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[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Proposed Rules]
[Pages 1347-1349]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00080]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

Request for Comment on Application of Commission Regulations to 
Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties 
Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in 
the United States

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
requesting comment on an advisory issued by Commission staff on 
November 14, 2013 (the ``Staff Advisory''), regarding the applicability 
of certain Commission regulations to the activity in the United States 
of swap dealers (``SDs'') and major swap participants (``MSPs'') 
registered with the Commission that are established in jurisdictions 
other than the United States (whether an affiliate or not of a U.S. 
person, a ``non-U.S. SD'' or ``non-U.S. MSP'').

DATES: Comments must be received on or before March 10, 2014.

ADDRESSES: You may submit comments 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: Melissa D. Jurgens, 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 may be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that may be exempt from disclosure under the Freedom of Information 
Act, a petition for confidential treatment of the exempt information 
may be submitted according to the established procedures in CFTC 
Regulation 145.9 (17 CFR 145.9).
    The Commission reserves the right, but shall have no obligation, to 
review,

[[Page 1348]]

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 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.

FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977, 
gbarnett@cftc.gov, or Frank Fisanich, Chief Counsel, 202-418-5949, 
ffisanich@cftc.gov, Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \1\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework 
for swaps.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
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    In the three years since the enactment of Dodd-Frank, the 
Commission has finalized 68 rules, orders, and guidance statements in 
the process of implementing Title VII of the Dodd-Frank Act. The 
finalized rules promulgated under section 4s of the CEA, added by the 
Dodd-Frank Act, address registration of SDs and MSPs and other 
substantive requirements applicable to SDs and MSPs, while guidance 
published by the Commission provided the Commission's general views 
regarding the scope of the cross-border application of such rules.\2\ 
Among other things, the Guidance sets forth the Commission's general 
views on how it ordinarily expects to apply, in accordance with section 
2(i) of the CEA, the CEA and certain Commission regulations applicable 
on a transaction-by-transaction basis (the ``transactional 
requirements'') to swaps between a non-U.S. SD and a non-U.S. person, 
including swaps involving guaranteed or conduit affiliates of U.S. 
persons.\3\ In addition, the Guidance addressed the circumstances under 
which the transactional requirements could be satisfied through 
substituted compliance.\4\
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    \2\ See Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations 78 FR 45292 (July 26, 2013) 
(hereinafter, the ``Guidance'').
    \3\ For purposes of this notice, the Commission would generally 
interpret the terms ``U.S. person,'' ``guaranteed affiliate,'' and 
``affiliate conduit'' in the same way as described in the Guidance, 
78 FR at 45316-45317, 45350-45359. The Commission uses the term 
``non-U.S. person'' to refer to any person outside its 
interpretation of the term ``U.S. person.''
    \4\ The Guidance generally describes the policy and procedural 
framework under which the Commission would consider a substituted 
compliance program with respect to Commission regulations applicable 
to non-U.S. SDs. Specifically, the Commission described 
circumstances where it expected that compliance with a comparable 
regulatory requirement of a foreign jurisdiction would serve as a 
reasonable substitute for compliance with the attendant requirements 
of the CEA and the Commission's regulations, 78 FR at 45342-45344.
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    With few exceptions, the delayed compliance dates for the 
Commission's regulations implementing requirements of section 4s of the 
CEA have passed and SDs and MSPs are now required to be in full 
compliance with such regulations upon registration with the 
Commission.\5\
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    \5\ The compliance dates are summarized on the Compliance Dates 
page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)
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    Subsequent to publication of the Guidance, swap market participants 
have raised questions with Commission staff regarding compliance by 
non-U.S. SDs with the transactional requirements when using personnel 
or agents located in the United States to enter into swaps with non-
U.S. persons. In other words, swap market participants have asked 
whether the transactional requirements would apply to these swaps (and 
if so, whether substituted compliance may be available for these swaps) 
even though such swaps are between two non-U.S. persons, regardless of 
whether the activities of the non-U.S. SD that lead to such swaps take 
place in the United States.
    In response to these inquires, the Staff Advisory \6\ was issued, 
stating that for swaps between a non-U.S. SD and a non-U.S. person, the 
transactional requirements either do not apply or, in some cases, may 
be subject to substituted compliance if the activities of the non-U.S. 
SD take place outside the United States. The Staff Advisory further 
stated that, for transactions arranged, executed, or negotiated by 
personnel or agents located in the United States of non-U.S. SDs 
(whether affiliates or not of a U.S. person) regularly using personnel 
or agents located in the U.S. to arrange, negotiate, or execute swaps 
with non-U.S. persons (the ``Covered Transactions''), the non-U.S. SD 
generally would be required to comply with the transactional 
requirements. The Staff Advisory further stated that this view would 
also apply to a Covered Transaction booked in a non-U.S. branch of the 
non-U.S. SD.\7\
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    \6\ Division of Swap Dealer and Intermediary Oversight, 
Applicability of Transaction-Level Requirements to Activity in the 
United States, Nov. 14, 2013. Available at: http://www.cftc.gov/ucm/groups/public/@1rlettergeneral/documents/letter/13-69.pdf. As stated 
in the Staff Advisory, the advisory, and the views expressed 
therein, represent the views of the Division of Swap Dealer and 
Intermediary Oversight only, and do not represent the position or 
view of the Commission or of any other office or division of the 
Commission.
    \7\ See the Staff Advisory, supra note 6.
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    The Commission notes that subsequent to the Staff Advisory, the 
Commission's Divisions of Swap Dealer and Intermediary Oversight, 
Market Oversight, and Clearing and Risk provided non-U.S. SDs time-
limited staff no-action relief from certain transactional requirements 
for Covered Transactions,\8\ and have recently extended such relief 
until September 15, 2014, subject to certain terms and conditions 
stated in such Divisions' no-action letter.\9\
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    \8\ See CFTC Staff Letter 13-71, available on the Commission's 
Web site: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.
    \9\ See CFTC Staff Letter 14-01, available on the Commission's 
Web site.
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II. Request for Comment

