Source: http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2012-11838
Timestamp: 2016-12-03 13:46:35
Document Index: 412198473

Matched Legal Cases: ['art 35', 'art 35', 'art 35', 'art 35', 'art 35', 'art 35', 'art 35', 'art 35']

Federal Register, Volume 77 Issue 95 (Wednesday, May 16, 2012)[Federal Register Volume 77, Number 95 (Wednesday, May 16, 2012)]
[Pages 28819-28824]
[FR Doc No: 2012-11838]
SUMMARY: On July 14, 2011, the Commodity Futures Trading Commission (``CFTC'' or the ``Commission'') issued a final order (``July 14 Order'') that granted temporary exemptive relief from certain provisions of the Commodity Exchange Act (``CEA'') that otherwise would have taken effect on the general effective date of title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-
Frank Act'')--July 16, 2011. On December 23, 2011, the Commission amended the July 14 Order to extend the potential latest expiration date of the July 14 Order from December 31, 2011 to July 16, 2012, and added provisions to account for the repeal and replacement (as of December 31, 2011) of part 35 of the Commission's regulations (the ``First Amended July 14 Order''). In this Notice of Proposed Amendment (``Notice''), the Commission proposes to further modify the temporary exemptive relief provided in the First Amended July 14 Order by: (1) Removing references to the entities terms, including ``swap dealer,'' ``major swap participant,'' and ``eligible contract participant'' in light of the final, joint CFTC-SEC rulemaking further defining them issued on April 18, 2012; (2) extending the potential latest expiration date of the July 14 Order to December 31, 2012, or, depending on the nature of the relief, such other compliance date as may be determined by the Commission; (3) allowing the clearing of agricultural swaps, as described herein; and (4) removing any reference to the exempt commercial market (``ECM'') and exempt board of trade (``EBOT'') grandfather relief previously issued by the Commission. Only comments pertaining to these proposed amendments to the First Amended July 14 Order, as amended (the ``Second Amended July 14 Order''), will be considered.
DATES: Submit comments on or before May 30, 2012.
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 regulations, 17 CFR 145.9.
5864, mhiggins@cftc.gov, Office of the General Counsel; David Van Wagner, Chief Counsel, (202) 418-5481, dvanwagner@cftc.gov, Division of Market Oversight; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; or Anne Polaski, Special Counsel, (312) 596-0575, apolaski@cftc.gov, Division of Clearing and Risk; Commodity Futures Trading Commission, 525 West Monroe, Chicago, Illinois 60661.
SUPPLEMENTARY INFORMATION: On July 14, 2011, the Commission exercised its exemptive authority under CEA section 4(c) \1\ and its authority under section 712(f) of the Dodd-Frank Act by issuing a final order (the ``July 14 Order'') that addressed the potential that the final, joint CFTC-SEC rulemakings further defining the terms in sections 712(d) \2\ and 721(c) \3\ would not be in effect as of July 16, 2011 (i.e., the general effective date set forth in section 754 of the Dodd-Frank Act).\4\ In so doing, the Commission sought to address concerns that had been raised about the applicability of various regulatory requirements to certain agreements, contracts, and transactions after July 16, 2011, and thereby ensure that current practices would not be unduly disrupted during the transition to the new regulatory regime.\5\
For those same reasons, on December 23, 2011, the Commission published in the Federal Register a final order, the First Amended July 14 Order, amending the July 14 Order in two ways.\6\ First, the Commission extended the potential latest expiry date from December 31, 2011 to July 16, 2012 or, depending on the nature of the relief, such other compliance date as may be determined by the Commission,\7\ to address the potential that, as of December 31, 2011, the aforementioned joint CFTC-Securities and Exchange Commission (``SEC'') joint rulemakings would not be effective. Second, the Commission included within the relief set forth in the First Amended July 14 Order any agreement, contract or transaction that fully meets the conditions in part 35 as in effect prior to December 31, 2011. This amendment addressed the fact that such transactions, which were not included within the scope of the original July 14 Order because the exemptive rules in part 35 covered them at that time, required temporary relief because part 35 would not be available as of December 31, 2011.\8\ In so doing, the Commission clarified that new part 35 and the exemptive relief issued in the First Amended July 14 Order, and any interaction of the two, do not operate to expand the pre-Dodd-Frank Act scope of transactions eligible to be transacted on either an ECM or EBOT to include transactions in agricultural commodities.
