
comment on whether a non-U.S. person should include, in determining 
whether it is required to register as an MSP, its swap positions with 
foreign branches of U.S. swap dealers.
    Q5. Under the aggregation description above, a non-U.S. person, in 
determining whether the de minimis threshold is met, must include the 
notional value of dealing swaps by its non-U.S. affiliates under common 
control. The Commission requests comments on whether, to the extent 
that any such non-U.S. affiliate is registered with the Commission as a 
swap dealer, the notional value of dealing swaps entered into by such 
registered swap dealer should not be aggregated with the notional value 
of dealing swaps entered into by the other non-U.S. affiliates under 
common control.\55\
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    \55\ Thus, within an affiliated group of firms, the dealing 
activities of any affiliates that are registered with the Commission 
as swap dealers would not be included in considering whether any of 
the other affiliates are required to register as a swap dealer. 
However, all non-U.S. affiliates under common control that are not 
so registered would have to aggregate the notional value of any swap 
dealing transactions with U.S. persons (or where the obligations of 
such non-U.S. affiliates are guaranteed by U.S. persons) to 
determine if such swap dealing transactions exceed the de minimis 
threshold of swap dealing activity.
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    Q7. Should the Commission consider any other types of swap dealing 
transactions by non-U.S. persons to determine whether a non-U.S. person 
is a swap dealer? If so, which ones?
    Q8. Do commenters agree that the Commission should exclude the swap 
dealing transactions of a non-U.S. person from the determination of 
whether such non-U.S. person qualifies as a swap dealer, where the 
counterparty to such dealing swaps are non-U.S. persons (guaranteed or 
not)? Should the Commission exclude swap obligations in excess of a 
capped guaranty provided by a U.S. person (i.e., a guaranty that limits 
the U.S. person's liability to a capped or maximum amount)? How should 
the Commission account for the reduced risks assumed by a U.S. person 
guaranteeing certain or all swaps of a particular non-U.S. person under 
that non-U.S. person's master agreements with non-U.S. counterparties, 
where the U.S. person's liability under the guarantee is limited?
    Q9. Can a limited designation registration as provided for in the 
statutory definitions of the terms ``swap dealer'' and ``major swap 
participant'' be used to address the Commission's regulatory interests 
under the Dodd-Frank Act with respect to cross-border swap activities? 
If so, how?

[[Page 41223]]

III. Cross-Border Application of the CEA's Swap Provisions and 
Implementing Regulations

    A non-U.S. person who meets or exceeds the de minimis threshold for 
swap dealers or the position thresholds for MSPs would be required to 
register with the Commission as a swap dealer or MSP, respectively, 
pursuant to the procedures prescribed in Part 3 of the Commission's 
regulations.\56\ Once registered, the non-U.S. swap dealer or non-U.S. 
MSP would become subject to all of the substantive requirements under 
Title VII of the Dodd-Frank Act that apply to registered swap dealers 
or MSPs, including but not limited to sections 2(a)(13), 4r, and 4s of 
the CEA, with respect to all of their swap activities. In other words, 
the requirements under Title VII of the Dodd-Frank Act related to swap 
dealers and MSPs apply to all registered swap dealers and MSPs, 
irrespective of where such dealer or MSP is based. In exercising its 
authority over non-U.S. swap dealers, non-U.S. MSPs, or cross-border 
activities, however, the Commission will be informed by canons of 
statutory construction regarding the application of its authority in a 
manner consistent with principles of international comity. A brief 
discussion of these principles follows.
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    \56\ See 7 U.S.C. 6s(b)(1). See also 77 FR 2613, 2616, Jan. 19, 
2012.
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A. Principles of International Comity

    The Supreme Court has held that ``an act of Congress ought never to 
be construed to violate the law of nations if any other possible 
construction remains.'' \57\ Jurisdiction is generally construed, ``to 
avoid unreasonable interference with the sovereign authority of other 
nations.'' \58\ The most relevant Supreme Court precedents addressing 
the application of international comity concepts in determining the 
extraterritorial applicability of federal statutes come from 
antitrust.\59\ In these cases, the Supreme Court has noted that the 
principles in the Third Restatement of Foreign Relations Law are 
relevant to the interpretation of U.S. law:
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    \57\ Hartford Fire Ins. Co. et al., 509 U.S. 764, 817 (1993); F. 
Hoffmann-La Roche, Ltd., 542 U.S. 155, 164 (2004).
    \58\ F. Hoffmann-La Roche, Ltd., 542 U.S. at 164.
    \59\ See notes 82-84, supra.

    This rule of construction reflects principles of customary 
international law--law that (we must assume) Congress ordinarily 
seeks to follow. See Restatement (Third) of Foreign Relations Law of 
the United States Sec. Sec.  403(1), 403(2) (1986). * * *
    This rule of statutory construction cautions courts to assume 
that legislators take account of the legitimate sovereign interests 
of other nations when they write American laws. It thereby helps the 
potentially conflicting laws of different nations work together in 
harmony--a harmony particularly needed in today's highly 
interdependent commercial world.\60\
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    \60\ F. Hoffmann-La Roche, Ltd., 542 U.S. at 164-65. 
Specifically, section 403 of the Restatement (Third) of Foreign 
Relations Law states, in relevant part:
    Whether exercise of jurisdiction over a person or activity is 
unreasonable is determined by evaluating all relevant factors, 
including, where appropriate:
    (a) The link of the activity to the territory of the regulating 
state, i.e., the extent to which the activity takes place within the 
territory, or has substantial, direct, and foreseeable effect upon 
or in the territory;
    (b) The connections, such as nationality, residence, or economic 
activity, between the regulating state and the person principally 
responsible for the activity to be regulated, or between that state 
and those whom the regulation is designed to protect;
    (c) The character of the activity to be regulated, the 
importance of regulation to the regulating state, the extent to 
which other states regulate such activities, and the degree to which 
the desirability of such regulation is generally accepted;
    (d) The existence of justified expectations that might be 
protected or hurt by the regulation;
    (e) The importance of the regulation to the international 
political, legal, or economic system;
    (f) The extent to which the regulation is consistent with the 
traditions of the international system;
    (g) The extent to which another state may have an interest in 
regulating the activity; and
    (h) The likelihood of conflict with regulation by another state.

    In accordance with judicial and executive branch precedent and 
guidance in interpreting statutes with cross-border application, the 
Commission proposes that it should exercise its regulatory authority 
over cross-border activities in a manner consistent with these 
principles of statutory construction and international comity.\61\ The 
Commission is therefore guided by these principles as discussed in 
these precedents.\62\
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    \61\ For a similar consideration of the application of 
principles of international comity by federal agencies in the 
enforcement of the antitrust laws, see U.S. Department of Justice 
and the Federal Trade Commission, Antitrust Enforcement Guidelines 
for International Operations, Apr. 1995, which is available at 
http://www.justice.gov/atr/public/guidelines/internat.htm.
    \62\ The Commission has a longstanding policy of considering 
principles of international comity in its rulemakings and 
interpretations. For example, the Commission adopted regulatory 
amendments that codify its longstanding policy towards foreign 
brokers. See Exemption from Registration for Certain Foreign 
Persons, 72 FR 63976, 63978-79, Nov. 14, 2007. The amendments 
codified a registration exemption for any foreign person functioning 
as an introducing broker, commodity pool operator or commodity 
trading advisor solely on behalf of customers located outside the 
United States, if all commodity interest transactions are submitted 
for clearing to a registered FCM. See id. at 63978-79. In addition, 
the Commission amended Sec.  3.12 of the Commission's regulations to 
codify a registration exemption for any individual located in the 
branch office of a Commission registrant that does not solicit or 
accept orders from customers located in the United States.
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B. Proposed Application of the CEA's Swap Provisions to Non-U.S. Swap 
Dealers and Foreign Branches, Agencies, Affiliates, and Subsidiaries of 
U.S. Swap Dealers

1. Categories of Regulatory Requirements
    Title VII of the Dodd-Frank Act establishes a comprehensive new 
regulatory framework for swap dealers and MSPs. This framework is an 
important element of the ``improve[d] financial architecture'' that 
Congress intended in enacting the Dodd-Frank Act and its goal of 
reducing systemic risk and enhancing market transparency.\63\ Among 
other things, a registered swap dealer or MSP must comport with certain 
standards (and regulations as the Commission may promulgate) governing 
risk management, internal and external business conducts, and 
reporting. Further, U.S. swap dealers and MSPs, once registered, are 
required to comply with all of the requirements applicable to swap 
dealers and MSPs for all their swaps, not just the swaps that make them 
a swap dealer or MSP.
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    \63\ S. Rep. No. 111-176, at 228 (2010), available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf.
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    A number of commenters recommended that the Commission, in 
interpreting the cross-border applicability of the Dodd-Frank Act swap 
provisions to a registered swap dealer or MSP, should distinguish 
between requirements that: (i) Apply at an entity level (i.e., to the 
firm as a whole); or (ii) apply at a transactional level (i.e., to the 
individual transaction or trading relationship).\64\ These commenters 
believed that requirements that relate to the core operations of a firm 
should be applied on an entity-level basis and would include the 
capital and related prudential requirements and recordkeeping, as well 
as certain risk mitigation requirements (e.g., information barriers and 
the designation of a chief compliance officer). The commenters stated 
that other requirements, such as margin, should apply on transaction-
by-transaction basis and only to swaps with U.S. counterparties.\65\
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    \64\ See, e.g., SIFMA (Feb. 3, 2011), ISDA (Jan. 24, 2011), 
Cleary (Sept. 20, 2011), Seven Foreign Banks (Jan. 11, 2011), and 
Twelve Foreign Banks (Feb. 17, 2011).
    \65\ See SIFMA (Feb. 3, 2011).
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    The Commission agrees with the commenters that the various Dodd-
Frank Act swap provisions can be conceptually divided into the 
following

[[Page 41224]]

two categories: (i) Entity-Level Requirements, which apply to a swap 
dealer or MSP to the firm as a whole; and (ii) Transactional-Level 
Requirements, which apply to the individual swap. A discussion of the 
Entity-Level Requirements is set out in the section immediately below, 
followed by discussions of the Transaction-Level Requirements.
2. Entity-Level Requirements
    The Entity-Level Requirements under Title VII of the Dodd-Frank Act 
and the Commission's regulations promulgated thereunder relate to: (i) 
Capital adequacy; (ii) chief compliance officer; (iii) risk management; 
(iv) swap data recordkeeping; (v) swap data reporting (``SDR 
Reporting''); and (vi) physical commodity swaps reporting (``Large 
Trader Reporting''). The Entity-Level Requirements apply to registered 
swap dealers and MSPs across all their swaps without distinctions as to 
the counterparty or the location of the swap.
    The first subcategory of Entity-Level Requirements relating to 
capital adequacy, chief compliance officer, risk management, and swap 
data recordkeeping relate to risks to a firm as a whole. These 
requirements address and manage risks that arise from a firm's 
operation as a swap dealer or MSP. Individually, they represent a key 
component of a firm's internal risk controls. Collectively, they 
constitute a firm's first line of defense against financial, 
operational, and compliance risks that could lead to a firm's default 
or failure.
    At the core of a robust internal risk controls system is the firm's 
capital--and particularly, how the firm identifies and manages its risk 
exposure arising from its portfolio of activities.\66\ Equally 
foundational to the financial integrity of a firm is an effective 
internal risk management process, which must be comprehensive in scope 
and reliant on timely and accurate data regarding its swap activities. 
To be effective, such system must have a strong and independent 
compliance function. These internal controls-related requirements--
namely, the requirements related to chief compliance officer, risk 
management, swap data recordkeeping--are designed to serve that end. 
Given their functions, this subcategory of Entity-Level Requirements 
must be applied on a firm-wide basis to effectively address risks to 
the swap dealer or MSP as a whole.
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    \66\ By way of illustration, consistent with the purpose of the 
capital requirement, which is intended to reduce the likelihood and 
cost of a swap dealer's default by requiring a financial cushion, a 
swap dealer's or MSP's capital requirements would be set on the 
basis of its overall portfolio of assets and liabilities.
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    The second subcategory of Entity-Level Requirements, namely, SDR 
Reporting and Large Trader Reporting, relates more closely to the 
Commission's market surveillance program. Among other things, data 
reported to swap data repositories (``SDRs'') will enhance the 
Commission's understanding of concentrations of risks within the 
market, as well as promote a more effective monitoring of risk profiles 
of market participants in the swaps market. Large Trader Reporting, 
along with an analogous reporting system for futures contracts, is 
essential to the Commission's ability to conduct effective surveillance 
of the futures market and their economically equivalent swaps. Given 
the functions of these reporting requirements, each must be applied 
across swaps, irrespective of the counterparty or the location of the 
swap, in order to ensure that the Commission has a comprehensive and 
accurate picture of market activities. Otherwise, the intended benefits 
of these Entity-Level Requirements would be significantly compromised, 
if not undermined. Each of the Entity-Level Requirements is discussed 
in the subsections that follow.
i. Capital Requirements
    Section 4s(e)(3)(A) of the CEA specifically directs the Commission 
to set capital requirements for swap dealers and MSPs that are not 
subject to the capital requirements of prudential regulators 
(hereinafter referred to as ``non-bank swap dealers or MSPs'').\67\ 
These requirements must: ``(1) [h]elp ensure the safety and soundness 
of the swap dealer or major swap participant; and (2) [be] appropriate 
for the risk associated with the non-cleared swaps held as a swap 
dealer or major swap participant.'' \68\ Pursuant to section 4s(e)(3), 
the Commission proposed regulations, which would require non-bank swap 
dealers and MSPs to hold a minimum level of adjusted net capital (i.e., 
``regulatory capital'') based on whether the non-bank swap dealer or 
MSP is: (i) Also a futures commission merchant (``FCM''); (ii) not an 
FCM, but is a non-bank subsidiary of a bank holding company; or (iii) 
neither an FCM nor a non-bank subsidiary of a bank holding company.\69\ 
The purpose of the capital requirement is to reduce the likelihood and 
cost of a swap dealer's or MSP's default by requiring a financial 
cushion that can absorb losses in the event of the firm's default.
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    \67\ See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) of the CEA 
explicitly requires the adoption of rules establishing capital and 
margin requirements for swap dealers and MSPs, and applies a 
bifurcated approach that requires each swap dealer and MSP for which 
there is a prudential regulator to meet the capital and margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with the Commission's capital and margin regulations. See 
7 U.S.C. 6s(e). Further, systemically important financial 
institutions (``SIFIs'') that are not futures commission merchants 
would be exempt from the Commission's capital requirements, and 
would comply instead with Federal Reserve Board requirements 
applicable to SIFIs, while nonbank (and non-futures commission 
merchant) subsidiaries of U.S. bank holding companies would 
calculate their Commission capital requirement using the same 
methodology specified in Federal Reserve Board regulations 
applicable to the bank holding company, as if the subsidiary itself 
were a bank holding company. The term ``prudential regulator'' is 
defined in CEA section 1a(39) as the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39).
    \68\ See 7 U.S.C. 6s(e)(3)(A).
    \69\ See 7 U.S.C. 6s(e). See also Capital Requirements of Swap 
Dealers and Major Swap Participants, 76 FR 27802, May 12, 2011. 
``The Commission's capital proposal for [swap dealers] and MSPs 
includes a minimum dollar level of $20 million. A non-bank [swap 
dealer] or MSP that is part of a U.S. bank holding company would be 
required to maintain a minimum of $20 million of Tier 1 capital as 
measured under the capital rules of the Federal Reserve Board. [A 
swap dealer] or MSP that also is registered as an FCM would be 
required to maintain a minimum of $20 million of adjusted net 
capital as defined under [proposed] section 1.17. In addition, a 
[swap dealer] or MSP that is not part of a U.S. bank holding company 
or registered as an FCM would be required to maintain a minimum of 
$20 million of tangible net equity, plus the amount of the [swap 
dealer's] or MSP's market risk exposure and OTC counterparty credit 
risk exposure.'' See id. at 27817.
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ii. Chief Compliance Officer
    Section 4s(k) requires that each swap dealer and MSP designate an 
individual to serve as its chief compliance officer (``CCO'') and 
specifies certain duties of the CCO.\70\ Pursuant to section 4s(k), the 
Commission recently adopted Sec.  3.3, which requires swap dealers and 
MSPs to designate a CCO who would be responsible for administering the 
firm's compliance policies and procedures, reporting directly to the 
board of directors or a senior officer of the swap dealer or MSP, as 
well as preparing and filing with the Commission a certified report of 
compliance with the CEA.\71\ The chief compliance function is an 
integral element of a firm's risk management and oversight and the 
Commission's effort to foster a strong culture of compliance within 
swap dealers and MSPs.
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    \70\ See 7 U.S.C. 6s(k).
    \71\ See 17 CFR 3.3.

