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[Federal Register Volume 77, Number 134 (Thursday, July 12, 2012)]
[Proposed Rules]
[Pages 41110-41120]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16498]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD85

Exemptive Order Regarding Compliance With Certain Swap 
Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed exemptive order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing to grant, pursuant to section 4(c) of the Commodity Exchange 
Act (``CEA''), temporary exemptive relief in order to allow non-U.S. 
swap dealers and non-U.S. major swap participants to delay compliance 
with certain entity-level requirements of the CEA (and Commission 
regulations promulgated thereunder), subject to specified conditions. 
Additionally, with respect to transaction-level requirements of the CEA 
(and Commission regulations promulgated thereunder), the relief would 
allow non-U.S. swap dealers and non-U.S. major swap participants, as 
well as foreign branches of U.S. swap dealers and major swap 
participants, to comply only with those requirements as may be required 
in the home jurisdiction of such non-U.S. swap dealers and non-U.S. 
major swap participants (or in the case of foreign branches of a U.S. 
swap dealer or U.S. major swap participant, the foreign location of the 
branch) for swaps with non-U.S. counterparties. This relief would 
become effective concurrently with the date upon which swap dealers and 
major swap participants must first apply for registration and expire 12 
months following the publication of this proposed order in the Federal 
Register. Finally, U.S. swap dealers and U.S. major swap participants 
may delay compliance with certain entity-level requirements of the CEA 
(and

[[Page 41111]]

Commission regulations promulgated thereunder) from the date upon which 
swap dealers and major swap participants must apply for registration 
until January 1, 2013.

DATES: Comments must be received on or before August 13, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD85, 
by any of the following methods:
     The agency's Web site, at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that you believe is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
Sec.  145.9 of the Commission's regulations.\1\
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    \1\ See 17 CFR 145.9.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the proposal 
will be retained in the public comment file and will be considered as 
required under the Administrative Procedures Act \2\ and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.\3\
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    \2\ 5 U.S.C. 551, et seq.
    \3\ 5 U.S.C. 552.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act''),\4\ which amended the CEA and established a new regulatory 
framework for swaps. The legislation was enacted to reduce systemic 
risk, increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers (each, an 
``SD'') and major swap participants (each, an ``MSP''); (2) imposing 
clearing and trade execution requirements on standardized derivative 
products; (3) creating rigorous recordkeeping and data reporting 
regimes with respect to swaps, including real-time public reporting; 
and (4) enhancing the Commission's rulemaking and enforcement 
authorities over all registered entities, intermediaries, and swap 
counterparties subject to the Commission's oversight.
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    \4\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
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    To implement the Dodd-Frank Act, the Commission has promulgated 
rules pursuant to the various new provisions of the CEA, including 
those specifically applicable to SDs and MSPs. Examples of such 
provisions include CEA section 4s(a) (governing registration of SDs and 
MSPs) \5\ and section 4s(j) (requiring SDs and MSPs to establish a 
comprehensive internal risk management program).\6\ Rules to implement 
other requirements in the provisions of the CEA have been proposed but 
not finalized. These include CEA section 4s(e) (governing capital and 
margin requirements for SDs and MSPs) \7\ and CEA section 4s(i) 
(relating to the timely and accurate processing and netting of swaps 
entered by SDs and MSPs).\8\
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    \5\ 7 U.S.C. 6s(a).
    \6\ 7 U.S.C. 6s(j).
    \7\ 7 U.S.C. 6s(e).
    \8\ 7 U.S.C. 6s(i).
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    Further, the Commission approved for publication a proposed 
interpretive guidance and policy statement (``Cross-Border Interpretive 
Guidance'') on the application of the CEA's swap provisions and the 
implementing Commission regulations to cross-border activities and 
transactions.\9\ A brief overview of the Cross-Border Interpretive 
Guidance follows.
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    \9\ [CITE TO THE CB GUIDANCE RELEASE]
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II. Cross-Border Interpretive Guidance

    To provide greater clarity to market participants regarding their 
obligations under the Dodd-Frank Act, the Commission has published the 
Cross-Border Interpretive Guidance. Broadly speaking, the Cross-Border 
Interpretive Guidance sets forth the manner in which the Commission 
proposes to interpret section 2(i) of the CEA \10\ as it applies to the 
requirements under the Dodd-Frank Act and the Commission's regulations 
promulgated thereunder regarding cross-border swap activities.
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    \10\ Section 722(d) of the Dodd-Frank Act, which amended the CEA 
to add a new section 2(i), provides that the swaps provisions of the 
CEA apply to cross-border transactions and activities when certain 
conditions are met, namely, when such activities have a ``direct and 
significant'' connection with activities in, or effect on, commerce 
in the United States or when they contravene Commission rulemaking. 
See 7 U.S.C. 2(i).
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    Specifically, in the Cross-Border Interpretive Guidance, the 
Commission described the general manner in which it proposes to 
consider: (1) Whether a non-U.S. person's swap dealing activities are 
sufficient to require registration as a ``swap dealer'',\11\ as further 
defined in a joint release adopted by the Commission and the SEC 
(collectively, the ``Commissions''); (2) whether a non-U.S. person's 
swap positions are sufficient to require registration as a ``major swap 
participant'',\12\ as further defined in a joint release adopted by the 
Commissions; \13\ and (3) the treatment of foreign branches, agencies, 
affiliates, and subsidiaries of U.S. SDs and of U.S. branches of non-
U.S. SDs. The Cross-Border Interpretive Guidance also proposes, in 
certain circumstances, to permit a non-U.S. SD or non-U.S. MSP to 
comply with comparable and comprehensive foreign regulatory 
requirements in order to satisfy applicable statutory and regulatory 
requirements under Title VII of the Dodd-Frank Act.\14\ Finally, the 
Cross-Border Interpretive Guidance sets forth the manner in which the 
Commission proposes to interpret section 2(i) of the CEA as it applies 
to the clearing,

[[Page 41112]]

trading, and certain reporting requirements under the Dodd-Frank Act 
with respect to swaps between counterparties that are not SDs or MSPs.
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    \11\ 7 U.S.C. 1a(49).
    \12\ 7 U.S.C 1a(33).
    \13\ See ``Further Definition of `Swap Dealer,' `Security-Based 
Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap 
Participant' and `Eligible Contract Participant'; Final Rule, 77 FR 
30596, May 23, 2012.
    \14\ The Cross-Border Interpretive Guidance does not address the 
scope of the Commission's authority under CEA section 2(i) over non-
swap agreements, contracts, transactions or markets within the 
Commission's jurisdiction or persons who participate in or operate 
those markets.
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III. Proposed Relief

