[Federal Register Volume 81, Number 158 (Tuesday, August 16, 2016)]
[Rules and Regulations]
[Pages 54478-54498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18854]



[[Page 54478]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 23, 37, 43, 45, 46, and 170

RIN 3038-AE27


Final Response to District Court Remand Order in Securities 
Industry and Financial Markets Association, et al. v. United States 
Commodity Futures Trading Commission

AGENCY: Commodity Futures Trading Commission.

ACTION: Final response to district court remand order.

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SUMMARY: This release is the Commodity Futures Trading Commission's 
(``Commission'' or ``CFTC'') final response to the order of the United 
States District Court for the District of Columbia in Securities 
Industry and Financial Markets Association, et al. v. United States 
Commodity Futures Trading Commission, (``SIFMA v. CFTC''), remanding 
eight swaps-related rulemakings to the Commission to resolve what the 
court held to be inadequacies in the Commission's consideration of 
costs and benefits, or its explanation of its consideration of costs 
and benefits, in those rulemakings. In this release the Commission 
addresses cost-benefit issues raised and suggestions for rule changes 
made in comments submitted in response to the Commission's Initial 
Response to the remand order.

DATES: August 16, 2016.

FOR FURTHER INFORMATION CONTACT: Martin B. White, Assistant General 
Counsel, Office of the General Counsel, (202) 418-5129, 
[email protected]; Frank Fisanich, Chief Counsel, Division of Swap Dealer 
and Intermediary Oversight, (202) 418-5949, [email protected]; Philip 
Raimondi, Attorney Advisor, Division of Market Oversight, (202) 418-
5717, [email protected]; Michael A. Penick, Economist, Office of the 
Chief Economist, (202) 418-5279, [email protected]; Megan Wallace, 
Senior Special Counsel, Office of International Affairs, (202) 418-
5150, [email protected]; Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Overview and Scope

    This release is the Commission's final response to the order of the 
United States District Court for the District of Columbia in SIFMA v. 
CFTC 1 remanding eight swaps-related rulemakings to the 
Commission. It addresses issues raised by public comments submitted in 
response to a previous Federal Register release setting forth the 
Commission's initial response to the remand order.\2\
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    \1\ No. 13-1916 (PLF), 67 F. Supp. 3d. 373 (D.D.C. Sept. 16, 
2014).
    \2\ Initial Response to District Court Remand Order in 
Securities Industry and Financial Markets Association, et al. v. 
United States Commodity Futures Trading Commission, 80 FR 12555 
(Mar. 10, 2015) (``Initial Response'').
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    The present release is organized as follows. Part II describes the 
SIFMA litigation, the district court order, and the Commission's 
Initial Response. Part III discusses the Commission's general approach 
to extraterritorial costs and benefits in this release and potential 
methods for addressing extraterritorial cost-benefit issues. Part IV 
supplements the consideration of costs and benefits in the preambles to 
the original rulemakings and in the Initial Response by describing and 
evaluating the cost-benefit issues raised in the comments. Section IV.A 
discusses certain issues related to the costs of the extraterritorial 
application of the remanded rules. Section IV.B discusses certain 
issues related to the benefits of the extraterritorial application of 
the remanded rules. Section IV.C discusses the Commission's efforts to 
mitigate costs of the extraterritorial application of the Commission's 
rules, including the Commission's substituted compliance program and 
other actions. Section IV.D discusses consideration of substantive rule 
changes outside the scope of the remand order that may affect cross-
border costs and benefits. Section IV.E discusses commenters' concerns 
about ``market fragmentation,'' primarily in the context of the Swap 
Execution Facility (``SEF'') Registration Rule. Section IV.F discusses 
cost-benefit issues related to the use of a test for the application of 
transaction-level Dodd-Frank rules to non-U.S. swap dealers based on 
dealing activities physically located in the United States as described 
in a November 2013 Division of Swap Dealer and Intermediary Oversight 
staff advisory. It also discusses cost-benefit issues related to a test 
for the application of the SEF Registration Rule based on the provision 
of swap execution services to traders located in the United States as 
described in a Division of Market Oversight guidance document, also 
issued in November 2013. Section IV.G discusses certain additional 
cost-benefit issues specific to particular rules. Part V discusses 
commenters' recommendations for changes in the substance of the 
remanded rules and evaluates whether these changes are justified in 
light of the international cost-benefit considerations addressed in 
Part IV and other relevant considerations. Finally, Part VI concludes 
that, taking into account the facts and analysis in the original 
rulemaking preambles as well as the additional consideration of costs 
and benefits in the Initial Response and this release, the remanded 
rules are legally sound, and the Commission will not propose changes in 
the context of the SIFMA v. CFTC remand order.
    The Commission emphasizes that the purpose of the discussion of 
costs and benefits in Part IV and of potential rule changes in Parts V 
and VI is to respond to the mandate of the SIFMA remand order and to 
evaluate the present legal sufficiency of the remanded rulemaking 
proceedings. The discussion and conclusions in this release should not 
be interpreted to mean that the Commission will not consider other 
actions with respect to the rules, including substantive amendments, 
looking forward. To the contrary, the Commission will amend the rules 
in the future when amendment is in the public interest, whether in 
response to new information, experience, or the evolution of the 
markets and the international legal landscape.

II. Background \3\
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    \3\ For a more detailed description of the background of this 
release, see Initial Response, 80 FR at 12556-58.
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A. The District Court Litigation and Decision

    On December 4, 2013, three trade associations sued the Commission 
in the United States District Court for the District of Columbia, 
challenging the Commission's Interpretive Guidance and Policy Statement 
Regarding Compliance with Certain Swap Regulations \4\ (``Cross-Border 
Guidance'' or ``Guidance'') as well as the extraterritorial application 
of fourteen of the rules promulgated by the Commission to implement the 
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act \5\ regarding swaps.\6\
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    \4\ 78 FR 45292 (July 26, 2013).
    \5\ Public Law 111-203, 124 Stat. 1376 (2010).
    \6\ See SIFMA, 67 F. Supp. 3d at 384. The plaintiffs were the 
Securities Industry and Financial Markets Association, the 
International Swaps and Derivatives Association, and the Institute 
of International Bankers. Id. See also id. at 437-38.
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The fourteen challenged rules were promulgated by the Commission in 
twelve rulemakings.\7\ On September 16,

[[Page 54479]]

2014, the court issued a decision, granting summary judgment to the 
Commission on most issues but remanding without vacatur ten rules, 
promulgated in eight rulemakings.\8\ The court held that the preambles 
for these rules did not adequately address the costs and benefits of 
the extraterritorial application of the rules pursuant to section 2(i) 
of the Commodity Exchange Act (``section 2(i)'').\9\ Specifically, the 
court held that the Commission needed to address whether and to what 
extent the costs and benefits as to overseas activity may differ from 
those related to the domestic application of the rules.\10\
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    \7\ See id. at 437-38. Three of the fourteen challenged rules, 
informally identified by the court as the ``Daily Trading Records,'' 
``Risk Management,'' and ``Chief Compliance Officer'' Rules, were 
promulgated as part of a single rulemaking. Id.
    \8\ SIFMA, 67 F. Supp. 3d 373. For a more complete description 
of the decision, see the Commission's Initial Response, 80 FR 12555.
    \9\ SIFMA, 67 F. Supp. 3d at 430-33.
    \10\ Id. at 434-35.
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    The eight remanded rulemakings are:
    Real-Time Public Reporting of Swap Transactions Data \11\ (``Real-
Time Reporting Rule'');
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    \11\ 77 FR 1182 (Jan. 9, 2012).
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    Swap Data Recordkeeping and Reporting Requirements \12\ (``SDR 
Reporting Rule'');
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    \12\ 77 FR 2136 (Jan. 13, 2012).
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    Registration of Swap Dealers and Major Swap Participants \13\ 
(``Swap Entity Registration Rule'');
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    \13\ 77 FR 2613 (Jan. 19, 2012).
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    Swap Dealer and Major Swap Participant Recordkeeping, Reporting, 
and Duties Rule; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Rules; and Chief Compliance Officer Rules for 
Swap Dealers, Major Swap Participants, and Futures Commission Merchants 
\14\ (``Daily Trading Records,'' ``Risk Management,'' and ``Chief 
Compliance Officer'' Rules);
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    \14\ 77 FR 20128 (Apr. 3, 2012).
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    Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant,'' and ``Eligible Contract Participant'' \15\ (``Swap 
Entity Definition Rule'');
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    \15\ 77 FR 30596 (May 23, 2012).
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    Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment 
and Transition Swaps \16\ (``Historical SDR Reporting Rule'');
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    \16\ 77 FR 35200 (June 12, 2012).
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    Confirmation, Portfolio Reconciliation, Portfolio Compression, and 
Swap Trading Relationship Documentation Requirements for Swap Dealers 
and Major Swap Participants \17\ (``Portfolio Reconciliation Rule''); 
and
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    \17\ 77 FR 55904 (Sept. 11, 2012).
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    Core Principles and Other Requirements for Swap Execution 
Facilities \18\ (``SEF Registration Rule'').
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    \18\ 78 FR 33476 (June 4, 2013).
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B. The District Court's Rulings on Consideration of Costs and Benefits

    The district court remanded the eight rulemakings ``for further 
proceedings consistent with the Opinion issued this same day.'' \19\ As 
the Commission explained in its Initial Response to the remand order, 
the court's opinion included a number of holdings and observations that 
provide guidance as to the actions the Commission must take on remand.
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    \19\ SIFMA, 67 F. Supp. 3d at 437.
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    1. The court held that, because Congress made the determination 
that the swaps rules apply overseas to the extent specified in section 
2(i), the CEA provision on consideration of costs and benefits, section 
15(a), does not require the Commission to consider whether it is 
necessary or desirable for particular rules to apply to overseas 
activities as specified in section 2(i).\20\ Indeed, the court 
explained, the Commission cannot, based on a consideration of costs and 
benefits, second-guess Congress's decision that swaps rules apply to 
certain overseas activities.\21\ As a result, the court stated that 
``the only issues necessarily before the CFTC on remand would be the 
substance of the Title VII rules, not the scope of those Rules' 
extraterritorial applications under 7 U.S.C. 2(i).'' \22\
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    \20\ Id. at 431.
    \21\ Id. at 432; see also id. at 434-35 & n.35.
    \22\ Id. at 434-35.
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    2. At the same time, the court held that, in considering costs and 
benefits of the substantive regulatory choices it makes when 
promulgating a swaps rule, the Commission is required to take into 
consideration the fact that the rule, by statute, will apply to certain 
overseas activity.\23\ Thus, the Commission's consideration of costs 
and benefits of the application of the rule must encompass both foreign 
and domestic business activities.\24\ The court held that the 
Commission failed to meet this requirement because, the court stated, 
in the cost-benefit discussions for the rules at issue, the Commission 
did not state explicitly whether the identified costs and benefits 
regarding overseas activities are the same as, or differ from, those 
pertinent to domestic activities.\25\
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    \23\ Id. at 431-32.
    \24\ Id.
    \25\ Id.
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    3. The court held that the Commission has discretion either to 
consider costs and benefits of the international application of swaps 
rules separately from domestic application or to evaluate them 
together, ``so long as the cost-benefit analysis makes clear that the 
CFTC reasonably considered both.'' \26\ The district court found that, 
at the time the rules at issue in the litigation were promulgated, 
foreign swaps regulations were still under development so that costs of 
possible duplicative regulation were hypothetical and did not have to 
be considered.\27\ The court noted that this fact raised the 
possibility that the costs and benefits of the rules' extraterritorial 
applications ``were essentially identical to those of the Rules' 
domestic applications'' so that the Commission ``functionally 
considered the extraterritorial costs and benefits'' of the rules ``by 
considering the Rules' domestic costs and benefits.'' \28\ However, the 
court concluded that it did not need to address that possibility 
because the cost-benefit discussions in the rule preambles gave ``no 
indication'' that this was so.\29\ The court further noted that foreign 
swaps regulations passed since the promulgation of the rules at issue 
in the litigation ``may now raise issues of duplicative regulatory 
burdens,'' but that ``the CFTC may well conclude that its policy of 
substituted compliance largely negates these costs.'' \30\
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    \26\ Id. at 433.
    \27\ Id.
    \28\ Id.
    \29\ Id.
    \30\ Id. at 435.
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    4. Finally, the court noted that ``[p]laintiffs raise no complaints 
regarding the CFTC's evaluation of the general, often unquantifiable, 
benefits and costs of the domestic application of the Title VII 
Rules.'' \31\ As a result, the court held, ``[o]n remand, the CFTC 
would only need to make explicit which of those benefits and costs 
similarly apply to the Rules' extraterritorial applications.'' \32\
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    \31\ Id.
    \32\ Id.
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C. The Commission's Initial Response to the Remand Order

    On March 10, 2015, the Commission published its Initial Response to 
the district court remand order. In that release, the Commission 
described the district court litigation and order and took two 
substantive actions.
    First, the Commission supplemented the discussion of costs and 
benefits in the preambles of the remanded rulemakings by stating that 
it:

hereby clarifies that it considered costs and benefits based on the 
understanding that the swaps market functions internationally, with 
many transactions involving U.S. firms

[[Page 54480]]

taking place across international boundaries; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. The 
Commission considered all evidence in the record, and in the absence 
of evidence indicating differences in costs and benefits between 
foreign and domestic swaps activities, the Commission did not find 
occasion to characterize explicitly the identified costs and 
benefits as foreign or domestic. Thus, where the Commission did not 
specifically refer to matters of location, its discussion of costs 
and benefits referred to the effects of its rules on all business 
activity subject to its regulations, whether by virtue of the 
activity's physical location in the United States or by virtue of 
the activity's connection with or effect on U.S. commerce under 
section 2(i). In the language of the district court, the Commission 
``functionally considered the extraterritorial costs and benefits,'' 
and this was because the evidence in the record did not suggest that 
differences existed, with certain limited exceptions that the 
Commission addressed.\33\
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    \33\ 80 FR at 12558 (internal citation omitted).

    Second, to further inform its consideration of costs and benefits 
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on remand, the Commission solicited comments on four questions:

    1. Are there any benefits or costs that the Commission 
identified in any of the rule preambles that do not apply, or apply 
to a different extent, to the relevant rule's extraterritorial 
applications?
    2. Are there any costs or benefits that are unique to one or 
more of the rules' extraterritorial applications? If so, please 
specify how.
    3. Put another way, are the types of costs and benefits that 
arise from the extraterritorial application of any of the rules 
different from those that arise from the domestic application? If 
so, how and to what extent?
    4. If significant differences exist in the costs and benefits of 
the extraterritorial and domestic application of one or more of the 
rules, what are the implications of those differences for the 
substantive requirements of the rule or rules? \34\
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    \34\ Id.

    The Commission requested that commenters focus on information and 
analysis specifically relevant to the inquiry required by the remand 
order, and supply relevant data to support their comments.\35\
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    \35\ Id.
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    The Initial Response stated that, following review of the comments, 
the Commission would publish a further response to the district court 
remand order, which would include any necessary supplementation of the 
Commission's consideration of costs and benefits for the remanded 
rules. The Commission also stated that it would consider whether to 
amend any of the remanded rules based on information developed in this 
process.\36\
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    \36\ Id. at 12555.
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D. Comments in Response to the Commission's Initial Response

