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[Federal Register Volume 78, Number 1 (Wednesday, January 2, 2013)]
[Rules and Regulations]
[Pages 17-22]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30885]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96

Business Conduct and Documentation Requirements for Swap Dealers 
and Major Swap Participants; Extension of Compliance Date

AGENCY: Commodity Futures Trading Commission.

ACTION: Extension of compliance dates; request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
changing the compliance dates for certain rules in the Commission's 
regulations governing business conduct standards for swap dealers 
(``SDs'') and major swap participants (``MSPs''), and certain rules 
requiring SDs and MSPs to engage in portfolio reconciliation and to 
have certain documentation with their swap counterparties. The 
Commission is extending the compliance date for certain rules by four 
months, and up to six months for others. The extended compliance dates 
are intended to provide SDs and MSPs with additional time to achieve 
compliance with certain regulations.

DATES: Compliance Dates: The compliance date for the regulations at 17 
CFR 23.201(b)(3)(ii), 23.402; 23.410(c); 23.430; 23.431(a) through (c); 
23.432; 23.434(a)(2), (b), and (c); 23.440; 23.450, and 23.505 is 
extended until May 1, 2013; the compliance date for the regulations at 
17 CFR 23.502 and 23.504 is extended until July 1, 2013.
    Comment Date: The Commission will, however, consider any comments 
received on or before February 1, 2013 and may revise the modified 
compliance dates, if warranted.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC96 
and Business Conduct and Documentation Requirements for Swap Dealers 
and Major Swap Participants, by any of the following methods:
     Agency Web site, www.cftc.gov, via its Comments Online 
process at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. Follow the instructions for submitting 
comments through the Web site.
     Mail: 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 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 Sec.  145.9 
of the Commission's regulation, 17 CFR 145.9.
    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 
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: Frank Fisanich, Chief Counsel, 202-
418-5949, ffisanich@cftc.gov, Jason A. Shafer, Attorney-Advisor, 202-
418-5097, jshafer@cftc.gov, Division of Swap Dealer and Intermediary 
Oversight, or Sayee Srinivasan, Research Analyst, 202-418-5309, 
ssrinivasan@cftc.gov, Office of the Chief Economist, 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 Act.\1\ 
Title VII of

[[Page 18]]

