2011-18248
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Federal Register, Volume 76 Issue 138 (Tuesday, July 19, 2011)[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Rules and Regulations]
[Pages 42508-42534]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18248]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter 1
Effective Date for Swap Regulation
AGENCY: Commodity Futures Trading Commission.
ACTION: Final Order.
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SUMMARY: On June 17, 2011, the Commodity Futures Trading Commission
(``CFTC'' or the ``Commission'') published for public comment in the
Federal Register a proposed order that would grant, pursuant to the
Commission's exemptive authority pursuant to the Commodity Exchange Act
(``CEA''), certain temporary relief from the provisions of the CEA
added or amended by title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act'') that reference one or more
terms regarding entities or instruments that title VII requires be
``further defined,'' such as the terms ``swap,'' ``swap dealer,''
``major swap participant,'' or ``eligible contract participant,'' to
the extent that requirements or portions of such provisions
specifically relate to such referenced terms and do not require a
rulemaking. The CFTC also proposed to grant temporary relief from
certain provisions of the CEA that will or may apply to certain
agreements, contracts, and transactions in exempt or excluded
commodities as a result of the repeal of various CEA exemptions and
exclusions as of the general effective date set forth in section 754 of
the Dodd-Frank Act, July 16, 2011. Upon consideration of the full
record, the Commission has determined to issue this final exemptive
order (``Final Order'') essentially as proposed, with appropriate or
necessary modification or clarification.
DATES: Effective July 14, 2011.
FOR FURTHER INFORMATION CONTACT: Terry Arbit, Deputy General Counsel,
202-418-5120, tarbit@cftc.gov, or Harold Hardman, Deputy General
Counsel, 202-418-5120, hhardman@cftc.gov, Office of the General
Counsel, or Steven Kane, Consultant, 202-418-5911, skane@cftc.gov,
Office of the Chief Economist, CFTC, Three Lafayette Centre, 1151 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 the Dodd-Frank Act amends the CEA \2\ to establish a
comprehensive new regulatory framework for swaps. The legislation was
enacted 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 swap
dealers and major swap participants; (2) imposing clearing and trade
execution requirements on standardized derivative products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the rulemaking and enforcement authorities of the Commission
with respect to, among others, all registered entities and
intermediaries subject to the Commission's oversight. Title VII also
includes amendments to the federal securities laws to establish a
similar regulatory framework for security-based swaps under the
authority of the Securities and Exchange Commission (``SEC'').
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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law. 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1 et seq.
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Section 754 of the Dodd-Frank Act states that, unless otherwise
provided, the provisions of subtitle A of title VII of the Dodd-Frank
Act (``Title VII'') \3\ ``shall take effect on the later of 360 days
after the date of the enactment of this subtitle or, to the extent a
provision of this subtitle requires a rulemaking, not less than 60 days
after publication of the final rule or regulation implementing such
provision of this subtitle.'' The date 360 days after the date of
enactment is July 16, 2011.
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\3\ Subtitle A of Title VII contains two parts. Part I, entitled
``Regulatory Authority,'' consists of sections 711-720; part II,
entitled ``Regulation of Swap Markets,'' consists of sections 721-
754. Subtitle B of Title VII is entitled ``Regulation of Security-
Based Swap Markets,'' and consists of sections 761-774. References
to ``Title VII'' in this Release shall include only subtitle A of
Title VII.
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To implement the Dodd-Frank Act, as of July 8, 2011, the Commission
has issued 52 advance notices of proposed rulemaking or notices of
proposed rulemaking, two interim final rules, six final rules, and one
proposed interpretive order. The regulatory requirements that have been
proposed by the Commission present a substantially complete mosaic of
the Commission's proposed regulatory framework under Title VII. In
light of
[[Page 42509]]
this substantially complete mosaic, the Commission reopened or extended
the comment period of many of its proposed rulemakings in order to
provide the public with an additional opportunity to comment on the
proposed new regulatory framework for swaps, either in part or as a
whole.\4\ The extended comment period closed on June 3, 2011. The
Commission also has solicited public comments on the phasing of rule
implementation (i.e., identifying which requirements can be met sooner
and which ones will take more time).\5\
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\4\ See Reopening and Extension of Comment Periods for
Rulemakings Implementing the Dodd-Frank Wall Street Reform and
Consumer Protection Act, 76 FR 25274, May 4, 2011.
\5\ The Commission has noted its ability to phase in
implementation of the new requirements based on factors such as: The
type of swap, including by asset class; the type of market
participants that engage in such trades; the speed with which market
infrastructures can meet the new requirements; and whether
registered market infrastructures or participants might be required
to have policies and procedures in place ahead of compliance with
such policies and procedures by non-registrants. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/staffconcepts050211.pdf.
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Section 712(d)(1) of the Dodd-Frank Act requires the Commission and
the SEC to further define certain terms used in Title VII, including
the terms ``swap,'' ``swap dealer,'' ``major swap participant,'' and
``eligible contract participant.'' \6\ Section 721(c) requires the
Commission to adopt a rule to further define the terms ``swap,'' ``swap
dealer,'' ``major swap participant,'' and ``eligible contract
participant'' to prevent evasion of statutory and regulatory
obligations.\7\ The Commission has issued two notices of proposed
rulemaking that address these further definitions.\8\
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\6\ Section 712(d)(1) provides: ``Notwithstanding any other
provision of this title and subsections (b) and (c), the Commodity
Futures Trading Commission and the Securities and Exchange
Commission, in consultation with the Board of Governors [of the
Federal Reserve System], shall further define the terms `swap',
`security-based swap', `swap dealer', `security-based swap dealer',
`major swap participant', `major security-based swap participant',
and `security-based swap agreement' in section 1a(47)(A)(v) of the
Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''
\7\ Section 721(c) provides: ``To include transactions and
entities that have been structured to evade this subtitle (or an
amendment made by this subtitle), the Commodity Futures Trading
Commission shall adopt a rule to further define the terms `swap',
`swap dealer', `major swap participant', and `eligible contract
participant'.''
\8\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR
80174, Dec. 21, 2010 (``Entity Definitions'') and Further Definition
of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 76 FR 29818, May 23, 2011.
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The Commission's final rulemakings further defining the terms in
sections 712(d) and 721(c) will not be in place as of July 16, 2011.
Consequently, concerns have been raised about effects upon the swaps
market and the applicability of various regulatory requirements to
certain agreements, contracts, and transactions during the period
between July 16, 2011 and the date(s) that those rulemakings have been
completed. To address these concerns, and to ``strive to ensure that
current practices will not be unduly disrupted during the transition to
the new regulatory regime,'' \9\ the Commission proposed to exercise
its authority under CEA section 4(c) and section 712(f) of the Dodd-
Frank Act.
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\9\ See Notice Regarding the Treatment of Petitions Seeking
Grandfather Relief for Trading Activity Done in Reliance Upon
Section 2(h)(1)-(2) of the Commodity Exchange Act, 75 FR 56512,
56513, Sept. 16, 2010 (``Grandfather Notice'').
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Section 4(c) of the CEA, as amended by the Dodd-Frank Act, provides
the Commission with authority to exempt certain agreements, contracts,
and transactions (referred to hereafter collectively as
``transactions'') that may otherwise be subject to the CEA from various
provisions of the CEA.\10\ Section 712(f) of the Dodd-Frank Act states
that ``in order to prepare for the effective dates of the provisions of
this Act,'' including the general effective date set forth in section
754, the Commission may ``exempt persons, agreements, contracts, or
transactions from provisions of this Act, under the terms contained in
this Act.'' Section 754 specifies that unless otherwise provided in
Title VII, provisions requiring a rulemaking become effective ``not
less than 60 days after publication of the final rule'' (but not before
July 16, 2011).
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\10\ 7 U.S.C. 6(c).
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The provisions of Title VII can be grouped into four major
categories: (1) Provisions that require a rulemaking (for which relief
was not proposed); (2) self-effectuating provisions that reference
terms that require further definition; (3) self-effectuating provisions
that do not reference terms that require further definition and that
repeal provisions of current law; and (4) self-effectuating provisions
for which relief was not proposed.
Category 1 provisions are not self-effectuating because they
require a rulemaking. A significant number of the Title VII provisions
fall into this category. Examples of Category 1 provisions include new
CEA section 4s(a) (governing registration of swap dealers and major
swap participants), new CEA section 4s(e) (governing capital and margin
requirements for swap dealers and major swap participants), and new CEA
section 4s(h) (external business conduct standards for swap dealers and
major swap participants).\11\ Pursuant to section 754, the rulemakings
to implement these provisions of the CEA will not become effective, at
a minimum, until 60 days after publication of a final Commission rule
(and not before July 16, 2011).
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\11\ To be codified at 7 U.S.C. 6s(a), 6s(e) and 6s(h),
respectively.
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Because the Category 1 provisions are not self-effectuating as of
July 16, 2011, it was not necessary for the Commission to propose
relief with respect to the same. As noted above, the Category 1
provisions will not go into effect until at least 60 days after
publication of a final Commission rule in the Federal Register.\12\
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\12\ As stated in footnote 5, supra, the Commission has
discretion to phase-in implementation of new requirements in
Category 1 rulemakings as well as rulemakings conducted with respect
to Category 2 provisions. Accordingly, the Commission anticipates
that it may establish compliance dates for the substantive
requirements established in a rulemaking implementing Category 1
provisions that differ from the effective date of the rulemaking.
The effective date and compliance dates for each rulemaking will be
determined in each rulemaking proceeding. Additionally, as stated in
footnote 69, infra, the Commission has received and has solicited
public comments with respect to the appropriate phase-in of the
Dodd-Frank Act rulemaking requirements.
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The Category 4 provisions also fell outside the scope of the
proposed order. They are self-effectuating and do not require relief
because, in the judgment of the Commission, compliance with these
requirements upon the effective date will not cause undue disruption to
affected transactions, markets, or entities, and a delay of the
imposition of these statutory requirements would not be in the public
interest.
The proposed order, as well as lists of the Category 1 and Category
4 provisions prepared by Commission staff, were published on the
Commission's Web site (http://www.cftc.gov) on June 14, 2011. A list of
the provisions in each of the four categories is provided in the
Appendix to this Final Order.
II. The Proposed Order
On June 14, 2011, the Commission issued a proposed order to provide
temporary exemptive relief in two parts, each addressing one of the
remaining categories of provisions noted above: (1) Category 2--
provisions that are self-effectuating (i.e., do not require rulemaking)
and reference terms that require further definition (i.e., ``swap,''
``swap dealer,'' ``major swap participant,'' or ``eligible contract
[[Page 42510]]
participant''); and (2) Category 3--provisions that are self-
effectuating (i.e., do not require rulemaking) and repeal provisions of
current law, but that do not reference terms that require further
definition. The Commission's proposed order was published in the
Federal Register on June 17, 2011.\13\
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\13\ See Effective Date for Swap Regulation, 76 FR 35372, June
17, 2011.
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With respect to part one of the proposed order addressing Category
2 provisions, the Commission proposed to temporarily exempt persons and
entities from the provisions of the CEA, as added or amended by the
Dodd-Frank Act, that reference one or more of the terms regarding
entities or instruments subject to further definition under sections
712(d) and 721(c) of the Dodd-Frank Act, including the terms ``swap,''
``swap dealer,'' ``major swap participant,'' or ``eligible contract
participant.'' \14\ CEA section 4d(f), as amended by section 724 of the
Dodd-Frank Act, is an example of a Category 2 provision to which the
exemption provided in the proposed order would extend.\15\
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\14\ 76 FR at 35374. In footnote 15 of the proposed order, the
Commission stated: ``The Commission's authority to provide exemptive
relief under CEA section 4(c), as amended by section 721(d) of the
Dodd-Frank Act, may not extend to certain Category 2 provisions of
the Dodd-Frank Act and the CEA. These provisions include: new CEA
section 4s(l), 7 U.S.C. 6s(l) (providing for swap dealer segregation
requirements with respect to uncleared swaps); amended CEA section
5b(a), 7 U.S.C. 7a-1(a) (prohibiting a DCO from performing the
functions of a DCO with respect to swaps unless the DCO is
registered with the Commission); and new CEA section 4s(k), 7 U.S.C.
6s(k) (providing for the duties and designation of a chief
compliance officer for swap dealers and major swap participants). As
such, these provisions will take effect on July 16, 2011, and may
not be subject to the exemptive relief noted above granted by the
Commission. 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 similar time period.'' Subsequently, a draft staff
no-action letter that would provide such relief was posted on the
Commission's Web site. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/noaction061411.pdf.