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[[Page 41225]]

iii. Risk Management
    Section 4s(j) of the CEA requires each swap dealer and MSP to 
establish internal policies and procedures designed to, among other 
things, address risk management, monitor compliance with position 
limits, prevent conflicts of interest, and promote diligent 
supervision, as well as maintain business continuity and disaster 
recovery programs.\72\ The Commission recently adopted implementing 
sections 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 23.607 of 
its regulations.\73\ The Commission also recently adopted section 
23.609 of its regulations, which requires certain risk management 
procedures for swap dealers or MSPs that are clearing members of a 
derivatives clearing organization (``DCO'').\74\ Collectively, these 
requirements help to establish a robust and comprehensive internal risk 
management program for swap dealers and MSPs, which is critical to 
effective systemic risk management for the overall swaps market.
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    \72\ 7 U.S.C. 6s(j).
    \73\ 7 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 
23.607; see also Swap Dealer and Major Swap Participant 
Recordkeeping, Reporting, and Duties Rule, Futures Commission 
Merchant and Introducing Broker Conflicts of Interest Rule, and 
Chief Compliance Officer Rules for Swap Dealers, Major Swap 
Participants, and Futures Commission Merchants, 77 FR 20128, Apr. 3, 
2012 (relating to risk management program, monitoring of position 
limits, business continuity and disaster recovery, conflicts of 
interest policies and procedures, general information availability, 
and antitrust considerations, respectively).
    \74\ 17 CFR 23.609, see also Customer Clearing Documentation, 
Timing of Acceptance for Clearing, and Clearing Member Risk 
Management, 77 FR 21278, Apr. 9, 2012. Also, swap dealers must 
comply with Sec.  23.608, which prohibits swap dealers providing 
clearing services to customers from entering into agreements that 
would: (i) Disclose the identity of a customer's original executing 
counterparty; (ii) limit the number of counterparties a customer may 
trade with; (iii) impose counterparty-based position limits; (iv) 
impair a customer's access to execution of a trade on terms that 
have a reasonable relationship to the best terms available; or (v) 
prevent compliance with specified time frames for acceptance of 
trades into clearing.
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iv. Swap Data Recordkeeping
    CEA section 4s(f)(1)(B) requires swap dealers and MSPs to keep 
books and records for all activities related to their business.\75\ 
Section 4s(g)(1) requires swap dealers and MSPs to maintain trading 
records for each swap and all related records, as well as a complete 
audit trail for comprehensive trade reconstructions.\76\ Pursuant to 
these provisions, the Commission adopted Sec. Sec.  23.201 and 23.203, 
which require swap dealers and MSPs to keep records including complete 
transaction and position information for all swap activities, including 
documentation on which trade information is originally recorded.\77\ 
Swap dealers and MSPs also must comply with Part 46 of the Commission's 
regulations, which addresses the recordkeeping requirements for swaps 
entered into before the date of enactment of the Dodd-Frank Act (``pre-
enactment swaps'') and data relating to swaps entered into on or after 
the date of enactment but prior to the compliance date of the swap data 
reporting rules (``transition swaps'').\78\
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    \75\ 7 U.S.C. 6s(f)(1)(B).
    \76\ 7 U.S.C. 6s(g)(1).
    \77\ 17 CFR 23.201 and 23.203; see also 77 FR 20128, Apr. 3, 
2012. These requirements also require a swap dealer to provide the 
Commission with regular updates concerning its financial status, as 
well as information concerning internal corporate procedures.
    \78\ 17 CFR 46.1 et seq.; Swap Data Recordkeeping and Reporting 
Requirements: Pre-Enactment and Transition Swaps, 76 FR 22833, Apr. 
25, 2011.
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v. Swap Data Reporting
    CEA section 2(a)(13)(G) requires all swaps, whether cleared or 
uncleared, to be reported to a registered SDR.\79\ CEA section 21 
requires SDRs to collect and maintain data related to swaps as 
prescribed by the Commission, and to make such data electronically 
available to regulators.\80\ Swap dealers and MSPs would be required to 
comply with Part 45 of the Commission's regulations, which sets forth 
the specific transaction data that reporting counterparties and 
registered entities must report to a registered SDR; and Part 46, which 
addresses the recordkeeping requirements for pre-enactment swaps and 
data relating to transition swaps. Among other things, data reported to 
SDRs will enhance the Commission's understanding of concentrations of 
risks within the market, as well as promote a more effective monitoring 
of risk profiles of market participants in the swaps market. The 
Commission also believes that there are benefits that will accrue to 
swap dealers and MSPs as a result of the timely reporting of 
comprehensive swap transactional data and consistent data standards for 
recordkeeping, among other things. Such benefits include more robust 
risk monitoring and management capabilities for swap dealers and MSPs, 
which in turn will improve the monitoring of their current swap market 
positions.
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    \79\ 7 U.S.C. 2(a)(13)(G).
    \80\ 7 U.S.C. 24a.
---------------------------------------------------------------------------

vi. Physical Commodity Swaps Reporting (Large Trader Reporting)
    CEA section 4t \81\ authorizes the Commission to establish a large 
trader reporting system for significant price discovery swaps (of which 
economically equivalent swaps subject to part 20 reporting are a 
subset) in order to implement the statutory mandate in CEA section 4a 
\82\ for the Commission to establish and monitor position limits, as 
appropriate, for physical commodity swaps. Pursuant thereto, the 
Commission adopted part 20 rules requiring swap dealers, among other 
entities, to submit routine position reports on certain physical 
commodity swaps and swaptions.\83\ Additionally, part 20 rules require 
that swap dealers, among other entities, comply with certain 
recordkeeping obligations.
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    \81\ 7 U.S.C. 6t.
    \82\ 7 U.S.C. 6a.
    \83\ Large Trader Reporting for Physical Commodity Swaps, 76 FR 
43851, July 22, 2011. The rules require regular position reporting 
and recordkeeping by clearing organizations, clearing members, and 
swap dealers for any principal or counterparty accounts with 
reportable position in physical commodity swaps. In general, the 
rules apply to swaps that are linked to either the price of any of 
the 46 physical commodity futures contracts the Commission 
enumerates (Covered Futures Contracts) or the price of the physical 
commodity at the delivery location of any of the Covered Futures 
Contracts.
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3. Transaction-Level Requirements
    The Transaction-Level Requirements under Title VII of the Dodd-
Frank Act and the Commission's regulations (proposed or adopted) 
include: (i) Clearing and swap processing; (ii) margining and 
segregation for uncleared swaps; (iii) trade execution; (iv) swap 
trading relationship documentation; (v) portfolio reconciliation and 
compression; (vi) real-time public reporting; (vii) trade confirmation; 
(viii) daily trading records; and (ix) external business conduct 
standards.
    The Transaction-Level Requirements--with the exception of external 
business conduct standards--relate to both risk mitigation and market 
transparency. Certain of these requirements, such as clearing and 
margining, serve to lower a firm's risk of failure. In that respect, 
these Transaction-Level Requirements could be classified as Entity-
Level Requirements. Other Transaction-Level Requirements--such as trade 
confirmation, swap trading relationship documentation, and portfolio 
reconciliation and compression--also serve important risk mitigation 
functions, but are less closely connected to risk mitigation of the 
firm as a whole and thus are more appropriately applied

[[Page 41226]]

on a transaction-by-transaction basis. Likewise, the requirements 
related to trade execution, trade confirmation, daily trading records, 
and real-time public reporting have a closer nexus to the transparency 
goals of the Dodd-Frank Act, as opposed to addressing the risk of a 
firm's failure.
    As a result, whether a particular Dodd-Frank Act requirement should 
apply on a transaction-by-transaction basis in the context of cross-
border activity for purposes of section 2(i) of the CEA requires the 
Commission to exercise some degree of judgment, including 
considerations of international comity. Each of the Transaction-Level 
Requirements is discussed below.
i. Clearing and Swap Processing
    Section 2(h) of the CEA requires a swap to be submitted for 
clearing to a DCO if the Commission has determined that the swap is 
required to be cleared, unless one of the parties to the swap is 
eligible for an exception from the clearing requirement and elects not 
to clear the swap.\84\ Clearing via a DCO eliminates the risk of 
settlement for swap dealers or MSPs and their counterparties. Closely 
interlocked with the clearing requirement are the following swap 
processing requirements: (i) The recently finalized Sec.  23.506, which 
requires swap dealers and MSPs to submit swaps promptly for clearing; 
and (ii) Sec.  23.610, which establishes certain standards for swap 
processing by swap dealers and MSPs that are clearing members of a 
DCO.\85\ Together, the clearing and swap processing requirements 
promote safety and soundness of swap dealers and MSPs, and aim to 
protect their counterparties from the risk of a default.
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    \84\ 7 U.S.C. 2(h)(1), (7).
    \85\ 17 CFR 23.506, 23.610 and Customer Clearing Documentation, 
Timing of Acceptance for Clearing, and Clearing Member Risk 
Management, 77 FR 21278, Apr. 9, 2012.
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ii. Margin and Segregation Requirements for Uncleared Swaps
    Section 4s(e) of the CEA requires the Commission to set margin 
requirements for swap dealers (and MSPs) that trade in swaps that are 
not cleared.\86\ The margin requirements aim to reduce the risk of swap 
dealers, MSPs, and their counterparties taking on excessive risks posed 
by uncleared swaps without having adequate financial backing to fulfill 
their obligations under the swap. In addition, with respect to swaps 
that are not submitted for clearing, section 4s(l) requires that a swap 
dealer or MSP notify the counterparty of its right to require 
segregation of funds provided as margin, and upon such request, to 
segregate the funds with a third-party custodian for the benefit of the 
counterparty. In this way, the segregation requirement enhances the 
safety of margin and thereby provides additional financial protection 
to counterparties.
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    \86\ See 7 U.S.C. 6s(e). See also Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR 
23732, 23733-40, Apr. 28, 2011. Section 4s(e) explicitly requires 
the adoption of rules establishing margin requirements for swap 
dealers and MSPs, and applies a bifurcated approach that requires 
each swap dealer and MSP for which there is a prudential regulator 
to meet the margin requirements established by the applicable 
prudential regulator, and each swap dealer and MSP for which there 
is no prudential regulator to comply with the Commission's margin 
regulations. In contrast, the segregation requirements in section 
4s(1) do not use a bifurcated approach--that is, all swap dealers 
and MSPs are subject to the Commission's rule regarding notice and 
third party custodians for margin collected for uncleared swaps.
---------------------------------------------------------------------------

iii. Trade Execution Requirement
    Integrally linked to the clearing requirement is the trade 
execution requirement, which is intended to bring the trading of 
mandatorily cleared swaps onto regulated exchanges. Specifically, 
section 2(h)(8) of the CEA provides that unless a clearing exception 
applies and is elected, a swap that is subject to a clearing 
requirement must be executed on a designated contract market (``DCM'') 
or swap execution facility (``SEF''), unless no such DCM or SEF makes 
the swap available to trade.\87\ By requiring the trades of mandatorily 
cleared swaps to be executed on an exchange--with its attendant pre- 
and post-trade transparency and safeguards to ensure market integrity--
the trade execution requirement furthers the statutory goals of 
financial stability, market efficiency and enhanced transparency.
---------------------------------------------------------------------------

    \87\ See 7 U.S.C. 2(h)(8).
---------------------------------------------------------------------------

iv. Swap Trading Relationship Documentation
    CEA Section 4s(i) requires each swap dealer and MSP to conform to 
Commission standards for the timely and accurate confirmation, 
processing, netting, documentation and valuation of swaps. Pursuant 
thereto, the Commission has proposed Sec.  23.504(a) of its 
regulations, which would require swap dealers and MSPs to ``establish, 
maintain and enforce written policies and procedures'' to ensure that 
the swap dealer or MSP executes written swap trading relationship 
documentation.\88\ Under proposed Sec. Sec.  23.505(b)(1), 23.504 
(b)(3), and 23.504(b)(4) of the Commission's regulations, the swap 
trading relationship documentation must include, among other things: 
all terms governing the trading relationship between the swap dealer or 
MSP and its counterparty; credit support arrangements; investment and 
re-hypothecation terms for assets used as margin for uncleared swaps, 
and custodial arrangements.\89\ Further, the swap trading relationship 
documentation requirement applies to all swaps with registered swap 
dealers and MSPs. A robust swap documentation standard may promote 
standardization of documents and transactions, which are key conditions 
for central clearing, and lead to other operational efficiencies, 
including improved valuation and risk management.
---------------------------------------------------------------------------

    \88\ See Swap Trading Relationship documentation Requirements 
for Swap Dealers and Major Swap Participants, 76 FR 6715, Feb. 8, 
2011.
    \89\ The requirements under section 4s(i) relating to trade 
confirmations is a Transaction-Level Requirement. Accordingly, 
proposed section 23.504(b)(2), which requires a swap dealer's and 
MSP's swap trading relationship documentation to include all 
confirmations of swaps, will apply on a transaction-by-transaction 
basis.
---------------------------------------------------------------------------

v. Portfolio Reconciliation and Compression
    CEA section 4s(i) directs the Commission to prescribe regulations 
for the timely and accurate processing and netting of all swaps entered 
into by swap dealers and MSPs. Pursuant to CEA section 4s(i), the 
Commission proposed Sec. Sec.  23.502 and 23.503 of its regulations, 
which would require swap dealers and MSPs to perform portfolio 
reconciliation and compression, respectively, for all swaps.\90\ 
Portfolio reconciliation is a post-execution risk management tool to 
ensure accurate confirmation of a swap's terms and to identify and 
resolve any discrepancies between counterparties regarding the 
valuation of the swap. Portfolio compression is a post-trade processing 
and netting mechanism that is intended to ensure timely, accurate 
processing and netting of swaps.\91\ Proposed Sec.  23.503(c) would 
require all swap dealers and MSPs to participate in bilateral 
compression exercises and/or multilateral portfolio compression 
exercises conducted by their self-regulatory organizations (``SROs'') 
or DCOs of which they are members.\92\ Further, participation in 
multilateral

[[Page 41227]]

portfolio compression exercises is mandatory for dealer-to-dealer 
trades.
---------------------------------------------------------------------------

    \90\ See Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 81519, Dec. 28, 2010.
    \91\ For example, the reduced transaction count may decrease 
operational risk as there are fewer trades to maintain, process and 
settle.
    \92\ See 17 CFR 23.503(c), 75 FR 81519, Dec. 28, 2010.
---------------------------------------------------------------------------

vi. Real-Time Public Reporting
    Section 2(a)(13) of the CEA directs the Commission to promulgate 
rules providing for the public availability of swap transaction data on 
a real time basis.\93\ In accordance with this mandate, the Commission 
promulgated part 43 of its rules on December 20, 2011, which provide 
that all ``publicly reportable swap transactions'' must be reported and 
publicly disseminated.\94\ The real-time dissemination of swap 
transaction and pricing data supports the fairness and efficiency of 
markets and increases transparency, which in turn improves price 
discovery and decreases risk (e.g., liquidity risk).\95\
---------------------------------------------------------------------------

    \93\ See 7 U.S.C. 2(a)(13). See also Real-Time Public Reporting 
of Swap Transaction Data, 77 FR 1182, 1183, Jan. 9, 2012.
    \94\ Part 43 defines a ``publicly reportable swap transaction'' 
as (i) any swap that is an arm's-length transaction between two 
parties that results in a corresponding change in the market risk 
position between the two parties; or (ii) any termination, 
assignment, novation, exchange, transfer, amendment, conveyance, or 
extinguishing of rights or obligations of a swap that changes the 
pricing of a swap. See 77 FR 1182, Jan. 9, 2012.
    \95\ See 77 FR 1182, 1183.
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vii. Trade Confirmation
    Section 4s(i) of the CEA \96\ requires that each swap dealer and 
MSP must comply with the Commission's regulations prescribing timely 
and accurate confirmation of swaps. The Commission has proposed Sec.  
23.501, which requires, among other things, a timely and accurate 
confirmation of all swaps and life cycle events for existing swaps.\97\ 
Timely and accurate confirmation of swaps--together with portfolio 
reconciliation and compression--are important post-trade processing 
mechanisms for reducing risks and improving operational efficiency.\98\
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    \96\ 7 U.S.C. 6s(i).
    \97\ See 17 CFR 23.501; see also 75 FR 81519, Dec. 28, 2010.
    \98\ In addition, the Commission notes that proposed Sec.  
23.504(b)(2) requires a swap dealer's and MSP's swap trading 
relationship to include all confirmations of swaps.
---------------------------------------------------------------------------

viii. Daily Trading Records
    Pursuant to section CEA 4s(g)(1), the Commission adopted Sec.  
23.202 of its regulations, which requires swap dealers and MSPs to 
maintain daily trading records, including records of trade information 
related to pre-execution, execution, and post-execution data that is 
needed to conduct a comprehensive and accurate trade reconstruction for 
each swap. The final rule also requires that records be kept of cash or 
forward transactions used to hedge, mitigate the risk of, or offset any 
swap held by the swap dealer or MSP.\99\ Accurate and timely 
recordkeeping regarding all phases of a swap can serve to greatly 
enhance a firm's internal supervision, as well as the Commission's 
ability to detect and address market abuses.
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    \99\ See Swap Dealer and Major Swap Participant Recordkeeping, 
Reporting, and Duties Rules; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Rules; and Chief Compliance 
Officer Rules for Swap Dealers, Major Swap Participants, and Futures 
Commission Merchants, 77 FR 20128, Apr. 3, 2012.
---------------------------------------------------------------------------

ix. External Business Conduct Standards
    Pursuant to CEA section 4s(h), the Commission has adopted external 
business conduct rules, which establish business conduct standards 
governing the conduct of swap dealers and MSPs in dealing with their 
counterparties in entering into swaps.\100\ Broadly speaking, these 
rules are designed to enhance counterparty protection by significantly 
expanding the obligations of swap dealers and MSPs towards their 
counterparties. Under these rules, swap dealers and MSPs will be 
required, among other things, to conduct due diligence on their 
counterparties to verify eligibility to trade, provide disclosure of 
material information about the swap to their counterparties, provide a 
daily mid-market mark for uncleared swaps and, when recommending a swap 
to a counterparty, make a determination as to the suitability of the 
swap for the counterparty based on reasonable diligence concerning the 
counterparty.
---------------------------------------------------------------------------

