[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78878-78890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30981]


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COMMODITY FUTURES TRADING COMMISSION


Comparability Determination for the European Union: Certain 
Transaction-Level Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Comparability Determination for Certain Requirements 
under the European Market Infrastructure Regulation.

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SUMMARY: The following is the analysis and determination of the 
Commodity Futures Trading Commission (``Commission'') regarding certain 
parts of a joint request by the European Commission (``EC'') and the 
European Securities and Markets Authority (``ESMA'') that the 
Commission determine that laws and regulations applicable in the 
European Union (``EU'') provide a sufficient basis for an affirmative 
finding of comparability with respect to the following regulatory 
obligations applicable to swap dealers (``SDs'') and major swap 
participants (``MSPs'') registered with the Commission: (i) swap 
trading relationship documentation; (ii) swap portfolio reconciliation 
and compression; (iii) trade confirmation; and (iv) daily trading 
records (collectively, the ``Business Conduct Requirements'').

DATES: Effective Date: This determination will become effective 
immediately upon publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977, 
[email protected], Frank Fisanich, Chief Counsel, 202-418-5949, 
[email protected], and Ellie Jester, Special Counsel, 202-418-5874, 
[email protected], Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On July 26, 2013, the Commission published in the Federal Register 
its ``Interpretive Guidance and Policy Statement Regarding Compliance 
with Certain Swap Regulations'' (``Guidance'').\1\ In the Guidance, the 
Commission set forth its interpretation of the manner in which it 
believes that section 2(i) of the Commodity Exchange Act (``CEA'') 
applies Title VII's swap provisions to activities outside the U.S. and 
informed the public of some of the policies that it expects to follow, 
generally speaking, in applying Title VII and certain Commission 
regulations in contexts covered by section 2(i). Among other matters, 
the Guidance generally described the policy and procedural framework 
under which the Commission would consider a substituted compliance 
program with respect to Commission regulations applicable to entities 
located outside the U.S. Specifically, the Commission addressed a 
recognition program where compliance with a comparable regulatory 
requirement of a foreign jurisdiction would serve as a reasonable 
substitute for compliance with the attendant requirements of the CEA 
and the Commission's regulations promulgated thereunder.
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    \1\ 78 FR 45292 (July 26, 2013). The Commission originally 
published proposed and further proposed guidance on July 12, 2012 
and January 7, 2013, respectively. See Cross-Border Application of 
Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 
(July 12, 2012) and Further Proposed Guidance Regarding Compliance 
with Certain Swap Regulations,78 FR 909 (Jan. 7, 2013).
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    In addition to the Guidance, on July 22, 2013, the Commission 
issued the

[[Page 78879]]

Exemptive Order Regarding Compliance with Certain Swap Regulations (the 
``Exemptive Order'').\2\ Among other things, the Exemptive Order 
provided time for the Commission to consider substituted compliance 
with respect to six jurisdictions where non-U.S. SDs are currently 
organized. In this regard, the Exemptive Order generally provided non-
U.S. SDs and MSPs (and foreign branches of U.S. SDs and MSPs) in the 
six jurisdictions with conditional relief from certain requirements of 
Commission regulations (those referred to as ``Transaction-Level 
Requirements'' in the Guidance) until the earlier of December 21, 2013, 
or 30 days following the issuance of a substituted compliance 
determination.\3\ However, the Commission provided only transitional 
relief from the real-time public reporting requirements under part 43 
of the Commission's regulations until September 30, 2013, stating that 
``it would not be in the public interest to further delay reporting 
under part 43 . . . .'' \4\ Similarly, the Commission provided 
transitional relief only until October 10, 2013, from the clearing and 
swap processing requirements (as described in the Guidance), stating 
that, ``[b]ecause SDs and MSPs have been committed to clearing their 
[credit default swaps] and interest rate swaps for many years, and 
indeed have been voluntarily clearing for many years, any further delay 
of the Commission's clearing requirement is unwarranted.'' \5\ The 
Commission did not make any comparability determination with respect to 
clearing and swap processing prior to October 10, 2013, or real-time 
public reporting prior to September 30, 2013.
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    \2\ 78 FR 43785 (July 22, 2013).
    \3\ The Transaction-Level Requirements under the Exemptive Order 
consist of 17 CFR 37.12, 38.11, 23.202, 23.205, 23.400-451, 23.501, 
23.502, 23.503, 23.504, 23.505, 23.506, 23.610, and parts 43 and 50 
of the Commission's regulations.
    \4\ See id. at 43789.
    \5\ See id. at 43790.
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    On May 7, 2013, the EC and ESMA (collectively, the ``applicant'') 
submitted a request that the Commission determine that laws and 
regulations applicable in the EU provide a sufficient basis for an 
affirmative finding of comparability with respect to certain 
Transaction-Level Requirements, including the Business Conduct 
Requirements.\6\ The applicant provided Commission staff with an 
updated submission on August 6, 2013. On November 11, 2013, the 
application was further supplemented with corrections and additional 
materials. The following is the Commission's analysis and determination 
regarding the Business Conduct Requirements, as detailed below.
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    \6\ For purposes of this notice, the Business Conduct 
Requirements consist of 17 CFR 23.202, 23.501, 23.502, 23.503, and 
23.504.
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    In addition to the Business Conduct Requirements described below, 
the applicant also requested a comparability determination with respect 
to law and regulations applicable in the EU governing (1) clearing and 
swap processing;\7\ and (2) real-time public reporting. The Commission 
declines to take up the request for such comparability determination at 
this time due to the Commission's view that there are not laws or 
regulations applicable in the EU to compare with the requirements of 
the Commission's regulations on mandatory clearing and swap processing, 
and real-time public reporting. The Commission may address these 
requests in a separate notice at a later date in consequence of further 
developments in the law and regulations applicable in the EU.
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    \7\ According to the most recent Financial Stability Board 
Progress Report, the EU is scheduled to have a clearing requirement 
by Q3 2014. That report also states that the EU is scheduled to 
begin authorizing CCPs in Q4 2013, issue its first clearing 
determinations in Q1 2014, and adopt central clearing Regulatory 
Technical Standards (RTS) in Q2 2014 (OTC Derivatives Working Group, 
``OTC Derivatives Market Reforms: Sixth Progress Report on 
Implementation,'' Financial Stability Board, Sept. 2, 2013). Under 
EMIR, ESMA would determine which swaps would be subject to mandatory 
clearing according to provisions that are comparable to those set 
forth in Commission regulation 39.5(b). A clearing requirement would 
apply to financial entities, as well as to non-financial entities 
whose swap activity exceeds a certain threshold. ESMA's ``Discussion 
Paper, The Clearing Obligation under EMIR'' (July 2013) describes 
the standardized swaps that could be subject to a clearing 
requirement. Such swaps include the interest rate and credit default 
swaps covered by the Commission's clearing requirement (Commission 
regulation 50.4), other credit default swap indices, non-deliverable 
forwards that may be included in a Commission clearing requirement, 
and many other swaps including OTC equity index derivatives cleared 
only through European central counterparties, some of which are not 
Commission-registered derivatives clearing organizations.
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II. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act\8\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework 
for swaps.
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    \8\ Public Law 111-203, 124 Stat. 1376 (2016).
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    Section 722(d) of the Dodd-Frank Act amended the CEA by adding 
section 2(i), which provides that the swap provisions of the CEA 
(including any CEA rules or regulations) apply to cross-border 
activities when certain conditions are met, namely, when such 
activities have a ``direct and significant connection with activities 
in, or effect on, commerce of the United States'' or when they 
contravene Commission rules or regulations as are necessary or 
appropriate to prevent evasion of the swap provisions of the CEA 
enacted under Title VII of the Dodd-Frank Act.\9\
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    \9\ 7 U.S.C. 2(i).
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    In the three years since its enactment, the Commission has 
finalized 68 rules and orders to implement Title VII of the Dodd-Frank 
Act. The finalized rules include those promulgated under section 4s of 
the CEA, which address registration of SDs and MSPs and other 
substantive requirements applicable to SDs and MSPs. With few 
exceptions, the delayed compliance dates for the Commission's 
regulations implementing such section 4s requirements applicable to SDs 
and MSPs have passed and new SDs and MSPs are now required to be in 
full compliance with such regulations upon registration with the 
Commission.\10\ Notably, the requirements under Title VII of the Dodd-
Frank Act related to SDs and MSPs by their terms apply to all 
registered SDs and MSPs, irrespective of where they are located, albeit 
subject to the limitations of CEA section 2(i).
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    \10\ The compliance dates are summarized on the Compliance Dates 
page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)
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    To provide guidance as to the Commission's views regarding the 
scope of the cross-border application of Title VII of the Dodd-Frank 
Act, the Commission set forth in the Guidance its interpretation of the 
manner in which it believes that Title VII's swap provisions apply to 
activities outside the U.S. pursuant to section 2(i) of the CEA. Among 
other matters, the Guidance generally describes the policy and 
procedural framework under which the Commission would consider a 
substituted compliance program with respect to Commission regulations 
applicable to entities located outside the U.S. Specifically, the 
Commission established a recognition program where compliance with a 
comparable regulatory requirement of a foreign jurisdiction would serve 
as a reasonable substitute for compliance with the attendant 
requirements of the CEA and the Commission's regulations. With respect 
to the standards forming the basis for any determination of 
comparability (``comparability determination'' or ``comparability 
finding''), the Commission stated:

    In evaluating whether a particular category of foreign 
regulatory requirement(s) is comparable and comprehensive to the 
applicable requirement(s) under the CEA and Commission regulations, 
the Commission will take into consideration all relevant