A. Scope of Relief

    In order to ensure an orderly transition to the Dodd-Frank Act's 
regulatory regime and to provide certainty to market participants and 
in response to commenters' requests,\15\ the Commission is proposing to 
provide temporary exemptive relief pursuant to section 4(c) of the 
CEA.\16\ Specifically, the relief would allow non-U.S. SDs and non-U.S. 
MSPs \17\ to delay compliance with certain Entity-Level Requirements 
(as defined below) under the Dodd-Frank Act (and the Commission's 
regulations thereunder), subject to specified conditions described 
herein. Under the proposed relief, non-U.S. SDs and non-U.S. MSPs would 
be afforded additional time to prepare for the application of the 
Entity-Level Requirements with assurances that they would not be in 
violation of the CEA as a result. This would, in turn, facilitate an 
orderly transition to the Entity-Level Requirements of the Dodd-Frank 
Act regulatory regime, while minimizing undue disruptions to current 
market operations.
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    \15\ See Letter from Securities Industry and Financial Markets 
Association and Institute of International Bankers, dated, April 25, 
2012, available on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
    \16\ 7 U.S.C. 6(c).
    \17\ As used in this proposed exemptive order, the term ``non-
U.S. swap dealer'' refers to swap dealers that are non-U.S.-based as 
well as those that are foreign affiliates of a U.S. person. 
Similarly, the term ``non-U.S. MSP'' refers to MSPs that are non-
U.S.-based, as well as foreign affiliates of a U.S. person.
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    An exception to the foregoing relief from the Entity-Level 
Requirements relates to the Swap Data Repository (``SDR'') reporting 
requirement \18\ and part 20 of the Commission's regulations (``Large 
Trader Reporting''). Specifically, non-U.S. SDs and non-U.S.MSPs would 
be required to comply with the SDR reporting requirement for all swaps 
with U.S. person counterparties (``U.S. counterparties''), upon its 
compliance date. Under the proposed exemptive order, the reporting 
obligations of an SD under the Large Trader Reporting regulations would 
apply (or not apply) in the same manner as the SDR reporting 
requirements would apply (or not apply) to such SD.
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    \18\ See 7 U.S.C. 2(a)(13)(G). The Commission believes that the 
data reported to, and collected by, SDRs will be important to its 
ability to effectively monitor and address the risk exposures of 
individual market participants (including SDs and MSPs) and the 
concentration of risk within the swaps market more generally.
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    However, under the proposed exemptive order, non-U.S. SDs and non-
U.S. MSPs that are not affiliates or subsidiaries of a SD would be 
permitted to delay compliance with the SDR reporting requirement for 
swaps with non-U.S. counterparties. The Commission believes that this 
approach would facilitate such registrants' phasing in of their 
compliance with the SDR reporting requirement, without substantially 
undermining the regulatory objectives of SDR reporting. The Commission 
is not proposing to extend similar relief to non-U.S. SDs and non-U.S. 
MSPs that are affiliates or subsidiaries of a U.S. SD given the 
Commission's supervisory interest in data related to the swap 
activities of non-U.S. SDs and non-U.S. MSPs that are part of a U.S.-
based affiliated group.
    The Commission also proposes to grant, with respect to Transaction-
Level Requirements (as defined below), temporary relief to non-U.S. SDs 
and non-U.S. MSPs, as well as foreign branches of U.S. SDs and U.S. 
MSPs, for swaps with a non-U.S. counterparty in order that they comply 
only with the regulations as may be required in the home jurisdiction 
of the non-U.S. SD or non-U.S. MSP (or in the case of foreign branches 
of a U.S. SD or a U.S. MSP, the foreign location of the branch).\19\ 
With respect to swaps with a U.S. counterparty, however, these 
registrants would be required to comply with all applicable 
Transaction-Level Requirements that are in effect. Given the nature of 
these requirements (i.e., they may be applied on a transaction-by-
transaction basis) and their importance to the protection of U.S. 
counterparties, the Commission would require non-U.S. SDs and non-U.S. 
MSPs, as well as foreign branches of U.S. SDs and U.S. MSPs, to comply 
with all applicable Transaction-Level Requirements with respect to such 
counterparties.\20\
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    \19\ Under the proposed Cross-Border Interpretive Guidance and 
for purposes of this order, a foreign branch of a U.S. person is 
deemed a U.S. person. Accordingly, swaps entered between a foreign 
branch of a U.S. person with another foreign branch of a U.S. person 
would be subject to the Dodd-Frank Transaction-Level Requirements. 
The Commission solicits comments on whether, for purposes of this 
order, substituted compliance should be permitted for such swaps, 
which effectively would allow foreign branches to comply only with 
the regulations as may be required in the foreign location of the 
branches.
    \20\ This relief does not cover swaps between non-SDs and non-
MSPs. Any such swaps involving a U.S. counterparty would be subject 
to applicable Dodd-Frank Act requirements as set forth in the Cross-
Border Interpretive Guidance.
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    The relief for non-U.S. SDs and non-U.S. MSPs (and foreign branches 
of U.S. SDs and U.S. MSPs with respect to Transaction-Level 
Requirements) would become effective on the compliance date for 
registration of SDs and MSPs and expire 12 months following the 
publication of this proposed order in the Federal Register. The 
Commission is committed to an orderly transition to the Dodd-Frank 
Act's regulatory regime. In furtherance of that objective, the 
Commission intends to consider extending the effectiveness of this 
exemptive relief at its expiration based on, among other things, 
whether and when substituted compliance with foreign regulatory 
requirements for non-U.S. persons is available.
    With respect to U.S. SDs and U.S. MSPs, the Commission proposes to 
permit such registrants to delay compliance with certain Entity-Level 
Requirements under the Dodd-Frank Act (and the Commission's regulations 
thereunder) until January 1, 2013. Under the proposed relief, U.S. SDs 
and U.S. MSPs would be afforded additional time to prepare for the 
application of the Entity-Level Requirements so as to ensure an orderly 
transition, while minimizing undue disruptions to current market 
operations. This relief with respect to Entity-Level Requirements, 
however, does not extend to swap data recordkeeping, SDR reporting or 
Large Trader Reporting requirements. That is, U.S. SDs and U.S. MSPs 
would be required to comply with the swap data recordkeeping, SDR and 
Large Trader Reporting requirements for all swaps. Finally, the 
Commission reiterates that a U.S. person would be expected to apply for 
registration as an SD or MSP by the effective date of the Swap 
Definitional Rule.
    Finally, the relief for U.S. SDs and U.S. MSPs (with respect to 
Entity-Level Requirements) would be effective until January 1, 2013. 
The Commission believes that allowing U.S. registrants additional time 
as specified is appropriate in light of the importance of implementing 
the Dodd-Frank Act regulatory regime as expeditiously as possible while 
taking due consideration of the need for U.S. registrants to effect an 
orderly transition to the new regulatory regime.

B. Conditions to Relief

    Under this proposal, a non-U.S. SD or non-U.S. MSP seeking relief 
from the specified Entity-Level Requirements must satisfy certain 
conditions. First, the non-U.S. person that is required to register as 
an SD or MSP must apply to become registered as such when registration 
is required. Second, within

[[Page 41113]]

60 days of applying for registration, the non-U.S. applicant would be 
required to submit to the National Futures Association (``NFA'') a 
compliance plan addressing how it plans to comply, in good faith, with 
all applicable requirements under the CEA and related rules and 
regulations upon the effective date of the Cross-Border Interpretive 
Guidance.\21\
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    \21\ Additionally, a U.S. SD or U.S. MSP whose foreign branch 
seeks to rely on the exemptive relief with respect to swaps with 
non-U.S. counterparties must submit a compliance plan addressing how 
it plans to comply, in good faith, with all applicable Transaction-
Level Requirements under the CEA upon the expiration of this 
proposed exemptive order.
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    At a minimum, such plan would provide, for each Entity-Level and 
Transaction-Level Requirement, a description of: (1) Whether the non-
U.S. SD or non-U.S. MSP plans to comply with each of the Entity-Level 
and Transaction-Level Requirements that are in effect at such time or 
plans to seek a comparability determination and rely on compliance with 
one or more of the requirements of the home jurisdiction, as 
applicable; and (2) to the extent that the non-U.S. SD or non-U.S. MSP 
would seek to comply with one or more of the requirement(s) of the home 
jurisdiction, a description of such requirement(s). The Commission 
notes that such person may modify or alter the compliance plan as 
appropriate, provided that they submit any such amended plan to 
NFA.\22\
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    \22\ The Commission anticipates that compliance plans would be 
updated on a periodic basis as new regulations are adopted and come 
into effect. Such updates should be submitted to NFA. Any such 
submission should identify the name of the registrant, the fact that 
the submission is made in reliance upon and pursuant to this 
exemptive relief, and contact name and information.
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    The Commission further notes that the proposed relief does not 
limit the applicability of any CEA provision or Commission regulation 
to any person, entity or transaction except as provided in the proposed 
order. In addition, the proposed relief would not affect any effective 
date or compliance date set out in any specific Dodd-Frank Act 
rulemaking by the Commission.