    \100\ See 7 U.S.C. 6s(h). See also Business Conduct Standards 
for Swap Dealers and Major Swap Participants With Counterparties, 77 
FR 9734, 9822-29, Feb. 17, 2012.
---------------------------------------------------------------------------

4. Application of the Entity-Level Requirements \101\
---------------------------------------------------------------------------

    \101\ Appendix A in this release provides a chart describing the 
application of the Entity-Level Requirements to U.S. and non-U.S. 
swap dealers and MSPs.
---------------------------------------------------------------------------

    The Dodd-Frank Act takes a comprehensive and integrated approach to 
the regulation of the swaps market. The first subcategory of Entity-
Level Requirements, relating to capital adequacy, chief compliance 
officer, risk management, and swap data recordkeeping are at the heart 
of such framework. Specifically, these Entity-Level Requirements ensure 
that registered swap dealers and MSPs implement and maintain a 
comprehensive and robust system of internal controls to ensure the 
financial integrity of the firm, and in turn, the protection of the 
financial system. In this respect, the Commission has strong 
supervisory interests in applying the same rigorous standards, or 
comparable standards, to non-U.S. swap dealers and non-U.S. MSPs whose 
swaps activities or positions are substantial enough to require 
registration under the CEA. Requiring such swap dealers and MSPs to 
rigorously monitor and address the risks they incur as part of their 
day-to-day businesses would lower the registrants' risk of default--and 
ultimately protect the public and the financial system.
    Therefore, the Commission proposes to interpret CEA section 2(i) so 
as to require that registered non-U.S. swap dealers and non-U.S. MSPs 
comply with all of the first subcategory of Entity-Level 
Requirements.\102\ In consideration of principles of international 
comity, the Commission further proposes to interpret CEA section 2(i) 
so as to permit substituted compliance with foreign regulations for 
these Entity-Level Requirements in certain circumstances. The 
circumstances in which the Commission proposes to consider permitting 
substituted compliance are explained below in the Section III.C. of 
this proposed interpretative guidance.
---------------------------------------------------------------------------

    \102\ As discussed above in Section II.D of this proposed 
interpretive guidance, the Commission considers foreign branches and 
agencies of U.S. swap dealers to be the agents of their U.S. person. 
Thus, in all instances, the U.S. swap dealer would be responsible 
for complying with all Entity-Level Requirements.
---------------------------------------------------------------------------

    With respect to SDR Reporting, the Commission believes that direct 
access to data concerning all swaps in which a registered swap dealer 
or MSP enters is essential in order for the Commission to carry out its 
supervisory mandates concerning, among other things, increased 
transparency, systemic risk mitigation, market monitoring, and market 
abuse prevention. For example, data reported to SDRs would be critical 
to ensure that the Commission has a comprehensive and accurate picture 
of swap dealers and MSPs that are its registrants, including the gross 
and net counterparty exposures of swaps of all swap dealers and MSPs, 
to the greatest extent possible. Similarly, swap data reported by swap 
dealers to the Commission under Large Trader Reporting is critical to 
the Commission's ability to effectively monitor and oversee the swaps 
market.
    For these reasons, the Commission proposes to interpret CEA section 
2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs to report 
all of their swaps to a registered SDR \103\ and to require non-U.S. 
swap dealers to report

[[Page 41228]]

all of their reportable positions under part 20. At the same time, the 
Commission recognizes the interests of foreign jurisdictions with 
respect to swaps between a non-U.S. swap dealer or non-U.S. MSP with a 
non-U.S. counterparty and therefore, further interprets CEA section 
2(i) so as to permit substituted compliance with comparable foreign 
regimes for SDR Reporting and Large Trader Reporting.
---------------------------------------------------------------------------

    \103\ See 7 U.S.C. 2(a)(13)(G). See also 77 FR at 2197-2211.
---------------------------------------------------------------------------

5. Application of the Transaction-Level Requirements \104\
---------------------------------------------------------------------------

    \104\ Appendix B in this release provides charts describing the 
application of the Transaction-Level Requirements to U.S. and non-
U.S. swap dealers and MSPs.
---------------------------------------------------------------------------

    As discussed above, Transaction-Level Requirements serve to 
mitigate risks to swap dealers and MSPs and their counterparties, to 
promote greater market transparency and efficiency in the U.S. swaps 
market, and to provide counterparty protections. The Commission has a 
strong supervisory interest in ensuring that these Dodd-Frank Act 
requirements apply to swaps between a registered swap dealer or MSP 
(regardless of whether they are a U.S. person or non-U.S. person) and 
U.S. persons as counterparties, with a limited exception. Accordingly, 
the Commission proposes to interpret section 2(i) in a manner so as to 
require non-U.S. swap dealers and non-U.S. MSPs to comply with 
Transaction-Level Requirements for all of their swaps with U.S. 
persons, other than foreign branches of U.S. persons, as 
counterparties.\105\ Consistent with the foregoing rationale, in most 
cases, the Commission does not intend to permit substituted compliance 
for the Transaction-Level Requirements for swaps between non-U.S. swap 
dealers or non-U.S. MSPs and U.S. persons.\106\ The following 
discussion provides proposed guidance on the application of the 
Transaction-Level Requirements to swaps by non-U.S. swap dealers and 
non-U.S. MSPs with non-U.S. counterparties.
---------------------------------------------------------------------------

    \105\ Moreover, the U.S. counterparties, as well as the non-U.S. 
swap dealers and non-U.S. MSPs, may have an expectation that the 
Dodd-Frank Act will extend to them and their swaps.
    \106\ Section III.D. (below) addresses the application of the 
Entity and Transaction-Level Requirements to branches, agencies, 
subsidiaries, and affiliates of U.S. swap dealers.
---------------------------------------------------------------------------

i. Clearing and Swap Processing, Margin (and Segregation), Trade 
Execution, Swap Trading Relationship Documentation, Portfolio 
Reconciliation and Compression, Real-Time Public Reporting, Trade 
Confirmation, and Daily Trading Records
    With respect to swaps between non-U.S. swap dealers or non-U.S. 
MSPs and non-U.S. counterparties, the Commission proposes to interpret 
section 2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs 
to comply with the clearing and swap processing and margin (and 
segregation) requirements for swaps where the non-U.S. counterparty's 
performance is guaranteed by (or otherwise supported by) a U.S. 
person.\107\ The Commission interprets section 2(i) in this manner 
because where a non-U.S. counterparty's swap obligations are guaranteed 
by a U.S. person, the risk of non-performance by the counterparty rests 
with the U.S. person. If the non-U.S. person defaults on its 
obligations under the swaps, then the U.S. person guarantor will be 
held responsible (or would bear the cost) to settle those obligations. 
In circumstances in which a U.S. person ultimately bears the risk of 
non-performance of a counterparty to a swap with a non-U.S. swap dealer 
or non-U.S. MSP, the Commission has a strong regulatory interest in the 
performance of the swap by both parties to the swap, and hence the 
application of these Transaction-Level Requirements with respect to 
such swaps is warranted. In consideration of international comity 
principles, the Commission further interprets CEA section 2(i) so as to 
permit substituted compliance for these Transaction-Level 
Requirements.\108\
---------------------------------------------------------------------------

    \107\ As noted above in Section II.B of this proposed 
interpretive guidance, risk may be imported into the U.S. In these 
circumstances, and regardless of whether the non-U.S. swap dealer's 
counterparty is a U.S. person or a non-U.S. person, the risk of 
default by the non-U.S. swap dealer with respect to its swap dealing 
transactions ultimately rests with a U.S. person.
    \108\ Below (in Section IV), the Commission describes the 
specific circumstances under which it proposes to permit compliance 
with a foreign regulatory regime's clearing requirement for swaps 
entered into by non-U.S. swap dealers, non-U.S. MSPs, and other non-
U.S. market participants in lieu of compliance with a Commission-
issued clearing requirement.
---------------------------------------------------------------------------

    Similarly, the requirements relating to portfolio reconciliation 
and compression can serve to significantly mitigate risks to the 
counterparties, and by extension, the U.S. person guaranteeing the non-
U.S. counterparty's obligations under the swap. Specifically, portfolio 
reconciliation serves to diminish the risk of disputes for the 
counterparties. Portfolio compression also has the effect of lowering 
the risk for the counterparties by diminishing operational risks. Other 
Transaction-Level Requirements--trade confirmation, swap trading 
relationship documentation, and daily trading records--by ensuring that 
swaps are properly documented and recorded, serve to protect the 
counterparties, as well as the U.S. person that is the guarantor.\109\
---------------------------------------------------------------------------

    \109\ As noted above, the portfolio compression and swap trading 
relationship documentation requirements apply to all swaps between 
registered swap dealers. Thus, where the non-U.S. counterparty is 
another U.S.-registered swap dealer, these Transaction-Level 
Requirements apply. The Commission believes that this inclusive 
approach is necessary given the significant role registered swap 
dealers play in the swaps market.
---------------------------------------------------------------------------

    The Commission also proposes to interpret section 2(i) so as to 
require non-U.S. swap dealers and non-U.S. MSPs to comply with the 
trade execution requirement for swaps where the non-U.S. counterparty's 
performance is guaranteed by a U.S. person.
    The trade execution requirement is linked to the clearing 
requirement and for that reason, should be treated in same manner as 
the clearing requirement for regulatory purposes, which better ensures 
the effectiveness of the clearing and trading mandates. Requiring swaps 
to be traded on a regulated exchange provides market participants with 
greater pre- and post-trade transparency. Similarly, real-time public 
reporting improves price discovery by requiring that swap transaction 
and pricing data be made publicly available. Together, trade execution 
and real-time reporting requirements provide important information for 
risk management purposes and bring greater efficiency to the 
marketplace--to the benefit of the individual counterparties. As with 
the other Transaction-Level Requirements, the Commission further 
interprets CEA section 2(i), consistent with comity principles, so as 
to permit substituted compliance with respect to these transactions.
    Similar concerns regarding the flow of risk to the United States 
are raised by an entity that effectively operates as a ``conduit'' for 
a U.S. person to execute swaps outside the Dodd-Frank Act regime. The 
Commission recognizes that such conduits may be used legitimately to 
move economic risks from one person within a corporate group to another 
in order to manage the group's overall swap portfolio. The Commission 
also recognizes that, in many cases, the

[[Page 41229]]

conduits could be subject to prudential and risk management 
requirements and may lay off the risk of its dealing activities on an 
individual or portfolio basis through transactions that would be 
subject to and reported under the Dodd-Frank Act.
    Nevertheless, the Commission is concerned that given the nature of 
the relationship between the conduit and the U.S. person, the U.S. 
person is directly exposed to risks from and incurred by the conduit. 
The Commission is further concerned that rather than execute a swap 
opposite a U.S. counterparty, which would be subject to the Dodd-Frank 
transactional requirements, a U.S. swap dealer or MSP could execute a 
swap with its foreign affiliate or subsidiary, which could then execute 
a swap with a non-U.S. third-party in a jurisdiction that is 
unregulated or lack comparable transactional requirements. Accordingly, 
the Commission proposes to apply these Transaction-Level Requirements 
to swaps in which: (i) A non-U.S. counterparty is majority-owned, 
directly or indirectly, by a U.S. person; (ii) the non-U.S. 
counterparty regularly enters into swaps with one or more other U.S. 
affiliates or subsidiaries of the U.S. person; and (iii) the financials 
of such non-U.S. counterparty are included in the consolidated 
financial statements of the U.S. person. Further, the Commission 
interprets CEA section 2(i), consistent with comity principles, so as 
to permit substituted compliance for these Transaction-Level 
Requirements with respect to swaps between a non-U.S. swap dealer or 
non-U.S. MSP and such affiliate conduit.
    Conversely, and consistent with the foregoing rationale, the 
Commission proposes to interpret section 2(i) so as to not require the 
application of any of these Transaction-Level Requirements to swaps 
between a non-U.S. swap dealer or non-U.S. MSP with a non-U.S. 
counterparty that is not guaranteed by a U.S. person. In such 
instances, the Commission recognizes that foreign regulators have a 
strong supervisory interest in swaps occurring within their territories 
involving their domiciles.
ii. External Business Conduct Standards
    With respect to the external business conduct standards, the 
Commission proposes to interpret section 2(i) to not require non-U.S. 
swap dealers and non-U.S. MSPs to comply with these requirements for 
swaps with a non-U.S. counterparty (whether or not guaranteed by a U.S. 
person). The Commission believes that sales practice concerns related 
to swaps between non-U.S. persons taking place outside the United 
States implicate fewer U.S. supervisory concerns and, when weighed 
together with the supervisory interests of foreign regulatory regimes, 
may not warrant application of these requirements.\110\
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    \110\ That is to say, just as the Commission would have a strong 
supervisory interest in regulating and enforcing sales practices 
associated with activities taking place within the United States, 
the foreign regulators would have a similar claim to overseeing 
sales practices occurring within their jurisdiction.
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C. Substituted Compliance With Respect to Particular Requirements

    The Commission believes that a cross-border policy that allows for 
flexibility in the application of the CEA, while ensuring the high 
level of regulation contemplated by the Dodd-Frank Act and avoiding 
potentially conflicting regulations is consistent with principles of 
international comity. It would also advance the congressional directive 
that the Commission act in order to ``promote effective and consistent 
global regulation of swaps * * * as appropriate, shall consult and 
coordinate with foreign regulatory authorities on the establishment of 
consistent international standards with respect to regulation 
(including fees) of swaps * * *.'' \111\ Practical considerations--
namely, the limitations in the Commission's supervisory resources and 
its ability to effectively oversee and enforce application of the CEA 
to cross-border transactions and activities--also support the 
Commission applying its regulations in a manner that is focused on the 
primary objectives of the CEA.
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    \111\ See section 752 of the Dodd-Frank Act. As the Supreme 
Court observed in Hoffmann-LaRoche, principles of international 
comity ``help[ ] the potentially conflicting laws of different 
nations work together in harmony--a harmony particularly needed in 
today's highly interdependent commercial world.'' See Hoffmann-
LaRoche, 542 U.S. at 164-165.
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    In light of the foregoing considerations, the Commission proposes 
to permit a non-U.S. swap dealer or non-U.S. MSP, once registered with 
the Commission, to comply with a substituted compliance regime under 
certain circumstances. Substituted compliance means that a non-U.S. 
swap dealer or non-U.S. MSP is permitted to conduct business by 
complying with its home regulations, without additional requirements 
under the CEA. Specifically, the Commission proposes to permit non-U.S. 
swap dealers and non-U.S. MSPs to substitute compliance with the 
requirements of the relevant home jurisdiction's law and regulations, 
in lieu of compliance with the CEA and Commission's regulations, if the 
Commission finds that such requirements are comparable to cognate 
requirements under the CEA and Commission regulations. As discussed 
below, this approach would build on the Commission's longstanding 
policy of recognizing comparable regulatory regimes based on 
international coordination and comity principles with respect to cross-
border activities involving futures (and options).\112\
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    \112\ For example, under part 30 of the Commission's 
regulations, if the Commission determines that compliance with the 
foreign regulatory regime would offer comparable protection to U.S. 
customers and there is an appropriate information-sharing 
arrangement between the home supervisor and the Commission, the 
Commission has permitted foreign brokers to comply with their home 
regulations (in lieu of the applicable Commission regulations), 
subject to appropriate conditions. See, e.g., 67 FR 30785 (Apr. 29, 
2002); 71 FR 6759 (Feb. 9, 2001).
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    The Commission proposes that it would make comparability 
determinations on an individual requirement basis, rather than the 
foreign regime as a whole. In the Commission's view, this would allow 
for a more flexible registration process as it would permit a non-U.S. 
person to become registered as a swap dealer or MSP even in the absence 
of comparability with respect to all of the Dodd-Frank Act 
requirements. Rather, a non-U.S. swap dealer or non-U.S. MSP may be 
permitted to comply with regulations in its home jurisdiction to the 
extent that the comparability standard is met but also may be required 
to comply with certain of the Dodd-Frank Act requirements where 
comparable home regulation(s) are lacking.\113\
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    \113\ The details concerning the Commission's comparability 
determinations will be discussed below in Section IV.
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    In this section, the Commission broadly outlines the circumstances 
under which the Commission would permit a non-U.S. swap dealer or non-
U.S. MSP to rely on foreign regulation and supervision as a substitute 
for compliance by that swap dealer or MSP with some or all of the 
requirements that would otherwise be applicable to it under Title VII 
of the Dodd-Frank Act.
1. Entity-Level Requirements
    The Commission anticipates that non-U.S. persons that will register 
as swap dealers or MSPs with the Commission will likely have their 
principal swap business in their home jurisdiction. The Commission 
believes that it would be appropriate to permit substituted compliance 
with respect to the previously-described Entity-Level Requirements 
where the non-U.S. swap dealers or non-U.S. MSPs are subject to 
comparable regulation in their home jurisdiction. In these 
circumstances, the Commission notes that the home