\15\ To be codified at 7 U.S.C. 6d(f). Thus, for example,
persons who accept money, securities or property (or extend credit
in lieu thereof) from, for, or on behalf of a swaps customer to
margin, guarantee, or secure a swap cleared by or through a
derivatives clearing organization would not be required to register
as futures commission merchants as otherwise required by section
4d(f)(1) until the expiration of the exemption in part one of the
proposed order.
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The Commission made clear that the proposed exemptive relief from
such provisions would apply only with respect to those requirements or
portions of such provisions that specifically relate to such referenced
terms. Further, the Commission stressed that the proposed relief
``would not in any way limit the Commission's authority with respect to
any person, entity, or transaction pursuant to CEA sections 2(a)(1)(B),
4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the
Commission promulgated pursuant to such authorities, including
regulations pursuant to CEA section 4c(b) proscribing fraud.'' \16\
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\16\ 76 FR at 35374. In footnote 16 of the proposed order, the
Commission stated, ``The Dodd-Frank Act amended the CEA's anti-fraud
and anti-manipulation provisions to cover `swaps.''' Examples of
such provisions include the amendments to the antifraud provisions
in CEA section 4b, 7 U.S.C. 6b, as well as the amendments set forth
in section 746 of the Dodd-Frank Act, which enacted certain insider
trading prohibitions that apply to, among other things, futures
contracts and swaps. The Commission stated: ``Although these
provisions therefore would, under the proposed relief, not apply to
`swaps' under the Dodd-Frank Act because that term is subject to
further definition, nevertheless, they will apply to all
transactions other than `swaps' (including, but not limited to,
futures contracts, options on futures contracts, transactions with
retail customers in foreign currency or other commodities pursuant
to CEA section 2(c)(2) (7 U.S.C. 2(c)(2)), and transactions subject
to exemptive relief pursuant to part two of the proposed order).''
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The Commission also placed other limitations on the relief in part
one of the proposed order. First, the Commission stated that the relief
would not apply to any provisions of Title VII and the CEA that have
become effective prior to July 16, 2011 or to Commission regulations
already issued.\17\ Further, the relief would not affect any effective
date set out in any specific Dodd-Frank Act rulemaking by the
Commission.\18\ In addition, the proposed order would not limit the
Commission's authority under section 712(f) of the Dodd-Frank Act to
issue rules, orders, or exemptions prior to the effective date of any
provision, in order to prepare for the effective date of such
provision, provided that such rule, order, or exemption shall not
become effective prior to the effective date of the provision.\19\
Finally, the Commission stated that the proposed order would not affect
the applicability of any provision of the CEA to futures contracts or
options on futures contracts.\20\
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\17\ 76 FR at 35374. In footnote 17 of the proposed order, the
Commission included the following citation: ``See, e.g., section
737(d) of the Dodd-Frank Act (amendments regarding position limits
effective on the date of enactment). Similarly, this relief would
not affect the effective date of any provision that may become
effective after July 16, 2011, such as section 716 of the Dodd-Frank
Act.''
\18\ 76 FR at 35374.
\19\ Id.
\20\ Id. In footnote 18 of the proposed order, the Commission
stated: ``Accordingly and by way of non-exclusive example, where a
provision references both swaps and futures, this relief does not
affect in any way the application of the provision (and any
implementing Commission regulations thereunder) insofar as it refers
to futures.''
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The Commission proposed that the temporary exemptive relief would
expire upon the earlier of: (1) The effective date of the applicable
final rule further defining the relevant term; or (2) December 31,
2011.\21\ In proposing to limit the relief to no more than a fixed
period (i.e., December 31, 2011), the Commission provided the following
reasons:
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\21\ 76 FR at 35374.
First, the Commission believes it appropriate and prudent to
periodically review the extent and scope of any relief provided from
the CEA, as amended by the Dodd-Frank Act. The Commission
anticipates that additional rulemakings to implement the Dodd-Frank
Act will be completed during this period of transitional relief.
During this period the Commission also will be considering the
appropriate phase-in of the various regulatory requirements under
the Dodd-Frank rulemakings. Accordingly, the Commission believes it
would be appropriate to periodically re-examine the scope and extent
of the proposed exemptive relief in order to ensure that the scope
of relief is appropriately tailored to the schedule of
implementation of the Dodd-Frank Act requirements.
Second, the limitation of this exemptive relief to no more than
a fixed period of time is consistent with similar limitations on
transitional relief provided by the Congress elsewhere in Title VII.
Section 723(c) of the Dodd-Frank Act allows persons to submit
petitions to the Commission ``to remain subject to section 2(h) of
the [CEA].'' In acting upon such petitions, the Commission may allow
persons to ``continue operating subject to section 2(h) [of the CEA]
for not longer than a 1-year period.'' Similarly, section 734
authorizes the Commission to grant petitions for persons to remain
subject to the provisions of section 5d of the CEA governing the
operation of exempt boards of trade (``EBOTs'') ``for up to 1 year
after the effective date of this subtitle.'' In light of these
provisions authorizing the Commission to provide transitional relief
for no longer than a fixed period of time, the Commission believes
it would be appropriate to provide transitional relief consistent
with section 712(f) of the Dodd-Frank Act and CEA section 4(c) under
this proposed order for no longer than a fixed time period.\22\
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\22\ 76 FR at 35375 (footnotes omitted).
In the proposed order, the Commission reiterated its intent: (1)
That existing practices should not be unduly disrupted during any
transition period; and (2) to deliberatively and efficiently proceed to
complete the rulemakings to implement the Dodd-Frank Act.\23\ As to
timing, the Commission proposed that in the event that a further
definitions rulemaking is completed prior to December 31, 2011, the
Commission will at the time of such
[[Page 42511]]
rulemaking address the appropriate phase-in and implementation dates of
the resulting regulatory requirements. Alternatively, the Commission
stated, should the proposed order expire at the end of the fixed time
period--December 31, 2011--such expiration will not affect the
Commission's ability to provide further relief, as appropriate, to
avoid undue disruption or costs to market participants.\24\
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\23\ Id.
\24\ Id.
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With respect to part two of the proposed order addressing Category
3 provisions, the Commission's proposed order identified the existing
provisions of the CEA that currently exclude or exempt, in whole or in
part, certain transactions from Commission oversight under the CEA.\25\
These are as follows:
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\25\ Id.
i. Section 2(d)(1),\26\ transactions in excluded commodities
\27\ between eligible contract participants and not executed or
traded on a trading facility;
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\26\ 7 U.S.C. 2(d)(1).
\27\ The term ``excluded commodity'' is defined in CEA section
1a(13), 7 U.S.C. 1a(13), to include, among other things, financial
instruments such as a currency, interest rate, or exchange rate, or
any economic or commercial index based on prices, rates, values, or
levels that are not within the control of any party to the
transaction.
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ii. Section 2(d)(2),\28\ principal-to-principal transactions in
excluded commodities between certain eligible contract participants
and executed or traded on an electronic trading facility;
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\28\ 7 U.S.C. 2(d)(2).
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iii. Section 2(g),\29\ transactions subject to individual
negotiation between eligible contract participants in commodities
other than agricultural commodities and not executed or traded on a
trading facility;
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\29\ 7 U.S.C. 2(g).
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iv. Sections 2(h)(1)-(2),\30\ transactions in exempt commodities
\31\ between eligible contract participants and not entered into on
a trading facility;
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\30\ 7 U.S.C. 2(h)(1)-(2).
\31\ The term ``exempt commodity'' is defined in CEA section
1a(14), 7 U.S.C. 1a(14), as a commodity other than an excluded or
agricultural commodity, and includes energy and metals commodities.
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v. Sections 2(h)(3)-(7),\32\ principal-to-principal transactions
in exempt commodities between eligible commercial entities \33\ and
executed or traded on an electronic trading facility (called exempt
commercial markets, or ``ECMs'');
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\32\ 7 U.S.C. 2(h)(3)-(7).
\33\ The term ``eligible commercial entity'' is defined in CEA
section 1a(11), 7 U.S.C. 1a(11).
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vi. Section 5d,\34\ transactions in commodities, among other
things, having a nearly inexhaustible deliverable supply or no cash
market, between eligible contract participants and traded on an
exempt board of trade (``EBOT''); and
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\34\ 7 U.S.C. 7a-3.
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vii. Section 2(e),\35\ which generally provides that nothing in
the CEA governs or is applicable to an electronic trading facility
that limits transactions authorized to be conducted on its
facilities to those satisfying the requirements of sections 2(d)(2),
2(g) or 2(h)(3).
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\35\ 7 U.S.C. 2(e).
Under the Dodd-Frank Act, these provisions will be removed from the
CEA as of July 16, 2011. However, the Commission noted that part 35 of
the Commission's regulations,\36\ and part 32 with respect to
options,\37\ will continue to be available with respect to transactions
that meet the conditions therein, until such time as they may be
withdrawn, amended, or replaced by the Commission.\38\
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\36\ 17 CFR 35.1 et seq.
\37\ 17 CFR 32.1 et seq.
\38\ 76 FR at 35375 and 35376 n.36.
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As the Commission stated in the proposed order, part 35 originally
was promulgated in 1993 pursuant to, among others, the Commission's
general exemptive authority in CEA section 4(c) and authority under
section 4c(b), and provides a broad-based exemption from the CEA for
``swap agreements'' in any commodity.\39\ Specifically, part 35 exempts
``swap agreements,'' as defined therein, from most of the provisions of
the CEA if: (1) They are entered into by ``eligible swap participants''
(``ESPs''); \40\ (2) they are not part of a fungible class of
agreements standardized as to their material economic terms; \41\ (3)
the creditworthiness of any party having an actual or potential
obligation under the swap agreement would be a material consideration
in entering into or determining the terms of the swap agreement,
including pricing, cost, or credit enhancement terms; \42\ and (4) they
are not entered into or traded on a multilateral transaction execution
facility.\43\ The Commission stated that transactions fully meeting the
conditions of part 35 are outside the scope of the proposed order.\44\
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\39\ The Commission notes, as discussed infra, that part 35 was
originally promulgated in part pursuant to the Commission's plenary
options authority in CEA section 4c(b), 7 U.S.C. 6c(b).
\40\ The parties covered under the ESP definition, while very
broad, are not coextensive with those covered by the terms
``eligible commercial entity'' or ``eligible contract participant.''
Therefore, it is possible that a small segment of persons or
entities that are currently relying on one or more of the CEA
exclusions or exemptions cited above might not qualify as an ESP and
consequently would not be eligible for exemptive relief under part
35.
\41\ This condition was designed so that the exemption would not
establish ``a market in swap agreements, the terms of which are
fixed and are not subject to negotiation that functions essentially
in the same manner as an exchange but for the bilateral execution of
transactions.'' See Exemption for Certain Swap Agreements, 58 FR
5587, 5590, Jan. 22, 1993.
\42\ By this condition, the exemption does not extend to
transactions that are subject to a clearing system where the credit
risk of individual members of the system to each other in a
transaction to which each is a counterparty is effectively
eliminated and replaced by a system of mutualized risk of loss that
binds members generally, whether or not they are counterparties to
the original transaction. Id. at 5591.
\43\ In this context, a multilateral transaction execution
facility is a physical or electronic facility in which all market
makers and other participants that are members simultaneously have
the ability to execute transactions and bind both parties by
accepting offers which are made by one member and open to all
members of the facility. Id.
\44\ 76 FR at 35376. In footnote 36, the proposed order also
stated that ``part 32 of the Commission's regulations will continue
to be available with respect to commodity option transactions that
meet the conditions therein, until such time as part 32 may be
withdrawn, amended, or replaced by the Commission.'' See Commodity
Options and Agricultural Swaps, 76 FR 6095, Feb. 3, 2011.
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However, because part 35 covers essentially non-standardized, non-
cleared, non-exchange traded transactions, certain persons or entities
that currently rely on the CEA exclusions or exemptions cited above may
not qualify for part 35. Therefore, and in response to requests from
market participants for greater clarity regarding the applicability of
various statutory and regulatory requirements to certain transactions
following the general effective date, the Commission, pursuant to its
authority under CEA section 4(c), proposed to grant relief for those
transactions that satisfy certain criteria specified below.\45\
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\45\ 76 FR at 35376.