[[Page 78880]]

factors, including but not limited to, the comprehensiveness of 
those requirement(s), the scope and objectives of the relevant 
regulatory requirement(s), the comprehensiveness of the foreign 
regulator's supervisory compliance program, as well as the home 
jurisdiction's authority to support and enforce its oversight of the 
registrant. In this context, comparable does not necessarily mean 
identical. Rather, the Commission would evaluate whether the home 
jurisdiction's regulatory requirement is comparable to and as 
comprehensive as the corresponding U.S. regulatory 
requirement(s).\11\

    \11\ 78 FR 45342-45345.
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    Upon a comparability finding, consistent with CEA section 2(i) and 
comity principles, the Commission's policy generally is that eligible 
entities may comply with a substituted compliance regime subject to any 
conditions the Commission places on its finding, and subject to the 
Commission's retention of its examination authority and its enforcement 
authority.\12\
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    \12\ See the Guidance, 78 FR 45342-44.
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    In this regard, the Commission notes that a comparability 
determination cannot be premised on whether an SD or MSP must disclose 
comprehensive information to its regulator in its home jurisdiction, 
but rather on whether information relevant to the Commission's 
oversight of an SD or MSP would be directly available to the Commission 
and any U.S. prudential regulator of the SD or MSP.\13\ The 
Commission's direct access to the books and records required to be 
maintained by an SD or MSP registered with the Commission is a core 
requirement of the CEA\14\ and the Commission's regulations,\15\ and is 
a condition to registration.\16\
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    \13\ Under Sec. Sec.  23.203 and 23.606, all records required by 
the CEA and the Commission's regulations to be maintained by a 
registered SD or MSP shall be maintained in accordance with 
Commission regulation 1.31 and shall be open for inspection by 
representatives of the Commission, the United States Department of 
Justice, or any applicable prudential regulator.
    In its Final Exemptive Order Regarding Compliance with Certain 
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted 
that an applicant for registration as an SD or MSP must file a Form 
7-R with the National Futures Association and that Form 7-R was 
being modified at that time to address existing blocking, privacy, 
or secrecy laws of foreign jurisdictions that applied to the books 
and records of SDs and MSPs acting in those jurisdictions. See id. 
at 871-72 n. 107. The modifications to Form 7-R were a temporary 
measure intended to allow SDs and MSPs to apply for registration in 
a timely manner in recognition of the existence of the blocking, 
privacy, and secrecy laws. In the Guidance, the Commission clarified 
that the change to Form 7-R impacts the registration application 
only and does not modify the Commission's authority under the CEA 
and its regulations to access records held by registered SDs and 
MSPs. Commission access to a registrant's books and records is a 
fundamental regulatory tool necessary to properly monitor and 
examine each registrant's compliance with the CEA and the 
regulations adopted pursuant thereto. The Commission has maintained 
an ongoing dialogue on a bilateral and multilateral basis with 
foreign regulators and with registrants to address books and records 
access issues and may consider appropriate measures where requested 
to do so.
    \14\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the 
CEA.
    \15\ See e.g., Sec. Sec.  23.203(b) and 23.606.
    \16\ See supra note 13.
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III. Regulation of SDs and MSPs in the EU

    On May 7, 2013, the EC and ESMA submitted a request that the 
Commission assess the comparability of laws and regulations applicable 
in the EU with the requirements of the CEA and the Commission's 
regulations, and that a determination be made on the extent to which 
SDs and MSPs in the EU can rely on substituted compliance.\17\ The 
applicant provided Commission staff with an updated submission on 
August 6, 2013. On November 11, 2013, the application was further 
supplemented with corrections and additional materials.
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    \17\ On July 11, 2013, the Commission staff issued a no-action 
letter related to EU rules on risk mitigation. See No-Action Relief 
for Registered Swap Dealers and Major Swap Participants from Certain 
Requirements under Subpart I of Part 23 of Commission Regulations in 
Connection with Uncleared Swaps Subject to Risk Mitigation 
Techniques under EMIR, CFTC Letter No. 13-45 (July, 11, 2013) 
(``Risk Mitigation Letter''). The Commission staff found that the 
Commission and the EU have essentially identical rules in important 
areas of risk mitigation for the largest counterparty swap market 
participants. Specifically, the Commission staff determined that 
under EMIR, the EU has adopted risk mitigation rules that are 
essentially identical to certain provisions of the Commission's 
business conduct standards for SDs and MSPs. In areas such as 
confirmation, portfolio reconciliation, portfolio compression, 
valuation, and dispute resolution, the Commission staff found that 
the respective regimes are essentially identical. The Commission 
staff determined that where a swap/OTC derivative is subject to 
concurrent jurisdiction under US and EU risk mitigation rules, 
compliance under EMIR will achieve compliance with the relevant 
Commission rules because they are essentially identical. The 
Commission's analysis of the subject submission is informed by the 
staff's finding in connection with the Risk Mitigation Letter but 
the Commission notes that the standards applied in that context are 
distinguishable from the ``comparable and comprehensive'' standards 
applied in the instant comparability determination.
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    As represented to the Commission by the applicant, swap activities 
in the EU member states is governed primarily by the European Market 
Infrastructure Regulation (``EMIR'').\18\
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    \18\ EMIR: Regulation (EU) No 648/2012 of the European 
Parliament and of the Council of 4 July 2012 on OTC derivatives, 
central counterparties and trade repositories. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF
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    EMIR and the Regulatory Technical Standards (``RTS'') are 
regulations with immediate, binding, and direct effect in all EU member 
states (i.e., no transposition into domestic law is required). EMIR 
entered into force on August 16, 2012.
    Commission Delegated Regulation (EU) No 149/2013 of December 19, 
2012 supplementing Regulation (EU) No 648/2012 of the European 
Parliament and of the Council with regard to regulatory technical 
standards on indirect clearing arrangements, the clearing obligation, 
the public register, access to a trading venue, non-financial 
counterparties, and risk mitigation techniques for OTC derivatives 
contracts not cleared by a central counterparty (``CCP'') (``OTC RTS'') 
entered into force on March 15, 2013.
    It is helpful to note certain terminology used in EMIR:
     Financial counterparties (``FCs''), Article 2(8) EMIR: all 
types of counterparties established in the EU--regardless of size or 
activity--that are financial in nature and authorized as such: credit 
institutions, insurers/reinsurers, pension funds, and hedge funds.
     Non-financial counterparties (``NFCs''), Article 2(9) 
EMIR: all types of counterparties established in the EU that do not 
meet the definition of an FC (e.g., corporates, certain SPVs).
     Non-financial counterparties above the clearing threshold 
(``NFCs+''), Non-financial counterparties below the clearing threshold 
(``NFCs-''):
     The clearing thresholds are calculated at the group level 
and are as follows:
    (a) EUR 1 billion in gross notional value for OTC credit derivative 
contracts;
    (b) EUR 1 billion in gross notional value for OTC equity derivative 
contracts;
    (c) EUR 3 billion in gross notional value for OTC interest rate 
derivative contracts;
    (d) EUR 3 billion in gross notional value for OTC foreign exchange 
derivative contracts; and
    (e) EUR 3 billion in gross notional value for OTC commodity 
derivative contracts and other OTC derivative contracts not provided 
for under points (a) to (d).
    However, transactions objectively measurable as reducing risks 
directly relating to the commercial activity or treasury financing 
activity of the NFC or its group (i.e., hedges) do not count towards 
the clearing threshold.\19\ Under the hedging definition both portfolio 
and macro hedging are allowed.
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    \19\ See EMIR Article 10 and RTS Article 10.
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    Certain requirements of EMIR and the RTS are subject to delayed 
implementation. EMIR Article 11 and

[[Page 78881]]

RTS Articles 12 to 17 are subject to a phase-in period:
     Timely Confirmation: Staggered phase-in according to 
product type.
     Portfolio Reconciliation, Compression, and Dispute 
Resolution: Requirements operational for all market participants 
subject to them (different provisions apply to FC, NFC+ and NFC-) as of 
September 15, 2013.
     Daily mark-to-market and mark-to-model: Applies to FC and 
NFC+ as of March 15, 2013.
    In addition, as represented to the Commission by the applicant, 
swap activities in the EU are also governed by a number of regulatory 
requirements other than EMIR.
    Markets in Financial Instruments Directive (``MiFID)'':\20\ MiFID 
is a directive and in accordance with the Treaty on the Functioning of 
the European Union, all member states of the EU are legally bound to 
implement the provisions of MiFID by November 1, 2007, by transposing 
them into their national laws. MiFID applies in particular to 
investment firms, which comprise any legal person whose regular 
occupation or business is the provision of one or more investment 
services to third parties and/or the performance of one or more 
investment activities on a professional basis. Investment services and 
activities means any of the services and activities listed in Section A 
of Annex I of MiFID relating to any of the instruments listed in 
Section C of Annex I of MiFID. Section C of Annex 1 refers explicitly 
to swaps as well as ``other derivative financial instruments.''
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    \20\ Directive 2004/39/EC and the relevant implementing measures 
(Directive 2006/73/EC and Regulation 1287/2006). http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0039:EN:NOT
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    Due to the requirement that each EU member state transpose MiFID 
into its national law, the comparability determinations in this notice 
are based on the representations of the applicant to the Commission 
that (i) each member state of the EU where an SD or MSP would seek to 
rely on substituted compliance on the basis of the comparability of the 
MiFID standards has completed the process of transposing MiFID into its 
national law;\21\ (ii) such national laws have transposed MiFID without 
change in any aspect that is material for a comparability determination 
contained herein; and (iii) such transposed law is in full force and 
effect as of the time that any SD or MSP seeks to rely on a relevant 
comparability determination contained herein. The Commission notes that 
to the extent that any of the foregoing representations are incorrect, 
an affected comparability determination will not be valid.\22\
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    \21\ See the Web site of the European Commission for 
confirmation of the transposition of MiFID into the national law of 
each member state, available here: http://ec.europa.eu/internal_market/securities/docs/transposition/table_en.pdf. Note that the 
issue of partial implementation in the Netherlands was resolved in 
2008, http://ec.europa.eu/eu_law/eulaw/decisions/dec_08_05_06.htm.The Commission notes that the EC has certified to the 
Commission that each member state in which a registered SD or MSP is 
organized has completed the transposition process (e.g., Ireland, 
UK, France, Spain, and Germany).
    \22\ Because the applicant's request and the Commission's 
determinations herein are based on the comparability of EU 
requirements applicable to entities subject to EMIR and MiFID, an SD 
or MSP that is not subject to the requirements of EMIR or MiFID upon 
which the Commission bases its determinations, may not be able to 
rely on the Commission's comparability determinations herein. The 
applicant has noted for the Commission that the concept of an MSP is 
not explicitly mirrored in EU legislation and so it cannot be 
confirmed that MSPs would always be covered by EMIR and MiFID. 
However, the applicant states that the definition of an ``investment 
firm'' under MiFID is considerably wider than that of an SD, and 
thus MSP's should, in most cases, be caught within the definition of 
``investment firm.''
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    In addition to MiFID, the applicant noted that there are a number 
of proposed laws and regulations that, when implemented, would affect 
the regulation of SDs and MSPs in the EU.\23\
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    \23\ The applicant provided information regarding MiFID II and 
the Markets in Financial Instruments Regulation (``MiFIR''),  http://ec.europa.eu/internal_market/securities/isd/mifid/index_en.htm, 
stating that these two proposals are part of the legislative package 
for the review of MiFID, and that the legislative process may be 
concluded with the adoption of the final political agreement by the 
end of 2013. The applicant further stated that an additional 18 to 
24 months will be needed to adopt implementing measures, with the 
overall package to be applied by the end of 2015.
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IV. Comparable and Comprehensiveness Standard