[[Page 41230]]

regulator would have a primary relationship to the swap dealer or MSP, 
which, coupled with the firm-wide focus of the Entity-Level 
Requirements, supports permitting substituted compliance.
    With respect to SDR Reporting, the Commission proposes to permit 
substituted compliance with respect to swaps by non-U.S. swap dealers 
and non-U.S. MSPs with non-U.S. counterparties (whether or not such 
non-U.S. swap dealers or such non-U.S. MSPs are guaranteed by U.S. 
persons), provided that the Commission has direct access to the swap 
data for such non-U.S. swap dealers or non-U.S. MSPs that is stored at 
the foreign trade repository. The Commission believes that this 
approach would minimize burdens on non-U.S. swap dealers and non-U.S. 
MSPs that report their swaps data to a foreign trade repository, while 
ensuring that the Commission has access to information that is critical 
to its oversight of these entities.
2. Transaction-Level Requirements
    As discussed above, the Commission proposes to interpret section 
2(i) so as to require non-U.S. swap dealers and non-U.S. MSPs to comply 
with the clearing and swap processing, margining (and segregation), 
trade execution, swap trading relationship documentation, portfolio 
reconciliation and compression, real-time public reporting, trade 
confirmation, and daily trading records requirements for all 
transactions with a counterparty that is a U.S. person or is a non-U.S. 
person whose swap obligations are guaranteed by a U.S. person.
    The Commission would not permit substituted compliance with respect 
to these Transaction-Level Requirements for a non-U.S. swap dealer's or 
non-U.S. MSP's transactions with a counterparty that is a U.S. person, 
with a limited exception.\114\ Generally, where swaps are executed with 
U.S. persons, the Commission's supervisory interests in such 
transactions, which have a direct and significant connection with 
activities in, or effect on, U.S. commerce, and in ensuring the 
protection of U.S. counterparties weighs in favor of applying the 
requirements of the CEA, rather than permitting substituted compliance.
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    \114\ The Commission, however, would continue to permit 
substituted compliance with comparable home country regulations with 
respect to Entity-Level Reqirements in this instance. Transactions 
with a foreign branch or agency of a U.S. swap dealer are discussed 
below.
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    On the other hand, it may be more appropriate for the Commission to 
permit substituted compliance for transactions between a non-U.S. swap 
dealer or non-U.S. MSP and a non-U.S. person whose swap obligations are 
guaranteed by a U.S. person. In such circumstances, the foreign 
jurisdiction has a strong supervisory interest in regulating the 
activities of its domiciles occurring within its territory. At the same 
time, given that such transactions are guaranteed by a U.S. person, the 
Commission also has a strong supervisory interest in ensuring that the 
protections of the Dodd-Frank Act are extended to the U.S. guarantor. 
In consideration of these factors, the Commission would permit 
substituted compliance with respect to these Transaction-Level 
Requirements for swaps between a non-U.S. swap dealer or non-U.S. MSP 
with a non-U.S. person guaranteed by a U.S. person, as well as swaps 
with non-U.S. affiliate conduits. Substituted compliance, the 
Commission believes, would address its supervisory concerns while, at 
the same time, minimizing the potential for conflicts with the 
requirements under foreign jurisdictions.\115\
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    \115\ As noted above, swaps with non-U.S. persons satisfying 
each prong of the conduit test would be similarly subject to the 
Transaction-Level Requirements, provided, however, that the non-U.S. 
swap dealer or non-U.S. MSP executing such swaps may substitute 
compliance with a comparable foreign regulatory regime in 
appropriate cases.
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D. Application of Entity-Level and Transaction-Level Requirements to 
Branches, Agencies, Affiliates, and Subsidiaries of U.S. Swap Dealers

1. Foreign Branches and Agencies of U.S. Swap Dealers
    As discussed above, the Commission considers foreign branches and 
agencies of a U.S. person to be a part of the U.S. person. Thus, the 
Commission proposes that the U.S. person would be legally responsible 
for complying with all applicable Entity-Level Requirements. Further, 
the Commission proposes to require compliance with most of the 
Transaction-Level Requirements (i.e., clearing and swap processing, 
margin (and segregation) for uncleared swaps, trade execution, real-
time reporting, trade confirmation, swap trading relationship 
documentation, daily trading records, and portfolio reconciliation and 
compression), irrespective of whether the counterparty is a U.S. person 
or non-U.S. person.\116\ This approach is appropriate in light of the 
Commission's strong supervisory interests in entities that are part or 
an extension of a U.S.-based swap dealer.
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    \116\ For reasons stated above, with respect to external 
business conduct standards, the Commission would apply such 
requirements only for swaps where the counterparty is a U.S. person.
---------------------------------------------------------------------------

    The Commission further interprets section 2(i) to permit 
substituted compliance with respect to the Transaction-Level 
Requirements for swaps with certain counterparties. Specifically, the 
Commission proposes to permit substituted compliance for swaps between 
a foreign branch of a U.S. person and a non-U.S. person counterparty 
(both whose obligations under the swap are guaranteed by a U.S. person 
and those that are not). Given that the counterparty is a non-U.S. 
person, coupled with the supervisory interest of the foreign 
jurisdiction in the execution and clearing of trades occurring in that 
jurisdiction, the Commission believes that it would be appropriate to 
permit the parties to comply with comparable foreign requirements. In 
doing so, the Commission notes that, as discussed in further detail 
below, its recognition of substituted compliance would be based on an 
evaluation of whether the requirements of the home jurisdiction are 
comparable and comprehensive to the applicable requirement(s) under the 
CEA and Commission regulations based on a consideration of all relevant 
factors, including, among other things: (i) The comprehensiveness of 
the foreign regulator's supervisory compliance program; and (ii) the 
authority of such foreign regulator to support and enforce its 
oversight of the registrant's branch or agency with regard to such 
activities to which substituted compliance applies.
    In limited circumstances where foreign regulations are not 
comparable, the Commission believes that it could be appropriate to 
permit foreign branches and agencies of U.S. swap dealers to comply 
with the transaction-level requirements applicable to entities 
domiciled or doing business in the foreign jurisdiction, rather than 
the Transaction-Level Requirements that would otherwise be applicable 
to the U.S. person's activities.\117\ Specifically, the Commission 
understands that U.S. swap dealers' swap dealing activities through 
branches or agencies in emerging markets in many cases may not be 
significant but may be nevertheless an integral element of their global 
business. Under the circumstances, the Commission proposes that section 
2(i) should be interpreted to permit foreign branches and agencies of 
U.S. swap dealers to

[[Page 41231]]

participate in the swap markets in such countries on a limited basis. 
To be eligible for this exception, the aggregate notional value 
(expressed in U.S. dollars and measured on a quarterly basis) of the 
swaps of all foreign branches and agencies in such countries may not 
exceed five percent of the aggregate notional value (expressed in U.S. 
dollars and measured on a quarterly basis) of all of the swaps of the 
U.S. swap dealer. However, the U.S. person relying on this exception 
would be required to maintain records with supporting information to 
verify its eligibility for the exception, as well as identify, define, 
and address any significant risk that may arise from the non-
application of the Transaction-Level Requirements.\118\
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    \117\ As noted above, the proposed interpretive guidance does 
not limit the applicability of any CEA provision or Commission 
regulation to any person, entity or transaction except as provided 
herein.
    \118\ The Commission solicits comments on all aspects of the 
proposed exception, including the conditions for eligibility. In 
particular, the Commission is interested in the types of risk-
mitigating measure(s) that should be imposed on a firm as a 
condition to the exception.
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    Further, as discussed above, the Commission proposes that the U.S. 
person may task its foreign branch or agency to fulfill its regulatory 
obligations with respect to the Transaction-Level Requirements. The 
Commission would consider compliance by the foreign branch or agency to 
constitute compliance with the Transaction-Level Requirements. The 
Commission proposes, however, that the U.S. person remains responsible 
for compliance with the Transaction-Level Requirements.
2. Foreign Affiliates and Subsidiaries of U.S. Swap Dealers
    With respect to foreign affiliates or subsidiaries of U.S. swap 
dealers, the Commission proposes that the regulatory requirements that 
may apply to such affiliate or subsidiary would depend on where their 
swaps are booked and whether the affiliate or subsidiary engages in 
activities that trigger swap dealer registration. Where the swaps are 
directly booked in the U.S. swap dealer but the foreign affiliate or 
subsidiary facing the counterparty engages in swap dealing and 
independently meets the definition of a swap dealer, the U.S. swap 
dealer must comply with all of the swap dealer duties and obligations, 
including capital-related prudential requirements. The foreign 
affiliate or subsidiary would be required to separately register as a 
swap dealer and comply with any Entity-Level and Transaction-Level 
Requirements applicable to its swap dealing activities.
    Thus, if the counterparty facing affiliate or subsidiary was acting 
merely as a disclosed agent and did not meet the definition of a swap 
dealer, then the Dodd-Frank Act requirements applicable to swap dealers 
would not be applicable to the affiliate or subsidiary, provided that 
the agency relationship was properly documented and the principal 
remained primarily responsible for the actions of the affiliate. On the 
other hand, if the counterparty facing affiliate or subsidiary 
independently met the definition of a swap dealer, then it would be 
required to register as a swap dealer and satisfy the Dodd-Frank Act 
requirements applicable to swap dealers, even though all exposure to 
the swaps it entered into were transferred to a central booking entity, 
regardless of how those transfers were accomplished.\119\ In this 
scenario, the Commission interprets section 2(i), consistent with the 
principles of international comity, so as to permit substituted 
compliance by the foreign affiliate or subsidiary.
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    \119\ As noted earlier, the booking entity itself also would be 
required to register as a swap dealer and satisfy the Dodd-Frank Act 
requirements applicable to swap dealers, even though the affiliate 
facing the third party counterparty also was required to register as 
a swap dealer.
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    Where the counterparty-facing affiliate or subsidiary and the 
central booking entity are both required to comply with Dodd-Frank Act 
requirements with respect to swap dealers, the question may arise as to 
the allocation of responsibilities between the two entities for 
obligations owed to the third-party counterparty. In such cases, the 
Commission is of the view that both entities are responsible for 
satisfying the Dodd-Frank Act requirements applicable to swap dealers 
and with respect to the performance of an obligation owed to a third 
party; satisfactory performance by one may satisfy the obligations of 
both, but an unsatisfactory performance of an obligation owed to a 
counterparty is a responsibility that will be borne by both entities.
    In the case where non-U.S. affiliates or subsidiaries enter into 
swaps that are not directly booked in a U.S. person, the Commission 
proposes to interpret section 2(i) so as to require any such foreign 
affiliates or subsidiaries to register as a swap dealer, assuming that 
they individually or in the aggregate meet the definition of a swap 
dealer. Because these affiliates or subsidiaries are domiciled in a 
foreign jurisdiction and the swaps are not booked in the U.S. swap 
dealer, these affiliates or subsidiaries would be treated in a manner 
consistent with respect to non-U.S. swap dealers.\120\
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    \120\ Accordingly, the Commission would apply the clearing and 
swap processing, margining (and segregation), trade execution, swap 
trading relationship documentation, portfolio reconciliation and 
compression, real-time public reporting, trade confirmation, and 
daily trading records requirements to transactions with a non-U.S. 
person guaranteed by a U.S. person. The Commission further believes 
that it is appropriate to permit a foreign affiliate or subsidiary 
to comply with comparable and comprehensive regulatory 
requirement(s). Substituted compliance would mitigate any burden 
associated with potentially duplicative or conflicting foreign 
regulations and is appropriate in light of the foreign regulator's 
supervisory interests in entities domiciled and operating in its 
jurisdiction. Similar concerns regarding the risk of non-performance 
is not present where the non-U.S. counterparty is not guaranteed or 
similarly supported by a U.S. person, and therefore, the Commission 
proposes to not apply the Transaction-Level Requirements with 
respect to such swaps.
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    With respect to SDR Reporting, the Commission proposes to interpret 
section 2(i) so as to require foreign affiliates or subsidiaries of a 
U.S. swap dealer to comply with the SDR Reporting requirement but would 
permit substituted compliance, provided that the Commission has direct 
access to the swap data for these swaps that is stored at the foreign 
trade repository. As noted above, the Commission believes that this 
approach would best minimize burdens on counterparties that report 
their swaps data to a foreign trade repository, while ensuring that the 
Commission has direct access to the information critical to its 
oversight of the swaps market.
Request for Comment
    Q10. Please provide comments regarding all aspects of the 
Commission's proposed grouping of requirements into Entity-Level and 
Transaction-Level Requirements and application of the same to U.S. and 
non-U.S. persons as discussed above.
    Q11. Are there any Entity-Level Requirements that should be 
reclassified as Transaction-Level Requirements, or vice versa? In 
particular, the Commission is interested in comments on whether 
portfolio reconciliation and compression requirements, as central risk 
mitigation and back-office functions, could or should be categorized as 
entity-level requirements. Similarly, the Commission is interested in 
comments on whether clearing and margin and segregation for uncleared 
swaps should be categorized as Entity-Level requirements.
    Q11a. Should the Commission group the Entity-Level Requirements and 
Transaction-Level Requirements differently for swap dealers and MSPs? 
If so, how and why?

[[Page 41232]]

    Q11b. Should the real-time reporting and trade execution 
requirements be treated in the same manner as the external business 
conduct standards?
    Q12. Please provide specific comments regarding the proposed 
application of the Transaction-Level Requirements to swaps with 
counterparties that are U.S. persons. Should the Commission permit 
substituted compliance for swaps between a non-U.S. swap dealer or non-
U.S. MSP with a U.S. person?
    Q13. Please provide specific comments regarding the proposed 
application of the Transaction-Level Requirements to swaps with 
counterparties that are non-U.S. persons.
    Q14. Market participants may not be able to determine, in certain 
cases, whether their counterparties are U.S. persons, non-U.S. persons 
with a guarantee from U.S. persons, or non-U.S. persons without 
guarantees. How should the Commission address this issue?
    Q15. Please provide comments regarding the Commission's proposed 
interpretation with respect to non-U.S. swap counterparties whose swap 
obligations are guaranteed by U.S. persons. Should the interpretation 
for swaps between non-U.S. swap dealers or non-U.S. MSPs and non-U.S. 
counterparties whose swap obligations are guaranteed by U.S. persons be 
different than with respect to swaps between non-U.S. swap dealers or 
non-U.S. MSPs and U.S. persons (e.g., should fewer Transaction-Level 
Requirements apply)? If so, how (e.g., which Transaction-Level 
Requirements should apply)? Should the Commission not permit 
substituted compliance with respect to the Entity-Level and 
Transaction-Level Requirements in connection with transactions with 
non-U.S. persons?
    Q15a. Should the Commission permit substituted compliance for some 
requirements but not others? If so, which ones? Should the applicable 
requirements be different for non-U.S. swap dealers as compared to non-
U.S. MSPs?
    Q16. For Entity-Level Requirements, should the Commission not 
permit substituted compliance for U.S. persons?
    Q17. The Commission is aware that some non-U.S. swap dealers or 
MSPs may be prohibited from reporting swap transaction data to an SDR 
as a result of their home country's privacy laws, especially with 
respect to such swap dealer's or MSP's swaps with non-U.S. persons. How 
should the Commission address the application of the SDR Reporting 
requirement with respect to these swaps? Should the Commission address 
the application of such requirements differently with respect to non-
U.S. swap dealers and non-U.S. MSPs?
    Q18. The Commission seeks comments concerning the proposed 
disapplication of the external business conduct standards to swaps 
involving non-U.S. persons. Would it be consistent with the 
expectations of non-U.S. persons to not apply these requirements to 
swaps with their local swap dealer, irrespective of whether such dealer 
is a foreign- or U.S.-based person? Should such requirements apply only 
to swaps involving the foreign branches or affiliates of a U.S.-based 
swap dealer?
    Q19. Should the Commission interpret section 2(i) so as to not 
apply the Transaction-Level requirements to the foreign branches of 
U.S.-swap dealers operating in the emerging markets? If so, is it 
appropriate to condition eligibility for such an exception in the 
manner discussed above? Should the Commission permit a higher or lower 
percentage of swaps to be executed through foreign branches of U.S. 
registrants in emerging market jurisdictions without comparable 
regulation? If so, why and what percentage would be appropriate?
    Q20. With respect to the exception for foreign branches of a U.S. 
swap dealer operating in the emerging markets with respect to swaps 
with a non-U.S. person guaranteed by a U.S. person, should the 
Commission change the baseline from the aggregate notional value of a 
firm's swap activities to $8 billion (or certain fixed numerical 
threshold) so as to not disadvantage small swap dealers?
    Q21. The Commission requests comment on its proposed approach of 
applying the Transaction-Level Requirements to a conduit's swaps as if 
counterparty were a non-U.S. person that is guaranteed by a U.S. person 
(i.e., Transaction-Level Requirements will apply, with substituted 
compliance permitted).
    Q22. The Commission requests comment on its proposed definition of 
``conduit.'' Are the three prongs of that definition appropriate? If 
not, how should they be modified? Should the second prong include 
language that limits application of the conduit test to ``regular'' 
inter-affiliate transactions moving economic risk, in whole or in part, 
to the United States. Should the definition of conduit distinguish 
between different types of counterparties or registration status of 
such counterparties?
    Q23. The Commission requests comment on: (i) The prevalence of 
cross-border inter-affiliate swaps and the mechanics of moving swap-
related risks between U.S. and non-U.S. affiliated entities for risk 
management and other purposes; (ii) risk implications of cross border 
inter-affiliate conduit swaps for the U.S. markets; and (iii) specific 
means to address the risk issues potentially presented by cross-border 
conduit arrangements.
    Q24. The Commission proposed anti-evasion provisions in proposed 
rule 1.6 of the product definitions joint rulemaking with the SEC.\121\ 
To what extent would inter affiliate conduit transactions be undertaken 
for purposes of evasion as described in proposed rule 1.6?
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    \121\ See 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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    Q25. The Commission requests comments on whether substituted 
compliance should be permitted for swaps entered between a foreign 
branch of a U.S. person with another foreign branch of a U.S. person.