\6\ Amendment to July 14, 2011 Order for Swap Regulation, 76 FR 80233 (Dec. 23, 2011).
\7\ The Commission clarified that while the exemption set forth in the second part of the First Amended July 14 Order generally shall expire upon the earlier of July 16, 2012 or such other compliance date as may be determined by the Commission, it modified that alternative condition to provide that the exemption will not expire prior to July 16, 2012 in certain circumstances. Specifically, the Commission stated that no other compliance date will be determined (and thus, the exemption will remain in effect until July 16, 2012) for agreements, contracts, and transactions (and for persons offering, entering into, or rendering advice or rendering other services with respect to, such agreements, contracts or transactions) that: (1) Are executed on an ECM or EBOT that is operating under the terms of the Commission's Order Regarding the Treatment of Petitions Seeking Grandfather Relief for Exempt Commercial Markets and Exempt Boards of Trade, 75 FR 56513, Sept. 16, 2010 (the ECM/EBOT Grandfather Order''), and that complies with all of the applicable conditions of the ECM/EBOT Grandfather Order; and (2) are cleared by a Commission-registered derivatives clearing organization (``DCO''). Concurrent with the First Amended July 14 Order, the Divisions also issued a new staff no-action letter further addressing the applicability of the amendments made to the CEA by Dodd-Frank Act sections 724(c), 725(a), and 731. The Commission staff has informed the Commission that it is separately considering whether to issue a no-action letter in which the staff would state that it would not recommend that the Commission commence an enforcement action against markets or market participants for failure to comply with the above-referenced provisions over a period of time co-extensive with that set forth in the Second Amended July 14 Order, as proposed herein.
In this Notice, the Commission is proposing to further amend the First Amended July 14 Order in the following four ways.\9\ First, in light of the final, joint CFTC-SEC rulemaking further defining the entities terms in sections 712(d), including ``swap dealer,'' ``major swap participant,'' and ``eligible contract participant,'' issued on April 18, 2012,\10\ the Commission is removing references to those terms in this proposed Second Amended July 14 Order. Second, the Commission is proposing to extend the latest potential expiry date from July 16, 2012 to December 31, 2012 or, depending on the nature of the relief, such other compliance date as may be determined by the Commission. The extension would ensure that market practices will not be unduly disrupted during the transition to the new regulatory regime.
\9\ As proposed, the Second Amended July 14 Order.
\10\ CFTC-SEC, Further Definition of ``Swap Dealer'', ``Security-Based Swap Dealer'', ``Major Swap Participant'', ``Major Security-Based Swap Participant'', and ``Eligible Contract Participant'' (issued Apr. 18, 2012) (to be codified at 17 CFR pt. 1), available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister041812b.pdf.
Third, the Commission is proposing to further amend the First Amended July 14 Order to provide that agricultural swaps, whether entered into bilaterally, on a DCM, or a SEF, may be cleared in the same manner that any other swap may be cleared and without the need for the Commission to issue any further exemption under section 4(c) of the CEA.\11\ This amendment is intended to harmonize the First Amended July 14 Order and the final rules amending part 35 of the Commission's regulations, to the extent that the July 14 Order, as amended, maintained the pre-Dodd-Frank part 35 prohibition against the clearing of agricultural swaps. While the proposed Second Amended July 14 Order would remove the clearing prohibition for agricultural swaps, this proposal would not permit agricultural swaps to be entered into or executed on an ECM or EBOT. The Commission notes that ECMs and EBOTs both operate some form of trading facility without any self-regulatory responsibilities. The Commission generally believes that any form of exchange trading in agricultural swaps should only be permitted in a self-regulated environment. In other words, unlike exempt and excluded commodities, which were allowed to be transacted on a trading facility (i.e., platform-traded) in an unregulated environment under the CEA prior to the Dodd-Frank Act and now during the transition to the Dodd-
Frank Act regulatory regime, agricultural swaps, which were not allowed to be platform-traded on an ECM or EBOT under the CEA prior to Dodd-
Frank Act, may not be platform-traded during the transition to the Dodd-Frank Act regulatory regime. Accordingly, under this proposed amendment and in conjunction with 17 CFR part 35, as effective on and after December 31, 2011, the Commission confirms that agricultural swaps may only be entered into or executed bilaterally, on a DCM,\12\ or on a SEF.\13\
\12\ See December 23 Order, 76 FR at 80236, note 11 (Dec. 23, 2011).