    The Commission's comparability analysis will be based on a 
comparison of specific foreign requirements against the specific 
related CEA provisions and Commission regulations as categorized and 
described in the Guidance. As explained in the Guidance, within the 
framework of CEA section 2(i) and principles of international comity, 
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as 
a whole.\24\ In making its comparability determinations, the Commission 
may include conditions that take into account timing and other issues 
related to coordinating the implementation of reform efforts across 
jurisdictions.\25\
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    \24\ 78 FR 45343.
    \25\ 78 FR 45343.
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    In evaluating whether a particular category of foreign regulatory 
requirement(s) is comparable and comprehensive to the corollary 
requirement(s) under the CEA and Commission regulations, the Commission 
will take into consideration all relevant factors, including, but not 
limited to:
     The comprehensiveness of those requirement(s),
     The scope and objectives of the relevant regulatory 
requirement(s),
     The comprehensiveness of the foreign regulator's 
supervisory compliance program, and
     The home jurisdiction's authority to support and enforce 
its oversight of the registrant.\26\
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    \26\ 78 FR 45343.
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    In making a comparability determination, the Commission takes an 
``outcome-based'' approach. An ``outcome-based'' approach means that 
when evaluating whether a foreign jurisdiction's regulatory 
requirements are comparable to, and as comprehensive as, the corollary 
areas of the CEA and Commission regulations, the Commission ultimately 
focuses on regulatory outcomes (i.e., the home jurisdiction's 
requirements do not have to be identical).\27\ This approach recognizes 
that foreign regulatory systems differ and their approaches vary and 
may differ from how the Commission chose to address an issue, but that 
the foreign jurisdiction's regulatory requirements nonetheless achieve 
the regulatory outcome sought to be achieved by a certain provision of 
the CEA or Commission regulation.
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    \27\ 78 FR 45343. The Commission's substituted compliance 
program would generally be available for swap data repository 
reporting (``SDR Reporting''), as outlined in the Guidance, only if 
the Commission has direct access to all of the data elements that 
are reported to a foreign trade repository pursuant to the 
substituted compliance program. Thus, direct access to swap data is 
a threshold matter to be addressed in a comparability evaluation for 
SDR Reporting. Moreover, the Commission explains in the Guidance 
that, due to its technical nature, a comparability evaluation for 
SDR Reporting ``will generally entail a detailed comparison and 
technical analysis.'' A more particularized analysis will generally 
be necessary to determine whether data stored in a foreign trade 
repository provides for effective Commission use, in furtherance of 
the regulatory purposes of the Dodd-Frank Act. See 78 FR 45345.
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    In doing its comparability analysis, the Commission may determine 
that no comparability determination can be made\28\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to 
its foreign branches, or non-registrant, to the extent

[[Page 78882]]

applicable under the Guidance, may be required to comply with the CEA 
and Commission regulations.
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    \28\ A finding of comparability may not be possible for a number 
of reasons, including the fact that the foreign jurisdiction has not 
yet implemented or finalized particular requirements.
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    The starting point in the Commission's analysis is a consideration 
of the regulatory objectives of the foreign jurisdiction's regulation 
of swaps and swap market participants. As stated in the Guidance, 
jurisdictions may not have swap specific regulations in some areas, and 
instead have regulatory or supervisory regimes that achieve comparable 
and comprehensive regulation to the Dodd-Frank Act requirements, but on 
a more general, entity-wide, or prudential, basis.\29\ In addition, 
portions of a foreign regulatory regime may have similar regulatory 
objectives, but the means by which these objectives are achieved with 
respect to swap market activities may not be clearly defined, or may 
not expressly include specific regulatory elements that the Commission 
concludes are critical to achieving the regulatory objectives or 
outcomes required under the CEA and the Commission's regulations. In 
these circumstances, the Commission will work with the regulators and 
registrants in these jurisdictions to consider alternative approaches 
that may result in a determination that substituted compliance 
applies.\30\
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    \29\ 78 FR 45343.
    \30\ As explained in the Guidance, such ``approaches used will 
vary depending on the circumstances relevant to each jurisdiction. 
One example would include coordinating with the foreign regulators 
in developing appropriate regulatory changes or new regulations, 
particularly where changes or new regulations already are being 
considered or proposed by the foreign regulators or legislative 
bodies. As another example, the Commission may, after consultation 
with the appropriate regulators and market participants, include in 
its substituted compliance determination a description of the means 
by which certain swaps market participants can achieve substituted 
compliance within the construct of the foreign regulatory regime. 
The identification of the means by which substituted compliance is 
achieved would be designed to address the regulatory objectives and 
outcomes of the relevant Dodd-Frank Act requirements in a manner 
that does not conflict with a foreign regulatory regime and reduces 
the likelihood of inconsistent regulatory obligations. For example, 
the Commission may specify that [SDs] and MSPs in the jurisdiction 
undertake certain recordkeeping and documentation for swap 
activities that otherwise is only addressed by the foreign 
regulatory regime with respect to financial activities generally. In 
addition, the substituted compliance determination may include 
provisions for summary compliance and risk reporting to the 
Commission to allow the Commission to monitor whether the regulatory 
outcomes are being achieved. By using these approaches, in the 
interest of comity, the Commission would seek to achieve its 
regulatory objectives with respect to the Commission's registrants 
that are operating in foreign jurisdictions in a manner that works 
in harmony with the regulatory interests of those jurisdictions.'' 
78 FR 45343-44.
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    Finally, the Commission generally will rely on an applicant's 
description of the laws and regulations of the foreign jurisdiction in 
making its comparability determination. The Commission considers an 
application to be a representation by the applicant that the laws and 
regulations submitted are in full force and effect, that the 
description of such laws and regulations is accurate and complete, and 
that, unless otherwise noted, the scope of such laws and regulations 
encompasses the swaps activities\31\ of SDs and MSPs\32\ in the 
relevant jurisdictions. \33\ Further, as stated in the Guidance, the 
Commission expects that an applicant would notify the Commission of any 
material changes to information submitted in support of a comparability 
determination (including, but not limited to, changes in the relevant 
supervisory or regulatory regime) as, depending on the nature of the 
change, the Commission's comparability determination may no longer be 
valid.\34\
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    \31\ ``Swaps activities'' is defined in Commission regulation 
23.600(a)(7) to mean, ``with respect to a registrant, such 
registrant's activities related to swaps and any product used to 
hedge such swaps, including, but not limited to, futures, options, 
other swaps or security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives.'' The 
Commission's regulations under Part 23 (17 CFR Part 23) are limited 
in scope to the swaps activities of SDs and MSPs.
    \32\ No SD or MSP that is not legally required to comply with a 
law or regulation determined to be comparable may voluntarily comply 
with such law or regulation in lieu of compliance with the CEA and 
the relevant Commission regulation. Each SD or MSP that seeks to 
rely on a comparability determination is solely responsible for 
determining whether it is legally required to comply with the laws 
and regulations found comparable. Currently, there are no MSPs 
organized outside the U.S. and the Commission therefore cautions any 
non-financial entity organized outside the U.S. and applying for 
registration as an MSP to carefully consider whether the laws and 
regulations determined to be comparable herein are applicable to 
such entity.
    \33\ The Commission has provided the relevant foreign 
regulator(s) with opportunities to review and correct the 
applicant's description of such laws and regulations on which the 
Commission will base its comparability determination. The Commission 
relies on the accuracy and completeness of such review and any 
corrections received in making its comparability determinations. A 
comparability determination based on an inaccurate description of 
foreign laws and regulations may not be valid.
    \34\ 78 FR 45345.
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    The Guidance provided a detailed discussion of the Commission's 
policy regarding the availability of substituted compliance\35\ for the 
Business Conduct Requirements.
---------------------------------------------------------------------------

