Source: https://www.federalregister.gov/documents/2011/03/03/2011-4657/amendments-to-commodity-pool-operator-and-commodity-trading-advisor-regulations-resulting-from-the
Timestamp: 2017-09-23 08:41:20
Document Index: 113436141

Matched Legal Cases: ['art 4', 'art 4', 'art 4', 'art 4', 'art 4', 'art 4', 'art 4', 'art 4', 'art 4', 'art 45', 'art 4', 'art 4', 'art 4', 'art 4']

A Proposed Rule by the Commodity Futures Trading Commission on 03/03/2011
11701-11705 (5 pages)
https://www.federalregister.gov/d/2011-4657 https://www.federalregister.gov/d/2011-4657
Start Preamble Start Printed Page 11701
The Commodity Futures Trading Commission (Commission or CFTC) is proposing to amend its regulations affecting the operations and activities of commodity pool operators (CPOs) and commodity trading advisors (CTAs) (Proposal) in order to have those regulations reflect changes made to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
You may submit comments, identified by RIN 3038-AD49, by any of the following methods:
All comments must be submitted in English, or if not, accompanied by an English translation. Comments will 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 is exempt from disclosure under the Freedom of Information Act (FOIA),[1] a petition for confidential treatment of the exempt information may be submitted according to the procedures set forth in Commission Regulation 145.9.[2]
Barbara S. Gold, Associate Director, or Christopher W. Cummings, Special Counsel, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number: 202-418-5450 and electronic mail: bgold@cftc.gov or ccummings@cftc.gov.
On July 21, 2010, President Obama signed the Dodd-Frank Act.[3] Title VII of the Dodd-Frank Act [4] amended the CEA [5] to establish a comprehensive new regulatory framework for swaps and security-based swaps. The goal of this legislation was 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 robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight. Among the changes made by the Dodd-Frank Act to the CEA were to include within the CPO definition the operator of a collective investment vehicle that trades swaps, and to include within the CTA definition a person who provides advice concerning swaps.[6]
Part 4 of the Commission's regulations sets forth a comprehensive regulatory scheme for the operations and activities of CPOs and CTAs. It includes disclosure, reporting and recordkeeping requirements for registered CPOs and CTAs, registration and compliance exemptions for CPOs and CTAs, and other provisions, including anti-fraud provisions, applicable to CPOs and CTAs regardless of registration status. Many of the Part 4 regulations generally apply to CPOs and CTAs and, thus, they will be applicable to CPOs and CTAs with respect to their swap activities.[7] In other instances, however, the text of certain Part 4 regulations is specific to activities involving futures contracts, commodity options, and off-exchange retail foreign currency transactions, and it does not include, refer to or otherwise take account of swap activities.[8] The Proposal is intended to clarify and ensure that the requirements governing the operations and activities of CPOs and CTAs continue to apply to these intermediaries in the context of their involvement with swap transactions.[9]
The Commission is proposing still other rulemakings in response to the Dodd-Frank Act that could affect the Part 4 regulations.[10] The Commission intends to resolve any discrepancies that may arise between any of these other rulemakings and the Proposal in Start Printed Page 11702the course of finalizing its rulemaking under the Dodd-Frank Act.
The Part 4 regulations employ the term “commodity interest” throughout.[11] This term currently is defined in Regulation 1.3(yy) to mean:
To ensure that the Part 4 regulations adequately and accurately encompass swap transactions, the Proposal would adopt in new Regulation 4.10(a) a definition of the term “commodity interest” to be employed for the purposes of Part 4. That definition would include the text of existing Regulation 1.3(yy) along with reference to the term “swap” as defined in Section 1a(47) of the CEA.[12]
At various regulations throughout Part 4, the Proposal would insert “swap,” “swap transaction” or a similar term. See the proposed amendments to Regulations 4.23(a)(1), 4.24(g), (h)(1), and (i)(2) for CPOs and Regulations 4.34(g) and 4.34(i)(2) for CTAs. For example, regulation 4.23(a)(1) would be amended to include “swap type and counterparty” in the itemized daily record that a CPO must make and keep with respect to a pool's commodity interest transactions.