the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'') \3\ 
to establish a comprehensive regulatory framework to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of SDs and MSPs; (2) imposing 
clearing and trade execution requirements on standardized derivative 
products; (3) creating rigorous recordkeeping and real-time reporting 
regimes; and (4) enhancing the Commission's rulemaking and enforcement 
authorities with respect to all registered entities and intermediaries 
subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    In the two years since its enactment, the Commission has finalized 
41 rules to implement Title VII of the Dodd-Frank Act. Earlier this 
year, the Commission, jointly with the Securities and Exchange 
Commission, finalized the main foundational elements of the Dodd-Frank 
regulatory framework by adopting regulations further defining the terms 
``swap dealer'' and ``major swap participant,'' \4\ as well as the 
regulations further defining the term ``swap.'' \5\ The Commission also 
adopted regulations setting forth a comprehensive scheme for the 
registration process for SDs and MSPs.\6\ Other finalized rules include 
various substantive requirements applicable to SDs and MSPs under CEA 
section 4s,\7\ which address reporting and recordkeeping,\8\ business 
conduct standards,\9\ documentation standards,\10\ duties,\11\ and 
designation of chief compliance officers.\12\
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    \4\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant,'' and ``Eligible Contract Participant,'' 77 FR 
30596 (May 23, 2012).
    \5\ See Further Definition of ``Swap,'' ``Security-Based Swap,'' 
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based 
Swap Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012).
    \6\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613 (Jan. 19, 2012).
    \7\ 7 U.S.C 6s.
    \8\ 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).
    \9\ See Business Conduct Standards for Swap Dealers and Major 
Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012).
    \10\ See Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 77 FR 
55904 (Sept. 11, 2012).
    \11\ See supra note 8.
    \12\ Id.
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    Among other things, upon registration, an SD or MSP must submit 
documentation demonstrating its compliance with any Commission 
regulation issued pursuant to section 4s(e), (f), (g), (h), (i), (j), 
(k), or (l) of the CEA that is applicable to it and for which the 
compliance date has passed. Such Commission regulations include 
business conduct standards under subpart H of part 23 of the 
Commission's regulation promulgated under section 4s(h) of the CEA, 
documentation standards under subpart I of part 23 of the Commission's 
regulations promulgated under section 4s(i) of the CEA, and reporting 
and recordkeeping requirements under subpart F of part 23 of the 
Commission's regulations promulgated under section 4s(f) of the CEA.
    With respect to business conduct standards with counterparties, 
section 4s(h) of the CEA provides the Commission with both mandatory 
and discretionary rulemaking authority to impose business conduct 
standards on SDs and MSPs in their dealings with counterparties, 
including Special Entities, and section 4s(i) of the CEA establishes 
swap documentation standards for SDs and MSPs.
    Pursuant to section 4s(h) of the CEA, on December 22, 2010, the 
Commission published in the Federal Register proposed subpart H of part 
23 of the Commission's regulations.\13\ There was a 60-day period for 
the public to comment on the proposing release. On May 4, 2011, the 
Commission published in the Federal Register a notice to re-open the 
public comment period for an additional 30 days, which ended on June 3, 
2011.\14\ On February 17, 2012, the Commission adopted as final rules 
subpart H to part 23, which set forth business conduct standards for 
swap dealers and major swap participants in their dealings with 
counterparties.\15\ A number of the Commission's rules under subpart H 
of part 23 require SDs and MSPs to provide or obtain specific 
information from their counterparties prior to entering into (or in 
some cases, offering to enter into) a swap with such 
counterparties.\16\ Subpart H of part 23 permits SDs and MSPs to rely 
on written representations from their counterparties and standardized 
disclosures, each of which may require amendments or supplements to an 
SD's or MSP's relationship documentation with such counterparties prior 
to entering into a swap with such counterparties.\17\
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    \13\ Business Conduct Standards for Swap Dealers and Major Swap 
Participants With Counterparties, 75 FR 80638 (proposed Dec. 22, 
2010).
    \14\ Reopening and Extension of Comment Periods for Rulemakings 
Implementing the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 75 FR 25274 (May 4, 2011).
    \15\ See supra note 9.
    \16\ See, e.g., Sec.  23.402(b) (requiring SDs to obtain 
essential facts about their counterparty prior to execution of a 
transaction); Sec.  23.430(a) (requiring SDs and MSPs to verify that 
a counterparty meets the eligibility standards for an eligible 
contract participant before offering to enter into or entering into 
a swap with such counterparty); and Sec.  23.431(a) (requiring SDs 
and MSPs to provide material information concerning a swap to its 
counterparty at a reasonably sufficient time prior to entering into 
the swap).
    \17\ See Sec.  23.402(d), (e), and (f).
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    SDs and MSPs are required to comply with the requirements found in 
subpart H to part 23 by January 1, 2013.\18\
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    \18\ The external business conduct standards final rule required 
that swap dealers and major swap participants must comply with the 
rules in subpart H of part 23 on the later of 180 days after the 
effective date of these rules or the date no which swap dealers or 
major swap participants are required to apply for registration 
pursuant to Commission rule 3.10. However, in a subsequent 
rulemaking, the compliance date for Sec. Sec.  23.402; 23.410(c); 
23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c); 23.440; 
and 23.450 was deferred until January 1, 2013. See Confirmation, 
Portfolio Reconciliation, Portfolio Compression, and Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major 
Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012).
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    Section 4s(i)(1) of the CEA requires SDs and MSPs to ``conform with 
such standards as may be prescribed by the Commission by rule or 
regulation that relate to timely and accurate confirmation, processing, 
netting, documentation, and valuation of all swaps.'' Under section 
4s(i)(2), the Commission is required to adopt rules ``governing 
documentation standards for swap dealers and major swap participants.'' 
The Commission proposed the regulations on swap confirmation, portfolio 
reconciliation, and portfolio compression on December 28, 2010.\19\ In 
a separate rulemaking, on February 8, 2011, the Commission proposed 
regulations governing swap documentation, including what documentation 
would be required to be kept by the SD or MSP when it transacts with a 
counterparty that exercises its rights under the end-user clearing 
exception from the mandatory clearing requirement under section 2(h)(7) 
of the CEA.\20\ There was a 60-day comment period for both proposals. 
On September 11, 2012, the Commission issued final rules governing swap