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Specifically, the Commission proposed to temporarily exempt a
transaction in exempt or excluded commodities (and any person or entity
offering or entering into such transaction) from the CEA (other than
the anti-fraud and anti-manipulation enforcement provisions identified
below) following the general effective date if the transaction
otherwise would comply with part 35, notwithstanding that: (1) The
transaction may be executed on a multilateral transaction execution
facility; (2) the transaction may be cleared; (3) persons offering or
entering into the transaction may be eligible contract participants as
defined in the CEA (prior to July 16, 2011); (4) the transaction may be
part of a fungible class of agreements that are standardized as to
their material economic terms; and/or (5) no more than one of the
parties to the transaction is entering into the transaction in
conjunction with its line of business, but is neither an eligible
contract participant nor an ESP, and the transaction was not and is not
marketed to the public (the ``line of business provision'').\46\
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\46\ Id. In footnote 37, the proposed order stated that
commenters responding to the Commission's proposed Entity
Definitions have suggested that the Commission should exercise its
authority to further define the term ``eligible contract
participant'' to encompass the ``line of business'' provision that
was a part of the Commission's Policy Statement Concerning Swap
Transactions, 54 FR 30694, 30696-30697, July 21, 1989. The staff is
evaluating these comments in the context of the Commission's
rulemaking to further define the term ``eligible contract
participant.''
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[[Page 42512]]
As the Commission noted, the proposed temporary exemptive relief
would not affect the availability of either parts 35 or 32 with respect
to transactions that fully meet the conditions therein.\47\ For
transactions that fall outside of existing parts 35 or 32, the
Commission made clear that the proposed relief would only be available
to the extent those transactions (and persons offering or entering into
such transactions) fall within the scope of any of the existing CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d as in effect prior to July 16,
2011 or the line of business provision.\48\
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\47\ 76 FR at 35376. In addition, in September 2010, the
Commission published an order in the Federal Register providing that
it would extend grandfather relief, as provided in sections 723(c)
and 734(c) of the Dodd-Frank Act, to ECMs and EBOTs provided that
certain conditions are met. See Order Regarding the Treatment of
Petitions Seeking Grandfather Relief for Exempt Commercial Markets
and Exempt Boards of Trade, 75 FR 56513, Sept. 16, 2010
(``grandfather relief orders''). The Commission stated that nothing
in the proposed order was intended to impact the availability of the
independent grandfather relief provided in the grandfather relief
orders. Id. at n.38.
\48\ 76 FR at 35376. The Commission stated in footnote 39 of the
proposed order that the exemptive relief would not be available to
an electronic trading facility that, as of July 15, 2011, is not
already operating as an ECM pursuant to CEA sections 2(h)(3)-(7), or
to an EBOT that, as of July 15, 2011, is not already operating
pursuant to CEA section 5d, or not compliant with the conditions set
forth in such provisions.
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With respect to any transaction within the scope of part two of the
proposed order, the Commission stated that the proposed exemptive
relief ``would not in any way limit the Commission's authority with
respect to any person, entity, or transaction pursuant to CEA sections
2(a)(1)(B), 4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2) or 13, or the
regulations of the Commission promulgated pursuant to such authorities,
including regulations pursuant to CEA section 4c(b) proscribing
fraud.'' \49\ Additionally, the Commission stated that the proposed
relief would not affect any Dodd-Frank Act implementing regulations
(and any implementation period contained therein) that the Commission
promulgates and applies to the subject transactions, market
participants, or markets.\50\ With respect to timing, the Commission
proposed that this temporary exemptive relief would expire upon the
earlier of: (1) December 31, 2011; or (2) the repeal or replacement of
parts 35 or 32, as applicable.\51\ The Commission also specified that
the exemptive relief in part two of the proposed order would operate
for no longer than a fixed period of time for the same reasons as
described above with respect to part one of the proposed order.\52\
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\49\ 76 FR at 35376. In so doing, the Commission noted that
``the addition of the term `swap' to some of these provisions would
not in any way affect the applicability of these anti-fraud and
anti-manipulation enforcement provisions to transactions subject to
relief pursuant to part two of the proposed order.'' Id. at n.40.
\50\ 76 FR at 35376. The Commission noted that the proposed
order would not affect any Commission rulemaking authority over
agreements, contracts, or transactions that may not depend on the
terms subject to further definition under sections 712(d) or 721(c)
of the Dodd-Frank Act. This relief also would not affect any
provisions of the Dodd-Frank Act or the CEA that have become
effective prior to July 16, 2011 or regulations already issued. Id.
at n.41.
\51\ 76 FR at 35376.
\52\ Id.
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III. Comments on the Proposed Relief and Commission Determinations
A. Comments Generally
The Commission requested comment on all aspects of the proposed
order, including whether the proposed temporary exemptions are
consistent with the public interest and other requirements of CEA
section 4(c).\53\ The Commission received 19 comment letters from a
variety of interested parties, including market participants and trade
associations, trading platforms and clearing organizations, futures and
derivatives committees of bar associations, a law firm, and a non-
governmental public interest organization.\54\
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\53\ 76 FR at 35377.
\54\ Comments unrelated to the proposed order will not be
evaluated here, but will inform the Commission as it proceeds with
its Dodd-Frank Act rulemakings.
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The majority of commenters generally supported the Commission
taking action to provide clarity and exemptive relief with respect to
the July 16 effective date. For example, the American Feed Industry
Association (``AFIA'') described the proposed order as ``a prudent
move'' to ``ensure current practices for bona fide hedgers and end-
users of agricultural commodities are not unduly disrupted during the
transition.'' \55\ Better Markets, Inc. (``Better Markets'') described
the proposed relief as ``appropriate and reasonable,'' and said that a
limited delay is ``consistent with the Dodd-Frank Act, informed
rulemaking and the goal of financial reform.'' \56\ The Alternative
Investment Management Association (``AIMA'') commented that the
proposed order was ``clear and provide[s] sufficient guidance for
persons and entities to know which rules fall within the order and
which do not.'' \57\ The National Grain and Feed Association (``NGFA'')
commended the agency ``for taking steps to ensure the continued
availability of important risk management tools used by hedgers in the
grain, feed and processing industry.'' \58\
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\55\ See letter dated June 28, 2011, from Joel G. Newman,
President and Chief Executive Officer, AFIA, at p. 1.
\56\ See letter dated July 1, 2011, from Dennis M. Kelleher,
President and Chief Executive Officer and Wallace C. Turbeville,
Derivatives Specialist, Better Markets, at pp. 1, 2.
\57\ See letter dated July 1, 2011, from Jiri Krol, Director of
Government & Regulatory Affairs, AIMA, at page 2.
\58\ See letter dated July 1, 2011, from Matt Bruns, Chair, Risk
Management Committee, NGFA, at p. 1.
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Commenters also suggested various modifications or clarifications
of the proposed order to address specific issues related to the scope
or basis for the proposed exemptive relief. These issues, which are
discussed in the remainder of this section below, include: (1) The
scope of temporary relief; (2) the expiration date; (3) coverage of
commodity options and agricultural swaps; (4) coverage of eligible
contract participants; (5) private rights of action; (6) preemption;
(7) market issues; (8) core principles; (9) intermediary issues; and
(10) the scope of ``appropriate persons'' under CEA section 4(c). After
considering the complete record in this matter, the Commission has
determined that the requirements of CEA section 4(c) have been met. For
the reasons discussed below, the Commission deems it in the public
interest to issue this Final Order substantially as proposed, except
for certain clarifications set forth in the discussion in this section
below, which the Commission deems appropriate or necessary upon due
consideration of the comments received.
B. Scope of Temporary Relief
1. Comments
Several commenters expressed general support for the Commission's
effort to provide exemptive relief but urged the Commission to use what
they stated to be the Commission's broad authority to grant a more
comprehensive relief. For example, the Committee on Futures and
Derivatives Regulation of the New York City Bar Association (``NYCBA'')
stated that the Commission has ``ample'' authority, either based solely
on CEA Section 4(c) or as supplemented by section 754 and section
712(f) of the Dodd-Frank Act, to
[[Page 42513]]
delay the effective date of the Dodd-Frank Act provisions until the
effective date of the related implementing regulations.\59\ Similarly,
the Derivatives and Futures Law Committee of the Business Law Section
of the American Bar Association (``ABA Derivatives Committee'') stated
that sections 754 and 712(f), as well as CEA section 4(c), authorize
the Commission to temporarily grant relief from the Dodd-Frank Act
until all necessary final rulemakings, including rulemakings as to
definitions, are in place.\60\ Finally, BG Americas & Global LNG
(``BGA'') contends that section 721(f) of the Dodd-Frank Act authorizes
the Commission to extend exemptive relief with respect to CEA sections
4s(l) (collateral segregation requirements for uncleared swaps) and
4s(k) (duties and designation of a chief compliance officer).\61\
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\59\ See letter dated June 30, 2011, from Timothy P. Selby,
Chair, NYCBA, at p. 3. NYCBA asserted that the requirement in
section 712(f)(4) that exemptions be made ``under the terms of the
Act'' is intended to require that they be made under the provisions
establishing or limiting regulatory authority under the Dodd-Frank
Act as a whole, rather than referring to the substance of the
exemptive authority available under provisions of the CEA. Id. at p.
4.
\60\ See ABA Derivatives Committee at pp. 2-3. The ABA
Derivatives Committee stated that the Commission's exemptive
authority under the Dodd-Frank Act is broader than the exemptive
authority specifically conferred by the CEA, especially in light of
the different language of section 712(e) as compared to section
712(f). Id. at p. 5.
\61\ See letter dated July 1, 2011, from Lisa Yoho, Director,
Regulatory Affairs and Matt Schatzman, Senior Vice President, Energy
Marketing, BGA, at pp. 9-10. As discussed in footnote 14, supra, the
Commission believes that its authority to provide exemptive relief
under section 4(c), as amended by section 721(d) of the Dodd-Frank
Act, may not extend to certain Category 2 provisions, such as CEA
sections 4s(l) and 4s(k), though the Commission is informed that
staff is separately considering a no-action letter with respect to
these provisions.
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The Commission also received comments requesting modification or
clarification regarding the categorization of certain provisions of the
Dodd-Frank Act.\62\ Specifically, seven trade associations
(collectively, the ``Associations'') filed a joint comment letter
contending that many provisions in Categories 1 and 2 are
interdependent with related rulemakings (including those relating to
definitions) and, thus, should be extended exemptive relief until all
of the mutually-interdependent rulemakings have been completed.\63\ The
ABA Derivatives Committee believes that Category 2 provisions also are
Category 1 provisions because they require the definitional rulemakings
to be completed.\64\
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\62\ See generally letter dated July 1, 2011, from David M.
Perlman, Bracewell & Giuliani LLP, on behalf of the Coalition of
Physical Energy Companies, at p. 3 (requesting statement that the
Commission intends to preserve the legal status quo for the swaps
market unless and until it affirmatively and systematically makes
changes).
\63\ See letter dated July 1, 2011, from American Bankers
Association, ABA Securities Association, Futures Industry
Association, Institute of International Bankers, International Swaps
and Derivatives Association, Investment Company Institute, and
Securities Industry and Financial Markets Association, at p. 4.
\64\ See ABA Derivatives Committee at p. 3.
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Commenters addressing the proposed relief for Category 3 provisions
urged that the Commission use its broad authority under CEA section
4(c) and section 712(f) of the Dodd-Frank Act to amend part 35 of the
Commission's regulations to provide blanket exemptive relief.\65\ The
NYCBA recommended that the Commission preserve the current ``safe
harbors'' in CEA sections 2(d), 2(e), 2(g), 2(h) and 5d until the
effective date of the applicable final rules with certain
clarifications, and that such ``safe harbors'' should be available even
if the subject transaction is cleared.\66\
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\65\ See, e.g., letter dated July 1, 2011, from R. Michael
Sweeney, Jr., Hunton & Williams, on behalf of the Working Group of
Commercial Energy Firms (``CEF''), at pp. 3-4. In the alternative,
CEF recommends that at a minimum, the Commission use its authority
under sections 723(c)(l)-(2) to provide grandfather relief to all
persons who transact, operate, or otherwise rely on current CEA
section 2(h) as well as all transactions subject to this provision,
for a six-month period commencing on July 16, 2011. CEF states that
the Commission may rely on section 712(f) as well as sections
723(c)(l)-(2) to exempt persons relying on current CEA sections
2(h)(l)-(2) in carrying out their bilateral exempt commodity
transactions, for up to a one year period, following the effective
date. CEF at p. 4.
\66\ NYCBA at pp. 6-8.
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2. Commission Determination
As stated in the proposed order, a significant number of Dodd-Frank
Act provisions are not self-effectuating and, thus, it is not necessary
to provide relief with respect to such provisions (i.e., Category 1).
With respect to the provisions of the Dodd-Frank Act in Categories 2 or
3, the Commission has determined to use its authority to issue this
exemptive relief under section 712(f) of the Dodd-Frank Act co-
extensively with its exemptive authority under the CEA.\67\ The
exemptive relief will allow markets and market participants to continue
to operate under the regulatory regime as in effect prior to July 16,
2011, but subject to various implementing regulations that the
Commission promulgates and applies to the subject transactions, market
participants, or markets.