    The Commission received four comments in response to its Initial 
Response to the remand order: A five-page comment jointly filed by the 
International Swaps and Derivatives Association and the Securities 
Industry and Financial Markets Association (``ISDA-SIFMA''); a three-
page comment filed by the Japanese Bankers Association (``JBA''); a 
two-page comment filed by UBS Securities LLC (``UBS''); and a twenty-
one page comment filed by the Institute of International Bankers 
(``IIB'').\37\ The substance of the comments is discussed in detail in 
the remainder of this release.
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    \37\ The IIB comment also had a thirteen-page appendix 
consisting of a comment letter previously filed in response to 
another Commission request for comments, but covering largely 
similar subject matter to the primary IIB comment. Comment letters 
are available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1564.
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    Briefly, ISDA-SIFMA cautioned against an overly narrow conception 
of the burdens of overseas application of Commission rules, stating 
that, in addition to costs such as registration fees and expenses to 
construct and administer compliance systems, foreign entities would 
incur additional costs of ``engag[ing] with an unfamiliar, non-domestic 
regulator and face uncertainty regarding the ramifications of being 
subject to a new regime.'' \38\ The comment stated that ``internal 
conflicts and customer resistance frequently may follow.'' \39\ ISDA-
SIFMA further stated that these costs and uncertainties function as 
barriers to engagement in U.S. markets, potentially resulting in market 
fragmentation and decreased liquidity available to U.S. persons.\40\ 
ISDA-SIFMA stated that these costs must be weighed against what ISDA-
SIFMA described as ``attenuated or minimal benefits'' from Commission 
rules where ``foreign regulations . . . meet the objectives outlined by 
the G-20 jurisdictions.'' \41\
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    \38\ ISDA-SIFMA at 2. ISDA-SIFMA stated that ``[s]imple 
redeployment of the Commission's apparently domestic previous cost-
benefit analysis'' would not yield new information or distill 
lessons from experience to date with the Commission's rules and 
would ``miss a valuable opportunity to contribute to the global 
discussion regarding resolution of cross-border issues.'' Id. 
However, in making this observation, ISDA-SIFMA stated that ``it is 
not our purpose in this letter to express a view on what further 
actions are necessary in order to satisfy the `reasonable 
consideration' and related requirements of the remand order.'' Id. 
at 2 n.4.
    \39\ Id. at 2.
    \40\ Id.
    \41\ Id. The reference to G-20 objectives is to the 2009 
commitment by the G-20 group of major industrial nations to 
implement regulations for the over-the-counter derivatives market, 
including requirements for clearing, trading on exchanges or 
electronic trading platforms, and reporting of information on 
derivatives contracts to trade repositories. See Leaders' Statement, 
The Pittsburgh Summit (Sept. 24-25, 2009) at 20, https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf. Of the ten rules 
remanded in SIFMA, three fall within the specific scope of the 2009 
G-20 commitment--the SEF Registration Rule and the SDR and 
Historical SDR Reporting Rules. Other rules contribute to the 
broader G-20 objective of reducing risk to the financial system from 
the use of derivatives.
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    As evidence of market fragmentation, ISDA-SIFMA referred to ISDA 
research indicating a reduced percentage of transactions by European 
swap dealers with U.S. swap dealers in the market for euro denominated 
interest rate swaps following the implementation of the SEF 
Registration Rule.\42\ ISDA-SIFMA made suggestions for specific 
substantive changes in two remanded rules. In the Swap Entity 
Definition Rule, it recommended greater use of safe harbors to reduce 
uncertainty for businesses hedging financial risk in applying the de 
minimis exception for determining swap dealer status.\43\ In the SDR 
Reporting Rule, it recommended that the Commission ``re-examine'' the 
requirement of Commission rule 45.2(h) that swap counterparties who are 
not Commission registrants make their books and records available to 
the Commission and other U.S. authorities.\44\
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    \42\ ISDA-SIFMA at 3.
    \43\ Id.
    \44\ Id.
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    ISDA-SIFMA also urged the Commission to undertake greater 
harmonization with foreign jurisdictions. In connection with the SEF 
Registration Rule, ISDA-SIFMA stated that there was a ``stark 
contrast'' between what it described as ``very rigid execution 
methods'' under the Commission's rule and ``greater flexibility'' under 
the rules that the European Union plans to implement, and urged the 
Commission to ``re-examine its approach.'' \45\ ISDA-SIFMA also 
supported greater international harmonization in the area of swap data 
reporting.\46\ ISDA-SIFMA further stated that significant costs would 
be incurred if the Commission implemented the test for the application 
of certain Commission rules based on swap dealing activities within the 
United States by non-U.S. swap dealers set forth in the Division of 
Swap Dealer and

[[Page 54481]]

Intermediary Oversight Advisory, Applicability of Transaction-Level 
Requirements to Activity in the United States (CFTC Staff Advisory No. 
13-69, Nov. 14, 2013) (``DSIO Advisory'').\47\ Finally, with respect to 
the use of substituted compliance as a means for addressing issues of 
duplicative regulation, ISDA-SIFMA stated that ``broad, holistic'' 
substituted compliance ``can be of substantial help.'' \48\
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    \45\ Id.
    \46\ Id.
    \47\ Id. at 4. ISDA-SIFMA called this a ``personnel-based 
test.'' Id.
    \48\ Id.
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    JBA stated that banks are faced with legal and consulting fees to 
comply with Dodd-Frank rules and that remaining areas of ambiguity 
cause them to manage their business in a conservative manner.\49\ Banks 
have also incurred costs to comply with regulatory requirements that 
differ across jurisdictions, including where comparability is not 
established.\50\ With respect to foreign banks registered as swap 
dealers, JBA stated that the Commission's initial cost-benefit analysis 
did not take into consideration the fact that entity-level requirements 
apply to all of a bank's swaps business even though, for a non-U.S. 
bank, transactions with U.S. persons account for only 10% of that 
business.\51\ JBA further stated that foreign banks not registered as 
swap dealers have avoided transacting with U.S. financial institutions 
to avoid U.S. regulation, inconveniencing their customers and 
increasing risks and costs for maintaining market liquidity.\52\ JBA 
also stated that customers have avoided transacting with subsidiaries 
of foreign banks incorporated in the U.S. in order to avoid U.S. 
regulation, resulting in costs to book transactions with these 
customers with non-U.S. entities to maintain business 
relationships.\53\ JBA identified the reporting of swap data to trade 
repositories as one area where banks have been subject to differing 
requirements in multiple jurisdictions, resulting in increased 
compliance costs.\54\ JBA therefore recommended that the swap data 
reporting process should be established ``through an industry-wide 
initiative.'' \55\ JBA identified the swaps push-out rule as a second 
area of particular concern.\56\ However, this statutory provision \57\ 
was not part of the SIFMA litigation or remand order.
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    \49\ JBA at 1.
    \50\ Id.
    \51\ Id. at 1-2.
    \52\ Id. at 2.
    \53\ Id.
    \54\ Id. at 2-3.
    \55\ Id. at 3.
    \56\ Id.
    \57\ The phrase ``swaps push-out rule'' is commonly used to 
refer to 15 U.S.C. 8305, which, broadly speaking and with certain 
exclusions, prohibits advances from a Federal Reserve credit 
facility or discount window to assist swap dealers and certain 
similar entities.
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    UBS focused on the benefits of the SEF Registration Rule in 
promoting a level playing field for market participants, facilitating 
access to liquidity providers, and making the workflow from execution 
to clearing as robust and efficient as possible.\58\ UBS stated that 
application of the rule to all activities under the Commission's 
jurisdiction pursuant to section 2(i) helps to ensure that the core 
principles and benefits of the rule ``remain relevant as the global 
swaps market continues to evolve.'' \59\ UBS also urged the Commission 
to work with foreign regulators to maximize harmonization, avoid 
regulatory arbitrage, and establish substituted compliance regimes that 
address duplicative regulatory burdens, while also maintaining 
consistency with the principles of the Dodd-Frank Act and Commission 
regulations in the SEF area.\60\
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    \58\ UBS at 1.
    \59\ Id.
    \60\ Id.
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    IIB dealt primarily with cost-benefit issues that would arise from 
implementation of the test based on swap dealing activities physically 
located in the United States articulated in the DSIO Advisory.\61\ IIB 
focused on swaps between a non-U.S. swap dealer and its non-U.S. 
counterparties that--under the test set forth in the Advisory--would be 
subject to transaction-level Dodd-Frank rules if the relevant swaps are 
arranged, negotiated, or executed by personnel or agents of the non-
U.S. swap dealer located in the United States, but not otherwise. 
According to IIB, in such transactions, the costs of U.S. rules would 
be greater and benefits lower than in other transactions to which Dodd-
Frank rules apply. IIB stated that, in order to avoid U.S. regulation, 
foreign swap dealers would forgo using staff located in the United 
States in transactions with foreign counterparties even in 
circumstances where employing U.S. personnel would be advantageous, for 
example because a trader located in the United States is more familiar 
with a particular market.\62\ IIB also stated that such a test could 
result in covered transactions being subject to duplicative and 
possibly contradictory regulation by multiple jurisdictions and in 
costs to establish systems to keep track of which swaps are handled by 
personnel or agents located in the United States.\63\ IIB further 
stated that benefits would be doubtful in transactions made subject to 
Commission rules by such a test because the resulting swaps would be 
between two foreign entities and thus, according to IIB, pose little 
threat to the U.S. financial system.\64\ IIB also discussed cost-
benefit implications of a test based on physical presence in the United 
States in the context of several particular Dodd-Frank rules, 
including, but not limited to, some of the rules subject to the SIFMA 
remand order.\65\ IIB urged the Commission either to not implement such 
a test or to implement a version considerably narrower than the one 
described in the DSIO Advisory.\66\ IIB also was critical of a 
different standard based on services provided within the United States 
by non-U.S. persons, set forth in a Division of Market Oversight 
guidance document. Under this standard, the SEF Registration Rule 
applies to foreign-based entities that provide swap execution services 
to traders located in the United States, even if the traders execute 
swaps for non-U.S. persons.\67\
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    \61\ IIB called this a ``U.S. personnel test.'' IIB at 4.
    \62\ IIB at 5.
    \63\ Id. at 6-8.
    \64\ Id. at 6.
    \65\ Id. at 9-16. IIB's points regarding particular remanded 
rules are described in section IV.F, below.
    \66\ Id. at 17-19.
    \67\ Id. at 13-14.
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    In addition to discussing the application of Commission rules to 
non-U.S. firms based on activities within the United States, IIB stated 
that, in the area of swap data reporting, duplicative requirements 
create costs that could be avoided if the Commission could obtain 
information from foreign regulators and trade repositories.\68\ IIB 
stated that it supported Commission efforts to address legal and other 
obstacles to cross-border information sharing.\69\ Pending completion 
of these international efforts, IIB recommended that the Commission 
formalize existing no-action relief relating to the extraterritorial 
application of the SDR and Historical SDR Reporting Rules.\70\ IIB made 
no recommendations for specific changes in the substantive requirements 
of the remanded rules.
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    \68\ Id. at 20.
    \69\ Id.
    \70\ Id.

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[[Page 54482]]

III. General Approach to Costs and Benefits of Extraterritorial 
Application of Remanded Rules and Methods for Addressing Cost-Benefit 
Issues Raised by Commenters

    Under the SIFMA decision, the ultimate mandate to the Commission on 
remand, following consideration of the extraterritorial costs and 
benefits of the remanded rules, is to determine whether such 
consideration requires any changes to be made in the ``substantive 
transaction- and entity-level requirements'' of the remanded rules and, 
if not, to give a reasoned explanation why not.\71\ The Commission 
observes, consistent with the court's analysis, that Congress's 
decision to apply the swaps rules extraterritorially may have 
implications for the costs and benefits of the substance of those 
rules. This possibility is inherent in cross-border regulation because 
different sovereigns will make different substantive choices in 
implementing swaps-market reforms, and will do so at different paces, 
which raises the prospect of regulatory arbitrage and/or overlapping or 
inconsistent rulemaking.
---------------------------------------------------------------------------

    \71\ 67 F. Supp. 3d at 435.
---------------------------------------------------------------------------

    Although it is likely impossible to fully eliminate those 
difficulties, there are three general means by which the Commission and 
other regulators can reduce them. First, the regulator may promulgate 
rules and pursue policies specifically addressing the geographic reach 
of its regulations. For the Commission, any such cross-border rules and 
policies must be within the framework for the extraterritorial 
application of swaps rules set forth in section 2(i) and must take into 
account the policies of the relevant Dodd-Frank provisions as well as 
international harmonization and comity. Second, the regulator may alter 
the substance of its rules to conform them to those of foreign 
jurisdictions or to otherwise address the special issues inherent in 
cross-border regulation. Finally, the regulator may offer substituted 
compliance or similar relief in situations where a foreign regulation 
achieves results that are comparable to its own rules. At the 
Commission, similar relief may also come at the staff level in the form 
of no-action letters to address problems that may be more transient in 
nature, require faster action, or otherwise be better suited to staff 
action. These three categories of regulatory action may be used 
individually or in concert.
    As to the first of these methods--rules or policies specifically 
addressing the geographical scope of regulations--the Commission in 
2013 issued the Cross-Border Guidance to announce what it judged to be 
a desirable balance between Dodd-Frank's financial reform policies and 
international cooperation, consistent with the language of section 
2(i). The Commission acknowledged, however, that swaps markets are 
dynamic and would continue to evolve, necessitating an adaptable 
approach.\72\ In that vein, the Commission stated that it would 
consider addressing some of the subjects discussed in the Guidance by 
rulemaking in the future.\73\ That remains the Commission's position. 
As markets evolve and the Commission receives more information, it will 
consider the possibility of adopting rules concerning the cross-border 
application of its swaps regulations.\74\ Consideration of such rules 
is, however, outside the scope of the remand order.\75\
---------------------------------------------------------------------------

    \72\ Cross-Border Guidance, 78 FR at 45297.
    \73\ Id. at 45297 n.39.
    \74\ For example, in conjunction with its rule on Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 636 (Jan. 6, 2016), the Commission has adopted 
an accompanying rule specifically addressing cross-border 
application. Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants--Cross-Border Application of the 
Margin Requirements, 81 FR 34818 (May 31, 2016).
    \75\ SIFMA v. CFTC, 67 F. Supp. 3d at 435; see also id. at 434-
35 (distinguishing between ``substance'' of rules and ``scope'' of 
their extraterritorial application under section 2(i)).
---------------------------------------------------------------------------

    The second tool for addressing cross-border issues, tailoring 
substantive rule requirements, is the subject of this release, pursuant 
to the district court mandate. Although tailoring substantive rule 
requirements is a possible tool by which to avoid certain issues of 
regulatory arbitrage and inconsistent regulation, this approach has 
significant limitations. Chief among these is that the Commission does 
not have unlimited flexibility to alter rules or lower its standards, 
consistent with its statutory mandate. Even where the statute permits 
flexibility, relaxing a particular substantive requirement to address a 
cross-border issue may be undesirable from a public-policy standpoint 
when other relevant factors are also considered. This is particularly 
true since changes in the substance of rules affect domestic as well as 
extraterritorial transactions and entities.
    A further concern with relaxation of substantive rule requirements 
as a tool to address issues of regulatory arbitrage and costs of 
regulation by multiple jurisdictions is that it could contribute to a 
``race to the bottom'' dynamic if engaged in unilaterally rather than 
as an outcome of internationally coordinated rule harmonization 
efforts. This point is complicated by the fact, discussed in more 
detail below, that foreign jurisdictions do not yet have regulations in 
place, or fully in place, in important areas covered by the remanded 
rules. A final consideration in connection with the present remand is 
that, at the time of its original rulemakings, the Commission consulted 
with foreign regulators, reviewed comments concerning overseas 
application of rules, and took these sources of information into 
account in framing the substance of rules even where the accompanying 
cost-benefit discussion did not explicitly distinguish between domestic 
and extraterritorial rule applications.\76\
---------------------------------------------------------------------------

    \76\ For example, in the Portfolio Reconciliation Rule, the 
Commission, at the request of commenters, modified the proposed 
confirmation deadlines to take into account swaps executed in 
different time zones. 77 FR at 55923. See also, e.g., Real-Time 
Reporting Rule, 77 FR at 1189-90; SDR Reporting Rule, 77 FR at 2137-
38, 2151, 2160-62, 2165, 2167.
---------------------------------------------------------------------------

    Notwithstanding these concerns, the Commission recognizes that 
incremental changes to harmonize its substantive rules with those of 
foreign jurisdictions, or otherwise to address issues specific to 
extraterritorial application, might be desirable under certain 
circumstances. However, perhaps because of the difficulties described 
in the previous paragraph, commenters made only a small number of 
recommendations for specific changes in the substantive requirements of 
the remanded rules. As explained in Part V, below, the available record 
does not justify adoption of these proposed changes in the context of 
the present remand, taking into account both considerations unique to 
the extraterritorial application of the relevant rules, and 
considerations common to their domestic and extraterritorial 
application. Commenters also urged the Commission to continue or expand 
its engagement in international harmonization efforts for certain 
rules. The Commission agrees, as discussed in more detail below. 
However, as also explained below, these efforts have not reached the 
point today where they can serve as the basis for specific rule 
changes.
    At this time, the Commission is focused, in large part, on the 
third tool--cooperative international efforts including, but not 
limited to, substituted compliance and similar relief at the staff 
level. As outlined in the Cross-Border Guidance, the Commission's 
substituted compliance program is designed to avoid potential conflicts 
and duplication between U.S. regulations and foreign law, consistent 
with principles of international comity,

[[Page 54483]]

but only in instances where the laws and regulations of the foreign 
jurisdiction are comparable and as comprehensive as a corresponding 
category of U.S. laws and regulations, thus avoiding the risk of a race 
to the bottom and ensuring that the Commission's public policy goals, 
established by Congress, are met.\77\ As foreign regulators continue to 
make progress in implementing swaps-market reforms, incentives for 
regulatory arbitrage will diminish, and substituted compliance can be 
expanded to reduce duplicative or otherwise unnecessary regulatory 
burdens.\78\
---------------------------------------------------------------------------

    \77\ 78 FR at 45340.
    \78\ See below at section IV.C.
---------------------------------------------------------------------------

IV. Evaluation of International Cost-Benefit Considerations Raised in 
Comments

A. Commenters' General Observations on Costs of Extraterritorial 
Application of Rules

    ISDA-SIFMA identifies a number of general respects in which 
compliance with Commission rules may be more difficult for foreign 
market participants than domestic ones:

    When foreign market participants are subject to Commission 
rules, they must engage with an unfamiliar, non-domestic regulator 
and face uncertainty regarding the ramifications of being subject to 
a new regime. A full-bore legal investigation (which may leave 
unresolved issues) and substantial management attention are 
prerequisites in any responsible entity becoming subject to a 
foreign regulator. The addition of specially trained staff is a 
common adjunct. Internal conflicts and customer resistance 
frequently may follow. It is unsurprising that non-U.S. market 
participants simply may be unwilling to take on this burden.\79\
---------------------------------------------------------------------------

    \79\ ISDA-SIFMA at 2.