IV. Substituted Compliance: Process for Comparability Determination

A. Overview

    As noted above, the Commission will use its experience exempting 
foreign brokers from registration as FCMs under its rule 30.10 
``comparability'' findings in developing an approach for swaps. 
However, the Commission contemplates that it will calibrate its 
approach to reflect the heightened requirements and expectations under 
the Dodd-Frank Act. Accordingly, the Commission will examine the 
regulatory requirements to which non-U.S. swap dealers and non-U.S. 
MSPs are subject. The Commission will use an outcomes based approach to 
determine whether these requirements are designed to meet the same 
regulatory objectives of the Dodd-Frank Act. The Commission 
contemplates that its approach also will require a more robust and 
ongoing process of cooperation and coordination between the Commission 
and the relevant foreign regulatory authority regarding ongoing 
compliance efforts.
1. Scope of Review
    As noted above, the Commission would determine comparability and 
comprehensiveness by reviewing the foreign jurisdiction's laws and 
regulations. In making this determination, the Commission may

[[Page 41233]]

find that a jurisdiction has comparable law(s) and regulation(s) in 
some, but not all, of the applicable Dodd-Frank Act provisions (and 
related Commission regulations).\122\ Similar to its policy under rule 
30.10, the Commission would retain broad discretion to determine that 
the objectives of any program elements are met, notwithstanding the 
fact that the foreign requirement(s) may not be identical to that of 
the Commission.\123\ However, in cases where the foreign regulatory 
regime does not achieve the objectives of the Dodd-Frank Act, the 
Commission proposes to recognize substituted compliance in only those 
areas that are determined to be comparable and comprehensive to the CEA 
and Commission regulations.
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    \122\ The Commission anticipates that it would review 
comparability in the areas described above: (i) Capital 
requirements; (ii) chief compliance officer (iii) clearing and swap 
processing; (iv) daily trading records; (v) margin (and segregation) 
requirements for uncleared swap transactions; (vi) physical 
commodity swaps reporting; (vii) portfolio reconciliation and 
compression; (viii) real-time public reporting; (ix) SDR Reporting; 
(x) risk management; (xi) swap data recordkeeping; (xii) swap 
trading relationship documentation; (xiii) trade confirmation (xiv) 
trade execution.
    \123\ The Commission would retain broad enforcement authority, 
including anti-fraud and anti-manipulation authority, with respect 
to the subject cross-border swap activities.
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    In evaluating whether a particular foreign regulatory 
requirement(s) is comparable and comprehensive to the applicable 
requirement(s) under the CEA and Commission regulations, the Commission 
would take into consideration all relevant factors, including but not 
limited to, the scope and objectives of the relevant regulatory 
requirement(s), and the comprehensiveness of those requirement(s), the 
comprehensiveness of the foreign regulator's supervisory compliance 
program, as well as the authority to support and enforce its oversight 
of the non-U.S. swap dealer or non-U.S. MSP applicant. In this context, 
comparable does not necessarily mean identical. Rather, the Commission 
would evaluate whether the home jurisdiction's regulatory requirement 
is comparable to the regulatory requirement(s) supported and enforced 
by the Commission.
2. Process
    The Commission may recognize the comparability of a foreign regime 
and permit substituted compliance subject to such terms and conditions 
as the Commission finds appropriate.\124\ Further, similar to its 
policy under rule 30.10, the Commission would retain broad discretion 
to determine that the objectives of any program elements are met, 
notwithstanding the fact that the foreign regulations(s) may not be 
identical to that of the Commission.
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    \124\ The procedures described in this subsection, which are not 
all-inclusive, are contemplated for applicants for substituted 
compliance. The Commission further notes that non-compliance with 
the comparable home country regulations would constitute a breach of 
the terms and conditions of the registration with the Commission and 
potentially would serve as a basis for de-registration of the non-
U.S. swap dealer or non-U.S. MSP and/or the commencement of an 
enforcement action.
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    A non-U.S. person may request the Commission's permission to comply 
with comparable requirements of its home jurisdiction, in lieu of the 
applicable Dodd-Frank Act requirements, as described above. In lieu of 
a non-U.S. person requesting substituted compliance, a group of non-
U.S. persons from the same jurisdiction, or a foreign regulator, may 
submit an application for substituted compliance on behalf of non-U.S. 
persons subject to a foreign supervisory regime.
    Such request would be made directly to the Commission in connection 
with its application to register as a swap dealer or MSP.\125\ The 
Commission anticipates that it would work closely with the National 
Futures Association to develop the necessary procedural framework.
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    \125\ After it completes its evaluation, the Commission intends 
to post a finding of comparability on its Web site.
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    The Commission would expect that the applicant, at minimum, state 
with specificity the factual basis for requesting that the Commission 
recognize comparability with respect to a particular Dodd-Frank Act 
requirement as described above and include with specificity all 
applicable legislation, rules and policies. \126\
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    \126\ The Commission may, as it deems appropriate and necessary, 
conduct an on-site examination of the applicant, as well as consult 
with the applicant's home regulator. For certain matters, the 
Commission may request an opinion of counsel.
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    An applicant would be expected to state that it is licensed and in 
good standing with the applicant's supervisor(s) in its home country. 
Further, the Commission expects that, in a substituted compliance 
situation, it would enter into an appropriate memorandum of 
understanding (``MOU'') or similar arrangement between the Commission 
and the relevant foreign supervisor(s). Existing information-sharing 
and/or enforcement arrangements would be indicative of a foreign 
supervisor's ability to cooperate with the Commission. However, going 
forward, the Commission and relevant foreign supervisor(s) would need 
to establish supervisory MOUs or other arrangements that provide for 
information sharing and cooperation in the context of supervising swap 
dealers and MSPs. The Commission contemplates that such a supervisory 
MOU would establish the type of ongoing coordination activities that 
would continue on an ongoing basis between the Commission and the 
foreign supervisor(s), including topics such as, but not limited to, 
procedures for confirming continuing oversight activities, access to 
information,\127\ on-site visits, and notification and procedures in 
certain situations.\128\
---------------------------------------------------------------------------

    \127\ The Commission notes that under Commission's regulation 
Sec.  23.603(i), a registered swap dealer or MSP must make all 
records required to be maintained in accordance with Commission 
regulation 1.31 promptly upon request to representatives of the 
Commission. The Commission reserves this right to access records 
held by registered swap dealers and MSPs, including those that are 
non-U.S. persons who may comply with the Dodd-Frank recordkeeping 
requirement through substituted compliance.
    \128\ In this regard, the Commission has started working with 
foreign regulators to prepare for such arrangements.
---------------------------------------------------------------------------

    It is expected that the Commission generally may rely on prior 
comparability determinations with respect to a particular jurisdiction 
to facilitate its review of a subsequent applicant's request for 
recognition of substituted compliance.\129\ Subsequent to registration 
with the Commission, the Commission expects that a non-U.S swap dealer 
or non-U.S. MSP would notify the Commission of any material changes to 
information submitted in support of a comparability finding (including, 
but not limited to, changes in the relevant supervisory or regulatory 
regime) as the Commission's comparability determination may no longer 
be valid. In order to avoid an unduly burdensome notification process, 
the Commission contemplates that it would enumerate the specific 
foreign requirements or category of requirements which, if changed, 
would trigger a notification requirement.
---------------------------------------------------------------------------

    \129\ Prior determinations of comparability under part 30.10 of 
the Commission's regulations will not be determinative for those 
purposes.
---------------------------------------------------------------------------

    Where the Commission proposes a change to its regulations governing 
swaps, the Commission will evaluate whether the proposed regulatory 
change would affect the basis upon which a prior comparability finding 
was made. The Commission would initiate discussions with the affected 
swap dealers and MSPs and their regulator(s) to determine how to 
address any possible discrepancy in requirements.
3. Clearing
    In response to a number of inquiries, with regard to swaps covered 
by a

[[Page 41234]]

Commission-issued clearing requirement, the Commission notes that it 
expects to find comparability with foreign regulatory regimes when (i) 
the swap is subject to a mandate issued by appropriate government 
authorities in the home country of the counterparties to the swap, 
provided that the foreign mandate is comparable and comprehensive to 
the Commission's mandate; and (ii) the swap is cleared through a DCO 
that is exempted from registration under the CEA.
Request for Comment
    Q26. Please provide comments regarding the Commission's substituted 
compliance proposal, including the appropriate standard and degree of 
comparability and comprehensiveness that should be applied to make such 
determination.
    Q27. What are some of the factors or elements of a supervisory 
program that the Commission should consider in making a comparability 
finding?
    Q27a. Should the Commission take a different approach with respect 
to swap dealers as compared to MSPs?
    Q28. How should the Commission address potential inconsistencies or 
conflicts between U.S. and non-U.S. requirements with respect to the 
oversight of non-U.S. swap dealers and non-U.S. MSPs?
    Q29. Many foreign jurisdictions are in the process of implementing 
major changes to their oversight of the swaps market. Assuming that a 
foreign jurisdiction has adopted swaps legislation but has yet to 
finalize implementing regulations, should the Commission develop an 
interim process that takes into account the development of 
``comparable'' legislation and proposed regulations?
    Q30. How should the Commission ensure that prior comparability 
determinations remain appropriate over time?

V. Cross-Border Application of the CEA's Swap Provisions to 
Transactions Involving Other (Non-Swap Dealer and MSP) Market 
Participants

A. Cross-Border Transactions With U.S. Persons 130
---------------------------------------------------------------------------

    \130\ Appendix C in this release provides a chart describing the 
application of the specified Dodd-Frank provisions to transactions 
between counterparties that are neither a swap dealer or MSP.
---------------------------------------------------------------------------

    Several of the CEA's swap provisions--namely, those relating to 
clearing,\131\ trade execution,\132\ real-time public reporting,\133\ 
Large Trader Reporting,\134\ and SDR Reporting,\135\ and recordkeeping 
\136\--also apply to persons or counterparties other than a swap dealer 
or MSP. As a result, questions arise as to whether, and the extent to 
which, these requirements apply to transactions outside the United 
States involving U.S. and non-U.S. persons. In this section, the 
Commission provides interpretive guidance concerning the application of 
these Dodd-Frank Act provisions to cross-border transactions in which 
neither counterparty is a swap dealer or MSP (i.e., all other market 
participants including ``financial entities,'' as defined in CEA 
section 2(h)(7)(C)).\137\
---------------------------------------------------------------------------

    \131\ See Section III.B.3.i., supra.
    \132\ See Section III.B.3.iii. supra.
    \133\ See Section III.B.3.vi. supra.
    \134\ See Section III.B.2.vi. supra.
    \135\ See Section III.B.2.v. supra.
    \136\ The Commission's part 45 rules require non-swap dealers 
and non-MSPs to keep ``full, complete and systematic records'' with 
respect to each swap to which they are a counterparty. See 17 CFR 
45.2. Such records must include those demonstrating that the parties 
to a swap are entitled to make use of the clearing exception in CEA 
section 2(h)(7). Non-swap dealers and non-MSPs must also comply with 
the Commission's regulations in part 46, which address the reporting 
of data relating to pre-enactment swaps and data relating to 
transition swaps.
    \137\ Nothing in this interpretive guidance should be construed 
to affect the ability of a foreign board of trade to offer swaps to 
U.S. persons pursuant to part 48 of the Commission's regulations.
---------------------------------------------------------------------------

    The Commission believes that U.S. persons' swap activities outside 
the United States have a direct and significant connection with 
activities in, or effect on, U.S. commerce. The swaps market today is 
global in nature. To manage risks in a global economy, U.S. persons may 
need to--and often do--transact swaps with both U.S. and non-U.S. 
persons. Many such swap activities of U.S. persons, particularly those 
with global operations, may be located outside the United States. In 
light of the significant extent of U.S. persons' swap activities 
outside the United States in today's global marketplace, and the risks 
to U.S. persons and the financial system presented by such swaps 
activities outside the United States with U.S. persons as 
counterparties, the Commission believes that U.S. persons' swap 
activities outside the United States have the requisite connection with 
or effect on U.S. commerce under section 2(i) to apply the swaps 
provisions of the CEA to such activities.\138\
---------------------------------------------------------------------------

    \138\ In further support of this interpretation, the Commission 
notes that the risks to U.S. persons and the U.S. financial system 
from swap activities of U.S. persons does not depend on the location 
of such swap activities of U.S. persons. Moreover, the Commission 
believes that section 2(i) does not require a transaction-by-
transaction determination that a particular swap outside the United 
States has a direct and significant connection with activities in, 
or effect on, commerce of the United States in order to apply the 
swaps provisions of the CEA to such transactions; rather, it is the 
aggregate of such activities and the aggregate connection of such 
activities with activities in the U.S. or effect on U.S. commerce 
that warrants application of the CEA swaps provisions to all such 
activities. See F. Hoffmann-La Roche, Ltd., 542 U.S. at 164 (in 
response to respondents' argument that the court can take account of 
comity considerations on a case by case basis, the Court held that 
such approach is ``too complex to be prove workable.'').
---------------------------------------------------------------------------

    Accordingly, with respect to swaps where one (or both) of the 
counterparties to the swap is a U.S. person, the Commission proposes to 
interpret section 2(i) in a manner so that the Dodd-Frank Act 
requirements relating to clearing, trade-execution, real-time public 
reporting, Large Trader Reporting, and SDR Reporting, and recordkeeping 
apply to such swaps. Conversely, where a non-U.S. person enters into a 
swap with another non-U.S. person outside the United States, and where 
neither counterparty is required to register as a swap dealer or MSP, 
the Commission would not apply the Dodd-Frank Act requirements to such 
swaps.\139\
---------------------------------------------------------------------------

    \139\ The exception involves Large Trader Reporting, as further 
discussed below.
---------------------------------------------------------------------------

    As discussed above, the Commission is concerned that a non-U.S. 
affiliate or subsidiary could effectively operate as a ``conduit'' for 
the U.S. person. More specifically, the Commission is concerned that 
the non-U.S. affiliate or subsidiary of a U.S. person could be used to 
execute swaps with counterparties in foreign jurisdictions, outside the 
Dodd-Frank Act regulatory regime. The Commission is considering whether 
to propose measures to address this situation. However, at this time, 
the Commission makes clear that such non-U.S. affiliate or subsidiary 
would not be subject to the Dodd-Frank swap provisions, except pursuant 
to specific Dodd-Frank Act provisions (or Commission regulation adopted 
thereunder) or Commission orders.

B. Clearing, Trade Execution, Real-Time Public Reporting, Large Trader 
Reporting, and SDR Reporting, and Swap Data Recordkeeping

    As described in greater detail above, the Dodd-Frank Act's clearing 
requirement mitigates counterparty risks and, in turn, fosters 
protection against systemic risk. In a similar vein, the trade 
execution and real-time public reporting requirements serve to promote 
both pre- and post-trade transparency which, in turn, enhance price 
discovery and decrease risk. Together, these requirements serve an 
important role in protecting U.S. market participants and the general 
market against financial losses. Accordingly, the Commission interprets 
section 2(i) to apply the Dodd-Frank Act's clearing, trade

[[Page 41235]]

execution, and real-time public reporting requirements to any swaps 
where one of the counterparties is a U.S. person (irrespective of the 
location of the transaction), without permitting substituted compliance 
with a foreign regulatory regime.
    The Commission's part 20 rules regarding Large Trader Reporting 
require routine reports from clearing members, in addition to swap 
dealers and clearing organizations, with reportable positions in 
specified physical commodity swaps or swaptions. The Commission 
believes that such data is essential in order for the Commission to 
carry out its supervisory mandates concerning, among other things, 
increased transparency, market monitoring, and market abuse prevention. 
Therefore, the Commission proposes to interpret CEA section 2(i) to 
require non-U.S. clearing members to report all reportable positions 
under part 20. The part 20 rules also impose recordkeeping obligations 
on traders with reportable positions. The Commission proposes to 
interpret CEA section 2(i) so as to require non-U.S. persons with 
reportable positions under part 20 to comply with such obligations. 
Given the significance of these rules to the Commission's oversight of 
swaps and swaptions that are closely linked to the U.S. futures 
markets, the Commission would not allow substituted compliance.
    With respect to transactions that are subject to the SDR Reporting 
and swap data recordkeeping requirements, the Commission proposes to 
interpret section 2(i) so as to permit substituted compliance, provided 
that the Commission has direct access to the swap data for these 
transactions that is stored at the foreign trade repository. The 
Commission has a strong supervisory interest in applying the SDR 
reporting and recordkeeping requirements to any transactions involving 
a U.S. counterparty in order to effectively monitor the swap activities 
of U.S. persons. Nevertheless, the Commission believes that substituted 
compliance is warranted where it would ease the burden on the 
counterparties that report their swaps data to a foreign trade 
repository and the Commission is assured of prompt access to the 
information critical to its oversight of the swaps market.
    The Commission recognizes that applying the Dodd-Frank Act 
requirements to swaps conducted outside the United States involving a 
U.S. counterparty may result in two or more jurisdictions asserting 
authority over these swaps--with the counterparties potentially facing 
conflicting or duplicative regulatory requirements. The Commission will 
continue its efforts to address these issues through close coordination 
and consultation with its regulatory counterparts in other 
jurisdictions. The Commission also anticipates that cooperative efforts 
would be reflected in the MOU or similar arrangement (whether bilateral 
and/or multilateral) discussed above which would provide a framework 
for regulatory coordination where two or more jurisdictions have 
authority over a swap.
Request for Comment
    Q31. Please provide comments regarding all aspects of the 
Commission's interpretation of CEA section 2(i) with respect to the 
proposed application of the Transaction-Level Requirements. The 
Commission is particularly interested in commenters' views on the 
impact on U.S. persons as a result of the proposed application of the 
Dodd-Frank Act's trading requirements.
    Q32. What, if any, competitive or economic effects on U.S. 
commerce, including U.S. persons, should the Commission consider when 
interpreting CEA section 2(i)? What, if any, competitive or economic 
effects on non-U.S. persons should the Commission consider when 
interpreting CEA section 2(i)?

