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[Federal Register: September 16, 2010 (Volume 75, Number 179)]
[Notices]               
[Page 56513-56516]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16se10-32]                         

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COMMODITY FUTURES TRADING COMMISSION

 
Orders Regarding the Treatment of Petitions Seeking Grandfather 
Relief for Exempt Commercial Markets and Exempt Boards of Trade

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice; final orders.

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SUMMARY: The Commission is issuing orders whereby entities currently 
operating as exempt commercial markets, pursuant to Section 2(h)(3)-(7) 
of the Commodity Exchange Act, or exempt boards of trade, pursuant to 
Section 5d of the Commodity Exchange Act, may receive grandfather 
relief to continue to operate in accordance with those provisions 
notwithstanding their deletion from the Commodity Exchange Act, 
effective July 15, 2011, by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. The Commission's orders set forth various 
conditions for such grandfather relief, including the filing of a 
relief petition

[[Page 56514]]

and a swap execution facility or designated contract market application 
with the Commission.

DATES: Effective Date: September 10, 2010. Comments on this notice will 
be accepted until October 18, 2010.

ADDRESSES: You may submit comments or petitions for relief, identified 
with ``ECM/EBOT Grandfather Relief'' in the subject line, whichever is 
appropriate, by any of the following methods:
     E-mail for Comments: ecmebotcomments@cftc.gov. E-mail for 
petitions: ecmebotpetitionscftc.gov.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments and petitions will be posted as 
received to http://www.cftc.gov.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Chief Counsel, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5481. E-mail: dvanwagner@cftc.gov; or Beverly E. 
Loew, Assistant General Counsel, Office of the General Counsel, same 
address. Telephone: (202) 418-5648. E-mail: bloew@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ 
Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act 
(``CEA'') \3\ to establish a comprehensive new regulatory framework for 
swaps and security-based swaps. Among other changes to the CEA, the 
Dodd-Frank Act eliminated certain exempt market categories--exempt 
commercial markets (``ECMs'') and exempt boards of trade (``EBOTs'')--
from the CEA; established a new regulated market category--swap 
execution facilities (``SEFs''); revised certain requirements for an 
extant regulated market category--designated contract markets 
(``DCMs''); and authorized the Commission to grant grandfather relief 
for entities in the eliminated exempt market categories in order to 
assist those entities to transition their business models to a 
different market category.\4\
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
    \4\ The same provision of the Dodd-Frank Act that eliminated 
EBOTs also deleted CEA Section 5a--a provision that established a 
category of regulated markets known as derivatives transaction 
execution facilities (``DTEFs''). See Section 734 of the Dodd-Frank 
Act. The Dodd-Frank Act does not, however, authorize the Commission 
to grant grandfather relief to the DTEFs. Accordingly, DTEFs are not 
addressed in the Commission's subject order. Notably, the Commission 
has never registered a DTEF.
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II. Background and Discussion