IV. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA authorizes the Commission to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transaction from any of the 
provisions of the CEA (subject to certain exceptions) where the 
Commission determines that the exemption would be consistent with the 
public interest.\23\ Under section 4(c)(2) of the CEA, the Commission 
may not grant exemptive relief unless it determines that: (1) The 
exemption is appropriate for the transaction and consistent with the 
public interest; (2) the exemption is consistent with the purposes of 
the CEA; (3) the transaction will be entered into solely between 
``appropriate persons''; \24\ and (4) the exemption will not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory 
responsibilities under the CEA.\25\ The Commission may grant such an 
exemption by rule, regulation or order, after notice and opportunity 
for hearing, and may do so on application of any person or on its own 
initiative. In enacting section 4(c), Congress noted that the goal of 
the provision is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner.\26\
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    \23\ 7 U.S.C. 6(c)(1).
    \24\ CEA section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the 
term ``appropriate persons'' a number of specified categories of 
persons deemed appropriate under the CEA for entering into swaps 
exempted by the Commission under section 4(c). This includes persons 
the Commission determines to be appropriate in light of their 
financial or other qualifications, or the applicability of 
appropriate regulatory protections.
    \25\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2).
    \26\ See ``Notice Regarding the Treatment of Petitions Seeking 
Grandfather Relief for Trading Activity Done in Reliance Upon 
Section 2(h)(1)-(2) of the Commodity Exchange Act,'' 75 FR 56512, 
56513, Sept. 16, 2010.
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    As noted earlier, the Commission is proposing to issue this relief 
in order to ensure an orderly transition to the Dodd-Frank Act 
regulatory regime and to provide greater legal certainty to market 
participants regarding their obligations under the CEA with respect to 
their cross-border activities. The proposed relief also would advance 
the congressional mandate concerning harmonization of international 
standards, consistent with section 752(a) of the Dodd-Frank Act. In 
that section, Congress directed that, in order to ``promote effective 
and consistent global regulation of swaps and security-based swaps,'' 
the Commission, ``as appropriate, shall consult and coordinate with 
foreign regulatory authorities on the establishment of consistent 
international standards with respect to the regulation'' of swaps and 
security-based swaps.\27\ The proposed relief, by providing U.S. and 
non-U.S. registrants the latitude necessary to develop and modify their 
compliance plans as the regulatory structure in their home jurisdiction 
changes, would promote greater regulatory consistency and coordination 
with international regulators.
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    \27\ See section 752(a) of the Dodd-Frank Act.
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    The Commission emphasizes that the proposed order is temporary in 
duration and reserves the Commission's anti-fraud and anti-manipulation 
enforcement authority. As such, the Commission believes that the 
proposed order would be consistent with the public interest and 
purposes of the CEA. For similar reasons, the Commission believes that 
the proposed order would not have a material adverse effect on the 
ability of the Commission or any contract market to discharge its 
regulatory or self-regulatory duties under the CEA. Finally, the 
Commission believes that the order would be limited to appropriate 
persons within the meaning of section 4c(3)(K) since the SDs and MSPs 
eligible for the relief are likely to be financial institutions active 
in the swaps market.\28\ The Commission seeks comment on whether the 
proposed temporary exemptive order is consistent with the public 
interest and the other requirements of CEA section 4(c).
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    \28\ CEA Section 4(c)(3)(K), 7 U.S.C. 6(c)(3)(K) (appropriate 
persons may include such ``other persons that the Commission 
determines to be appropriate in light of their financial or other 
qualifications, or the applicability of appropriate regulatory 
protections'').
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V. Terms ``U.S. Person,'' ``Entity-Level Requirements,'' and 
``Transaction-Level Requirements''

A. U.S. Person

    In the Cross-Border Interpretive Guidance, the Commission proposes 
to interpret the term ``U.S. person'' by reference to the extent to 
which swap activities or transactions involving one or more such 
persons have the relevant effect on U.S. commerce. Specifically, as 
proposed, the term ``U.S. person'' would include, but not be limited 
to: (1) Any natural person who is a resident of the United States; (2) 
any corporation, partnership, limited liability company, business or 
other trust, association, joint-stock company, fund, or any form of 
enterprise similar to any of the foregoing, in each case either (A) 
organized or incorporated under the laws of the United States \29\ or 
having its principal place of business in the United States (``legal 
entity'') or (B) in which the direct or indirect owners thereof are 
responsible for the liabilities of such entity and one or more of such

[[Page 41114]]

owners is a U.S. person; (3) any individual account (discretionary or 
not) where the beneficial owner is a U.S. person; (4) any commodity 
pool, pooled account, or collective investment vehicle (whether or not 
it is organized or incorporated in the United States) of which a 
majority ownership or equity interest is held, directly or indirectly, 
by a U.S. person(s); (5) any commodity pool, pooled account, or 
collective investment vehicle the operator of which would be required 
to register as a commodity pool operator under the CEA; (6) a pension 
plan for the employees, officers, or principals of a legal entity with 
its principal place of business inside the United States; and (7) an 
estate or trust, the income of which is subject to United States income 
tax regardless of source.
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    \29\ United States would mean the United States, its states, the 
District of Columbia, Puerto Rico, the U.S. Virgin Islands, and any 
other territories or possessions of the United States government, 
its agencies or instrumentalities.
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    Under the interpretation of the term ``U.S. person'' in the Cross-
Border Interpretive Guidance, a foreign branch or agency of a U.S. 
person would be covered by virtue of the fact that it is an extension 
of a U.S. person. By contrast, a foreign affiliate or subsidiary of a 
U.S. person would be considered a non-U.S. person. Solely for purposes 
of the temporary exemptive relief provided in the proposed order, the 
Commission adopts the interpretation of the term ``U.S. person'' as set 
forth in the Cross-Border Interpretive Guidance.