Appendix A--Entity-Level Requirements

    The Entity-Level Requirements relate to the management of risks 
to a swap dealer or MSP as a whole. Accordingly, these requirements 
apply on a firm-wide basis, inclusive of all swaps and irrespective 
of whether the counterparty is a U.S. person (or not) or where the 
transactions are executed.
    Capital: CEA section 4s(e) directs the Commission to set capital 
requirements for swap dealers and MSPs that are not subject to the 
capital requirements of prudential regulators (i.e., non-bank swap 
entities). The Commission has proposed rule, Sec.  23.101, which 
would apply FCM capital requirements if the nonbank swap dealer or 
MSP is also registered as an FCM, and would apply other capital 
requirements for those that are not also FCMs. Certain of these non-
FCM, nonbank swap entities would be required to meet capital 
requirements established by the Federal Reserve Board; specifically, 
SIFIs and nonbank subsidiaries of U.S. bank holding companies.\140\
---------------------------------------------------------------------------

    \140\ SIFIs that are not FCMs would be exempt from the 
Commission's capital requirements, and would comply instead with 
Federal Reserve Board requirements applicable to SIFIs, while 
nonbank (and non-FCM) subsidiaries of U.S. bank holding companies 
would calculate their Commission capital requirement using the same 
methodology specified in Federal Reserve Board regulations 
applicable to the bank holding company, as if the subsidiary itself 
were a bank holding company.
---------------------------------------------------------------------------

    Chief Compliance Officer: CEA Section 4s(k) requires that each 
swap dealer and MSP to designate a chief compliance officer 
(``CCO'') and specify certain duties by the CCO. Pursuant to section 
4s(k), the Commission adopted Sec.  3.3, which requires swap dealers 
and MSPs to designate a CCO responsible for administering the firm's 
compliance policies and procedures, reporting directly to the board 
of directors or a senior officer of the swap dealer, as well as 
preparing and filing (with the Commission) a certified report of 
compliance with the CEA.
    Risk Management: CEA Section 4s(j) requires each swap dealer and 
MSP to establish internal policies and procedures designed to, among 
other things, address risk management, monitor compliance with 
position limits, prevent conflicts of interest, and promote diligent 
supervision, as well as maintain business continuity and disaster 
recovery programs. The Commission adopted implementing regulations 
(Sec. Sec.  23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 
23.607). The Commission also adopted: (A) Sec.  23.609, which 
requires certain risk management procedures for swap dealers or MSPs 
that are clearing members of a DCO; and (B) Sec.  23.608, which 
prohibits swap dealers providing clearing services to customers from 
entering into agreements that would: (i) Disclose the identity of a 
customer's original executing counterparty; (ii) limit the number of 
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution 
of a trade on terms that have a reasonable relationship to the best 
terms available; or (v) prevent compliance with specified time 
frames for acceptance of trades into clearing.
    Swap Data Recordkeeping: CEA section 4s(f)(1)(B) requires swap 
dealers and MSPs to keep books and records for all activities 
related to their business. Section 4s(g)(1) requires swap dealers 
and MSPs to maintain trading records for each swap transaction and 
all related records, as well as a complete audit trail for 
comprehensive trade reconstructions. Pursuant to these provisions, 
the Commission adopted Sec. Sec.  23.201and 23.203, which require 
swap dealers and MSPs to keep records including complete transaction 
and position information for all swap activities, including 
documentation on which trade information is originally recorded. 
Swap dealers and MSPs also have to comply with Part 46 of the 
Commission's regulations, which addresses the recordkeeping 
requirements for swaps entered into before the date of enactment of 
the Dodd-Frank Act (``pre-enactment swaps'') and data relating to 
swaps entered into on or after the date of enactment but prior to 
the part 45 compliance date (``transition swaps'').
    SDR Reporting: CEA section 2(a)(13)(G) requires all swaps, 
whether cleared or uncleared, to be reported to a registered swap 
data repository (``SDR''). CEA section 21 requires SDRs to collect 
and maintain data related to swap transactions as prescribed by the 
Commission, and to make such data

[[Page 41236]]

electronically available to regulators. Swap dealers and MSPs would 
be required to comply with Part 45 of the Commission's regulations, 
which set forth the specific transaction data that reporting 
counterparties and registered entities must report to a registered 
SDR; and Part 46, which addresses the recordkeeping requirements for 
pre-enactment swaps and data relating to transition swaps.
    Physical Commodity Swaps Reporting (Large Trader Reporting): CEA 
section 4t authorizes the Commission to establish a large trader 
reporting system for significant price discovery swaps, of which the 
economically equivalent swaps subject to part 20 reporting are a 
subset, and in order to implement the statutory mandate in CEA 
section 4a for the Commission to establish position limits, as 
appropriate, for physical commodity swaps. The Commission published 
part 20 rules requiring swap dealers, among other entities, to 
submit routine position reports on certain physical commodity swaps 
and swaptions.

                        Entity-Level Requirements
------------------------------------------------------------------------
 
------------------------------------------------------------------------
U.S.-Based Swap Dealer..........  Apply.
Foreign Branches/Agencies of      Apply.
 U.S.-Based Swap Dealer**.
Foreign Affiliates of U.S.
 Person:
    --Swaps Booked in U.S.......  Apply.*
Foreign Affiliate of U.S.
 Person:
    --The Affiliate is the Legal  Substituted Compliance.***
     Counterparty But All Swaps
     Guaranteed by U.S. Person.
Foreign Affiliate of U.S.
 Person:
    --Swaps Not Booked in U.S.    Substituted Compliance.
     (i.e., Affiliate is Legal
     Counterparty); and Swaps
     Not Guaranteed by U.S.
     Person.
Non-U.S.-Based Swap Dealer:
    --Swaps neither Booked in     Substituted Compliance.
     U.S. nor Guaranteed by U.S.
     Person.
------------------------------------------------------------------------
* Where swaps are solicited or negotiated by a foreign affiliate of a
  U.S. person but directly booked in the U.S. person, the U.S. person
  must comply with all of the swap dealer duties and obligations related
  to the swaps, including registration, capital and related prudential
  requirements.
** Both Entity-Level and Transaction-Level Requirements are the ultimate
  responsibilities of the U.S.-based swap dealer.
*** With respect to the SDR reporting requirement, the Commission may
  permit substituted compliance only if direct access to swap data is
  provided to the Commission.

Appendix B--Transaction-Level Requirements

    The Transaction-Level Requirements cover a range of Dodd-Frank 
requirements: some of the requirements more directly address 
financial protection of swap dealers (or MSPs) and their 
counterparties; others address more directly market efficiency and/
or price discovery. Further, some of the Transaction-Level 
Requirements can be classified as Entity-Level Requirements and 
applied on a firm-wide basis across all swap transactions or 
activities. Nevertheless, in the interest of comity principles, the 
Commission believes that the Transaction-Level Requirements may be 
applied on a transaction-by-transaction basis.

Category A: Risk Mitigation and Transparency

    Clearing and Swap Processing: CEA section 2(h)(1) requires a 
swap to be submitted for clearing to a derivatives clearing 
organization (``DCO'') if the Commission has determined that the 
swap is required to be cleared, unless one of the parties to the 
swap is eligible for an exception under section 2(h)(7) from the 
clearing requirement and elects not to clear the swap. Finally, the 
Commission adopted Sec.  23.506, which requires swap dealers and 
MSPs to submit swaps promptly for clearing and comply with Sec.  
23.610, which establishes certain standards for swap processing by 
swap dealers and MSPs that are clearing members of a DCO.
    Margin (and Segregation) Requirement for Uncleared Swap 
Transactions: Section 4s(e) explicitly requires the adoption of 
rules establishing margin requirements for swap dealers and MSPs, 
and applies a bifurcated approach that requires each swap dealer and 
MSP for which there is a prudential regulator to meet the margin 
requirements established by the applicable prudential regulator, and 
each swap dealer and MSP for which there is no prudential regulator 
to comply with Commission's margin regulations. In contrast, the 
``segregation'' requirements in 4s(1) don't use a bifurcated 
approach--all swap dealers and MSPs are subject to the Commission's 
rule regarding notice and third party custodians for margin 
collected for uncleared swaps.
    Mandatory Trade Execution: CEA section 2(h)(8) provides that 
unless a non-financial end-user exemption applies, a swap that is 
subject to clearing requirement and made available to trade must be 
traded on a DCM or SEF.
    Swap Trading Relationship Documentation: CEA Section 4s(i) 
requires each swap dealer and MSP to conform to commission standards 
for the timely and accurate confirmation, processing, netting 
documentation and valuation of swaps. Pursuant thereto the 
Commission has proposed Sec.  23.504(a), which would require swap 
dealers and MSPs to ``establish, maintain and enforce written 
policies and procedures'' to ensure that the swap dealer or MSP 
executes written swap trading relationship documentation. Under 
proposed Sec. Sec.  23.505(b(1), 23.504 (b)(3), and 23.504(b)(4), 
the swap trading relationship documentation must include, among 
other things: all terms governing the trading relationship between 
the swap dealer and its counterparty; credit support arrangements; 
investment and rehypothecation terms for assets used as margin for 
uncleared swaps and custodial arrangements.\141\ Further, the swap 
trading relationship documentation requirement applies to all 
transactions with registered swap dealers and MSPs.
---------------------------------------------------------------------------

    \141\ The requirements under section 4s(i) relating to trade 
confirmations is a Transaction-Level Requirement. Accordingly, 
proposed 17 CFR 23.504(b)(2), which requires a swap dealer's and 
MSP's swap trading relationship documentation to include all 
confirmations of swap transactions, will apply on a transaction-by-
transaction basis.
---------------------------------------------------------------------------

    Portfolio Reconciliation and Compression: CEA section 4s(i) 
directs the Commission to prescribe regulations for the timely and 
accurate processing and netting of all swaps entered into by swap 
dealers and MSPs. Pursuant to CEA section 4s(i), the Commission 
proposed regulations (Sec. Sec.  23.502 and 23.503), which would 
require swap dealers and MSPs to perform portfolio reconciliation 
and compression, respectively, for all swap transactions. Portfolio 
reconciliation is a post-execution risk management tool to ensure 
accurate confirmation of a swap's terms and to identify and resolve 
any discrepancies between counterparties regarding the valuation of 
the swap. Portfolio compression is a post-trade processing and 
netting mechanism that is intended to ensure timely accurate 
processing and netting of swaps. Proposed Sec.  23.503(c) would 
require all swap dealers and MSPs to participate in bilateral 
compression exercises and/or multilateral portfolio compression 
exercises conducted by their SROs or DCOs of which they are members. 
Further, participation in multilateral portfolio compression 
exercises is mandatory for dealer to dealer trades.
    Real-Time Public Reporting: CEA section 2(a)(13) directs the 
Commission to promulgate rules providing for the public availability 
of swap transaction data in real time basis. The Commission 
promulgated part 43 rules, which provides that all ``publicly 
reportable swap transactions'' must be reported and publicly 
disseminated.
    Trade Confirmation: CEA section 4s(i) requires that each swap 
dealer and MSP must comply with the Commission's regulations 
prescribing timely and accurate confirmation of transactions. The 
Commission has proposed Sec.  23.501, which requires, among other 
things, a timely and accurate confirmation of all swaps and life 
cycle

[[Page 41237]]

events for existing swaps. In addition, proposed Sec.  23.504(b)(2) 
requires a swap dealer's and MSP's swap trading relationship 
documentation to include all confirmations of swap transactions.
    Daily Trading Records: Pursuant to section CEA 4s(g)(1), the 
Commission adopted Sec.  23.202, which requires swap dealers and 
MSPs to maintain daily trading records, including records of trade 
information related to pre-execution, execution, and post-execution 
data that is needed to conduct a comprehensive and accurate trade 
reconstruction for each swap. The final rule also requires that 
records be kept of cash or forward transactions used to hedge, 
mitigate the risk of, or offset any swap held by the swap dealer or 
MSP.

Category B: Sales Practices

    External Business Conduct Standards: Pursuant to CEA section 
4s(h), the Commission has adopted external business conduct rules, 
which establish business conduct standards governing the conduct of 
swap dealers and MSPs in dealing with their counterparties in 
entering into swaps.

                                                   Category A
----------------------------------------------------------------------------------------------------------------
                                                         Non-U.S. person
                                      U.S. Person      guaranteed by U.S.    Non-U.S. person not  guaranteed by
                                                            person **                   U.S. person
----------------------------------------------------------------------------------------------------------------
U.S.-Based Swap Dealer..........  Apply..............  Apply.............  Apply.
Foreign Affiliate/Swaps Booked    Apply..............  Apply.............  Apply.
 in U.S.*.
Foreign Branches/Agencies of      Apply..............  Substituted         Substituted Compliance.***
 U.S.-Based Swap Dealer.                                Compliance***.
Foreign Affiliate of U.S.
 Person:
    --The Affiliate is the Legal  Apply..............  Substituted         Do Not Apply.
     Counterparty But All Swaps                         Compliance.
     Guaranteed by U.S. Person.
Foreign Affiliate of U.S.
 Person:
    --Swaps Not Booked in U.S.    Apply..............  Substituted         Do Not Apply.
     (i.e., Affiliate is Legal                          Compliance.
     Counterparty); and Swaps
     Not Guaranteed by U.S.
     Person.
Non-U.S.-Based Swap Dealer:
    --Swaps neither Booked in     Apply..............  Substituted         Do Not Apply.
     U.S. nor Guaranteed by U.S.                        Compliance.
     Person.
----------------------------------------------------------------------------------------------------------------
* Where swaps are solicited or negotiated by a foreign affiliate but directly booked in the U.S. person, the
  U.S. person must comply with all of the swap dealer duties and obligations, including all Transaction-Level
  Requirements. The foreign affiliate, if separately required to register as a swap dealer, must comply with
  those requirements applicable to its swap dealing activities.
** The Transaction-Level Requirements apply to swaps in which: (i) a non-U.S. counterparty is majority-owned,
  directly or indirectly, by a U.S. person; (ii) the non-U.S. counterparty regularly enters into swaps with one
  or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the financials of such non-U.S.
  counterparty are included in the consolidated financial statements of the U.S. person.
*** Under limited circumstances, where there is not a comparable foreign regulatory regime, foreign branches and
  agencies of U.S. swap dealers may comply with the local transaction-level requirements rather than the
  Transaction-Level Requirements, subject to specified conditions.
Notes:
1. The swap trading relationship documentation requirement applies to all transactions with registered swap
  dealers and MSPs.
2. Participation in multilateral portfolio compression exercises is mandatory for dealer to dealer trades.


                                                   Category B
----------------------------------------------------------------------------------------------------------------
                                                                   Non-U.S. person         Non-U.S. person not
                                          U.S. person            guaranteed by U.S.        guaranteed by U.S.
                                                                      person **                  person
----------------------------------------------------------------------------------------------------------------
U.S.-Based Swap Dealer...........  Apply....................  Apply...................  Apply.
Foreign Affiliate of U.S. Person:
    --Swaps are Booked in U.S.*..  Apply....................  Do Not Apply............  Do Not Apply.
Foreign Branches/Agencies of U.S.- Apply....................  Do Not Apply............  Do Not Apply.
 Based Swap Dealer.
Foreign Affiliate of U.S. Person:
    --The Affiliate is the Legal   Apply....................  Do Not Apply............  Do Not Apply.
     Counterparty But All Swaps
     Guaranteed by U.S. Person.
Foreign Affiliate of U.S. Person:
    --Swaps Not Booked in U.S.     Apply....................  Do Not Apply............  Do Not Apply.
     (i.e., Affiliate is Legal
     Counterparty); and Swaps Not
     Guaranteed by U.S. Person.
Non-U.S.-Based Swap Dealer:
    --Swaps neither Booked in      Apply....................  Do Not Apply............  Do Not Apply.
     U.S. nor Guaranteed by U.S.
     Person.
----------------------------------------------------------------------------------------------------------------
* Where swaps are solicited or negotiated by an affiliate of a U.S. person but directly booked in the U.S.
  person, the U.S. person must comply with all of the swap dealer duties and obligations, including all
  Transaction-Level Requirements. The foreign affiliate, if separately required to register as a swap dealer,
  must comply with those requirements applicable to its swap dealing activities.
** The Transaction-Level Requirements apply to swaps in which: (i) A non-U.S. counterparty is majority-owned,
  directly or indirectly, by a U.S. person; (ii) the non-U.S. counterparty regularly enters into swaps with one
  or more U.S. affiliates or subsidiaries of the U.S. person; and (iii) the financials of such non-U.S.
  counterparty are included in the consolidated financial statements of the U.S. person.

Appendix C--All Other (Non-Swap Dealer/MSP) Market ParticipantS \*\

 
----------------------------------------------------------------------------------------------------------------
                                                                   Non-U.S. person         Non-U.S. person not
                                          U.S. person            guaranteed by U.S.        guaranteed by U.S.
                                                                       person                    person
----------------------------------------------------------------------------------------------------------------
U.S. Person......................  Apply....................  Apply...................  Apply.
Non-U.S. Person Guaranteed by      Apply....................  Do Not Apply............  Do Not Apply.
 U.S. Person.

[[Page 41238]]

 
Non-U.S. Person Not Guaranteed by  Apply....................  Do Not Apply............  Do Not Apply.
 U.S. Person.
----------------------------------------------------------------------------------------------------------------
* The relevant Dodd-Frank requirements are those relating to: clearing, trade execution, real-time public
  reporting, Large Trader Reporting, SDR reporting and swap data recordkeeping.