[[Page 19]]

confirmation (Sec.  23.501), portfolio reconciliation (Sec.  23.502), 
portfolio compression (Sec.  23.503), and swap trading relationship 
documentation (Sec.  23.504), and end user exception documentation 
(Sec.  23.505).\21\ Among other things, Sec.  23.502 requires SDs and 
MSPs to agree in writing with each counterparty on the terms of 
conducting portfolio reconciliation.\22\ Section 23.504 requires that 
an SD or MSP execute swap trading relationship documentation meeting 
the requirements of the rule with a counterparty prior to or 
contemporaneously with entering into a swap transaction with such 
counterparty.\23\ Section 23.505 requires, with an exception, that SDs 
and MSPs, when transacting with market participants claiming the 
exception to clearing under 2(h)(7) of the CEA, obtain documentation 
sufficient to provide a reasonable basis on which to believe that its 
counterparty meets the statutory conditions required for the 
exception.\24\
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    \19\ Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 8519 (proposed Dec. 28, 2010).
    \20\ Swap Trading Relationship Documentation for Swap Dealers 
and Major Swap Participants, 76 FR 6715 (proposed Feb. 8, 2011).
    \21\ See supra note 10.
    \22\ See Sec.  23.502(a)(1).
    \23\ See Sec.  23.504(a)(2).
    \24\ See Sec.  23.505(a).
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    With regard to the portfolio reconciliation requirements found in 
Sec.  23.502, the Commission staggered the compliance dates by 
providing extended compliance dates for those SDs and MSPs that have 
not been previously regulated by a prudential regulator, and thus are 
least likely to have the infrastructure in place to begin regular 
reconciliation with their counterparties.\25\ SDs and MSPs that have 
been previously regulated by a prudential regulator need not comply 
with Sec.  23.502 until December 11, 2012. SDs and MSPs that have not 
been previously regulated need not comply with Sec.  23.502 until March 
11, 2013. The earliest that an SD or MSP would be required to comply 
with the swap trading relationship documentation requirements found in 
Sec.  23.504 is January 1, 2013.\26\ Additionally, the earliest that an 
SD or MSP would be required to comply with the documentation 
requirements found in Sec.  23.505 is December 31, 2012.
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    \25\ 77 FR 55904, 55941-42 (Sept. 11, 2012).
    \26\ The current compliance schedule associated with Sec.  
23.504 is as follows: With respect to swap transactions with SDs, 
security-based swap dealers, MSPs, major security-based swap 
participants, or any private fund, as defined in section 202(a) of 
the Investment Advisers Act of 1940, that is not a third-party 
subaccount (defined below) and that executes 200 or more swaps per 
month based on a monthly average over the 12 months preceding this 
adopting release (active funds), SDs and MSPs must comply with Sec.  
23.504 by January 1, 2013. With respect to swap transactions with 
commodity pools; private funds as defined in section 202(a) of the 
Investment Advisers Act of 1940 other than active funds; or persons 
predominantly engaged in activities that are in the business of 
banking, or in activities that are financial in nature as defined in 
section 4(k) of the Bank Holding Company Act of 1956, provided that 
the entity is not an account that is managed by an investment 
manager that (1) is independent of and unaffiliated with the 
account's beneficial owner or sponsor, and (2) is responsible for 
the documentation necessary for the account's beneficial owner to 
document swaps as required under section 4s(i) of the CEA (third-
party subaccounts), SDs and MSPs must comply with Sec.  23.504 by 
April 1, 2013. With respect to swap transactions with any other 
counterparty, SDs and MSPs must comply with Sec.  23.504 by July 1, 
2013. 77 FR 55904, 55940 (Sept. 11, 2012). However, in a final rule 
recently adopted by the Commission, the compliance schedules for 
active funds was amended by requiring private funds to calculate the 
number of swaps they enter as a monthly average over the past 12 
months preceding November 1, 2012.
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    Section 4s(f)(1) of the CEA requires SDs and MSPs to ``make such 
reports as are required by the Commission by rule or regulation 
regarding the transactions and positions and financial condition of the 
registered swap dealer or major swap participant.'' Under section 
4s(f)(1)(B)(i) and (ii) of the CEA, the Commission was authorized to 
prescribe the books and records requirements of ``all activities 
related to the business of swap dealers and major swap participants.'' 
On December 9, 2010, the Commission proposed Sec.  23.201, which set 
forth the records SDs and MSPs must maintain.\27\ After a 60-day period 
for the public to comment on the proposal, the Commission published a 
Federal Register notice that re-opened the comment period for an 
additional 30 days ending on June 3, 2011.\28\ On April 3, 2012, the 
Commission adopted final rules governing, among other requirements, 
general records requirements for SDs and MSPs (Sec.  23.201).\29\ The 
earliest that an SD or MSP would be required to comply with Sec.  
23.201 is December 31, 2012.\30\
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    \27\ Reporting, Recordkeeping, and Daily Trading Records 
Requirements for Swap Dealers and Major Swap Participants, 75 FR 
76666 (proposed Dec. 9, 2010).
    \28\ See supra note 14.
    \29\ See supra note 8.
    \30\ See 77 FR 20128, 20165 (Apr. 3, 2012). Sec.  23.201(a)(1) 
is currently the subject of a staff no-action letter that was 
published on October 26, 2012, which provided no-action relief from 
compliance with Sec.  23.201(a)(1) until March 31, 2013. See CFTC 
Letter No. 12-29, Request for No-Action Relief for Swap Dealers and 
Major Swap Participants from Compliance with Certain Internal 
Business Conduct Requirements Found in subpart F to part 23 of the 
CFTC's Regulations (http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-29.pdf).
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II. Compliance Date Extension for Certain Business Conduct and 
Documentation Requirements for Swap Dealers and Major Swap Participants