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\67\ See CEA sections 4(c) and 4c(b).
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This temporary relief, in the Commission's judgment, is
appropriately tailored to enable the Commission to continue to
implement the Dodd-Frank Act in an expeditious manner, while minimizing
undue disruption and uncertainty for the markets and market
participants during the transition period. In this regard, the
Commission reiterates that, in considering the appropriate phase-in of
its various Dodd-Frank Act implementing regulations, it intends to
continue to ``strive to ensure that current practices will not be
unduly disrupted during the transition to the new regulatory
regime.''\68\ While the sequencing of the final rules is beyond the
scope of this Final Order, the interdependencies of the various
rulemakings will be a consideration in determining the implementation
date for each final rule.\69\
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\68\ See Grandfather Notice, supra, n.9.
\69\ During the Dodd-Frank Act rulemaking process the Commission
has received a number of comments recommending that the Commission
appropriately sequence the effective dates and compliance dates
under the various Dodd-Frank Act rulemakings. As noted in footnote
5, supra, the Commission already has held a roundtable and solicited
public comments with respect to the appropriate phase-in of the
Dodd-Frank Act rulemaking requirements. Prior to the roundtable, on
April 29, 2011, CFTC staff released a document that set forth
concepts that the Commission may consider with regard to the
effective dates of final rules for swaps under the Dodd-Frank Act.
The Commission therefore anticipates that the determinations
regarding the phase-in of compliance dates for and within the
various rulemakings will continue to be informed by the Commission's
further consideration of this issue, including public comments.
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C. Expiration Date
1. Comments
The proposed order included an outermost, fixed expiration date for
parts one and two of the exemptive relief. Part one would expire on the
earlier of: (1) The effective date of the applicable final rule further
defining the relevant term; or (2) December 31, 2011. Part two of the
proposed order would expire on the earlier of: (1) December 31, 2011;
or (2) the repeal or replacement of part 35 of the Commission's
regulations. In the proposed order, the Commission explained that
setting an expiration date was ``appropriate to periodically re-examine
the scope and extent of the proposed exemptive relief'' and that ``the
limitation of this exemptive relief to no more than a fixed period of
time is consistent with similar limitations on transitional relief
provided by the Congress'' in section 723(c) and section 734 of the
Dodd-Frank Act.\70\
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\70\ 76 FR at 35375.
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Better Markets generally supported the expiration date because it
believes that it is extremely important for the
[[Page 42514]]
Commission to have the ability to assess conditions related to
implementation as they evolve over the next six months.\71\ Conversely,
the ABA Derivatives Committee, AIMA, the Associations, CME Group Inc.
(``CME''), and MarketAxess Holdings Inc. (``MarketAxess'') argued that
a predetermined global expiration date was not necessary and the
Commission should provide that the temporary relief will expire for a
given rule only upon the effective date (or compliance date, if later)
of the applicable final rule.\72\
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\71\ See Better Markets at p. 2.
\72\ See ABA Derivatives Committee at p. 6; AIMA at p. 2;
Associations at p. 6; letter dated July 1, 2011, from Craig S.
Donohue, Chief Executive Officer, CME, at p. 2; letter dated June
29, 2011, from Richard McVey, Chairman and Chief Executive Officer,
MarketAxess, at p. 2.
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In the event the Commission decides to include an expiration date,
the NYCBA and ABA Derivatives Committee believe that the Commission
should revise the proposed order to trigger the effectiveness of the
relevant provision only when both the definitional rulemaking and the
substantive rulemaking for the relevant provision become effective.\73\
Similarly, the Associations and CME urged the Commission, at a minimum,
to extend the expiration date to July 2012, consistent with the
transitional period specified in sections 723(c) and 734 of the Dodd-
Frank Act.\74\ Finally, to address a perceived ``potential gap
period,'' the NYCBA and ABA Derivatives Committee believe that the
order should contain language specifically addressing situations where
final rules are adopted within 60 days before December 31, 2011, or
where a final rule otherwise has a prescribed effective date after
December 31, 2011.\75\
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\73\ See NYCBA at p. 4; ABA Derivatives Committee at p. 7.
\74\ See Associations at p. 6, n.11; CME at p. 2.
\75\ See NYCBA at p. 5; ABA Derivatives Committee at pp. 7-8.
NYCBA and the ABA Derivatives Committee proposed the following
language: ``This order shall expire on (1) December 31, 2011, with
respect to any provision for which final rules (including final
definitional rules) were not adopted on or before December 31, 2011,
or (2) with respect to any provision for which final rules
(including final definitional rules) were adopted on or before
December 31, 2011, on the later of the effective date of all final
definitional rules used in the provision and the effective date of
the provision as set forth in the final rules adopting such
provision.''
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2. Commission Determination
The Commission has determined, for the reasons discussed in the
proposed order, not to alter the expiration date(s) contained in the
proposed order. An automatic expiration date of no later than December
31, 2011, will allow the Commission to review the extent and scope of
relief provided from the CEA on a measured basis. Should the Commission
deem it appropriate to extend any exemptive relief, the Commission will
be in a better position to tailor any exemption at that time. Further,
as noted in the proposed order, limiting exemptive relief to a fixed
period is consistent with the approach to transitional relief provided
in sections 723(c) and 734 of the Dodd-Frank Act. With regard to any
concerns over a potential ``gap period'' before or after the expiration
date of December 31, 2011, the Commission notes that it can address
compliance date concerns within the context of each individual
rulemaking. Once again, the Commission will be able to act in a
measured manner tailored to the particular statutory and regulatory
provisions.
D. Commodity Options and Agricultural Swaps
1. Comments
Several commenters requested that the Commission clarify that the
relief based on part 35 in part two of the proposed order, which
applies to certain transactions in exempt and excluded commodities,
covers commodity options.\76\ The ABA Derivatives Committee also
requested that the Commission expand the relief based on part 35 in
part two of the proposed order to include swaps and options in
agricultural commodities.\77\ Finally, commenters including various
energy companies urged the Commission to rely, in part, upon CEA
section 4c(b) as authority to issue the elements of the relief related
to options, stating that the Commission retains its plenary authority
to regulate commodity options under CEA section 4c(b) \78\ and that
section 4c(b) was unaltered by the Dodd-Frank Act.\79\ The NGFA,
though, noted that the proposed order addressed concerns it had
regarding the availability of certain option-based transactions until
final rules authorizing their continued use are published.\80\
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\76\ See CEF at p. 5; ABA Derivatives Committee at p. 12; BGA at
p. 8.
\77\ See ABA Derivatives Committee at pp. 9, 11-13; letter dated
June 29, 2011, from Paul J. Pantano, Jr., and Athena Eastwood,
Cadwalader, Wickersham & Taft LLP, on behalf of the Commodity
Options and Agricultural Swaps Working Group, at p. 2.
\78\ See CEF at p. 5, n.12.
\79\ See ABA Derivatives Committee at pp. 10-11; BGA at p. 8,
n.22.
\80\ See NGFA at p. 1.
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2. Commission Determination
With respect to options, the Commission is clarifying that the
relief in part two of the Final Order that is based on part 35 applies
to commodity options on excluded and exempt commodities to the extent
they were permitted by the applicable statutory exemptions and
exclusions in effect prior to July 16, 2011. As reflected in the
commenters' citations to Sec. 35.1 of the Commission's regulations,
the text of paragraph (b)(1) of the ``swap agreement'' definition in
the rule lists several types of options, including, but not limited to,
currency options, interest rate options, and rate caps and collars, and
includes the following text: ``any other similar agreement (including
any option to enter into any of the foregoing).'' \81\
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\81\ 17 CFR 35.1(b)(1)(i). In addition to the options
specifically identified in the swap agreement definition, in the
part 35 adopting release, the Commission stated that ``[t]he words
`any similar agreement' in the definition includes any agreement
with a similar structure to those transactions expressly included in
the definition (e.g., a cap, collar, or floor) without regard to the
nature of the underlying commodity interest involved.'' Exemption
for Certain Swap Agreements, 58 FR 5587, 5589 n.16, Jan. 22, 1993.
The Commission also said that ``[i]n enacting this exemptive rule,
the Commission is also acting under its plenary authority under
section 4c(b) of the Act with respect to swap agreements that may be
regarded as commodity options.'' Id. at 5589.
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Under part two of the Final Order, transactions in exempt or
excluded commodities (and persons offering, entering into, or rendering
advice or rendering other services with respect to such transactions)
will be temporarily exempt from the CEA if such transactions comply
with part 35 notwithstanding that: (1) The transaction may be executed
on a multilateral transaction execution facility; (2) the transaction
may be cleared; (3) persons offering or entering into the transaction
may be eligible contract participants as defined in the CEA (prior to
the enactment of the Dodd-Frank Act); (4) the transaction may be part
of a fungible class of agreements that are standardized as to their
material economic terms; and/or (5) no more than one of the parties to
the transaction is entering into the transaction in conjunction with
its line of business, but is neither an eligible contract participant
nor an ESP, and the transaction was not and is not marketed to the
public. The options identified in the swap agreement definition and any
options captured by the concluding catch-all language, as well as any
options described in paragraphs (b)(1)(ii) \82\ and/or (iii) \83\ of
Sec. 35.1 of the
[[Page 42515]]
Commission's regulations, involving excluded or exempt commodities are,
therefore, within the scope of the Final Order.\84\
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\82\ Paragraph (b)(1)(ii) of Sec. 35.1 defines ``any
combination of the foregoing [list of identified swap agreements]''
as a swap agreement.
\83\ Paragraph (b)(1)(iii) of Sec. 35.1 defines ``[a] master
agreement for any of the foregoing [list of identified swap
agreements] together with all supplements thereto'' as a swap
agreement.
\84\ In addition to CEA section 4(c) and section 712(f) of the
Dodd-Frank Act, CEA section 4c(b), 7 U.S.C. 6c(b) also provides the
Commission with authority to issue the temporary exemptive Order
with respect to commodity options. Section 4c(b), which was
unaltered by the Dodd-Frank Act, provides the Commission plenary
authority to regulate commodity options. Parts 32 and 35 were
issued, in part, based on the Commission's authority under CEA
section 4c(b).
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With respect to agricultural commodities, part 35 is not currently
available for option transactions on the agricultural commodities
enumerated in either CEA section 1a(4) \85\ or Sec. 32.2 of the
Commission's regulations \86\ (the ``Enumerated Agricultural
Commodities''). Such option transactions may occur only pursuant to the
agricultural trade option exemption in Sec. 32.13 of the Commission's
regulations.\87\ As the Commission noted when it adopted Sec. 32.13 as
an interim final rule, which it later adopted as a final rule:
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\85\ 7 U.S.C. 1a(4).
\86\ 17 CFR 32.2.
\87\ 17 CFR 32.13. The Commission notes that the NGFA comment
letter generally supported the Commission's approach ``to preserve
the availability of certain option-based transactions such as * * *
OTC options until final rules authorizing their continued use are
published.'' See NGFA at p. 1.
[o]ne commenter representing swaps dealers requested that the
Commission clarify that the part 35 exemption applies to off-
exchange agricultural options rather than this exemption [17 CFR
Sec. 32.13(g)]. The Commission disagrees. Any off-exchange option
on an enumerated agricultural commodity must comply with Commission
rule 32.13(g) for exemption from the Act and Commission rules, and
no other exemptive provision is available.'' \88\
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\88\ See Trade Options on the Enumerated Agricultural
Commodities, 63 FR 18821, 18829, Apr. 16, 1998. Sec. 32.13(a)
technically also would be available to persons satisfying its terms.
However, that would require such persons to register as agricultural
trade option merchants (``ATOMs'') and comply with the ATOM
regulatory regime. Only one firm has ever registered as an ATOM, and
it later withdrew its registration. Currently, no firm is registered
as an ATOM. The Commission recently proposed to repeal Sec. 32.13.
See Commodity Options and Agricultural Swaps, 76 FR 6095, Feb. 3,
2011.
Accordingly, part 35 may not be relied upon for options in the
Enumerated Agricultural Commodities. As the Commission noted in the
proposed order, though, part 32 of the Commission's regulations will
continue to be available with respect to commodity option transactions
that meet the conditions therein, until such time as part 32 may be
withdrawn, amended, or replaced by the Commission.\89\ The Commission
further stated in the proposed order that the purpose of the proposed
relief is to ``strive to ensure that current practices will not be
unduly disrupted during the transition to the new regulatory regime.''
\90\ Accordingly, the Commission is clarifying that part two of this
Final Order does not apply to options on Enumerated Agricultural
Commodities.
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\89\ 76 FR at 35376 n.36.