    ISDA-SIFMA thus suggests that foreign swaps entities may find it 
more costly to comply with Commission regulations than domestic 
entities because foreign entities will be less familiar with U.S. laws 
and institutions and will need to invest resources in learning about 
them. Along the same lines, the JBA comments that ``banks are faced 
with increasing costs for legal fees and external consulting fees in 
their efforts to accurately interpret and comply with [Dodd-Frank 
rules].'' \80\ JBA also points out that banks have incurred costs to 
comply with multiple jurisdictions' regulations where the timing of 
implementation or requirements may differ, and that foreign swap 
dealers need to incur costs to comply with entity-level rules that 
apply to a firm's overall operations even though only a relatively 
small portion of the dealer's swaps may be with U.S. 
counterparties.\81\
---------------------------------------------------------------------------

    \80\ JBA at 1.
    \81\ Id. at 1-2.
---------------------------------------------------------------------------

    With respect to these general points about costs of 
extraterritorial application of Commission rules, the Commission notes:
    1. The commenters do not appear to dispute the basic point made in 
the Commission's Initial Response that ``the swaps market functions 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with leading industry members 
typically conducting operations both within and outside the United 
States; and with industry members commonly following substantially 
similar business practices wherever located.'' \82\ By the same token, 
ISDA-SIFMA's and JBA's general observations on costs are not 
inconsistent with the conclusion that the types of costs and benefits 
identified in the original preambles to the remanded rule characterize 
the extraterritorial, as well as the domestic, application of the 
rules. The Commission agrees, however, that entities doing business 
internationally likely would face additional costs resulting from the 
need to comply with swaps regulations in more than one jurisdiction. 
The more jurisdictions in which the market participant does business, 
the greater the costs that predictably will result. This is inherent in 
cross-border regulation, both as required of the Commission by Congress 
and by foreign regulators.
---------------------------------------------------------------------------

    \82\ 80 FR at 12558. Similarly, while the comments set forth 
various ways in which, according to the commenters, foreign and 
domestic costs may differ, they do not take issue with the 
Commission's statement in the Initial Response that, in the original 
Federal Register releases for the rules at issue, ``where the 
Commission did not specifically refer to matters of location, its 
discussion of costs and benefits referred to the effects of its 
rules on all business activity subject to its regulations, whether 
by virtue of the activity's physical location in the United States 
or by virtue of the activity's connection with or effect on U.S. 
commerce under section 2(i).'' Id.
---------------------------------------------------------------------------

    2. ISDA-SIFMA and JBA state that, in at least some instances, 
foreign firms will find it more costly to comply with CFTC Dodd-Frank 
rules than domestic firms will. However, for purposes of considering 
costs and benefits on remand, a number of factors significantly limit 
the weight that can be given to their general observations on costs.
    a. With certain limited exceptions, discussed below,\83\ ISDA-SIFMA 
and JBA provide no quantitative information on, or estimates of, the 
differential foreign and domestic cost effects they assert. Moreover, 
even in qualitative terms they provide little in the way of specific 
analysis or examples of how the cost mechanisms they mention work in 
practice.\84\ This makes it difficult to evaluate how significant any 
differences in foreign and domestic costs are relative to the 
similarities resulting from the overall international nature of the 
swaps markets; and to assess the attendant implications with respect to 
the substance of the remanded rules.
---------------------------------------------------------------------------

    \83\ See section IV.E below.
    \84\ IIB provides somewhat more detail in its discussion of 
issues raised by the DSIO Advisory. See section IV.F. below.
---------------------------------------------------------------------------

    b. The costs identified by ISDA-SIFMA and JBA are, to a 
considerable extent, not unique to the foreign applications of the 
remanded rules. Both comments emphasize the cost of learning about, and 
establishing compliance programs for, a novel regulatory scheme. 
However, the Dodd-Frank swaps regime, and the Commission's implementing 
rules, were novel for domestic as well as foreign firms since swaps in 
the United States were largely unregulated before Dodd-Frank. Moreover, 
firms located in the United States also must learn about foreign swaps 
regulations if they wish to do business overseas. The discussion by 
ISDA-SIFMA and JBA does not clearly distinguish the special costs of 
foreign firms complying with novel U.S. regulations from the costs to 
all firms of complying with any novel regulations. ISDA-SIFMA also does 
not adequately take into consideration that some costs of complying 
with U.S. rules may have been higher simply because the United States 
moved more quickly than foreign jurisdictions to implement derivatives 
regulations in response to the financial crisis; and foreign 
jurisdictions still do not have regulations fully in place.
    c. The discussion of general costs in ISDA-SIFMA and JBA, to a 
large extent, does not distinguish between costs attributable to the 
remanded rules and costs attributable to the underlying statute. As 
noted, one of the major cost drivers described in these comments is the 
cost of learning about, and establishing compliance programs for, U.S. 
law. However, in virtually all areas covered by the remanded rules, the 
Dodd-Frank statute either specifically required the CFTC to promulgate 
some form of rule or directly imposed regulatory requirements.\85\ And, 
as held

[[Page 54484]]

by the court in SIFMA, the rules were made applicable to foreign 
activity by CEA section 2(i), not the Commission's rulemaking. As a 
result, at least part of the cost of figuring out and applying U.S. law 
discussed in these comments is attributable to the statutory scheme and 
not to the specific terms of the rules promulgated by the Commission.
---------------------------------------------------------------------------

    \85\ For example, reporting of swaps to swap data repositories 
is required by CEA section 2(a)(13)(G), 7 U.S.C. 2(a)(13)(G); the 
Swap Entity Registration Rule is required by CEA sections 4s(a) and 
4s(b), 7 U.S.C. 6s(a) and 6s(b); the Daily Trading Records Rule is 
required by CEA section 4s(g), 7 U.S.C. 6s(g); the Real-Time 
Reporting Rule is required by CEA section 2(a)(13)(C), 7 U.S.C. 
2(a)(13)(C); and requirements for risk management and chief 
compliance officers are imposed by CEA sections 4s(j)(2) and 4s(k), 
7 U.S.C. 6s(j)(2) and 6s(k).
---------------------------------------------------------------------------

    d. The regulatory requirements imposed by the remanded rules fall 
largely on sophisticated financial firms active in international 
markets. It is unlikely that such firms would have significantly more 
difficulty than similar U.S. firms in applying U.S. law.
    Foreign firms made subject to the rules by section 2(i) are likely 
to have significant experience in international markets, including in 
particular the U.S. market, since that provision only applies to firms 
whose transactions have a significant connection with or effect on U.S. 
commerce. Among such firms, the Swap Entity Registration,\86\ Daily 
Trading Records, Risk Management, Chief Compliance Officer,\87\ Swap 
Entity Definition,\88\ and Portfolio Reconciliation \89\ Rules 
primarily impose requirements on swap dealers. A foreign business that 
meets the legal criteria to be classified as a swap dealer is likely to 
be a major international financial firm, for a number of reasons. 
Broadly speaking, the statutory swap dealer definition encompasses 
firms that are in the business of making available swaps to other 
persons, to meet the business needs of those persons, as opposed to 
firms that merely use swaps to hedge their own business risks or for 
their own investment purposes.\90\ Firms engaged in this line of 
business are likely to be sophisticated financial entities. Indeed, the 
Commission's rule further defining a swap dealer includes a ``de 
minimis'' exception under which an entity dealing in swaps is not 
considered to be a swap dealer unless its volume of dealing activity 
exceeds a specified notional dollar amount, currently $8 billion, with 
certain limited exceptions.\91\
---------------------------------------------------------------------------

    \86\ 77 FR 2613.
    \87\ 77 FR 20128.
    \88\ 77 FR 30596.
    \89\ 77 FR 55904.
    \90\ See, e.g., the interpretive guidance on the definition of 
swap dealer in the preamble to the Swap Entity Definition Rule, 77 
FR at 30607-16.
    \91\ 17 CFR 1.3(ggg)(4). Under the terms of the regulation, the 
amount will change to $3 billion at the end of 2017 unless the 
Commission takes action to the contrary. The Commission is currently 
evaluating what the de minimis amount should be after this date. 
See, e.g., Swap Dealer De Minimis Exception Preliminary Report, A 
Report by Staff of the U.S. Commodity Futures Trading Commission 
Pursuant to Regulation 1.3(ggg) (Nov. 18, 2015).
---------------------------------------------------------------------------

    Pursuant to section 2(i), a foreign firm that otherwise meets the 
definition of a swap dealer would not be considered a swap dealer for 
purposes of Dodd-Frank swaps regulations unless its dealing activity 
has a direct and significant connection with activities in or effect on 
U.S. commerce. The Cross-Border Guidance describes current Commission 
policy for applying this limitation. Generally speaking, a non-U.S. 
firm engaged in swap dealing is only treated as a swap dealer if it is 
a guaranteed or conduit affiliate of a U.S. firm, or if its dealing 
activity with a connection to or effect on U.S. markets--including 
trades with U.S. persons and trades with non-U.S. firms that are 
guaranteed or conduit affiliates of U.S. persons--exceeds the de 
minimis amount, which, as noted, is currently $8 billion.\92\ Non-U.S. 
firms that meet these criteria are likely not only to be sophisticated 
financial firms, but also to have a significant presence in 
international markets and at least some familiarity with U.S. law, 
including Dodd-Frank and the CEA, and capacity for implementing 
compliance programs based on it. While the Guidance is non-binding, the 
scope of section 2(i) itself means that foreign entities subject to the 
swap dealer definition will generally be sophisticated international 
companies.
---------------------------------------------------------------------------

    \92\ Cross-Border Guidance, 78 FR at 45318-20. An exception is 
non-U.S. firms that are themselves guaranteed or conduit affiliates 
of U.S. firms. For these firms, all of their swap dealing activity 
counts toward the de minimis threshold. Id. at 45318-19.
---------------------------------------------------------------------------

    Consistent with this conclusion, of the firms currently registered 
as swap dealers with the Commission, almost all that are not U.S. 
companies are either foreign affiliates of U.S. companies, 
international banking companies, or affiliates of other major 
international companies.\93\ Similarly, in the preamble to the Swap 
Entity Registration Rule, the Commission noted that many of the 
foreign-based commenters on the rule had experience navigating U.S. law 
in connection with lines of business such as banking or insurance, 
although it acknowledged that there might potentially be higher costs 
for any swap dealers that may lack familiarity with U.S. law.\94\
---------------------------------------------------------------------------

    \93\ See Dodd-Frank Act, Provisionally Registered Swap Dealers, 
CFTC.gov, http://www.cftc.gov/ LawRegulation/DoddFrankAct/
registerswapdealer.
    \94\ 77 FR at 2625.
---------------------------------------------------------------------------

    The remanded reporting rules--the Real-Time Reporting, SDR 
Reporting, and Historical SDR Reporting Rules--also impose duties 
largely on sophisticated parties. For transactions executed on or 
subject to the rules of designated contract markets \95\ (``DCMs'') or 
SEFs, reporting duties generally fall on the relevant DCM or SEF. In 
other swap transactions, the reporting duty generally falls on a swap 
dealer, assuming at least one of the parties is a dealer.\96\ For 
cleared swaps, certain reporting duties are handled by derivatives 
clearing organizations, another category of sophisticated entity.\97\ 
The Commission's understanding is that transactions that are not traded 
on or pursuant to the rules of a DCM or SEF and that do not involve a 
dealer, account for only a relatively small portion of the market.
---------------------------------------------------------------------------

    \95\ Broadly speaking, ``designated contract market'' is the 
term used in the CEA for a traditional futures exchange or a similar 
exchange used for swap trading.
    \96\ 17 CFR 43.3(a)(3)(i)-(iii).
    \97\ See, e.g., 17 CFR 45.4(b); Amendments to Swap Data 
Recordkeeping and Reporting Requirements for Cleared Swaps, 80 FR 
52544 (Aug. 31, 2015).
---------------------------------------------------------------------------

    3. The Commission and its staff have taken a variety of actions 
that mitigate, though they do not eliminate, differential costs of 
compliance for foreign and domestic swaps business, most importantly, 
though not only, through the program of substituted compliance. These 
mitigation actions are described in section IV.C, below.

B. General Observations by Commenters on Benefits of Extraterritorial 
Application of Remanded Rules

    ISDA-SIFMA stated that net benefits of the extraterritorial 
application of Commission rules are likely to be reduced where foreign 
regulations accomplish similar results; they refer to ``attenuated or 
minimal benefits'' from ``overlayering Commission regulations onto 
foreign regulations that meet the objectives outlined by the G-20 
jurisdictions.'' \98\ Other commenters also refer to the existence of 
overlapping regulations in some areas such as reporting.\99\ The 
Commission agrees that the existence of similar foreign regulations can 
potentially reduce the incremental benefits of Commission rules for 
entities or transactions covered by those regulations. However, there 
are a number of factors that limit the weight that can be given to 
commenters' observations on this point in the context of the present 
remand.
---------------------------------------------------------------------------

    \98\ ISDA-SIFMA at 2.
    \99\ JBA at 2-3, IIB at 19-20.
---------------------------------------------------------------------------

    1. ISDA-SIFMA and other commenters give little or no information as 
to what foreign regulations are currently in effect that they believe 
address the subject areas of the remanded Commission rules, in 
particular foreign regulations that are not at this time subject to 
substituted

[[Page 54485]]

compliance. Several of the remanded rules cover subjects where non-U.S. 
regulation is not yet final. One example is the SEF Registration Rule. 
In the European Union (``EU''), the leading swaps market outside the 
United States, new regulations for ``multilateral trading facilities'' 
and ``organized trading facilities''--EU terms for certain types of 
facilities that execute swaps--are being put in place pursuant to EU 
Directive 2014/65, markets in financial instruments directive, commonly 
known as ``MiFID II,'' and Regulation No. 600/2014, markets in 
financial instruments regulation, commonly known as ``MiFIR,'' both of 
which were adopted in 2014.\100\ However, the EU still needs to approve 
draft Regulatory Technical Standards put forth by the European 
Securities and Markets Authority implementing MiFID II and MiFIR.\101\ 
For some requirements, individual European states and competent 
authorities will need to take action to put requirements in force.\102\ 
As a result, these EU requirements are not currently expected to go 
into effect until January 3, 2018.\103\ Other foreign jurisdictions 
also generally do not have current regulations in operation for swaps 
trading facilities analogous to SEFs.\104\
---------------------------------------------------------------------------

    \100\ See, e.g., Directive 2014/65/EU of the European Parliament 
and of the Council of 15 May 2014 on markets in financial 
instruments and amending Directive 2002/92/EC and Directive 2011/61/
EU, 2014 O.J. (L 173) 349; Regulation (EU) No. 600/2014 of the 
European Parliament and of the Council of 15 May 2014 on markets in 
financial instruments and amending regulation (EU) No. 648/2012, 
2014 O.J. (L 173) 84.
    \101\ Council of the EU Press Release 255/16, Markets in 
financial instruments: Council confirms agreement on one-year delay 
(May 18, 2016).
    \102\ Id.
    \103\ Id.
    \104\ See Financial Stability Board, OTC Derivatives Market 
Reforms, Tenth Progress Report on Implementation, at 12-13, 17 Table 
F (Nov. 4, 2015), http://www.fsb.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf.
---------------------------------------------------------------------------

    Another example is the Real-Time Reporting Rule. European 
regulations that will require the post-trade publication of swap 
transaction information are being implemented within the MiFID II/MiFIR 
framework and therefore are not yet operational.\105\ At present, with 
very limited exceptions, other non-U.S. jurisdictions also do not yet 
provide for public reporting of swap transaction information similar to 
that provided by the Real-Time Reporting Rule.\106\
---------------------------------------------------------------------------

    \105\ See International Organization of Securities Commissions 
(``IOSCO''), Post-Trade Transparency in the Credit Default Swaps 
Market, Final Report, at 6 (Aug. 2015), http://www.iosco.org/library/pubdocs/pdf/IOSCOPD499.pdf.
    \106\ See id. Financial Stability Board, Thematic Review on OTC 
Derivatives Trade Reporting, Peer Review Report, at 51 Table 12 
(Nov. 4, 2015) (``FSB Trade Reporting Review''), http://www.fsb.org/wp-content/uploads/Peer-review-on-trade-reporting.pdf.
---------------------------------------------------------------------------

    The Commission will also need to monitor the effect of the recent 
vote by the United Kingdom to leave the European Union on the timing 
and other aspects of the implementation of foreign regulation in the 
areas of the remanded rules, particularly given the importance of 
London as a financial center.
    2. Even where foreign jurisdictions have in place regulations 
broadly similar to U.S. regulations, there can be important benefits to 
having U.S. rules apply to foreign swaps activity that has a 
significant connection with or effect on U.S. markets. Among the 
remanded rules, one example is the Swap Entity Registration Rule, which 
sets forth the paperwork and related requirements for a swap dealer to 
register with the Commission.\107\ As explained in the cost-benefit 
discussion in the rule preamble, the major benefit of this rule is that 
it ``will enable the Commission to increase market integrity and 
protect market participants and the public by identifying the universe 
of [swap dealers] and [major swap participants] subject to heightened 
regulatory requirements and oversight in connection with their swaps 
activities.'' \108\ In other words, the rule provides the Commission 
with basic identifying and other information to enable it to monitor 
the activities of swap dealers and major swap participants--whether 
foreign or domestic--with a significant connection with or effect on 
the U.S. market, thereby facilitating regulatory actions that may be 
required. Foreign licensure requirements do not provide the same 
benefit of directly and systematically providing the Commission 
information to enable it to identify and monitor foreign participants 
in U.S. markets.
---------------------------------------------------------------------------

    \107\ 77 FR at 2614. The underlying requirement to register 
derives from the statute. See CEA section 4s(a), 7 U.S.C. 6s(a).
    \108\ Swap Entity Registration Rule, 77 FR at 2623.
---------------------------------------------------------------------------

    Other important examples are the SDR and Historical SDR Reporting 
Rules. Among the primary benefits of these rules is to provide the 
Commission and other U.S. regulators with information on swaps trades 
to enable them to monitor and analyze the market.\109\ This benefit is 
relevant to swaps outside the United States made subject to reporting 
by section 2(i), since such swaps are likely to have significant 
effects on or connections to the U.S. financial system. While the EU 
and some other major swaps jurisdictions have rules in place requiring 
reporting of swaps transactions to ``trade repositories,'' U.S. 
regulators currently do not have ready access to this data for a 
variety of legal and practical reasons.\110\ While efforts are underway 
to address these issues, at present reporting to foreign trade 
repositories does not provide the same benefits for U.S. markets as the 
Commission's SDR and Historical SDR Reporting Rules.\111\
---------------------------------------------------------------------------

    \109\ See, e.g., discussion of benefits of SDR Reporting Rule in 
rule preamble, 77 FR at 2176, 2179, 2181.
    \110\ See FSB Trade Reporting Review at 27-28.
    \111\ See id. at 29-30 (recommendation that all jurisdictions 
should have a legal framework in place to permit access to data in 
trade repositories by foreign regulatory authorities by June 2018).
---------------------------------------------------------------------------

    3. In circumstances where foreign and U.S. regulations address 
similar concerns, there may be economies in compliance activity that 
partially compensate for the effects of regulatory overlap. For 
example, investments by a firm in information and compliance systems to 
comply with foreign legal requirements in areas such as reporting and 
risk management are likely to be useful for--and thus reduce the 
incremental cost of--complying with similar U.S. requirements even if 
the rules differ in detail.
    4. Through substituted compliance and other actions, the Commission 
has allowed businesses to rely on foreign law in circumstances where it 
can be shown that that law achieves benefits similar to the 
Commission's requirements. The Commission expects to make additional 
use of substituted compliance or other forms of recognition of similar 
foreign regulation as appropriate in the future, including when other 
foreign rules take effect. Substituted compliance and related actions 
are discussed in detail in section IV.C, below.