    Subsequent to the issuance of the above-identified rules, the 
Commission received requests from a variety of market participants for 
additional time to achieve compliance with the documentation 
requirements of such rules.\31\ More specifically, market participants 
requested that the Commission extend the compliance dates for the 
provisions of subpart H of part 23 that involve documentation,\32\ the 
compliance dates for the provisions of Sec.  23.502 (Portfolio 
Reconciliation), which has a significant documentation component, and 
the compliance dates for the provisions of Sec.  23.504 (Swap Trading 
Relationship Documentation),\33\ which also has a significant 
documentation component, to facilitate an orderly transition to the new 
regulatory regime.
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    \31\ See, e.g., Letter dated Dec. 4, 2012 from the International 
Swaps and Derivatives Association (``ISDA'') requesting exercise of 
Commission authority regarding part 23 Compliance Rules, Letter 
dated Nov. 27, 2012 (revised Dec. 6, 2012) from ISDA requesting 
exercise of Commission authority regarding part 23 compliance rules 
(``ISDA Dec. 6 Letter''), and Letter dated Nov. 20, 2012 from ISDA 
requesting no-action relief from compliance with Sec. Sec.  23.502 
and 23.504.
    \32\ The current compliance date for Sec. Sec.  23.402; 
23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and 
(c); 23.440; and 23.450 is January 1, 2013. See Confirmation, 
Portfolio Reconciliation, Portfolio Compression, and Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major 
Swap Participants, 77 FR 55904, 55942 (Sept. 11, 2012); see also 
Business Conduct Standards for Swap Dealers and Major Swap 
Participants with Counterparties, 77 FR 9734, 9823-27 (Feb. 17, 
2012) (promulgating the relevant provisions of subpart H of part 23 
of the Commission's Regulations).
    \33\ 77 FR at 55940.
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    In their letter, ISDA states that in order to facilitate an 
efficient transition to compliance, it has sponsored a number of 
documentation protocols for its members and other market participants, 
where amendments or supplements required by the Commission's 
regulations are effected through delivery of an adherence letter by 
each party to the underlying document to be amended (i.e., a master 
agreement), and provides for additional bilateral delivery requirements 
in order to effectuate the addition of supplemental terms.\34\
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    \34\ See http://www2.isda.org/dodd-frank-documentation-initiative/.
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    ISDA published its first Dodd-Frank protocol in August 2012, 
focused on facilitating compliance with several new Commission 
regulations, including those found in part 23.\35\ Pursuant to