\90\ 76 FR at 35373, quoting Grandfather Notice, supra, n. 9
(emphasis added).
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Part 35, however, always has covered swap agreements (other than
options) on the Enumerated Agricultural Commodities and swap agreements
(including options) \91\ on non-enumerated agricultural commodities
(e.g., coffee, sugar, cocoa). As the Commission noted in the proposed
order, part 35 will continue to be available with respect to
transactions that meet the conditions therein, until such time as it
may be withdrawn, amended, or repealed by the Commission.\92\
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\91\ Options on non-enumerated agricultural commodities may be
conducted pursuant to part 35, as the agricultural trade option
rules in Sec. 32.13 apply only to options on the Enumerated
Agricultural Commodities.
\92\ 76 FR at 35375.
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For certain transactions, part two of this Final Order provides
relief notwithstanding that the transaction may not satisfy certain
part 35 requirements (e.g., cleared, executed on a multilateral trade
execution facility, entered into by certain persons that are not
eligible contract participants, etc.).\93\ This relief is limited to
transactions in exempt and excluded commodities, and does not extend to
transactions in agricultural commodities (enumerated or non-
enumerated). As stated in the proposed order, the purpose of part two
of the Final Order is to provide relief with respect to CEA provisions
that will be repealed as of July 16, 2011--specifically, current CEA
sections 2(d), 2(e), 2(g), 2(h), and 5d. These provisions apply only to
transactions in exempt and excluded commodities, and do not encompass
agricultural commodities. Thus, because transactions in agricultural
commodities cannot today be executed in reliance on one or more of
these provisions to be repealed on July 16, extending part two of the
Final Order to transactions in agricultural commodities is not
necessary to ``strive to ensure that current practices will not be
unduly disrupted during the transition to the new regulatory regime.''
\94\
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\93\ Id. at 35376.
\94\ See supra, n.9. The Commission has in the past granted
exemptive relief pursuant to CEA section 4(c) from the requirements
of part 35 to permit the clearing of certain agricultural basis and
calendar swaps. See orders granted to ICE Clear US, Inc., 73 FR
77015, Dec. 18, 2008; Chicago Mercantile Exchange, 74 FR 12316, Mar.
24, 2009; and Kansas City Board of Trade, 75 FR 34983, June 21,
2010. Part two of this Final Order does not apply; however, parties
may continue to rely on these prior orders to the extent their
transactions fully comply with them.
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In sum, the Commission is clarifying that the temporary exemptive
relief in part two of the Final Order that is based on part 35 applies
to commodity options on excluded and exempt commodities to the extent
that these transactions were permitted by the applicable statutory
exclusions and exemptions in effect prior to July 16, 2011. It does not
apply, however, with respect to swaps and commodity options on
agricultural commodities (enumerated or non-enumerated). Market
participants may continue to rely on part 35 with respect to swaps and
commodity options on non-enumerated agricultural commodities, as well
as swaps (other than commodity options) on Enumerated Agricultural
Commodities, to the extent these transactions fully comply with part
35. Market participants also may continue to rely on part 32 for
options on Enumerated Agricultural Commodities to the extent these
transactions are conducted in accordance with Sec. 32.13(g) of the
Commission's regulations.
E. Eligible Contract Participants
1. Comments
First, with respect to the amendments that the Dodd-Frank Act made
to the existing definition of the term ``eligible contract
participant'' in the CEA, the NYCBA asked the Commission to confirm
that these changes are subject to exemptive relief under the Final
Order.\95\ The ABA Derivatives Committee believes that because the term
``eligible contract participant'' expressly requires rulemaking, the
amendments to the existing CEA definition would not take effect even in
the absence of exemptive relief; it asked that the Final Order confirm
this.\96\ Comment letters from various energy companies supported the
request of the ABA Derivatives Committee in this regard.\97\
---------------------------------------------------------------------------
\95\ See NYCBA at p. 5.
\96\ See ABA Derivatives Committee at p. 8.
\97\ See CEF at p. 8; BGA at p. 6.
---------------------------------------------------------------------------
The Associations requested that the Commission confirm that
amendments to CEA sections 2(c)(2)(B), 2(c)(2)(C), and 2(c)(2)(E)
regarding off-exchange foreign currency (``forex'') transactions with
retail customers will not become effective until relevant required
[[Page 42516]]
rulemakings have been completed.\98\ The Associations requested that
the Commission confirm that, notwithstanding its general classification
of the Dodd-Frank Act's retail forex amendments as Category 4
provisions, it will regard the specific provisions that relate to the
definition of the term ``eligible contract participant'' as Category 1
provisions.\99\ The Associations believe that CEA Section 2(c)(2)(E)
also should be treated as a Category 1 provision because it explicitly
requires rulemakings by other financial regulatory agencies.
Alternatively, the Associations stated, these provisions fall in
Category 2 because they depend on the definition of the term ``eligible
contract participant,'' and thus should be subject to section 4(c)
exemptive relief.\100\ The Associations requested, if the Commission
declines to adopt either of these categorizations, a non-enforcement
position until the rule further defining the term ``eligible contract
participant'' and the federal regulatory agency rules applicable to
retail forex transactions have been finalized, along with a
corresponding section 4(c) order exempting affected persons from
private rights of action.\101\
---------------------------------------------------------------------------
\98\ See Associations at p. 3.
\99\ Id. at p. 16.
\100\ Id.
\101\ See Associations at p. 16, n.38.
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2. Commission Determination
With respect to the first issue, the term ``eligible contract
participant'' is currently defined in the CEA.\102\ The Dodd-Frank Act
amended the existing CEA definition by, among other things, raising the
monetary thresholds for certain persons and entities to qualify as
eligible contract participants. As noted, the term ``eligible contract
participant'' is one of the terms that Congress, in sections 712(d) and
721(c), required the Commission (jointly with the SEC, and in
consultation with the Board of Governors of the Federal Reserve System)
to further define. Sections 712(d) and 721(c) are included in the list
of Category 1 provisions in the Appendix. Accordingly, the Commission
confirms that pending the effective date of the required rulemaking to
further define the term ``eligible contract participant,'' that term
shall continue to mean an eligible contract participant as defined by
the CEA prior to the enactment of the Dodd-Frank Act.
---------------------------------------------------------------------------
\102\ See CEA section 1a(12), 7 U.S.C. 1a(12).
---------------------------------------------------------------------------
With respect to the second issue, sections 741 and 742 of the Dodd-
Frank Act enacted various amendments to CEA sections 2(c)(2)(B) and
(C), which address certain types of forex transactions with retail
customers. These amendments do not themselves require a rulemaking, nor
do they reference the term ``eligible contract participant'' or any
other term requiring further definition. Therefore, they are
appropriately placed in Category 4, outside the scope of the Final
Order granting temporary exemptive relief from the July 16 effective
date.
To be sure, both of these provisions, in text that was not amended
by the Dodd-Frank Act, define the ``retail'' customers to which they
apply as persons that are not eligible contract participants. Yet, the
amendments in sections 741 and 742 of the Dodd-Frank Act contain
important protections for non-eligible contract participants engaging
in off-exchange forex transactions, which represent an area that
historically has been fraught with customer fraud and other abusive
sales practices. As one example, they clarify that an account or pooled
investment vehicle that is offered for the purpose of trading, or that
trades, a covered off-exchange forex transaction with a non-eligible
contract participant--in addition to the transaction itself--is subject
to the Commission's jurisdiction, including its anti-fraud authority.
Unlike new statutory terms required to be further defined (e.g.,
``swap,'' ``swap dealer,'' and ``major swap participant''), the CEA
prior to enactment of the Dodd-Frank Act already contains a definition
of the term ``eligible contract participant'' that has been in place
for over a decade.\103\ The Commission does not believe that it is
necessary or appropriate to delay the effective date of the important
customer protections in amended CEA sections 2(c)(2)(B) and (C) until
such time as it issues the final joint rulemaking further defining the
term ``eligible contract participant'' for purposes of the new swap
regulatory regime.\104\ Accordingly, the Commission, as proposed,
considers the amendments to CEA sections 2(c)(2)(B) and (C) to be
Category 4 provisions in their entirety and is not providing exemptive
relief from the July 16 effective date of these provisions. As
discussed above, though, pending the effective date of the required
rulemaking to further define the term ``eligible contract
participant,'' for purposes of CEA sections 2(c)(2)(B) and (C) that
term shall continue to mean an eligible contract participant as defined
by the CEA prior to the enactment of the Dodd-Frank Act.
---------------------------------------------------------------------------
\103\ The amendments to the definition of the term ``eligible
contract participant'' in the Dodd-Frank Act were motivated largely
by concerns regarding the marketing of over-the-counter derivatives
that the Dodd-Frank Act defines as ``swaps.'' See generally
Department of the Treasury, Financial Regulatory Reform: A New
Foundation; Rebuilding Financial Supervision and Regulation, at pp.
45-46, June 17, 2009.
\104\ Even if these provisions were placed in Category 2,
section 742 of the Dodd-Frank Act is listed in section 721(d), which
places limits on the Commission's exemptive authority under CEA
section 4(c).
---------------------------------------------------------------------------
With respect to new CEA section 2(c)(2)(E) enacted as part of
section 742 of the Dodd-Frank Act,\105\ it generally prohibits a
financial institution for which there is a Federal regulatory agency
\106\ from entering into certain off-exchange forex transactions \107\
with retail customers (i.e., non-eligible contract participants) except
pursuant to a rule or regulation of the Federal regulatory agency
allowing the transaction under such terms and conditions as the Federal
regulatory agency shall prescribe. The Commission does not agree that
CEA section 2(c)(2)(E) should be treated as a Category 1 provision on
the basis that it requires rulemakings by other financial regulatory
agencies.\108\ Although section 2(c)(2)(E) prohibits a financial
institution from entering into certain forex transactions with non-
eligible contract participants unless its Federal regulatory agency
adopts rules allowing such transactions, it does not require Federal
regulatory agencies to adopt such rules.
---------------------------------------------------------------------------
\105\ To be codified at 7 U.S.C. 2(c)(2)(E).
\106\ Section 2(c)(2)(E) defines a ``Federal regulatory agency''
to include the Commission, the SEC, the National Credit Union
Administration, the Farm Credit Administration, and an ``appropriate
Federal banking agency.'' Section 721(a)(2) of the Dodd-Frank Act,
in turn, adds a new definition of the term ``appropriate Federal
banking agency'' in CEA section 1a(2), to be codified at 7 U.S.C.
1a(2), that includes the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, and the Board of
Governors of the Federal Reserve System.
\107\ The prohibition applies to forex transactions of the type
described in CEA section 2(c)(2)(B), as well as all forex
transactions ``that are functionally or economically similar'' to
such transactions.
\108\ See Associations at p. 16.
---------------------------------------------------------------------------
Granting relief from the July 16 effective date with respect to
section 2(c)(2)(E) would treat this provision differently from the
Commission's treatment of the similar provisions in sections 2(c)(2)(B)
and (C) as Category 4 provisions, as discussed above.\109\ In light of
the important customer protection interests served by section
2(c)(2)(E), the Commission does not believe that such different
treatment is necessary or appropriate. Accordingly, the Commission, as
proposed, considers new CEA section 2(c)(2)(E) to be a Category 4
provision and is not
[[Page 42517]]
providing exemptive relief from the July 16 effective date of this
provision.\110\ As discussed above, though, pending the effective date
of the required rulemaking to further define the term ``eligible
contract participant,'' for purposes of CEA section 2(c)(2)(E) that
term shall mean an eligible contract participant as defined by the CEA
prior to the enactment of the Dodd-Frank Act.\111\
---------------------------------------------------------------------------
\109\ See also supra, n.104.
\110\ Although none of the comment letters discussed new CEA
section 2(c)(2)(D) enacted in section 742 of the Dodd-Frank Act, to
be codified at 7 U.S.C. 2(c)(2)(D), it provides protections to
retail customers, which it defines as persons that are not eligible
contract participants, in transactions in commodities other than
foreign currency. Thus, it raises similar issues. Fraud and abusive
practices also have been a frequent problem in off-exchange
transactions with retail customers in commodities such as precious
metals. In light of these important customer protection concerns,
and the fact that the CEA prior to enactment of the Dodd-Frank Act
already contains a settled definition of the term ``eligible
contract participant,'' the Commission is clarifying that new CEA
section 2(c)(2)(D) similarly is a Category 4 provision for which no
relief from the July 16 effective date is being provided. Pending
the effective date of the required rulemaking to further define the
term ``eligible contract participant,'' for purposes of CEA section
2(c)(2)(D) that term shall mean an eligible contract participant as
defined by the CEA prior to the enactment of the Dodd-Frank Act.