    Issued in Washington, DC, on June 29, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Cross-Border Application of Certain Swaps Provisions of 
the Commodity Exchange Act--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 Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed guidance on the cross-border application 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd Frank Act). The Commission is not required to solicit public 
comment on interpretive guidance, but we are particularly interested 
in the public's input and look forward to comments on the proposed 
guidance.
    In 2008, swaps, and in particular credit default swaps, 
concentrated risk in financial institutions and contributed to the 
financial crisis, the worst economic crisis Americans have 
experienced since the Great Depression. Eight million Americans lost 
their jobs, millions of families lost their homes, and small 
businesses across the country folded. Congress and the President 
responded with the Dodd-Frank Act, bringing common-sense rules of 
the road to the swaps marketplace.
    Section 722(d) of the Dodd-Frank Act states that swaps reforms 
shall not apply to activities outside the United States unless those 
activities have ``a direct and significant connection with 
activities in, or effect on, commerce of the United States.'' In 
interpreting Section 722(d), we must not forget the lessons of the 
2008 crisis and earlier. Swaps executed offshore by U.S. financial 
institutions can send risk straight back to our shores. It was true 
with the London and Cayman Islands affiliates of AIG, Lehman 
Brothers, Citigroup and Bear Stearns. A decade earlier, it was true, 
as well, with Long-Term Capital Management.
    The nature of modern finance is that large financial 
institutions set up hundreds, if not thousands of ``legal entities'' 
around the globe.
    They do so in an effort to respond to customer needs, funding 
opportunities, risk management and compliance with local laws. They 
do so as well, though, to lower their taxes, manage their reported 
accounting, and to minimize regulatory, capital and other 
requirements, so-called ``regulatory arbitrage.'' Many of these far-
flung legal entities, however, are still highly connected back to 
their U.S. affiliates.
    During a default or crisis, the risk that builds up offshore 
inevitably comes crashing back onto U.S. shores. When an affiliate 
of a large, international financial group has problems, the markets 
accept this will infect the rest of the group. This was true with 
AIG. Its subsidiary, AIG Financial Products, brought down the 
company and nearly toppled the U.S. economy. It was run out of 
London as a branch of a French-registered bank, though technically 
was organized in the United States.
    Lehman Brothers was another example. Among its complex web of 
affiliates was Lehman Brothers International (Europe) in London. 
When Lehman failed, the London affiliate had more than 130,000 
outstanding swaps contracts, many of them guaranteed by Lehman 
Brothers Holdings back in the United States.
    Yet another example was Citigroup, which set up numerous 
structured investment vehicles (SIVs) to move positions off its 
balance sheet for accounting purposes, as well as to lower its 
regulatory capital requirements. Yet, Citigroup had guaranteed the 
funding of these SIVs through a mechanism called a liquidity put. 
When the SIVs were about to fail, Citigroup in the United States 
assumed the huge debt, and taxpayers later bore the brunt with two 
multi-billion dollar infusions. The SIVs were launched out of London 
and incorporated in the Cayman Islands.
    Bear Stearns is another case. Bear Stearns' two sinking hedge 
funds it bailed out in 2007 were incorporated in the Cayman Islands. 
Yet again, the public assumed part of the burden when Bear Stearns 
itself collapsed nine months later.
    A decade earlier, the same was true for Long-Term Capital 
Management. When the hedge fund failed in 1998, its swaps book 
totaled in excess of $1.2 trillion notional. The vast majority were 
booked in its affiliated partnership in the Cayman Islands.
    The recent events of JPMorgan Chase, where it executed swaps 
through its London branch, are a stark reminder of this reality of 
modern finance.
    The proposed guidance interpreting Section 722(d),intended to be 
flexible in application, includes the following key elements:
    First, it provides the guidance that when a foreign entity 
transacts in more than a de minimis level of U.S. facing swap 
dealing activity, the entity would register under the Dodd-Frank Act 
swap dealer registration requirements.
    Second, it includes a tiered approach for foreign swap dealer 
requirements. Some requirements would be considered entity-level, 
such as for capital, chief compliance officer, swap data 
recordkeeping, reporting to swap data repositories and large trader 
reporting. Some requirements would be considered transaction-level, 
such as clearing, margin, real-time public reporting, trade 
execution, trading documentation and sales practices.
    Third, entity-level requirements would apply to all registered 
swap dealers, but in certain circumstances, foreign swap dealers 
could meet these requirements by complying with comparable and 
comprehensive foreign regulatory requirements, or what we call 
``substituted compliance.''
    Fourth, transaction-level requirements would apply to all U.S. 
facing transactions. For these requirements, U.S. facing 
transactions would include not only transactions with persons or 
entities operating or incorporated in the United States, but also 
transactions with their overseas branches. Likewise, this would 
include transactions with foreign affiliates that are guaranteed by 
a U.S. entity, as well as the foreign affiliates operating as 
conduits for a U.S. entity's swap activity. Foreign swap dealers, as 
well as overseas branches of U.S. swap dealers, in certain 
circumstances, may rely on substituted compliance when transacting 
with foreign affiliates guaranteed by or operating as conduits of 
U.S. entities.
    Fifth, for certain transactions between a foreign swap dealer 
(including an overseas affiliate of a U.S. person) and 
counterparties not guaranteed by or operating as conduits for U.S. 
entities, Dodd-Frank transaction-level requirements may not apply. 
For example, this would be the case for a transaction between a 
foreign swap dealer and a foreign insurance company not guaranteed 
by a U.S. person. There are some in the financial community who 
might want the CFTC to ignore the hard lessons of the crisis and 
before.
    They might comment that swap trades entered into in London 
branches of U.S. entities do not have a direct and significant 
connection with activities in, or effect on U.S. commerce.
    They might comment that affiliates guaranteed by a U.S. mother 
ship do not have a direct and significant connection with activities 
in, or effect on U.S. commerce.
    They might comment that affiliates acting as conduits for swaps 
activity back here in

[[Page 41239]]

the United States do not have a direct and significant connection 
with activities in, or effect on U.S. commerce.
    If we were to follow these comments, though, American jobs and 
markets might move offshore, yet the risk associated with such 
overseas swaps activities, particularly in times of crisis, would 
still have a direct and significant connection with activities in, 
or effect on U.S. commerce.

Appendix 3--Statement of Commissioner Jill Sommers

    Over a year ago, the Commission finally acknowledged that we 
needed to address the growing uncertainty brewing among swap market 
participants who were trying to decipher the extraterritorial reach 
of the Dodd-Frank Act. We held a two-day roundtable last August and 
have received numerous comments since then from market participants 
and other regulators asking us to consider a global approach to the 
regulation of these global markets. We were encouraged to coordinate 
with our foreign and domestic partners and urged not to implement 
our regulatory approach in a silo.
    CFTC staff has worked diligently to address the challenging 
issues associated with the statutory language of Section 2(i) of the 
Commodity Exchange Act (CEA). Unfortunately, when the Proposed 
Interpretive Guidance and Policy Statement (``Interpretive 
Guidance'') was finally shared with the rest of the Commission on 
June 1, 2012, we learned that staff had been guided by what could 
only be called the ``Intergalactic Commerce Clause'' of the United 
States Constitution, in that every single swap a U.S. person enters 
into, no matter what the swap or where it was transacted, was stated 
to have a direct and significant connection with activities in, or 
effect on, commerce of the United States. This statutory and 
constitutional analysis of the extraterritorial application of U.S. 
law was, in my view, nothing short of extra-statutory and extra-
constitutional.
    While the many revisions over the last several weeks have 
tempered the outer limits of our initial approach, the Interpretive 
Guidance nonetheless continues to ignore the Commission's successful 
history of mutual recognition of foreign regulatory regimes spanning 
20-plus years. We have worked for decades to establish relationships 
with our foreign counterparts built on respect and trust, and should 
not be so eager and willing to disregard their capabilities. All G20 
nations agreed to comprehensive regulation of swap markets and we 
should rely on their regional expertise. The current document 
acknowledges the concept of ``substituted compliance,'' but it is 
extremely vague with respect to what the Commission will be 
considering in making these determinations. In my view, a very broad 
and high level review of regulatory regimes is appropriate versus a 
word-for-word comparison of rule books.
    While the market failures described in the ``Background'' 
section of the Interpretive Guidance recount why the G20 nations 
together agreed to a common set of principles for regulation of a 
global marketplace, recounting those market failures does not 
justify the expansive view the Commission has taken of its 
jurisdictional reach, and does not justify the implication that 
other nations are not capable of effective regulation.
    As Commissioner O'Malia points out in his concurrence, not only 
have we failed to coordinate with foreign regulators on a global 
cross-border approach, we have failed to coordinate with our fellow 
domestic regulators. As I have said for many months, we should be 
proposing a rule defining the cross-border application of Dodd-Frank 
that is harmonized with the SEC's approach, both in substance and in 
timing. Unfortunately we are not doing that. Instead, we are 
proposing Interpretive Guidance that ultimately has the effect of a 
rule. No matter what it is called, the Interpretive Guidance is so 
inextricably linked to the entity definitions and the registration 
rules that it is a part of those rules themselves. Because it is not 
titled a ``Notice of Proposed Rulemaking,'' we skirt the 
requirements of the Administrative Procedure Act and the requirement 
under Section 15(a) of the CEA that the Commission conduct a cost-
benefit analysis. I believe this approach, yet again, needlessly 
exposes the Commission to litigation.
    Over the last two years, while considering many proposed and 
final rules, I have been very clear that I cannot support an 
approach that creates an un-level playing field for market 
participants. I am concerned that the different compliance dates in 
the Proposed Exemptive Order may unnecessarily disadvantage U.S.-
based swap dealers and MSPs from the moment the document is 
published in the Federal Register. I encourage comment on this issue 
and hope that if we determine to harmonize the compliance dates for 
entities in the U.S. and abroad, that we can do so before too much 
damage is done to U.S.-based market participants.
    As I reviewed the documents currently under consideration, it 
occurred to me that two choices are presented. One is that the 
Commission decline to issue the Interpretive Guidance and Proposed 
Exemptive Order and leave market participants in a continued state 
of uncertainty. The other is that the Commission issue these 
documents and provide market participants with the certainty that we 
are advancing a flawed policy. Neither is appealing.
    My decision to support putting these proposals out for comment 
was not easily reached. From the beginning I have supported a much 
simpler approach to the extraterritorial reach of Dodd-Frank. I am 
hopeful that the comment letters will encourage the Commission to 
adopt a final rule that will rely on mutual recognition of all 
global regulatory regimes in a manner that avoids costly, burdensome 
duplicative regulations.

Appendix 4--Statement of Commissioner Scott D. O'Malia

    I respectfully concur with the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') approval of its 
proposed interpretive guidance and policy statement (``Proposed 
Guidance'') regarding section 2(i) of the Commodity Exchange Act 
(``CEA'') \142\ and its notice of proposed exemptive order 
(``Proposed Order''). While I have strong reservations about the 
statutory authority and disagree with the Commission's decision to 
issue interpretive guidance instead of a formal rulemaking, I 
believe that the timely release of these proposals is critical for 
firms to have some sense of what U.S. standards will apply to their 
cross-border transaction, and how those standards will comport with 
international standards. We expect that these proposals will improve 
as a result of input from market participants, as well as an open 
dialogue with global regulators.
---------------------------------------------------------------------------

    \142\ See 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------

    These two proposals are complementary in that the Commission's 
long-awaited Proposed Guidance establishes our view of the 
application of the swaps provisions of the CEA to cross-border swaps 
transactions, while the Proposed Order will delay compliance with 
certain entity-level and transaction-level swaps requirements in the 
CEA pending the final adoption of the Proposed Guidance. The 
Proposed Order also borrows definitions and concepts from the 
Proposed Guidance, such as the proposed definition of ``U.S. 
person.'' While I believe that the Commission's issuance of the 
Proposed Guidance and the Proposed Order are overdue, I have a 
number of general concerns with the former.
    I have been assured that the Proposed Guidance is a draft and, 
although it is not required, will follow the normal notice-and-
comment process under the Administrative Procedure Act.\143\ After 
the comment period, the Commission will review public comments and 
subsequently will incorporate those comments into final guidance. I 
would like to make it clear that if I were asked to vote on the 
Proposed Guidance as final, my vote would be no.
---------------------------------------------------------------------------

    \143\ See 5 U.S.C. 551 et seq.
---------------------------------------------------------------------------

The Proposed Guidance

    My concerns with the Proposed Guidance relate generally to the 
Commission's unsound interpretation of section 2(i) of the CEA. In 
particular, I believe that the Commission's analysis: (i) 
Misconstrues the language of section 2(i); (ii) is inconsistently 
applied to different activities; (iii) loosely considers 
international law and comity; (iv) lacks meaningful collaboration 
with foreign and domestic regulators; and (v) blurs the lines 
between interpretive guidance and legislative or interpretive 
rulemaking. I discuss each of these concerns below.

i. Statutory Misconstruction

    Section 2(i) of the CEA provides, in part, that the Commission's 
swap authority does not apply to foreign activities unless those 
activities ``have a direct and significant connection with 
activities in, or effect on, commerce of the United States * * *.'' 
\144\ When Congress passed the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the ``Dodd-Frank Act''),\145\ it intended 
that

[[Page 41240]]

section 2(i) act as a limitation on the Commission's authority. 
Under section 2(i), the Commission is required to demonstrate how 
and when its jurisdiction applies to activities that take place 
outside of the United States. Instead, the Commission's Proposed 
Guidance ignores the literal statutory construction of section 2(i) 
and prejudicially switches the analysis. In other words, the 
Proposed Guidance now places the burden on market participants to 
explain why their foreign swaps activities are outside of the 
Commission's regulatory oversight. By placing the burden on market 
participants to determine whether their swaps activities are subject 
to the swaps provisions of the CEA--and without providing more 
guidance to these participants--the Commission inappropriately 
broadens the scope of swaps activities that will fall within the 
Commission's jurisdiction. The Commission could more clearly 
delineate which activities it believes will have a direct and 
significant connection with U.S. commerce in order to ensure that 
our regulatory interests are preserved.\146\
---------------------------------------------------------------------------

    \144\ 7 U.S.C. 2(i) (2012).
    \145\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \146\ For example, in the case of non-interdealer swap 
transactions, the Commission could focus its analysis on the 
solicitation activities of swap dealers. In the case of other swap 
transactions, the Commission could examine the location of where 
performance of the primary obligations under a swap agreement takes 
place.
---------------------------------------------------------------------------

ii. Inconsistent Application of CEA Section 2(i)

    In addition, the Commission's Proposed Guidance inconsistently 
applies, and sometimes ignores, its own section 2(i) analysis. For 
instance, the Commission sets forth in detail its belief that ``the 
level of swap dealing that is substantial enough to require a person 
to register as a swap dealer when conducted by a U.S. person, also 
constitutes a `direct and significant connection' within the meaning 
of section 2(i)(1) of the CEA.'' \147\ As a result, a non-U.S. 
person would have a direct and significant connection with the 
United States and therefore have to register with the Commission as 
a swap dealer only once it engages in more than the de minimis level 
of swap dealing with U.S. persons.\148\ In contrast to this somewhat 
extensive analysis for swap dealers, the Commission provides a 
sparse explanation of why it believes each and every swap 
transaction between one or more U.S. persons or counterparties other 
than a swap dealer or major swap participant (``MSP'') satisfies the 
direct and significant connection analysis in section 2(i).\149\ 
Swap transactions that fall under this analysis would be subject to 
certain transaction-level swaps requirements, including clearing, 
exchange trading, reporting to a swap data repository under part 45 
of the Commission's regulations, real-time public reporting and 
large swaps trader reporting under part 20 of the Commission's 
regulations.
---------------------------------------------------------------------------

    \147\ The Commission's analysis in the Proposed Guidance relies 
on its analysis in the final entities rule. See Further Definition 
of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant,'' and 
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012).
    \148\ See 77 FR at 30634 (``[T]he Commissions believe that the 
appropriate threshold for the phase-in period is an annual gross 
notional level of swap dealing activity of $8 billion or less. In 
particular, the $8 billion level should still lead to the regulation 
of persons responsible for the vast majority of dealing activity 
within the swap markets.''). The Commission ties the direct and 
significant connection analysis to the crude analysis in the final 
entities rule. I voted against the final entities rule for several 
reasons, including its flawed reasoning. I expressed my support, 
however, with respect to the positive outcome that resulted from the 
establishment of the $8 billion de minimis threshold.
    \149\ See section V of this Proposed Guidance (``In light of the 
significant extent of U.S. persons' swap activities outside of the 
United States in today's global marketplace, and the risks to U.S. 
persons and the financial system presented by such swaps activities 
outside of the United States with U.S. persons as counterparties, 
the Commission believes that U.S. persons' swap activities outside 
the United States have the requisite connection with or effect on 
U.S. commerce under section 2(i) to apply the swaps provisions of 
the CEA to such activities.''). In a footnote in the Proposed 
Guidance, the Commission then reasons without persuasive legal 
support that the aggregate of outside activities and the aggregate 
connection with U.S. commerce warrant the application of the CEA 
swaps provisions to all such foreign activities.
    The Commission's analysis ignores and minimizes two important 
points. First, it ignores the fact that multinational entities also 
may have major operations and business relationships in foreign 
jurisdictions and may be considered persons within those 
jurisdictions. Second, its analysis minimizes the fact that there 
are an appreciable number of U.S. persons who engage in a relatively 
small number of swaps transactions. Even if those U.S. persons' 
transactions were aggregated, it is questionable whether their swaps 
in the aggregate would meet the ``significant'' element in the 
section 2(i) analysis.
---------------------------------------------------------------------------