[[Page 20]]

this first protocol, each party that submits an adherence letter must 
also deliver a completed questionnaire to another protocol participant 
for the addition of supplemental terms to be effective with respect to 
that protocol participant. To facilitate the delivery of completed 
questionnaires, ISDA, together with Markit, have developed a 
technology-based solution to automate the information-gathering process 
and provide sharing of submitted data and documents to permissioned 
counterparties.
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    \35\ ISDA's first Dodd-Frank protocol is intended to facilitate 
compliance with the following Final Rules: Business Conduct 
Standards for Swap Dealers and Major Swap Participants With 
Counterparties, 77 FR 9734 (Feb. 17, 2012); Large Trader Reporting 
for Physical Commodity Swaps, 76 FR 43851 (July 22, 2011); Position 
Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011); Real-Time 
Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 
2012); Swap Data Recordkeeping and Reporting Requirements, 77 FR. 
2136 (Jan. 13, 2012); 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); and Swap Data Recordkeeping and Reporting Requirements: Pre-
Enactment and Transition Swaps, 77 FR 35200 (June 12, 2012). 
However, the changes to compliance dates affected in this release do 
not address compliance with rules other than those specifically 
stated in the text above.
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    ISDA has represented to the Commission that, despite an extensive 
counterparty outreach and education effort by its members, only 17.5% 
of counterparties to prospective SDs and MSPs have submitted an 
adherence letter for its first Dodd-Frank protocol and less than 1% 
have submitted the completed questionnaires necessary for SDs and MSPs 
to make use of the protocol and integrate necessary counterparty 
information into their compliance systems. ISDA has represented that 
more time is needed for these counterparties to understand the 
Commission's requirements, to understand the legal consequences of 
adhering to the protocol, and to gather the information needed to 
complete the questionnaire from principals and beneficial owners.
    In addition, ISDA states that Hurricane Sandy has hampered the 
ability of SDs, MSPs, and their counterparties to complete the 
documentation process necessary to comply with the Commission's 
regulations within the original compliance periods. ISDA states that 
Hurricane Sandy shut down institutions and vendors, depleted staff and 
severely damaged development efforts in a number of compliance areas--
producing a knock-on effect across institutional (and vendor) 
compliance efforts (including delays at Markit--the provider of 
protocol automation mechanisms). Further, specifically with respect to 
the January 1, 2013 compliance date for subpart H of part 23 of the 
Commission's regulations, ISDA has represented that compliance 
obstacles are compounded by industry code freezes, which are typically 
put into effect near the calendar year-end to ensure a stable IT 
environment for the closing of books and records. The freezes limit the 
ability of firms to make adjustments to IT infrastructure related to 
the delivery of required disclosure and the re-onboarding of 
counterparties in accordance with the counterparty characteristics 
provided in response to the first Dodd-Frank protocol.
    Absent completion of the protocol process by a counterparty, or 
completion of bilateral amendments to trading documentation with the 
equivalent effect, an SD or MSP that continues to enter into swaps with 
such counterparty would be in violation of multiple Commission 
regulations contained in part 23. In order to avoid such violations of 
Commission regulations, ISDA has represented that many SDs and MSPs 
will stop entering into swaps with counterparties that have not 
completed the protocol process by December 31, 2012, which could result 
in a sudden and dramatic drop in the number of participants in the swap 
markets. ISDA states that the resulting decrease in liquidity would 
damage all market participants as well as the broader economy.
    ISDA has further represented that market participants are working 
diligently toward publishing a second Dodd-Frank protocol covering 
other Commission rules requiring documentation supplements, including 
Sec. Sec.  23.502 and 23.504, but require additional time to complete 
the review process and implement the protocol. ISDA states that the 
pace of implementation of its second Dodd-Frank protocol has been 
adversely affected by the difficulty of reaching agreement on the 
valuation methodologies required by Sec.  23.504(b)(4),\36\ the 
developmental challenges to reaching the agreement on reconciliation 
processes required by Sec.  23.502(a)(1), the consumption of legal and 
operational resources by the implementation of the first Dodd-Frank 
protocol, and the effects of Hurricane Sandy discussed above. 
Accordingly, ISDA has represented that an extension of the compliance 
dates for Sec. Sec.  23.502 and 23.504 would allow for a smooth and 
orderly progression to compliance with such rules and avoid unnecessary 
market disruption.
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    \36\ Commission regulation Sec.  23.504(b)(4) requires SDs and 
MSPs to agree with their counterparties, prior to the execution of a 
swap, on the process for determining the value of such swap at any 
time from execution to the termination, maturity, or expiration of 
such swap.
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    For reasons described above, the Commission has decided to defer 
the compliance dates for Sec. Sec.  23.201(b)(3)(ii), 23.402; 
23.410(c); 23.430; 23.431(a)-(c); 23.432; 23.434(a)(2), (b), and (c); 
23.440; 23.450; and 23.505 of subpart F, subpart H, and subpart I of 
part 23 until May 1, 2013. In addition, the Commission has decided to 
defer the compliance dates for Sec.  23.502 (Portfolio Reconciliation) 
and Sec.  23.504 (Swap Trading Relationship Documentation) \37\ of 
subpart I of part 23 until July 1, 2013.\38\ Compliance dates for all 
other provisions of subpart F, subpart H, and subpart I of part 23 
remain unchanged. All market participants are subject to the new 
compliance dates regardless of whether they participate in any protocol 
sponsored by ISDA.
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    \37\ As discussed in note 26 supra, the Commission imposed a 
staggered compliance schedule for Sec.  23.504, establishing three 
separate compliance dates based on the type of counterparty. The 
compliance date established herein--July 1, 2013--provides SDs and 
MSPs with a single compliance date for Sec.  23.504, that is 
applicable for all types of counterparties.
    \38\ The Commission's decision to defer compliance does not 
reflect an endorsement of the industry-led effort, nor does it imply 
that the Commission has reviewed the documentation protocol for 
compliance with Commission rules.
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III. Related Matters