B. Entity-Level and Transaction-Level Requirements

    Solely for purposes of the temporary exemptive relief provided in 
the proposed order, the Commission incorporates the proposed categories 
of Entity-Level and Transaction-Level Requirements, as set forth in the 
Cross-Border Interpretive Guidance.
1. Entity-Level Requirements
    In the Cross-Border Interpretive Guidance, the Commission proposes 
to divide the Dodd-Frank Act requirements that would apply to SDs and 
MSPs into those that: (1) Apply to an SD or MSP at an entity level 
(i.e., to the firm as a whole); and (2) apply at a transactional level 
(i.e., to specific transactions). Specifically, the entity-level 
requirements under Title VII of the Dodd-Frank Act and the Commission's 
regulations promulgated thereunder relate to: (1) Capital adequacy; (2) 
chief compliance officer; (3) risk management; (4) swap data 
recordkeeping; (5) reporting to an SDR; and (6) physical commodity 
swaps reporting (collectively, the foregoing requirements are referred 
to herein as ``Entity-Level Requirements''). The first subcategory of 
Entity-Level Requirements relating to capital adequacy, chief 
compliance officer, risk management, and swap data recordkeeping relate 
to risks to a firm as a whole. These requirements address and manage 
risks that arise from a firm's operation as an SD or MSP. Individually, 
they represent a key component of a firm's internal risk controls. 
Collectively, they constitute a firm's first line of defense against 
financial, operational, and compliance risks that could lead to a 
firm's default or failure. In short, these requirements relate to risks 
to a firm as a whole.
    At the core of a robust internal risk controls system is the firm's 
capital--and particularly, how the firm identifies and manages its risk 
exposure arising from its portfolio of activities.\30\ Equally 
foundational to the financial integrity of a firm is an effective 
internal risk management process, which must be comprehensive in scope 
and reliant on timely and accurate data regarding its swap activities. 
To be effective, such system must be under the supervision of a strong 
and independent function. These internal controls-related 
requirements--namely, the requirements relating to chief compliance 
officer, risk management, swap data recordkeeping--are designed to 
serve that end.
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    \30\ By way of illustration, consistent with the purpose of the 
capital requirement, which is to reduce the likelihood and cost of 
an SD's default by requiring a financial cushion, an SD's or MSP's 
capital requirements would be set on the basis of its overall 
portfolio of assets and liabilities.
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    No less important to the financial integrity of a firm is the SDR 
reporting requirement. SDR reporting ensures the Commission access to 
the information it needs to effectively supervise the risk exposure of 
its registrants and, thus, serves to lower their risk of failure. Given 
the functions of these reporting requirements, each must be applied on 
a firm-wide basis, across all swaps, in order to ensure that the 
Commission has a comprehensive and accurate picture of its activities. 
Otherwise, the intended benefits of these Entity-Level Requirements 
would be significantly compromised, if not undermined.
    Each of the Entity-Level Requirements is summarized below.
i. Capital requirements
    Section 4s(e)(3)(A) of the CEA specifically directs the Commission 
to set capital requirements for SDs and MSPs that are not subject to 
the capital requirements of prudential regulators (hereinafter referred 
to as ``non-bank SDs and MSPs'').\31\ Pursuant to section 4s(e)(3), the 
Commission proposed regulations, which would require non-bank SDs and 
MSPs to hold a minimum level of adjusted net capital (i.e., 
``regulatory capital'') based on whether the non-bank SD or MSP is: (1) 
Also a futures commission merchant (``FCM''); (2) not an FCM, but is a 
non-bank subsidiary of a bank holding company; or (3) neither an FCM 
nor a non-bank subsidiary of a bank holding company.\32\
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    \31\ See 7 U.S.C. 6s(e)(3)(A). Section 4s(e) of the CEA 
explicitly requires the adoption of rules establishing capital and 
margin requirements for SDs and MSPs, and applies a bifurcated 
approach that requires each SD and MSP for which there is a 
prudential regulator to meet the capital and margin requirements 
established by the applicable prudential regulator, and each SD and 
MSP for which there is no prudential regulator to comply with the 
Commission's capital and margin regulations. See 7 U.S.C. 6s(e). 
Further, systemically important financial institutions (``SIFIs'') 
that are not futures commission merchants (``FCMs'') would be exempt 
from the Commission's capital requirements, and would comply instead 
with Federal Reserve Board requirements applicable to SIFIs, while 
non-bank (and non-FCM) subsidiaries of U.S. bank holding companies 
would calculate their Commission capital requirement using the same 
methodology specified in Federal Reserve Board regulations 
applicable to the bank holding company, as if the subsidiary itself 
were a bank holding company. The term ``prudential regulator'' is 
defined in CEA section 1a(39) as the Board of Governors of the 
Federal Reserve System, the Office of the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the Farm Credit 
Administration, and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39).
    \32\ See 7 U.S.C. 6s(e). See also 76 FR 27802, May 12, 2011, 
available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-10881a.pdf. ``The 
Commission's capital proposal for [SDs] and MSPs includes a minimum 
dollar level of $20 million. A non-bank [SD] or MSP that is part of 
a U.S. bank holding company would be required to maintain a minimum 
of $20 million of Tier 1 capital as measured under the capital rules 
of the Federal Reserve Board. [An SD] or MSP that also is registered 
as an FCM would be required to maintain a minimum of $20 million of 
adjusted net capital as defined under [proposed] Sec.  1.17. In 
addition, an [SD] or MSP that is not part of a U.S. bank holding 
company or registered as an FCM would be required to maintain a 
minimum of $20 million of tangible net equity, plus the amount of 
the [SD's] or MSP's market risk exposure and OTC counterparty credit 
risk exposure.'' See id. at 27817.
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ii. Chief Compliance Officer
    Section 4s(k) requires that each SD and MSP designate an individual 
to serve as its chief compliance officer (``CCO'') and specifies 
certain duties of the CCO.\33\ Pursuant to section 4s(k), the 
Commission recently adopted Sec.  3.3, which requires SDs and MSPs to 
designate a CCO who would be responsible for administering the firm's 
compliance policies and procedures, reporting directly to the board of 
directors or a senior officer of the SD or MSP, as well as preparing 
and filing (with the Commission) a certified report of compliance with 
the CEA.\34\
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    \33\ See 7 U.S.C. 6s(k).
    \34\ See 17 CFR 3.3.

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[[Page 41115]]

iii. Risk Management
    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.\35\ The Commission recently adopted implementing regulations 
(Sec. Sec.  23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 
23.607).\36\ The Commission also recently adopted Sec.  23.609, which 
requires certain risk management procedures for SDs or MSPs that are 
clearing members of a derivatives clearing organization (``DCO'').\37\
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    \35\ 7 U.S.C. 6s(j).
    \36\ 17 CFR 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, and 
23.607; ``Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants,'' 77 FR 20128, Apr. 3, 2012 (relating 
to risk management program, monitoring of position limits, business 
continuity and disaster recovery, conflicts of interest policies and 
procedures, general information availability, and antitrust 
considerations, respectively).
    \37\ 17 CFR 23.609, ``Customer Clearing Documentation, Timing of 
Acceptance for Clearing, and Clearing Member Risk Management,'' 77 
FR 21278 (Apr. 9, 2012). In the same release, the Commission also 
adopted Sec.  23.608, which prohibits SDs providing clearing 
services to customers from entering into agreements that would: (1) 
Disclose the identity of a customer's original executing 
counterparty; (2) limit the number of counterparties a customer may 
trade with; (3) impose counterparty-based position limits; (4) 
impair a customer's access to execution of a trade on terms that 
have a reasonable relationship to the best terms available; or (5) 
prevent compliance with specified time frames for acceptance of 
trades into clearing.
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iv. Swap Data Recordkeeping
    CEA section 4s(f)(1)(B) requires SDs and MSPs to keep books and 
records for all activities related to their business.\38\ Section 
4s(g)(1) requires SDs and MSPs to maintain trading records for each 
swap and all related records, as well as a complete audit trail for 
comprehensive trade reconstructions.\39\ Pursuant to these provisions, 
the Commission adopted Sec. Sec.  23.201 and 23.203, which require SDs 
and MSPs to keep records including complete transaction and position 
information for all swap activities, including documentation on which 
trade information is originally recorded.\40\ SDs and MSPs also must 
comply with part 46 of the Commission's regulations, which addresses 
the recordkeeping requirements for swaps entered into before the date 
of enactment of the Dodd-Frank Act (``pre-enactment swaps'') and data 
relating to swaps entered into on or after the date of enactment but 
prior to the compliance date of the SDR reporting rules (``transition 
swaps'').\41\
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    \38\ 7 U.S.C. 6s(f)(1)(B).
    \39\ 7 U.S.C. 6s(g)(1).
    \40\ 17 CFR. 23.201and 23.203; ``Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants,'' 77 
FR 20128, Apr. 3, 2012. These requirements also require an SD to 
provide the Commission with regular updates concerning its financial 
status, as well as information concerning internal corporate 
procedures.
    \41\ 17 CFR 46.1 et seq.; ``Swap Data Recordkeeping and 
Reporting Requirements: Pre-Enactment and Transition Swaps,'' 76 FR 
22833, Apr. 25, 2011.
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v. Swap Data Reporting
    CEA section 2(a)(13)(G) requires all swaps, whether cleared or 
uncleared, to be reported to a registered SDR.\42\ CEA section 21 
requires SDRs to collect and maintain data related to swaps as 
prescribed by the Commission, and to make such data electronically 
available to regulators.\43\ SDs and MSPs would be required to comply 
with part 45 of the Commission's regulations, which set forth the 
specific transaction data that reporting counterparties and registered 
entities must report to a registered SDR; and part 46, which addresses 
the recordkeeping requirements for pre-enactment swaps and data 
relating to transition swaps.
---------------------------------------------------------------------------