    \35\ See 78 FR 45348-50. The Commission notes that registrants 
and other market participants are responsible for determining 
whether substituted compliance is available pursuant to the Guidance 
based on the comparability determination contained herein (including 
any conditions or exceptions), and its particular status and 
circumstances.
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V. Supervisory Arrangement

    In the Guidance, the Commission stated that, in connection with a 
determination that substituted compliance is appropriate, it would 
expect to enter into an appropriate memorandum of understanding 
(``MOU'') or similar arrangement\36\ with the relevant foreign 
regulator(s). Although existing arrangements would indicate a foreign 
regulator's ability to cooperate and share information, ``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 [SDs] 
and MSPs.''\37\
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    \36\ An MOU is one type of arrangement between or among 
regulators. Supervisory arrangements could include, as appropriate, 
cooperative arrangements that are memorialized and executed as 
addenda to existing MOUs or, for example, as independent bilateral 
arrangements, statements of intent, declarations, or letters.
    \37\ 78 FR 45344.
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    The Commission is in the process of developing its registration and 
supervision regime for provisionally-registered SDs and MSPs. This new 
initiative includes setting forth supervisory arrangements with 
authorities that have joint jurisdiction over SDs and MSPs that are 
registered with the Commission and subject to U.S. law. Given the 
developing nature of the Commission's regime and the fact that the 
Commission has not negotiated prior supervisory arrangements with 
certain authorities, the negotiation of supervisory arrangements 
presents a unique opportunity to develop close working relationships 
between and among authorities, as well as highlight any potential 
issues related to cooperation and information sharing.
    Accordingly, the Commission is negotiating such a supervisory 
arrangement with each applicable foreign regulator of an SD or MSP. The 
Commission expects that the arrangement will establish expectations for 
ongoing cooperation, address direct access to information,\38\ provide 
for

[[Page 78883]]

notification upon the occurrence of specified events, memorialize 
understandings related to on-site visits,\39\ and include protections 
related to the use and confidentiality of non-public information shared 
pursuant to the arrangement.
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    \38\ Section 4s(j)(3) and (4) of the CEA and Commission 
regulation 23.606 require a registered SD or MSP to make all records 
required to be maintained in accordance with Commission regulation 
1.31 available promptly upon request to, among others, 
representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR 
23.203. In the Guidance, the Commission states that it ``reserves 
this right to access records held by registered [SDs] and MSPs, 
including those that are non-U.S. persons who may comply with the 
Dodd-Frank recordkeeping requirement through substituted 
compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461 
(affirming the Commission's authority under the CEA and its 
regulations to access books and records held by registered SDs and 
MSPs as ``a fundamental regulatory tool necessary to properly 
monitor and examine each registrant's compliance with the CEA and 
the regulations adopted pursuant thereto'').
    \39\ The Commission retains its examination authority, both 
during the application process as well as upon and after 
registration of an SD or MSP. See 78 FR 45342 (stating Commission 
policy that ``eligible entities may comply with a substituted 
compliance regime under certain circumstances, subject, however, to 
the Commission's retention of its examination authority'') and 45344 
n. 471 (stating that the ``Commission may, as it deems appropriate 
and necessary, conduct an on-site examination of the applicant'').
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    These arrangements will establish a roadmap for how authorities 
will consult, cooperate, and share information. As with any such 
arrangement, however, nothing in these arrangements will supersede 
domestic laws or resolve potential conflicts of law, such as the 
application of domestic secrecy or blocking laws to regulated entities.

VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by 
specific sections of the CEA and the Commission's regulations for the 
Business Conduct Requirements in the ``risk mitigation and 
transparency'' category that are the subject of this comparability 
determination and the Commission's regulatory objectives with respect 
to such requirements. Immediately following a description of the 
requirement(s) and regulatory objective(s) of the specific Business 
Conduct Requirements that the requestor submitted for a comparability 
determination, the Commission provides a description of the foreign 
jurisdiction's comparable laws, regulations, or rules and whether such 
laws, regulations, or rules meet the applicable regulatory objective.
    The Commission's determinations in this regard and the discussion 
in this section are intended to inform the public of the Commission's 
views regarding whether the foreign jurisdiction's laws, regulations, 
or rules may be comparable to and as comprehensive as those 
requirements in the Dodd-Frank Act (and Commission regulations 
promulgated thereunder) and therefore, may form the basis of 
substituted compliance. In turn, the public (in the foreign 
jurisdiction, in the United States, and elsewhere) retains its ability 
to present facts and circumstances that would inform the determinations 
set forth in this release.
    As was stated in the Guidance, the Commission understands the 
complex and dynamic nature of the global swap market and the need to 
take an adaptable approach to cross-border issues, particularly as it 
continues to work closely with foreign regulators to address potential 
conflicts with respect to each country's respective regulatory regime. 
In this regard, the Commission may review, modify, or expand the 
determinations herein in light of comments received and future 
developments.

A. 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 SDs and MSPs. Accordingly, pursuant to CEA section 4s(i), the 
Commission adopted Sec. Sec.  23.502 and 23.503, which require SDs and 
MSPs to perform portfolio reconciliation and compression, respectively, 
for all swaps.\40\
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    \40\ 7 U.S.C. 6s(i).
---------------------------------------------------------------------------

1. Portfolio Reconciliation (Sec.  23.502)
    Commission Requirement: Regulation 23.502 provides standards for 
the timely and accurate confirmation, processing, and valuation of 
uncleared swaps by SDs and MSPs. The regulation requires SDs and MSPs 
to engage in portfolio reconciliation,\41\ which is a post-execution 
processing and risk management technique that is designed to: (i) 
identify and resolve discrepancies between the counterparties with 
regard to the terms of a swap after execution and during the life of 
the swap; and (ii) identify and resolve discrepancies between the 
counterparties regarding the valuation of the swap.
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    \41\ The term ``portfolio reconciliation'' is defined in Sec.  
23.500(i) as any process by which the two parties to one or more 
swaps: (1) exchange the terms of all swaps in the swap portfolio 
between the counterparties; (2) exchange each counterparty's 
valuation of each swap in the swap portfolio between the 
counterparties as of the close of business on the immediately 
preceding business day; and (3) resolve any discrepancy in material 
terms and valuations.
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    Pursuant to Commission regulation 23.502, for swap portfolios with 
other SDs/MSPs, an SD/MSP must agree in writing on the terms of 
reconciling the terms and valuations of each uncleared swap in the 
portfolio (which may be performed bilaterally or by a qualified third 
party), and must perform the reconciliation no less frequently than:
     Each business day for portfolios of 500 or more swaps;
     Once each week for portfolios of more than 50 but fewer 
than 500 swaps; and
     Quarterly for portfolios of no more than 50 swaps.
    Discrepancies in material terms must be resolved immediately; and 
SDs and MSPs must have policies and procedures to resolve discrepancies 
of 10% or greater in valuations as soon as possible but no later than 
five business days, provided that the SD or MSP has policies and 
procedures for identifying how it will comply with variation margin 
requirements pending resolution of a valuation dispute.
    For swap portfolios with non-SDs/MSPs, an SD/MSP must establish 
policies and procedures for engaging in portfolio reconciliation that 
include:
     Agreement in writing on the terms for reconciling the 
terms and valuations of each uncleared swap in the portfolio (which may 
be performed bilaterally or by a qualified third party);
     Portfolio reconciliation frequencies of quarterly for 
portfolios of more than 100 swaps, and annually for portfolios of 100 
or fewer swaps; and
     Discrepancies in material terms and valuations of more 
than 10% must be subject to procedures for resolving such discrepancies 
in a timely fashion.
    An SD/MSP must report any valuation dispute exceeding $20,000,000 
to the Commission and any applicable prudential regulator if not 
resolved within three business days (with respect to disputes between 
SDs/fMSPs) or five business days (with any other counterparty).
    Regulatory Objective: The Commission's portfolio reconciliation 
rule is designed to ensure accurate confirmation of a swap's terms and 
to identify and resolve any discrepancies between counterparties 
regarding the valuation of the swap. Given that arriving at a daily 
valuation is one of the building blocks for the margin regulations and 
is essential for the mitigation of risk posed by swaps, the regulations 
are aimed at ensuring that valuation disputes are resolved in a timely 
manner. Disputes related to confirming the terms of a swap, as well as 
swap valuation disputes impacting margin payments, have long been 
recognized as a significant problem in the OTC derivatives market, and 
portfolio reconciliation is widely recognized as an effective means of 
identifying and resolving these disputes. By identifying and managing 
mismatches in key economic terms and valuation for individual 
transactions across an entire portfolio, the regulations are aimed at 
achieving a process in which overall risk can be