At other Part 4 regulations, the Proposal would include the term “swap dealer” among the persons for whom a CPO or CTA must provide information in its Disclosure Document and a CPO must provide information in a pool's periodic Account Statement. See the proposed amendments to Regulations 4.22(a)(3), 4.24(j)(1), (j)(3), (l)(1), and (l)(2) for CPOs and Regulations 4.34(j)(1), (j)(3), (k)(1) and (k)(2) for CTAs. For example, Regulations 4.24(j) and 4.34(j) would be amended to include swap dealers in the group of persons as to which conflicts of interest must be disclosed by CPOs and CTAs. Also, the Proposal would include a registered swap dealer among the persons listed in Regulation 4.7(a)(2) that do not have to satisfy a portfolio requirement in order to be a qualified eligible person (QEP), such that a CPO or CTA that has claimed relief under Regulation 4.7 may accept the swap dealer as a pool participant or advisory client without regard to the size of its investment portfolio. This would be consistent with the current treatment of other financial intermediaries registered with the Commission (such as futures commission merchants and retail foreign exchange dealers) as QEPs under Regulation 4.7(a)(2).
Yet other proposed amendments would require a CPO or CTA to make and keep certain books and records generated by the swap transactions in which they engage on behalf of not only their pool participants and clients, but also themselves. See the proposed amendments to Regulations 4.23(a)(7) and (b)(1) for CPOs and Regulations 4.33(a)(6) and (b)(1) for CTAs. The proposed amendments to Regulations 4.23(a)(7) and 4.33(a)(6) would require CPOs and CTAs to retain each acknowledgment of a swap transaction received from a swap dealer. The proposed amendments to Regulations 4.23(b)(1) and 4.33(b)(1) would make clear that if a CPO or CTA was a counterparty to a swap transaction, then it would be subject to the swap data recordkeeping and reporting requirements of Part 45.[13]
Because swap dealers will generally fall within the statutory definition of CTA, and because a swap dealer engaging in uncleared swap transactions may be accepting funds or other property from its counterparties as variation and initial margin payments,[14] the Commission is proposing to amend Regulation 4.30 by excluding a registered swap dealer from the regulation's prohibition in connection with a swap that is not cleared through a derivatives clearing organization. This action would result in four distinct categories of intermediaries being excluded from the operative requirements of Regulation 4.30. Accordingly, the Commission also is proposing to amend the regulation by reorganizing its text where applicable to these exclusions.
Finally, the Proposal would delete Regulation 4.32. This regulation deals with trading by a registered CTA on or subject to the rules of a derivatives transaction execution facility (DTEF) for non-institutional numbers. Section 734(a) of the Dodd-Frank Act repeals Section 5a of the CEA, which is the section establishing and providing for the regulation of DTEFs. Accordingly, because subsequent to the effective date of the Dodd-Frank Act [15] Regulation 4.32 will no longer have a statutory basis or purpose, the Proposal would remove and reserve Regulation 4.32.
The Regulatory Flexibility Act (“RFA”) [16] requires that agencies, in proposing rules, consider the impact of those rules on small businesses.[17] The Commission previously has established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on such entities in accordance with the Start Printed Page 11703RFA.[18] With respect to CPOs, the Commission previously has determined that a CPO is a small entity for the purpose of the RFA if it meets the criteria for an exemption from registration under Regulation 4.13(a)(2).[19] Thus, because the Proposal applies to registered CPOs, the RFA is not applicable to it. As for CTAs, the Commission previously has stated that it would evaluate within the context of a particular rule proposal whether all or some affected CTAs would be considered to be small entities and, if so, the economic impact on them of the particular rule. In this regard, the Commission notes that the Proposal applies to registered CTAs. Moreover, the Proposal would not have a significant economic impact on any CPO or CTA who would be affected thereby, because it would merely bring within the current Part 4 regulatory structure of disclosure, reporting and recordkeeping information with respect to swap activities. It would not impose any additional operative requirements or otherwise direct or confine the activities of CPOs and CTAs.[20] Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the Proposal would not have a significant economic impact on a substantial number of small entities. However, the Commission invites the public to comment on this certification.
The Paperwork Reduction Act of 1995 (PRA) [21] imposes certain requirements on Federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA. The Proposal would not, if adopted, require any new collection of information from any entity that would be subject to the affected regulations. Accordingly, for purposes of the PRA, the Chairman, on behalf of the Commission, certifies that the proposed amendments to Part 4, if adopted, would not impose any new reporting or recordkeeping requirements.
Section 15(a) of the CEA [22] requires the Commission to consider the costs and benefits of its actions before issuing a rulemaking under the CEA. By its terms, Section 15(a) does not require the Commission to quantify the costs and benefits of a rule or to determine whether the benefits of the rulemaking outweigh its costs; rather, it simply requires that the Commission “consider” the costs and benefits of its actions. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may in its discretion give greater weight to any one of the five enumerated areas and could in its discretion determine that, notwithstanding its costs, a particular rule is necessary or appropriate to protect the public interest or to effectuate any of the provisions or accomplish any of the purposes of the CEA.