    \42\ 7 U.S.C. 2(a)(13)(G).
    \43\ 7 U.S.C. 24a.
---------------------------------------------------------------------------

vi. Physical Commodity Swaps Reporting (Large Trader Reporting)
    CEA section 4t \44\ authorizes the Commission to establish a large 
trader reporting system for significant price discovery swaps (of which 
economically equivalent swaps subject to part 20 reporting are a 
subset) in order to implement the statutory mandate in CEA section 4a 
\45\ for the Commission to establish position limits, as appropriate, 
for physical commodity swaps. Pursuant thereto, the Commission adopted 
part 20 rules requiring SDs, among other entities, to submit routine 
position reports on certain physical commodity swaps and swaptions.\46\ 
Just as with SDR reporting, part 20 reporting serves the Dodd-Frank 
Act's objective to enhance regulatory oversight of the swaps market. In 
fact, a stated reason for the Commission's adoption of part 20 was its 
ability to, in effect, perform the function of physical commodity SDRs 
until such time as such entities are operational and have the ability 
to convert swaps into positions.\47\
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    \44\ 7 U.S.C. 6t.
    \45\ 7 U.S.C. 6a.
    \46\ ``Large Trader Reporting for Physical Commodity Swaps,'' 76 
FR 43851, July 22, 2011.
    \47\ See 76 FR 43851, 43852.
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2. Transaction-Level Requirements
    The transaction-level requirements under Title VII of the Dodd-
Frank Act and the Commission's regulations (proposed or adopted) 
include: (1) Clearing and swap processing; (2) margining (and 
segregation) for uncleared swaps; (3) trade execution; (4) trade 
confirmation; (5) swap trading relationship documentation; (6) real-
time public reporting; (7) portfolio reconciliation and compression; 
(8) daily trading records; and (9) external business conduct standards 
(collectively, the foregoing requirements are referred to herein as 
``Transaction-Level Requirements''). Broadly speaking, the Transaction-
Level Requirements closely relate to the financial protection of SDs, 
MSPs and their counterparties, pre- and post-trade transparency, and 
other market-oriented regulatory safeguards.
i. Clearing and Swap Processing
    Section 2(h)(1) of the CEA requires a swap to be submitted for 
clearing to a DCO if the Commission has determined that the swap is 
required to be cleared, unless one of the parties to the swap is 
eligible for an exception from the clearing requirement and elects not 
to clear the swap.\48\ Closely interlocked with the clearing 
requirement are the following swap processing requirements: (1) The 
recently finalized Sec.  23.506, which requires SDs and MSPs to submit 
swaps promptly for clearing; and (2) Sec.  23.610, which establishes 
certain standards for swap processing by SDs and MSPs that are clearing 
members of a DCO.\49\
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    \48\ 7 U.S.C. 2(h)(1), (7).
    \49\ 17 CFR 23.506, 23.610 and ``Customer Clearing 
Documentation, Timing of Acceptance for Clearing, and Clearing 
Member Risk Management,'' 77 FR 21278, Apr. 9, 2012.
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ii. Margin (and Segregation) Requirements for Uncleared Swaps
    Section 4s(e) of the CEA requires the Commission to set margin 
requirements for SDs and MSPs that trade in swaps that are not 
cleared.\50\ In addition, with

[[Page 41116]]

respect to swaps that are not submitted for clearing, section 4s(l) 
requires that an SD or MSP notify the counterparty of its right to 
require segregation of funds provided as margin, and upon such request, 
to segregate the funds with a third-party custodian for the benefit of 
the counterparty.
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    \50\ See 7 U.S.C. 6s(e). See also ``Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants,'' 76 
FR 23732, 23733-40, Apr. 28, 2011. Section 4s(e) explicitly requires 
the adoption of rules establishing margin requirements for SDs and 
MSPs, and applies a bifurcated approach that requires each SD and 
MSP for which there is a prudential regulator to meet the margin 
requirements established by the applicable prudential regulator, and 
each SD and MSP for which there is no prudential regulator to comply 
with the Commission's margin regulations. In contrast, the 
segregation requirements in section 4s(1) do not use a bifurcated 
approach--that is, all SDs and MSPs are subject to the Commission's 
rule regarding notice and third party custodians for margin 
collected for uncleared swaps.
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iii. Trade Execution Requirement
    Integrally linked to the clearing requirement is the trade 
execution requirement, which is intended to bring the trading of 
mandatorily cleared swaps onto regulated exchanges. Specifically, 
section 2(h)(8) of the CEA provides that unless a clearing exception 
applies and is elected, a swap that is subject to a clearing 
requirement must be traded on a designated contract market (``DCM'') or 
swap execution facility (``SEF''), unless no DCM or SEF makes the swap 
available to trade.\51\
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    \51\ See 7 U.S.C. 2(h)(8).
---------------------------------------------------------------------------

iv. Swap Trading Relationship Documentation
    CEA Section 4s(i) requires each SD and MSP to conform to Commission 
standards for the timely and accurate confirmation, processing, 
netting, documentation and valuation of swaps. Pursuant thereto, the 
Commission has proposed Sec.  23.504(a), which would require SDs and 
MSPs to ``establish, maintain and enforce written policies and 
procedures'' to ensure that the SD or MSP executes written swap trading 
relationship documentation.\52\ Under proposed Sec. Sec.  23.505(b)(1), 
23.504(b)(3), and 23.504(b)(4), the swap trading relationship 
documentation must include, among other things: all terms governing the 
trading relationship between the SD or MSP and its counterparty; credit 
support arrangements; investment and rehypothecation terms for assets 
used as margin for uncleared swaps; and custodial arrangements.\53\ 
Further, the swap trading relationship documentation requirement 
applies to all swaps with registered SDs and MSPs.
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    \52\ See ``Swap Trading Relationship documentation Requirements 
for Swap Dealers and Major Swap Participants, 76 FR 6715,'' Feb. 8, 
2011.
    \53\ The requirements under section 4s(i) relating to trade 
confirmations is a Transaction-Level Requirement. Accordingly, 
proposed Sec.  23.504(b)(2), which requires an SD's and MSP's swap 
trading relationship documentation to include all confirmations of 
swaps, will apply on a transaction-by-transaction basis.
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v. Portfolio Reconciliation and Compression
    CEA section 4s(i) directs the Commission to prescribe regulations 
for the timely and accurate processing and netting of all swaps entered 
into by SDs and MSPs. Pursuant to CEA section 4s(i), the Commission 
proposed regulations Sec. Sec.  23.502 and 23.503, which would require 
SDs and MSPs to perform portfolio reconciliation and compression, 
respectively, for all swaps.\54\ Proposed Sec.  23.503(c) would require 
all SDs and MSPs to participate in bilateral compression exercises and/
or multilateral portfolio compression exercises conducted by their 
self-regulatory organizations or DCOs of which they are members.\55\ 
Further, participation in multilateral portfolio compression exercises 
is mandatory for dealer-to-dealer trades.
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    \54\ See ``Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants,'' 75 FR 81519, Dec. 28, 2010.
    \55\ See 17 CFR 23.503(c), 75 FR 81519, Dec. 28, 2010.
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vi. Real-Time Public Reporting
    Section 2(a)(13) of the CEA directs the Commission to promulgate 
rules providing for the public availability of swap transaction data on 
a real-time basis.\56\ In accordance with this mandate, the Commission 
promulgated part 43 rules on December 20, 2011, which provide that all 
``publicly reportable swap transactions'' must be reported and publicly 
disseminated.\57\
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    \56\ See 7 U.S.C. 2(a)(13). See also ``Real-Time Public 
Reporting of Swap Transaction Data,'' 77 FR 1182, 1183, Jan. 9, 
2012.
    \57\ Part 43 defines a ``publicly reportable swap transaction'' 
as (1) any swap that is an arm's-length transaction between two 
parties that results in a corresponding change in the market risk 
position between the two parties; or (2) any termination, 
assignment, novation, exchange, transfer, amendment, conveyance, or 
extinguishing of rights or obligations of a swap that changes the 
pricing of a swap. See Real-Time Public Reporting of Swap 
Transaction Data, 77 FR 1182, Jan. 9, 2012.
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vii. Trade Confirmation
    Section 4s(i) of the CEA \58\ requires that each SD and MSP must 
comply with the Commission's regulations prescribing timely and 
accurate confirmation of swaps. The Commission has proposed Sec.  
23.501, which requires, among other things, a timely and accurate 
confirmation of all swaps and life cycle events for existing swaps.\59\
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    \58\ 7 U.S.C. 6s(i).
    \59\ See 17 CFR 23.501; ``Confirmation, Portfolio 
Reconciliation, and Portfolio Compression Requirements for Swap 
Dealers and Major Swap Participants,'' 75 FR 81519, Dec. 28, 2010.
---------------------------------------------------------------------------