[[Page 78884]]

identified and reduced. The frequency of reconciliation of material 
terms and valuations of each swap required by the regulations will 
ensure the risk-reducing benefits of reconciliation by presenting a 
consolidated view of counterparty exposure down to the transaction 
level. The frequency with which portfolio reconciliation must be 
performed is a key component of this regulation.
    Comparable EU Law and Regulations: The applicant has represented to 
the Commission that the following provisions of law and regulations 
applicable in the EU are in full force and effect in the EU, and 
comparable to and as comprehensive as section 4s(i) of the CEA and 
Commission regulation 23.502.
     OTC RTS Art. 13.1: FCs and NFCs must agree with each of 
their counterparties in writing or other equivalent electronic means on 
the terms on which portfolios of uncleared OTC derivative contracts 
shall be reconciled. Such agreement must be reached before entering 
into the OTC derivative contract.
     OTC RTS Art. 13.2: Portfolio reconciliation must be 
performed by the counterparties to the OTC derivative contracts with 
each other, or by a qualified third party duly mandated to this effect 
by a counterparty.
     The portfolio reconciliation must cover key trade terms 
that identify each particular OTC derivative contract and must include 
at least the valuation attributed to each contract in accordance with 
the mark-to-market/mark-to-model obligation.
     In order to identify at an early stage any discrepancy in 
a material term of the OTC derivative contract, including its 
valuation, the portfolio reconciliation must be performed within the 
following timeframes. For portfolios between or among FCs or NFCs+, 
each business day when the counterparties have 500 or more OTC 
derivative contracts outstanding with each other; once per week when 
the counterparties have between 51 and 499 OTC derivative contracts 
outstanding with each other at any time during the week; and once per 
quarter when the counterparties have 50 or less OTC derivative 
contracts outstanding with each other at any time during the quarter. 
For portfolios where at least one of the counterparties is an NFC-, 
once per quarter when the counterparties have more than 100 OTC 
derivative contracts outstanding with each other at any time during the 
quarter; and once per year when the counterparties have 100 or less OTC 
derivative contracts outstanding with each other.
    Commission Determination: Pursuant to the foregoing standards under 
EMIR, FCs and NFCs must agree in writing with each of their OTC 
derivatives counterparties on the terms on which portfolios will be 
reconciled,\42\ which corresponds to the requirement in Commission 
regulation 23.502(a) and (b) that SDs and MSPs agree in writing with 
each counterparty (financial and non-financial) on the terms for 
conducting portfolio reconciliation.
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    \42\ See Article 13 of the EMIR Regulatory Technical Standards. 
In addition, Article 13(2) permits the reconciliation to be 
performed by a third-party, which corresponds to Commission 
regulation 23.502(a)(2) and (b)(2).
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    The EMIR standards require portfolio reconciliation covering key 
trade terms of each OTC derivative contract, including at least the 
valuation of each contract,\43\ which corresponds to the requirements 
under Commission regulation 23.502 that discrepancies in material terms 
and valuations be resolved.
---------------------------------------------------------------------------

    \43\ See Article 13(2) of the EMIR Regulatory Technical 
Standards.
---------------------------------------------------------------------------

    Frequency of reconciliation required under the EMIR standards for 
FCs and NFCs+ is daily when the number of outstanding OTC derivative 
contracts between counterparties is 500 or more, weekly when the number 
of outstanding OTC derivative contracts between counterparties is 
greater than 50 and less than 500, and quarterly when the number of OTC 
derivative contracts between counterparties is 50 or less,\44\ which 
corresponds with the frequency required of SDs and MSPs outlined above 
with respect to portfolios with other SDs and MSPs. EMIR requires 
reconciliation with NFCs- less frequently; quarterly for portfolios of 
more than 100 transactions and annually otherwise\45\--which 
corresponds with the requirement of Commission regulation 23.502(b)(3).
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    \44\ See Article 13(3)(a) of the EMIR Regulatory Technical 
Standards.
    \45\ See Article 13(3)(b) of the EMIR Regulatory Technical 
Standards.
---------------------------------------------------------------------------

    The EMIR standards require FCs to report to the relevant competent 
authority any disputes between counterparties relating to an OTC 
derivative contract, its valuation or the exchange of collateral for an 
amount or a value higher than [euro]15 million and outstanding for at 
least 15 business days,\46\ while Commission regulation 23.502(c) has a 
similar reporting requirement for disputes of at least $20 million 
outstanding from three to five days, depending on counterparty type. 
The EMIR standards, similar to Sec.  23.502(a)(5), require FCs and NFCs 
to have detailed procedures and processes for resolving disputes 
related to valuation.
---------------------------------------------------------------------------

    \46\ See Article 15(2) of the EMIR Regulatory Technical 
Standards.
---------------------------------------------------------------------------

    Generally identical in intent to Sec.  23.502, the EMIR portfolio 
reconciliation standards are designed to ensure that valuation disputes 
are recognized and resolved in a timely manner. This regular 
reconciliation will assist in identifying and resolving discrepancies, 
which in turn will aid the entities in their collateralization and risk 
management.
    Based on the foregoing and the representations of the applicant, 
the Commission finds that the portfolio reconciliation requirements of 
the EMIR standards submitted by the applicant are comparable to and as 
comprehensive as the portfolio reconciliation requirements of 
Commission regulation 23.502.
2. Portfolio Compression (Sec.  23.503)
    Commission Requirement: Portfolio compression is a post-trade 
processing and netting mechanism whereby substantially similar 
transactions among two or more counterparties are terminated and 
replaced with a smaller number of transactions of decreased notional 
value. Portfolio compression is intended to ensure timely and accurate 
processing and netting of swaps,\47\ and is widely acknowledged as an 
effective risk mitigation tool.\48\
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    \47\ For example, the reduced transaction count may decrease 
operational risk as there are fewer trades to maintain, process, and 
settle.
    \48\ See Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Requirements for Swap 
Dealers and Major Swap Participants, 77 FR 55904, 55932 (Sept. 11, 
2012).
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    Pursuant to Sec.  23.503, an SD/MSP must establish policies and 
procedures for terminating fully offsetting uncleared swaps, when 
appropriate; for periodically participating in bilateral and 
multilateral compression exercises for uncleared swaps with other SDs/
MSPs, when appropriate; and for engaging in such exercises for 
uncleared swaps with non-SDs/MSPs upon request.
    Regulatory Objective: The purpose of portfolio compression is to 
reduce the operational risk, cost, and inefficiency of maintaining 
unnecessary transactions on the counterparties' books.
    Comparable EU Law and Regulations: The applicant has represented to 
the Commission that the following provisions of law and regulations 
applicable in the EU are in full force and effect in the EU, and 
comparable to and as comprehensive as section 4s(i) of the CEA and 
Commission regulation 23.503:

[[Page 78885]]

     OTC RTS Art. 14: FCs and NFCs with 500 or more uncleared 
OTC derivative contracts outstanding with a counterparty must have 
procedures to regularly, and at least twice a year, analyse the 
possibility of conducting a portfolio compression exercise in order to 
reduce their counterparty credit risk and engage in such a portfolio 
compression exercise; and
     FCs and NFCs must ensure that they are able to provide a 
reasonable and valid explanation to the relevant competent authority 
for concluding that a portfolio compression exercise is not 
appropriate.
    Commission Determination: The EMIR standards specified above 
require FCs and NFCs with 500 or more OTC uncleared derivative 
contracts outstanding with a counterparty to have procedures to 
regularly, and at least twice a year, analyze the possibility of 
conducting a portfolio compression exercise in order to reduce their 
counterparty credit risk and engage in such a portfolio compression 
exercise,\49\ which corresponds to the requirement under Sec.  23.503 
that SDs and MSPs establish procedures for periodically engaging in 
compression exercises with their counterparties.
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    \49\ See Article 14 of the EMIR Regulatory Technical Standards.
---------------------------------------------------------------------------

    Under the EMIR standards, FCs and NFCs also must ensure that they 
are able to provide a reasonable and valid explanation to the relevant 
competent authority for concluding that a portfolio compression 
exercise is not appropriate.\50\ This requirement corresponds directly 
to regulation 23.503 that SDs and MSPs engage in compression exercises 
with their counterparties ``when appropriate,'' which would necessarily 
require such registrants to demonstrate to the Commission why a 
compression opportunity was not appropriate.
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    \50\ See id.
---------------------------------------------------------------------------

    Generally identical in intent to Sec.  23.503, the EMIR portfolio 
compression standards are designed to reduce the operational risk, 
cost, and inefficiency of maintaining unnecessary transactions on the 
counterparties' books.
    Based on the foregoing and the representations of the applicant, 
the Commission finds that the EMIR portfolio compression standards 
submitted by the applicant are comparable to and as comprehensive as 
the portfolio compression requirements of Commission regulation 23.503.

B. Trade Confirmation (Sec.  23.501)

    Commission Requirement: Section 4s(i) of the CEA\51\ requires that 
each SD and MSP comply with the Commission's regulations prescribing 
timely and accurate confirmation of swaps.
---------------------------------------------------------------------------

    \51\ 7 U.S.C. 6s(i).
---------------------------------------------------------------------------

    Subject to an implementation period, Sec.  23.501 requires 
confirmation of swap transactions (which includes execution, 
termination, assignment, novation, exchange, transfer, amendment, 
conveyance, or extinguishing of rights or obligations of a swap) among 
SDs and MSPs by the end of the first business day following the day of 
execution.
    Subject to an implementation period, with respect to swaps with 
non-SDs/MSPs, SDs and MSPs are required to establish policies and 
procedures reasonably designed to ensure confirmation with non-SDs and 
non-MSPs by the end of the first business day following the day of 
execution if the counterparty is a financial entity or the end of the 
second business day if the counterparty is a non-financial entity.
    SDs and MSPs are also required to send an acknowledgement of a swap 
transaction to a counterparty that is not an SD/MSP by the end of the 
first business day following the day of execution, and are required to 
provide a draft confirmation to non-SDs/MSPs prior to execution of a 
swap, if requested.
    The day of execution is determined by reference to the business 
days of the counterparties and whether the swap was executed after 4:00 
p.m. in the place of at least one of the counterparties.
    Commission regulation 23.501 does not apply to swaps executed on a 
swap execution facility (``SEF'') or designated contract market 
(``DCM'') if the SEF/DCM provides for confirmation of swap transactions 
at the same time as execution. It also does not apply to swap 
transactions that are submitted for clearing by a derivatives clearing 
organization (``DCO'') within the time required for confirmation and 
the DCO provides confirmation at the same time the swap transaction is 
accepted for clearing.
    Regulatory Objective: 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. Through Sec.  23.501, the Commission seeks to 
ensure that both parties to a trade are informed of and agree upon all 
terms of a swap transaction\52\ in writing in a timely manner following 
execution, thereby promoting post-trade processing, netting, and 
valuation of the swap for risk management purposes. The correct 
calculation of cash flows, margin requirements, discharge of settlement 
obligations, and accurate measurement of counterparty credit exposure 
are all dependent on timely and accurate confirmation.\53\
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    \52\ Pursuant to Sec.  23.500(l), ``swap transaction'' is 
defined to mean ``any event that results in a new swap or in a 
change to the terms of a swap, including execution, termination, 
assignment, novation, exchange, transfer, amendment, conveyance, or 
extinguishing of rights or obligations of a swap.''
    \53\ See Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 12 CFR 
Part 23, 77 FR 55904 at 55917 (September 11, 2012) (Final Rule).
---------------------------------------------------------------------------