    In view of the complex legal and policy issues involved with 
respect to the Staff Advisory, the Commission is soliciting comment 
from all interested parties to further inform the Commission's and its 
staff's deliberations regarding the subjects addressed in the Staff 
Advisory.
    Accordingly, the Commission requests comment on all aspects of the 
Staff Advisory, including but not limited to the following points. If a 
comment relates to one of the specific points noted below, please 
identify the point by number and provide a detailed rationale 
supporting the response.
    1. The Commission invites comment on whether the Commission should 
adopt the Staff Advisory as Commission policy, in whole or in part.
    2. The Commission invites commenters to provide their views on 
whether transactional requirements should apply to Covered Transactions 
with non-U.S. persons who are not guaranteed or conduit affiliates of 
U.S. persons. Please provide a detailed analysis of any such view and 
its effect on other aspects of the Commission's cross-border policy, if 
any.
    3. The Commission invites comment on whether there should be any 
differentiation in treatment of swaps with non-U.S. counterparties 
depending on the nature of the SD (i.e., whether it is a guaranteed 
affiliate or a conduit affiliate of a U.S. person).

[[Page 1349]]

    4. To the extent a non-U.S. SD must comply with the transactional 
requirements when entering a Covered Transaction, should the non-U.S. 
SD be able to rely on a substituted compliance program for purposes of 
complying with the relevant transactional requirements? If so, should 
substituted compliance be available for all transactional requirements 
or only specific requirements? Which requirements? Would the response 
be different depending on the nature of the counterparty (i.e., whether 
the non-U.S. counterparty is a guaranteed affiliate or a conduit 
affiliate of a U.S. person)?
    5. The Commission invites comment on the meaning of ``regularly'' 
in the phrase ``persons regularly arranging, negotiating, or executing 
swaps for or on behalf of an SD'' and whether such persons are 
performing core, front-office activities of that SD's swap dealing 
business. If not, what specific activities would constitute the core, 
front-office activities of an SD's swap dealing business? What 
characteristics or factors distinguish a ``core, front-office'' 
activity from other activities? Please be exhaustive in describing such 
activities.
    6. The Commission invites comment on the scope and degree of 
``arranging, negotiating, or executing'' swaps as used in this context.

    Issued in Washington, DC, on January 3, 2014, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendices To Request for Comment on Application of Commission 
Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. 
Counterparties Involving Personnel or Agents of the Non-U.S. Swap 
Dealers Located in the United States