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6 l, 6m, 6n, 6 o, 12a and 23, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (Jul. 21, 2010).
(3) Any contract, agreement or transaction subject to Commission jurisdiction under section 2(c)(2) of the Act; andStart Printed Page 11704
(4) A swap dealer that is registered as such under the Act, with respect to funds, securities or other property accepted to purchase, margin, guarantee Start Printed Page 11705or secure any swap that is not cleared through a derivatives clearing organization.
2. The Commission's regulations are found at 17 CFR Ch. I (2010) and can be accessed through the Commission's Web site, http://www.cftc.gov.
3. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/​ucm/​groups/​public/​@swaps/​documents/​file/​hr4173_​enrolledbill.pdf.
5. 7 U.S.C. 1 et seq. (2006). The CEA also can be accessed through the Commission's web site.
6. See Section 721(a) of the Dodd-Frank Act, which re-organized (and in some cases amended) existing definitions in, and added new definitions to, Section 1a of the CEA. The CPO and CTA definitions, as amended, are to be codified respectively at CEA sections 1a(11) and 1a(12).
7. See, e.g., Regulations 4.21 and 4.31, which respectively require registered CPOs and CTAs to deliver a Disclosure Document to prospective pool participants and clients. See also Regulation 4.41, which proscribes fraudulent advertising by CPOs, CTAs, and their principals.
8. See, e.g., Regulations 4.24(l) and 4.34(k), which currently do not include “swap dealer” among the intermediaries for whom a CPO or CTA must provide information concerning material litigation in its Disclosure Document. See also Regulations 4.24(g) and 4.34(g), which do not specify any risks unique to trading swaps in calling for disclosure of principal risk factors.
9. Part 4 applies to CPOs with respect to their activities affecting pool participants and to CTAs with respect to their activities affecting clients. Depending on the nature of its activities, a CPO or CTA may also come within the definition of the term “swap dealer” or “major swap participant” in new CEA Section 1a(49) or 1a(33), respectively (added to the CEA by Section 721(a) of the Dodd-Frank Act). As directed by the Dodd-Frank Act, the Commission has proposed new regulations that would establish business conduct standards for swap dealers and major swap participants. See 75 FR 80638 (Dec. 22, 2010). These new regulations would apply to swap dealers and major swap participants with respect to the counterparties with whom they transact swap business, and would govern different activity than that to which the Part 4 regulations apply.
10. See, e.g., Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations, 76 FR 7976 (Feb. 11, 2011); and Swap Data Recordkeeping and Reporting Requirements; Proposed Rule, 75 FR 76574 (Dec. 8, 2010).
11. See, e.g., Regulations 4.10(f) and (g), which respectively define the terms “direct” and “trading program;” 4.12(b)(1)(i)(D), which provides an exemption from CPO registration where, among other things, the pool at issue “will trade * * * commodity interests in a manner solely incidental to its securities trading activities;” 4.22(a)(1), which requires itemization in a pool's periodic Account Statement of certain information concerning commodity interest trading; 4.23 and 4.33, which respectively require CPOs and CTAs to make and keep certain books and records relating to commodity interest trading; and 4.24 and 4.34, which respectively require CPOs and CTAs to disclose specified information with respect to “commodity interests.”
12. Section 721(a) of the Dodd-Frank Act added this new definition to Section 1a of the CEA.
13. See Proposed Regulation 45.2, 75 FR 76574. In this regard, the Commission notes that it intends to propose regulations concerning recordkeeping and reporting requirements for “pre-enactment swaps” and “transition swaps,” as those terms will be defined in that proposal. The Commission further intends to provide a cross-reference in Regulations 4.23(b)(1) and 4.33(b)(1) to any such requirements it may adopt.
14. The Commission intends to address the circumstances in which non-bank swap dealers may be required or permitted to accept margin payments in uncleared swap transactions in a future proposed rulemaking. Accordingly, this proposed amendment to Regulation 4.30 should not be interpreted to impose or authorize any such margin requirements.
15. Subject to certain limited exceptions, the provisions of the Dodd-Frank Act become effective 360 days after its enactment (Jul. 21, 2010).
18. See 47 FR 18618 (Apr. 30, 1982).
20. While the Proposal would amend Regulation 4.30, which concerns prohibited activities by a CTA regardless of registration status, that amendment would extend to persons registered as a swap dealer the existing exclusion from the regulation's scope.