A. Administrative Law Matters and Request for Comments

    The Administrative Procedure Act \39\ (``APA'') generally requires 
an agency to publish a notice of a proposed rulemaking in the Federal 
Register.\40\ This requirement does not apply, however, when the agency 
``for good cause finds * * * that notice and public procedure are 
impracticable, unnecessary, or contrary to the public interest.'' \41\ 
Moreover, while the APA requires generally that an agency publish an 
adopted rule in the Federal Register 30 days before it becomes 
effective, this requirement does not apply if the agency finds good 
cause to make the rule effective sooner.\42\
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    \39\ 5 U.S.C. 553.
    \40\ 5 U.S.C. 553(b).
    \41\ Id.
    \42\ 5 U.S.C. 553(d).
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    The Commission, for good cause, finds that notice and solicitation 
of comment regarding the amendments is impracticable, unnecessary and 
contrary to the public interest. As of December 3, 2012, the CFTC has 
finalized over 41 new rulemakings pursuant to the Dodd-Frank Act, with 
each rulemaking imposing significant new regulatory requirements on 
market participants. In the aggregate, the rulemakings establish

[[Page 21]]

a robust and comprehensive registration and regulatory framework 
intended to achieve the overarching goals of the Dodd-Frank Act, as 
detailed in Section I above. In promulgating the final rules, the 
Commission constructed a phased implementation schedule that was 
intended to allow market participants to achieve full compliance 
through an orderly and effective process over a period of time. Market 
participants, including a trade association, buy-side firms and sell-
side dealers, have represented to the Commission that they have been 
diligently preparing to comply with the part 23 rules, in accordance 
with the phased implementation schedule. The Commission anticipates 
that the phased implementation schedule for most rules promulgated 
under part 23 will continue, on schedule, without need for delay.
    Notwithstanding the Commission's efforts to implement the business 
conduct standards rules required under the Dodd-Frank Act in a timely 
manner, the Commission has determined that, due to circumstances beyond 
the Commission's control, a short delay in the implementation schedule 
for a limited set of part 23 rules is necessary. As discussed in 
greater detail in Section II above, ISDA has represented that, despite 
an extensive counterparty outreach and education effort by its members, 
a relatively small percentage of counterparties have fully executed the 
necessary documentation to comply with the provisions of subpart H of 
part 23 that involve documentation. ISDA has represented that more time 
is needed for these counterparties to understand the Commission's 
requirements, to understand the legal consequences of adhering to the 
required documentation, and to gather the information needed to 
complete the questionnaire from principals and beneficial owners. ISDA 
further represented that without additional time to address that 
relatively narrow scope of documentation rules, a sudden and dramatic 
drop in the number of participants in the swap markets could occur, and 
the resulting decrease in liquidity would damage all market 
participants as well as the broader economy.
    The extended compliance dates provided herein do not include all 
business conduct standards promulgated by the Commission. Specifically, 
compliance dates for Sec.  23.410(a) and (b), Sec.  23.433, and Sec.  
23.434(a)(1) are not being extended. Consequently, fundamental 
counterparty protections relating to (i) prohibitions on fraud, 
manipulation and abusive practices, (ii) fair dealings in 
communications, and (iii) reasonable diligence regarding recommended 
swaps would not be affected by delayed compliance.
    Accordingly, for the reasons discussed above, the Commission finds 
good cause to extend the compliance dates for a short period, for a 
limited number of rules promulgated under part 23, to enable market 