viii. Daily Trading Records
    Pursuant to CEA section 4s(g)(1), the Commission adopted Sec.  
23.202, which requires SDs and MSPs to maintain daily trading records, 
including records of trade information related to pre-execution, 
execution, and post-execution data that is needed to conduct a 
comprehensive and accurate trade reconstruction for each swap. The 
final rule also requires that records be kept of cash or forward 
transactions used to hedge, mitigate the risk of, or offset any swap 
held by the SD or MSP.\60\
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    \60\ See ``Swap Dealer and Major Swap Participant Recordkeeping, 
Reporting, and Duties Rules; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Rules; and Chief Compliance 
Officer Rules for Swap Dealers, Major Swap Participants, and Futures 
Commission Merchants,'' 77 FR 20128, Apr. 3, 2012.
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ix. External Business Conduct Standards
    Pursuant to CEA section 4s(h), the Commission has adopted external 
business conduct rules, which establish business conduct standards 
governing the conduct of SDs and MSPs in dealing with their 
counterparties in entering into swaps.\61\
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    \61\ See 7 U.S.C. 6s(h). See also 77 FR 9734, 9822-29.
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VI. Request for Comment

    The Commission requests comment on all aspects of this proposed 
exemptive order.

VII. Related Matters

A. Paperwork Reduction Act

1. Overview
    The Paperwork Reduction Act (``PRA'') \62\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. Part of this proposed rulemaking would result in 
new collection of information requirements within the meaning of the 
PRA. The Commission therefore is required to submit this proposal to 
the Office of Management and Budget (``OMB'') for review and approval 
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Under this 
proposal, certain registrants claiming relief from the specified 
Entity-Level Requirements and Transaction-Level Requirements would be 
required to satisfy certain conditions that have PRA implications. The 
Commission will, by separate action, publish in the Federal Register a 
notice and request for comments on the paperwork burden associated with 
this exemptive order in accordance with 5 CFR 1320.8. If approved, this 
new collection of information will be mandatory.
---------------------------------------------------------------------------

    \62\ 44 U.S.C. 3501 et seq.

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[[Page 41117]]

B. Consideration of Costs and Benefits

    Section 15(a) of the CEA \63\ requires the Commission to consider 
the costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. 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 considers the costs and benefits 
resulting from its own discretionary determinations with respect to the 
section 15(a) factors.
---------------------------------------------------------------------------

    \63\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

Summary of the Proposed Exemption
    As discussed above, for a non-U.S. SD or non-U.S. MSP (or U.S. 
applicant relating to transaction-level requirements in the case of a 
branch of a U.S. SD) that has submitted a compliance plan describing 
how it will come into compliance with the swap requirements of the CEA 
as they become effective, the proposed exemptive order would delay the 
compliance date for certain Entity-Level Requirements and, to a more 
limited extent, Transaction-Level Requirements. An important exception 
to the foregoing is compliance with the CEA requirement regarding SDR 
reporting and the Large Trader Reporting requirement. For those 
requirements, non-U.S. SDs and non-U.S. MSPs must comply without delay 
with respect to transactions with U.S. counterparties.
    With respect to transactions with a U.S. counterparty, non-U.S. 
registrants would be required to comply with all Transaction-Level 
Requirements that are in effect. With respect to transactions with a 
non-U.S. counterparty, the non-U.S. SD or non-U.S. MSP, as well as 
foreign branches of U.S. SDs and U.S. MSPs, need only comply with such 
regulations as may be required by the home jurisdiction of such non-
U.S. registrant (or in the case of a branch, the foreign location of 
the branch). U.S. SDs and U.S. MSPs would be permitted to delay 
compliance with Entity-Level Requirements, except the swap data 
recordkeeping, SDR reporting and Large Trader Reporting requirements.
Costs
    As discussed above, the proposed order is exemptive in that it 
would provide eligible persons with relief in the form of additional 
time with which to comply with certain regulatory requirements. As with 
any exemptive order, the proposed order is permissive--eligible persons 
are not required to avail themselves of the exemptive relief provided. 
Accordingly, the Commission assumes that an entity will rely on the 
proposed exemption only if the anticipated benefits warrant the costs 
attendant to the condition that requires the filing of a compliance 
plan. Although there is significant uncertainty in the number of swap 
entities that will seek to register as SDs and MSPs, as well as the 
number of swap entities that will submit a compliance plan in order to 
obtain exemptive relief, the Commission believes it is reasonable to 
estimate that between 40 and 80 non-U.S. SDs and MSPs will submit 
compliance plans.\64\ The average cost of preparing and submitting the 
required compliance plan for such non-U.S. SDs and MSPs initially is 
estimated to be approximately $31,190 per registrant, or a total 
aggregate cost of between $1,247,600 (assuming that 40 SDs and MSPs 
submit a compliance plan) and $2,495,200 (assuming that 80 SDs and MSPs 
submit a compliance plan). This estimate is based on the hourly cost of 
personnel that are capable of evaluating both Commission and home 
country regulations in light of the non-U.S. persons' operations.\65\ 
Further, the condition that requires the filing of a compliance plan is 
not static--that is, the condition requires that the non-U.S. person 
submit, if necessary, a revised plan to account for any material 
changes since the filing of the initial plan. The Commission estimates 
that in most cases the cost of submitting a revised plan or plans will 
be the same as the cost of preparing and submitting the initial plan.
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    \64\ The Commission currently estimates that approximately 125 
entities will be covered by the definitions of the terms ``swap 
dealer'' and ``major swap participant.'' See ``Further Definition of 
`Swap Dealer,' `Security-Based Swap Dealer,' `Major Swap 
Participant,' `Major Security-Based Swap Participant' and `Eligible 
Contract Participant' ''; Final Rule, 77 FR 30596, 30713, May 23, 
2012. However, not all of these entities are eligible for or will 
seek exemptive relief.
    \65\ Although different registrants may choose to staff 
preparation of the compliance plan with different personnel, 
Commission staff estimates that, on average, an initial compliance 
plan could be prepared and submitted with 70 hours of attorney time, 
as follows: 10 hours for a senior attorney at $830/hour, 30 hours 
for a mid-level attorney at $418/hour, and 30 hours for a junior 
attorney at $345/hour. To estimate the hourly cost of senior and 
junior-level attorney time, Commission staff consulted with a law 
firm that has substantial expertise in advising clients on similar 
regulations. For the hourly cost of the mid-level attorney, 
Commission staff reviewed data contained in Securities Industry and 
Financial Markets Association (``SIFMA''), Report on Management and 
Professional Earnings in the Securities Industry, Oct. 2011, for New 
York, and adjusted by a factor for overhead and other benefits, 
which the Commission has estimated to be 1.3.
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    In addition, the Commission estimates that an additional 20 to 45 
U.S. SDs or U.S. MSPs whose foreign branch seeks to rely on the 
exemptive relief with respect to swaps with non-U.S. counterparties 
will submit a compliance plan. In this case, the compliance plan must 
only address how the registrant plans to comply, in good faith, with 
all applicable Transaction-Level Requirements under the CEA upon the 
expiration of this proposed exemptive order. The average cost of 
preparing and submitting the required compliance plan for such non-U.S. 
SDs and MSPs initially is estimated to be approximately $18,714 per 
U.S. registrant, or a total aggregate cost of between $374,280 
(assuming that 20 U.S. SDs and MSPs submit a compliance plan) and 
$842,130 (assuming that 45 SDs and MSPs submit a compliance plan). This 
estimate is based on the hourly cost of personnel that are capable of 
evaluating both Commission and home country regulations in light of the 
U.S. persons' foreign branch operations.\66\ Further, the condition 
that requires the filing of a compliance plan by a U.S. person is not 
static--that is, the condition requires that the U.S. person submit, if 
necessary, a revised plan to account for any material changes since the 
filing of the initial plan. The Commission estimates that in most cases 
the cost of submitting a revised plan or plans will be the same as the 
cost of preparing and submitting the initial plan.
---------------------------------------------------------------------------