C. Substituted Compliance and Other Commission Actions To Mitigate 
Costs of Application of Remanded Rules Outside the United States

    The Commission has taken a variety of actions to modify the 
overseas application of the remanded rules in circumstances where other 
jurisdictions have similar regulations in place. These actions may not 
eliminate the costs associated with duplicative regulation, but they 
substantially mitigate them, and therefore reduce any justification for 
substantive rule changes to address extraterritorial concerns.
    The most important of the Commission's actions to address problems 
of duplicative regulation is substituted compliance. A framework for 
substituted compliance was set forth in the Commission's Cross-Border

[[Page 54486]]

Guidance.\112\ Notably, since the Guidance is a non-binding policy 
statement, the Commission is not precluded from employing substituted 
compliance in circumstances, or on terms, not specified in the Guidance 
if there are good reasons for doing so.\113\
---------------------------------------------------------------------------

    \112\ 78 FR at 45342ff.
    \113\ For example, in the recently promulgated rule on the 
cross-border application of the Commission's rule on margin 
requirements for uncleared swaps, the Commission established 
standards as to when substituted compliance would be available with 
respect to that rule that are somewhat different from the standards 
set forth in the Cross-Border Guidance. See 81 FR at 34829-30.
---------------------------------------------------------------------------

    Substituted compliance is relevant to entities that are subject to 
the Commission's rules pursuant to section 2(i), but also are subject 
to the swaps laws of a foreign jurisdiction. Examples given in the 
Guidance include non-U.S. firms required under section 2(i) to register 
with the Commission as swap dealers and foreign branches and foreign-
located guaranteed and conduit affiliates of U.S. swap dealers.\114\ 
Substituted compliance means that the Commission will permit the entity 
to comply with the law of the relevant foreign jurisdiction in lieu of 
compliance with one or more of the Commission's regulatory 
requirements.\115\ As a condition for substituted compliance, the 
Commission must find that the foreign jurisdiction's requirements, in a 
particular subject area, are comparable to and as comprehensive as, the 
Commission's requirements.\116\ The foreign jurisdiction's requirements 
need not be identical, however, so long as they achieve similar 
outcomes.\117\ Under the program described in the Guidance, the 
availability of substituted compliance may vary depending on the type 
of regulations or transactions at issue. For example, for certain 
regulations, called ``transaction-level requirements'' in the Guidance, 
substituted compliance is available to foreign swap dealers that are 
affiliates of U.S. firms in transactions with foreign counterparties, 
but not in transactions with counterparties who are U.S. persons, in 
light of the greater U.S. interest in the latter.\118\
---------------------------------------------------------------------------

    \114\ 78 FR at 45342.
    \115\ Id.
    \116\ Id.
    \117\ Id. at 45342-43.
    \118\ Id. at 45350-61.
---------------------------------------------------------------------------

    Procedurally, persons interested in substituted compliance must 
apply to the Commission for a comparability determination. Applicants 
must identify the Commission requirements for which they seek 
substituted compliance and provide information about the foreign law 
that they believe is comparable.\119\ Applicants can include regulated 
firms, foreign regulators, and trade associations or similar 
groups.\120\ However, a resulting comparability determination will 
apply to all entities or transactions in the relevant jurisdiction, not 
just to particular applicants.\121\ In addition to the formal 
application, comparability determinations typically also involve 
consultation by the Commission with foreign regulators and may involve 
follow-up memoranda of understanding providing for information sharing 
and other forms of cooperation between regulators.\122\ These elements 
of the process allow the Commission to reduce burdens without 
sacrificing its regulatory interests as defined by the CEA and Dodd-
Frank.
---------------------------------------------------------------------------

    \119\ Id. at 45344.
    \120\ Id.
    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    In December 2013, the Commission announced comparability 
determinations--making substitute compliance possible--with respect to 
six foreign jurisdictions: Australia, Canada, the European Union, Hong 
Kong, Japan, and Switzerland in certain rulemaking areas. All of these 
jurisdictions were found to have laws comparable to two of the remanded 
rules, the Chief Compliance Officer and Risk Management Rules.\123\ The 
EU and Japan were found to have laws comparable to the Daily Trading 
Records Rule.\124\ The EU was also found to have laws comparable to 
most, and Japan to have laws comparable to some, provisions of the 
Portfolio Reconciliation Rule.\125\ The comparability determinations 
incorporated a number of exceptions, typically to ensure that the 
Commission or other U.S. authorities obtain information on foreign 
registrants.\126\
---------------------------------------------------------------------------

    \123\ 17 CFR 3.3, 23.600-23.606; see Comparability Determination 
for Australia: Certain Entity-Level Requirements, 78 FR 78864, 
78868-75 (Dec. 27, 2013); Comparability Determination for Canada: 
Certain Entity-Level Requirements, 78 FR 78839, 78842-49 (Dec. 27, 
2013); Comparability Determination for the European Union: Certain 
Entity-Level Requirements, 78 FR 78923, 78927-35 (Dec. 27, 2013); 
Comparability Determination for Hong Kong: Certain Entity-Level 
Requirements, 78 FR 78852, 78855-62 (Dec. 27, 2013); Comparability 
Determination for Japan: Certain Entity-Level Requirements, 78 FR 
78910, 78914-21 (Dec. 27, 2013); Comparability Determination for 
Switzerland: Certain Entity-Level Requirements, 78 FR 78899, 78902-
08 (Dec. 27, 2013).
    \124\ 17 CFR 23.202; see Comparability Determination for the 
European Union: Certain Entity-Level Requirements, 78 FR 78878, 
78887-88 (Dec. 27, 2013); Comparability Determination for Japan: 
Certain Transaction-Level Requirements, 78 FR 78890, 78896-97 (Dec. 
27, 2013).
    \125\ 17 CFR 23.501-23.506; see 78 FR at 78883-87; 78 FR at 
78894-95.
    \126\ For example the comparability determinations for the Risk 
Management and Chief Compliance Officer Rules required covered 
entities to make reports to the Commission, although these reports 
could be the same as the equivalent reports provided to the relevant 
foreign regulators.
---------------------------------------------------------------------------

    Nothing in the Commission's policies for substituted compliance 
precludes additional comparability determinations, beyond those made in 
2013, as the international legal landscape for swaps evolves. The 
Commission recently made a comparability determination for certain 
European rules for central counterparties, the EU equivalent of what 
U.S. law calls derivatives clearing organizations.\127\ While this is a 
subject area outside the SIFMA litigation, the Commission remains open 
to further substituted compliance for the remanded rules, upon an 
adequate showing of comparability.
---------------------------------------------------------------------------

    \127\ Comparability Determination for the European Union: Dually 
Registered Derivatives Clearing Organizations and Central 
Counterparties, 81 FR 15260 (Mar. 22, 2016).
---------------------------------------------------------------------------

    Comparability determinations have been supplemented by other 
actions to mitigate costs of the extraterritorial application of the 
remanded rules and accommodate foreign regulation. For example, in the 
Cross-Border Guidance, the Commission set forth a policy that, with 
certain exceptions, foreign swap dealers generally would not be 
required to comply with transaction-level requirements in connection 
with their swaps with foreign counterparties independently of the 
substituted compliance program.\128\ Another major example is the use 
of staff no-action letters. These have been used particularly in areas 
where the law is unsettled, either because of the continuing evolution 
of foreign law, efforts to harmonize regulation across jurisdictions, 
or, in some instances, possible changes in the Commission's own rules. 
Staff no-action relief has typically been for limited periods of time, 
with extensions granted as appropriate.
---------------------------------------------------------------------------

    \128\ 78 FR at 45369. In connection with the cross-border 
application of the margin rule for uncleared swaps, which postdates 
the present litigation, the Commission has established certain 
exclusions by rule. See 81 FR at 34850-51 (Table A).
---------------------------------------------------------------------------

    One example is no-action relief in the area of the SDR and 
Historical SDR Reporting Rules. With certain exceptions, the 
Commission's Division of Market Oversight has granted no-action relief 
with respect to these rules for swap dealers and major swap 
participants established under the laws of Australia, Canada, the 
European

[[Page 54487]]

Union, Japan, or Switzerland.\129\ This relief was issued after the 
Commission received requests for comparability determinations for trade 
repository reporting rules in these jurisdictions.\130\ The primary 
exceptions to the relief are for entities that are part of an 
affiliated group with a U.S. parent and for transactions with 
counterparties who are U.S. persons or guaranteed or conduit affiliates 
of U.S. persons.\131\ These exceptions reflect the stronger U.S. 
supervisory and oversight interest in such entities and 
transactions.\132\
---------------------------------------------------------------------------

    \129\ CFTC Letter No. 15-61 (extending no-action relief provided 
in CFTC Letter No. 13-75 and extended under CFTC Letter No. 14-141).
    \130\ See id. at 2; CFTC Letter No. 13-75 at 1-2. In response to 
a request from ISDA, this relief was extended in late 2015 until the 
earlier of (a) 30 days after the issuance of a relevant 
comparability determination or (b) December 1, 2016. CFTC Letter No. 
15-61 at 2.
    \131\ CFTC Letter No. 15-61 at 2. There are also exceptions for 
certain recordkeeping requirements. Id.
    \132\ See CFTC Letter No. 13-75 at 2.
---------------------------------------------------------------------------

    For certain other jurisdictions, the Division of Market Oversight, 
in response to an ISDA request, has granted no-action relief in 
connection with requirements in the SDR and Historical SDR Reporting 
Rules to report identifying information regarding swap counterparties 
in certain circumstances where doing so would conflict with foreign 
privacy laws or other legal requirements.\133\ The most recent no-
action letter on this subject extends relief through March 1, 
2017.\134\
---------------------------------------------------------------------------

    \133\ See, e.g., CFTC Letter Nos. 16-03, 13-41; see also IIB at 
20 (supporting Commission's efforts to dispel conflicts with foreign 
privacy laws through no-action relief, data standardization, and 
memoranda of understanding).
    \134\ CFTC Letter No. 16-03 at 4-5.
---------------------------------------------------------------------------

    In connection with the SEF Registration Rule, in 2014 the Division 
of Market Oversight and Division of Swap Dealer and Intermediary 
Oversight issued a letter stating that no-action relief from that rule 
would be available to multilateral trading facilities in EU member 
states upon certification that they were subject to regulatory 
requirements of their home governments similar to those of the SEF 
Registration Rule in specified ways.\135\ The letter also stated that 
certain no-action relief would be available to persons trading on these 
facilities to reflect the fact that the facilities would be carrying 
out functions like those of U.S. SEFs.\136\ This includes partial 
relief from two of the remanded rules, SDR Reporting and Real-Time 
Reporting, since the EU trading facility, like a SEF, would be 
reporting the swap data in question.\137\ To date, no European trading 
facilities have submitted the required certification to obtain this no-
action relief.
---------------------------------------------------------------------------

    \135\ See CFTC Letter No. 14-46. This letter superseded an 
earlier no-action letter on the same subject, CFTC Letter No. 14-16.
    \136\ CFTC Letter No. 14-46.
    \137\ Id.
---------------------------------------------------------------------------

    The Division of Market Oversight and the Division of Swap Dealer 
and Intermediary Oversight have also issued a letter announcing the 
availability of similar no-action relief for certain Australian 
licensed financial markets.\138\ An Australian trading facility has 
advised the Division of Market Oversight that it intends to make the 
certification required by the enabling letter.\139\ In the interim, the 
Division has issued a series of no-action letters granting the facility 
time-limited no-action relief from the SEF Registration Rule, subject 
to certain conditions.\140\ This relief currently extends until 
September 15, 2016.\141\
---------------------------------------------------------------------------

    \138\ CFTC Letter No. 14-117, updated by CFTC Letter No. 15-29.
    \139\ See CFTC Letter No. 16-52.
    \140\ Id.
    \141\ Id.
---------------------------------------------------------------------------

    Further, in response to industry requests, the Commission staff has 
issued no-action relief to address a variety of issues related to the 
implementation of some of the remanded rules that do not specifically 
involve cross-border issues, but that may provide relief to foreign as 
well as domestic businesses subject to the rules.\142\ In addition, the 
Commission is codifying some existing no-action relief via 
rulemaking.\143\
---------------------------------------------------------------------------

    \142\ See, e.g., CFTC Letter Nos. 15-60, 15-38.
    \143\ The Commission has recently done this for registration 
requirements involving foreign nationals. Alternative to 
Fingerprinting Requirement for Foreign Natural Persons, 81 FR 18743 
(Apr. 1, 2016). See also, Definitions of ``Portfolio 
Reconciliation'' and ``Material Terms'' for Purposes of Swap 
Portfolio Reconciliation, 81 FR 27309 (May 6, 2016).
---------------------------------------------------------------------------

D. Commission Consideration of Substantive Rule Changes Outside the 
Context of the Remand Order

    Another factor weighing against adopting substantive rule changes 
in the immediate context of the SIFMA remand is that the Commission 
currently is involved in a number of ongoing international efforts that 
may in the future result in the Commission considering substantive rule 
changes and may thereby lead to further mitigation of costs of 
extraterritorial application of the remanded rules. These include 
discussions with foreign regulators at a variety of levels of 
formality. For example, in the SEF area, the Commission has worked with 
European counterparts to understand similarities and differences in our 
rules.
    In the area of swap data reporting, the Commission staff is 
actively involved in international efforts to develop guidance 
regarding data elements used for reporting in different 
jurisdictions.\144\ While the primary purpose of this effort is to make 
reported information more valuable to regulators, better 
standardization of data elements may also reduce compliance costs for 
entities operating under the laws of multiple jurisdictions and help 
facilitate the use of substituted compliance for reporting requirements 
in the future. In another example of ongoing developments involving 
swaps data reporting, in December 2015 Congress amended the Dodd-Frank 
provision regarding swaps data repositories to remove an 
indemnification requirement that has proven to be an obstacle to the 
sharing of data internationally.\145\ The Commission staff is 
considering recommendations to the Commission for amendments to 
Commission rules to address this statutory change. As with data 
standards, improved sharing of information among regulators potentially 
could support the future use of substituted compliance in the swap data 
reporting area.
---------------------------------------------------------------------------

    \144\ See, e.g., Committee on Payments and Market 
Infrastructures and Board of the International Organization of 
Securities Commissions, Consultative report, Harmonisation of key 
OTC derivatives data elements (other than UTI and UPI)--first batch 
(Sept. 2015). The Commission co-chairs an international working 
group in this area. Id. at Annex 2.
    \145\ See, e.g., FAST Act Includes Dodd-Frank Swap Fix on Global 
Transparency, Practical Law (Dec. 15, 2015), http://us.practicallaw.com/w-001-0649?q=&qp=&qo=&qe=.
---------------------------------------------------------------------------

    The Commission believes that harmonization through substantive rule 
changes is best considered first in consultation with foreign 
counterparts, rather than unilaterally and reactively. Indeed, section 
752 of Dodd-Frank directs the Commission to ``consult and coordinate 
with foreign regulatory authorities on the establishment of consistent 
international standards with respect to the regulation (including fees) 
of swaps.'' \146\ This ensures that rule changes are more likely to 
result in harmonized regulation rather than a race to the bottom or 
rules that do not function efficiently in combination. Where such 
progress has not yet produced agreement or relief, it does not affect 
the present costs and benefits of the extraterritorial application of 
the remanded rules. But the existence of these efforts is a factor 
weighing against making immediate changes in the rules in the context 
of the SIFMA v. CFTC remand.
---------------------------------------------------------------------------

    \146\ Public Law 111-203, 124 Stat. 1376 (2010).