\111\ AIMA submitted a comment letter that expressed ``support
[for] exemptive relief from any rule that relies on the amended
definition'' of the term ``eligible contract participant.'' See AIMA
at p. 2. The exemptive relief being issued by the Commission applies
to various provisions of the Dodd-Frank Act and the CEA that
otherwise would become effective on July 16, 2011. The Commission
will consider the appropriate effective date and compliance date of
the rules implementing the Dodd-Frank Act in its final rulemakings
adopting such rules.
---------------------------------------------------------------------------
F. Private Right of Action
1. Comments
Section 749 of the Dodd-Frank Act amends CEA section 22(a)(1)(B)
\112\ to apply the CEA's private right of action to violations
involving swaps. The Associations requested that the Commission confirm
that it is granting a temporary exemption pursuant to CEA section 4(c)
with respect to the Dodd-Frank Act's expansion of the private right of
action to violations involving swaps, and to provide a specific section
4(c) exemption with respect to the application of CEA section
22(a)(1)(B) to any provision that is the subject of a Commission or
staff no-action position.\113\ The Associations noted that ``under the
Commission's proposed categorization, it is clear that section 749's
amendment to CEA Section 22(a)(1)(B) should logically fall under
Category 2, and accordingly be the subject of a temporary exemption
under CEA Section 4(c).'' \114\
---------------------------------------------------------------------------
\112\ 7 U.S.C. 25(a)(1)(B).
\113\ See Associations at p. 12.
\114\ Id. at 11.
---------------------------------------------------------------------------
2. Commission Determination
As noted in the proposed order, amended CEA section 22(a) (private
right of action with respect to swaps) is a provision that amends the
CEA and that references a term that requires further definition, but
nevertheless, the Commission does not believe that it is appropriate to
include the provision within the scope of the exemptive relief.\115\ To
the extent that the Final Order provides exemptive relief under CEA
section 4(c) with respect to Category 2 and Category 3 provisions, such
exemptive relief would, in effect, preclude a person from succeeding in
a private right of action under CEA section 22(a) for violation of such
provisions. Accordingly, the Commission believes that the requested
relief is not necessary to achieve the purposes of the Final
Order.\116\
---------------------------------------------------------------------------
\115\ 76 FR at 35374, n.13.
\116\ The Commission also declines to provide a section 4(c)
exemption with respect to the application of CEA section 22(a)(1)(B)
to any provision that is the subject of a no-action letter, as such
relief would be the functional equivalent of exemptive relief which
may be restricted under the limitations on CEA section 4(c) set
forth in section 721(d) of the Dodd-Frank Act. In the absence of
clear authority to provide such relief in this manner, the
Commission does not believe that granting such relief in this Final
Order would provide the requested legal clarity.
---------------------------------------------------------------------------
Nevertheless, the staff's Category 4 list that was posted on the
CFTC Web site identified only CEA sections 22(a)(4) and (5)--not
section 22(a)(1), which is the provision that provides for a private
right of action for violation of the swap provisions. To address this
inadvertent omission, the Category 4 list in the appendix to this Final
Order includes CEA section 22(a)(1)(B).\117\
---------------------------------------------------------------------------
\117\ In addition, the lists of Category 1 and Category 4
provisions set forth in the Appendix include other changes as
compared to the staff lists that were posted on the Commission's Web
site on June 14, 2011. Specifically with respect to Category 1: (i)
section 711 of the Dodd-Frank Act has been added to the ``Required
Rulemaking'' column for Teams II and XXI; (ii) section 741(b)(10) of
the Dodd-Frank Act has been added to the ``Required Rulemaking''
column for Team II; (iii) the reference to ``section 2(h)(7)'' of
the CEA for Team XI has been modified to read ``section 2(h)(7)(A)-
(D);'' and (iv) the separate rows with respect to swap data
recordkeeping and reporting requirements have been combined. And
with respect to Category 4: (i) sections 722(a) and (c) of the Dodd-
Frank Act have been added; (ii) new CEA section 5b(h), to be
codified at 7 U.S.C. 7a-1(h), has been added; (iii) section 741(a)
of the Dodd-Frank Act has been added; (iv) the reference to
``section 741(b)'' of the Dodd-Frank Act has been modified to read
``section 741(b)(8)-(9);'' (v) wording changes to the ``Summary
Description'' of sections 742(a) and (c) of the Dodd-Frank Act have
been made; (vi) new CEA sections 23(g) and (m), to be codified at 7
U.S.C. 26(g) and (m), have been added with respect to section 748 of
the Dodd-Frank Act; and (vii) a technical correction in the
reference to CEA section 6(b) has been made with respect to section
749 of the Dodd-Frank Act.
---------------------------------------------------------------------------
NYCBA requested the Commission to ``explicitly provide that section
22(a)(4)(B) of the CEA as amended by the Dodd-Frank Act will become
effective July 16, 2011.'' \118\ The Commission notes that the Category
4 list in the Appendix includes amended sections 22(a)(4)-(5) under the
Dodd-Frank Act section 739 provisions governing legal certainty for
swaps. As such, sections 22(a)(4)-(5) become effective on July 16,
2011.
---------------------------------------------------------------------------
\118\ See NYCBA at p. 8.
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G. Preemption
1. Comments
The Commission also received comments addressing questions of the
preemption of state gaming and bucket shop laws. NYCBA requested that
the Final Order clarify that any agreement, contract or transaction
subject to the Final Order ``will benefit from the preemption of any
state or local laws provided by Section 12(e)(2) of the CEA because the
relief is granted under Section 4(c) of the CEA.'' \119\
---------------------------------------------------------------------------
\119\ Id.
---------------------------------------------------------------------------
The Associations noted that because the Dodd-Frank Act repealed the
application of CEA section 12(e)(2)(B) \120\ to certain previously
exempted swap transactions, ``market participants are concerned that
transactions conducted in accordance with the federal statutory
provisions and rules applicable to swaps could potentially be subject
to challenges for invalidity under state law prohibitions against
gaming and bucket shops that in many cases pre-date even federal
regulation of futures contracts.'' \121\ To address these concerns, the
Associations suggested the adoption of a permanent exemption under
section 4(c) for such transactions. They noted that ``[i]f the
Commission extends permanent exemptive relief to such transactions,
this risk would be eliminated, since CEA section 12(e)(2)(B) explicitly
states that the CEA supersedes state gaming and bucket shop laws in the
case of `an agreement, contract or transaction * * *
[[Page 42518]]
exempted under section 4(c) of [the CEA] * * *' '' \122\
---------------------------------------------------------------------------
\120\ CEA section 12(e)(2)(B), as amended by section 749 of the
Dodd-Frank Act, provides that:
(2) This Act shall supersede and preempt the application of any
State or local law that prohibits or regulates gaming or the
operation of bucket shops (other than antifraud provisions of
general applicability) in the case of--
* * *
(B) An agreement, contract, or transaction that is excluded from
this Act under section 2(c) or 2(f) of this Act * * * or exempted
under section 4(c) of this Act (regardless of whether any such
agreement, contract, or transaction is otherwise subject to this
Act.)
\121\ See Associations at p. 14.
\122\ Id.; see also ABA Derivatives Committee at p. 13.
---------------------------------------------------------------------------
2. Commission Determination
The Commission notes that the Final Order does not affect the
applicability of CEA section 12(e)(2)(B) to any exemptive relief under
section 4(c) that is provided by the Final Order. CEA section
12(e)(2)(B) as amended by section 749 of the Dodd-Frank Act provides
that the CEA supersedes state gaming and bucket shop laws in the case
of ``an agreement, contract or transaction * * * exempted under section
4(c)'' of the CEA. To the extent that the Final Order provides
temporary exemptive relief under CEA section 4(c), CEA section
12(e)(2)(B) will apply to such transactions that are within the scope
of such exemptive relief.
As the Commission explained in its proposed order, the purpose of
the relief is to address concerns that were raised about the effects
upon the swaps market during the period between July 16, 2011 and the
date(s) that the definitional rulemakings have been completed.\123\
Indeed, the Commission reaffirmed in its proposed order that it intends
to ``strive to ensure that current practices will not be unduly
disrupted during the transition to the new regulatory regime.'' \124\
Insofar as these comments seek a permanent exemption under section
4(c), the requested relief is outside the scope of the Final Order.
---------------------------------------------------------------------------
\123\ 76 FR at 35373.
\124\ See n.9, supra.
---------------------------------------------------------------------------
H. Market Issues
1. Comments
State Street Corporation (``State Street'') expressed concern that
``limiting exemptive relief under the Commission's Order and
grandfather relief under the [swap execution facility] rules to the
small number of firms that are already operating an electronic trading
platform or system for the trading of exempt commodities (in the case
of ECMs) or the trading of futures contracts on excluded commodities
(in the case of EBOTs) would have the effect of making it impossible
for new entrants--who would have to wait for the [swap execution
facility] rules to be adopted and their applications to be approved''
to enter the swaps market and compete.\125\ State Street also requested
that the Commission clarify that electronic trading facilities that
operate, either currently or at any point during the relief period,
under CEA sections 2(d)(2) and 2(e), as in effect prior to July 16,
2011, will be permitted to conduct business operations on a temporary
basis during the relief period, without regard to whether the
electronic trading facility is currently operating or instead commences
operations at some point during the relief period.\126\
---------------------------------------------------------------------------
\125\ See letter dated June 28, 2011, from David C. Phelan,
Executive Vice President and General Counsel, State Street, at p. 3.
\126\ Id. at pp. 2-3.
---------------------------------------------------------------------------
CME requested that the Commission confirm that exemptive relief is
not needed for a designated contract market (``DCM'') to list swaps for
trading on or after July 16, so long as those products are regulated as
futures products and market participants trading those products are
regulated as futures market participants. Alternatively, if the
Commission views it differently, CME asks the Commission to issue such
exemptive relief.\127\
---------------------------------------------------------------------------
\127\ See CME at pp. 4-5.
---------------------------------------------------------------------------
2. Commission Determination
In response to the comments, the Commission would like to clarify
the conditions that apply to the grandfather relief orders for ECMs and
EBOTs that were issued by the Commission in September 2010.\128\ Both
of those orders have three basic conditions. First, the ECM or EBOT
must file an appropriate and timely petition with the Commission. In
the case of ECMs, the filing deadline was September 20, 2010 and for
EBOTs, the deadline is July 15, 2011. Second, the ECM or EBOT must file
a DCM or swap execution facility (``SEF'') application with the
Commission within 60 days of the effective date of final regulations
regarding the DCM or SEF provisions. Third, the ECM's or EBOT's DCM or
SEF application must remain pending before the Commission.
---------------------------------------------------------------------------
\128\ See supra, n.47.
---------------------------------------------------------------------------
The Commission is clarifying the second and third conditions, in
that the Commission has not yet issued any final DCM or SEF rulemakings
since enactment of the Dodd-Frank Act. The Commission notes that the
list of conditions for the ECM and EBOT grandfather relief orders are
premised on the ECM or EBOT ``meet[ing] all of the following applicable
conditions.'' \129\ Given that the Commission has not yet adopted
either final DCM or final SEF regulations, the ECM and EBOT grandfather
relief order conditions premised on DCM or SEF applications are not yet
applicable. Accordingly, at this point in time, all that an ECM or EBOT
must do to receive relief pursuant to the grandfather relief orders is
to have satisfied the orders' petition condition in a timely manner.
---------------------------------------------------------------------------
\129\ Id. at 56515.
---------------------------------------------------------------------------
The Commission also is clarifying the relationship between the
grandfather relief orders and this Final Order. For ECMs that filed
their petitions with the Commission by September 20, 2010, the
grandfather relief order operates independently and those ECMs may rely
on either the grandfather relief order or this Final Order, or both.
For those ECMs that did not file a petition for grandfather relief by
September 20, 2010, they may qualify for relief under this temporary
Final Order if they satisfy the requisite terms and conditions
herein.\130\ Similarly, for EBOTs that file or have filed their
petitions for grandfather relief by July 15, 2011, that grandfather
relief operates independently and those EBOTs may rely on either the
grandfather relief order or this Final Order, or both. Likewise, for
those EBOTs that have not filed their petitions for grandfather relief
by July 15, 2011, they may qualify for relief under this Final Order if
they, too, satisfy the requisite terms and conditions herein.
---------------------------------------------------------------------------
\130\ EBOTs and ECMs that rely on this exemptive relief also
must comply with part 36 of the Commission's regulations and, in
particular, its various reporting requirements.
