78852 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 

1 78 FR 45292 (July 26, 2013). The Commission 

originally published proposed and further proposed 

guidance on July 12, 2012 and January 7, 2013, 

respectively. See Cross-Border Application of 

Certain Swaps Provisions of the Commodity 

Exchange Act, 77 FR 41214 (July 12, 2012) and 

Further Proposed Guidance Regarding Compliance 

with Certain Swap Regulations, 78 FR 909 (Jan. 7, 

2013). 

2 78 FR 43785 (July 22, 2013). 

3The Entity-Level Requirements under the 

Exemptive Order consist of 17 CFR 1.31, 3.3, 

23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 

23.605, 23.606, 23.608, 23.609, and parts 45 and 46 

of the Commission’s regulations. 

4For purposes of this notice, the Internal 

Business Conduct Requirements consist of 17 CFR 

3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 

23.605, and 23.606. 

questions regarding information sharing, 

cooperation, supervision, and enforcement 

will remain unanswered until the 

Commission and our fellow regulators 

execute these MOUs. 

Second, the Commission has issued timelimited no-action relief for the swap data 

repository reporting requirements. These 

comparability determinations will be done as 

separate notices. However, the timing and 

process for these determinations remain 

uncertain. 

Third, the Commission has failed to 

provide clarity on the process for addressing 

the comparability determinations that it 

declined to undertake at this time. The 

Notices only state that the Commission may 

address these requests in a separate notice at 

a later date given further developments in the 

law and regulations of other jurisdictions. To 

promote certainty in the financial markets, 

the Commission must provide a clear path 

forward for market participants and foreign 

regulators. 

The following steps would be a better 

approach: (1) The Commission should extend 

the Exemptive Order to allow foreign 

regulators to further implement their 

regulatory regimes and coordinate with them 

to implement a harmonized substituted 

compliance process; (2) the Commission 

should implement a flexible, outcomes-based 

approach to the substituted compliance 

process and apply it similarly to all 

jurisdictions; and (3) the Commission should 

work closely with our fellow regulators to 

expeditiously implement MOUs that resolve 

regulatory differences and address regulatory 

oversight issues. 

Conclusion 

While I support the narrow comparability 

determinations that the Commission has 

made, it was my hope that the Commission 

would work with foreign regulators to 

implement a substituted compliance process 

that would increase the global harmonization 

effort. I am disappointed that the 

Commission has failed to implement such a 

process. 

I do believe that in the longer term, the 

swaps regulations of the major jurisdictions 

will converge. At this time, however, the 

Commission’s comparability determinations 

have done little to alleviate the burden of 

regulatory uncertainty and duplicative 

compliance with both U.S. and foreign 

regulations. 

The G–20 process delineated and put in 

place the swaps market reforms in G–20 

member nations. It is then no surprise that 

the Commission must learn to coordinate 

with foreign regulators to minimize 

confusion and disruption in bringing much 

needed clarity to the swaps market. For all 

these shortcomings, I respectfully dissent 

from the Commission’s approval of the 

Notices. 

[FR Doc. 2013–30979 Filed 12–26–13; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Comparability Determination for Hong 

Kong: Certain Entity-Level 

Requirements 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of Comparability 

Determination for Certain Requirements 

under the laws of Hong Kong. 

SUMMARY: The following is the analysis 

and determination of the Commodity 

Futures Trading Commission 

(‘‘Commission’’) regarding certain parts 

of a request by the Hong Kong Monetary 

Authority (‘‘HKMA’’) that the 

Commission determine that laws and 

regulations applicable in Hong Kong 

provide a sufficient basis for an 

affirmative finding of comparability 

with respect to the following regulatory 

obligations applicable to swap dealers 

(‘‘SDs’’) and major swap participants 

(‘‘MSPs’’) registered with the 

Commission: (i) Chief compliance 

officer; (ii) risk management; and (iii) 

swap data recordkeeping (collectively, 

the ‘‘Internal Business Conduct 

Requirements’’). 

DATES: Effective Date: This 

determination will become effective 

immediately upon publication in the 

Federal Register. 

FOR FURTHER INFORMATION CONTACT: Gary 

Barnett, Director, 202–418–5977, 

gbarnett@cftc.gov, Frank Fisanich, Chief 

Counsel, 202–418–5949, ffisanich@

cftc.gov, and August A. Imholtz III, 

Special Counsel, 202–418–5140, 

aimholtz@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

On July 26, 2013, the Commission 

published in the Federal Register its 

‘‘Interpretive Guidance and Policy 

Statement Regarding Compliance with 

Certain Swap Regulations’’ (the 

‘‘Guidance’’).1 In the Guidance, the 

Commission set forth its interpretation 

of the manner in which it believes that 

section 2(i) of the Commodity Exchange 

Act (‘‘CEA’’) applies Title VII’s swap 

provisions to activities outside the U.S. 

and informed the public of some of the 

policies that it expects to follow, 

generally speaking, in applying Title VII 

and certain Commission regulations in 

contexts covered by section 2(i). Among 

other matters, the Guidance generally 

described the policy and procedural 

framework under which the 

Commission would consider a 

substituted compliance program with 

respect to Commission regulations 

applicable to entities located outside the 

U.S. Specifically, the Commission 

addressed a recognition program where 

compliance with a comparable 

regulatory requirement of a foreign 

jurisdiction would serve as a reasonable 

substitute for compliance with the 

attendant requirements of the CEA and 

the Commission’s regulations 

promulgated thereunder. 

In addition to the Guidance, on July 

22, 2013, the Commission issued the 

Exemptive Order Regarding Compliance 

with Certain Swap Regulations (the 

‘‘Exemptive Order’’).2 Among other 

things, the Exemptive Order provided 

time for the Commission to consider 

substituted compliance with respect to 

six jurisdictions where non-U.S. SDs are 

currently organized. In this regard, the 

Exemptive Order generally provided 

non-U.S. SDs and MSPs in the six 

jurisdictions with conditional relief 

from certain requirements of 

Commission regulations (those referred 

to as ‘‘Entity-Level Requirements’’ in the 

Guidance) until the earlier of December 

21, 2013, or 30 days following the 

issuance of a substituted compliance 

determination.3

On July 12, 2013, the HKMA (the 

‘‘applicant’’) submitted a request that 

the Commission determine that laws 

and regulations applicable in Hong 

Kong provide a sufficient basis for an 

affirmative finding of comparability 

with respect to certain Entity-Level 

Requirements, including the Internal 

Business Conduct Requirements.4 The 

applicant provided Commission staff 

with updated submissions on August 8 

and 19, 2013. On November 11, 

November 28, and December 6, 2013, 

the applicant further supplemented the 

application with corrections and 

additional materials. The following is 


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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 78853 

5This notice does not address swap data 

repository reporting (‘‘SDR Reporting’’). The 

Commission may provide a comparability 

determination with respect to the SDR Reporting 

requirement in a separate notice. 6Public Law 111–203, 124 Stat. 1376 (2010). 

7 7 U.S.C. 2(i). 

8The compliance dates are summarized on the 

Compliance Dates page of the Commission’s Web 

site. (http://www.cftc.gov/LawRegulation/

DoddFrankAct/ComplianceDates/index.htm.) 

9 78 FR 45342–45. 

10See the Guidance, 78 FR 45342–44. 

11Under §§ 23.203 and 23.606, all records 

required by the CEA and the Commission’s 

regulations to be maintained by a registered SD or 

MSP shall be maintained in accordance with 

Commission regulation 1.31 and shall be open for 

inspection by representatives of the Commission, 

the United States Department of Justice, or any 

applicable U.S. prudential regulator. 

In its Final Exemptive Order Regarding 

Compliance with Certain Swap Regulations, 78 FR 

858 (Jan. 7, 2013), the Commission noted that an 

applicant for registration as a SD or MSP must file 

a Form 7–R with the National Futures Association 

and that Form 7–R was being modified at that time 

to address existing blocking, privacy, or secrecy 

laws of foreign jurisdictions that applied to the 

books and records of SDs and MSPs acting in those 

jurisdictions. See id. at 871–72 n. 107. The 

modifications to Form 7–R were a temporary 

measure intended to allow SDs and MSPs to apply 

for registration in a timely manner in recognition 

of the existence of the blocking, privacy, and 

secrecy laws. In the Guidance, the Commission 

clarified that the change to Form 7–R impacts the 

registration application only and does not modify 

the Commission’s authority under the CEA and its 

regulations to access records held by registered SDs 

and MSPs. Commission access to a registrant’s 

books and records is a fundamental regulatory tool 

necessary to properly monitor and examine each 

registrant’s compliance with the CEA and the 

regulations adopted pursuant thereto. The 

Commission has maintained an ongoing dialogue 

on a bilateral and multilateral basis with foreign 

regulators and with registrants to address books and 

records access issues and may consider appropriate 

measures where requested to do so. 

12See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of 

the CEA. 

13See e.g., §§ 23.203(b) and 23.606. 

14See supra note 9. 

15Because the applicant’s request and the 

Commission’s determinations herein are based on 

the comparability of the requirements applicable to 

Authorized Institutions (‘‘AI’’) regulated by the 

HKMA, an SD or MSP that is not an AI, or is 

otherwise not subject to the requirements 

applicable to AIs upon which the Commission 

bases its determinations, may not be able to rely on 

the Commission’s comparability determinations 

herein. 

the Commission’s analysis and 

determination regarding the Internal 

Business Conduct Requirements, as 

detailed below.5

II. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act6

(‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’), 

which, in Title VII, established a new 

regulatory framework for swaps. 

Section 722(d) of the Dodd-Frank Act 

amended the CEA by adding section 

2(i), which provides that the swap 

provisions of the CEA (including any 

CEA rules or regulations) apply to crossborder activities when certain 

conditions are met, namely, when such 

activities have a ‘‘direct and significant 

connection with activities in, or effect 

on, commerce of the United States’’ or 

when they contravene Commission 

rules or regulations as are necessary or 

appropriate to prevent evasion of the 

swap provisions of the CEA enacted 

under Title VII of the Dodd-Frank Act.7

In the three years since its enactment, 

the Commission has finalized 68 rules 

and orders to implement Title VII of the 

Dodd-Frank Act. The finalized rules 

include those promulgated under 

section 4s of the CEA, which address 

registration of SDs and MSPs and other 

substantive requirements applicable to 

SDs and MSPs. With few exceptions, the 

delayed compliance dates for the 

Commission’s regulations implementing 

such section 4s requirements applicable 

to SDs and MSPs have passed and new 

SDs and MSPs are now required to be 

in full compliance with such regulations 

upon registration with the 

Commission.8 Notably, the requirements 

under Title VII of the Dodd-Frank Act 

related to SDs and MSPs by their terms 

apply to all registered SDs and MSPs, 

irrespective of where they are located, 

albeit subject to the limitations of CEA 

section 2(i). 