---------------------------------------------------------------------------

[[Page 54488]]

E. Market Fragmentation and Related Issues

    ISDA-SIFMA and JBA state that, in addition to imposing direct costs 
on foreign businesses, the extraterritorial application of the remanded 
rules may induce such businesses to reduce their participation in the 
U.S. market to avoid U.S. regulation. For example, ISDA-SIFMA observes:
    These costs and uncertainties [of foreign entities' compliance 
with U.S. rules] function as barriers to entry and to continued 
engagement in U.S. markets, potentially resulting in market 
fragmentation and decreased liquidity available to U.S. persons as 
foreign market participants change their business practices so as 
not to subject themselves to Commission regulation.\147\
---------------------------------------------------------------------------

    \147\ ISDA-SIFMA at 2. See also JBA at 2. IIB also discusses 
market withdrawal issues, but primarily in the context of 
application of the DSIO Advisory and Division of Market Oversight 
guidance document relating to legal standards for the application of 
Commission rules based on the provision of swap-related services by 
non-U.S. persons within the United States. IIB's concerns in this 
area are discussed below in section IV.F.

    This is an important issue worthy of the Commission's sustained 
attention. The possibility that compliance costs may induce some 
businesses--whether domestic or foreign--to reduce their swaps 
activities was recognized at the time of the original rulemakings and 
was discussed in the cost-benefit section of the preamble to the Swap 
Entity Definition Rule, albeit without specifically distinguishing 
between domestic and cross-border activity.\148\ It is plausible that 
foreign firms are more likely to reduce their swaps activities in U.S. 
markets in response to U.S. regulation since U.S. markets may be less 
important to foreign firms, at least for some firms and some categories 
of swaps. However, it is difficult to evaluate the magnitude of any 
such effects since, with the important but limited exception of ISDA 
data on the SEF Registration Rule discussed immediately below, 
commenters generally did not provide quantitative information on the 
subject.
---------------------------------------------------------------------------

    \148\ See 77 FR at 30703 & n.1272, 30705.
---------------------------------------------------------------------------

    Nevertheless, it is reasonable to believe that if an individual 
firm judges that costs of complying with U.S. rules exceed the costs of 
reducing its participation in or withdrawing from U.S. markets, it may 
choose to avoid U.S. markets, at least temporarily. Accordingly, it is 
important to consider, as ISDA-SIFMA has raised, whether and to what 
extent rule-induced avoidance of U.S. markets will have a significant 
effect on the liquidity and the overall operation of those markets. 
ISDA-SIFMA discusses two ISDA research notes which provide relevant 
quantitative information on this issue for one of the remanded rules, 
the SEF Registration Rule.\149\
---------------------------------------------------------------------------

    \149\ ISDA-SIFMA at 3 & n.6 (citing ISDA Research Note, Cross-
Border Fragmentation of Global OTC Derivatives: An Empirical 
Analysis (Jan. 2014), https://www2.isda.org/attachment/NjIzNw==/Cross%20Border%20Fragmentation%20-%20An%20Empirical%20Analysis.pdf; 
and ISDA Research Note, Revisiting Cross-Border Fragmentation of 
Global OTC Derivatives: Mid-Year 2014 Update (July 2014), https://www2.isda.org/attachment/NjY0NQ==/Fragmentation%20study%20FINAL.pdf).
---------------------------------------------------------------------------

    The research notes studied transactions between U.S. and European 
swap dealers before and after the compliance date of the rule in 
October 2013. They studied transactions involving two categories of 
cleared swaps, euro-denominated interest rate swaps (``euro IRS'') and 
U.S. dollar-denominated interest rate swaps (``dollar IRS'').\150\ For 
euro IRS, the notes found that, before the compliance date of the SEF 
Registration Rule, the average volume of transactions between European 
and U.S. dealers was approximately 29% of the total volume of euro IRS. 
This figure fell to 9% in October 2013 and 6% in May 2014.\151\
---------------------------------------------------------------------------

    \150\ ISDA Research Note, Cross-Border Fragmentation of Global 
OTC Derivatives: An Empirical Analysis (Jan. 2014), and ISDA 
Research Note, Revisiting Cross-Border Fragmentation of Global OTC 
Derivatives: Mid-Year 2014 Update (July 2014).
    \151\ ISDA-SIFMA at 3.
---------------------------------------------------------------------------

    The ISDA figures on euro IRS volume provide evidence of a reduction 
in European involvement in the U.S. interdealer market following the 
compliance date of the SEF Registration Rule, but do not measure 
liquidity or market quality. The ISDA evidence raises concerns about 
market fragmentation and justifies further inquiry, including inquiry 
into possible effects of market fragmentation on liquidity. However, 
the ISDA data does not require immediate changes in the SEF 
Registration Rule in the context of the SIFMA v. CFTC remand, for a 
number of reasons.
    1. There is a significant possibility that the ISDA data reflect a 
temporary transition period rather than the permanent effects of the 
SEF Registration Rule. As discussed above, the European Union, in MiFID 
II and MiFIR, has determined to put in place a regulatory framework for 
swap trading facilities that aims at many of the same objectives as the 
Dodd-Frank regime for SEFs.\152\ As also discussed above, these 
regulations are planned to take effect in 2018. As a result, to the 
extent that the reduced participation in the U.S. market reported by 
ISDA is driven by differences in U.S. and European regulation of 
trading facilities, those differences can be expected to narrow in the 
next few years. For the same reason, the results reported by ISDA may 
not reflect European dealers' response to the specific substantive 
requirements of the SEF Registration Rule but, rather, a preference to 
trade in a market where more robust regulation of trading platforms has 
yet been put into effect. It is also possible that, as the European 
Union regime is implemented, the Commission may consider substituted 
compliance or similar actions that might affect choice of 
counterparties by European dealers.\153\
---------------------------------------------------------------------------

    \152\ See, e.g., MiFIR, supra note 100, at 2-3 (recital 8).
    \153\ See, e.g., CEA section 5h(g), 7 U.S.C. 7b-3(g) 
(authorizing conditional or unconditional exemptions from SEF 
registration for SEFs subject to comparable, comprehensive 
supervision and regulation by governmental authorities in the home 
country of the facility). For comparison, in the area of clearing, 
the Commission has granted conditional exemptions from U.S. 
registration to a number of foreign-regulated derivatives clearing 
organizations under the authority of CEA section 5b(h), 7 U.S.C. 7a-
1(h). See, e.g., Order of Exemption from Registration, In the Matter 
of the Petition of Japan Securities Clearing Corporation for 
Exemption from Registration as a Derivatives Clearing Organization 
(CFTC Oct. 26, 2015), available on the Commission's Web site at 
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf.
---------------------------------------------------------------------------

    2. It is not clear how far the results reported by ISDA for euro 
IRS generalize. According to the more recent of the research notes 
cited by ISDA-SIFMA, in the interdealer market for dollar IRS, the 
portion of the market involving transactions between European and U.S. 
swap dealers declined to some extent for several months after the SEF 
Registration Rule took effect, but then returned to more-or-less pre-
rule levels.\154\ The note suggests that the difference between the 
results for euro IRS and dollar IRS ``may be because the market for US 
IRS is US-centric, whereas the market for euro IRS has a more global 
character and is thus more prone to fragmentation.'' \155\ The market 
for euro IRS is large enough that even results confined to this market 
are still important for Commission policymaking, but the differences in 
the results reported by ISDA for different IRS markets affected by the 
same SEF Registration Rule are a reason for caution in drawing 
conclusions with respect to the specifics of the rule.\156\
---------------------------------------------------------------------------

    \154\ ISDA Research Note, Revisiting Cross-Border Fragmentation 
of Global OTC Derivatives: Mid-Year 2014 Update at 8.
    \155\ Id.
    \156\ It may also be noted that, in the euro IRS market, U.S. 
swap dealers continued to do most of their trading with European 
swap dealers after the implementation of the SEF Registration Rule, 
notwithstanding the apparent shift away from the U.S. market by the 
European firms. According to the more recent of the research notes, 
U.S. swap dealers did 66% of the volume of their euro IRS trades 
with European swap dealers in 2013, and still did 61% of the volume 
of these trades with European swap dealers in the first part of 
2014. Id. at 5.

---------------------------------------------------------------------------

[[Page 54489]]

    3. To the extent that the results reported by ISDA are attributable 
to regulation, they may be partly attributable to regulatory 
requirements that are not subject to the SIFMA remand, including 
statutory requirements. As the more recent of the ISDA research notes 
points out, initial ``made available to trade'' determinations occurred 
in early 2014, triggering a requirement under U.S. law that the types 
of swaps studied by ISDA be traded on SEFs or DCMs. According to the 
research note, this could have contributed to the European swap dealer 
behavior reported by ISDA.\157\ However, the requirement that certain 
swaps be traded on either SEFs or DCMs is not imposed by the remanded 
SEF Registration Rule. It arises primarily from the combined effect of 
the mandatory clearing requirement under CEA section 2(h)(1); \158\ the 
Commission's Clearing Determination Rule,\159\ which was part of the 
SIFMA lawsuit, but was not remanded; and the statutory requirement that 
swap transactions subject to mandatory clearing be traded on a SEF or 
DCM if a SEF or DCM makes the swap available to trade.\160\ This adds a 
further complication in drawing conclusions from the ISDA data for 
purposes of the remand order.
---------------------------------------------------------------------------

    \157\ Id. at 1, 4-5.
    \158\ 7 U.S.C. 2(h)(1).
    \159\ 17 CFR part 50.
    \160\ See CEA section 2(h)(8), 7 U.S.C. 2(h)(8).
---------------------------------------------------------------------------

    4. The criteria for identifying dealers as European and U.S. in the 
ISDA research notes is not completely clear, but appear to be based, at 
least in part, on country of incorporation.\161\ However, some swap 
dealers incorporated in Europe are subsidiaries or affiliates of U.S. 
companies while some swap dealers incorporated in the United States are 
subsidiaries or affiliates of European companies.\162\ As a result, it 
is likely that some of the swaps business that shifted away from U.S. 
dealers as reported in the ISDA notes moved to swap dealers 
incorporated in Europe that have corporate relationships with U.S. swap 
dealers. The economic effect of such a shift may depend on the nature 
of the business relationship between the affiliated dealers--for 
example whether their swaps activities are managed in a unified manner 
or how risks and obligations are transferred among the affiliates. 
These issues are not explored in the research notes.
---------------------------------------------------------------------------

    \161\ See ISDA Research Note, Revisiting Cross-Border 
Fragmentation of Global OTC Derivatives: Mid-Year 2014 Update at 4 
n.5.
    \162\ See Dodd-Frank Act, Provisionally Registered Swap Dealers, 
CFTC.gov, http://www.cftc.gov/ LawRegulation/DoddFrankAct/
registerswapdealer (list of registered swap dealers).
---------------------------------------------------------------------------

    5. Even apart from scheduled changes in European law, enhanced 
regulation of multilateral swap trading platforms, such as SEFs, is 
still relatively new and the industry is likely to continue to 
evolve.\163\ There is also ongoing research into the effects of SEF 
regulation, including the market fragmentation issue raised by ISDA-
SIFMA.\164\ As a result, a better understanding of the issue and its 
implications is likely to be available in the reasonably near future 
compared with the present record.
---------------------------------------------------------------------------

    \163\ See, e.g., Chris Barnes, Is an All-to-All SEF Market About 
to Arrive? Clarus Financial Technology (Sept. 8, 2015), https://www.clarusft.com/is-an-all-to-all-sef-market-about-to-arrive/.
    \164\ See, e.g., Evangelos Benos, Richard Payne & Michalis 
Vasios, Centralized trading, transparency and interest rate swap 
market liquidity: evidence from the implementation of the Dodd-Frank 
Act, Staff Working Paper No. 580 (Jan. 2016), http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp580.pdf; ISDA Research Note, Cross-Border Fragmentation of Global 
Interest Rate Derivatives: The New Normal? First Half 2015 Update 
(Oct. 2015), http://www2.isda.org/attachment/Nzk2NA==/Market%20fragmentation%20Oct15%20FINAL.pdf. Because these sources 
postdate the comment period on the Commission's Initial Response, 
the Commission is not relying on their findings. They are cited as 
evidence that relevant research is ongoing.
---------------------------------------------------------------------------

    6. The evidence of market fragmentation cited by ISDA-SIFMA needs 
to be considered against the background of the expected benefits to the 
functioning of the swap market provided by the requirements of the SEF 
Registration Rule. These benefits were discussed in detail in the 
preamble to the rule.\165\ They include, among others, increased pre-
trade transparency (availability of information about prices and 
quantities at which traders are prepared to transact), potentially 
making the market more efficient by facilitating the ability of 
participants to identify potential counterparties.\166\ The 
requirements of the rule are also calculated to put market participants 
on a more even footing, reducing the effects of informational 
asymmetries or other forms of market power, and potentially making the 
swaps market less concentrated and more competitive.\167\ All of this 
can potentially increase market liquidity.\168\ The research notes 
cited by ISDA-SIFMA raise significant issues but provide little, if 
any, information on how the functioning of U.S. swaps markets has been 
affected, so far, by any reduced participation on the part of European 
swap dealers. For example, they do not provide comparative information 
on bid-ask spreads or other indicators of market efficiency.
---------------------------------------------------------------------------

    \165\ See 78 FR at 33553-56, 33564-81.
    \166\ Id. at 33564-65.
    \167\ Id. at 33564.
    \168\ See id. at 33554-55.
---------------------------------------------------------------------------

    Notwithstanding these considerations, the research cited by ISDA-
SIFMA raises important issues that justify further inquiry. But, for 
the reasons stated, it does not require immediate changes to the SEF 
Registration Rule in the context of the SIFMA remand.

F. Issues Relating to Application of Commission Rules to Foreign Firms 
Based on Swaps Activities Within the United States

1. Background
    The IIB comment focused on the cost-benefit implications for the 
remanded rules if the Commission employs a test based on swaps-related 
activities physically located within the United States for determining, 
in certain circumstances, whether U.S. swaps rules apply to 
transactions between two non-U.S. firms. ISDA-SIFMA addressed the 
implications of such a test more briefly, making points similar to 
those of IIB. As noted previously, the idea of a test based on physical 
presence of activities in the United States in connection with rules 
for swap dealers was articulated in the November 2013 DSIO Advisory; 
while a test based on trading by persons inside the United States on 
multilateral platforms located outside the country was articulated in 
the Division of Market Oversight Guidance on Application of Certain 
Commission Regulations to Swap Execution Facilities (November 15, 2013) 
(``DMO Guidance''). Before addressing the issues raised by IIB and 
ISDA-SIFMA, some background will be given as context.
    The DSIO Advisory dealt with certain issues involving the 
application of transaction-level requirements to non-U.S. swap dealers, 
i.e., foreign firms that do sufficient U.S.-related swap dealing that 
they are required to register with the Commission as swap dealers. In 
the Cross-Border Guidance, the Commission stated that its policy for 
applying Commission rules to such dealers in accordance with section 
2(i) of the CEA would make use of a distinction between what it 
described as entity-level requirements and transaction-level 
requirements.\169\ As the names imply, an entity-level requirement is a 
rule

[[Page 54490]]

requirement that is recognized by the Commission as applying to a firm 
as a whole, while a transaction-level requirement is a requirement that 
is recognized by the Commission as applying at the level of the 
individual transaction.\170\ Among the remanded rules, the Real-Time 
Reporting, Daily Trading Records, and Portfolio Reconciliation Rules 
are characterized as transaction-level rules in the Guidance.\171\ 
According to the policy announced in the Cross-Border Guidance, 
transaction-level requirements would generally be expected to apply to 
swaps between a non-U.S. swap dealer and U.S. counterparty, but they 
would not generally be expected to apply, with certain exceptions, to 
swaps between a non-U.S. swap dealer and a non-U.S. counterparty.\172\ 
The general exceptions are for transactions with certain non-U.S. 
counterparties with a particularly close connection to the U.S. market, 
specifically guaranteed and conduit affiliates of U.S. firms.\173\
---------------------------------------------------------------------------

    \169\ 78 FR at 45331.
    \170\ Id.
    \171\ Id. at 45333.
    \172\ Id. at 45350-53.
    \173\ Id. at 45353-59.
---------------------------------------------------------------------------

    The DSIO Advisory addresses situations where a non-U.S. swap dealer 
has personnel located within the United States that regularly engage in 
certain forms of swap dealing activity. The advisory expressed the view 
that a non-U.S. dealer who is ``regularly using personnel or agents 
located in the U.S. to arrange, negotiate, or execute a swap with a 
non-U.S. person generally would be required to comply with the 
Transaction-Level Requirements'' with respect to such swaps, even 
though a non-U.S. swap dealer generally is not required to comply with 
transaction-level requirements for swaps with another non-U.S. 
counterparty.\174\ In support of this position, the advisory stated 
that, in the view of DSIO, ``the Commission has a strong supervisory 
interest in swap dealing activities that occur within the United 
States, regardless of the status of the counterparties.'' \175\ The 
advisory stated that it reflected the views of DSIO only, and did not 
necessarily represent the position of the Commission or any other 
office or division of the Commission.\176\
---------------------------------------------------------------------------