    Comparable EU Law and Regulations: The applicant has represented to 
the Commission that the following provisions of law and regulations 
applicable in the EU are in full force and effect in the EU, and 
comparable to and as comprehensive as section 4s(i) of the CEA and 
Commission regulation 23.501.
    OTC RTS Art 12.1: Subject to an implementation period, FCs and 
NFCs+ must have in place procedures to ensure that uncleared OTC 
derivatives transactions between FCs and NFCs+ are confirmed, where 
available via electronic means, as soon as possible and at the latest 
by the end of the next business day following the date of execution.
    OTC RTS Art. 12.2: Subject to an implementation period, FCs and 
NFCs+ must have in place procedures to ensure that non-centrally 
cleared OTC derivatives transactions with non- FCs/NFCs+ are confirmed, 
where available via electronic means, as soon as possible and at the 
latest by the end of the second business day following the date of 
execution.
    OTC RTS Art. 12.3: For transactions concluded after 4:00 p.m. local 
time, or with a counterparty located in a different time zone which 
does not allow confirmation by the set deadline, the confirmation must 
take place as soon as possible and, at the latest, one business day 
following the deadline set out above.
    OTC RTS Art. 12.4: FCs must establish the necessary procedure to 
report on a monthly basis to the relevant competent authority the 
number of unconfirmed OTC derivative transactions referred to in OTC 
RTS Art. 12.1--12.3 that have been outstanding for more than five 
business days.

[[Page 78886]]

    Commission Determination: Pursuant to the EMIR standards specified 
above, and subject to a phase-in period, OTC derivative contracts 
entered into between FCs or NFCs+ must be confirmed as soon as possible 
and at the latest by the end of the next business day following the 
date of execution,\54\ which corresponds to Commission regulation 
23.501(a)(1) and (3)(i), requiring confirmation with other SDs, MSPs, 
and financial entities by the end of the first business day following 
the day of execution.
---------------------------------------------------------------------------

    \54\ See Article 12 of the EMIR Regulatory Technical Standards.
---------------------------------------------------------------------------

    For OTC derivative contracts with all other NFCs, the EMIR 
standards require confirmation as soon as possible and, at the latest, 
by the end of the second business day following the date of 
execution.\55\ This approach corresponds to the Commission regulation 
23.501(a)(3)(ii), which requires written policies and procedures 
reasonably designed to ensure confirmation with non-SDs, non-MSPs, or 
non-financial entities by the end of the second business day following 
the day of execution.
---------------------------------------------------------------------------

    \55\ See id.
---------------------------------------------------------------------------

    As with Commission regulation 23.501(a)(5), which provides for a 
next business day adjustment for transactions executed after 4:00 p.m. 
or on a non-business day, the EMIR standards provide that transactions 
concluded after 4:00 p.m. local time, or with a counterparty located in 
a different time zone that does not allow confirmation by the set 
deadline, the confirmation must take place as soon as possible and, at 
the latest, one business day following the otherwise applicable 
deadline.
    Generally identical in intent to Sec.  23.501, the EMIR trade 
confirmation requirements are designed to ensure that both parties to a 
trade are informed of, and agree upon, all terms of a swap transaction 
in writing in a timely manner following execution, thereby promoting 
post-trade processing, netting, and valuation of the swap for risk 
management purposes.
    Based on the foregoing and the representations of the applicant, 
the Commission finds that the trade confirmation requirements of the 
EMIR standards are comparable to and as comprehensive as the swap 
transaction confirmation requirements of Commission regulation 23.501.

C. Swap Trading Relationship Documentation (Sec.  23.504)

    Commission Requirement: Section 4s(i) of the CEA requires each SD 
and MSP to conform to Commission standards for the timely and accurate 
confirmation, processing, netting, documentation, and valuation of 
swaps.\56\ Pursuant to this requirement, the Commission adopted Sec.  
23.504.
---------------------------------------------------------------------------

    \56\ See 7 U.S.C. 6s(i).
---------------------------------------------------------------------------

    Pursuant to Sec.  23.504(a), SDs and MSPs must have policies and 
procedures reasonably designed to ensure that the SD or MSP enters into 
swap trading relationship documentation with each counterparty prior to 
executing any swap with such counterparty. Such requirement does not 
apply to cleared swaps.
    Pursuant to Sec.  23.504(b), SDs and MSPs must, at a minimum, 
document terms relating to:
     Payment obligations;
     Netting of payments;
     Events of default or other termination events;
     Netting of obligations upon termination;
     Transfer of rights/obligations;
     Governing law;
     Valuation--must be able to value swaps in a predictable 
and objective manner--complete and independently verifiable methodology 
for valuation;
     Dispute resolution procedures; and
     Credit support arrangements with initial/variation margin 
at least as high as set for SD/MSPs or prudential regulator 
(identifying haircuts and class of eligible assets).
    Regulatory Objective: Through Commission regulation 23.504, the 
Commission seeks to reduce the legal, operational, counterparty credit, 
and market risk that can arise from undocumented swaps or undocumented 
terms of swaps. Inadequate documentation of swap transactions is more 
likely to result in collateral and legal disputes, thereby exposing 
counterparties to significant counterparty credit risk.
    In particular, documenting agreements regarding valuation is 
critical because, as the Commission has noted, the ability to determine 
definitively the value of a swap at any given time lies at the center 
of many of the OTC derivatives market reforms contained in the Dodd-
Frank Act and is a cornerstone of risk management. With respect to 
other SDs/MSPs and financial entities, or upon request of any other 
counterparty, the regulation requires agreement on the process 
(including alternatives and dispute resolution procedures) for 
determining the value of each swap for the duration of such swap for 
purposes of complying with the Commission's margin and risk management 
requirements, with such valuations based on objective criteria to the 
extent practicable.
    Comparable EU Law and Regulations: The applicant has represented to 
the Commission that the following provisions of law and regulations 
applicable in the EU are in full force and effect in the EU, and 
comparable to and as comprehensive as section 4s(i) of the CEA and 
Commission regulation 23.504.
    MiFID requires counterparties to be classified as retail clients, 
professional clients,\57\ and eligible counterparties,\58\ and 
corresponding different conduct of business rules apply.\59\ Investment 
firms have to correctly categorize clients and notify those clients of 
their classification; furthermore, investment firms should be able to 
demonstrate the correctness of the classification.
---------------------------------------------------------------------------

    \57\ Annex II of MiFID.
    \58\ Article 24 MiFID.
    \59\ Article 19 MiFID and 28 to 34 of MiFID L2D.
---------------------------------------------------------------------------

    Firms have to conclude agreements with retail and professional 
clients setting out the respective rights and obligations and any other 
terms for the provision of the services.\60\ Ex-ante information has to 
be provided to clients on the services provided, the risks, and the 
safeguarding of their assets.\61\ Adequate ex-post reports also have to 
be provided.\62\ Irrespective of the classification of clients, 
specific record-keeping obligations regulate the recording of client 
orders and transactions.\63\
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    \60\ Article 19 (7) MiFID.
    \61\ Article 19 (3) MiFID and Articles 29-33 MiFID L2D.
    \62\ Article 19 (8) MiFID and Articles 40-43 of MiFID L2D.
    \63\ Article 51 MiFID L2D and Articles 7-8 and Annex I, table I 
of MiFID L2R.
---------------------------------------------------------------------------

    With respect to dispute resolution, when concluding OTC derivative 
contracts with each other, FCs and NFCs must have agreed detailed 
procedures and processes in relation to: (a) the identification, 
recording, and monitoring of disputes relating to the recognition or 
valuation of the contract and to the exchange of collateral between 
counterparties, and (b) the resolution of disputes in a timely manner 
with a specific process for handling those disputes that are not 
resolved within five business days. Those procedures must at least 
record the length of time for which the dispute remains outstanding, 
the counterparty, and the amount which is disputed.\64\
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    \64\ EMIR Art. 11 and OTC RTS Art 15.
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    Commission Determination: The EMIR standards specified above 
require OTC derivative contracts entered into between FCs or NFCs to be 
confirmed in