To provide guidance as to the 

Commission’s views regarding the scope 

of the cross-border application of Title 

VII of the Dodd-Frank Act, the 

Commission set forth in the Guidance 

its interpretation of the manner in 

which it believes that Title VII’s swap 

provisions apply to activities outside 

the U.S. pursuant to section 2(i) of the 

CEA. Among other matters, the 

Guidance generally described the policy 

and procedural framework under which 

the Commission would consider a 

substituted compliance program with 

respect to Commission regulations 

applicable to entities located outside the 

U.S. Specifically, the Commission 

addressed a recognition program where 

compliance with a comparable 

regulatory requirement of a foreign 

jurisdiction would serve as a reasonable 

substitute for compliance with the 

attendant requirements of the CEA and 

the Commission’s regulations. With 

respect to the standards forming the 

basis for any determination of 

comparability (‘‘comparability 

determination’’ or ‘‘comparability 

finding’’), the Commission stated: 

In evaluating whether a particular category 

of foreign regulatory requirement(s) is 

comparable and comprehensive to the 

applicable requirement(s) under the CEA and 

Commission regulations, the Commission 

will take into consideration all relevant 

factors, including but not limited to, the 

comprehensiveness of those requirement(s), 

the scope and objectives of the relevant 

regulatory requirement(s), the 

comprehensiveness of the foreign regulator’s 

supervisory compliance program, as well as 

the home jurisdiction’s authority to support 

and enforce its oversight of the registrant. In 

this context, comparable does not necessarily 

mean identical. Rather, the Commission 

would evaluate whether the home 

jurisdiction’s regulatory requirement is 

comparable to and as comprehensive as the 

corresponding U.S. regulatory 

requirement(s).9

Upon a comparability finding, 

consistent with CEA section 2(i) and 

comity principles, the Commission’s 

policy generally is that eligible entities 

may comply with a substituted 

compliance regime, subject to any 

conditions the Commission places on its 

finding, and subject to the 

Commission’s retention of its 

examination authority and its 

enforcement authority.10

In this regard, the Commission notes 

that a comparability determination 

cannot be premised on whether an SD 

or MSP must disclose comprehensive 

information to its regulator in its home 

jurisdiction, but rather on whether 

information relevant to the 

Commission’s oversight of an SD or 

MSP would be directly available to the 

Commission and any U.S. prudential 

regulator of the SD or MSP.11 The 

Commission’s direct access to the books 

and records required to be maintained 

by an SD or MSP registered with the 

Commission is a core requirement of the 

CEA 12 and the Commission’s 

regulations,13 and is a condition to 

registration.14

III. Regulation of SDs and MSPs in 

Hong Kong 

The HKMA administers the Hong 

Kong Banking Ordinance and is the 

government authority in Hong Kong 

responsible for maintaining monetary 

and banking stability.15 Its main 

functions are: 

• Maintaining currency stability 

within the framework of the Linked 

Exchange Rate system; 

• Promoting the stability and integrity 

of the financial system, including the 

banking system; 

• Helping to maintain Hong Kong’s 

status as an international financial 

center, including the maintenance and 

development of Hong Kong’s financial 

infrastructure; and 

• Managing the Exchange Fund. 


tkelley on DSK3SPTVN1PROD with NOTICES
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16 78 FR 45343. 

17 78 FR 45343. 

18 78 FR 45343. 

19 78 FR 45343. The Commission’s substituted 

compliance program would generally be available 

for SDR Reporting, as outlined in the Guidance, 

only if the Commission has direct access to all of 

the data elements that are reported to a foreign trade 

repository pursuant to the substituted compliance 

program. Thus, direct access to swap data is a 

threshold matter to be addressed in a comparability 

evaluation for SDR Reporting. Moreover, the 

Commission explains in the Guidance that, due to 

its technical nature, a comparability evaluation for 

SDR Reporting ‘‘will generally entail a detailed 

comparison and technical analysis.’’ A more 

particularized analysis will generally be necessary 

to determine whether data stored in a foreign trade 

repository provides for effective Commission use, in 

furtherance of the regulatory purposes of the DoddFrank Act. See 78 FR 45345. 

20A finding of comparability may not be possible 

for a number of reasons, including the fact that the 

foreign jurisdiction has not yet implemented or 

finalized particular requirements. 

21 78 FR 45343. 

22As explained in the Guidance, such 

‘‘approaches used will vary depending on the 

circumstances relevant to each jurisdiction. One 

example would include coordinating with the 

foreign regulators in developing appropriate 

regulatory changes or new regulations, particularly 

where changes or new regulations already are being 

considered or proposed by the foreign regulators or 

legislative bodies. As another example, the 

Commission may, after consultation with the 

appropriate regulators and market participants, 

include in its substituted compliance determination 

a description of the means by which certain swaps 

market participants can achieve substituted 

compliance within the construct of the foreign 

regulatory regime. The identification of the means 

by which substituted compliance is achieved would 

be designed to address the regulatory objectives and 

outcomes of the relevant Dodd-Frank Act 

requirements in a manner that does not conflict 

with a foreign regulatory regime and reduces the 

likelihood of inconsistent regulatory obligations. 

For example, the Commission may specify that 

[SDs] and MSPs in the jurisdiction undertake 

certain recordkeeping and documentation for swap 

activities that otherwise is only addressed by the 

foreign regulatory regime with respect to financial 

activities generally. In addition, the substituted 

compliance determination may include provisions 

for summary compliance and risk reporting to the 

Commission to allow the Commission to monitor 

whether the regulatory outcomes are being 

achieved. By using these approaches, in the interest 

of comity, the Commission would seek to achieve 

its regulatory objectives with respect to the 

Commission’s registrants that are operating in 

foreign jurisdictions in a manner that works in 

harmony with the regulatory interests of those 

jurisdictions.’’ 78 FR 45343–44. 

23 ‘‘Swaps activities’’ is defined in Commission 

regulation 23.600(a)(7) to mean, ‘‘with respect to a 

registrant, such registrant’s activities related to 

swaps and any product used to hedge such swaps, 

including, but not limited to, futures, options, other 

swaps or security-based swaps, debt or equity 

securities, foreign currency, physical commodities, 

and other derivatives.’’ The Commission’s 

regulations under Part 23 (17 CFR Part 23) are 

limited in scope to the swaps activities of SDs and 

MSPs. 

24No SD or MSP that is not legally required to 

comply with a law or regulation determined to be 

comparable may voluntarily comply with such law 

or regulation in lieu of compliance with the CEA 

and the relevant Commission regulation. Each SD 

or MSP that seeks to rely on a comparability 

determination is responsible for determining 

whether it is subject to the laws and regulations 

found comparable. Currently, there are no MSPs 

organized outside the U.S. and the Commission 

therefore cautions any non-financial entity 

organized outside the U.S. and applying for 

registration as an MSP to carefully consider 

whether the laws and regulations determined to be 

comparable herein are applicable to such entity. 

25The Commission has provided the relevant 

foreign regulator(s) with opportunities to review 

and correct the applicant’s description of such laws 

and regulations on which the Commission will base 

its comparability determination. The Commission 

relies on the accuracy and completeness of such 

review and any corrections received in making its 

comparability determinations. A comparability 

determination based on an inaccurate description of 

foreign laws and regulations may not be valid. 

IV. Comparable and 

Comprehensiveness Standard 

The Commission’s comparability 

analysis will be based on a comparison 

of specific foreign requirements against 

the specific related CEA provisions and 

Commission regulations as categorized 

and described in the Guidance. As 

explained in the Guidance, within the 

framework of CEA section 2(i) and 

principles of international comity, the 

Commission may make a comparability 

determination on a requirement-byrequirement basis, rather than on the 

basis of the foreign regime as a whole.16

In making its comparability 

determinations, the Commission may 

include conditions that take into 

account timing and other issues related 

to coordinating the implementation of 

reform efforts across jurisdictions.17

In evaluating whether a particular 

category of foreign regulatory 

requirement(s) is comparable and 

comprehensive to the corollary 

requirement(s) under the CEA and 

Commission regulations, the 

Commission will take into consideration 

all relevant factors, including, but not 

limited to: 

• The comprehensiveness of those 

requirement(s), 

• The scope and objectives of the 

relevant regulatory requirement(s), 

• The comprehensiveness of the 

foreign regulator’s supervisory 

compliance program, and 

• The home jurisdiction’s authority to 

support and enforce its oversight of the 

registrant.18

In making a comparability 

determination, the Commission takes an 

‘‘outcome-based’’ approach. An 

‘‘outcome-based’’ approach means that 

when evaluating whether a foreign 

jurisdiction’s regulatory requirements 

are comparable to, and as 

comprehensive as, the corollary areas of 

the CEA and Commission regulations, 

the Commission ultimately focuses on 

regulatory outcomes (i.e., the home 

jurisdiction’s requirements do not have 

to be identical).19 This approach 

recognizes that foreign regulatory 

systems differ and their approaches vary 

and may differ from how the 

Commission chose to address an issue, 

but that the foreign jurisdiction’s 

regulatory requirements nonetheless 

achieve the regulatory outcome sought 

to be achieved by a certain provision of 

the CEA or Commission regulation. 

In doing its comparability analysis the 

Commission may determine that no 

comparability determination can be 

made 20 and that the non-U.S. SD or 

non-U.S. MSP, U.S. bank that is an SD 

or MSP with respect to its foreign 

branches, or non-registrant, to the extent 

applicable under the Guidance, may be 

required to comply with the CEA and 

Commission regulations. 

The starting point in the 

Commission’s analysis is a 

consideration of the regulatory 

objectives of the foreign jurisdiction’s 

regulation of swaps and swap market 

participants. As stated in the Guidance, 

jurisdictions may not have swap 

specific regulations in some areas, and 

instead have regulatory or supervisory 

regimes that achieve comparable and 

comprehensive regulation to the DoddFrank Act requirements, but on a more 

general, entity-wide, or prudential, 

basis.21 In addition, portions of a foreign 

regulatory regime may have similar 

regulatory objectives, but the means by 

which these objectives are achieved 

with respect to swaps market activities 

may not be clearly defined, or may not 

expressly include specific regulatory 

elements that the Commission 

concludes are critical to achieving the 

regulatory objectives or outcomes 

required under the CEA and the 

Commission’s regulations. In these 

circumstances, the Commission will 

work with the regulators and registrants 

in these jurisdictions to consider 

alternative approaches that may result 

in a determination that substituted 

compliance applies.22

Finally, the Commission will 

generally rely on an applicant’s 

description of the laws and regulations 

of the foreign jurisdiction in making its 

comparability determination. The 

Commission considers an application to 

be a representation by the applicant that 

the laws and regulations submitted are 

in full force and effect, that the 

description of such laws and regulations 

is accurate and complete, and that, 

unless otherwise noted, the scope of 

such laws and regulations encompasses 

the swaps activities 23 of SDs and 

MSPs 24 in the relevant jurisdictions.25

Further, as stated in the Guidance, the 

Commission expects that an applicant 


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26 78 FR 45345. 