    \174\ DSIO Advisory at 2.
    \175\ Id.
    \176\ Id.
---------------------------------------------------------------------------

    Shortly after the DSIO Advisory was issued, the Division of Swap 
Dealer and Intermediary Oversight, the Division of Market Oversight, 
and the Division of Clearing and Risk issued temporary no-action relief 
with respect to activity within the scope of that described in the DSIO 
Advisory regarding transaction-level requirements.\177\ This relief has 
since been extended, most recently until the earlier of September 30, 
2016, or the effective date of any Commission action with respect to 
the issues raised by the DSIO Advisory.\178\ In January of 2014, the 
Commission published a notice in the Federal Register seeking public 
comment on the DSIO Advisory.\179\ Comments on the DSIO Advisory remain 
under review and the Commission, to date, has not sought to enforce its 
rules against a foreign entity based solely on the type of swap dealing 
activity discussed in the advisory.
---------------------------------------------------------------------------

    \177\ CFTC Letter No. 13-71.
    \178\ CFTC Letter No. 15-48.
    \179\ Request for Comment on Application of Commission 
Regulations to Swaps Between Non-U.S Swap Dealers and Non-U.S. 
Counterparties Involving Personnel or Agents of the Non-U.S. Swap 
Dealers Located in the United States, 79 FR 1347 (Jan. 8, 2014).
---------------------------------------------------------------------------

    The DMO Guidance addressed a variety of issues regarding 
application of the SEF Registration Rule. As relevant here, the DMO 
Guidance addressed circumstances in which a multilateral swaps trading 
platform located outside the United States provides U.S. persons or 
persons located in the United States--including personnel or agents of 
non-U.S. persons--with the ability to trade or execute swaps on or 
pursuant to the rules of the platform, whether directly or through 
intermediaries.\180\ The DMO Guidance expressed the view that provision 
of the ability to trade or execute swaps to U.S. located-persons, 
including personnel or agents of non-U.S. persons, ``may create the 
requisite connection under CEA section 2(i) for purposes of the SEF/DCM 
registration requirement.'' \181\ As a result, the Division of Market 
Oversight ``expects that a multilateral swaps trading platform located 
outside the United States'' that provides U.S. located persons, 
including personnel or agents of non-U.S. firms, with the ability to 
trade or execute swaps pursuant to the rules of the platform ``will 
register as a SEF or DCM.'' \182\ The DMO Guidance indicated that in 
determining whether a particular foreign trading platform needed to 
register as a SEF, it would take into consideration whether the 
platform directly solicits or markets its services to U.S.-located 
persons and whether a significant portion of its business involved 
U.S.-located persons.\183\ The DMO Guidance stated that it represents 
the views of the Division of Market Oversight only and does not 
represent the views of the Commission or any other office or division 
of the Commission.\184\
---------------------------------------------------------------------------

    \180\ DMO Guidance at 2.
    \181\ Id.
    \182\ Id. at 2.
    \183\ Id. at 2 n.8.
    \184\ Id. at 5.
---------------------------------------------------------------------------

2. Comments on Cost-Benefit Implications of DSIO Advisory
a. Points Made by Commenters
    IIB identifies a number of general costs--not specific to 
particular rules--from applying a test based on presence in the United 
States to transactions between non-U.S. swap dealers and non-U.S. 
counterparties. The major cost, according to IIB, is that such a test 
would create incentives to avoid using personnel located in the United 
States in such transactions in order to avoid being subject to U.S. 
transaction-level rules.\185\ While the transactions could still occur, 
IIB states that parties would lose certain advantages that may be 
associated with the use of personnel located in the United States. In 
particular, IIB states that personnel with the greatest expertise in 
some markets, such as U.S. dollar denominated interest rate swaps, are 
typically located in the United States.\186\ Relatedly, presence in the 
United States may provide traders with better access to information on 
U.S. markets.\187\ In addition, U.S.-located personnel can have 
advantages for time zone reasons.\188\ IIB also states that some 
advantages of centralized risk management may be lost if functions 
previously handled by personnel located in the United States are split, 
with U.S. personnel retaining the functions for transactions with U.S. 
counterparties and personnel outside the U.S. handling those same 
functions for other transactions to avoid the effects of a U.S. 
presence test.\189\
---------------------------------------------------------------------------

    \185\ IIB at 5-6; see also ISDA-SIFMA at 4.
    \186\ IIB at 5 & n.12.
    \187\ Id. at 5.
    \188\ Id.
    \189\ Id. at 5-6.
---------------------------------------------------------------------------

    IIB also states that, since such a test applies to transactions 
between non-U.S. firms, it exposes them to the cost of dealing with 
duplicative and possibly contradictory foreign regulation.\190\ IIB 
also notes that there will be costs associated with keeping track of 
which swaps with non-U.S. counterparties are arranged, negotiated, or 
executed by personnel located in the United States and incorporating 
that information into compliance systems.\191\ IIB further observes 
that, even if most of these costs fall on non-U.S. swap dealers who 
maintain offices in the United States, some will fall on non-U.S.

[[Page 54491]]

counterparties who deal with these swap dealers.\192\
---------------------------------------------------------------------------

    \190\ Id. at 6-7.
    \191\ Id. at 8.
    \192\ Id. at 8-9.
---------------------------------------------------------------------------

    IIB also characterizes the benefits of applying a test based on 
physical presence in the United States to transaction-level 
requirements as doubtful. IIB states that transactions made subject to 
U.S. regulation by such a test do not give rise to risks to the U.S. 
financial system because they do not involve a counterparty that is a 
U.S. person or a guaranteed or conduit affiliate of a U.S. person.\193\ 
IIB further asserts that this test does not offer competitive parity 
benefits. IIB states that, even if the Commission believes that, 
without a physical presence test, there is an unlevel playing field 
between U.S. and non-U.S. swap dealers employing U.S.-located front-
office personnel, such concerns are outweighed by the applicability of 
foreign regulation to those non-U.S. swap dealers and by new 
competitive disparities such a test would create between U.S. and non-
U.S. personnel.\194\ Finally, IIB states that any benefits from 
application of rules pursuant to a physical presence test would be 
``largely illusory'' to the extent that non-U.S. entities structure 
transactions to fall outside the test.\195\
---------------------------------------------------------------------------

    \193\ Id. at 6. As explained above, under the policies for 
applying section 2(i) announced in the Cross-Border Guidance, 
transactions between a non-U.S. swap dealer and a counterparty that 
is a U.S. person or guaranteed or conduit affiliate are subject to 
transaction-level requirements independently of the location of the 
swap dealer's personnel.
    \194\ IIB at 6.
    \195\ Id.
---------------------------------------------------------------------------

    IIB also discusses certain implications of the application of such 
a test to particular rules, including the three transaction-level rules 
that are part of the SIFMA remand.\196\ IIB notes that the Portfolio 
Reconciliation Rule and the Daily Trading Records Rule are intended to 
mitigate risks to the U.S. financial system.\197\ IIB states that the 
risks those rules are intended to address are not borne by the 
personnel who arrange, negotiate, or execute swaps, but rather by the 
parties to the swap.\198\ In transactions made subject to these rules 
solely based on the physical presence of dealing activity in the United 
States, neither counterparty is a U.S. person or a guaranteed or 
conduit affiliate of a U.S. person so, according to IIB, the risks do 
not flow back to the U.S. financial system and the purposes of the 
rules are not served or only served in an attenuated way.\199\
---------------------------------------------------------------------------

    \196\ Much of IIB's discussion of specific rules concerns 
external business conduct and entity-level rules that are outside 
the remand and therefore are not addressed here. See, e.g., IIB at 
14-16, 19-20.
    \197\ IIB at 9.
    \198\ Id.
    \199\ Id. at 9 & n.27.
---------------------------------------------------------------------------

    With respect to the Real-Time Reporting Rule, IIB appears to 
acknowledge that this rule, as a general matter, may generate useful 
market information since it states that non-U.S. counterparties ``can 
effectively free ride and obtain the benefits of the CEA's real-time 
public reporting requirements by accessing publicly available price 
data and taking that data into account when negotiating its swaps.'' 
\200\ However, IIB asserts that these same non-U.S. counterparties have 
a financial incentive to avoid engaging in transactions that are 
subject to this rule, and will therefore have an incentive to avoid 
transactions involving U.S. personnel if a physical presence test 
applies. In particular, according to IIB, swap dealers may provide 
worse pricing in transactions subject to real-time reporting. This is 
so, according to IIB, because swap dealers must allow for the 
possibility that they will be unable to hedge the transaction before 
the terms of the underlying transaction are disclosed pursuant to the 
Real-Time Reporting Rule, and may face worse market terms for their 
hedge transactions as a result of the disclosure.\201\ IIB does not, 
however, provide data indicating how often this phenomenon is likely to 
occur or comparing bid-ask spreads in transactions subject to the Real-
Time Reporting Rule with those in similar transactions not covered by 
the rule. IIB also states that application of a physical presence test 
to the Real-Time Reporting Rule may be costly to implement because 
current systems used by non-U.S. swap dealers to identity which of 
their swaps must be reported under the rule do not track information on 
the location of front-office personnel involved in arranging, 
negotiating, or executing the swap.\202\ IIB does not provide 
quantitative cost estimates, however.
---------------------------------------------------------------------------

    \200\ Id. at 12.
    \201\ Id.
    \202\ Id.
---------------------------------------------------------------------------

b. Commission Response
    The Commission agrees with IIB and ISDA-SIFMA that the test 
articulated in the DSIO Advisory raises significant issues that need to 
be considered by the Commission. However, their comments are 
overwhelmingly presented as a criticism of the test itself, not as a 
basis for substantive rule changes. The SIFMA v. CFTC remand order does 
not cover this issue, because the test relates to the geographical 
scope of application of certain Commission rules and not to their 
substance.\203\ Accordingly, the Commission will not pass judgment on 
it in the context of this release. Rather, as noted above, the 
Commission has separately solicited, and is considering, comments on 
the DSIO Advisory; and, in the interim, the Commission's regulatory 
divisions have granted staff no-action relief.
---------------------------------------------------------------------------

    \203\ See SIFMA, 67 F. Supp. 3d at 434-35.
---------------------------------------------------------------------------

    For purposes of the remand, the Commission will address a narrower 
issue: do the possible cost-benefit implications of a physical presence 
test sufficiently alter the evaluation of the costs and benefits of the 
three remanded transaction-level rules to require the Commission to 
make changes in the substance of those rules at the present time. The 
Commission concludes that they do not, for a number of reasons:
    1. The cost-benefit implications of the test articulated in the 
DSIO Advisory for the three remanded transaction-level rules are 
currently uncertain because the Commission is still considering public 
comments and it is uncertain at this time whether the Commission will 
apply the test. As a result of no-action relief, the test has not, to 
date, been applied or, therefore, affected the costs and benefits of 
the remanded rules. As a result, even if the test potentially might 
affect costs and benefits in a manner that is distinct from the mere 
fact of extraterritorial regulation, it is not appropriate at this time 
to fashion substantive rule changes to account for it.
    2. The test articulated in the DSIO Advisory affects a somewhat 
limited segment of the market--only swap transactions that a non-U.S. 
swap dealer enters into with non-U.S. counterparties that are not 
guaranteed or conduit affiliates of U.S. persons and that are arranged, 
negotiated, or executed using personnel or agents of the non-U.S. swap 
dealer that are located in the United States. This limits the 
implications of the test for the overall costs and benefits of the 
remanded rules even if the points made by the commenters are important 
for purposes of the costs and benefits of the rules as applied to 
transactions within the scope of such a test. In addition, this fact 
makes it likely that the best way to address issues raised with respect 
to the test will involve assessing the test itself rather than making 
rule changes that would affect numerous transactions outside its scope. 
Consistent with this conclusion, the IIB comment makes recommendations 
with regard to application of the test itself, but makes no 
recommendations for across-the-board changes in the substance of the

[[Page 54492]]

three remanded transaction-level rules.\204\ Similarly, ISDA-SIFMA 
identifies costs that it states would be caused by implementation of 
the test, but does not make recommendations for changes to the 
substance of the remanded transaction-level rules as a way of 
addressing those costs.\205\
---------------------------------------------------------------------------

    \204\ See IIB at 16-19.
    \205\ ISDA-SIFMA at 4.
---------------------------------------------------------------------------

    3. Even assuming that a test based on dealing activities by non-
U.S. firms physically present in the United States were to be 
implemented for transaction-level rules, there are a number of 
considerations that limit, though they do not eliminate, the weight 
that can be given to some of the points made by commenters with respect 
to the implications of such a test for costs and benefits.
    (a) IIB and ISDA-SIFMA do not provide quantitative information or 
estimates of the effects they project.\206\ The fact that staff no-
action relief was promptly put in place presumably affected the ability 
to obtain quantitative information on the effects of the test in the 
DSIO Advisory, but the absence of quantitative information, or even 
estimates, makes it difficult to assess how important the effects 
described by the commenters would be in practice.
---------------------------------------------------------------------------

    \206\ The ISDA research notes on market fragmentation do not 
relate to the test in the DSIO Advisory since they involve 
transactions between European and U.S. swap dealers, while the DSIO 
Advisory primarily relates to transactions between two non-U.S. 
firms.
---------------------------------------------------------------------------

    (b) Convergence between foreign and U.S. regulation may reduce 
incentives to avoid U.S. regulation and therefore to avoid making use 
of U.S. personnel or agents to avoid such regulation. For example, as 
described above, the EU currently is planning to implement public 
reporting of swaps transactions broadly similar to the Real-Time 
Reporting Rule in 2018.
    (c) The discussion of the implications of a physical presence test 
for the Real-Time Reporting Rule in the IIB comment asserts that swap 
dealers will tend to offer worse pricing to counterparties in 
transactions subject to the Real-Time Reporting Rule because reporting 
may expose dealers to worse prices in their hedging transactions.\207\ 
However, this possibility was recognized in the original rulemaking and 
provisions were built into the rule to minimize the chance that the 
otherwise anonymous public reporting of trades would provide the market 
with information that would enable traders to identify planned, but 
not-yet-executed, hedge trades by dealers and take advantage of that 
information. These provisions include time delays for reporting of 
large transactions \208\ and reporting of rounded or ``capped'' 
notional amounts rather than the actual notional amount for block 
trades and certain other large transactions.\209\ The cost-benefit 
discussion in the preamble to the rule concluded that time delays 
``will counter the possibility for front-running large block trades 
before they can be adequately hedged.'' \210\ The IIB comment does not 
address the consideration of this issue in the original rulemaking and 
in a subsequent rulemaking that amended the anonymity-protecting 
provisions.\211\
---------------------------------------------------------------------------

    \207\ IIB at 12.
    \208\ See 17 CFR 43.5.
    \209\ See 17 CFR 43.4(h).
    \210\ Real-Time Reporting Rule, 77 FR at 1239.
    \211\ See Procedures to Establish Appropriate Minimum Block 
Sizes for Large Notional Off-Facility Swaps and Block Trades, 78 FR 
32866, 32928-31 (May 31, 2013) (discussing costs and benefits of 
amendments to anonymity protection provisions of Real-Time Reporting 
Rule).
---------------------------------------------------------------------------

3. Comments on Application of SEF Registration Rule to Non-U.S. Trading 
Platforms Based on Provision of Services Within the United States
a. Points Made in Comments
    IIB discusses cost-benefit issues arising from the application of a 
test based on provision of services within the United States to the SEF 
Registration Rule pursuant to the interpretation of section 2(i) in the 
DMO Guidance.\212\ As described above, according to this 
interpretation, a non-U.S. swaps trading platform would be subject to 
the SEF Registration Rule even if the platform provides swap execution 
services solely to non-U.S. persons, if it provides personnel or agents 
of those persons with the ability to make trades from locations within 
the United States. According to IIB, this has a number of negative 
effects. IIB states that some non-U.S. multilateral trading platforms 
have refused access to U.S.-located personnel of foreign firms in order 
to avoid the costs of having to register as SEFs.\213\ According to 
IIB, this encourages U.S. personnel of non-U.S. entities to trade swaps 
bilaterally, over-the-counter, contrary to the Commission's overall 
transparency objectives.\214\ IIB does not, however, provide 
information on how often these phenomena may have occurred or give 
examples. IIB also does not discuss whether U.S. SEFs or other non-U.S. 
multilateral trading platforms may sometimes be able to provide 
substitute services if a particular non-U.S. multilateral trading 
platform refuses access. IIB also notes that the test in the DMO 
Guidance extends to trades executed through an intermediary and states 
that the benefits of SEF registration are highly attenuated in 
transactions where U.S. personnel of non-U.S. firms trade on a non-U.S. 
multilateral trading facility through an intermediary because the 
intermediary will be regulated by the Commission and this will provide 
significant customer and market integrity protections.\215\
---------------------------------------------------------------------------

    \212\ IIB at 13-14.
    \213\ Id. at 13.
    \214\ Id.
    \215\ Id. at 14.
---------------------------------------------------------------------------

b. Commission Response
    As with the DSIO Advisory, the issues raised by IIB with respect to 
the DMO Guidance relate to the geographic scope of the SEF Registration 
Rule as opposed to substantive rule requirements that may carry unique 
cross-border costs. Consistent with this, IIB recommends changes in the 
geographic approach taken in the DMO Guidance and does not recommend 
changes in the SEF Registration Rule itself. Moreover, to the extent 
that there are cost implications of the type identified by IIB, they 
relate to a limited subset of the market--transactions between non-U.S. 
firms that the firms would prefer to have executed on a non-U.S. 
trading platform with at least one firm using a U.S.-based trader. For 
these reasons, the Commission concludes that the issues raised by IIB 
with respect to the DMO Guidance do not warrant changes in the 
substantive provisions of the SEF Registration Rule and are beyond the 
scope of the remand.