[[Page 78887]]

writing,\65\ which corresponds to the requirements of Commission 
regulation 23.504(b)(2).
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    \65\ See Article 12 of the EMIR Regulatory Technical Standards.
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    Pursuant to EMIR Article 11, FCs and NFCs+ are required to value 
outstanding OTC derivatives contracts on a mark-to-market basis daily, 
or where market conditions determine otherwise, a ``reliable and 
prudent marking to model'' may be used.\66\ This corresponds with 
Commission regulation 23.504(b)(4)(i), which requires SDs and MSPs to 
engage in daily valuation with other SDs and MSPs, and financial 
entities, but allows such procedures to be included in documentation 
with NFCs to the extent such counterparties request them.
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    \66\ See Article 11(2) of EMIR. See also Article 16 of the EMIR 
Regulatory Technical Standards (describing the market conditions 
that prevent marking-to-market) and Article 17 of the EMIR 
Regulatory Technical Standards (describing the criteria for using 
marking-to-model).
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    Under the EMIR standards, when concluding OTC derivative contracts 
with each other, counterparties must have agreed detailed procedures 
and processes in relation to the identification, recording, and 
monitoring of disputes relating to the recognition or valuation of the 
contracts and to the exchange of collateral between counterparties and 
in relation to the resolution of disputes in a timely manner, including 
a specific process for handling disputes that are not resolved within 
five business days. These aspects of the EMIR standards correspond to 
the valuation documentation requirements under Commission regulation 
23.504(b)(4), which also require use of market transactions for 
valuations to the extent practicable, or other objective criteria, and 
an agreement on detailed processes for valuation dispute resolution for 
purposes of complying with margin requirements.
    Generally identical in intent to Sec.  23.504(b)(2) and (4), the 
EMIR confirmation and valuation documentation requirements are designed 
to reduce the legal, operational, counterparty credit, and market risk 
that can arise from undocumented transactions or terms, reducing the 
risk of collateral and legal disputes, and exposure of counterparties 
to significant counterparty credit risk.
    Based on the foregoing and the representations of the applicant, 
the Commission finds the confirmation and valuation documentation 
requirements of the EMIR standards specified above are comparable to 
and as comprehensive as the swap trading relationship documentation 
requirements of Commission regulations Sec.  23.504(b)(2) and (4).
    For the avoidance of doubt the Commission notes that the foregoing 
comparability determination only applies with regard to two provisions 
of Sec.  23.504 (i.e., Sec.  23.504(b)(2) and (4)). No comparability 
finding is made regarding the other provisions of Sec.  23.504, namely 
Sec.  23.504(a)(2) and (c)(2), that SDs and MSPs establish policies and 
procedures, approved in writing by senior management of the SD or MSP, 
reasonably designed to ensure that they have entered into swap trading 
relationship documentation with each counterparty prior to or 
contemporaneously with entering into a swap transaction with such 
counterparty.\67\
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    \67\ See Commission regulation 23.504(a)(2), 17 CFR 
23.504(c)(2).
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    Moreover, the foregoing comparability determination does not extend 
to the requirement that such documentation include terms addressing 
payment obligations, netting of payments, events of default or other 
termination events, calculation and netting of obligations upon 
termination, transfer of rights and obligations, governing law, dispute 
resolution, and credit support arrangements, as well as notice of the 
status of the counterparty under the orderly liquidation procedures of 
Title II of the Dodd-Frank Act, and the effect of clearing on swaps 
executed bilaterally.\68\ Nor does this determination relieve an SD or 
MSP from the documentation audit and recordkeeping requirements under 
Sec.  23.504(c) and (d).
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    \68\ See Sec.  23.504(b)(1), (3), (5), and (6).
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D. Daily Trading Records (Sec.  23.202)

    Commission Requirement: Section 4s(g)(1) of the CEA and Commission 
regulation 23.202 generally require that SDs and MSPs retain daily 
trading records for swaps and related cash and forward transactions, 
including:
     Documents on which transaction information is originally 
recorded;
     All information necessary to conduct a comprehensive and 
accurate trade reconstruction;
     Pre-execution trade information including records of all 
oral and written communications concerning quotes, solicitations, bids, 
offers, instructions, trading, and prices that lead to the execution of 
a swap or related cash and forward transactions, whether communicated 
by phone, fax, instant messaging, chat rooms, email, mobile device, or 
other digital or electronic media;
     Reliable timing date for the initiation of a trade;
     A record of the time, to the nearest minute using 
Coordinated Universal Time (UTC), of each quotation provided or 
received prior to trade execution;
     Execution trade information including the terms of each 
swap and related cash or forward transaction, terms regarding payment 
or settlement, initial and variation margin requirements, option 
premiums, and other cash flows;
     The trade ticket for each swap and related cash or forward 
transaction;
     The date and time of execution of each swap and related 
cash or forward transaction to the nearest minute using UTC;
     The identity of the counterparty and the date and title of 
the agreement to which each swap is subject, including any swap trading 
relationship documentation and credit support arrangements;
     The product name and identifier, the price at which the 
swap was executed, and the fees, commissions and other expenses 
applicable;
     Post-execution trade information including records of 
confirmation, termination, novation, amendment, assignment, netting, 
compression, reconciliation, valuation, margining, collateralization, 
and central clearing;
     The time of confirmation to the nearest minute using UTC;
     Ledgers of payments and interest received, moneys borrowed 
and loaned, daily swap valuations, and daily calculation of current and 
potential future exposure for each counterparty;
     Daily calculation of initial and variation margin 
requirements;
     Daily calculation of the value of collateral, including 
haircuts;
     Transfers of collateral, including substitutions, and the 
types of collateral transferred; and
     Credits and debits for each counterparty's account.
    Daily trading records must be maintained in a form and manner 
identifiable and searchable by transaction and counterparty, and 
records of swaps must be maintained for the duration of the swap plus 
five years, and voice recordings for one year. Records must be 
``readily accessible'' for the first two years of the five year 
retention period (consistent with Sec.  1.31).
    Regulatory Objective: Through Sec.  23.202, the Commission seeks to 
ensure that an SD's or MSP's records include all information necessary 
to conduct a comprehensive and accurate trade reconstruction for each 
swap, which necessarily requires the records to be identifiable by 
transaction and

[[Page 78888]]

counterparty. Complete and accurate trade reconstruction is critical 
for both regulatory oversight and investigations of illegal activity 
pursuant to the Commission's enforcement authority. The Commission 
believes that a comprehensive and accurate trade reconstruction 
requires records of pre-execution, execution, and post-execution trade 
information.
    Comparable EU Law and Regulations: The applicant has represented to 
the Commission that the following provisions of law and regulations 
applicable in the EU are in full force and effect in the EU, and 
comparable to and as comprehensive as section 4s(g) of the CEA and 
Commission regulation 23.202.
    MiFID Article 13.6 and MiFID L2D Articles 5.1.f and 51: Firms are 
required to maintain records of all services and transactions 
undertaken by the firm that are sufficient to enable regulator 
authorities to monitor compliance with MiFID and to ascertain whether 
the firm has complied with all obligations with respect to clients or 
potential clients.
    Firms are required to keep detailed records in relation to every 
client order and decision to deal, and every client order executed or 
transmitted.
    All required records must be retained in a medium available for 
future reference by the regulator, and in a form/manner that:
     Allows the regulator to access them readily and 
reconstitute each key stage of processing each transaction;
     Allows corrections or other amendments, and the contents 
of the records prior to such corrections or amendments, to be easily 
ascertained; and
     Ensures that records are not manipulated or altered.
    MiFID Article 25(2): Firms must keep at the disposal of the 
regulator, for at least five years, the relevant data relating to all 
transactions in financial instruments which they have carried out, 
whether on their own account or on behalf of a client.
    MiFID L2R Articles 9 to 16: Requires transaction reporting in order 
to provide the competent authorities with the necessary information to 
conduct proper market surveillance.
    Investment firms are required to report details of all executed 
transactions in any financial instruments admitted to trading on a 
Regulated Market to the competent authority as quickly as possible and 
no later than the close of the following working day.
    The content of the transaction report is specified in L2 measures 
(MiFID L2R Article 13).
    The reporting obligation lies with investment firms. In a case 
where all the required information with respect to derivatives 
transactions has been transmitted to a TR that transmits this 
information onwards to the competent authority the obligation on the 
investment firm to report will be waived.
    Commission Determination: The Commission finds that compliance with 
MiFID would enable the relevant competent authority to conduct a 
comprehensive and accurate trade reconstruction for each swap, which 
the Commission finds generally meets the regulatory objective of Sec.  
23.202. However, the request did not provide any basis on which the 
Commission could determine that MiFID or EMIR are comparable to and as 
comprehensive as Sec.  23.202(a)(1) or regulation 23.202(b)(1), which 
require records of oral communications to be maintained for swap 
transactions and related cash and forward transactions, respectively, 
including telephone, voicemail, and mobile device recordings.\69\
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    \69\ In the EU's request for a comparability determination 
proposed regulations concerning the recording of oral communications 
were submitted. These requirements are currently under negotiation. 
The Commission may reconsider the EU's request when and if the 
proposal is enacted.
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    Based on the foregoing and the representations of the applicant, 
the Commission hereby determines that the daily trading records 
requirements of MiFID are comparable to and as comprehensive as Sec.  
23.202, excepting Sec.  23.202(a)(1) and (b)(1). This determination is 
limited to the content of the recordkeeping requirements of Sec.  
23.202 (excepting subsections (a)(1) and (b)(1)) and does not extend to 
the requirement that the Commission and any U.S. prudential regulator 
of an SD or MSP have direct access to such records.\70\
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    \70\ Unless the records required by MiFID are available to the 
Commission and any U.S. prudential regulator under the foreign legal 
regime, it would be impossible to meet the regulatory objective of 
Sec.  23.202. As stated in the Guidance, the ability to rely on a 
substituted compliance regime is dependent on direct access to the 
books and records of a registrant. This is the case with respect to 
any Transaction-Level Requirement, and not only the daily trading 
records required by Sec.  23.202. See 78 FR 45344-45.

    Issued in Washington, DC, on December 20, 2013, by the 
Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.

Appendices to Comparability Determination for the European Union: 
Certain Transaction-Level Requirements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and 
Wetjen voted in the affirmative. Commissioner O'Malia voted in the 
negative.