27See 78 FR 45348–50. The Commission notes 

that registrants and other market participants are 

responsible for determining whether substituted 

compliance is available pursuant to the Guidance 

based on the comparability determination 

contained herein (including any conditions or 

exceptions), and its particular status and 

circumstances. 

28This notice does not address § 23.608 

(Restrictions on counterparty clearing relationships) 

nor § 23.609 (Clearing member risk management). 

The Commission declines to take up the request for 

a comparability determination with respect to these 

regulations due to the Commission’s view that there 

are not laws or regulations applicable in Hong Kong 

to compare with the prohibitions and requirements 

of §§ 23.608 or 23.609. The Commission may 

provide a comparability determination with respect 

to these regulations at a later date in consequence 

of further developments in the law and regulations 

applicable in Hong Kong. 

This notice also does not address capital 

adequacy because the Commission has not yet 

finalized rules for SDs and MSPs in this area, nor 

SDR Reporting. The Commission may provide a 

comparability determination with respect to these 

requirements at a later date or in a separate notice. 

29An MOU is one type of arrangement between 

or among regulators. Supervisory arrangements 

could include, as appropriate, cooperative 

arrangements that are memorialized and executed 

as addenda to existing MOUs or, for example, as 

independent bilateral arrangements, statements of 

intent, declarations, or letters. 

30 78 FR 45344. 

31Section 4s(j)(3) and (4) of the CEA and 

Commission regulation 23.606 require a registered 

SD or MSP to make all records required to be 

maintained in accordance with Commission 

regulation 1.31 available promptly upon request to, 

among others, representatives of the Commission. 

See also 7 U.S.C. 6s(f); 17 CFR 23.203. In the 

Guidance, the Commission states that it ‘‘reserves 

this right to access records held by registered [SDs] 

and MSPs, including those that are non-U.S. 

persons who may comply with the Dodd-Frank 

recordkeeping requirement through substituted 

compliance.’’ 78 FR 45345 n. 472; see also id. at 

45342 n. 461 (affirming the Commission’s authority 

under the CEA and its regulations to access books 

and records held by registered SDs and MSPs as ‘‘a 

fundamental regulatory tool necessary to properly 

monitor and examine each registrant’s compliance 

with the CEA and the regulations adopted pursuant 

thereto’’). 

32The Commission retains its examination 

authority, both during the application process as 

well as upon and after registration of an SD or MSP. 

See 78 FR 45342 (stating Commission policy that 

‘‘eligible entities may comply with a substituted 

compliance regime under certain circumstances, 

subject, however, to the Commission’s retention of 

its examination authority’’) and 45344 n. 471 

(stating that the ‘‘Commission may, as it deems 

appropriate and necessary, conduct an on-site 

examination of the applicant’’). 

would notify the Commission of any 

material changes to information 

submitted in support of a comparability 

determination (including, but not 

limited to, changes in the relevant 

supervisory or regulatory regime) as, 

depending on the nature of the change, 

the Commission’s comparability 

determination may no longer be valid.26

The Guidance provided a detailed 

discussion of the Commission’s policy 

regarding the availability of substituted 

compliance 27 for the Internal Business 

Conduct Requirements.28

V. Supervisory Arrangement 

In the Guidance, the Commission 

stated that, in connection with a 

determination that substituted 

compliance is appropriate, it would 

expect to enter into an appropriate 

memorandum of understanding 

(‘‘MOU’’) or similar arrangement 29 with 

the relevant foreign regulator(s). 

Although existing arrangements would 

indicate a foreign regulator’s ability to 

cooperate and share information, ‘‘going 

forward, the Commission and relevant 

foreign supervisor(s) would need to 

establish supervisory MOUs or other 

arrangements that provide for 

information sharing and cooperation in 

the context of supervising [SDs] and 

MSPs.’’ 30

The Commission is in the process of 

developing its registration and 

supervision regime for provisionallyregistered SDs and MSPs. This new 

initiative includes setting forth 

supervisory arrangements with 

authorities that have joint jurisdiction 

over SDs and MSPs that are registered 

with the Commission and subject to 

U.S. law. Given the developing nature of 

the Commission’s regime and the fact 

that the Commission has not negotiated 

prior supervisory arrangements with 

certain authorities, the negotiation of 

supervisory arrangements presents a 

unique opportunity to develop close 

working relationships between and 

among authorities, as well as highlight 

any potential issues related to 

cooperation and information sharing. 

Accordingly, the Commission is 

negotiating such a supervisory 

arrangement with each applicable 

foreign regulator of an SD or MSP. The 

Commission expects that the 

arrangement will establish expectations 

for ongoing cooperation, address direct 

access to information,31 provide for 

notification upon the occurrence of 

specified events, memorialize 

understandings related to on-site 

visits,32 and include protections related 

to the use and confidentiality of nonpublic information shared pursuant to 

the arrangement. 

These arrangements will establish a 

roadmap for how authorities will 

consult, cooperate, and share 

information. As with any such 

arrangement, however, nothing in these 

arrangements will supersede domestic 

laws or resolve potential conflicts of 

law, such as the application of domestic 

secrecy or blocking laws to regulated 

entities. 

VI. Comparability Determination and 

Analysis 

The following section describes the 

requirements imposed by specific 

sections of the CEA and the 

Commission’s regulations for the 

Internal Business Conduct 

Requirements that are the subject of this 

comparability determination, and the 

Commission’s regulatory objectives with 

respect to such requirements. 

Immediately following a description of 

the requirement(s) and regulatory 

objective(s) of the specific Internal 

Business Conduct Requirements that the 

requestor submitted for a comparability 

determination, the Commission 

provides a description of the foreign 

jurisdiction’s comparable laws, 

regulations, or rules and whether such 

laws, regulations, or rules meet the 

applicable regulatory objective. 

The Commission’s determinations in 

this regard and the discussion in this 

section are intended to inform the 

public of the Commission’s views 

regarding whether the foreign 

jurisdiction’s laws, regulations, or rules 

may be comparable and comprehensive 

as those requirements in the DoddFrank Act (and Commission regulations 

promulgated thereunder) and therefore, 

may form the basis of substituted 

compliance. In turn, the public (in the 

foreign jurisdiction, in the United 

States, and elsewhere) retains its ability 

to present facts and circumstances that 

would inform the determinations set 

forth in this notice. 

As was stated in the Guidance, the 

Commission recognizes the complex 

and dynamic nature of the global swap 

market and the need to take an 

adaptable approach to cross-border 

issues, particularly as it continues to 

work closely with foreign regulators to 

address potential conflicts with respect 

to each country’s respective regulatory 

regime. In this regard, the Commission 

may review, modify, or expand the 

determinations herein in light of 

comments received and future 

developments. 

A. Chief Compliance Officer (§ 3.3) 

Commission Requirement: 

Implementing section 4s(k) of the CEA, 

Commission regulation 3.3 generally 

sets forth the following requirements for 

SDs and MSPs: 

• An SD or MSP must designate an 

individual as Chief Compliance Officer 

(‘‘CCO’’); 

• The CCO must have the 

responsibility and authority to develop 

the regulatory compliance policies and 

procedures of the SD or MSP; 


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• The CCO must report to the board 

of directors or the senior officer of the 

SD or MSP; 

• Only the board of directors or a 

senior officer may remove the CCO; 

• The CCO and the board of directors 

must meet at least once per year; 

• The CCO must have the background 

and skills appropriate for the 

responsibilities of the position; 

• The CCO must not be subject to 

disqualification from registration under 

sections 8a(2) or (3) of the CEA; 

• Each SD and MSP must include a 

designation of a CCO in its registration 

application; 

• The CCO must administer the 

regulatory compliance policies of the SD 

or MSP; 

• The CCO must take reasonable steps 

to ensure compliance with the CEA and 

Commission regulations, and resolve 

conflicts of interest; 

• The CCO must establish procedures 

for detecting and remediating noncompliance issues; 

• The CCO must annually prepare 

and sign an ‘‘annual compliance report’’ 

containing: (i) A description of policies 

and procedures reasonably designed to 

ensure compliance; (ii) an assessment of 

the effectiveness of such policies and 

procedures; (iii) a description of 

material non-compliance issues and the 

action taken; (iv) recommendations of 

improvements in compliance policies; 

and (v) a certification by the CCO or 

CEO that, to the best of such officer’s 

knowledge and belief, the annual report 

is accurate and complete under penalty 

of law; and 

• The annual compliance report must 

be furnished to the CFTC within 90 days 

after the end of the fiscal year of the SD 

or MSP, simultaneously with its annual 

financial condition report. 

Regulatory Objective: The 

Commission believes that compliance 

by SDs and MSPs with the CEA and the 

Commission’s rules greatly contributes 

to the protection of customers, orderly 

and fair markets, and the stability and 

integrity of the market intermediaries 

registered with the Commission. The 

Commission expects SDs and MSPs to 

strictly comply with the CEA and the 

Commission’s rules and to devote 

sufficient resources to ensuring such 

compliance. Thus, through its CCO rule, 

the Commission seeks to ensure firms 

have designated a qualified individual 

as CCO that reports directly to the board 

of directors or the senior officer of the 

firm and that has the independence, 

responsibility, and authority to develop 

and administer compliance policies and 

procedures reasonably designed to 

ensure compliance with the CEA and 

Commission regulations, resolve 

conflicts of interest, remediate 

noncompliance issues, and report 

annually to the Commission and the 

board or senior officer on compliance of 

the firm. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as section 4s(k) of the 

CEA and Commission regulation 3.3. 

• Hong Kong Banking Ordinance, 

Section 72B requires all AIs (i.e., banks, 

restricted license banks and deposittaking companies), including a bank 

that is registered as an SD, to appoint a 

manager principally responsible for the 

compliance function. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that the 

primary role of the compliance function 

is to ensure that the AI is in compliance 

with the statutory provisions, regulatory 

requirements, and codes of conduct 

applicable to its banking or other 

regulated activities. To this end, the 

compliance function must ensure that 

the compliance policies and procedures 

developed by it or other departments are 

adequate and effective. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that the 

compliance function should have 

appropriate standing and authority 

within an AI, with a direct reporting 

line to a designated committee (e.g., 

Audit Committee) or senior 

management. AIs are required to have a 

compliance function that is responsible 

for ensuring the firm’s compliance with 

statutory and regulatory requirements. 

The compliance function must have 

sufficient authority and independence 

to function effectively. It should also be 

able to carry out its duties on its own 

initiative in all business and operating 

units of the AI in which compliance risk 

exists, with unfettered access to any 

records or files necessary to enable it to 

conduct its work. 

• Under the HKMA Supervisory 

Policy Manual, Module CG–1, the board 

of directors is responsible for the 

appointment and removal of senior 

management, including the compliance 

manager. The board must meet regularly 

with senior management and internal 

control functions (including those 

responsible for internal audit, risk 

management and compliance) to review 

the policies and controls in order to 

identify areas that need improvement 

and address significant risks and issues. 