G. Additional Observations Made by Commenters on Costs and Benefits of 
Extraterritorial Application of Particular Rules

1. SEF Registration Rule
    The UBS comment emphasized the benefits of the SEF Registration 
Rule, particularly provisions requiring SEFs to provide impartial 
access so that market participants can compete on a level playing field 
and to provide straight-through-processing, which is designed to make 
the workflow from trade execution to clearing as robust and efficient 
as possible.\216\ The comment endorsed the extraterritorial application 
of the rule consistent with section 2(i), stating that, ``[i]n light of 
the global and flexible nature of swaps execution, failing to apply the 
provisions of [the rule] to all activities subject to the Commission's 
jurisdiction would risk undermining the importance of the core 
principles contained therein as the

[[Page 54493]]

global swaps market continues to evolve.'' \217\ The comment further 
stated that, as other jurisdictions proceed with finalizing swap 
execution rules, the Commission should attempt to maximize 
harmonization while preserving core principles that are critical to a 
well-functioning market.\218\
---------------------------------------------------------------------------

    \216\ UBS at 1.
    \217\ Id.
    \218\ Id.
---------------------------------------------------------------------------

    The Commission agrees that broad application of the SEF 
Registration Rule within its jurisdiction will benefit the market in 
terms of transparency, efficiency, and competitiveness. The Commission 
also agrees that realization of those benefits may be enhanced by 
harmonization with foreign regimes, consistent with the Commission's 
own regulatory objectives.
    ISDA-SIFMA also recommended harmonization in the SEF area; and 
specifically urged the Commission to ``re-examine'' what ISDA-SIFMA 
considered to be a ``very rigid'' approach to execution methods in the 
SEF Registration Rule in light of what ISDA-SIFMA characterized as 
greater flexibility for swap trading platforms in the European Union 
under MiFID II.\219\ As described previously, the MiFID II regime is 
still in the process of being implemented and is not expected to be in 
operation until 2018. The Commission also notes that the SEF 
Registration Rule provides for flexibility in execution methods, albeit 
not in the precise ways that ISDA and SIFMA have recommended in other 
documents.\220\ In particular, the rule requires SEFs to make available 
trading via an order book, but also allows trades to be executed on 
SEFs using a request for quotes system.\221\ It also allows block 
trading for large transactions.\222\ Additional flexibility for SEFs 
with respect to block trades has been provided through staff no-action 
relief.\223\ The MiFID II standards for pre-trade transparency in 
transactions on derivatives trading platforms, in some important 
respects, may be more stringent and prescriptive than the Commission's 
SEF rules.\224\
---------------------------------------------------------------------------

    \219\ ISDA-SIFMA at 3.
    \220\ See generally ISDA, Path Forward for Centralized Execution 
of Swaps (Apr. 2015), cited in ISDA-SIFMA at 3 n.7.
    \221\ 17 CFR 37.9.
    \222\ 17 CFR 37.9(a)(2).
    \223\ See CFTC Letter No. 15-60.
    \224\ See, e.g., MiFIR, supra note 100, at 2-3 (recital 8); Amir 
Khwaja, MiFID II and Transparency for Swaps: What You Need to Know, 
Clarus Financial Technology (Sept. 29, 2015), https://www.clarusft.com/mifid-ii-and-transparency-for-swaps-what-you-need-to-know/.
---------------------------------------------------------------------------

2. SDR and Historical SDR Reporting Rules
    Commenters observed that the current international regime in which, 
pursuant to international commitments made following the 2008 financial 
crisis, multiple jurisdictions have put in place requirements to report 
data on swap transactions to swap data repositories or their foreign 
equivalents has increased costs and reduced benefits of reporting. For 
example, ISDA-SIFMA stated:

    [I]mplementation of trade reporting mandates in different 
jurisdictions is producing a disjointed and costly framework of 
overlapping reporting obligations, in some cases in conflict with 
local laws, with market participants reporting to a multiplicity of 
trade repositories on different bases. Despite having access to 
tremendous amounts of information, regulators are unable to 
consolidate, aggregate and effectively use that information.\225\
---------------------------------------------------------------------------

    \225\ ISDA-SIFMA at 3.

    JBA and IIB made substantially similar observations.\226\ None of 
the commenters provided quantitative data on, or estimates of, the cost 
of duplicative reporting. Commenters also did not provide detailed or 
specific qualitative information on how the Commission's reporting 
rules interact with foreign requirements. With the exception of a 
recommended change in Commission rule 45.2(h), discussed below, none of 
the commenters recommended specific substantive changes in the SDR or 
Historical SDR Reporting Rules. Commenters generally recommended that 
the Commission address the current problems with the international 
reporting regime through international cooperative means such as 
memoranda of understanding with foreign regulators, initiatives to 
promote data standardization and remove legal obstacles to cross-border 
access to reported information, and international rules to determine 
parties responsible for reporting.\227\ IIB also recommended that, 
while efforts to resolve international data reporting issues are 
ongoing, the Commission keep in place and formalize existing no-action 
relief.\228\
---------------------------------------------------------------------------

    \226\ JBA at 2-3; IIB at 19-20.
    \227\ JBA at 3; IIB at 20.
    \228\ IIB at 20.
---------------------------------------------------------------------------

    The Commission agrees that improvements in standardization and 
sharing of reported swap data across jurisdictions would be beneficial, 
and Commission staff is working toward these objectives, as noted in 
section IV.D, above. Among other benefits, they might facilitate the 
use of substituted compliance or similar arrangements to reduce 
duplicative regulation in the swap reporting area. By their nature, 
however, improvements in these areas require international cooperative 
efforts, as commenters generally recognized. As a result, the issues 
with swap data reporting raised by the commenters do not support 
unilateral changes in the substance of the SDR or Historical SDR 
Reporting Rules in the context of the present remand.

V. Commenters' Recommendations for Changes in Substantive Requirements 
of Rules

A. Introduction

    As noted above in Part III, under the SIFMA decision, the ultimate 
mandate to the Commission on remand, following consideration of any 
differences between the extraterritorial and domestic costs and 
benefits of the remanded rules, is to determine whether such 
consideration requires any changes to be made in the substantive 
requirements of the remanded rules and, if not, to give a reasoned 
explanation why not.\229\ For this purpose the Commission, as mentioned 
above, asked commenters about ``the implications of'' any differences 
between extraterritorial and domestic costs and benefits ``for the 
substantive requirements'' of the remanded rules.\230\ In addition to 
general discussions of cross-border costs and benefits of some of the 
remanded rules, addressed in Part IV, above, commenters put forth two 
requests for specific changes in particular substantive rule 
requirements, which are discussed here. The Commission believes that it 
is useful in this context to evaluate the commenters' proposed changes 
in light of the fact that the Commission is required to apply to its 
own regulatory proposals pursuant to section 15(a) of the Commodity 
Exchange Act (``section 15(a)'').\231\ The Commission also incorporates 
by reference the discussions in the preceding sections.
---------------------------------------------------------------------------

    \229\ See 67 F. Supp. 3d at 435.
    \230\ Initial Response, 80 FR at 12558.
    \231\ Section 15(a)(1), 7 U.S.C. 19(a)(1), requires the 
Commission, with certain exceptions, to consider the costs and 
benefits of its action before promulgating a regulation or issuing 
an order. Section 15(a)(2), 7 U.S.C. 19(a)(2) states that the costs 
and benefits of the proposed Commission action shall be evaluated in 
light of--(A) considerations of protection of market participants 
and the public; (B) consideration of the efficiency, 
competitiveness, and financial integrity of futures markets; (C) 
considerations of price discovery; (D) considerations of sound risk 
management practices; and (E) other public interest considerations.
---------------------------------------------------------------------------

    In addition to making recommendations regarding the substance of 
some of the remanded rules, the commenters made a number of 
recommendations as to how the

[[Page 54494]]

Commission should apply section 2(i) in particular circumstances to 
establish the extraterritorial scope of one or more of the rules.\232\ 
For purposes of its response to the remand order, the Commission will 
not attempt to make determinations regarding the merits of commenters' 
recommendations for rule changes or other actions defining the 
extraterritorial scope, as opposed to the substance, of the rules.
---------------------------------------------------------------------------

    \232\ An example is IIB's recommendation that the Commission not 
make use of a test based on the physical presence of swap dealing 
activity in the United States test in determining what transactions 
are subject to transaction-level rules. IIB at 16-19.
---------------------------------------------------------------------------

B. Expanded Use of Safe Harbors in the Swap Entity Definition Rule

1. Commenter Proposal
    Based on its observation that foreign entities are likely to have 
more difficulty figuring out U.S. law than U.S. firms, ISDA-SIFMA 
states that the costs of extraterritorial application of rules could be 
mitigated by ``greater clarity around the scope of Commission rules and 
greater use of safe harbors.'' \233\ The Commission agrees that use of 
safe harbors or other forms of ``bright line'' rules can make it easier 
for businesses to determine whether they are in compliance with 
regulations. On the other hand, use of bright line rules commonly 
involves a trade-off between simplicity of implementation and risks of 
either underinclusiveness or overinclusiveness with regard to the 
policy objectives of the regulation. As a result, suggestions for 
greater use of bright line rules need to be evaluated in specific 
contexts.
---------------------------------------------------------------------------

    \233\ ISDA-SIFMA at 3.
---------------------------------------------------------------------------

    ISDA-SIFMA makes only one specific suggestion for greater use of 
safe harbor provisions, in the definition of a swap dealer. The comment 
states:

    [P]ersons utilizing the de minimis exemption from swap dealer 
status may be avoiding transactions with U.S. swap dealers due to 
uncertainty regarding whether their swaps hedging their own 
financial risks would be considered to be entered into ``in 
connection with dealing activity.'' Expansion of the safe harbor now 
restricted to physical commodity hedging, so as to encompass a 
broader array of hedging transactions, could mitigate this 
effect.\234\
---------------------------------------------------------------------------

    \234\ Id.

    The ISDA-SIFMA recommendation relates to an issue that was 
considered by the Commission at the time of the original Swap Entity 
Definition rulemaking. As noted above, under the Commission's 
regulation defining a swap dealer, a person who enters into swap 
transactions is only considered to be a swap dealer if its swap 
positions in connection with its dealing activity exceed a specified de 
minimis amount, currently $8 billion.\235\ Thus, in order to determine 
if it needs to register as a swap dealer, a business that enters into a 
large volume of swaps may need to evaluate whether its positions 
involve dealing or are for some other purpose. In close cases, this may 
involve a judgment taking into account a number of factors.\236\ 
However, the Commission has specified that some categories of swap 
transactions are not considered in determining whether an entity is a 
swap dealer. One of these safe harbor categories is swaps used to hedge 
market positions in physical commodities.\237\
---------------------------------------------------------------------------

    \235\ 17 CFR 1.3(ggg)(4)(i)(A).
    \236\ See, e.g., 77 FR at 30614-16 (discussing interpretive 
issues in application of statutory definition of swap dealer).
    \237\ 17 CFR 1.3(ggg)(6)(iii).
---------------------------------------------------------------------------

    At the time of the original rulemaking, the Commission considered 
whether to also create a safe harbor for swaps used to hedge commercial 
risks--including financial risks--not associated with physical 
commodities.\238\ The Commission stated that hedging generally was not 
a form of dealing activity, but determined that a per se safe harbor 
for commercial hedging should not be adopted because, in practice, it 
is often difficult to distinguish commercial hedging transactions from 
dealing transactions without taking into consideration the surrounding 
facts and circumstances.\239\ ``[N]o method has yet been developed to 
reliably distinguish, through a per se rule between: (i) [s]waps that 
are entered into for the purpose of hedging or mitigating commercial 
risk; and (ii) swaps that are entered into for the purpose of 
accommodating the counterparty's needs or demands or otherwise 
constitute swap dealing activity, but which also have a hedging 
consequence.'' \240\ By contrast, the Commission had extensive 
experience in the futures market with exclusions for hedging risks 
associated with physical commodities and therefore concluded that it 
could safely make use of a per se rule for swaps used for this 
purpose.\241\ The hedging safe harbor was adopted as an interim final 
rule and the Commission invited comments, including on whether the safe 
harbor should be expanded to include hedging of financial risks.\242\ 
However, the Commission has not, to date, found reason to modify the 
safe harbor as originally promulgated.
---------------------------------------------------------------------------

    \238\ 77 FR at 30611-13.
    \239\ Id.
    \240\ Id. at 30613.
    \241\ Id. at 30612-13.
    \242\ Id. at 30613.
---------------------------------------------------------------------------

    The ISDA-SIFMA safe-harbor proposal thus raises issues that go well 
beyond ISDA-SIFMA's concern with making U.S. law easier for foreign 
firms to figure out. Maintaining the integrity of the line between 
hedging and dealing activities is fundamental to a definition of a swap 
dealer that is meaningful in practice and thus fundamental to the 
effectiveness of the Dodd-Frank regulatory regime for swap dealers, 
both foreign and domestic. Unfortunately, the ISDA-SIFMA comment does 
not put forward a solution to the problem identified in the original 
rulemaking--devising a reliable per se rule for distinguishing between 
swaps entered into to hedge commercial risks and swaps that constitute 
dealing activity without taking into consideration additional facts and 
circumstances.
2. Evaluation in Light of Section 15(a) Factors
a. Protection of Market Participants and the Public
    Expanding the hedging safe harbor in the definition of swap dealer 
to cover hedging of financial risks poses significant risks of reducing 
protection of market participants and the public. As noted above, the 
Commission found in the preamble to the Swap Entity Definition Rule 
that no reliable per se method has been found for distinguishing 
between hedging financial risks using swaps and swap dealing. As a 
result, a safe harbor for hedging financial risks could increase the 
possibility that some entities engaged in a large volume of swap 
dealing would be misclassified and not treated as dealers. This is 
particularly true since, in close cases, businesses would have 
incentives to label transactions as hedging rather than dealing to take 
advantage of the safe harbor. Thus, a safe harbor for hedging financial 
risks could result in some entities engaged in large volumes of swap 
dealing not being subject to the provisions of Dodd-Frank and 
Commission implementing regulations designed to protect market 
participants and the public against wrongdoing by swap dealers and 
against the risks to the financial system that were associated with 
unregulated swap dealing before Dodd-Frank. This includes both some of 
the remanded rules and statutory provisions and Commission rules that 
are not subject to the remand order but that would not apply to firms 
that were no longer classified as swap dealers as

[[Page 54495]]

a result of an expanded safe harbor.\243\ This concern applies to 
overseas as well as domestic entities since, given the de minimis 
volume element of the swap dealer definition and limits of section 
2(i), a safe harbor would only be relevant to foreign entities engaged 
in a reasonably large volume of swaps that affect or are connected to 
U.S. markets. The ISDA-SIFMA comment does not specify methods for 
crafting a safe harbor for hedging financial risks that avoids 
misidentification or otherwise give reasons to overturn the 
Commission's judgment regarding the workability of a safe harbor in the 
preamble to the Swap Entity Definition Rule.
---------------------------------------------------------------------------