participants to continue the work necessary to achieve full compliance. 
Specifically, the compliance date for Sec. Sec.  23.201(b)(3)(ii), 
23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2), 
(b), and (c); 23.440; 23.450, and 23.505 is delayed until May 1, 2013, 
providing an additional 4 months from the original compliance date. 
Likewise, the compliance date for Sec.  23.502 and Sec.  23.504 is 
deferred until July 1, 2013, providing an additional 6 months from the 
original date.\43\ Compliance dates for all other provisions of part 23 
remain unchanged. The Commission anticipates that the amended 
compliance dates will enable market participants to achieve full 
compliance with the affected rules prior to the expiration of the 
amended compliance period.
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    \43\ The Commission's decision to defer compliance does not 
reflect an endorsement of the industry-led effort, nor does it imply 
that the Commission has reviewed the documentation protocol for 
compliance with Commission rules. All market participants are 
subject to the new compliance dates regardless of whether they 
participate in the protocol.
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    Although the Commission is dispensing with prior notice of proposed 
rulemaking, the Commission is soliciting written comments on the 
changes to compliance dates affected by this release within 30 days 
after publication of this release in the Federal Register. The 
Commission will consider those comments and make changes to the 
amendments if necessary.

B. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (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.\44\ The changes to compliance dates affected by this release 
will not impose any new recordkeeping or information collection 
requirements, or other collections of information that require approval 
of the Office of Management and Budget under the PRA. The Commission 
invites public comment on the accuracy of its estimate that no 
additional information collection requirements or changes to existing 
collection requirements would result from the rules proposed herein.
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    \44\ 44 U.S.C. 3501 et seq.
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C. Considerations of the Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
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.
1. Background
    The Commission is changing its compliance dates for amendments to 
specific sections of subparts H, I and F of part 23 of the Commission 
regulations. Subpart H to part 23 sets forth business conduct standards 
for SDs and MSPs in their dealings with counterparties. SDs and MSPs 
are required to comply with the requirements found in subpart H to part 
23 by January 1, 2013. The changes to compliance dates for Sec. Sec.  
23.402; 23.410(c); 23.430; 23.431(a) through (c); 23.432; 23.434(a)(2), 
(b), and (c); 23.440; and 23.450 contained in subpart H rules will 
extend the compliance dates for these provisions until May 1, 2013. 
Compliance dates for all other provisions of subpart H of part 23 
remain unchanged.
    With regard to the portfolio reconciliation requirements found in 
Sec.  23.502, for those SDs and MSPs that have been previously 
regulated by a prudential regulator, the Commission had provided for a 
compliance date of December 11, 2012. The compliance date for SDs and 
MSPs that have not been previously regulated was March 11, 2013. The 
earliest that an SD or MSP would be required to comply with the swap 
trading relationship documentation requirements of Sec.  23.504 is 
January 1, 2013. The earliest that an SD or MSP would be required to 
comply with the end user documentation requirements of Sec.  23.505 is 
December 31, 2012. The changes to compliance dates for Sec. Sec.  
23.502 and 23.504 contained in subpart I will extend the compliance 
dates for these provisions until July 1, 2013. The changes to 
compliance dates for Sec.  23.505 will extend the compliance date for 
this rule until May 1, 2013.
    With regard to the general records requirements found in Sec.  
23.201 of