• The HKMA Supervisory Policy 

Manual, Module CG–1 provides that 

senior managers, such as the 

compliance manager, are required to 

have appropriate background and skills 

to enable them to manage and supervise 

the AI’s internal control and risk 

management functions, including 

compliance. Further, the manual also 

provides guidance for assessing whether 

senior management, including the CCO, 

is ‘‘fit and proper.’’ One of the 

considerations is whether the person 

has a record of non-compliance with 

various non-statutory codes or has been 

reprimanded, censured, disciplined or 

publicly criticized by professional or 

regulatory bodies. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that the 

compliance function must monitor and 

test compliance. The compliance 

function also must establish a 

compliance program that sets out its 

planned activities. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that the 

compliance function must report 

regularly to senior management on 

compliance matters. Additionally, the 

chief executive of an AI must endorse 

the Certificate of Compliance submitted 

to the HKMA quarterly to confirm 

compliance with the specified statutory 

requirements under the Hong Kong 

Banking Ordinance. 

Commission Determination: The 

Commission finds that the provisions of 

the Hong Kong Banking Ordinance and 

the HKMA Supervisory Policy Manual 

specified above are generally identical 

in intent to § 3.3 by seeking to ensure 

firms have designated a qualified 

individual as the compliance officer that 

reports directly to a sufficiently senior 

function of the firm and that has the 

independence, responsibility, and 

authority to develop and administer 

compliance policies and procedures 

reasonably designed to ensure 

compliance with the CEA and 

Commission regulations, remediate 

noncompliance issues, and report 

regularly on compliance of the firm. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

provisions of the Hong Kong Banking 

Ordinance and the HKMA Supervisory 

Policy Manual that govern the 

compliance manager and compliance 

function within an AI are comparable to 

and as comprehensive as § 3.3, with the 

exception of § 3.3(f) concerning 

certifying and furnishing an annual 

compliance report to the Commission. 

Notwithstanding that the Commission 

has not determined that the 

requirements of the Hong Kong Banking 

Ordinance and the HKMA Supervisory 

Policy Manual are comparable to and as 

comprehensive as § 3.3(f), any SD or 


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33 7 U.S.C. 6s(j). 

34See Final Swap Dealer and MSP Recordkeeping 

Rule, 77 FR 20128 (April 3, 2012) (relating to risk 

management program, monitoring of position 

limits, business continuity and disaster recovery, 

conflicts of interest policies and procedures, and 

general information availability, respectively). 

35See Customer Documentation Rule, 77 FR 

21278. Also, SDs must comply with Commission 

regulation 23.608, which prohibits SDs providing 

clearing services to customers from entering into 

agreements that would: (i) Disclose the identity of 

a customer’s original executing counterparty; (ii) 

limit the number of counterparties a customer may 

trade with; (iii) impose counterparty-based position 

limits; (iv) impair a customer’s access to execution 

of a trade on terms that have a reasonable 

relationship to the best terms available; or (v) 

prevent compliance with specified time frames for 

acceptance of trades into clearing. 

36 ‘‘Swaps activities’’ is defined in Commission 

regulation 23.600(a)(7) to mean, ‘‘with respect to a 

registrant, such registrant’s activities related to 

swaps and any product used to hedge such swaps, 

including, but not limited to, futures, options, other 

swaps or security-based swaps, debt or equity 

securities, foreign currency, physical commodities, 

and other derivatives.’’ The Commission’s 

regulations under 17 CFR Part 23 are limited in 

scope to the swaps activities of SDs and MSPs. 37As stated above, this notice does not address 

§ 23.608 (Restrictions on counterparty clearing 

relationships) nor § 23.609 (Clearing member risk 

management). The Commission declines to take up 

the request for a comparability determination with 

respect to these regulations due to the 

Commission’s view that there are not laws or 

regulations applicable in Hong Kong to compare 

with the prohibitions and requirements of §§ 23.608 

or 23.609. The Commission may provide a 

comparability determination with respect to these 

regulations at a later date in consequence of further 

developments in the law and regulations applicable 

in Hong Kong. 

MSP to which both § 3.3 and the 

provisions of the Hong Kong Banking 

Ordinance and the HKMA Supervisory 

Policy Manual specified above are 

applicable would generally be deemed 

to be in compliance with § 3.3(f) if that 

SD or MSP complies with the provisions 

of the Hong Kong Banking Ordinance 

and the HKMA Supervisory Policy 

Manual specified above, subject to 

certifying and furnishing the 

Commission with the compliance 

reports required under the provisions of 

the Hong Kong Banking Ordinance and 

the HKMA Supervisory Policy Manual 

specified above in accordance with 

§ 3.3(f). The Commission notes that it 

generally expects registrants to submit 

required reports to the Commission in 

the English language. 

B. Risk Management Duties (§§ 23.600— 

23.609) 

Section 4s(j) of the CEA requires each 

SD and MSP to establish internal 

policies and procedures designed to, 

among other things, address risk 

management, monitor compliance with 

position limits, prevent conflicts of 

interest, and promote diligent 

supervision, as well as maintain 

business continuity and disaster 

recovery programs.33 The Commission 

adopted regulations 23.600, 23.601, 

23.602, 23.603, 23.605, and 23.606 to 

implement the statute.34 The 

Commission also adopted regulation 

23.609, which requires certain risk 

management procedures for SDs or 

MSPs that are clearing members of a 

derivatives clearing organization 

(‘‘DCO’’).35 Collectively, these 

requirements help to establish a robust 

and comprehensive internal risk 

management program for SDs and MSPs 

with respect to their swaps activities,36

which is critical to effective systemic 

risk management for the overall swaps 

market. In making its comparability 

determination with regard to these risk 

management duties, the Commission 

will consider each regulation 

individually.37

1. Risk Management Program for SDs 

and MSPs (§ 23.600) 

Commission Requirement: 

Implementing section 4s(j)(2) of the 

CEA, Commission regulation 23.600 

generally requires that: 

• Each SD or MSP must establish and 

enforce a risk management program 

consisting of a system of written risk 

management policies and procedures 

designed to monitor and manage the 

risks associated with the swap activities 

of the firm, including without 

limitation, market, credit, liquidity, 

foreign currency, legal, operational, and 

settlement risks, and furnish a copy of 

such policies and procedures to the 

CFTC upon application for registration 

and upon request; 

• The SD or MSP must establish a 

risk management unit independent from 

the business trading unit; 

• The risk management policies and 

procedures of the SD or MSP must be 

approved by the firm’s governing body; 

• Risk tolerance limits and exceptions 

therefrom must be reviewed and 

approved quarterly by senior 

management and annually by the 

governing body; 

• The risk management program must 

have a system for detecting breaches of 

risk tolerance limits and alerting 

supervisors and senior management, as 

appropriate; 

• The risk management program must 

account for risks posed by affiliates and 

be integrated at the consolidated entity 

level; 

• The risk management unit must 

provide senior management and the 

governing body with quarterly risk 

exposure reports and upon detection of 

any material change in the risk exposure 

of the SD or MSP; 

• Risk exposure reports must be 

furnished to the CFTC within five 

business days following provision to 

senior management; 

• The risk management program must 

have a new product policy for assessing 

the risks of new products prior to 

engaging in such transactions; 

• The risk management program must 

have policies and procedures providing 

for trading limits, monitoring of trading, 

processing of trades, and separation of 

personnel in the trading unit from 

personnel in the risk management unit; 

and 

• The risk management program must 

be reviewed and tested at least annually 

and upon any material change in the 

business of the SD or MSP. 

Regulatory Objective: Through the 

required system of risk management, the 

Commission seeks to ensure that firms 

are adequately managing the risks of 

their swaps activities to prevent failure 

of the SD or MSP, which could result in 

losses to counterparties doing business 

with the SD or MSP, and systemic risk 

more generally. To this end, the 

Commission believes the risk 

management program of an SD or MSP 

must contain at least the following 

critical elements: 

• Identification of risk categories; 

• Establishment of risk tolerance 

limits for each category of risk and 

approval of such limits by senior 

management and the governing body; 

• An independent risk management 

unit to administer a risk management 

program; and 

• Periodic oversight of risk exposures 

by senior management and the 

governing body. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as section 4s(j)(2) of the 

CEA and Commission regulation 23.600. 

HKMA represents to the Commission 

that it generally requires AIs to have 

adequate risk management policies, 

procedures, systems and controls to 

identify, assess, measure, monitor, and 

control eight types of inherent risks 

arising from their activities (on and off 

balance sheet, and including swap 

activities) under SA–1 Risk-based 

Supervisory Approach. 

HKMA also represents to the 

Commission that the risk management 

requirements in its guidelines apply to 

swap activities conducted by AIs. 

HKMA further represents to the 

Commission that it has dedicated 

guidelines on major types of risk (e.g., 

management of credit (including 


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38The setting of position limits by the 

Commission, a DCM, or a SEF is subject to 

requirements under the CEA and Commission 

regulations other than § 23.601. The setting of 

position limits and compliance with such limits is 

not subject to the Commission’s substituted 

compliance regime. 

counterparty credit), market, liquidity 

and operational risks, etc.). Specifically: 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that the 

board is responsible for articulating risk 

management strategies. Senior 

management must develop, and the 

board must approve, a risk management 

framework based on risk management 

strategies that is consistent with the AI’s 

business goals and risk appetite. Senior 

management must: formulate detailed 

policies, procedures and limits for 

managing different aspects of risk 

arising from the AI’s business activities; 

design and implement a risk 

management framework; and ensure 

that the relevant control systems within 

the framework function as intended. 

The risk management policies and 

procedures must be approved by the 

board or its designated committee(s). 

The board also must exercise oversight 

over the effectiveness of the risk 

management framework. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that AIs 

should have a dedicated risk 

management function. The risk 

management function must be 

independent from the risk-taking and 

operational units which it reviews. The 

risk management function must have 

unfettered access to information from 

the risk-taking and operational units. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that a set 

of limits should be put in place to 

control an AI’s exposure to various 

quantifiable risks associated with its 

business activities and to control 

different sources of risk concentration. 

These limits should be documented and 

approved by the board or its designated 

committee(s). Limit utilization should 

be closely monitored, and excesses or 

exceptions should be reported promptly 

to senior management for necessary 

action. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that risk 

management must be conducted on a 

group-wide basis by managing the 

relevant risks of the parent bank and its 

group entities as a whole. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that a 

sound risk management system should 

include adequate risk measurement, 

monitoring and reporting systems to 

support all business activities and 

related risks. The risk management 

information system should be capable of 

reporting excesses in limits and policy 

exceptions, and alerting management of 

risk exposures approaching pre-set 

limits. The risk management 

information system also should be able 

to produce information at appropriate 

intervals, including at more frequent 

intervals in times of stress as required 

by management. 