a. Exempt Commercial Markets and Exempt Boards of Trade

    Sections 723 and 734 of the Dodd-Frank Act will strike from the CEA 
enabling provisions for two categories of exempt markets established by 
the Commodity Futures Modernization Act of 2000 (``CFMA'').\5\ 
Specifically, Section 723 of the Dodd-Frank Act will strike CEA Section 
2(h)(3)-(7) and, thus, eliminate the ECM category.\6\ Similarly, 
Section 734 of the Dodd-Frank Act will strike CEA Section 5d and, thus, 
eliminate the EBOT category.\7\
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    \5\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (2000).
    \6\ See Section 723(a)(1)(A) of the Dodd-Frank Act.
    \7\ See Section 734(a) of the Dodd-Frank Act.
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    The Commission notes that ECMs and EBOTs are both required to 
operate their execution platforms as trading facilities, as that term 
is defined by CEA Section 1a(34), and must limit access to a narrow 
group of market participants--eligible commercial entities in the case 
of ECMs and eligible contract participants in the case of EBOTs. These 
requirements are not inconsistent with the execution platform and 
market participant requirements for DCMs or SEFs as they are set forth 
in the CEA and the Dodd-Frank Act. Accordingly, while the ECM and EBOT 
provisions will be eliminated from the CEA effective July 15, 2011, the 
basic structural requirements for both of those market categories 
should facilitate the ability of ECMs and EBOTs to transition to either 
the SEF or DCM market category; provided, of course, that they comply 
with the enhanced regulatory requirements for those two categories.
    Sections 723 and 734 of the Dodd-Frank Act contain similar 
grandfather provisions for ECMs and EBOTs, respectively, whereby they 
may petition the Commission to continue to operate as ECMs and EBOTs. 
With some variation, both sections establish three basic requirements 
regarding the processing of grandfather petitions.
    First, entities seeking grandfather treatment must submit their 
petitions to the Commission by a set deadline: ECMs must submit their 
petitions within sixty days of the enactment of the Dodd-Frank Act 
(i.e., by September 20, 2010) and EBOTs must submit their petitions by 
the Dodd-Frank Act's effective date (i.e., by July 15, 2011). Second, 
the Commission must consider all petitions in a ``prompt manner.'' 
Third, the Commission may grant grandfather treatment for up to one 
year. In the case of EBOT petitions, the Dodd-Frank Act makes clear 
that the one-year period would commence with the Dodd-Frank Act's 
effective date of July 15, 2011. By contrast, the Dodd-Frank Act does 
not specify what the reference date should be for the running of any 
grandfather period for ECMs.
    The Commission expects that many entities that currently operate as 
ECMs or EBOTs will seek to become either SEFs or DCMs when the 
Commission adopts regulations implementing Dodd-Frank's requirements 
for those facilities. While the Commission expects to adopt SEF and DCM 
regulations prior to the July 15, 2011, effective date for deleting the 
ECM and EBOT provisions from the CEA, the Commission also anticipates 
that concurrent with the implementation of those new provisions it will 
have to process a large number of SEF and DCM applications from ECMs, 
EBOTs and interdealer brokers.\8\ In order to ease this congestion of 
applications, and to facilitate the transition of current ECM and EBOT 
businesses to the new regulatory regime mandated by the Dodd-Frank Act, 
the Commission believes that it would be appropriate to provide 
grandfather relief allowing EBOTs and ECMs to continue to operate as 
EBOTs and ECMs after the July 15, 2011, effective date of the Dodd-
Frank Act.
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    \8\ Currently, there are 16 ECMs and 6 EBOTs with active 
Notifications of Operation or Annual Certifications on file with the 
Commission.
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    Accordingly, the Commission is issuing orders that would establish 
procedures whereby ECMs and EBOTs may petition for and receive 
grandfather relief from the otherwise applicable provisions of the 
Dodd-Frank Act, so long as they submit both timely and acceptable 
grandfather relief requests and either DCM or SEF applications. To be 
acceptable, the grandfather relief request shall contain a commitment 
to provide the Commission and its staff with access to the books and 
records of the ECM or EBOT relating to its business as an ECM or EBOT 
in

[[Page 56515]]

accordance with the requirements in Commission Regulation 1.31, 17 CFR 
1.31, effective July 15, 2011. Failure to comply with any request for 
books and records in accordance with the requirements of Commission 
Regulation 1.31 shall constitute a basis for revocation of the 
grandfather relief. The grandfather relief will extend for as long as 
the ECM or EBOT has a legitimate DCM or SEF application pending before 
the Commission and, accordingly, the relief will expire upon the 
Commission's approval or disapproval of the application.

b. Eligible Contract Participants Operating Pursuant to Section 2(h)(1)

    Section 723 of the Dodd-Frank Act, which eliminated the ECM 
category from the CEA, also deleted CEA Section 2(h)(1)-(2)--a 
provision that provides an exemption for certain types of bilateral 
trading conducted off of regulated markets. Although the Dodd-Frank Act 
authorizes the Commission to grant grandfather relief to trading 
activity that relies upon CEA Section 2(h)(1)-(2), the nature of that 
trading activity is qualitatively different from trading activity on 
EBOTs and ECMs, both of which must operate as trading facilities, as 
that term is defined in CEA Section 1a(34). Accordingly, the issue of 
grandfather treatment for Section 2(h)(1)-(2) bilateral trading will be 
addressed by the Commission in a separate action.

III. Related Matters

a. Paperwork Reduction Act

    The Commission has determined that these proposed orders will not 
impose any new recordkeeping or information collection requirements, or 
other collections of information that require approval of the Office of 
Management and Budget under the Paperwork Reduction Act (``PRA'').\9\ 
Collections of information that may be associated with a SEF or DCM 
application required as a condition for receiving relief will be 
addressed within the SEF and DCM-related rulemakings implementing the 
Dodd-Frank Act.
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    \9\ 44 U.S.C. 3501 et seq.
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b. Cost-Benefit Analysis