    \66\ Although different registrants may choose to staff 
preparation of the compliance plan with different personnel, 
Commission staff estimates that, on average, an initial compliance 
plan could be prepared and submitted with 42 hours of attorney time, 
as follows: 6 hours for a senior attorney at $830/hour, 18 hours for 
a mid-level attorney at $418/hour, and 18 hours for a junior 
attorney at $345/hour. To estimate the hourly cost of senior and 
junior-level attorney time, Commission staff consulted with a law 
firm that has substantial expertise in advising clients on similar 
regulations. For the hourly cost of the mid-level attorney, 
Commission staff reviewed data contained in Securities Industry and 
Financial Markets Association (``SIFMA''), Report on Management and 
Professional Earnings in the Securities Industry, Oct. 2011, for New 
York, and adjusted by a factor for overhead and other benefits, 
which the Commission has estimated to be 1.3.
---------------------------------------------------------------------------

    Apart from the direct costs discussed above, the Commission 
proposes that the exemptive order may result in indirect costs to the 
public, including the costs of delayed compliance with the Entity-Level 
Requirements and, to a more limited extent, Transaction-Level 
Requirements of the Dodd-Frank Act. The Commission proposes that these 
costs are not, however, susceptible to

[[Page 41118]]

meaningful quantification due to a lack of data regarding several key 
variables, including the probability of a significant market 
disturbance, the impact of that disturbance on the U.S. public and U.S. 
entities, and the role of entities subject to the order in creating or 
propagating such a disturbance. Nevertheless, the Commission seeks 
comment on any such indirect costs, including empirical data from which 
to quantify the same.
Benefits
    The proposed exemptive order provides a benefit in that it would 
allow affected entities additional time to transition into the new 
regulatory regime in a more orderly manner, which promotes stability in 
the markets as that transition occurs. This, in turn, promotes the 
integrity and efficiency of the swap markets during the transition 
period. The phased-in process would eliminate the need for affected 
persons to file individual applications for exemptive relief and/or no-
action relief, and reduces compliance costs related to the exempted 
transactions that occur during the transition period. Another benefit 
will be increased international harmonization because the proposed 
relief provides U.S. and non-U.S. registrants the latitude necessary to 
develop and modify their compliance plans as the regulatory structure 
in their home jurisdiction changes, which would promote greater 
regulatory consistency and coordination with international regulators.
    The primary benefit of the proposed compliance plan condition is 
that it ensures that non-U.S. persons claiming the exemption would be 
actively and demonstrably considering and planning for compliance with 
the Entity-Level and Transaction-Level Requirements under the CEA, as 
may be applicable. Absent such a condition and the requirement, a non-
U.S. person could simply claim the exemption, without making a good-
faith effort to comply with the Dodd-Frank Act. Further, the 
requirement that the plan be updated to reflect any material change in 
the information initially submitted ensures that the planning for 
compliance is performed in a thoughtful and continuous manner. Finally, 
the compliance plan also would assist NFA and Commission staff in 
preparing for the registration of non-U.S. SDs and non-U.S. MSPs as 
they develop familiarity with the regulatory regimes of foreign 
jurisdictions.
    In addition, the relief would allow foreign branches of U.S. SDs 
and MSPs to comply only with those requirements as may be required in 
the jurisdiction where the foreign branch is located for swaps with 
non-U.S. counterparties, effective concurrently with the date upon 
which such SDs and MSPs must first apply for registration until 12 
months following the publication of the proposed order in the Federal 
Register. In addition, U.S. SDs and U.S. MSPs may delay compliance with 
certain entity-level requirements of the CEA (and Commission 
regulations promulgated thereunder) from the date upon which SDs and 
MSPs must apply for registration until January 1, 2013.
    The Commission requests comments on all aspects of the 
consideration of costs and benefits of the proposed exemptive order 
discussed in this Notice and any alternatives to the same. Commenters 
should submit estimates of any costs and benefits perceived, together 
with any supporting empirical evidence available.
Section 15(a) Factors
Protection of Market Participants and the Public
    The Commission expects that the exemptive relief provided in this 
proposed order would protect market participants and the public by 
facilitating a more orderly transition to the new regulatory regime 
than might otherwise occur in the absence of this proposed order. In 
particular, non-U.S. persons would be afforded additional time to come 
into compliance than would otherwise be the case, which contributes to 
greater stability and reliability of the swap markets during the 
transition process.
    As discussed above, to the extent that non-U.S. persons submit a 
plan for compliance regarding Entity-Level and Transaction-Level 
Requirements, such persons would experience savings during the interim 
period. Reduced costs may occur as the result of delaying decisions 
about new systems, operational patterns, legal agreements, or other 
business arrangements until such time as a non-U.S. person knows what 
its obligations will be with respect to the cross-border application of 
Title VII of the Dodd-Frank Act, as well as by reducing the period of 
time during which ongoing costs associated with Entity-Level 
Requirements are borne by that entity.
    As discussed above, non-U.S. SDs and non-U.S. MSPs taking advantage 
of this exemption would have to file a compliance plan with NFA and, if 
necessary, update the same. The costs of the compliance plan are 
discussed above.
Efficiency, Competitiveness, and Financial Integrity of the Markets
    The proposed order would promote efficiency by providing additional 
time in which eligible persons may implement compliance controls and 
new technologies, and adjust operational patterns and legal agreements, 
if necessary. This additional time would minimize the risk that certain 
entities would withdraw from the market in order to avoid taking steps 
necessary for compliance.
Price Discovery
    The Commission has not identified any costs or benefits of the 
proposed order with respect to price discovery.
Risk Management
    Entity level risk-management and capital requirements could be 
delayed by operation of the exemptive order, which could weaken risk 
management. However, such potential risk is limited by the fact that 
the proposed exemptive order is finite in the additional time it 
provides eligible persons.
Other Public Interest Considerations
    The Commission has not identified any other public interest costs 
or benefits of the proposed order.

VIII. Proposed Order

    The Commission, in order to provide for an orderly implementation 
of Title VII of the Dodd-Frank Act, and consistent with the 
determinations set forth above, which are incorporated in the Final 
Order by reference, hereby grants, pursuant to section 4(c) of the CEA, 
temporary relief to non-U.S. swap dealers (``SDs'') and non-U.S. major 
swaps participants (``MSPs''), and to U.S. SDs and U.S. MSPs, including 
their foreign branches, from certain swap provisions of the CEA, 
subject to the terms and conditions below.\67\
---------------------------------------------------------------------------

    \67\ As used in this order, the terms ``U.S. person,'' ``Entity-
Level Requirements,'' and ``Transaction-Level Requirements'' have 
the same meanings as provided in the Cross-Border Interpretive 
Guidance.
---------------------------------------------------------------------------

    (1) Non-U.S. Person: A non-U.S. person may delay compliance with 
respect to Entity-Level Requirements (subject to the condition in 
paragraph (2) below); provided, however, that: (A) such person shall 
file with National Futures Association (``NFA'') an application to 
register as an SD or MSP, as applicable, pursuant to Commission 
Regulation part 3 by the date for which such person must apply for 
registration; (B) within 60 days of filing its application for 
registration, such person shall file with NFA a compliance plan 
addressing how it plans to comply, in