• The HKMA collects internal risk 

exposure reports from the AIs. AIs are 

required to submit quarterly capital 

adequacy ratio returns to the HKMA 

that address market risk. HKMA also 

conducts regular surveys on AIs’ 

derivative exposures. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that AIs 

should have in place an internally 

approved and well-documented ‘‘new 

product approval policy’’ which 

addresses not only the development and 

approval of entirely new products and 

services but also significant changes in 

the features of existing products and 

services. 

Commission Determination: The 

Commission finds that the provisions of 

the HKMA Supervisory Policy Manual 

specified above are generally identical 

in intent to § 23.600 by requiring a 

system of risk management that seeks to 

ensure that firms are adequately 

managing the risks of their swaps 

activities to prevent failure of the SD or 

MSP, which could result in losses to 

counterparties doing business with the 

SD or MSP, and systemic risk more 

generally. Specifically, the Commission 

finds that the provisions of the HKMA 

Supervisory Policy Manual specified 

above comprehensively require SDs and 

MSPs to establish risk management 

programs containing the following 

critical elements: 

• Identification of risk categories; 

• Establishment of risk tolerance 

limits for each category of risk and 

approval of such limits by senior 

management and the governing body; 

• An independent risk management 

unit to administer a risk management 

program; and 

• Periodic oversight of risk exposures 

by senior management and the 

governing body. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

risk management program requirements 

of the HKMA Supervisory Policy 

Manual, as specified above, are 

comparable to and as comprehensive as 

§ 23.600, with the exception of 

§ 23.600(c)(2) concerning the 

requirement that each SD and MSP 

produce a quarterly risk exposure report 

and provide such report to its senior 

management, governing body, and the 

Commission. 

Notwithstanding that the Commission 

has not determined that the 

requirements of the provisions of the 

HKMA Supervisory Policy Manual are 

comparable to and as comprehensive as 

§ 23.600(c)(2), any SD or MSP to which 

both § 23.600 and the provisions of the 

HKMA Supervisory Policy Manual 

specified above are applicable would 

generally be deemed to be in 

compliance with § 23.600(c)(2) if that 

SD or MSP complies with the provisions 

of the HKMA Supervisory Policy 

Manual specified above, subject to 

compliance with the requirement that it 

produce quarterly risk exposure reports 

and provide such reports to its senior 

management, governing body, and the 

Commission in accordance with 

§ 23.600(c)(2). The Commission notes 

that it generally expects reports 

furnished to the Commission by 

registrants to be in the English language. 

2. Monitoring of Position Limits 

(§ 23.601) 

Commission Requirement: 

Implementing section 4s(j)(1) of the 

CEA, Commission regulation 23.601 

requires each SD or MSP to establish 

and enforce written policies and 

procedures that are reasonably designed 

to monitor for, and prevent violations 

of, applicable position limits established 

by the Commission, a designated 

contract market (‘‘DCM’’), or a swap 

execution facility (‘‘SEF’’).38 The 

policies and procedures must include 

an early warning system and provide for 

escalation of violations to senior 

management (including the firm’s 

governing body). 

Regulatory Objective: Generally, 

position limits are implemented to 

ensure market integrity, fairness, 

orderliness, and accurate pricing in the 

commodity markets. Commission 

regulation 23.601 thus seeks to ensure 

that SDs and MSPs have established the 

necessary policies and procedures to 

monitor the trading of the firm to 

prevent violations of applicable position 

limits established by the Commission, a 

DCM, or a SEF. As part of its Risk 

Management Program, § 23.601 is 

intended to ensure that established 

position limits are not breached by the 

SD or MSP. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as section 4s(j)(1) of the 


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39 In addition to the foregoing, the applicant also 

submitted various guidelines and required best 

practices concerning the setting of internal risk 

tolerance limits and monitoring for compliance 

with such internal limits. Although the Commission 

recognizes these as prudent risk management 

practices, the Commission does not believe that 

these provisions are relevant for a comparability 

determination with respect to § 23.601 because 

§ 23.601 requires monitoring for compliance with 

external position limits set by the Commission, a 

DCM, or a SEF. 

CEA and Commission regulation 

§ 23.601. 

The applicant represents to the 

Commission that AIs have a 

responsibility to comply with all 

applicable laws and regulations, 

whether in Hong Kong or outside of 

Hong Kong, including applicable 

position limits established by the 

Commission, a DCM, or a SEF. Under 

the HKMA Supervisory Policy Manual, 

module IC–1, General Risk Management 

Controls paragraph 5.1.3, an AI’s 

internal control system must cover 

controls relating to compliance with 

statutory and regulatory requirements, 

which would require a system of 

controls to maintain compliance with 

applicable position limits established by 

the Commission, a DCM, or a SEF. AI’s 

must maintain adequate systems of 

control to maintain a banking license 

pursuant to the Banking Ordinance, 

Schedule 7, paragraph 10.39

Commission Determination: The 

Commission finds that the HKMA and 

Banking Ordinance standards specified 

above are generally identical in intent to 

§ 23.601 by requiring SDs and MSPs to 

establish necessary policies and 

procedures to monitor the trading of the 

firm to prevent violations of applicable 

position limits established by applicable 

laws and regulations, including those of 

the Commission, a DCM, or a SEF. 

Specifically, the Commission finds that 

the HKMA and Banking Ordinance 

standards specified above, while not 

specific to the issue of position limit 

compliance, nevertheless 

comprehensively require SDs and MSPs 

to monitor for regulatory compliance 

generally, including monitoring for 

compliance with position limits set 

pursuant to applicable law (including 

the CEA and Commission regulations) 

and escalation of violations to senior 

management (including the board of 

directors) responsible for such 

compliance. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

compliance monitoring requirements of 

the HKMA and Banking Ordinance 

standards, as specified above, are 

comparable to and as comprehensive as 

§ 23.601. For the avoidance of doubt, the 

Commission notes that this 

determination may not be relied on to 

relieve an SD or MSP from its obligation 

to strictly comply with any applicable 

position limit established by the 

Commission, a DCM, or a SEF. 

3. Diligent Supervision (§ 23.602) 

Commission Requirement: 

Commission regulation 23.602 

implements section 4s(h)(1)(B) of the 

CEA and requires each SD and MSP to 

establish a system to diligently 

supervise all activities relating to its 

business performed by its partners, 

members, officers, employees, and 

agents. The system must be reasonably 

designed to achieve compliance with 

the CEA and CFTC regulations. 

Commission regulation 23.602 requires 

that the supervisory system must 

specifically designate qualified persons 

with authority to carry out the 

supervisory responsibilities of the SD or 

MSP for all activities relating to its 

business as an SD or MSP. 

Regulatory Objective: The 

Commission’s diligent supervision rule 

seeks to ensure that SDs and MSPs 

strictly comply with the CEA and the 

Commission’s rules. To this end, 

through § 23.602, the Commission seeks 

to ensure that each SD and MSP not 

only establishes the necessary policies 

and procedures that would lead to 

compliance with the CEA and 

Commission regulations, but also 

establishes an effective system of 

internal oversight and enforcement of 

such policies and procedures to ensure 

that such policies and procedures are 

diligently followed. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as section 4s(h)(1)(B) of 

the CEA and Commission regulation 

23.602. 

• The HKMA Supervisory Policy 

Manual, Module CG–1 provides that the 

board is ultimately responsible for 

overseeing senior management to 

operate within the risk appetite and 

strategies prescribed by the board, on a 

prudent basis and in accordance with 

applicable laws, regulations and 

supervisory standards. 

• The HKMA Supervisory Policy 

Manual, Module IC–1 provides that an 

AI’s internal control system should, 

among others, cover controls relating to 

compliance with statutory and 

regulatory requirements. 

• The Hong Kong Banking Ordinance 

provides that senior management are 

responsible for carrying out the 

supervisory responsibilities of the AIs, 

and they can be personally liable for 

breaches of the Banking Ordinance 

committed by AIs. 

Commission Determination: The 

Commission finds that the provisions of 

the Hong Kong Banking Ordinance and 

the HKMA Supervisory Policy Manual 

specified above are generally identical 

in intent to § 23.602 because such 

standards seek to ensure that SDs and 

MSPs strictly comply with applicable 

law, which would include the CEA and 

the Commission’s regulations. Through 

the provisions of the Hong Kong 

Banking Ordinance and the HKMA 

Supervisory Policy Manual specified 

above, Hong Kong laws and regulations 

seek to ensure that each SD and MSP 

not only establishes the necessary 

policies and procedures that would lead 

to compliance with applicable law, 

which would include the CEA and 

Commission regulations, but also 

establishes an effective system of 

internal oversight and enforcement of 

such policies and procedures to ensure 

that such policies and procedures are 

diligently followed. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

internal supervision requirements of the 

provisions of the Hong Kong Banking 

Ordinance and the HKMA Supervisory 

Policy Manual, as specified above, are 

comparable to and as comprehensive as 

§ 23.602. 

4. Business Continuity and Disaster 

Recovery (§ 23.603) 

Commission Requirement: To ensure 

the proper functioning of the swaps 

markets and the prevention of systemic 

risk more generally, Commission 

regulation 23.603 requires each SD and 

MSP, as part of its risk management 

program, to establish a business 

continuity and disaster recovery plan 

that includes procedures for, and the 

maintenance of, back-up facilities, 

systems, infrastructure, personnel, and 

other resources to achieve the timely 

recovery of data and documentation and 

to resume operations generally within 

the next business day after the 

disruption. 

Regulatory Objective: Commission 

regulation 23.603 is intended to ensure 

that any market disruption affecting SDs 

and MSPs, whether caused by natural 

disaster or otherwise, is minimized in 

length and severity. To that end, this 

requirement seeks to ensure that entities 

adequately plan for disruptions and 

devote sufficient resources capable of 

carrying out an appropriate plan within 

one business day, if necessary. 


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Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as Commission 

regulation 23.603. 

• HKMA Supervisory Policy Manual, 

Module TM–G–2 on Business 

Continuity Planning requires all AIs to 

have adequate and regularly tested 

business continuity plans. 

Commission Determination: The 

Commission finds that the provisions of 

the HKMA Supervisory Policy Manual 

specified above are generally identical 

in intent to § 23.603 because such 

standards seek to ensure that any market 

disruption affecting SDs and MSPs, 

whether caused by natural disaster or 

otherwise, is minimized in length and 

severity. To that end, the Commission 

finds that the provisions of the HKMA 

Supervisory Policy Manual specified 

above seek to ensure that entities 

adequately plan for disruptions and 

devote sufficient resources capable of 

carrying out an appropriate plan in a 

timely manner. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

business continuity and disaster 

recovery requirements of the provisions 

of the HKMA Supervisory Policy 

Manual, as specified above, are 

comparable to and as comprehensive as 

§ 23.603. 

5. Conflicts of Interest (§ 23.605) 

Commission Requirement: Section 

4s(j)(5) of the CEA and Commission 

regulation 23.605(c) generally require 

each SD or MSP to establish structural 

and institutional safeguards to ensure 

that the activities of any person within 

the firm relating to research or analysis 

of the price or market for any 

commodity or swap are separated by 

appropriate informational partitions 

within the firm from the review, 

pressure, or oversight of persons whose 

involvement in pricing, trading, or 

clearing activities might potentially bias 

their judgment or supervision. 