    Section 15(a) of the CEA \10\ requires the Commission to consider 
the costs and benefits of its actions before issuing an order under the 
Act. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs; rather, it requires that the 
Commission ``consider'' the costs and benefits of its actions. Section 
15(a) further specifies that the costs and benefits shall be evaluated 
in light of five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may in its discretion give 
greater weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
order is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or accomplish any of the purposes of 
the Act. The Commission has determined that providing grandfather 
relief to ECMs and EBOTs, as provided in these orders, will mitigate 
market disruptions by permitting ECMs and EBOTs to continue to operate 
while they transition into new market categories once the Dodd-Frank 
Act becomes effective.\11\
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    \10\ 7 U.S.C. 19(a).
    \11\ The Commission is aware of certain ECMs that have block 
trade mechanisms whereby large-sized block transactions are executed 
away from the ECM's central marketplace, but in accordance with the 
ECM's rules, and subsequently reported to the ECM and treated as 
fungible with positions established through the central marketplace. 
Those block trades and resultant positions should be considered 
within the scope of the ECM grandfather relief being granted by this 
release.
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c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \12\ requires that 
agencies consider the impact of their rules on small businesses. The 
Commission previously has determined that neither ECMs nor EBOTs are 
small entities for purposes of the RFA.\13\ Accordingly, the Chairman, 
on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 
605(b) that these Orders, taken in connection with Sections 2(h)(3)-(7) 
and 5d of the Act and with the Part 36 rules, will not have a 
significant impact on a substantial number of small entities.
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    \12\ 5 U.S.C. 601 et seq.
    \13\ 66 FR 42256, 42268 (Aug. 10, 2001).
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IV. Orders

a. ECM Grandfather Order

    After considering the complete record in this matter, the 
Commission has determined to issue the following Order pursuant to its 
authority under Section 723(c) of the Dodd-Frank Act:
    It is hereby ordered that any ECM that meets all of the following 
applicable conditions may continue to operate pursuant to the 
provisions of CEA Section 2(h)(3)-(7) until July 15, 2012 (one year 
after the general effective date of the Dodd-Frank Act's amendments to 
the CEA): \14\
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    \14\ See Section 754 of the Dodd-Frank Act.
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    (1) The ECM must have filed with the Commission by September 20, 
2010, a grandfather relief petition that:
    (a) Is labeled ``Exempt Commercial Market Grandfather Relief 
Petition Filed Pursuant to Section 723(c)(2)(A) of the Dodd-Frank 
Act,''
    (b) Identifies the requesting ECM,
    (c) Identifies a contact person at the ECM, including that person's 
contact information at the ECM, and
    (d) Grants the Commission and its representatives access to the 
books and records of the ECM relating to its business as an ECM in 
accordance with the requirements of Commission Regulation 1.31, 
starting July 15, 2011 and throughout the pendency of the grandfather 
relief.
    (2) The ECM must have filed a formal SEF or DCM application with 
the Commission within sixty days after the effective date of final 
regulations implementing the provisions of either Section 733 or 735 of 
the Dodd-Frank Act, whichever is appropriate.
    (3) The ECM's SEF or DCM application is currently pending before 
the Commission.

b. EBOT Grandfather Order

    After considering the complete record in this matter, the 
Commission has determined to issue the following Order pursuant to its 
authority under Section 734(c)(1) of the Dodd-Frank Act:
    It is hereby ordered that any EBOT that meets all of the following 
applicable conditions may continue to operate pursuant to the 
provisions of CEA Section 5d up until July 15, 2012 (one year after the 
general effective date of the Dodd-Frank Act's amendments to the CEA): 
\15\
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    \15\ See Section 754 of the Dodd-Frank Act.
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    (1) The EBOT must have filed with the Commission by July 15, 2011, 
a grandfather relief petition that:
    (a) Is labeled ``Exempt Board of Trade Grandfather Relief Petition 
Filed Pursuant to Section 734(c)(1) of the Dodd-Frank Act,''
    (b) Identifies the requesting EBOT,
    (c) Identifies a contact person at the EBOT, including that 
person's contact information at the EBOT, and
    (d) Grants the Commission and its representatives access to the 
books and records of the EBOT relating to its business as an EBOT in 
accordance with the requirements of Commission

[[Page 56516]]

Regulation 1.31, starting July 15, 2011 and throughout the pendency of 
the grandfather relief.
    (2) The EBOT must have filed a formal SEF or DCM application with 
the Commission within sixty days after the effective date of final 
regulations implementing the provisions of either Section 733 or 735 of 
the Dodd-Frank Act, whichever is appropriate.
    (3) The EBOT's SEF or DCM application is currently pending before 
the Commission.

    Issued in Washington, DC, on September 10, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-23142 Filed 9-15-10; 8:45 am]
BILLING CODE 6351-01-P
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