[[Page 22]]

subpart F of part 23, the earliest that an SD or MSP would be required 
to comply with such requirements is December 31, 2012. The changes to 
compliance dates for Sec.  23.201 will extend the compliance date for 
certain provisions of this rule until May 1, 2013.
    The changes to compliance dates being adopted do not change the 
substance of the rules; rather, they merely provide additional time by 
which parties can comply. As such, the costs and benefits of the 
Commission's action relate only to the additional time provided.
2. Costs
    The Commission does not anticipate there being any new, 
quantifiable costs attributable to these changes to compliance dates 
being adopted because it is only extending the compliance dates for 
certain requirements in part 23 of the Commission's regulations. At the 
same time, however, the Commission is mindful that a delay in the 
protections afforded by the regulations could result in costs to the 
public, even if the same is not amenable to quantification. The 
Commission believes, however, that these costs are mitigated by the 
maintenance of various other provisions relating to (i) prohibitions on 
fraud, manipulation and abusive practices, (ii) fair dealings in 
communications, and (iii) reasonable diligence regarding recommended 
swaps. These provisions are unaffected by delayed compliance from this 
extension. The Commission invites comments from the public on any 
costs, quantitative and qualitative, arising from the delay granted by 
the changes to compliance dates being adopted.
3. Benefits
    The additional time for compliance provided for in this release 
will yield substantial benefit for market participants and the public 
alike. Absent this extension, market participants would be required to 
implement temporary solutions while the more permanent, industry wide 
solutions described earlier are finalized. The Commission believes that 
this duplication of efforts to achieve compliance would impose 
extensive burdens and costs on parties without any concomitant benefit 
to the public. Moreover, the Commission is concerned that based on the 
representations made by market participants, absent the changes to 
compliance dates being adopted, market participants might exit the 
market or curtail their swaps activity due to a lack of legal certainty 
and protection afforded by Commission relief. If that were to occur, 
the Commission expects that reduced market liquidity would increase the 
costs of hedging, which would then be passed on the public in the form 
of higher costs.
4. Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    The Commission believes that by extending the compliance date for 
certain regulations in part 23, market participants will be able to 
continue to participate in the swaps market without concerns about 
potential consequences of failure to comply with the specified 
regulations. This will, in turn, protect the public by ensuring that 
the economy does not suffer as a result of any unintended consequences 
that may have arisen if market participants exited the swaps market. 
The Commission recognizes that any delay in compliance with the 
aforementioned business conduct and documentation requirements 
continues to leave the public without the protections and attendant 
benefits of those requirements. However, the Commission believes that 
delaying compliance for only certain business conduct and documentation 
requirements, while retaining the original compliance dates for 
fundamental counterparty protections relating to (i) prohibitions on 
fraud, manipulation and abusive practices, (ii) fair dealings in 
communications, and (iii) reasonable diligence regarding recommended 
swaps, will mitigate those effects while avoiding this risk that market 
participants will exit the market due to legal uncertainty.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that extending the compliance dates for the 
aforementioned rules will help protect the efficiency and 
competitiveness of the markets by obviating the need to stop 
transacting in swaps due to delay in complying with specific Commission 
regulations. It will also strengthen the financial integrity of markets 
by ensuring that market participants do not transact in the swaps 
markets while not being in full compliance with these regulations.
c. Price Discovery
    If concerns regarding non-compliance results in a reduction in 
participation by a large number of market participants, such a decrease 
in swaps activity will adversely impact the price discovery process of 
the swaps markets.
d. Sound Risk Management
    If counterparties refrain from transacting in swaps, the ability of 
other market participants to hedge their risks using these instruments 
may suffer. By mitigating the concerns of market participants regarding 
compliance with Commission rules, the changes to compliance dates being 
adopted herein help ensure that, while firms diligently complete the 
compliance requirements, they can continue entering into swap 
transactions to hedge their business and investment risks.
e. Other Public Interest Considerations
    The Commission has not identified an impact on other public 
interest considerations, other than those mentioned above, as a result 
of the changes to compliance dates being adopted herein, but seeks 
comment as to any potential impact on this and other 15(a) factors.

    Issued in Washington, DC on December 18, 2012, by the 
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

Appendix to Business Conduct and Documentation Requirements for Swap 
Dealers and Major Swap Participants--Commission Voting Summary

    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.

[FR Doc. 2012-30885 Filed 12-31-12; 8:45 am]
BILLING CODE 6351-01-P
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