In addition, section 4s(j)(5) of the CEA 

and Commission regulation 23.605(d)(1) 

generally prohibits an SD or MSP from 

directly or indirectly interfering with or 

attempting to influence the decision of 

any clearing unit of any affiliated 

clearing member of a DCO to provide 

clearing services and activities to a 

particular customer, including: 

• Whether to offer clearing services to 

a particular customer; 

• Whether to accept a particular 

customer for clearing derivatives; 

• Whether to submit a customer’s 

transaction to a particular DCO; 

• Whether to set or adjust risk 

tolerance levels for a particular 

customer; or 

• Whether to set a customer’s fees 

based on criteria other than those 

generally available and applicable to 

other customers. 

Commission regulation 23.605(d)(2) 

generally requires each SD or MSP to 

create and maintain an appropriate 

informational partition between 

business trading units of the SD or MSP 

and clearing units of any affiliated 

clearing member of a DCO to reasonably 

ensure compliance with the Act and the 

prohibitions set forth in § 23.605(d)(1) 

outlined above. 

The Commission observes that 

§ 23.605(d) works in tandem with 

Commission regulation 1.71, which 

requires FCMs that are clearing 

members of a DCO and affiliated with 

an SD or MSP to create and maintain an 

appropriate informational partition 

between business trading units of the 

SD or MSP and clearing units of the 

FCM to reasonably ensure compliance 

with the Act and the prohibitions set 

forth in § 1.71(d)(1), which are the same 

as the prohibitions set forth in 

§ 23.605(d)(1) outlined above. 

Finally, § 23.605(e) requires that each 

SD or MSP have policies and 

procedures that mandate the disclosure 

to counterparties of material incentives 

or conflicts of interest regarding the 

decision of a counterparty to execute a 

derivative on a swap execution facility 

or DCM or to clear a derivative through 

a DCO. 

Regulatory Objective: Commission 

regulation 23.605(c) seeks to ensure that 

research provided to the general public 

by an SD or MSP is unbiased and free 

from the influence of the interests of an 

SD or MSP arising from the SD’s or 

MSP’s trading business. 

In addition, the § 23.605(d) (working 

in tandem with § 1.71) seeks to ensure 

open access to the clearing of swaps by 

requiring that access to and the 

provision of clearing services provided 

by an affiliate of an SD or MSP are not 

influenced by the interests of an SD’s or 

MSP’s trading business. 

Finally, § 23.605(e) seeks to ensure 

equal access to trading venues and 

clearinghouses, as well as orderly and 

fair markets, by requiring that each SD 

and MSP disclose to counterparties any 

material incentives or conflicts of 

interest regarding the decision of a 

counterparty to execute a derivative on 

a SEF or DCM, or to clear a derivative 

through a DCO. 

Comparable Hong Kong Law and 

Regulations: The applicants have 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as Commission 

regulation 23.605. 

The applicant represents to the 

Commission that AIs that are active in 

the OTC derivative market are typically 

also registered with the Hong Kong 

Securities and Futures Commission 

(‘‘HKSFC’’) and hence subject to the 

HKSFC’s Code of Conduct. These AI’s 

registered with the HKSFC include the 

current SD established in Hong Kong. 

Pursuant to Section 16 of the HKSFC’s 

Code of Conduct, registrants must have: 

• Mechanisms ensuring that analysts’ 

trading activities or financial interests 

do not prejudice their investment 

research and recommendations; 

• Mechanisms ensuring that analysts’ 

investment research and 

recommendations are not prejudiced by 

the trading activities, financial interests 

or business relationships of the firms 

that employ them; 

• Reporting lines for analysts and 

their compensation arrangements that 

are structured to eliminate or severely 

limit actual and potential conflicts of 

interest; 

• Written internal procedures or 

controls to identify and eliminate, 

avoid, manage, or disclose actual and 

potential analyst conflicts of interest; 

• Procedures to ensure that undue 

influence of securities issuers, 

institutional investors, and other 

outside parties on analysts is eliminated 

or managed; 

• Controls to ensure that disclosures 

of actual and potential conflicts of 

interest are complete, timely, clear, 

concise, specific, and prominent; and 

• Policies to ensure that analysts are 

held to high integrity standards. 

The HKMA Supervisory Policy 

Manual, Module CG–1 requires that the 

board of directors of an AI establish, 

implement, and maintain written 

policies that address the various 

conflicts of interest that may arise in the 

AI’s business, and that provide for the 

prevention or management of these 

conflicts. 

In addition, the Banking Ordinance 

requires an AI to carry on its business 

with integrity, prudence and the 

appropriate degree of professional 

competence. The applicant represents 

that if an AI permits conflicts of interest 

(whether general or particular) to 

continue, it would raise doubts with the 

HKMA as to whether the AI is carrying 

on its business with integrity, prudence 


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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 78861 

and the appropriate degree of 

professional competence. Carrying on 

business in such a manner is one of the 

continuing authorization criteria under 

the Banking Ordinance. A failure to 

comply with such criterion is a ground 

for revocation of that AI’s authorization 

to conduct banking or deposit-taking 

business in Hong Kong. 

Finally, the HKMA has represented to 

the Commission that, as part of its 

oversight and enforcement of the 

foregoing standards for AIs, the HKMA 

would require any AI (including an AI 

that is an SD) to adopt measures to 

prevent or manage any conflicts of 

interests that may areis or be 

discovered, including those involving 

the provision of clearing services by a 

clearing member of a DCO that is an 

affiliate of the AI, or the decision of a 

counterparty to execute a derivative on 

a SEF or DCM, or clear a derivative 

through a DCO. The measures include 

information barriers, segregation of 

duties, and, as appropriate, disclosures. 

Commission Determination: The 

Commission finds that the HKSFC and 

Banking Ordinance standards specified 

above with respect to conflicts of 

interest that may arise in producing or 

distributing research are generally 

identical in intent to § 23.605(c) because 

such standards seek to ensure that 

research provided to the general public 

by an SD is unbiased and free from the 

influence of the interests of an SD 

arising from the SD’s trading business. 

With respect to conflicts of interest 

that may arise in the provision of 

clearing services by an affiliate of an SD 

or MSP, the Commission further finds 

that although the general conflicts of 

interest prevention requirements in the 

Banking Ordinance and the HKMA 

Supervisory Policy Manual do not 

require with specificity that access to 

and the provision of clearing services 

provided by an affiliate of an SD or MSP 

not be improperly influenced by the 

interests of an SD’s or MSP’s trading 

business, such general requirements 

would require prevention and 

remediation of such improper influence 

when recognized or discovered. Thus 

such standards would ensure open 

access to clearing. 

Finally, although not as specific as the 

requirements of § 23.605(e) (Undue 

influence on counterparties), the 

Commission finds that the general 

disclosure requirements specified above 

would ensure equal access to trading 

venues and clearinghouses by requiring 

that each SD and MSP disclose to 

counterparties any material incentives 

or conflicts of interest regarding the 

decision of a counterparty to execute a 

derivative on a SEF or DCM, or to clear 

a derivative through a DCO. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

requirements found in Hong Kong’s 

laws and regulations specified above, in 

relation to conflicts of interest are 

comparable to and as comprehensive as 

§ 23.605. 

6. Availability of Information for 

Disclosure and Inspection (§ 23.606) 

Commission Requirement: 

Commission regulation 23.606 

implements sections 4s(j)(3) and (4) of 

the CEA, and requires each SD and MSP 

to disclose to the Commission, and an 

SD’s or MSP’s U.S. prudential regulator 

(if any) comprehensive information 

about its swap activities, and to 

establish and maintain reliable internal 

data capture, processing, storage, and 

other operational systems sufficient to 

capture, process, record, store, and 

produce all information necessary to 

satisfy its duties under the CEA and 

Commission regulations. Such systems 

must be designed to provide such 

information to the Commission and an 

SD’s or MSP’s U.S. prudential regulator 

within the time frames set forth in the 

CEA and Commission regulations and 

upon request. 

Regulatory Objective: Commission 

regulation 23.606 seeks to ensure that 

each SD and MSP captures and 

maintains comprehensive information 

about their swap activities, and is able 

to retrieve and disclose such 

information to the Commission and its 

U.S. prudential regulator, if any, as 

necessary for compliance with the CEA 

and the Commission’s regulations and 

for purposes of Commission oversight, 

as well as oversight by the SD’s or 

MSP’s U.S. prudential regulator, if any. 

The Commission observes that it 

would be impossible to meet the 

regulatory objective of § 23.606 unless 

the required information is available to 

the Commission and any U.S. 

prudential regulator under the foreign 

legal regime. Thus, a comparability 

determination with respect to the 

information access provisions of 

§ 23.606 would be premised on whether 

the relevant information would be 

available to the Commission and any 

U.S. prudential regulator of the SD or 

MSP, not on whether an SD or MSP 

must disclose comprehensive 

information to its regulator in its home 

jurisdiction. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as Commission 

regulation 23.606. 

Under Section 56 of the Hong Kong 

Banking Ordinance, AIs are required to 

produce records and information 

whenever requested by the HKMA, 

including information and records 

relating to the AI’s OTC derivatives or 

swaps activities. Under the Banking 

Ordinance, the failure to produce 

records and information when requested 

by the HKMA is a criminal offense. The 

HKMA represents that in order to 

produce records and information 

whenever requested by the HKMA, AIs 

must necessarily have adequate systems 

and infrastructure to enable them to 

retrieve such records and information. 

Commission Determination: The 

Commission finds that the Banking 

Ordinance standards specified above are 

generally identical in intent to § 23.606 

because such standards seek to ensure 

that AIs capture and store 

comprehensive information about their 

swap activities, and are able to retrieve 

and disclose such information as 

necessary for compliance with 

applicable law and for purposes of 

regulatory oversight. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

requirements of the Hong Kong Banking 

Ordinance with respect to the 

availability of information for 

inspection and disclosure, as specified 

above, are comparable to, and as 

comprehensive as, § 23.606, with the 

exception of § 23.606(a)(2) concerning 

the requirement that an SD or MSP 

make information required by 

§ 23.606(a)(1) available promptly upon 

request to Commission staff and the staff 

of an applicable U.S. prudential 

regulator. The applicant has not 

submitted any provision of law or 

regulations applicable in Hong Kong 

upon which the Commission could 

make a finding that SDs and MSPs 

would be required to retrieve and 

disclose comprehensive information 

about their swap activities to the 

Commission or any U.S. prudential 

regulator as necessary for compliance 

with the CEA and Commission 

regulations, and for purposes of 

Commission oversight and the oversight 

of any U.S. prudential regulator. 