Appendix 2--Joint Statement of Chairman Gary Gensler and Commissioners 
Bart Chilton and Mark Wetjen

    We support the Commission's approval of broad comparability 
determinations that will be used for substituted compliance 
purposes. For each of the six jurisdictions that has registered swap 
dealers, we carefully reviewed each regulatory provision of the 
foreign jurisdictions submitted to us and compared the provision's 
intended outcome to the Commission's own regulatory objectives. The 
resulting comparability determinations for entity-level requirements 
permit non-U.S. swap dealers to comply with regulations in their 
home jurisdiction as a substitute for compliance with the relevant 
Commission regulations.
    These determinations reflect the Commission's commitment to 
coordinating our efforts to bring transparency to the swaps market 
and reduce its risks to the public. The comparability findings for 
the entity-level requirements are a testament to the comparability 
of these regulatory systems as we work together in building a strong 
international regulatory framework.
    In addition, we are pleased that the Commission was able to find 
comparability with respect to swap-specific transaction-level 
requirements in the European Union and Japan.
    The Commission attained this benchmark by working cooperatively 
with authorities in Australia, Canada, the European Union, Hong 
Kong, Japan, and Switzerland to reach mutual agreement. The 
Commission looks forward to continuing to collaborate with both 
foreign authorities and market participants to build on this 
progress in the months and years ahead.

Appendix 3--Statement of Dissent by Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading 
Commission's (``Commission'') approval of the Notices of 
Comparability Determinations for Certain Requirements under the laws 
of Australia, Canada, the European Union, Hong Kong, Japan, and 
Switzerland (collectively, ``Notices''). While I support the narrow 
comparability determinations that the Commission has made, moving 
forward, the Commission must collaborate with foreign regulators to 
harmonize our respective regimes consistent with the G-20 reforms.

[[Page 78889]]

    However, I cannot support the Notices because they: (1) are 
based on the legally unsound cross-border guidance 
(``Guidance'');\1\ (2) are the result of a flawed substituted 
compliance process; and (3) fail to provide a clear path moving 
forward. If the Commission's objective for substituted compliance is 
to develop a narrow rule-by-rule approach that leaves unanswered 
major regulatory gaps between our regulatory framework and foreign 
jurisdictions, then I believe that the Commission has successfully 
achieved its goal today.
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    \1\ Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26, 
2013).
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Determinations Based on Legally Unsound Guidance

    As I previously stated in my dissent, the Guidance fails to 
articulate a valid statutory foundation for its overbroad scope and 
inconsistently applies the statute to different activities.\2\ Section 
2(i) of the Commodity Exchange Act (``CEA'') states that the Commission 
does not have jurisdiction over foreign activities unless ``those 
activities have a direct and significant connection with activities in, 
or effect on, commerce of the United States . . .'' \3\ However, the 
Commission never properly articulated how and when this limiting 
standard on the Commission's extraterritorial reach is met, which would 
trigger the application of Title VII of the Dodd-Frank Act \4\ and any 
Commission regulations promulgated thereunder to swap activities that 
are outside of the United States. Given this statutorily unsound 
interpretation of the Commission's extraterritorial authority, the 
Commission often applies CEA section 2(i) inconsistently and 
arbitrarily to foreign activities.
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    \2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
    \3\ CEA section 2(i); 7 U.S.C. 2(i).
    \4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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    Accordingly, because the Commission is relying on the legally 
deficient Guidance to make its substituted compliance determinations, 
and for the reasons discussed below, I cannot support the Notices. The 
Commission should have collaborated with foreign regulators to agree on 
and implement a workable regime of substituted compliance, and then 
should have made determinations pursuant to that regime.

Flawed Substituted Compliance Process

    Substituted compliance should not be a case of picking a set of 
foreign rules identical to our rules, determining them to be 
``comparable,'' but then making no determination regarding rules that 
require extensive gap analysis to assess to what extent each 
jurisdiction is, or is not, comparable based on overall outcomes of the 
regulatory regimes. While I support the narrow comparability 
determinations that the Commission has made, I am concerned that in a 
rush to provide some relief, the Commission has made substituted 
compliance determinations that only afford narrow relief and fail to 
address major regulatory gaps between our domestic regulatory framework 
and foreign jurisdictions. I will address a few examples below.
    First, earlier this year, the OTC Derivatives Regulators Group 
(``ODRG'') agreed to a number of substantive understandings to improve 
the cross-border implementation of over-the-counter derivatives 
reforms.\5\ The ODRG specifically agreed that a flexible, outcomes-
based approach, based on a broad category-by-category basis, should 
form the basis of comparability determinations.\6\
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    \5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.
    \6\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings. 
Understanding number 2 states that ``[a] flexible, outcomes-based 
approach should form the basis of final assessments regarding 
equivalence or substituted compliance.''
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    However, instead of following this approach, the Commission has 
made its comparability determinations on a rule-by-rule basis. For 
example, in Japan's Comparability Determination for Transaction-Level 
Requirements, the Commission has made a positive comparability 
determination for some of the detailed requirements under the swap 
trading relationship documentation provisions, but not for other 
requirements.\7\ This detailed approach clearly contravenes the ODRG's 
understanding.
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    \7\ The Commission made a positive comparability determination 
for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3), 
(b)(4), (c), and (d), but not for Commission regulations 
23.504(b)(5) and (b)(6).
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    Second, in several areas, the Commission has declined to consider a 
request for a comparability determination, and has also failed to 
provide an analysis regarding the extent to which the other 
jurisdiction is, or is not, comparable. For example, the Commission has 
declined to address or provide any clarity regarding the European 
Union's regulatory data reporting determination, even though the 
European Union's reporting regime is set to begin on February 12, 2014. 
Although the Commission has provided some limited relief with respect 
to regulatory data reporting, the lack of clarity creates unnecessary 
uncertainty, especially when the European Union's reporting regime is 
set to begin in less than two months.
    Similarly, Japan receives no consideration for its mandatory 
clearing requirement, even though the Commission considers Japan's 
legal framework to be comparable to the U.S. framework. While the 
Commission has declined to provide even a partial comparability 
determination, at least in this instance the Commission has provided a 
reason: the differences in the scope of entities and products subject 
to the clearing requirement.\8\ Such treatment creates uncertainty and 
is contrary to increased global harmonization efforts.
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    \8\ Yen-denominated interest rate swaps are subject to the 
mandatory clearing requirement in both the U.S. and Japan.
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    Third, in the Commission's rush to meet the artificial deadline of 
December 21, 2013, as established in the Exemptive Order Regarding 
Compliance with Certain Swap Regulations (``Exemptive Order''),\9\ the 
Commission failed to complete an important piece of the cross-border 
regime, namely, supervisory memoranda of understanding (``MOUs'') 
between the Commission and fellow regulators.
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    \9\ Exemptive Order Regarding Compliance With Certain Swap 
Regulations, 78 FR 43785 (Jul. 22, 2013).
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    I have previously stated that these MOUs, if done right, can be a 
key part of the global harmonization effort because they provide 
mutually agreed-upon solutions for differences in regulatory 
regimes.\10\ Accordingly, I stated that the Commission should be able 
to review MOUs alongside the respective comparability determinations 
and vote on them at the same time. Without these MOUs, our fellow 
regulators are left wondering whether and how any differences, such as 
direct access to books and records, will be resolved.
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    \10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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    Finally, as I have consistently maintained, the substituted 
compliance process should allow other regulatory bodies to engage with 
the full Commission.\11\ While I am pleased that the Notices are being 
voted on by the Commission, the full Commission only gained access to 
the comment letters from foreign regulators on the Commission's 
comparability determination draft proposals a few days ago. This is 
hardly a transparent process.
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    \11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
---------------------------------------------------------------------------

Unclear Path Forward

    Looking forward to next steps, the Commission must provide answers 
to

[[Page 78890]]

several outstanding questions regarding these comparability 
determinations. In doing so, the Commission must collaborate with 
foreign regulators to increase global harmonization.
    First, there is uncertainty surrounding the timing and outcome of 
the MOUs. Critical questions regarding information sharing, 
cooperation, supervision, and enforcement will remain unanswered until 
the Commission and our fellow regulators execute these MOUs.
    Second, the Commission has issued time-limited no-action relief for 
the swap data repository reporting requirements. These comparability 
determinations will be done as separate notices. However, the timing 
and process for these determinations remain uncertain.
    Third, the Commission has failed to provide clarity on the process 
for addressing the comparability determinations that it declined to 
undertake at this time. The Notices only state that the Commission may 
address these requests in a separate notice at a later date given 
further developments in the law and regulations of other jurisdictions. 
To promote certainty in the financial markets, the Commission must 
provide a clear path forward for market participants and foreign 
regulators.
    The following steps would be a better approach: (1) the Commission 
should extend the Exemptive Order to allow foreign regulators to 
further implement their regulatory regimes and coordinate with them to 
implement a harmonized substituted compliance process; (2) the 
Commission should implement a flexible, outcomes-based approach to the 
substituted compliance process and apply it similarly to all 
jurisdictions; and (3) the Commission should work closely with our 
fellow regulators to expeditiously implement MOUs that resolve 
regulatory differences and address regulatory oversight issues.

Conclusion

    While I support the narrow comparability determinations that the 
Commission has made, it was my hope that the Commission would work with 
foreign regulators to implement a substituted compliance process that 
would increase the global harmonization effort. I am disappointed that 
the Commission has failed to implement such a process.
    I do believe that in the longer term, the swaps regulations of the 
major jurisdictions will converge. At this time, however, the 
Commission's comparability determinations have done little to alleviate 
the burden of regulatory uncertainty and duplicative compliance with 
both U.S. and foreign regulations.
    The G-20 process delineated and put in place the swaps market 
reforms in G-20 member nations. It is then no surprise that the 
Commission must learn to coordinate with foreign regulators to minimize 
confusion and disruption in bringing much needed clarity to the swaps 
market. For all these shortcomings, I respectfully dissent from the 
Commission's approval of the Notices.
[FR Doc. 2013-30981 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P