\13\ See 17 CFR 35.1(b).
In connection with swaps executed on a DCM (whether agricultural swaps or otherwise), the Commission clarifies that a DCM may list such swaps for trading under the DCM's rules related to futures contracts without exemptive relief.\14\ As required for futures, a DCM must submit such swaps to the Commission under either Sec. 40.2 (listing products for trading by certification) \15\ or Sec. 40.3 (voluntary submission of new products for Commission review and approval) \16\ of the Commission's regulations. Swaps that are traded on a DCM are required to be cleared by a DCO.\17\ In order for a DCO to be able to clear a swap listed for trading on a
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DCM, the DCO must be eligible to clear such swap pursuant to Sec. 39.5(a)(1) or (2),\18\ and must submit the swap to the Commission pursuant to Sec. 39.5(b).\19\
\14\ See 76 FR at 80236, note 22 (Dec. 23, 2011).
\15\ 17 CFR 40.2.
\16\ 17 CFR 40.3.
\17\ See 7 U.S.C. 5(d)(11)(A).
\18\ 17 CFR 39.5(a).
\19\ 17 CFR 39.5(b).
Fourth, the Commission is proposing to further amend the First Amended July 14 Order to remove any reference to the ECM/EBOT Grandfather Order, which expires on July 16, 2012.\20\ After July 16, 2012, ECMs and EBOTs, as well as markets that rely on pre-Dodd-Frank CEA section 2(d)(2) (``2(d)(2) Markets''), will only be able to rely on the Second Amended July 14 Order, as proposed herein. The relief for ECMs and EBOTs, as well as for 2(d)(2) Markets, granted under the proposed Second Amended July 14 Order shall expire upon the effective date of the DCM or SEF final rules, whichever is later, unless the ECM or EBOT, or 2(d)(2) Markets, files a DCM or SEF application on or before the effective date of the DCM or SEF final rules, in which case the relief shall remain in place during the pendency of the application.\21\ For these purposes, an application will be considered no longer pending upon the application being approved, provisionally approved,\22\ withdrawn, or denied.
\20\ The Commission issued the ECM/EBOT Grandfather Order pursuant to Sections 723(c) and 734(c) of the Dodd-Frank Act which authorized the Commission to permit ECMs and EBOTs respectively to continue to operate pursuant to CEA Sections 2(h)(3) and 5d for no more than one year after the general effective date of the Dodd-
\21\ The Commission currently receives notice filings from ECMs and EBOTs, and thus has a general familiarity with the nature and number of markets operating pursuant to ECM and EBOT exemptive relief. See 17 CFR 36.2(b) and 17 CFR 36.3(a). In order for the Commission to gain a similar familiarity with 2(d)(2) Markets, and to facilitate their eventual transition to registered DCM or registered SEF status, the Commission strongly encourages 2(d)(2) Markets intending to operate pursuant to the exemptive relief proposed in this Second Amended Order to provide the Commission with notice of their operations (or intent to so operate) on or before July 16, 2012, or as reasonably soon thereafter as is practicable. Any such notice should be sent to the Commission's Division of Market Oversight, 1155 21st St. NW., Washington, DC 20581 (or electronically, to DMOLetters@cftc.gov), and should include the name and address of the 2(d)(2) Market, and the name and telephone number of a contact person. The Commission anticipates that such notice will assist the Commission in its preparation to review any subsequent application for registration, or provisional registration, as a SEF or DCM submitted by such 2(d)(2) Market. Notwithstanding the provision of such notice, the Commission notes that any subsequent SEF or DCM registration application by a 2(d)(2) Market will still undergo a separate, complete, and independent evaluation by the Commission, just as will every SEF and/or DCM application submitted by an ECM and/or EBOT.