Notwithstanding that the Commission 

has not determined that the 

requirements of the Hong Kong Banking 

Ordinance are comparable to and as 

comprehensive as § 23.606(a)(2), any SD 

or MSP to which both § 23.606 and the 

Banking Ordinance standards specified 

above are applicable would generally be 


tkelley on DSK3SPTVN1PROD with NOTICES
78862 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 

40See the Guidance for a discussion of the 

availability of substituted compliance with respect 

to swap data recordkeeping, 78 FR 45332–33. 

41The HKMA noted that a record keeping 

requirement specific to OTC derivative transactions 

is intended to be included in the forthcoming law 

implementing the regulatory regime for such 

transactions. Pursuant to such regulatory regime, 

the HKMA tentatively expects that records of OTC 

derivatives transactions (including swaps) will be 

required to be maintained for the duration of the 

contract plus six years thereafter. The retention 

period for voice recordings is to be decided. The 

HKMA will set out specific recordkeeping 

requirements in the regulations or guidelines to be 

issued to supplement the new regulatory regime. 

deemed to be in compliance with 

§ 23.606(a)(2) if that SD or MSP 

complies with the Banking Ordinance 

standards specified above, subject to 

compliance with the requirement that it 

produce information to Commission 

staff and the staff of an applicable U.S. 

prudential regulator in accordance with 

§ 23.606(a)(2). 

C. Swap Data Recordkeeping (§§ 23.201 

and 23.203) 

Commission Requirement: Sections 

4s(f)(1)(B) and 4s(g)(1) of the CEA, and 

Commission regulation 23.201 generally 

require SDs and MSPs to retain records 

of each transaction, each position held, 

general business records (including 

records related to complaints and sales 

and marketing materials), records 

related to governance, financial records, 

records of data reported to SDRs, and 

records of real-time reporting data along 

with a record of the date and time the 

SD or MSP made such reports. 

Transaction records must be kept in a 

form and manner identifiable and 

searchable by transaction and 

counterparty. 

Commission regulation 23.203, 

requires SDs and MSPs to maintain 

records of a swap transaction until the 

termination, maturity, expiration, 

transfer, assignment, or novation date of 

the transaction, and for a period of five 

years after such date. Records must be 

‘‘readily accessible’’ for the first 2 years 

of the 5 year retention period (consistent 

with § 1.31). 

The Commission notes that the 

comparability determination below with 

respect to §§ 23.201 and 23.203 

encompasses both swap data 

recordkeeping generally and swap data 

recordkeeping relating to complaints 

and marketing and sales materials in 

accordance with § 23.201(b)(3) and 

(4).40

Regulatory Objective: Through the 

Commission’s regulations requiring SDs 

and MSPs to keep comprehensive 

records of their swap transactions and 

related data, the Commission seeks to 

ensure the effectiveness of the internal 

controls of SDs and MSPs, and 

transparency in the swaps market for 

regulators and market participants. 

The Commission’s regulations require 

SDs and MSPs to keep swap data in a 

level of detail sufficient to enable 

regulatory authorities to understand an 

SD’s or MSP’s swaps business and to 

assess its swaps exposure. 

By requiring comprehensive records 

of swap data, the Commission seeks to 

ensure that SDs and MSPs employ 

effective risk management, and strictly 

comply with Commission regulations. 

Further, such records facilitate effective 

regulatory oversight. 

The Commission observes that it 

would be impossible to meet the 

regulatory objective of §§ 23.201 and 

23.203 unless the required information 

is available to the Commission and any 

U.S. prudential regulator under the 

foreign legal regime. Thus, a 

comparability determination with 

respect to the information access 

provisions of § 23.203 would be 

premised on whether the relevant 

information would be available to the 

Commission and any U.S. prudential 

regulator of the SD or MSP, not on 

whether an SD or MSP must disclose 

comprehensive information to its 

regulator in its home jurisdiction. 

Comparable Hong Kong Law and 

Regulations: The applicant has 

represented to the Commission that the 

following provisions of law and 

regulations applicable in Hong Kong are 

in full force and effect in Hong Kong, 

and comparable to and as 

comprehensive as sections 4s(f)(1)(B) 

and 4s(g)(1) of the CEA and §§ 23.201 

and 23.203. 

Section 20 of Schedule 2 to the Hong 

Kong Anti-Money Laundering and 

Counter-Terrorist Financing (Financial 

Institution) Ordinance (Cap 615) (the 

‘‘AML–CTF Ordinance’’) provides that 

financial institutions must keep all 

documents, data, and information 

related to each transaction it carries out. 

The AML–CTF Ordinance provides that 

financial institutions must keep all files 

relating to each customer account and 

all business correspondence with each 

customer. The AML–CTF Ordinance 

provides that transaction records must 

be kept for six years after the transaction 

is completed. 

The HKMA represents to the 

Commission that the recordkeeping 

requirements in the AML–CTF 

Ordinance apply to all transactions that 

an AI carries out with each of its 

customers, including swap and OTC 

derivative transactions.41

Commission Determination: The 

Commission finds that the Hong Kong 

standards specified above are generally 

identical in intent to §§ 23.201 and 

23.203 because such standards seek to 

ensure the effectiveness of the internal 

controls of SDs and MSPs, and 

transparency in the swaps market for 

regulators and market participants. 

In addition, the Commission finds 

that the Hong Kong standards specified 

above require SDs and MSPs to keep 

swap data in a level of detail sufficient 

to enable regulatory authorities to 

understand an SD’s or MSP’s swaps 

business and to assess its swaps 

exposure. 

Finally, the Commission finds that the 

Hong Kong standards specified above, 

by requiring comprehensive records of 

swap data, seek to ensure that SDs and 

MSPs employ effective risk 

management, seek to ensure that SDs 

and MSPs strictly comply with 

applicable regulatory requirements 

(including the CEA and Commission 

regulations), and that such records 

facilitate effective regulatory oversight. 

Based on the foregoing and the 

representations of the applicant, the 

Commission hereby determines that the 

recordkeeping requirements of the Hong 

Kong AML–CTF Ordinance with respect 

to swap data recordkeeping, as specified 

above, are comparable to, and as 

comprehensive as, §§ 23.201 and 

23.203, with the exception of 

§ 23.203(b)(2) concerning the 

requirement that an SD or MSPs make 

records required by § 23.201 open to 

inspection by any representative of the 

Commission, the United States 

Department of Justice, or any applicable 

U.S. prudential regulator. The applicant 

has not submitted any provision of law 

or regulations applicable in Hong Kong 

upon which the Commission could 

make a finding that SDs and MSPs 

would be required to make records 

required by § 23.201 open to inspection 

by any representative of the 

Commission, the United States 

Department of Justice, or any applicable 

U.S. prudential regulator. 

Notwithstanding that the Commission 

has not determined that the 

requirements of the Hong Kong AML– 

CTF Ordinance are comparable to and 

as comprehensive as § 23.203(b)(2), any 

SD or MSP to which both § 23.203 and 

the Hong Kong AML–CTF Ordinance 

are applicable would generally be 

deemed to be in compliance with 

§ 23.203(b)(2) if that SD or MSP 

complies with the Hong Kong AML– 

CTF Ordinance, subject to compliance 

with the requirement that it make 

records required by § 23.201 open to 

inspection by any representative of the 

Commission, the United States 

Department of Justice, or any applicable 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 78863 

1 Interpretive Guidance and Policy Statement 

Regarding Compliance with Certain Swap 

Regulations, 78 FR 45292 (Jul. 26, 2013). 

2http://www.cftc.gov/PressRoom/

SpeechesTestimony/omaliastatement071213b. 

3CEA section 2(i); 7 U.S.C. 2(i). 

4Title VII of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, Public Law 111–203, 

124 Stat. 1376 (2010). 

5http://www.cftc.gov/PressRoom/PressReleases/

pr6678–13. 

6http://www.cftc.gov/ucm/groups/public/@

newsroom/documents/file/odrgreport.pdf. The 

ODRG agreed to six understandings. Understanding 

number 2 states that ‘‘[a] flexible, outcomes-based 

approach should form the basis of final assessments 

regarding equivalence or substituted compliance.’’ 

7The Commission made a positive comparability 

determination for Commission regulations 

23.504(a)(2), (b)(1), (b)(2), (b)(3), (b)(4), (c), and (d), 

but not for Commission regulations 23.504(b)(5) and 

(b)(6). 

8 Yen-denominated interest rate swaps are subject 

to the mandatory clearing requirement in both the 

U.S. and Japan. 

U.S. prudential regulator in accordance 

with § 23.203(b)(2). 

Issued in Washington, DC on December 20, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendices to Comparability 

Determination for Hong Kong: Certain 

Entity-Level Requirements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton and Wetjen voted in 

the affirmative. Commissioner O’Malia voted 

in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler and Commissioners 

Chilton and Wetjen 

We support the Commission’s approval of 

broad comparability determinations that will 

be used for substituted compliance purposes. 

For each of the six jurisdictions that has 

registered swap dealers, we carefully 

reviewed each regulatory provision of the 

foreign jurisdictions submitted to us and 

compared the provision’s intended outcome 

to the Commission’s own regulatory 

objectives. The resulting comparability 

determinations for entity-level requirements 

permit non-U.S. swap dealers to comply with 

regulations in their home jurisdiction as a 

substitute for compliance with the relevant 

Commission regulations. 

These determinations reflect the 

Commission’s commitment to coordinating 

our efforts to bring transparency to the swaps 

market and reduce its risks to the public. The 

comparability findings for the entity-level 

requirements are a testament to the 

comparability of these regulatory systems as 

we work together in building a strong 

international regulatory framework. 

In addition, we are pleased that the 

Commission was able to find comparability 

with respect to swap-specific transactionlevel requirements in the European Union 

and Japan. 

The Commission attained this benchmark 

by working cooperatively with authorities in 

Australia, Canada, the European Union, Hong 

Kong, Japan, and Switzerland to reach 

mutual agreement. The Commission looks 

forward to continuing to collaborate with 

both foreign authorities and market 

participants to build on this progress in the 

months and years ahead. 

Appendix 3—Dissenting Statement of 

Commissioner Scott D. O’Malia 

I respectfully dissent from the Commodity 

Futures Trading Commission’s 

(‘‘Commission’’) approval of the Notices of 

Comparability Determinations for Certain 

Requirements under the laws of Australia, 

Canada, the European Union, Hong Kong, 

Japan, and Switzerland (collectively, 

‘‘Notices’’). While I support the narrow 

comparability determinations that the 

Commission has made, moving forward, the 

Commission must collaborate with foreign 

regulators to harmonize our respective 

regimes consistent with the G–20 reforms. 

However, I cannot support the Notices 

because they: (1) Are based on the legally 

unsound cross-border guidance 

(‘‘Guidance’’); 1 (2) are the result of a flawed 

substituted compliance process; and (3) fail 

to provide a clear path moving forward. If the 

Commission’s objective for substituted 

compliance is to develop a narrow rule-byrule approach that leaves unanswered major 

regulatory gaps between our regulatory 

framework and foreign jurisdictions, then I 

believe that the Commission has successfully 

achieved its goal today. 