    Similarly, in another instance, the Commission has divined an 
exception to the application of certain Commission regulations for 
situations where a foreign branch of a U.S. swap dealer engages in 
swap dealing activities in emerging markets or other jurisdictions 
without comparable swaps regimes.\150\ Although the policy result of 
this exception is well intended, its bare analysis pales in 
comparison to the Commission's section 2(i) analysis in other places 
of the Proposed Guidance.\151\
---------------------------------------------------------------------------

    \150\ See section III.D.1 of this Proposed Guidance (``To be 
eligible for this exception, the aggregate notional value (expressed 
in U.S. dollars and measured on a quarterly basis) of the swaps of 
all foreign branches in such countries may not exceed five percent 
of the aggregate notional value (expressed in U.S. dollars and 
measure on a quarterly basis) of all of the swaps of the U.S. swap 
dealer.'').
    \151\ See, e.g., the MSP discussion in section II.C.2. of this 
Proposed Guidance.
---------------------------------------------------------------------------

    In yet another section of the Proposed Guidance, the Commission 
does not adequately explain why almost all transaction-level 
requirements (i.e., clearing, margining for uncleared swaps, real-
time public reporting and certain business conduct standards) 
equally satisfy the direct and significant connection analysis under 
CEA section 2(i). In my view, two transaction-level requirements 
related to pre- and post-trade transparency--namely, trade execution 
and real-time public reporting requirements--do not raise the same 
level of systemic risk concerns as clearing and margining for 
uncleared swaps. I believe the Commission should better explain its 
rationale for requiring foreign swap dealers transacting with non-
U.S. persons to meet the trade execution and real-time public 
reporting requirements under Title VII of the Dodd-Frank Act and 
Commission regulations.

iii. Loose Consideration of Principles of International Comity

    Moreover, the Commission's interpretation of CEA section 2(i) is 
overly broad to the point where the extent of the Commission's 
jurisdiction is virtually endless. The Proposed Guidance takes the 
position that all transactions involving a U.S. person fall within 
the Commission's jurisdiction, regardless of the location of the 
transaction or the regulations in effect within the relevant 
jurisdiction.
    While section 2(i) gives the Commission jurisdiction to reach 
activities that take place outside of the United States, the 
Commission's Proposed Guidance loosely considers principles of 
international comity that are essential for determining the 
extraterritorial applicability of U.S. law. Although the Proposed 
Guidance expressly states that the Commission will exercise its 
regulatory authority over cross-border activities in a manner 
consistent with principles of international comity, the Commission's 
proposed approach could be described as unilateral and dismissive of 
foreign law, even when those laws may achieve the same results 
sought by the Commission.\152\
---------------------------------------------------------------------------

    \152\ The Proposed Guidance correctly cites judicial and 
executive branch precedent and guidance addressing the application 
of international law and comity concepts in determining the 
extraterritorial applicability of federal statutes. See section 
III.A. of this Proposed Guidance. These concepts are found in 
sections 403(1) and (2) of the Third Restatement of Foreign 
Relations Law. See Restatement (Third) of Foreign Relations Law of 
the United States Sec. Sec.  403(1), 403(2) (1986).
---------------------------------------------------------------------------

    I strongly believe that the Commission instead must honor these 
principles in order to respect the legitimate interests of other 
sovereign nations. This approach would serve to complement, and not 
limit, the ability of the Commission to effectively regulate swaps 
markets. The Commission does not have the resources to register and 
regulate all market participants and swaps activities. By relying on 
comparable foreign regulatory regimes to address the trading 
activities of foreign market participants, the Commission could 
better allocate resources domestically in a more effective manner.

iv. The Commission Should Engage in Real and Meaningful Cooperation 
With Foreign and Domestic Regulators

    The Proposed Guidance references a series of well-known large 
financial institution failures--such as Lehman Brothers and Long 
Term Capital Management--to support the Commission's over-expansive 
interpretation and application of Title VII of the Dodd-Frank Act. I 
agree that those failures had a detrimental effect on the U.S. 
economy. We must not forget, however, that the swaps

[[Page 41241]]

markets are truly global and the Commission's swaps regulations will 
not operate in a vacuum. For that reason, the Commission should 
consider the interaction of its swaps regulations with the 
regulations of other jurisdictions, all of which have legitimate 
regulatory interests in the trading of swaps by multinational 
organizations. Thus, the Commission's swaps regulation should be 
concordant with foreign swaps regulations in order to avoid 
duplication, conflict and unnecessary uncertainty.
    In light of today's highly interdependent, global financial 
markets, the Commission needs to engage in real cooperation with 
foreign regulators and to coordinate its swaps regulations with the 
regulations of other sovereign nations. Concepts of comparability 
and mutual recognition are essential.
    The Commission should follow the example of international 
cooperation and coordination seen in the efforts of the Basel 
Commission on Banking Supervision (``BCBS'') and the International 
Organization of Securities Commissions (``IOSCO'') in developing 
harmonized international standards for the margining of uncleared 
swaps. BCBS and IOSCO plans to publish a consultation paper 
outlining these standards. Notwithstanding the Commission's own 
efforts to propose rules for the margining of uncleared swaps for 
swap dealers and MSPs,\153\ the Commission plans to consider the 
final policy recommendations set forth by BCBS and IOSCO when 
adopting the Commission's final rules for the margining of uncleared 
swaps and may adapt those final rules to conform with BCBS and 
IOSCO's final policy recommendations. The Commission should follow 
the lead of BCBS and IOSCO in harmonizing many of its other rules. 
In my view, either the G20 or another international body or 
consortium of nations could act as a springboard for the 
coordination of swaps regulation.\154\
---------------------------------------------------------------------------

    \153\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, 76 Fed. Reg. 27802 (May 12, 2011).
    \154\ On June 18-19, 2012, the leaders of the G20 convened in 
Los Cabos, Mexico to reaffirm their commitments with respect to the 
regulation of the over-the-counter (``OTC'') derivatives markets. 
Specifically, the G20 leaders reaffirmed their commitment that all 
standardized OTC derivatives be traded on exchanges or electronic 
platforms and be centrally cleared by the end 2012. See the G20 
Declaration (June 2012), para. 39, p. 7, at: http://www.g20.org/images/stories/docs/g20/conclu/G20_Leaders_Declaration_2012.pdf.
    The Commission should follow the spirit of the G20's cooperative 
efforts by working with foreign regulators to determine the 
applicability of its swaps regulations to cross-border swaps.
---------------------------------------------------------------------------

    On June 22, 2012, European Union Commissioner Michel Barnier 
echoed this position in a statement to the Financial Times.\155\ Mr. 
Barnier made clear that effective international regulation involves 
regulators coordinating their efforts to implement mandatory 
clearing, trading and reporting of over-the-counter derivatives. A 
coordinated approach would ensure that swaps do not evade 
regulation. Mr. Barnier also made clear that regulatory regimes that 
assert jurisdiction over trading activity already within the 
jurisdiction of another competent regulator is both unnecessary and 
costly. I agree with Mr. Barnier's view that our goal as regulators 
should be to establish regulatory regimes that prevent swaps from 
slipping through the cracks without applying our laws to activity 
that is better regulated by our trusted colleagues abroad.
---------------------------------------------------------------------------

    \155\ See statement by Commissioner Michel Barnier of the 
European Union, Financial Times, June 22, 2012 (``Where the rules of 
another country are comparable and consistent with the objectives of 
U.S. law, it is reasonable to expect U.S. authorities to rely on 
those rules and recognize activities regulated under them as 
compliant. We in the EU can do exactly the same * * * This is 
reasonable because it accepts legal boundaries and the need for 
regulators to trust and rely on each other. It is effective because 
it achieves our common objective of mandatory clearing, trading and 
reporting of OTC derivatives: no trade will escape the regulation. 
It is efficient because it avoids subjecting the same trades and 
businesses to two different sets of rules simultaneously and 
expensively.'').
---------------------------------------------------------------------------

    Unfortunately, the Proposed Guidance overreaches in many 
respects and, as a result, steps on the toes of other sovereign 
nations. Today's Proposed Guidance will likely provoke these nations 
to develop strict swaps rules in retaliation that unfairly and 
unnecessarily burden U.S. firms.\156\
---------------------------------------------------------------------------

    \156\ Some jurisdictions have provisions that are similar to CEA 
section 2(i). For example, Article 13 of European Market 
Infrastructure Regulation (``EMIR'') provides that the European 
Securities and Markets Authority must prescribe technical standards 
specifying the contracts that are considered to have a direct, 
substantial and foreseeable effect on the European Union, or in 
cases where it is necessary or appropriate to prevent the evasion of 
any general applicability provisions in EMIR. See Regulation of the 
European Parliament and of the Council on OTC Derivatives, Central 
Counterparties and Trade Repositories, European Market 
Infrastructure Regulation (Mar. 29. 2012), available at: http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm. The Commission's overreaching interpretation of CEA section 
2(i) may inspire ESMA and other regulators to interpret their 
provisions in a similar manner.
---------------------------------------------------------------------------

    Interestingly, we not only fail to harmonize internationally, we 
also fail to harmonize domestically. In other words, I believe that 
the Commission should take a page from the Securities and Exchange 
Commission's (``SEC'') playbook regarding implementation and the 
application of swaps requirements to cross-border activities. 
Recently, the SEC issued a statement of general policy (the ``SEC's 
Statement'') on the sequencing of compliance dates for final rules 
applicable to the security-based swaps market.\157\ The SEC's 
Statement presents a commonsense sequencing of the compliance dates 
for the SEC's final rules implementing the provisions of Title VII 
of the Dodd-Frank Act to domestic and cross-border swaps activities.
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    \157\ See Statement of General Policy on the Sequencing of the 
Compliance Dates for Final Rules Applicable to Security-Based Swaps 
Adopted Pursuant to the Securities Exchange Act of 1934 and the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, to be 
published under 17 CFR Part 240 (June 11, 2012), available at: 
http://www.sec.gov/rules/policy/2012/34-67177.pdf.
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    In stark contrast, the Commission is engaging in what amounts to 
high-frequency regulation. I am very critical of this regulatory 
approach because it generally results in regulatory uncertainty and 
unintended, adverse consequences. In my view, failure to achieve 
real and meaningful harmonization of the implementation and 
application of swaps and security-based swaps rules will result in 
inconsistencies and added compliance challenges and costs for market 
participants who trade in both markets.

v. Interpretive Guidance or an Interpretive Rule?

    Several times while reading drafts of the Proposed Guidance, I 
had to stop, put it down, and recall that I was reading the 
Commission's proposed interpretation of CEA section 2(i)--not a 
prescriptive rule. Although the Commission has taken great pains to 
clarify that it is publishing guidance and a policy statement 
regarding the cross-border application of the swaps provisions of 
the CEA, certain elements of the Proposed Guidance are written 
similar to legislative or interpretive rules instead of interpretive 
guidance. For example, the Proposed Guidance states that subsequent 
to registration with the Commission:
    [T]he Commission expects that a non-U.S. swap dealer or non-U.S. 
MSP would notify the Commission of any material changes to 
information submitted in support of a comparability finding 
(including, but not limited to, changes in the relevant supervisory 
or regulatory regime) as the Commission's comparability 
determination may no longer be valid.\158\
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    \158\ Section IV.A.2 of this Proposed Guidance.

The Commission's artful use of the terms ``expect'' and 
``expectation'' in the Proposed Guidance does not disguise the fact 
that it is requiring applicants to satisfy significant ongoing 
monitoring and compliance obligations in order to maintain its 
comparability finding. If the Commission wanted to require a non-
U.S. swap dealer or non-U.S. MSP applicant to submit these 
additional documents in connection with such applicant's ongoing 
registration-related obligations, the Commission should have 
included these requirements in the swap dealer and MSP registration 
rulemaking, which the Commission finalized in January of this 
year.\159\ Instead, the Commission is issuing today's Proposed 
Guidance in a manner that is outside of the requirements set forth 
in the Administrative Procedure Act.\160\
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    \159\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613 (Jan. 19, 2012).
    \160\ See 5 U.S.C. 551 et seq.
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The Proposed Order

    Notwithstanding my general concerns with the Proposed Guidance, 
I believe that the Commission's Proposed Order appropriately 
provides both U.S. and foreign firms with transition periods in 
which to comply with the Commission's interpretation of CEA section 
2(i). As noted above, the Proposed Order would permit foreign swap 
dealer and MSP registrants to delay compliance with certain entity-
level requirements and transaction-level requirements under Title 
VII of the Dodd-Frank Act pending the adoption of the Commission's 
final

[[Page 41242]]

interpretive guidance regarding section 2(i). My concurrence today 
comes after several days of negotiations with my fellow 
commissioners. I am relieved that we are protecting the 
competitiveness of U.S. firms in the Proposed Order.\161\ Although I 
am generally supportive of the Proposed Order, I do have a couple of 
more pragmatic concerns regarding the manner in which foreign swap 
dealers and MSPs will comply with the Commission's registration 
requirements.
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    \161\ Under the Proposed Order, U.S. swap dealers and MSPs will 
only be required to register with the Commission and to meet the 
requirements under parts 20 (large swap trader reporting) and 45 
(swap data recordkeeping and reporting) until December 31, 2012 
before other entity-level requirements will become effective.
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    First, I believe the Commission should tie the expiration of 
this relief to the adoption of a final exemptive order. Currently, 
the Proposed Order unjustifiably ties the expiration of the relief 
to the date on which the Proposed Order is published in the Federal 
Register. The Proposed Order's current expiration does not make 
sense in light of the fact that potential registrants will not know 
the contours of the final relief until the Commission approves a 
final exemptive order. If we do not tie the expiration of relief to 
the publication of the final exemptive order, are we truly providing 
adequate notice and a period of time in which registrants can 
comply?
    Second, the Proposed Order should at least include questions 
regarding how the Commission proposes to address practical 
considerations regarding the registration of foreign swap dealers 
and MSPs. The Commission should set out its preliminary thinking 
regarding how these foreign swap dealers and MSPs will register 
their associated persons and principals, in addition to addressing 
concerns regarding the transfer of, and withdrawal from, Commission 
registration.
    I have included a few questions at the end of my statement to 
address these practical concerns.

Do Not Ignore the Significant Cost Implications

    I would like to make one closing but important point regarding 
the potential costs of today's Proposed Guidance. While I understand 
that the CEA only requires the Commission to consider the costs and 
benefits of its regulations and orders--not interpretive guidance--
the Proposed Guidance, once finalized will result in significant 
costs to the swaps industry. The implications of the Commission's 
adoption of interpretive guidance on cross-border swaps activities 
will be nothing at which to laugh. Firms will incur significant 
operational, legal and administrative expenses in connection with 
the registration and ongoing compliance with the Commission's swaps 
regulations. Not to mention, many firms that operate through 
branches may feel compelled to convert into, and separately 
capitalize, affiliates in order to limit the impact of the 
Commission's interpretation.
    Accordingly, I encourage the Commission to prepare a report 
separate from its adoption of the Proposed Guidance, which analyzes 
the costs attributable to the breadth of the Commission's new 
authority under CEA section 2(i). This report will help inform 
market participants who seek guidance as to the potential costs of 
trading swaps in the United States. More importantly, the report 
will help inform the Commission in connection with the issuance of 
future rulemakings under Title VII of the Dodd-Frank Act.

Conclusion

    I am relieved that the Commission is finally issuing today's 
proposals. Commission staff has spent well over one year preparing 
the proposals before us today. The publication of the Commission's 
interpretation of CEA section 2(i) is crucial. I hope that the 
release of these proposals will enable market participants to 
determine how the international rules and expansive international 
oversight of the Dodd-Frank Act might impact their activities in the 
United States and internationally. I want to ensure that U.S. firms 
are placed on a fair and competitive playing field that offers no 
opportunity for regulatory arbitrage. I am mindful that a seamless 
regulatory net can only be achieved through international 
cooperation and coordination.
    In summary, I believe the Commission's final interpretive 
guidance should reflect: (1) Principles of international law and 
comity; (2) a clear understanding of the implications of the 
Proposed Guidance so that the Commission can make an informed 
decision regarding the various policy alternatives; and (3) parity 
to ensure that U.S. firms are not unfairly disadvantaged vis-
[agrave]-vis their foreign competitors. I fear that if we adopt the 
Proposed Guidance as final, the Commission will take an 
imperialistic view of the swaps market. I also remain concerned 
regarding the Commission's shaky legal analysis.
    I look forward to reviewing the myriad of comments submitted in 
response to today's proposals. I implore market participants, as 
well as domestic and foreign regulators, to share their views and 
let us know how to harmonize our efforts so that we collectively can 
develop an internationally consistent and complementary approach to 
address the cross-border regulation of the swaps markets.

 Questions

    1. Please share your views regarding the Commission's proposed 
effective date for the relief set forth in the Proposed Order. 
Should the expiration of the effective date be extended or 
shortened?
    2. Should the Commission permit swap dealer and MSP registrants 
to conditionally de-register following the expiration of the 
effective date of the Proposed Order? If so, under what conditions 
should the Commission allow de-registration?
    3. Should the Commission permit swap dealer and MSP registrants 
to transfer their registration to a majority-owned affiliate or 
subsidiary? If so, under what circumstances should the Commission 
allow such a transfer?

[FR Doc. 2012-16496 Filed 7-11-12; 8:45 am]
BILLING CODE 6351-01-P