\22\ For these purposes, an application is ``provisionally approved'' on the date that such provisional approval becomes effective such that the ECM, EBOT, or 2(d)(2) Market may then rely on such provisional approval to operate as a DCM or SEF, as applicable.
The Paperwork Reduction Act (``PRA'') \23\ imposes certain requirements on Federal agencies (including the Commission) in connection with conducting or sponsoring any collection of information as defined by the PRA. The proposed Second Amended July 14 Order will not require a new collection of information from any persons or entities that will be subject to the final order.
Section 15(a) of the CEA \24\ requires the Commission to consider the costs and benefits of its action before issuing an order under the CEA. CEA section 15(a) further specifies that 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 proposes that there are no significant, if any, costs associated with this proposed amendment. This is so because the proposed order is permissive--that is, it provides additional time beyond that provided for in the First Amended July 14 Order for persons to comply with any substantive or administrative requirements being imposed elsewhere.
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b. This exemption shall expire upon the earlier of: (i) December 31, 2012; or (ii) such other compliance date as may be determined by the Commission; except that, for agreements, contracts, and transactions executed on an exempt commercial market (``ECM''), exempt board of trade (``EBOT''), or pursuant to CEA section 2(d)(2) as in effect prior to July 16, 2011 (``2(d)(2) Market''), this exemption shall expire upon the earlier of (i) December 31, 2012; or (ii) the effective date of the designated contract market (``DCM'') or swap execution facility (``SEF'') final rules, whichever is later, unless the ECM, EBOT, or 2(d)(2) Market files a DCM or SEF registration application on or before the effective date of the DCM or SEF final rules, in which case the relief shall remain in place during the pendency of the application. For these purposes, an application will be considered no longer pending when the application has been approved, provisionally approved, withdrawn, or denied.
Appendices to Proposed Order Amending the Second Amendment to July 14, 2011 Order for Swap Regulation--Commission Voting Summary and Statements of Commissioners
Appendix 1--Chairman Gary Gensler
Second, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission have now completed the rule further defining the term ``swap dealer'' and ``securities-based swap dealer.'' Thus, the proposed 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 proposed exemptive order appropriately provides relief from the effective dates of certain Dodd-Frank provisions.
Fourth, unregistered trading facilities that offer swaps for trading were required under Dodd-Frank to register
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as swap execution facilities (SEFs) or designated contract markets 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 with regard to SEFs, this proposed order gives these platforms additional time for such a transition.
I concur in support of the Commission's proposal to further modify the temporary exemptive relief provided in the Commission's final order dated July 14, 2011 (the ``July 14 Order'').\25\ In the July 14 Order, the Commission addressed concerns raised by industry regarding the applicability of various regulatory requirements to agreements, contracts and transactions after the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act''). Today's proposal would, among other things, extend the temporary exemptive relief from last extension date (i.e., July 16, 2012) to December 31, 2012.\26\
\25\ See Effective Date for Swap Regulation, 76 FR 42508 (issued and made effective by the Commission on July 14, 2011; published in the Federal Register on July 19, 2011).
\26\ The proposed amendment to the July 14 Order also seeks to: (1) Remove references to the entities terms in Sections 712(d) of the Dodd-Frank Act, including ``swap dealer,'' ``major swap participant,'' and ``eligible contract participant'' in light of the final, joint CFTC-Securities and Exchange Commission rulemaking further defining those terms on April 18, 2012; (2) allow the clearing of agricultural swaps; and (3) removing any reference to the exempt commercial market and exempt board of trade grandfather relief previously issued by the Commission.
Based on the Chairman's statements at a recent industry conference,\27\ I am supportive of the Commission's proposed amendment to the July 14 Order to the delay application until the end of the year or until the implementation. However, I understand that unless the Commission focuses on its priorities, it seems unlikely we can meet this schedule.
\27\ See Commodity Futures Trading Commission Chairman Gary Gensler, Remarks before International Swaps and Derivatives Association's 27 Annual General Meeting (May 2, 2012), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-112.
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