---------------------------------------------------------------------------
The Commission stated in footnote 39 of the proposed order that the
proposed exemptive relief would not be available to an electronic
trading facility that, as of July 15, 2011, was not already operating
as an ECM pursuant to CEA sections 2(h)(3)-(7), or to an EBOT that, as
of July 15, 2011, was not already operating pursuant to CEA section 5d,
or not compliant with the conditions set forth in such provisions. The
Commission, however, has determined not to limit the Final Order herein
to those ECMs and EBOTs that already are operating as of July 15, 2011.
Further, the Commission also clarifies that the relief under this Final
Order is available to an electronic trading facility that currently
operates or commences operations during the pendency of this relief
pursuant to CEA sections 2(d)(2) and 2(e), as in effect prior to July
16, 2011.
The Commission also confirms that a DCM may list and trade swaps on
or after July 16 under the DCM's rules related to futures contracts,
without exemptive relief.\131\
---------------------------------------------------------------------------
\131\ The Commission notes that if a DCM intends to trade swaps
pursuant to the rules, processes, and procedures currently
regulating trading on its DCM, the DCM may need to amend or
otherwise update applicable rules, processes, and procedures, in
order to address the trading of swaps, depending upon the
composition of the DCM's rules.
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[[Page 42519]]
I. Core Principles
1. Comments
The Commission received a number of comments on the application of
the Proposed Order to the DCM and derivatives clearing organization
(``DCO'') core principles. On the one hand, CME agreed that the core
principles for DCMs and DCOs are appropriately categorized as Category
4 provisions for which the Commission is not issuing exemptive
relief.\132\
---------------------------------------------------------------------------
\132\ CME at p. 4.
---------------------------------------------------------------------------
On the other hand, some commenters believe that the core principles
for DCMs and DCOs in CEA sections 5(d) and 5b(c)(2), respectively,\133\
should be treated as either Category 1 or 2 provisions. The Minneapolis
Grain Exchange, Inc. (``MGEX'') stated that the Commission should grant
temporary relief from the new core principles of the Dodd-Frank Act for
DCOs and DCMs.\134\ The Natural Gas Exchange (``NGX'') expressed
concern that DCOs will have to make modifications to come into
compliance with amended core principles by July 16, 2011, and then may
be required to again make modifications when final rules are issued.
NGX requested that the Commission or its staff adopt a non-enforcement
policy against any DCO or DCO member or participant with respect to
compliance with the DCO core principles until the implementation of
final Commission rules governing the operation of DCOs or,
alternatively, that the Commission provide at least a 60-day period
following July 16, 2011, before it takes any enforcement action.\135\
---------------------------------------------------------------------------
\133\ 7 U.S.C. 7(d) and 7a-1(c)(2).
\134\ See letter dated July 1, 2011, from Layne G. Carlson,
Corporate Secretary, MGEX, at pp. 1-2.
\135\ See letter dated June 30, 2011, from Peter Krenkel,
President and Chief Executive Officer, NGX, at pp. 2-3.
---------------------------------------------------------------------------
Nodal Exchange cautioned that placing the DCM core principles in
section 735 of the Dodd-Frank Act into Category 4, while the core
principles for SEFs in section 733 are in Category 1, may lead to their
respective regulations being issued and finalized at different
times.\136\ Nodal Exchange recommended that the Commission issue final
rules regarding the DCM and SEF core principles simultaneously.\137\
---------------------------------------------------------------------------
\136\ See letter dated June 30, 2011, from Paul Cusenza, Chief
Executive Officer, Nodal Exchange, at pp. 1, 4.
\137\ Id. at p. 4.
---------------------------------------------------------------------------
2. Commission Determination
The Commission has considered these comments and believes that the
DCO and DCM core principles are properly treated as Category 4
provisions outside the scope of relief of this Final Order. These
amended core principles apply to the trading and clearing of
instruments on DCMs and DCOs, regardless of whether the instrument is a
futures contract or a swap. The Commission sees no need to delay the
application of these amended core principles to DCMs that trade futures
contracts or to DCOs that clear futures, a term which does not require
further definition under the Dodd-Frank Act. Moreover, the amended core
principles provide that, absent a rule or regulation prescribed by the
Commission, DCMs and DCOs shall have reasonable discretion in
developing their rules and programs to comply with the core
principles.\138\
---------------------------------------------------------------------------
\138\ See, e.g., CEA section 5(d)(1)(B) and section
5b(c)(2)(A)(ii), 7 U.S.C. 7(d)(1)(B) and 7a-1(c)(2)(A)(ii).
---------------------------------------------------------------------------
To the extent that the Commission has issued proposed rulemakings
with regard to these core principles, any requirements or guidance in
such rulemakings will not become effective until the effective or
compliance date of a final rulemaking. The Commission, in its
discretion, will, where appropriate, establish separate compliance
dates to address issues arising from the impact of compliance with any
new requirements.
J. Intermediary Issues
1. Comments
The Commission received a comment on part two of its proposed order
relating to whether the exemption provided under part 35 applies to
agency transactions. Specifically, State Street requested that the
Commission ``make clear that eligible swap participants and eligible
contract participants may continue to rely on the Part 35 exemption to
effect transactions in excluded or exempt commodities, either directly
or through brokers and other agents, as currently permitted by Part
35.'' \139\
---------------------------------------------------------------------------
\139\ See State Street at p. 4.
---------------------------------------------------------------------------
The Commission also received a comment on part two of the Proposed
Order relating to registration requirements for futures commission
merchants (``FCMs''), introducing brokers (``IBs''), and commodity
trading advisors (``CTAs''). The law firm of Covington & Burling noted
that many participants exclusively in the ``OTC'' swaps market are not
currently registered with the Commission in any capacity, but may have
to register with the Commission as FCMs, IBs or CTAs after the
Commission's Dodd-Frank Act rules are made effective. The commenter
requested that the Commission clarify that these entities will not be
required to register in those capacities based solely on their swaps
activity until after the last adopted final product definition rules
become effective.\140\
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\140\ See letter dated July 1, 2011 from Bruce C. Bennett,
Covington & Burling LLP, at p. 5.
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2. Commission Determination
The purpose of this exemptive relief is to maintain the status quo
during the implementation process for the Dodd-Frank Act. As noted in
the proposed order, the temporary exemptive relief would not affect the
availability of part 35 with respect to transactions that fully meet
the requirements of part 35.\141\ Thus, the Commission confirms that to
the extent that agency transactions are permitted under part 35, that
relief is unaffected by the temporary exemptive relief provided
herein.\142\ However, for transactions that exclusively qualify for the
temporary exemptive relief in part two of this Final Order (i.e., do
not comply fully with the requirements of part 35), such agency
transactions would only be permitted to the extent they were permitted
by the applicable statutory exclusions and exemptions in effect prior
to July 16, 2011 (i.e., current CEA sections 2(d), 2(e), 2(g), 2(h),
and 5d).
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\141\ 76 FR at 35376.
\142\ See Exemption for Bilateral Transactions, 65 FR 78030,
78033, Dec. 13, 2000.
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The Dodd-Frank Act amended various intermediary definitions to
cover swaps activity as well as futures transactions.\143\ The
Commission confirms that if an entity is exclusively participating in
the swaps market, it would not have to register as an FCM, IB or CTA
prior to the completion of the rulemaking further defining the term
``swap.'' In sum, the Commission will not require registration in an
intermediary capacity in this situation until the further definition of
the term ``swap'' becomes effective.
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\143\ See, e.g., 76 FR at 35374 n.16.
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IV. Section 4(c) of the Commodity Exchange Act
Section 4(c)(1) of the CEA \144\ authorizes the CFTC to exempt any
[[Page 42520]]
transaction or class of transactions (including any person or class of
persons offering, entering into, rendering advice or rendering other
services with respect to, the transaction) from any of the provisions
of the CEA (subject to certain exceptions). Pursuant to CEA section
4(c)(2), the Commission must determine that: (1) The exemption is
appropriate for the transaction and consistent with the public
interest; (2) the exemption is consistent with the purposes of the CEA;
(3) the transaction will be entered into solely between ``appropriate
persons;'' \145\ and (4) the exemption will not have a material adverse
effect on the ability of the Commission or any contract market to
discharge its regulatory or self-regulatory responsibilities under the
CEA.\146\
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\144\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1), provides in full
that:
In order to promote responsible economic or financial innovation
and fair competition, the Commission by rule, regulation, or order,
after notice and opportunity for hearing, may (on its own initiative
or on application of any person, including any board of trade
designated or registered as a contract market or derivatives
transaction execution facility for transactions for future delivery
in any commodity under section 5 of this Act) exempt any agreement,
contract, or transaction (or class thereof) that is otherwise
subject to subsection (a) (including any person or class of persons
offering, entering into, rendering advice or rendering other
services with respect to, the agreement, contract, or transaction),
either unconditionally or on stated terms or conditions or for
stated periods and either retroactively or prospectively, or both,
from any of the requirements of subsection (a), or from any other
provision of this Act (except subparagraphs (C)(ii) and (D) of
section 2(a)(1), except that the Commission and the Securities and
Exchange Commission may by rule, regulation, or order jointly
exclude any agreement, contract, or transaction from section
2(a)(1)(D)), if the Commission determines that the exemption would
be consistent with the public interest.
\145\ CEA section 4(c)(3), 7 U.S.C. 6(c)(3), includes within the
term ``appropriate person'' a number of specified categories of
persons deemed appropriate under the CEA for entering into
transactions exempted by the Commission under section 4(c). This
includes persons the Commission determines to be appropriate in
light of their financial or other qualifications, or the
applicability of appropriate regulatory protections. See CEA section
4(c)(3)(K), 7 U.S.C 6(c)(3)(K).
\146\ CEA Section 4(c)(2), 7 U.S.C. 6(c)(2), provides in full
that:
The Commission shall not grant any exemption under paragraph (1)
from any of the requirements of subsection (a) unless the Commission
determines that--
(A) The requirement should not be applied to the agreement,
contract, or transaction for which the exemption is sought and that
the exemption would be consistent with the public interest and the
purposes of this Act; and
(B) The agreement, contract, or transaction--
(i) Will be entered into solely between appropriate persons; and
(ii) Will not have a material adverse effect on the ability of
the Commission or any contract market or derivatives transaction
execution facility to discharge its regulatory or self-regulatory
duties under this Act.
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The Commission may grant such an exemption by rule, regulation or
order, after notice and opportunity for hearing, and may do so on
application of any person or on its own initiative. Further, the
Commission may grant such an exemption either conditionally or
unconditionally, or for stated periods within the Commission's
discretion. Finally, section 712(f) of the Dodd-Frank Act authorizes
the Commission to ``exempt persons, agreements, contracts, or
transactions from provisions of the Act, under the terms contained in''
the Act, in order to prepare for the effective dates of the provisions
of Title VII.
A. The Proposed Order
In enacting section 4(c), Congress noted that the goal of the
provision ``is to give the Commission a means of providing certainty
and stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.'' \147\ In proposing the temporary relief, the
Commission stated its intention to provide clarity and stability to the
markets and market participants concerning the applicability of the
provisions of the CEA, as added or amended by the Dodd-Frank Act (in
part one), and the current provisions of the CEA as repealed by the
Dodd-Frank Act (in part two), upon the general effective date of Title
VII, thereby avoiding or minimizing undue and unwarranted disruptions
to the markets.\148\
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\147\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
\148\ 76 FR at 35377.
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The Commission also noted the limited duration of the proposed
order and that it reserved the Commission's anti-fraud and anti-
manipulation enforcement authority.\149\ As such, the Commission stated
its belief that the proposed order would be consistent with the public
interest and purposes of the CEA.\150\ The Commission proposed to limit
the relief to appropriate persons, including persons in current
registration categories for which the Dodd-Frank Act expanded the
definition to include activities relating to swaps (e.g., IBs,
commodity pool operators (``CPOs''), CTAs, and associated persons
thereof).\151\ The Commission stated its belief that the proposed order
would not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory duties under the CEA.\152\
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\149\ Id.
\150\ Id.
\151\ 76 FR at 35377 n.46, citing CEA section 4(c)(3)(K), 7
U.S.C. 6(c)(3)(K) (appropriate persons may include such ``other
persons that the Commission determines to be appropriate in light of
their financial or other qualifications, or the applicability of
appropriate regulatory protections'').
\152\ 76 FR at 35377.
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B. Comments
The ABA Derivatives Committee commented that the Commission should
exercise its authority under CEA section 4(c)(3)(K) to make it clear
that the ``appropriate persons'' who qualify for relief under its
exemptive order include individuals whose total assets exceed $10
million and ``persons relying on the `line of business' exemption to
engage in swaps without ECP status.'' \153\
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\153\ See ABA Derivatives Committee at p. 9. See also CEF at p.