[[Page 41119]]

good faith, with the applicable Entity-Level and Transaction-Level 
Requirements under the CEA. At a minimum, such plan would provide, for 
each Entity-Level Requirement and Transaction-Level Requirement, a 
description of: (i) whether such person would comply with the Entity-
Level and Transaction-Level requirements that are in effect or whether 
they would seek a comparability determination and rely on compliance 
with one or more of the requirements of the home jurisdiction; and (ii) 
to the extent that such person would comply with one or more of the 
requirement(s) of the home jurisdiction, a description of such 
requirement(s). Such persons may modify or alter the compliance plans 
as appropriate, provided that they submit any such amended plan to NFA.
    (2) Notwithstanding paragraph (1), non-U.S. SDs and non-U.S. MSPs 
shall be required to comply with the SDR reporting and Large Trader 
Reporting requirements for all swaps with U.S. counterparties, upon its 
compliance date. However, during the pendency of this Order, non-U.S. 
SDs and non-U.S. MSPs that are not affiliates or subsidiaries of a U.S. 
SD may delay compliance with the SDR reporting and Large Trader 
Reporting requirements for swaps with non-U.S. counterparties.
    (3) With respect to Transaction-Level Requirements as applied to 
transactions with a non-U.S. counterparty, non-U.S. SDs and non-U.S. 
MSPs may comply with such regulations only as may be required by the 
home jurisdiction of such registrants; provided, however, that such 
registrants shall comply with such requirements that are in effect for 
all swaps with U.S. counterparties.
    (4) The relief provided to non-U.S. SDs and non-U.S. MSPs in this 
order shall be effective concurrently with the date upon which SDs and 
MSPs must first apply for registration and expire 12 months following 
the publication of the proposed order in the Federal Register.
    (5) U.S Person: A U.S. person shall apply to register as an SD or 
MSP by the date such registration is required and shall comply with all 
applicable Entity-Level and Transaction-Level Requirements that are in 
effect, except as provided: (A) such person may delay compliance with 
the Entity-Level Requirements until January 1, 2013, except with 
respect to swap data recordkeeping, SDR reporting, and Large Trader 
Reporting requirements. Nevertheless, with respect to Transaction-Level 
Requirements as applied to swaps with a non-U.S. counterparty, a 
foreign branch of a U.S. SD or U.S. MSP may comply with those 
requirements only as may be required by the foreign location of such 
branches.
    (6) A U.S. SD or U.S. MSP whose foreign branch seeks to rely on the 
exemptive relief with respect to swaps with non-U.S. counterparties 
must submit a compliance plan (as described in paragraph (1) herein) 
addressing how it plans to comply, in good faith, with all applicable 
Transaction-Level Requirements under the CEA upon the expiration of 
this proposed exemptive order.
    (7) Scope of Relief: The temporary relief provided in this Order: 
(A) shall not affect, with respect to any swap within the scope of this 
Order, the applicability of any other CEA provision or Commission 
regulation (i.e., those outside the Entity-Level and Transaction-Level 
Requirements); (B) shall not limit the applicability of any CEA 
provision or Commission regulation to any person, entity or transaction 
except as provided in this Order; (C) shall not affect the 
applicability of any provision of the CEA or Commission regulation to 
futures contracts, or options on future contracts; and (D) shall not 
affect any effective or compliance date set out in any specific Dodd-
Frank Act rulemaking by the Commission.
    Finally, the Commission may, in its discretion, condition, suspend, 
terminate, or otherwise modify this Order, as appropriate, on its own 
motion.

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

Appendices to Exemptive Order Regarding Compliance With Certain Swap 
Regulations--Commission Voting Summary and Statements of Commissioners

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the exemptive order regarding the effective dates of 
certain Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) provisions.
    Today's exemptive order makes five changes to the exemptive 
order issued on December 19, 2011.
    First, the proposed exemptive order extends the sunset date from 
July 16, 2012, to December 31, 2012.
    Second, the Commodity Futures Trading Commission (CFTC) and the 
Securities and Exchange Commission (SEC) have now completed the rule 
further defining the term ``swap dealer'' and ``securities-based 
swap dealer.'' Thus, the exemptive order no longer provides relief 
as it once did until those terms were further defined.
    The Commissions are also mandated by the Dodd-Frank Act to 
further define the term ``swap'' and ``securities-based swap.'' The 
staffs are making great progress, and I anticipate the Commissions 
will take up this final definitions rule in the near term. Until 
that rule is finalized, the exemptive order appropriately provides 
relief from the effective dates of certain Dodd-Frank provisions.
    Third, in advance of the completion of the definitions rule, 
market participants requested clarity regarding transacting in 
agricultural swaps. The exemptive order allows agricultural swaps 
cleared through a derivatives clearing organization or traded on a 
designated contract market to be transacted and cleared as any other 
swap. This is consistent with the agricultural swaps rule the 
Commission already finalized, which allows farmers, ranchers, 
packers, processors and other end-users to manage their risk.
    Fourth, unregistered trading facilities that offer swaps for 
trading were required under Dodd-Frank to register as swap execution 
facilities (SEFs) or designated contract markets (DCM) by July of 
this year. These facilities include exempt boards of trade, exempt 
commercial markets and markets excluded from regulation under 
section 2(d)(2). Given the Commission has yet to finalize rules on 
SEFs, this order gives these platforms additional time for such a 
transition.
    Fifth, the Commission is providing guidance regarding 
enforcement of rules that require that certain off-exchange swap 
transactions only be entered into by eligible contract participants 
(ECPs). The guidance provides that if a person takes reasonable 
steps to verify that its counterparty is an ECP, but the 
counterparty turns out not to be an ECP based on subsequent 
Commission guidance, absent other material factors, the CFTC will 
not bring an enforcement action against the person.

Phased Compliance

    I support the proposed release on phased compliance for foreign 
swap dealers. The release provides phased compliance for foreign 
swap dealers (including overseas affiliates of U.S. swap dealers) of 
certain requirements of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act).
    Such phased compliance would enable market participants to 
comply with the Dodd-Frank Act in an orderly fashion. It would allow 
time for the CFTC to receive public comment on interpretive guidance 
on the cross-border application of the Dodd-Frank Act.
    Under the interpretive guidance, in certain circumstances, 
market participants may

[[Page 41120]]

comply with certain Dodd-Frank requirements by complying with 
comparable and comprehensive foreign regulatory requirements, or 
what we call ``substituted compliance.'' The release on phased 
compliance also allows time for the CFTC, foreign regulators and 
market participants to continue to consult and coordinate on 
regulation of cross-border swaps activity, as well as the 
appropriate implementation of substituted compliance.
    In this period, foreign swap dealers must file a plan 
demonstrating how they will eventually comply with Dodd-Frank, which 
in certain circumstances could be through substituted compliance.
    The release provides for phased compliance in the following 
manner:
     Foreign swap dealers would be required to register with 
the CFTC upon the compliance date of the registration requirement;
     U.S. and foreign swap dealers must comply with 
transaction-level requirements with U.S. persons, including branches 
of U.S. persons;
     For transaction-level requirements, foreign swap 
dealers, as well as overseas branches of U.S. swap dealers, 
transacting with non-U.S. persons is phased for one year.
     Entity-level requirements (other than reporting to SDRs 
and large trader reporting) that might come under substituted 
compliance is phased for one year; and
     For foreign swap dealers, swaps with U.S. persons, 
including branches of U.S. persons, would be required to be reported 
to a SDR or the CFTC.
    In addition, U.S. swap dealers' compliance with certain internal 
business conduct requirements is phased until January 1, 2013.
    The release addresses comments from U.S. and international 
market participants, and I look forward to additional input on the 
proposal.

[FR Doc. 2012-16498 Filed 7-11-12; 8:45 am]
BILLING CODE P
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