Determinations Based on Legally Unsound 

Guidance 

As I previously stated in my dissent, the 

Guidance fails to articulate a valid statutory 

foundation for its overbroad scope and 

inconsistently applies the statute to different 

activities.2 Section 2(i) of the Commodity 

Exchange Act (‘‘CEA’’) states that the 

Commission does not have jurisdiction over 

foreign activities unless ‘‘those activities 

have a direct and significant connection with 

activities in, or effect on, commerce of the 

United States . . .’’ 3 However, the 

Commission never properly articulated how 

and when this limiting standard on the 

Commission’s extraterritorial reach is met, 

which would trigger the application of Title 

VII of the Dodd-Frank Act 4 and any 

Commission regulations promulgated 

thereunder to swap activities that are outside 

of the United States. Given this statutorily 

unsound interpretation of the Commission’s 

extraterritorial authority, the Commission 

often applies CEA section 2(i) inconsistently 

and arbitrarily to foreign activities. 

Accordingly, because the Commission is 

relying on the legally deficient Guidance to 

make its substituted compliance 

determinations, and for the reasons discussed 

below, I cannot support the Notices. The 

Commission should have collaborated with 

foreign regulators to agree on and implement 

a workable regime of substituted compliance, 

and then should have made determinations 

pursuant to that regime. 

Flawed Substituted Compliance Process 

Substituted compliance should not be a 

case of picking a set of foreign rules identical 

to our rules, determining them to be 

‘‘comparable,’’ but then making no 

determination regarding rules that require 

extensive gap analysis to assess to what 

extent each jurisdiction is, or is not, 

comparable based on overall outcomes of the 

regulatory regimes. While I support the 

narrow comparability determinations that the 

Commission has made, I am concerned that 

in a rush to provide some relief, the 

Commission has made substituted 

compliance determinations that only afford 

narrow relief and fail to address major 

regulatory gaps between our domestic 

regulatory framework and foreign 

jurisdictions. I will address a few examples 

below. 

First, earlier this year, the OTC Derivatives 

Regulators Group (‘‘ODRG’’) agreed to a 

number of substantive understandings to 

improve the cross-border implementation of 

over-the-counter derivatives reforms.5 The 

ODRG specifically agreed that a flexible, 

outcomes-based approach, based on a broad 

category-by-category basis, should form the 

basis of comparability determinations.6

However, instead of following this 

approach, the Commission has made its 

comparability determinations on a rule-byrule basis. For example, in Japan’s 

Comparability Determination for 

Transaction-Level Requirements, the 

Commission has made a positive 

comparability determination for some of the 

detailed requirements under the swap trading 

relationship documentation provisions, but 

not for other requirements.7 This detailed 

approach clearly contravenes the ODRG’s 

understanding. 

Second, in several areas, the Commission 

has declined to consider a request for a 

comparability determination, and has also 

failed to provide an analysis regarding the 

extent to which the other jurisdiction is, or 

is not, comparable. For example, the 

Commission has declined to address or 

provide any clarity regarding the European 

Union’s regulatory data reporting 

determination, even though the European 

Union’s reporting regime is set to begin on 

February 12, 2014. Although the Commission 

has provided some limited relief with respect 

to regulatory data reporting, the lack of 

clarity creates unnecessary uncertainty, 

especially when the European Union’s 

reporting regime is set to begin in less than 

two months. 

Similarly, Japan receives no consideration 

for its mandatory clearing requirement, even 

though the Commission considers Japan’s 

legal framework to be comparable to the U.S. 

framework. While the Commission has 

declined to provide even a partial 

comparability determination, at least in this 

instance the Commission has provided a 

reason: the differences in the scope of entities 

and products subject to the clearing 

requirement.8 Such treatment creates 

uncertainty and is contrary to increased 

global harmonization efforts. 

Third, in the Commission’s rush to meet 

the artificial deadline of December 21, 2013, 

as established in the Exemptive Order 

Regarding Compliance with Certain Swap 


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78864 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 

9Exemptive Order Regarding Compliance With 

Certain Swap Regulations, 78 FR 43785 (Jul. 22, 

2013). 

10http://www.cftc.gov/PressRoom/

SpeechesTestimony/opaomalia-29. 

11http://www.cftc.gov/PressRoom/

SpeechesTestimony/omaliastatement071213b. 

1 78 FR 45292 (July 26, 2013). The Commission 

originally published proposed and further proposed 

guidance on July 12, 2012 and January 7, 2013, 

respectively. See Cross-Border Application of 

Certain Swaps Provisions of the Commodity 

Exchange Act, 77 FR 41214 (July 12, 2012) and 

Further Proposed Guidance Regarding Compliance 

with Certain Swap Regulations, 78 FR 909 (Jan. 7, 

2013). 

Regulations (‘‘Exemptive Order’’),9 the 

Commission failed to complete an important 

piece of the cross-border regime, namely, 

supervisory memoranda of understanding 

(‘‘MOUs’’) between the Commission and 

fellow regulators. 

I have previously stated that these MOUs, 

if done right, can be a key part of the global 

harmonization effort because they provide 

mutually agreed-upon solutions for 

differences in regulatory regimes.10

Accordingly, I stated that the Commission 

should be able to review MOUs alongside the 

respective comparability determinations and 

vote on them at the same time. Without these 

MOUs, our fellow regulators are left 

wondering whether and how any differences, 

such as direct access to books and records, 

will be resolved. 

Finally, as I have consistently maintained, 

the substituted compliance process should 

allow other regulatory bodies to engage with 

the full Commission.11 While I am pleased 

that the Notices are being voted on by the 

Commission, the full Commission only 

gained access to the comment letters from 

foreign regulators on the Commission’s 

comparability determination draft proposals 

a few days ago. This is hardly a transparent 

process. 

Unclear Path Forward 

Looking forward to next steps, the 

Commission must provide answers to several 

outstanding questions regarding these 

comparability determinations. In doing so, 

the Commission must collaborate with 

foreign regulators to increase global 

harmonization. 

First, there is uncertainty surrounding the 

timing and outcome of the MOUs. Critical 

questions regarding information sharing, 

cooperation, supervision, and enforcement 

will remain unanswered until the 

Commission and our fellow regulators 

execute these MOUs. 

Second, the Commission has issued timelimited no-action relief for the swap data 

repository reporting requirements. These 

comparability determinations will be done as 

separate notices. However, the timing and 

process for these determinations remain 

uncertain. 

Third, the Commission has failed to 

provide clarity on the process for addressing 

the comparability determinations that it 

declined to undertake at this time. The 

Notices only state that the Commission may 

address these requests in a separate notice at 

a later date given further developments in the 

law and regulations of other jurisdictions. To 

promote certainty in the financial markets, 

the Commission must provide a clear path 

forward for market participants and foreign 

regulators. 

The following steps would be a better 

approach: (1) The Commission should extend 

the Exemptive Order to allow foreign 

regulators to further implement their 

regulatory regimes and coordinate with them 

to implement a harmonized substituted 

compliance process; (2) the Commission 

should implement a flexible, outcomes-based 

approach to the substituted compliance 

process and apply it similarly to all 

jurisdictions; and (3) the Commission should 

work closely with our fellow regulators to 

expeditiously implement MOUs that resolve 

regulatory differences and address regulatory 

oversight issues. 

Conclusion 

While I support the narrow comparability 

determinations that the Commission has 

made, it was my hope that the Commission 

would work with foreign regulators to 

implement a substituted compliance process 

that would increase the global harmonization 

effort. I am disappointed that the 

Commission has failed to implement such a 

process. 

I do believe that in the longer term, the 

swaps regulations of the major jurisdictions 

will converge. At this time, however, the 

Commission’s comparability determinations 

have done little to alleviate the burden of 

regulatory uncertainty and duplicative 

compliance with both U.S. and foreign 

regulations. 

The G–20 process delineated and put in 

place the swaps market reforms in G–20 

member nations. It is then no surprise that 

the Commission must learn to coordinate 

with foreign regulators to minimize 

confusion and disruption in bringing much 

needed clarity to the swaps market. For all 

these shortcomings, I respectfully dissent 

from the Commission’s approval of the 

Notices. 

[FR Doc. 2013–30975 Filed 12–26–13; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Comparability Determination for 

Australia: Certain Entity-Level 

Requirements 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of Comparability 

Determination for Certain Requirements 

under Australian Regulation. 

SUMMARY: The following is the analysis 

and determination of the Commodity 

Futures Trading Commission 

(‘‘Commission’’) regarding certain parts 

of a request by the Australian Bankers 

Association (‘‘ABA’’) that the 

Commission determine that laws and 

regulations applicable in in the 

Commonwealth of Australia 

(‘‘Australia’’) provide a sufficient basis 

for an affirmative finding of 

comparability with respect to the 

following regulatory obligations 

applicable to swap dealers (‘‘SDs’’) and 

major swap participants (‘‘MSPs’’) 

registered with the Commission: (i) 

Chief compliance officer; (ii) risk 

management; and (iii) swap data 

recordkeeping (collectively, the 

‘‘Internal Business Conduct 

Requirements’’). 

DATES: Effective Date: This 

determination will become effective 

immediately upon publication in the 

Federal Register. 

FOR FURTHER INFORMATION CONTACT: Gary 

Barnett, Director, 202–418–5977, 

gbarnett@cftc.gov, Frank Fisanich, Chief 

Counsel, 202–418–5949, ffisanich@

cftc.gov, Adam Kezsbom, Special 

Counsel, 202–418–5372, akezsbom@

cftc.gov, Israel Goodman, Special 

Counsel, 202–418–6715, igoodman@

cftc.gov, Division of Swap Dealer and 

Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION:

I. Introduction 

On July 26, 2013, the Commission 

published in the Federal Register its 

‘‘Interpretive Guidance and Policy 

Statement Regarding Compliance with 

Certain Swap Regulations’’ (the 

‘‘Guidance’’).1 In the Guidance, the 

Commission set forth its interpretation 

of the manner in which it believes that 

section 2(i) of the Commodity Exchange 

Act (‘‘CEA’’) applies Title VII’s swap 

provisions to activities outside the U.S. 

and informed the public of some of the 

policies that it expects to follow, 

generally speaking, in applying Title VII 

and certain Commission regulations in 

contexts covered by section 2(i). Among 

other matters, the Guidance generally 

described the policy and procedural 

framework under which the 

Commission would consider a 

substituted compliance program with 

respect to Commission regulations 

applicable to entities located outside the 

U.S. Specifically, the Commission 

addressed a recognition program where 

compliance with a comparable 

regulatory requirement of a foreign 

jurisdiction would serve as a reasonable 

substitute for compliance with the 

attendant requirements of the CEA and 

the Commission’s regulations 

promulgated thereunder. 

In addition to the Guidance, on July 

22, 2013, the Commission issued the 

Exemptive Order Regarding Compliance 

with Certain Swap Regulations (the 


tkelley on DSK3SPTVN1PROD with NOTICES