Appendix 1--Commission Voting Summary

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

Appendix 2--Dissenting Statement of Commissioner Scott D. O'Malia

    If you thought that the Commission's approach last year 
regarding cross-border issues resulted in an unsound rulemaking 
process, the start of 2014 is no better.
    Today's announcement of the request for comment on a staff 
Advisory abrogates the Commission's fundamental legal obligations 
under the Administrative Procedure Act (``APA'') and provides 
another example of the Commission's unsound rule implementation 
process.
    Making matters worse, today's request for comment is completely 
outside the scope of the cross-border Guidance and the Exemptive 
Order as the Commission did not address the issue relating to swaps 
negotiated between non-U.S. swap dealers (``SDs'') and non-U.S. 
counterparties acting through agents of the non-U.S. SDs located in 
the United States. This is simply a strategic move by the Commission 
to try to duck blame for consistently circumventing the fundamental 
tenets of the APA and failing to adhere faithfully to the express 
congressional directive to limit the extraterritorial application of 
the Dodd-Frank Act to foreign transactions that ``have a direct and 
significant connection with activities in, or effect on, commerce of 
the United States.'' \1\
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    \1\ 7 U.S.C. 2(i).
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    Moreover, I question why the Commission has decided to request 
comment on a narrow issue of the extraterritorial application of 
Dodd-Frank, while essentially ignoring the dozens of comments 
already filed as part of the Commission's cross-border Exemptive 
Order.\2\ Simply requesting comment on a staff Advisory does not 
endorse the validity of the cross-border Guidance or the staff 
Advisory issued based on the Guidance.
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    \2\ See Statement of Dissent by Commissioner Scott D. O'Malia, 
Interpretive Guidance and Policy Statement Regarding Compliance With 
Certain Swap Regulations and Related Exemptive Order, July 12, 2013, 
http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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    Additionally, I have serious concerns with the evolving 
jurisdictional application of the Commission's authority over cross-
border trades. It appears based on the staff Advisory, that the 
Commission is applying a ``territorial'' jurisdiction test to 
elements of a trade between non-U.S. entities. To better understand 
the legal underpinnings of this position, I have included several 
additional questions to be considered as part of the overall comment 
file. It is my hope that public comments will provide greater 
clarity regarding our cross-border authority and identify areas 
where we must harmonize global rules with our international 
regulatory partners in the near future. It makes no sense to apply 
guidance or staff advisories that do not enjoy the full support and 
authority provided through rulemakings based on the Commodity 
Exchange Act (``CEA'').
    Looking forward into this year, the CFTC needs to do away with 
the reflexive rule implementation process via staff no-action and 
advisories that are not voted on by the Commission. It should be the 
goal of the Commission to develop rules that adhere to the APA and 
ensure proper regulatory oversight, transparency and promote 
competition in the derivatives space.
    In this regard, I would like to seek additional comment on the 
following points:
    1. Please provide your views on whether Covered Transactions 
with non-U.S. persons who are not guaranteed or conduit affiliates 
of U.S. persons meet the direct and significant test under CEA 
section 2(i).\3\ Please provide a detailed analysis of any such view 
and its effect on other aspects of the Commission's cross-border 
policy, if any. Would your view change depending on whether a non-
U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S. 
person?
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    \3\ 7 U.S.C. 2(i).
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    2. CEA section 2(a)(1) \4\ provides for the general 
jurisidiction of the Commission. Please provide your views on 
whether Covered Transactions with non-U.S. persons who are not 
guaranteed or conduit affiliates of U.S. persons fall within the 
Commission's jurisdiction under CEA section 2(a)(1) or any other 
provision of the CEA providing for Commission jurisdiction. Please 
provide a detailed analysis of any such view and its effect on other 
aspects of the Commission's cross-border policy, if any. Would your 
view change depending on the nature of the non-U.S. SD (i.e., 
whether it is a guaranteed affiliate or a conduit affiliate of a 
U.S. person)?
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    \4\ 7 U.S.C. 2(a)(1).
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    3. To the extent that Covered Transactions fall within the 
Commission's jurisdiction, should a non-U.S. SD be required to 
comply with all, or only certain, Transaction-Level Requirements? 
Please provide a detailed analysis of any such view and its effect 
on other aspects of the Commission's cross-border policy, if any. 
Would your view change depending on the nature of the non-U.S. SD 
(i.e., whether it is a guaranteed affiliate or a conduit affiliate 
of a U.S. person)?
    4. In the open meeting to consider the cross-border final 
guidance and cross-border phase-in exemptive order, I asked about 
the Commission's enforcement and legal authority under the cross-
border guidance. The Commission's General Counsel replied, ``[T]he 
guidance itself is not binding strictly. We couldn't go into court 
and, in a count of the complaint, list a violation of the guidance 
as an actionable claim.'' \5\ If the Commission adopts the staff 
Advisory as Commission policy (and not through the rulemaking 
process), please provide your views on the Commission's ability to 
enforce such policy.
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    \5\ Transcript of Open Meeting to Consider Cross-Border Final 
Guidance and Cross-Border Phase-In Exemptive Order (July 12, 2013), 
page 79.

[FR Doc. 2014-00080 Filed 1-7-14; 8:45 am]
BILLING CODE 6351-01-P
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