    \243\ Relevant remanded rules include the Swap Entity 
Registration, Daily Trading Records, Risk Management, Chief 
Compliance Officer, and Portfolio Reconciliation Rules. Examples of 
other requirements imposed on swap dealers to protect market 
participants and the public include the business conduct standards 
set forth at 17 CFR part 23, subpart H.
---------------------------------------------------------------------------

b. Efficiency, Competitiveness, and Financial Integrity
    A safe harbor for hedging of financial risks poses a significant 
risk of reducing efficiency, competitiveness, and financial integrity 
because, as already explained, it could result in firms that engage in 
large volumes of swap dealing not being subject to Dodd-Frank 
provisions and Commission regulations that apply to swap dealers and 
that are themselves designed to promote efficiency, competitiveness, 
and financial integrity in the business of swap dealing. Examples 
include the Daily Trading Records, Risk Management, Chief Compliance 
Officer, Portfolio Reconciliation, and Real-Time Reporting Rules, among 
others.
c. Price Discovery
    The recommended safe harbor appears unlikely to have a significant 
effect on price discovery. A safe harbor for swaps used to hedge 
financial risks could increase the volume of swaps transactions by some 
amount, but in light of the limited circumstances in which it is likely 
to make a difference, any change in volume of transactions is unlikely 
to affect price discovery. This is particularly true with respect to 
the even narrower category of foreign swaps market participants who 
might be affected by an expanded safe harbor.
d. Sound Risk Management Practices
    The recommended safe harbor could increase the use of swaps to 
manage financial risks in some limited circumstances--for example where 
a firm's volume of swap transactions is close to the de minimis amount 
for classification as a swap dealer, the firm wishes to expand its use 
of swaps to hedge financial risks, the costs of regulation as a swap 
dealer would outweigh the benefits from expanded use of swaps, and the 
nature of the firm's business model creates ambiguity as to whether it 
is engaged in hedging or dealing in the absence of a safe harbor. It is 
unclear from available information how often this is likely to be the 
case. For foreign firms, a safe harbor is unlikely to significantly 
increase use of swaps to manage risks because such firms can already 
avoid regulation as U.S. swap dealers by entering into swaps beyond the 
de minimis amount with non-U.S. counterparties.
    The recommended safe harbor also has a significant likelihood of 
reducing use of sound risk management practices by some firms that 
engage in swap dealing. As discussed previously, a safe harbor for 
swaps used to hedge financial risks may lead to some firms that engage 
in a large volume of swap dealing affecting U.S. markets being 
misclassified and not regulated as swap dealers. Many of the Dodd-Frank 
provisions and Commission rules applicable to swap dealers are designed 
to ensure that swap dealers adopt sound risk management practices, 
including, but not limited to, the Daily Trading Records, Risk 
Management, Chief Compliance Officer, and Portfolio Reconciliation 
Rules.
e. Other Public Interest Considerations
    For some firms, an expanded safe harbor could contribute to 
efficiency by making it easier to determine whether the firm needs to 
comply with regulations applicable to swap dealers. This would be true 
primarily, if not only, for firms that engaged in a total volume of 
swap transactions that approached or exceeded the de minimis amount and 
whose overall business model did not otherwise make clear whether or 
not they were engaged in swap dealing. ISDA-SIFMA does not provide 
information on the number of firms, either foreign or domestic, likely 
to be in this category and the Commission is not aware of other sources 
of information on this question. ISDA-SIFMA suggests that ease of 
determining whether a firm is within the definition of a swap dealer 
would be particularly valuable to foreign firms, on the theory that 
such firms have difficulty coping with U.S. law. However, it is unclear 
how important this factor would be for firms to which the recommended 
safe harbor is most relevant since such firms, for the reasons just 
stated, would likely have some level of financial and legal 
sophistication, whether domestic firms engaged in substantial swaps 
activity or foreign firms engaged in a significant volume of cross-
border swaps affecting or connected to U.S. markets.
    Relatedly, the recommended safe harbor might encourage some foreign 
counterparties who currently enter into swaps to hedge financial risks 
with non-U.S. firms to move some of their business to U.S. swap 
dealers. In particular, this might be true for foreign counterparties 
whose other business does not make them swap dealers; who engage, or 
would potentially engage, in more than the de minimis amount of swaps 
with U.S. persons; whose business model currently creates ambiguity as 
to whether the swaps in question are a form of dealing in the absence 
of a safe harbor; and who do not have other reasons for confining their 
swaps business to local, non-U.S., dealers. The available record does 
not provide information on the number of firms that would meet all 
these criteria or the volume of swaps business that would be involved. 
However, given the limited circumstances in which a safe harbor would 
have an effect, it appears unlikely, in the absence of information to 
the contrary, that the volume of swaps involved would have a major 
impact on the overall liquidity of U.S. markets.
    Based on its evaluation of these factors, the Commission concludes 
that expanding the hedging safe harbor is not warranted on the present 
record. This is particularly true in light of (1) the fact that the 
suggested expansion of the safe harbor would apply across the board and 
not just in circumstances where foreign firms have greater difficulty 
than U.S. firms in applying the swap dealer definition; (2) the 
importance of maintaining the integrity of the swap dealer definition 
to the entire Dodd-Frank regulatory regime; and (3) the conclusion in 
the original Swaps Entity Definition rulemaking that there is no 
reliable per se test for distinguishing between hedging financial risk 
and dealing, and the absence of any showing by the commenters that this 
conclusion is incorrect.

C. ``Re-examination'' of Application of Rule 45.2(h) to Non-Registrants

1. Commenter Proposal
    ISDA-SIFMA recommends that the Commission ``re-examine the 
provisions of Regulation 45.2 that require non-registrants `subject to 
the jurisdiction of the Commission' to make books and records available 
to the Commission and

[[Page 54496]]

other U.S. authorities.'' \244\ Commission rule 45.2 generally deals 
with recordkeeping requirements for registered entities and parties 
involved in swaps transactions. Section 45.2(h) requires covered 
persons subject to the Commission's jurisdiction, including registrants 
such as swap dealers but also swap counterparties not required to 
register with the Commission, to make records available on request to 
the Commission, the Justice Department, and the Securities and Exchange 
Commission; and to U.S. prudential regulators (i.e., bank regulators) 
as authorized by the Commission.\245\ The ISDA-SIFMA comment does not 
explain specifically how and to what extent costs of compliance for 
Sec.  45.2(h) differ for foreign and domestic entities, beyond ISDA-
SIFMA's general assertion, discussed in section IV.A above, that some 
foreign firms may have more difficulty coping with U.S. law than U.S. 
firms.
---------------------------------------------------------------------------

    \244\ ISDA-SIFMA at 3.
    \245\ 17 CFR 45.2(h).
---------------------------------------------------------------------------

2. Evaluation in Light of Section 15(a) Factors
a. Protection of Market Participants and the Public
    Eliminating or significantly restricting application of Sec.  
45.2(h) to non-registrants, including both domestic swaps 
counterparties and foreign counterparties sufficiently involved in U.S. 
swaps markets to be subject to U.S. regulation pursuant to section 
2(i), can be expected to reduce protection of market participants and 
the public since prompt and efficient access to records is necessary 
for effective regulation of financial activity, both for purposes of 
law enforcement and for purposes of market surveillance. This benefit 
is limited somewhat by the alternative possibilities of obtaining 
information about swap market participants by means such as legal 
process or obtaining the assistance of foreign regulators. However, 
such alternatives are likely to be slower and less efficient than use 
of Sec.  45.2(h). Prompt and efficient access to records is 
particularly important in developing situations, for example when there 
is reason to believe that fraud or other law violations are ongoing and 
that records may be destroyed or assets dissipated or hidden. It is 
similarly important when there is reason to believe that insolvency or 
other business problems at a firm with a large swaps portfolio may pose 
risks to other market participants or the market in general. While it 
is not practicable to quantify the benefits of Sec.  45.2(h) in 
protecting market participants and the public, there is strong reason 
to believe that the benefits are high relative to the costs since the 
provision commonly is employed in situations where regulators have a 
specific reason to be concerned about a firm's swaps activities or 
otherwise have a specific need for information.
b. Efficiency, Competitiveness, and Financial Integrity
    Eliminating or significantly restricting application of Sec.  
45.2(h) to non-registrants is likely to reduce efficiency, 
competitiveness, and financial integrity of relevant markets since it 
would make it more difficult to enforce legal requirements designed to 
promote these objectives, such as the anti-fraud and anti-market 
manipulation provisions of the Commodity Exchange Act.\246\ As noted in 
the previous section, it would also make it more difficult for U.S. 
authorities to make prompt inquiries when the financial integrity of a 
market participant is in question. The Commission does not have data 
that would permit it to quantify these effects, however. The Commission 
also does not have quantitative information on the costs of Sec.  
45.2(h). However, there is reason to believe that overall costs are 
relatively modest since this provision does not itself require either 
recordkeeping or routine making of reports, but only provision of 
access to existing records on request.
---------------------------------------------------------------------------

    \246\ CEA sections 4b(a)(2), 6(c), 7 U.S.C. 6b(a)(2), 9.
---------------------------------------------------------------------------

c. Price Discovery
    Changes in Sec.  45.2(h) appear unlikely to have any direct impact 
on price discovery. Scaling back this requirement could have negative 
indirect effects on price discovery since the provision can be used to 
investigate violations of provisions designed to promote the price 
discovery function of Commission-regulated markets, such as the 
prohibition against price manipulation.\247\ The Commission lacks 
information that would permit it to quantify any such effects, however.
---------------------------------------------------------------------------

    \247\ CEA section 6(c), 7 U.S.C. 9.
---------------------------------------------------------------------------

d. Sound Risk Management Practices
    Scaling back Sec.  45.2(h) appears unlikely to have a significant 
effect on use of swaps to manage risks since, as noted, this provision 
does not require recordkeeping or routine making of reports, but only 
requires that records be made available to the CFTC and other 
authorities on request.
e. Other Public Interest Considerations
    Conceivably, some foreign non-registrant swap counterparties who 
would prefer to avoid even a chance of involvement with U.S. 
authorities might switch business from foreign swap providers to U.S. 
swap dealers if Sec.  45.2(h) did not apply to them. ISDA-SIFMA does 
not provide information on how often this would be the case. However, 
in the absence of information to the contrary, it appears unlikely that 
any such effect would be large enough to have a significant impact on 
the overall liquidity of U.S. markets since the foreign firms in 
question would still be subject to inspection by their home 
authorities; and their records might still become available to U.S. 
authorities, albeit less expeditiously, through mechanisms such as 
cooperative enforcement arrangements with foreign jurisdictions.
    In light of these considerations and the importance of access to 
books and records for law enforcement, market surveillance, and other 
regulatory purposes, the Commission concludes that ISDA-SIFMA has not 
justified an amendment to Sec.  45.2(h) to exclude non-registrants.

D. Process Recommendations

    Commenters made a number of recommendations for Commission 
engagement in processes that could be expected to lead to substantive 
changes in some of the remanded rules. In particular, commenters 
generally supported Commission engagement in efforts for international 
harmonization of rules in the area of swap data reporting and 
regulation of SEFs and their foreign equivalents.\248\ The Commission 
agrees that such efforts are important and is participating in them, as 
described in section IV.C and IV.D, above. However, they are not at the 
point where they can provide the basis for specific rule changes in the 
context of the SIFMA remand. Consistent with this, commenters did not 
identify specific rule changes based on harmonization efforts to date.
---------------------------------------------------------------------------

    \248\ E.g., ISDA-SIFMA at 3; IIB at 20.
---------------------------------------------------------------------------

VI. Conclusion

    The comments on the Initial Response identify some respects in 
which the costs and benefits of the extraterritorial application of the 
remanded rules may differ from the domestic application. However, 
taking into account the facts and analysis in the original rulemaking 
preambles as well as the additional consideration of costs and benefits 
in the Initial Response and this release, the record does not establish 
a need to make

[[Page 54497]]

changes in the substantive requirements of the remanded rules as 
originally promulgated at the present time and in the context of the 
SIFMA remand order.

    Issued in Washington, DC, on August 4, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

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

Appendices to Final Response to District Court Remand Order in 
Securities Industry and Financial Markets Association, et al. v. United 
States Commodity Futures Trading Commission--Commission Voting Summary, 
Chairman's Statement, and Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioner Bowen voted in 
the affirmative. Commissioner Giancarlo voted in the negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    I support the two actions the Commission and staff have taken 
today, which address issues related to the cross-border application 
of our rules on swaps. I thank the staff for their hard work on 
these matters, my fellow Commissioners for their consideration, and 
the public for their feedback.
    Today, the CFTC has issued a final response to the remand order 
of the U.S. District Court for the District of Columbia in 
litigation brought by the Securities Industry and Financial Markets 
Association and other industry associations against the Commission. 
The litigation challenged the extra-territorial application of 
several swaps rules and unsuccessfully sought to invalidate the 
Commission's 2013 cross-border guidance. Today we have supplemented 
our earlier answer to the Court's inquiry regarding the costs and 
benefits of the overseas application of those rules.
    In addition, Commission staff today has extended for another 
year the previously issued no-action relief from certain 
transaction-level requirements for transactions between non-U.S. 
parties that regularly use personnel or agents located in the U.S. 
to ``arrange, negotiate, or execute'' them.
    These actions are part of our overall effort to address the 
cross-border implications of swap activity, while at the same time 
harmonizing derivatives regulation with other jurisdictions as much 
as possible. The past several years have been marked by progress in 
this regard. In the last year alone, we have accomplished a great 
deal in each of the four basic areas of derivatives regulation--
central clearing, oversight of swap dealers, trading and reporting. 
Consider the following:
    With regard to central clearing, we and the European Commission 
agreed upon a common approach regarding requirements for central 
clearing counterparties (CCPs), which will permit U.S. and European 
CCPs to continue providing clearing services to entities in each 
other's jurisdiction. We also granted exempt status to several 
foreign clearinghouses. The CFTC is also co-chairing a task force 
with international regulators to address resiliency requirements and 
engage in recovery planning, while also participating in 
international resolution planning for CCPs.
    When it comes to the oversight of swap dealers, we harmonized 
the substance of rules setting margin requirements for uncleared 
swaps, one of the most important parts of our overall regulatory 
framework. We also agreed on an international timetable for 
implementation. Although the European Commission recently delayed 
their implementation for technical reasons, they have made clear 
that this delay will be modest. We adopted a cross-border 
application of our margin rule, which provides a broad scope of 
substituted compliance. And we are currently working with other 
jurisdictions on substituted compliance determinations that will 
supplement those we have previously made in other areas.
    On trading, the CFTC is looking at ways to harmonize our swap 
execution facility rules with those of other jurisdictions. For 
example, now that the European Securities and Markets Authority has 
published its MiFiD II technical standards, we are working with our 
European counterparts to look at differences in our respective rules 
and make progress toward harmonization. We also recently issued no-
action relief to an Australia-based trading platform.
    We are focused on harmonizing data reporting standards as well. 
The CFTC co-chairs an international task force that is leading this 
effort. CFTC staff is also working with international regulators and 
the Office of Financial Research to develop effective means to 
identify swaps and swap activity by participant, transaction and 
product type throughout the swap lifecycle.
    We will continue making progress in all these areas. For 
example, this fall I intend to ask the Commission to consider a rule 
to begin to address the ``arrange, negotiate, or execute'' issues 
raised by the no-action relief that we have extended today.
    Our first responsibility is to implement our nation's laws 
faithfully, which requires us to address the cross-border 
implications of swap activity. A strong global regulatory framework 
is the best way to do so, and that is why harmonization is so 
important. To focus on the fact that full harmonization has not been 
reached, or that progress sometimes occurs in fits and starts, I 
believe misses the forest for the trees. Regulations are implemented 
by individual nations, or unions of nations, each of which has its 
own legal traditions, regulatory philosophies, political processes, 
and often, statutory timetables. There will always be differences, 
just as there are in every other area of financial regulation. The 
more important story is we are making good, steady progress.

Appendix 3--Dissenting Statement of Commissioner J. Christopher 
Giancarlo

    I respectfully dissent from the Commodity Futures Trading 
Commission's (CFTC or Commission) final response in the SIFMA 
litigation.
    The CFTC appears to have addressed the District Court's inquiry 
whether the costs and benefits identified in the remanded 
rulemakings apply to swaps activities outside of the United States 
(U.S.) and what differences are present in the costs and benefits 
between domestic and overseas activities. Nevertheless, it must be 
noted that the Commission has repeatedly failed to coordinate 
effectively with foreign regulators to ``implement global 
standards'' in financial markets as agreed to by the G-20 leaders in 
Pittsburgh in 2009.\1\ The lack of harmonization in the 
implementation date for margin for uncleared swaps is the latest 
example. The result for financial markets has been a complex, 
conflicting and costly array of CFTC cross-border regulations.
---------------------------------------------------------------------------

    \1\ G-20 Leaders' Statement, The Pittsburgh Summit at 7 (Sept. 
24-25, 2009) (G-20 Statement), available at http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
---------------------------------------------------------------------------

    The Commission's uncoordinated approach to regulation of swaps 
trading started with its July 2013 Interpretative Guidance and 
Policy Statement Regarding Compliance With Certain Swap Regulations 
(Interpretative Guidance).\2\ The Interpretative Guidance, which the 
District Court found is a non-binding general statement of policy, 
basically stated that every single swap a U.S. Person enters into, 
no matter where it is transacted, has a direct and significant 
connection with activities in, and effect on, commerce of the U.S. 
that requires imposing CFTC transaction rules.\3\ This uncoordinated 
approach has continued through the CFTC's Cross-Border Application 
of Margin Requirements,\4\ in which the Commission unilaterally 
imposed a set of preconditions to substituted compliance that is 
overly complex, unduly narrow and operationally impractical.\5\
---------------------------------------------------------------------------

    \2\ 78 FR 45292 (Jul. 26, 2013).
    \3\ Id.
    \4\ 81 FR 34818 (May 31, 2016).
    \5\ Id. at 34853-54.
---------------------------------------------------------------------------

    Unfortunately, the Commission's uncoordinated approach to cross-
border harmonization has allowed foreign regulators to respond in 
kind. The CFTC's and European Union's (EU) tortured and repeatedly 
delayed central counterparty clearinghouse equivalence process is a 
stark example, as is the EU's recent decision to postpone until 2017 
new rules setting collateral requirements for uncleared derivatives.
    The CFTC must do better to work with foreign regulators to 
implement global standards consistently in a way that ensures a 
level playing field and avoids market fragmentation, protectionism 
and regulatory arbitrage.\6\ As a good start, the CFTC should 
replace its Interpretative Guidance with a formal rulemaking that 
recognizes outcomes-

[[Page 54498]]

based substituted compliance for competent non-U.S. regulatory 
regimes.\7\ Such an approach is practical, provides certainty and is 
in keeping with the cooperative spirit of the 2009 G-20 Pittsburgh 
Accords.\8\
---------------------------------------------------------------------------

    \6\ G-20 Statement, par. 12.
    \7\ Keynote Address of CFTC Commissioner J. Christopher 
Giancarlo at The Global Forum for Derivatives Markets, 35th Annual 
Burgenstock Conference, Geneva, Switzerland, Sept. 24, 2014, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlos-1.
    \8\ See generally G-20 Statement.

[FR Doc. 2016-18854 Filed 8-15-16; 8:45 am]
 BILLING CODE 6351-01-P