7 n.21. The ``line of business'' provision was a part of the
Commission's Policy Statement Concerning Swap Transactions, 54 FR
30694, 30696-30697, July 21, 1989.
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C. Commission Determination
For the purpose of making the requisite findings under section 4(c)
for part two of the Final Order, the Commission confirms that
individuals whose total assets exceed $10 million are appropriate
persons. Likewise, for purposes of part two of this Final Order,
persons relying on the ``line of business'' exemption as described in
the proposed order are appropriate persons. It should be noted that the
explicit reference in the proposed order to IBs, CPOs, and CTAs (and
associated persons thereof) as appropriate persons was not intended to
restrict the scope of appropriate persons to only those persons. The
Commission confirms that for the purpose of this temporary Final Order,
the Commission has found the various persons and entities subject to
this temporary relief to be appropriate persons.
For the reasons provided in the proposed order and mentioned above,
the Commission has determined that: (1) The exemption provided by this
Final Order is appropriate for the subject transactions and consistent
with the public interest; (2) the exemption is consistent with the
purposes of the CEA; (3) the transactions will be entered into solely
between appropriate persons; and (4) the exemption will not have a
material adverse effect on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory
responsibilities under the CEA.
V. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \154\ imposes certain
requirements on federal agencies (including the Commission) in
connection with conducting or sponsoring any collection of information
as defined by the PRA. This Final Order does not require a new
collection of information from any persons or entities that would be
subject to the Final Order.
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\154\ 44 U.S.C. 3507(d).
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[[Page 42521]]
VI. Cost-Benefit Considerations
Section 15(a) of the CEA \155\ 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 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
order is necessary or appropriate to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the CEA.
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\155\ 7 U.S.C. 19(a).
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The Commission has decided to issue, pursuant to its authority
under CEA sections 4(c) and 4c(b), certain temporary relief from the
provisions of the CEA added or amended by Title VII of the Dodd-Frank
Act that reference one or more terms regarding entities or instruments
that Title VII requires be ``further defined,'' such as the terms
``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible
contract participant,'' to the extent that requirements or portions of
such provisions specifically relate to such referenced terms and do not
require a rulemaking. The Commission also is granting temporary relief
from certain provisions of the CEA that will or may apply to certain
agreements, contracts, and transactions as a result of the repeal of
various CEA exemptions and exclusions as of the general effective date
of Title VII of the Dodd-Frank Act set forth in section 754--July 16,
2011.
The Commission received no comments on the cost and benefit
considerations section of the proposed order. Nevertheless, the
Commission did receive two specific comments requesting additional
exemptive relief due to potential costs.
NGX is concerned that DCOs will have to make modifications to come
into compliance with amended core principles by July 16, 2011, and then
may be required to again make modifications when final rules are issued
by the Commission.\156\ Similarly, MGEX states that the Commission
should grant temporary relief from the new core principles of the Dodd-
Frank Act for DCOs and DCMs in sections 725 and 735.\157\
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\156\ See NGX at p. 2.
\157\ See MGEX at p. 2.
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The Commission has decided not to grant more relief to DCOs and
DCMs. The Commission recognizes that DCOs and DCMs have discretion in
how to comply with the core principles unless and until the CFTC issues
rules in this area.
An analysis of the specific areas of concern identified in section
15(a) is set out immediately below:
1. Protection of Market Participants and the Public
As discussed above, the scope of this temporary exemptive relief is
limited to persons who are ``appropriate persons'' as set forth in
section 4(c) of the CEA and in this Final Order. Further, this Final
Order does not affect the Commission's existing and future anti-fraud
and anti-manipulation authorities, including CEA sections 2(a)(1)(B),
4b, 4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the
Commission promulgated pursuant to such authorities, including
regulations pursuant to CEA section 4c(b) proscribing fraud. The
Commission believes that market participants and the public will
benefit from the clarity offered by the temporary exemptive relief,
while maintaining the Commission's authorities regarding the prevention
and deterrence of fraud and manipulation. With respect to costs, the
Commission believes that the exemptive relief imposes no affirmative
duties or obligations on market participants and the public. The
temporary exemptive relief does not contain any requirement to create,
retain, submit, or disclose any information. Furthermore, the exemptive
relief imposes no recordkeeping or related data retention or disclosure
requirements on any person, including small businesses. Consequently,
the Commission finds it unlikely that the exemptive relief will impose
any additional costs beyond the existing costs associated with ongoing
operations, including those that ensure that behavior and statements
are not fraudulent or manipulative.
2. Efficiency, Competition, and Financial Integrity
Although the Dodd-Frank Act establishes a comprehensive new
regulatory framework for swaps, the Commission's work to implement that
framework will not be complete as of July 16, 2011. Accordingly, this
relief offers the benefit of greater clarity in the swaps market that
is in the interest of both the markets and the public. The Commission
believes that this temporary exemptive relief is an appropriate measure
to facilitate a transition to the comprehensive new regulatory
framework for swaps set out in Title VII of the Dodd-Frank Act. Such an
orderly transition will promote market efficiency, competition, and
financial integrity.
3. Price Discovery
As stated above, the temporary relief provided here is designed to
maintain the functioning of the markets until such time as the
comprehensive new regulatory framework for swaps set forth in the Dodd-
Frank Act is in place. With the clarity offered by the exemptive
relief, markets will function better as venues for price discovery.
4. Sound Risk Management Practices
Appropriate persons covered by this exemptive relief will be
subject to the Commission's full array of existing anti-fraud and anti-
manipulation provisions and certain new authorities provided under the
Dodd-Frank Act. Market participants and the public will benefit
substantially from the continuing protection through the prevention and
deterrence of fraud and manipulation. Markets protected from fraud and
manipulation function better as venues for price discovery and risk
management.
5. Other Public Interest Considerations
This Final Order is temporary and limited. It will not affect the
applicability of any provision of the CEA to futures contracts, options
on futures contracts, or transactions with retail customers in foreign
currency or other commodities pursuant to CEA section 2(c)(2). Further,
it will expire at an appropriate date, as discussed above. The
expiration provision will permit the Commission to ensure that the
scope and extent of exemptive relief is appropriately tailored to the
schedule of implementation of the Dodd-Frank Act requirements.
After considering the costs and benefits, the Commission has
determined to issue this Final Order.
VII. Order
The Commission, to provide for the orderly implementation of the
requirements of Title VII of the Dodd-Frank Act, pursuant to sections
4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,
hereby issues this Order essentially as proposed, consistent with the
determinations set forth above, which are incorporated in this Final
Order by reference, and:
[[Page 42522]]
(1) Exempts, subject to the conditions set forth in paragraph (3),
all agreements, contracts, and transactions, and any person or entity
offering, entering into, or rendering advice or rendering other
services with respect to, any such agreement, contract, or transaction,
from the provisions of the CEA, as added or amended by the Dodd-Frank
Act, that reference one or more of the terms regarding entities or
instruments subject to further definition under sections 712(d) and
721(c) of the Dodd-Frank Act, which provisions are listed in Category 2
of the Appendix to this Order; provided, however, that the foregoing
exemption:
a. Applies only with respect to those requirements or portions of
such provisions that specifically relate to such referenced terms; and
b. Shall expire upon the earlier of: (i) the effective date of the
applicable final rule further defining the relevant term referenced in
the provision; or (ii) December 31, 2011;
(2) Exempts, subject to the conditions set forth in paragraph (3),
all agreements, contracts, and transactions in exempt and excluded (but
not agricultural) commodities, and any person or entity offering,
entering into, or rendering advice or rendering other services with
respect to, any such agreement, contract, or transaction, from the
provisions of the CEA, if the agreement, contract, or transaction
complies with part 35 of the Commission's regulations, notwithstanding
that:
a. The agreement, contract, or transaction may be executed on a
multilateral transaction execution facility;
b. The agreement, contract, or transaction may be cleared;
c. Persons offering or entering into the agreement, contract or
transaction may not be eligible swap participants, provided that all
parties are eligible contract participants as defined in the CEA prior
to the date of enactment of the Dodd-Frank Act;
d. The agreement, contract, or transaction may be part of a
fungible class of agreements that are standardized as to their material
economic terms; and/or
e. No more than one of the parties to the agreement, contract, or
transaction is entering into the agreement, contract, or transaction in
conjunction with its line of business, but is neither an eligible
contract participant nor an eligible swap participant, and the
agreement, contract, or transaction was not and is not marketed to the
public;
Provided, however, that: (i) such agreements, contracts, and
transactions (and persons offering, entering into, or rendering advice
or rendering other services with respect to, any such agreement,
contract, or transaction) fall within the scope of any of the existing
CEA sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of
business provision as in effect prior to July 16, 2011; and (ii) the
foregoing exemption shall expire upon the earlier of: (I) the repeal,
withdrawal or replacement of part 35 of the Commission's regulations;
or (II) December 31, 2011;
(3) Provides that the foregoing exemptions in paragraphs (1) and
(2) above shall not:
a. Limit in any way the Commission's authority with respect to any
person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b,
4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the
Commission promulgated pursuant to such authorities, including
regulations pursuant to CEA section 4c(b) proscribing fraud;
b. Apply to any provision of the Dodd-Frank Act or the CEA that has
become effective prior to July 16, 2011;
c. Affect any effective or compliance date set forth in any
rulemaking issued by the Commission to implement provisions of the
Dodd-Frank Act;
d. Limit in any way the Commission's authority under section 712(f)
of the Dodd-Frank Act to issue rules, orders, or exemptions prior to
the effective date of any provision of the Dodd-Frank Act and the CEA,
in order to prepare for the effective date of such provision, provided
that such rule, order, or exemption shall not become effective prior to
the effective date of the provision; and
e. Affect the applicability of any provision of the CEA to futures
contracts or options on futures contracts, or to cash markets.
In its discretion, the Commission may condition, suspend,
terminate, or otherwise modify this Order, as appropriate, on its own
motion. This Final Order shall be effective immediately.
Issued in Washington, DC, on July 14, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following Commissioner's statement will not appear in
the Code of Federal Regulations.
Concurrence of Commissioner Scott D. O'Malia on the Order Regarding the
Effective Date for Swap Regulation
I concur with the Commission's decision to use its exemptive
authority under section 4(c) of the Commodity Exchange Act (CEA) to
provide temporary relief from certain provisions of the Dodd-Frank Act.
This order will provide much needed legal certainty to the market, at
least until December 31, 2011, while the Commission continues its
efforts to adopt final rules under the Dodd-Frank Act. Whereas I
support the Commission in providing legal certainty, albeit limited, I
am disappointed in the lack of harmonization between our order and the
exemptive relief that the Securities and Exchange Commission (SEC)
provided. I am also disappointed that the final order ignored a number
of comments from market participants, those that have most at stake in
each of the Commission's decisions. I hope that this order does not
foreshadow the direction of final rulemakings to come.
Lack of Harmonization
In general, the SEC's order provides exemptive relief until the
relevant final rulemaking is implemented. The Commission's order
provides such relief only until December 31, 2011. I proposed an
amendment that would have conformed the two orders that the Commission
rejected. The SEC is a full partner in many of our rulemakings; it only
makes sense to develop identical relief policies. The CFTC's sunset
provision is based on an arbitrary date and cuts short the very legal
certainty that this order purports to provide. Moreover, participants
from every aspect of our market--including investor advocates, a
designated contract market and derivatives clearing organization, a
potential swap execution facility, and multiple trade associations
representing intermediaries--commented that the December 31, 2011,
expiration date is unnecessary. In contrast, only one commenter
supported the expiration date.
Comments From Market Participants
In addition to not heeding market participants with respect to the
expiration date, the Commission has also not addressed the public's
requests for an implementation plan. I have repeatedly asked the
Commission to set forth an implementation plan for public notice and
comment. SEC Chairman Shapiro indicated, in her prepared remarks before
the House Financial Services Committee, that the SEC is working on an
implementation plan that will include opportunity for public comment.
This Commission has already begun voting on final rules, but we have
yet to see a proposed implementation plan.
Market participants bear the burden of implementing the multitude
of reforms that the Commission is proposing. We
[[Page 42523]]
cannot pretend that Dodd-Frank has any chance of meeting its goals if
we do not work with the public to implement the regulatory
requirements.
The Commission is currently planning to meet on August 4th to
consider several final rules. I strongly urge the Commission to put
forward an implementation plan for public comment during the month of
August. This provides a perfect opportunity to receive comment on rule
order and implementation, without delaying the Commission schedule this
fall. If we wait until September, we will only have ourselves to blame.
BILLING CODE 6351-01-P
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[FR Doc. 2011-18248 Filed 7-18-11; 8:45 am]
BILLING CODE 6351-01-C
Last Updated: July 19, 2011
See Also:
