2012-792
-
Federal Register, Volume 77 Issue 12 (Thursday, January 19, 2012)[Federal Register Volume 77, Number 12 (Thursday, January 19, 2012)]
[Rules and Regulations]
[Pages 2613-2629]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-792]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 77, No. 12 / Thursday, January 19, 2012 /
Rules and Regulations
[[Page 2613]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 3, 23, and 170
RIN 3038-AC95
Registration of Swap Dealers and Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is adopting regulations under the Commodity Exchange Act (Act or CEA)
that establish the process for the registration of swap dealers (SDs)
and major swap participants (MSPs, and collectively with SDs, Swaps
Entities) and that require Swaps Entities to become and remain members
of a registered futures association (RFA). The Commission is also
adopting regulations that define an ``associated person'' of an SD or
MSP as a natural person and that implement the prohibition on a Swaps
Entity permitting an associated person who is statutorily disqualified
from registration from effecting or being involved in effecting swaps
on behalf of the Swaps Entity. The Commission is adopting these
regulations in accordance with section 4s of the CEA, which was
recently added to the CEA by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act).
DATES: Effective March 19, 2012.
FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
Christopher W. Cummings, Special Counsel, or Elizabeth Miller,
Attorney-Advisor, Division of Swap Dealer and Intermediary Oversight,
1155 21st Street NW., Washington, DC 20581. Telephone number: (202)
418-6700 and electronic mail: bgold@cftc.gov, ccummings@cftc.gov or
emiller@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Background
On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\
Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a
comprehensive new regulatory framework for swaps and security-based
swaps. The goal of this legislation was to reduce risk, increase
transparency, and promote market integrity within the financial system
by, among other things: (1) Providing for the registration and
comprehensive regulation of SDs and MSPs; (2) imposing clearing and
trade execution requirements on standardized derivatives products; (3)
creating robust recordkeeping and real-time reporting regimes; and (4)
enhancing the Commission's rulemaking and enforcement authorities with
respect to, among others, all registered entities and intermediaries
subject to the oversight of the Commission. The regulations the
Commission is adopting today concern the registration of SDs and MSPs,
as required by CEA section 4s(a). As is discussed below, these final
regulations are based in large part on the Commission's proposed
registration regulations for SDs and MSPs (Proposal).\4\
---------------------------------------------------------------------------
\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed through the Commission's Web site,
http://www.cftc.gov/.
\2\ Pursuant to Dodd-Frank Act section 701, Title VII may be
cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1 et seq. (2006). The CEA and Commission
regulations issued thereunder similarly can be accessed through the
Commission's Web site.
\4\ 75 FR 71379 (Nov. 23, 2010).
---------------------------------------------------------------------------
In furtherance of the foregoing legislative goals, Dodd-Frank Act
section 721(a) amended the definitions of various existing terms in the
CEA and added definitions of numerous new terms to the CEA, including
definitions of the new terms ``swap dealer,'' ``major swap
participant,'' and ``associated person of a swap dealer or major swap
participant.'' \5\ Section 712(d)(1) of the Dodd-Frank Act directed the
Commission and the Securities and Exchange Commission (SEC), in
consultation with the Board of Governors of the Federal Reserve System,
to further define the terms ``swap dealer'' and ``major swap
participant'' (Entities Definitional Regulations).\6\ The instant
rulemaking will apply to SDs and MSPs as defined in the CEA and as
further defined by the Commission.
---------------------------------------------------------------------------
\5\ See, respectively, CEA sections 1a(49), 1a(33) and 1a(4).
\6\ See 75 FR 80174 (Dec. 21, 2010).
---------------------------------------------------------------------------
B. Statutory Registration Requirements for SDs and MSPs
CEA sections 4s(a) and 4s(b) \7\ provide, in pertinent part, for
the registration of SDs and MSPs as follows:
---------------------------------------------------------------------------
\7\ Sections 4s(a) and 4s(b) were added to the CEA by Dodd-Frank
Act section 731.
---------------------------------------------------------------------------
(a) REGISTRATION.--
(1) SWAP DEALERS.--It shall be unlawful for any person to act as a
swap dealer unless the person is registered as a swap dealer with the
Commission.
(2) MAJOR SWAP PARTICIPANTS.--It shall be unlawful for any person
to act as a major swap participant unless the person is registered as a
major swap participant with the Commission.
(b) REQUIREMENTS.--
(1) IN GENERAL.--A person shall register as a swap dealer or major
swap participant by filing a registration application with the
Commission.
(2) CONTENTS.--
(A) IN GENERAL.--The application shall be made in such form and
manner as prescribed by the Commission, and shall contain such
information, as the Commission considers necessary concerning the
business in which the applicant is or will be engaged.
CEA section 4s does not direct the Commission to adopt rules that
provide for the registration of associated persons of SDs or MSPs.
However, CEA section 4s(b)(6) makes it unlawful for a Swaps Entity to
permit a person to associate with it if the person is subject to a
statutory disqualification, as follows:
Except to the extent otherwise specifically provided by rule,
regulation, or order, it shall be unlawful for a swap dealer or
major swap participant to permit any person associated with a swap
dealer or major swap participant who is subject to a statutory
disqualification to effect or be involved in effecting swaps on
behalf of the swap dealer or major swap participant, if the swap
dealer or major swap participant knew, or in the exercise of
reasonable care should have known, of the statutory
disqualification.
For the purpose of the regulations it is adopting today, and
specifically Regulation 23.22, the Commission
[[Page 2614]]
intends that, as proposed, a statutory disqualification is a
disqualification under CEA section 8a(2) or 8a(3).\8\ These CEA
sections contain an extensive list of matters that constitute grounds
pursuant to which the Commission may refuse to register a person,
including, without limitation, felony convictions, commodities or
securities law violations, and bars or other adverse actions taken by
financial regulators.
---------------------------------------------------------------------------
\8\ See 75 FR 71379, 71380. The Commission did not receive any
comments in response to this aspect of the Proposal. See Part II of
this Federal Register release, which discusses the comments the
Commission received on the Proposal.
---------------------------------------------------------------------------
CEA section 4s further directs the Commission to provide for the
regulation of SDs and MSPs with respect to, among others, the following
areas: Capital and margin, reporting and recordkeeping, daily trading
records, business conduct standards, documentation standards, duties,
designation of chief compliance officer,\9\ and, with respect to
uncleared swaps, segregation \10\ (collectively, Section 4s
Requirements). The Commission is addressing the Section 4s Requirements
through other rulemakings (Section 4s Implementing Regulations)
separate and apart from the instant rulemaking, which concerns the
registration process for Swaps Entities.\11\ Certain issues relevant to
the Section 4s Implementing Regulations--i.e., the timing of their
adoption and the initial demonstration of compliance with them by SDs
and MSPs--nonetheless have an impact on the registration process for
Swaps Entities, which is discussed below in Part II of this Federal
Register release.
---------------------------------------------------------------------------
\9\ CEA sections 4s(e) through (k), respectively, added to the
CEA by Dodd-Frank Act section 731.
\10\ CEA section 4s(l), added to the CEA by Dodd-Frank Act
section 724(c).
\11\ See 76 FR 23732 (Apr. 28, 2011), 76 FR 27802 (May 12, 2011)
(section 4s(e)--Capital and Margin); 75 FR 76666 (Dec. 9, 2010)
(section 4s(f)--Reporting and Recordkeeping, and section 4s(g)--
Daily Trading Records); 75 FR 80638 (Dec. 22, 2010), 75 FR 71391
(Nov. 23, 2010) (section 4s(h)--Business Conduct Standards); 75 FR
81519 (Dec. 28, 2010), 76 FR 6708 (Feb. 8, 2011), 76 FR 6715 (Feb.
8, 2011) (section 4s(i)--Documentation Standards); 75 FR 71397 (Nov.
23, 2010) (section 4s(j)--Duties); 75 FR 70881 (Nov. 19, 2010)
(section 4s(k)--Designation of Chief Compliance Officer); 75 FR
75162 (Dec. 2, 2010), 75 FR 75432 (Dec. 2, 2010), (section 4s(l)--
Segregation Requirements for Uncleared Swaps).
---------------------------------------------------------------------------
Additionally, Dodd-Frank Act section 716 prohibits an insured
depository institution (IDI) from receiving Federal assistance if it is
also an SD that engages in swaps activities that are not covered by the
exclusion in section 716(d).\12\ Under Dodd-Frank Act section 716(c),
an IDI can retain its access to Federal assistance if it transfers
covered activities to a non-IDI affiliate (a Push-Out Affiliate) that
is an SD or MSP, if the affiliate complies with the requirements of
section 716(c), including such requirements as the Commission may
establish.\13\ The Push-Out Affiliate, however, would not have access
to Federal assistance. The Commission did not include in the Proposal
any specific Push-Out Affiliate requirements, and as it stated in the
Proposal, the Commission intends that any Push-Out Affiliate that comes
within the statutory definition of an SD or an MSP be subject to
registration and regulation as an SD or as an MSP, as the case may
be.\14\
---------------------------------------------------------------------------
\12\ Specifically, the prohibition against Federal assistance to
Swaps Entities is set forth in Dodd-Frank Act section 716(a), as
follows:
(a) PROHIBITION ON FEDERAL ASSISTANCE.--Notwithstanding any
other provision of law (including regulations), no Federal
assistance may be provided to any swaps entity with respect to any
swap, security-based swap, or other activity of the swaps entity.
Dodd-Frank Act section 716(d) carves out certain swaps
activities of an IDI that is an SD, and therefore a ``swaps
entity,'' from the prohibition against ``Federal assistance.'' In
particular, the prohibition against Federal assistance does not
apply to the extent the IDI SD engages in: (1) Hedging and other
risk-mitigating activities of the IDI; or (2) acting as an SD for
swaps and security-based swaps involving rates (e.g., interest rate
swaps) or reference assets that are permissible investments.
Engaging in non-cleared credit default swaps, however, would subject
an IDI SD to the prohibition against Federal assistance.
\13\ Section 716(c) provides for the Push-Out Affiliate
exception as follows:
(c) AFFILIATES OF INSURED DEPOSITORY INSTITUTIONS.--The
prohibition on Federal assistance contained in subsection (a) does
not apply to and shall not prevent an insured depository institution
from having or establishing an affiliate which is a swaps entity, as
long as such insured depository institution is part of a bank
holding company, or savings and loan holding company, that is
supervised by the Federal Reserve and such swaps entity affiliate
complies with sections 23A and 23B of the Federal Reserve Act and
such other requirements as the Commodity Futures Trading Commission
* * * may determine to be necessary and appropriate.
\14\ See 75 FR 71379, 71380-81. The Commission did not receive
any comments on its statement in the Proposal.
---------------------------------------------------------------------------
C. The Proposal
To fulfill the statutory mandates contained in CEA sections 4s(a)
and 4s(b), the Commission proposed amendments to existing Regulations
3.2, 3.4, 3.10, 3.21, 3.30, 3.31 and 3.33 \15\ and new Regulations
23.21, 23.22 and 170.16, to, respectively, establish the registration
process for SDs and MSPs; incorporate the statutory prohibition on SDs
and MSPs permitting an associated person to effect or be involved in
effecting swaps on their behalf; and require SDs and MSPs to become and
remain members of an RFA.
---------------------------------------------------------------------------
\15\ Part 3 of the Commission's regulations governs the
registration of intermediaries and certain market participants under
the CEA.
---------------------------------------------------------------------------
In the section-by-section analysis of the regulations contained in
the Proposal, the Commission specifically requested comment on whether
it should restrict the definition of an associated person of a Swaps
Entity to a natural person, and how to best implement the statutory
disqualification prohibition in CEA section 4s(b)(6).\16\ Elsewhere,
the Commission requested comment on the concept of a provisional
registration process for SDs and MSPs that would be responsive to a
phased implementation of the Entities Definitional Regulations and the
section 4s Implementing Regulations,\17\ and on the allocation of
responsibilities among the Commission and one or more RFAs attendant to
the oversight of the activities of Swaps Entities generally.\18\
Finally, the Commission requested comment on the application of
extraterritorial issues to the registration requirements it proposed
for Swaps Entities.\19\
---------------------------------------------------------------------------
\16\ See 75 FR at 71385.
\17\ See 75 FR at 71381.
\18\ See 75 FR at 71381-82.
\19\ See 75 FR at 71382-71383.
---------------------------------------------------------------------------
II. Comments \20\ and Responses
---------------------------------------------------------------------------
\20\ The comments the Commission received on the Proposal are
currently available on the Commission's Web site.
---------------------------------------------------------------------------
A. In General
The Commission received numerous comments on the Proposal.
Commenters include domestic banks, foreign banks, companies engaged in
various energy businesses, trade and public interest associations
(energy, international banking, securities, and swaps), the National
Futures Association (NFA, currently the only RFA), and both United
States (U.S.) and foreign citizens. The Commission received several
requests for clarification on and enhancements to its contemplated
registration process for Swaps Entities, and the final regulations
adopted today do contain some revisions to the Proposal. In
consideration of the comments received, the Commission is adopting the
Proposal mainly in the form as issued, with specific changes as
discussed below.
B. Restricting Associated Persons to Natural Persons
As stated in the Proposal:
The term ``associated person'' in the context of existing
Commission registrants is not defined in the CEA. That term is
defined in the Commission's regulations. Specifically, Regulation
1.3(aa) provides that ``[T]his term [i.e., associated person] means
any natural person who is associated with'', e.g., [a futures
commission merchant] * * * in any capacity that involves
solicitation or the supervision of any person or persons so engaged
(emphasis added). ``Associated
[[Page 2615]]
person'' has typically referred to a salesperson of a registrant.
Thus, a corporation, partnership or other legal entity has never
been considered an associated person. The use of the term ``natural
person'' in the current associated person definition is intended to
distinguish between the rights and responsibilities of persons
acting as associated persons of a registrant and persons acting as
IBs. However, in the absence of any language in the Dodd-Frank Act
restricting associated persons of swaps entities to natural persons,
the Commission is not proposing such a definition. The Commission
nonetheless requests comment on whether it should by regulation in
fact restrict associated persons of swaps entities to natural
persons.\21\
---------------------------------------------------------------------------
\21\ 75 FR at 71385 (footnote omitted).
The comments the Commission received in response to this request
were unanimous in their support of such a restriction. The Commission
is amending Regulation 1.3(aa) to include in the ``associated person''
definition provided for thereunder a natural person associated with an
SD or MSP as a partner, officer, employee or agent (or functionally
similar role) in a capacity that involves the solicitation or
acceptance of swaps, or the supervision of persons so engaged.
Specifically, this definition is now found in new Regulation
1.3(aa)(6).\22\
---------------------------------------------------------------------------
\22\ This action supersedes the prior proposal of the Commission
to define the term ``associated person of a swap dealer or major
swap participant'' in a new Regulation 1.3(zz). See 76 FR 33066,
33067 (June 7, 2011). However, for the purpose of adding the
``Exemption from fingerprinting requirement in certain cases''
provided for in Regulation 3.21(c) with respect to outside directors
of an applicant for registration as an SD or MSP, the Commission has
employed the term ``transactions involving `commodity interests,' as
that term is defined in Sec. 1.3(yy)''--which regulation the
Commission has proposed to revise to include ``[a]ny swap as defined
in the Act, the Commission's regulations, a Commission order or
interpretation, or a joint interpretation or order issued by the
Commission and the Securities and Exchange Commission.'' See 76 FR
at 33069, 33086.
---------------------------------------------------------------------------
C. Effect of Statutory Disqualification
The Commission proposed the adoption of new Regulation 23.22 to
implement the statutory prohibition in CEA section 4s(b)(6) against an
SD or MSP permitting a person associated with it who is subject to a
statutory disqualification to effect or be involved in effecting swaps
on behalf of the SD or MSP, if the SD or MSP ``knows, or in the
exercise of reasonable care should know, of the statutory
disqualification.'' In the proposed regulation, paragraph (a) defined
the term ``person'' as a shorthand substitute for the statutory term
``associated person of a swap dealer or major swap participant,'' and
paragraph (b) restated the statutory prohibition without exception. The
Commission proposed that an SD or MSP would be responsible for ensuring
that its associated persons are not subject to a statutory
disqualification. The Commission also requested comment on implementing
the statutory prohibition.
The Commission in its request focused on how an SD or MSP could
conduct background checks or otherwise fulfill the requirement to
ensure that persons subject to a statutory disqualification would not
effect or be involved in effecting swaps on its behalf. The sole
comment that the Commission received on this issue expressed the view
that the Commission allow, but not require, Swaps Entities to use NFA
for this vetting purpose.\23\ The Commission agrees with this comment.
It believes that Swaps Entities should be free to work with and through
the service provider of their choice to obtain information as to
whether a prospective associated person is subject to a statutory
disqualification--and NFA could qualify to be such a service provider.
Accordingly, the Commission has not adopted any requirement that Swaps
Entities must, and may only, employ NFA to fulfill their obligation
under CEA section 4s(b)(6). This same commenter suggested that if NFA
performed the background check, ``then it would constitute a safe
harbor for the firm if the individual is subject to a statutory
disqualification but NFA previously notified the firm that the person
is not subject to one.'' The Commission is not authorizing such a safe
harbor.
---------------------------------------------------------------------------
\23\ Comment letter from the National Futures Association (Jan.
24, 2011) (NFA Comment Letter).
---------------------------------------------------------------------------
One commenter on the implementation of the statutory prohibition
\24\ recommended that, contrary to the Proposal, the Commission adopt
an exception to the association prohibition in Regulation 23.22(b) for
any person listed as a principal or registered as an associated person
of a futures commission merchant (FCM), retail foreign exchange dealer
(RFED), introducing broker (IB), commodity pool operator (CPO), or
commodity trading advisor (CTA)--notwithstanding that such person may
be subject to a statutory disqualification under CEA section 8a(2) or
8a(3).\25\ This commenter noted that, pursuant to the authority the
Commission has delegated to NFA to exercise its registration
responsibilities in the futures markets, NFA has permitted a person to
be listed as a principal or registered as an associated person where
NFA, in its discretion, has determined that the incident giving rise to
a statutory disqualification is insufficiently serious, recent, or
otherwise relevant to evaluating the person's fitness. Where this has
occurred and the person now finds himself to be an associated person of
an SD or MSP, the commenter explained that absent an exception as
provided for in the introductory text of CEA section 4s(b)(6), an
anomalous result would ensue.
---------------------------------------------------------------------------
\24\ Id.
\25\ See, e.g., CEA section 4k, which requires the registration
of associated persons of FCMs, IBs, CPOs, and CTAs, and Regulation
3.10(a)(2), which requires each natural person who is a principal of
an applicant for registration to file a fingerprint card.
---------------------------------------------------------------------------
The statutory prohibition in CEA section 4s(b)(6) applies ``except
to the extent otherwise specifically provided by rule, regulation, or
order.'' The Commission recognizes that if it did not provide an
exception as suggested, a person could be permitted to direct futures-
related activities or solicit futures-related business with members of
the retail public--e.g., as, respectively, a principal or associated
person of an FCM or CPO--but that same person would be barred from
soliciting, accepting, or otherwise effecting or being involved in
effecting swaps transactions with significantly more sophisticated
clients as an associated person of an SD or MSP. On the other hand,
adopting the requested exception could result in persons to whom the
Dodd-Frank Act affords heightened protections engaging in transactions
marketed by associated persons of an SD or MSP subject to a statutory
disqualification. Even though the Commission did not propose such an
exception, it believes that the commenter's recommendation has merit.
The Commission therefore is adopting the commenter's recommendation
that Regulation 23.22(b) include both the general prohibition against
an SD or MSP permitting any person associated with it who is subject to
a statutory disqualification to effect or be involved in effecting
swaps on behalf of the SD or MSP and an exception to the prohibition
for any person subject to a statutory disqualification who is already
listed as a principal, registered as an associated person of another
registrant (i.e., an FCM, RFED, IB, CPO, CTA, or leverage transaction
merchant (LTM)), or registered as a floor broker (FB) or floor trader
(FT).\26\
---------------------------------------------------------------------------
\26\ In addition to the registration categories included in the
comment, the Commission has included in this exception any person
listed as a principal or registered as an associated person of an
LTM. Although there currently is no registered LTM, the CEA and
Commission regulations issued thereunder provide for an LTM
registration category. The Commission also has included in this
exception any person registered as an FB or FT because, as a natural
person and like an associated person of a registrant other than an
SD or MSP, it must submit a Form 8-R in connection with applying for
registration.
---------------------------------------------------------------------------
[[Page 2616]]
The same commenter also recommended that the Commission expand
Regulation 3.12(f), or adopt a new regulation, ``to address the
situations in which an individual conducts swaps-related activity on
behalf of more than one Swap Entity or conducts swaps activity on
behalf of a Swap Entity and is also registered as an AP of a different
firm.'' \27\ Regulation 3.12(f) currently provides for the reporting of
dual and multiple associations of a person registered as an associated
person with, and sponsored by, two or more Commission registrants. It
provides, among other things, that each sponsor registrant is jointly
and severally liable for the conduct of that associated person in
specified circumstances. While the Commission agrees with the
commenter's recommendation, it anticipates promptly addressing this
issue in a future rulemaking.
---------------------------------------------------------------------------
\27\ NFA Comment Letter.
---------------------------------------------------------------------------
D. Phased Implementation \28\
---------------------------------------------------------------------------
\28\ See generally 75 FR at 71379, 71381.
---------------------------------------------------------------------------
The Commission proposed a provisional registration process for SDs
and MSPs that would take into account, through phased implementation,
the strong likelihood that the Commission would adopt the Section 4s
Implementing Regulations subsequent to issuing the registration process
regulations for SDs and MSPs. As the Commission explained in the
Proposal, phased implementation is aimed at preserving the ``continuity
of the business operations of existing swaps entities, and to avoid
undue market disruption,'' by permitting applicants to continue swaps
activities pending confirmation of initial compliance with the Section
4s Implementing Regulations and notification of registration. In
addition, the final regulations make clear that provisional
registration will be granted upon filing of the application and any
documentation required under the applicable Section 4s Implementing
Regulation--and not upon NFA's review and approval of the
documentation.
Several commenters stressed the need for phased implementation over
extended periods of time so that SDs and MSPs can come into compliance
after evaluating the need, e.g., to restructure operations, re-document
client agreements as a result of new organizational structures or new
regulatory requirements, or upgrade systems. One commenter recommended
that the Commission postpone the effective date of the registration
process rulemaking until sometime after the Commission had adopted all
of the Section 4s Implementing Regulations.\29\ Another commenter
opined that, owing to business continuity concerns, a reasonable
transition period for a firm not previously subject to regulation would
be ``a one year period for such firm to (i) determine whether it is [an
SD or MSP] and (ii) register with the Commission.'' \30\ It suggested a
``roll off'' period that would enable a putative Swaps Entity to fall
outside the SD or MSP definition and thus not be subject to the
requirement to register as an SD or MSP if enough of the Swaps Entity's
legacy swaps expired. The commenter also estimated ``that it might take
up to as much as two years in addition to the suggested one year
registration period for such firms to complete the steps necessary to
comply with all of the requirements necessary for registration as [an
SD or MSP].''
---------------------------------------------------------------------------
\29\ Comment letter from the International Swaps and Derivatives
Association, Inc. (Jan. 24, 2011) (ISDA Comment Letter). Another
commenter advocated delaying effectiveness of the Section 4s
Implementing Regulations until at least 60 days after the
registration process regulations and the Entities Definitional
Regulations became effective. Comment letter from the Securities
Industry and Financial Markets Association (Jan. 18, 2011) (SIFMA
Comment Letter).
\30\ Comment letter from Hunton and Williams, LLP, on behalf of
the Working Group of Commercial Energy Firms (Jan. 24, 2011) (WGCEF
Comment Letter).
---------------------------------------------------------------------------
The Commission believes that the provisional registration process
adopted today is consistent with the incremental staging requested by
commenters. Thus, the Commission is declining to extend the
effectiveness of any Section 4s Implementing Regulation today.
Moreover, to provide the maximum amount of processing time, so that
applicants for SD or MSP registration can be registered at the earliest
possible date, and in the absence of any comments to the contrary, the
Commission has adopted, as proposed, Regulation 3.10(a)(1)(v), which
permits applicants to begin the registration process in advance of the
effective date of the requirement to register as an SD or MSP.\31\
---------------------------------------------------------------------------
\31\ In response to a comment received, the Commission has
clarified in Regulation 3.10(a)(1)(v)(C)(1) when a person may apply
to be registered as an SD or MSP and in Regulations
3.10(a)(1)(v)(C)(2) and 3.10(a)(1)(v)(C)(3) when a person must apply
to be registered as an SM or MSP. See NFA Comment Letter.
---------------------------------------------------------------------------
In the Proposal, the Commission provided for provisional
registration with reference to the Dodd-Frank Act's general statutory
effective date of July 16, 2011, and CEA section 4s(b), which requires
the Commission to issue regulations providing for the registration of
Swaps Entities not later than one year after the enactment of the Dodd-
Frank Act, or July 21, 2011. After issuing the Proposal, the Commission
issued effective date clarification of, as well as specific exemptive
relief from compliance with, numerous provisions of the Dodd-Frank Act
(Effective Date Release).\32\ The Effective Date Release explained that
many Dodd-Frank Act provisions require rulemakings to implement them,
including the registration mandate in CEA section 4s(a) and other
Section 4s Requirements, and that pursuant to Dodd-Frank Act section
754, those provisions would not be effective until 60 days after the
publication of those implementing final regulations (e.g., for the
registration mandate, this Federal Register release). Dates
notwithstanding, for the reasons stated in the Proposal and above, the
Commission continues to believe that provisional registration is
appropriate and consistent with the Effective Date Release.\33\
---------------------------------------------------------------------------
\32\ See 76 FR 42508, 42509 and 42524 (July 19, 2011).
\33\ So that the text of the registration regulations accurately
reflects the impact of the Effective Date Release on phased
implementation and the provisional registration process, the
Commission is adopting certain definitions, and is incorporating
those definitions into the registration process regulations it is
adopting today. Specifically, new Regulation 3.1(f) defines the term
``Section 4s Implementing Regulation'' to mean ``a regulation the
Commission issues pursuant to section 4s(e), 4s(f), 4s(h), 4s(i),
4s(j), 4s(k), or 4s(l) of the Act,'' and new Regulation 3.1(g)
defines the term ``Swap Definitional Regulation'' to mean ``a
regulation the Commission issues to further define the term `swap
dealer,' `major swap participant' or `swap' in section 1a(49),
1a(33) or 1a(47) of the Act, respectively, pursuant to the Dodd-
Frank Wall Street Reform and Consumer Protection Act.'' These terms
are employed in such registration process regulations as Regulation
3.2(c)(3)(i) (pertaining to provisional registration) and
3.10(a)(1)(v) (pertaining to applying for registration as an SD or
MSP).
---------------------------------------------------------------------------
Moreover, in response to a commenter requesting clarification on
provisional registration \34\ and as is reflected in the amended
heading of Regulation 3.2--which now reads ``Registration processing by
the National Futures Association; notification and duration of
registration; provisional registration'' (emphasis supplied)--the
Commission has adopted in new Regulation 3.2(c)(3) the exact terms
pursuant to which NFA will notify an applicant for SD or MSP
registration that it is provisionally registered, the continuing
obligations of a provisional registrant with respect to providing
documentation of compliance with each Section 4s Implementing
[[Page 2617]]
Regulation,\35\ and the terms pursuant to which a provisional
registrant will become registered with the Commission. The Commission
believes this clarification provides necessary specific details on
provisional registration and the transition of a provisional registrant
into a registered SD or MSP.
---------------------------------------------------------------------------
\34\ NFA Comment Letter.
\35\ See also Regulation 3.10(a)(1)(v)(D).
---------------------------------------------------------------------------
The Commission proposed in Regulation 3.2(c)(3) to require NFA to
notify the applicant for SD or MSP registration ``that it is
provisionally registered pending completion of a fitness review by the
National Futures Association.'' \36\ However, in light of the purpose
of provisional registration, along with the authority the Commission
today intends to delegate to NFA by notice and order (Notice and
Order)--e.g., the authority to conduct proceedings to deny the
registration of an applicant for registration as an SD or MSP--the
Commission has determined not to adopt any such delay with respect to
the notification by NFA to the applicant that it is provisionally
registered.
---------------------------------------------------------------------------
\36\ See 75 FR at 71387.
---------------------------------------------------------------------------
As proposed and as adopted, Regulation 3.10(a)(1)(i) provides that
application for registration as an SD or MSP will commence with the
filing of a Form 7-R with NFA--which is also how, under Regulation
3.10(a)(1)(i), the registration process commences for applicants for
registration as an FCM, RFED, IB, CPO, CTA, or LTM.\37\ In this regard,
the Commission notes that, as proposed, Regulation 3.10(a)(1)(v)(B)
provides that the commencement of the registration process by an SD or
MSP authorizes the Commission to conduct on-site inspection of the
applicant to determine compliance with the Section 4s Implementing
Regulations applicable to it. The Commission received no comment on the
inspection authority proposed in Regulation 3.10(a)(1)(v)(B).
---------------------------------------------------------------------------
\37\ The process for registration as an FB or FT commences with
the filing of a Form 8-R, which reflects the fact that FBs and FTs
are natural persons.
Further with respect to Regulation 3.10, the Commission notes
that paragraphs (a)(1)(iii) and (a)(1)(iv) were inadvertently
dropped from the regulation in connection with the adoption of the
regulatory program of the Commission for RFEDs. See 75 FR 55410,
55424 (Sep. 10, 2010). By this Federal Register release, the
Commission is returning paragraphs (a)(1)(iii) and (a)(1)(iv) to
Regulation 3.10 in the form and text identical to that which existed
prior to this unintentional deletion.
---------------------------------------------------------------------------
The Commission also proposed to require applicants for registration
as an SD or MSP ``to demonstrate compliance'' with such of the Section
4s Implementing Regulations in effect at the time of their application.
At the suggestion of a commenter, the Commission has adopted in
Regulation 3.10(a)(1)(v)(A) the requirement that the Form 7-R must be
accompanied by ``such documentation as may be required to demonstrate
compliance'' with each applicable Section 4s Implementing
Regulation.\38\ The Commission believes that the addition of this
phrase brings the registration application requirement for SDs and MSPs
in line with existing requirements for applicants for registration in
other categories--such as applicants for registration as an FCM or IB,
who must accompany their Form 7-R with specified documentation that
demonstrates their compliance with the financial requirements they must
meet to become registered.\39\ And, as proposed and as adopted,
Regulation 3.10(a)(1)(v)(A) provides that for the purpose of this
regulation, ``the term `compliance' includes the term `the ability to
comply,' to the extent that a particular Section 4s Implementing
Regulation may require demonstration of the ability to comply with a
requirement thereunder.'' \40\
---------------------------------------------------------------------------
\38\ NFA Comment Letter.
\39\ See Regulation 3.10(a)(1)(ii), which requires applicants
for registration as an FCM or IB to accompany their Form 7-R with a
Form 1-FR-FCM or Form 1-FR-IB, respectively.
\40\ As the Commission has stated previously, it ``will strive
to ensure that current practices will not be unduly disrupted during
the transition to the new regulatory regime.'' Effective Date for
Swap Regulation, 76 FR 42508, 42513 (July 19, 2011). Further, the
Commission has determined that ``the interdependencies of the
various rulemakings will be a consideration in determining the
implementation date for each final rule,'' and that such
determinations will be informed by the Commission's further
consideration of these issues, including public comments. Id.
Thus, for example, to determine with which Section 4s
Implementing Regulations an applicant must demonstrate compliance as
part of the registration process, the applicant should look to the
Section 4s Implementing Regulations themselves to determine
precisely when compliance is required for each. For example, the
Section 4s Implementing Regulations for External Business Conduct
Standards require compliance on the later of 180 days after the
effective date of those regulations or the date on which swap
dealers or major swap participants are required to apply for
registration pursuant to Regulation 3.10.
---------------------------------------------------------------------------
Two commenters asked the Commission what documentation is required
of an applicant for SD or MSP registration.\41\ One of these commenters
suggested that the documentation required to demonstrate compliance
with the regulations the Commission adopts to implement the business
conduct standards required by CEA section 4s(h) might consist of
written policies and procedures.\42\ Or, as the Commission notes, the
documentation required to demonstrate compliance with the regulations
the Commission adopts to implement the capital requirements of CEA
section 4s(e) might be a financial form specifically designed for this
purpose. The Commission anticipates that these questions will be
considered in connection with its adoption of the relevant Section 4s
Implementing Regulations.
---------------------------------------------------------------------------
\41\ NFA and WGCEF Comment Letters.
\42\ NFA Comment Letter.
---------------------------------------------------------------------------
The regulations the Commission proposed and is adopting also
address, in Regulation 3.10(a)(1)(v)(D)(1), the situation where an
applicant for registration as an SD or MSP to whom NFA has provided
notification of provisional registration subsequently fails to
demonstrate compliance with a Section 4s Implementing Regulation--i.e.,
that NFA ``will notify the applicant that its application is deficient,
whereupon the applicant must withdraw its registration application, it
must not engage in any new activity as a swap dealer or major swap
participant, as the case may be, and the applicant shall cease to be
provisionally registered.'' \43\ The Commission proposed a 30-day
period--subject to extension at the discretion of the Commission--
within which the applicant would be required to cure the deficiency.
Upon further consideration, the Commission has adopted in the final
regulation a 90-day cure period.\44\ Further, Regulation
3.10(a)(1)(v)(D)(2) makes clear that the provisions of Regulation
3.10(a)(1)(v)(D)(1) supplement, and are in addition to, the other
activities in which NFA engages under the Act and Commission
regulations in connection with processing an application for
registration as an SD or MSP.\45\
---------------------------------------------------------------------------
\43\ This provision was found in proposed Regulation
3.10(a)(1)(v)(D)(2).
\44\ New Regulation 3.10(a)(1)(v)(E), formerly proposed
Regulation 3.10(a)(1)(v)(D)(3), addresses the effect on the
applicable swap documentation of the SD or MSP. Broadly stated, as
proposed and as adopted, this regulation provides that ``unless
specifically reserved in the applicable swap documentation,'' any
withdrawal, cessation or revocation of registration does not affect
the terms of any swap transaction to which the applicant is a party
entered into prior to receiving notice that it is deficient in its
compliance with the applicable Section 4s Implementing Regulation.
See CEA section 22(a)(5), added by Dodd-Frank Act section 739, which
states:
EFFECT ON SWAPS.--Unless specifically reserved in the applicable
swap, neither the enactment of the Wall Street Transparency and
Accountability Act of 2010, nor any requirement under that Act or an
amendment made by that Act, shall constitute a termination event,
force majeure, illegality, increased costs, regulatory change, or
similar event under a swap (including any related credit support
arrangement) that would permit a party to terminate, renegotiate,
modify, amend, or supplement 1 or more transactions under the swap.
\45\ See, e.g., CEA sections 8a(2) and 8a(3) and generally Part
3 of the Commission's regulations.
---------------------------------------------------------------------------
[[Page 2618]]
To address comments requesting clarification of the effect of
provisional registration on the general registration process for SDs
and MSPs,\46\ the Commission notes that, as is stated in Part II.E
below, the Commission intends to issue the Notice and Order that
delegates to NFA the authority to perform the full range of
registration functions with respect to applicants for registration, and
persons registered, as an SD or MSP. Currently, persons who apply for
registration must file a Form 7-R, and a Form 8-R and fingerprint card
for each principal of the applicant who is a natural person,\47\
accompanied by such documentation as may be required to demonstrate
compliance with applicable regulatory requirements. NFA subsequently
reviews these materials in advance of granting registration.\48\ This,
then, is the course of action the Commission intends that NFA will
follow upon notification to an applicant for registration as an SD or
MSP that it is provisionally registered.
---------------------------------------------------------------------------
\46\ NFA Comment Letter.
\47\ Regulation 3.1 defines the term ``principal'' to mean, when
referring to an applicant for registration, a registrant or a person
required to be registered under the CEA or Commission regulations,
to include officers, directors, and persons who own ten percent or
more of the outstanding shares of the applicant or registrant.
\48\ For example, this is the procedure that NFA follows with
respect to applicants for registration as an FCM or IB, who must
file a Form 7-R, a Form 8-R for each natural person principal, and
specified financial documents.
---------------------------------------------------------------------------
In this regard, the Commission expects that NFA will promptly
perform these reviews and, as the Commission intends to state in the
Notice and Order, NFA will be required to perform these registration
processing functions in accordance with the standards established by
the CEA and the Commission's regulations and to follow the same
procedures with respect to recordkeeping, disclosure and tracking of
fitness investigations and adverse action proceedings concerning SDs
and MSPs as it must follow in cases involving other registrants. Thus,
for example, notwithstanding that it has notified an applicant for
registration as an SD or MSP that it is provisionally registered, NFA
may subsequently take an action to deny the registration application
based on the statutory disqualification of one of the applicant's
principals.\49\ In this regard, the Commission notes that the Form 7-R
specifies disclosures that must be made concerning an applicant's
criminal, regulatory and disciplinary histories, and that Form 8-R
additionally requires these disclosures for each of the applicant's
principals.\50\
---------------------------------------------------------------------------
\49\ See CEA sections 8a(2) and 8a(3).
\50\ These forms can be accessed through NFA's Web site, http://www.nfa.futures.org/.
---------------------------------------------------------------------------
Another commenter requested that the Commission consider separate
sets of regulations for SDs and MSPs.\51\ The Commission has considered
the reasons set forth in the comment and continues to believe that
applicants for SD or MSP registration should be subject to the same
registration requirements for the purpose of commencing the
registration process--i.e., the filing of the Form 7-R by the
applicant.
---------------------------------------------------------------------------
\51\ SIFMA Comment Letter.
---------------------------------------------------------------------------
E. Allocation of Responsibilities 52 and RFA Membership and
Oversight 53
As part of its efforts to bring SDs and MSPs into the existing
regulatory framework for futures intermediaries, the Commission
proposed Regulation 170.16, which would require each person registered
as an SD or MSP to become and remain a member of an RFA. As the
Commission noted, FCMs are subject to the RFA membership
requirement.\54\ Currently, NFA is the sole RFA. The Commission
received general comments in favor of the membership requirement, that
claimed such a requirement would provide the Commission with
flexibility in overseeing the operations and activities of Swaps
Entities.\55\ After consideration of the foregoing, the Commission is
adopting Regulation 170.16 as proposed.
---------------------------------------------------------------------------
\52\ See generally 75 FR 71379 at 71381-82.
\53\ See generally 75 FR at 71385.
\54\ Id.
\55\ Comment letter from the New England Fuel Institute and the
Petroleum Marketers Association of America (Jan. 18, 2011) (NEFI/
PMAA Comment Letter).
---------------------------------------------------------------------------
The Commission also requested comment on who should be responsible
for determining initial and ongoing compliance by Swaps Entities with
respect to the Section 4s Implementing Regulations and all other
applicable requirements. The Commission suggested three alternatives:
no delegation to any person, full delegation to NFA (or any association
that may be subsequently registered as a futures association), and
partial delegation to NFA (or any subsequent RFA).\56\
---------------------------------------------------------------------------
\56\ The Proposal specifically provided:
Option number one would involve the Commission being directly
responsible for ensuring compliance by swaps entities with all
requirements applicable to them under the CEA and Commission
regulations. Option number two would involve NFA (or any other
association that may subsequently be registered as a futures
association) being responsible for ensuring compliance, subject to
Commission oversight. Option number three would involve certain
compliance oversight activities being performed by the Commission
and others being delegated to NFA (or a subsequently registered
futures association). The Commission requests comment on these
options. In the case of option number three, commenters should
specify which oversight activities should be performed by the
Commission and which should be delegated to, or performed by NFA (or
another registered futures association).
75 FR at 71382.
---------------------------------------------------------------------------
One commenter favored no delegation, arguing that ``[t]he
fundamental duty to determine initial and continuing compliance to
qualify for registration is entrusted to and must remain with the
CFTC.'' \57\ This commenter nevertheless acknowledged that confirmation
and oversight of compliance with functions involving reporting and
recordkeeping, daily trading records, swap documentation structure,
designation of chief compliance officer, and filing of annual
compliance reports could be delegated to NFA if the Commission
determined that ``material efficiencies'' could be achieved. But,
confirmation and oversight of compliance with requirements relating to,
among other functions, capital and margin requirements, business
conduct standards and monitoring of trading and risk management were
viewed by this commenter as requiring ``involvement that is focused,
decisive and utterly free from even the appearance of influence brought
to bear by SDs and MSPs''--and therefore, this commenter claimed,
should be retained by the Commission.\58\ Another commenter observed
that until the enactment of the Dodd-Frank Act, NFA had been the self-
regulatory organization (SRO) for the futures industry exclusively, and
advanced that NFA would need to develop new capabilities to serve as an
effective SRO for the swaps industry.\59\ Other commenters favored full
delegation to NFA, based on NFA's historical performance of the
registration and fitness review functions, as well as confirming its
members' compliance with regulatory requirements.\60\
---------------------------------------------------------------------------
\57\ Comment letter from Better Markets, Inc. (Jan. 24, 2011)
(Better Markets Comment Letter).
\58\ Id. (emphasis in original).
\59\ ISDA Comment Letter.
\60\ NFA and WGCEF Comment Letters.
---------------------------------------------------------------------------
Another commenter requested that if the Commission adopted the
partial delegation model, it clearly define the responsibilities
delegated to NFA, and, in this regard, asked that the Commission
clarify certain of its registration process proposals.\61\ It
recommended that ``the Commission delegate to NFA not only the
authority to process Swap[s] Entity registration applications and
conduct background checks but also to conduct adverse registration
proceedings.'' This
[[Page 2619]]
commenter further requested that, in delegating ``to NFA the
responsibility to maintain records associated with processing Swap
Entity registration applications * * * the Commission specify whether
records filed with and maintained by NFA in connection with any
background check * * * are considered Commission records.''
---------------------------------------------------------------------------
\61\ NFA Comment Letter.
---------------------------------------------------------------------------
In response to these comments, in recognition of NFA's proven track
record in performing analogous functions for all other Commission
registrants, and consistent with past practice,\62\ including with
respect to the newest registrant category of RFED, the Commission
intends to delegate its full registration authority under the CEA and
its regulations to NFA with respect to applicants for registration, and
registrants, as an SD or MSP. Specifically, by the Notice and Order,
the Commission intends to delegate to NFA the authority to take the
following actions: (1) To process and grant applications for
registration and withdrawals from registration of SDs and MSPs, and to
notify applicants for registration as an SD or MSP of provisional
registration; (2) in connection with processing and granting
applications for registration of SDs and MSPs, to confirm initial
compliance with applicable Section 4s Implementing Regulations; \63\
(3) to conduct proceedings to deny, condition, suspend, restrict or
revoke the registration of any SD or MSP or of any applicant for
registration in either category; and (4) to maintain records regarding
SDs and MSPs, and to serve as the official custodian of those
Commission records.\64\ The Commission intends that the Notice and
Order will further provide that nothing contained therein ``shall
affect the Commission's authority to review the performance by NFA of
Commission registration functions, to adopt and enforce regulations
applicable to SDs and MSPs as Commission registrants, and to conduct
on-site examinations of the operations and activities of SDs and MSPs
as Commission registrants.''
---------------------------------------------------------------------------
\62\ The Commission previously has authorized NFA to perform the
full range of registration functions with regard to persons who must
register under the CEA, including granting applications for
registration; enabling withdrawals; and conducting proceedings to
deny, condition, suspend, restrict or revoke the registration of
existing registrants or applicants for registration in each
category. See 48 FR 15940 (Apr. 13, 1983); 48 FR 35158 (Aug. 3,
1983); 48 FR 51809 (Nov. 14, 1983); 49 FR 8226 (Mar. 5, 1984); 49 FR
39593 (Oct. 9, 1984); 50 FR 34885 (Aug. 28, 1985); and 75 FR 55310
(Sep. 10, 2010).
\63\ The Commission intends that applicants for registration may
seek confidential treatment of documentation submitted to
demonstrate initial compliance with the Section 4s Implementing
Regulations in accordance with the procedures set out in Regulation
145.9. This approach is consistent with that taken in other Dodd-
Frank Act rulemakings. See, e.g., Process for Review of Swaps for
Mandatory Clearing, 76 FR 44464, 44474 (July 26, 2011) (adopting
Regulation 39.5(b)(5) which allows a derivatives clearing
organization to request confidential treatment under Regulation
145.9 for portions of its submissions to the Commission).
\64\ The Commission has adopted as proposed an amendment to
Regulation 3.10(d) that subjects SD and MSP registrants to the
requirement applicable to all other persons registered in accordance
with Regulation 3.10 to annually review and update registration
information with NFA. However, in light of its intent to delegate
its full registration authority to NFA, the Commission has not
adopted as proposed a further amendment to Regulation 3.10(d) that
would have required SD and MSP registrants to also file this
updating registration information with the Commission.
---------------------------------------------------------------------------
The Commission recognizes that the operations, activities and
transactions engaged in by SDs and MSPs have not previously been
subject to an extensive regulatory framework. Ideally, and as one
commenter suggested, the Commission would retain direct responsibility,
at least initially, for confirming compliance with the Section 4s
Implementing Regulations.\65\ However, in order to best allocate its
resources, the Commission has determined to delegate to NFA the
responsibility for the initial determination that an applicant for
registration as an SD or MSP is in compliance with the Section 4s
Implementing Regulations.
---------------------------------------------------------------------------
\65\ Better Markets Comment Letter.
---------------------------------------------------------------------------
Going forward, the Commission expects that NFA, as it has for its
other members in connection with the discharge of its RFA
responsibilities under CEA section 17, will adopt rules for its SD and
MSP members that are the same as, or more stringent than, the Section
4s Implementing Regulations, and that NFA will engage in active
oversight of its SD and MSP members to monitor and ensure compliance
with those rules.\66\ In this regard, the Commission notes that CEA
section 17(j) requires an RFA--such as NFA--to submit to the Commission
any new change in or addition to its rules and that the RFA--
---------------------------------------------------------------------------
\66\ See, e.g., NFA Compliance Rule 2-13 for its member CPOs and
CTAs, wherein NFA has adopted in large part the Part 4 regulations
of the Commission, which govern the operations and activities of
these categories of registrant. See also NFA Financial Requirements
Rules for its member FCMs, RFEDs and IBs, whereby NFA has adopted
rules that are the same as, or more stringent than, the financial
requirements the Commission has adopted for these categories of
registrant.
may make such rules effective ten days after receipt of such
submission by the Commission unless, within the ten-day period, the
registered futures association requests review and approval thereof
by the Commission or the Commission notifies such registered futures
association in writing of its determination to review such rules for
---------------------------------------------------------------------------
approval.
As for the standard of review to which RFA rules are subject,
section 17(j) further provides that:
The Commission shall approve such rules if such rules are
determined by the Commission to be consistent with the requirements
of this section and not otherwise in violation of this Act or the
regulations issued pursuant to this Act, and the Commission shall
disapprove, after appropriate notice and opportunity for hearing,
any such rule which the Commission determines at any time to be
inconsistent with the requirements of this section or in violation
of this Act or the regulations issued pursuant to this Act.\67\
---------------------------------------------------------------------------
\67\ Section 17(j) further provides:
If the Commission does not approve or institute disapproval
proceedings with respect to any rule within one hundred and eighty
days after receipt or within such longer period of time as the [RFA]
may agree to, or if the Commission does not conclude a disapproval
proceeding with respect to any rule within one year after receipt or
within such longer period as the [RFA] may agree to, such rule may
be made effective by the [RFA] until such time as the Commission
disapproves such rule * * *.
However, and consistent with the Notice and Order the Commission
intends to issue, adoption by the Commission of Regulation 170.16
requiring membership in an RFA by SD and MSP registrants and adoption
by NFA of rules for its SD and MSP members does not affect the
authority of the Commission to adopt and enforce regulations applicable
to SDs and MSPs as Commission registrants and to conduct on-site
examinations of the operations and activities of SDs and MSPs as
Commission registrants.
The Commission has, in the past, issued written guidance to NFA
regarding the exercise of delegated authority.\68\ To the extent that a
Section 4s Implementing Regulation is not specific in this regard, the
Commission anticipates providing written guidance to NFA on the
criteria for, and manner of, determining that an applicant for SD or
MSP registration has demonstrated its initial compliance with the
regulation.
---------------------------------------------------------------------------
\68\ See Letter to Robert K. Wilmouth, President, NFA, from Jean
A. Webb, Secretary of the Commission, dated Dec. 4, 1997; Letter to
Robert K. Wilmouth, President, NFA, from Jean A. Webb, Secretary of
the Commission, dated Apr. 13, 2000. These letters are included in
Appendix A to Part 3 of the Commission's regulations.
---------------------------------------------------------------------------
F. Extraterritoriality
As is noted above, in the Proposal, the Commission requested
comment on the extraterritorial application of the SD and MSP
registration requirements. The Commission has determined to limit this
final rulemaking to the process of registration. Issues relating to
which
[[Page 2620]]
entities are SDs or MSPs and the substantive requirements applicable to
them, including the extraterritorial application of such substantive
requirements, are beyond the scope of this rulemaking.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (Reg Flex Act) requires federal
agencies to consider the impact of its rules on ``small entities.''
\69\ A regulatory flexibility analysis or certification typically is
required for ``any rule for which the agency publishes a general notice
of proposed rulemaking pursuant to'' the notice-and-comment provisions
of the Administrative Procedure Act, 5 U.S.C. 553(b).\70\ As the
Commission stated in the Proposal, it previously has established that
certain entities subject to its jurisdiction are not small entities for
purposes of complying with the Reg Flex Act. However, as the Commission
also noted in the Proposal, SDs and MSPs are new categories of
registrant for which the Commission had not previously addressed the
question of whether such persons are small entities.\71\
---------------------------------------------------------------------------
\69\ 5 U.S.C. 601 et seq.
\70\ 5 U.S.C. 601(2), 603, 604 and 605.
\71\ 75 FR 71379, 71385.
---------------------------------------------------------------------------
In this regard, the Commission explained in the Proposal that it
previously had determined that FCMs should not be considered to be
small entities for purposes of the Reg Flex Act, based, in part, upon
FCMs' obligation to meet the minimum financial requirements established
by the Commission to enhance the protection of customers' segregated
funds and protect the financial condition of FCMs generally.\72\ Like
FCMs, SDs will be subject to minimum capital requirements, and are
expected to be comprised of large firms. The Commission is statutorily
required to exempt from designation as an SD those entities that engage
in a de minimis quantity of swap dealing in connection with
transactions with or on behalf of customers.\73\ Accordingly, for
purposes of the Reg Flex Act for the Proposal and future rulemakings,
the Commission proposed that SDs should not be considered small
entities for essentially the same reasons that it had previously
determined FCMs not to be small entities.\74\
---------------------------------------------------------------------------
\72\ 47 FR 18618 (Apr. 30, 1982).
\73\ See CEA section 1a(49)(D).
\74\ 75 FR at 71385.
---------------------------------------------------------------------------
The Commission further explained that it had also previously
determined that large traders are not small entities for Reg Flex Act
purposes, with the Commission considering the size of a trader's
position to be the only appropriate test for the purpose of large
trader reporting.\75\ The Commission then noted that ``MSPs maintain
substantial positions in swaps, creating substantial counterparty
exposure that could have serious adverse effects on the financial
stability of the United States banking system or financial markets.''
\76\ Accordingly, for purposes of the Reg Flex Act for the Proposal and
future rulemakings, the Commission also proposed that MSPs should not
be considered to be small entities for essentially the same reasons
that it previously had determined large traders not to be small
entities.\77\
---------------------------------------------------------------------------
\75\ Id.
\76\ Id.
\77\ Id. at 71385-86.
---------------------------------------------------------------------------
In response to the Proposal, one commenter, representing a number
of market participants, submitted a comment related to the Reg Flex
Act, stating that ``[e]ach of the complex and interrelated regulations
currently being proposed by the Commission has both an individual, and
a cumulative, effect on [certain] small entities,'' and that ``the vast
majority of [our] members meet the definition of `small entities' under
the Small Business Regulatory Enforcement Fairness Act.''.\78\ Thus,
the commenter concluded that the Commission should conduct a regulatory
flexibility analysis for each of its rulemakings under the Dodd-Frank
Act, including this rulemaking applicable to the registration process
for Swaps Entities.
---------------------------------------------------------------------------
\78\ Comment letter from the National Rural Electric Cooperative
Association, American Public Power Association, Large Public Power
Council, Edison Electric Institute, and Electric Power Supply
Association (June 3, 2011).
---------------------------------------------------------------------------
This commenter did not provide any information on how the Proposal
may have a significant economic effect on a substantial number of small
entities. Nonetheless, the Commission has reevaluated this rulemaking
in light of the statements made to it by this commenter. After further
consideration of those statements, the Commission has again determined
that this final rulemaking, which is applicable to SDs and MSPs, will
not have a significant economic effect on a substantial number of small
businesses.
In terms of affecting a substantial number of small entities, as is
noted above, the Commission is statutorily required to exempt from
designation as an SD those entities that engage in a de minimis
quantity of swaps dealing. Thus, these exempted entities will not be
required to register as an SD. Moreover, the Commission does not expect
that the small entities identified by the commenter will be subject to
registration with the Commission as an MSP.
In terms of having a significant economic effect, in the experience
of the Commission, complying with the registration process regulations
has not had a significant economic effect on a substantial number of
small entities. Notably, Regulation 3.10, containing the same
registration requirements as those being issued today for SDs and MSPs,
has been applicable to IBs and CTAs \79\ without any known significant
economic effects since 1983.\80\ Most recently, in connection with its
adoption of substantively similar registration regulations for RFEDs,
the Commission stated that, in light of Congressionally-mandated
capital requirements, it would not define RFEDs as small entities for
Reg Flex Act purposes.\81\ There is no indication, from the
Commission's experience or the information presented by the commenter,
that the registration process requirements for Swaps Entities would
have an effect on small entities that would be subject to those
requirements, if any, that would be different than the effect the same
registration process requirements have had historically on other
Commission registrants that also may be small.
---------------------------------------------------------------------------
\79\ The Commission historically has evaluated on a case-by-case
basis the economic impact of a particular regulatory proposal on IBs
and CTAs to determine whether the regulatory proposal will have a
significant economic effect on a substantial number of small
entities. See, e.g., 76 FR 33066, 33079 (June 7, 2011) (initial
regulatory flexibility analysis conducted with respect to the
possible economic effects of a proposal to require IBs, among
others, to maintain records of certain oral communications).
\80\ See 48 FR 35248 (Aug. 3, 1983).
\81\ See 75 FR 55410, 55416 (Sep. 10, 2010). CEA section 2(c)(2)
generally requires an RFED to maintain adjusted net capital equal to
or in excess of $20,000.000.
---------------------------------------------------------------------------
Accordingly, for the reasons stated in the Proposal and the
additional rationale provided above, the Commission continues to
believe that the SD and MSP registration process rulemaking will not
have a significant economic impact on a substantial number of small
entities. Therefore, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the regulations being
published today by this Federal Register release will not have a
significant economic impact on a substantial number of small entities.
[[Page 2621]]
B. PaperworkReduction Act
1. Introduction
The Paperwork Reduction Act (PRA) \82\ imposes certain requirements
on federal agencies in connection with their conducting or sponsoring
any collection of information as defined by the PRA. Certain provisions
of these regulations will result in new collection of information
requirements within the meaning of the PRA. An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
---------------------------------------------------------------------------
\82\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Commission submitted the Proposal to the Office of Management
and Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The Commission requested that OMB approve and assign a new
control number for the collection of information covered by the
Proposal. The title for this collection of information is
``Registration of Swap Dealers and Major Swap Participants.'' OMB has
assigned OMB control number 3038-0072 to the Information Collection
Request (ICR) in connection with the Proposal, but OMB has not yet
approved the ICR. The OMB control number will not appear in the active
inventory until OMB grants approval.
Under the regulations that the Commission is adopting today, Swaps
Entities that must register with the Commission will be obligated to
file, periodically review and update certain registration forms.
Responses to the collection of information contained within these final
regulations are mandatory, and the Commission will protect proprietary
information according to the Freedom of Information Act \83\ and Part
145 of the Commission's regulations, ``Commission Records and
Information.'' In addition, the Commission emphasizes that CEA section
8(a)(1) strictly prohibits the Commission, unless specifically
authorized by the CEA, from ``publish[ing] data and information that
would separately disclose the business transactions or market positions
of any person and trade secrets or names of customers.'' The Commission
also is required to protect certain information contained in a
government system of records pursuant to the Privacy Act of 1974.\84\
---------------------------------------------------------------------------
\83\ 5 U.S.C. 552.
\84\ 5 U.S.C. 552a.
---------------------------------------------------------------------------
In the Proposal, the Commission estimated that there would be 300
``Respondents/Affected Entities'' (respondents) and that the
``respondent burden for this collection is estimated to average 0.5
hours per response for the Form 7-R; 0.4 hours per response for the
Form 8-R; 3 minutes per response for the Form 7-W; 6 minutes per
response for the Form 8-T; and 3 minutes per response for the Form 3-
R.'' \85\ As is discussed previously in this Federal Register release,
the Commission has modified from the Proposal certain of the
regulations it is adopting today. The Commission believes that none of
these modifications affect the burden estimates associated with the
information collection that the Commission proposed. In response to
comments received, the Commission has determined to increase the
respondent burden hours estimated for Swaps Entities for each of the
forms referenced above. The Commission is also decreasing the number of
respondents to 125 from the Proposal's estimate of 300. The following
sections address and respond to comments received on the proposed
burden estimates, explain the Commission's reduction of the estimated
number of respondents to this collection, discuss the registration fees
included in this rulemaking, and list the revised burden hour estimates
associated with this information collection and the final regulations
adopted today.
---------------------------------------------------------------------------
\85\ 75 FR at 71386.
---------------------------------------------------------------------------
2. Responses to Comments Received
The Commission invited the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicited comments in order to: (1) Evaluate whether the proposed
collection of information is necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (2) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collection of information; (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collection of information on those who are able to respond,
including through the use of automated collection techniques or other
forms of information technology.
OMB commented on the ICR in accordance with 5 CFR 1320.11(c),
questioning the burden hours estimated, which appeared to OMB to be
low. OMB stated that the Commission should consider the comments it
received on the Proposal, if any, to determine if the burden hours
estimated should be revised.
The Commission received one other comment on its PRA discussion in
the Proposal. This commenter stated in its letter that, ``[a]lthough
the Paperwork Reduction Act section of the release accompanying the
Proposed Regulations (the `Release') suggests that it will merely take
a matter of minutes for Swaps Entities to complete the forms required
by the Proposed Regulations, we are dubious that this is accurate.''
\86\ This commenter did not explain why it doubted the accuracy of the
estimates, nor did it suggest alternative burden estimates.
Nonetheless, the Commission has reviewed its PRA estimates in light of
this comment, as well as the comment provided by OMB. For the following
reasons, the Commission has determined to revise the burden hour
estimates in the Proposal.
---------------------------------------------------------------------------
\86\ ISDA Comment Letter.
---------------------------------------------------------------------------
Generally, these forms request only the information about an
applicant and its principals necessary for the Commission to
appropriately exercise its statutory registration and compliance
oversight functions with respect to them. This information generally
includes the names, addresses, location of records, regulatory and
disciplinary histories, and other similarly straightforward matters--
all of which should be in the possession of the applicant and readily
available for the applicant to provide. However, some Swaps Entities
may be unfamiliar with the current registration process and the Forms
7-R and 8-R that they must complete in order to apply for registration
as an SD or MSP.
The PRA estimates provided for these forms are averages that do not
necessarily reflect the actual time to be expended by each and every
person to complete the forms. The Commission's estimates do not account
significantly for the amount of time it would take to complete the
regulatory and disciplinary history sections of Forms 7-R and 8-R,
which impose the greatest burden on persons completing the forms where
the applicant SD or MSP (including a principal thereof) has an
extensive criminal or disciplinary history. The Commission believes
such SDs and MSPs will generally not be applying for registration in
the first place because they will likely be disqualified from
registration pursuant to CEA section 8a(2) or 8a(3). In addition, these
forms will be completed in an online, user-friendly process developed
by NFA, the Commission's delegee pursuant to CEA section 8a(10), which
process currently is used by all
[[Page 2622]]
other applicants for registration with the Commission.
Moreover, in proposing and adopting regulations applicable to the
registration of Swaps Entities, the Commission has made every effort to
establish a process that is minimally disruptive to the swap markets
and minimally burdensome to Swaps Entities. In so doing, and as it
proposed, the Commission is incorporating the registration process for
Swaps Entities into the existing regulatory scheme for all other
Commission registrants under Part 3--as opposed to constructing a
fundamentally new registration structure for Swaps Entities. While
current registrants may be familiar with this scheme, some Swaps
Entities will not have previously applied for registration with the
Commission, and the revised burden estimates take the potential
unfamiliarity of new applicants for registration into account.
The forms that Swaps Entities will be required to complete are
virtually identical to those forms that other Commission registrants
must currently complete, including RFEDs, who became subject to the
Commission's registration requirements in 2010. There is, however, an
additional requirement to which Swaps Entities will be subject in
connection with completing the Form 7-R. CEA section 4s(b)(6) prohibits
a Swaps Entity, except to the extent otherwise provided by rule,
regulation or order,\87\ from permitting a person associated with it
who is subject to a statutory disqualification to effect or be involved
in effecting swaps on the Swaps Entity's behalf, if the Swaps Entity
``knew, or in the exercise of reasonable care should have known, of the
statutory disqualification.'' \88\ Form 7-R incorporates CEA section
4s(b)(6) into the application for registration as an SD or MSP by
explicitly quoting the statutory language and requiring the applicant
to certify that ``the applicant is and shall remain in compliance with
section 4s(b)(6) of the Act.'' Because of the additional time required
to gather such background information on a Swaps Entity's associated
persons as is necessary to make that certification, the Commission
believes an increase in the time required for the Swaps Entity to
complete the Form 7-R is warranted.
---------------------------------------------------------------------------
\87\ See, e.g., infra Regulation 23.22(b).
\88\ See supra pt. II.C for a detailed discussion of the
prohibition in CEA section 4s(b)(6).
---------------------------------------------------------------------------
As part of the registration process, the regulations being adopted
today require Swaps Entities to demonstrate initial compliance with the
Section 4s Implementing Regulations as the Commission adopts these
regulations in order to obtain registration. However, because the
Section 4s Implementing Regulations are not yet final, and because they
will be phased in over time after the Commission adopts the
registration process regulations today, the Commission is unable to
estimate burden hours in connection with producing or collecting the
documentation required to demonstrate compliance with the Section 4s
Implementing Regulations. Consequently, the PRA estimates for this
registration process rulemaking only include time to be expended by
applicants' and registrants' personnel to complete the forms, and do
not include time to be expended to collect, produce or otherwise
develop the documentation required to demonstrate compliance with the
Section 4s Implementing Regulations. The Commission has estimated the
burden hours associated with information collections in connection with
the Section 4s Implementing Regulations in the rulemakings proposing
those regulations, and those burden hours need not be replicated here.
3. Reduction of the Estimated Number of Respondents
In the Proposal, the Commission took ``a conservative approach'' to
calculating the burden hours of this information collection by
estimating that as many as 300 persons would come within the SD or MSP
definition and, thus, would be subject to registration with the
Commission.\89\ Since the Proposal's publication in November 2010, the
Commission has met with industry participants and trade groups,
discussed extensively the universe of potential registrants with NFA,
and reviewed public information about potential SDs active in the
market and certain trade groups. Over time, and as the Commission has
gathered more information on the swap market and its participants, the
estimate of the number of SDs and MSPs has decreased. In its FY 2012
budget drafted in February 2011, the Commission estimated that 140 SDs
might register with the Commission.\90\ After recently receiving
additional specific information from NFA on the regulatory program it
is developing for SDs and MSPs,\91\ however, the Commission now
believes that approximately 125 persons will come within the SD or MSP
definition and, thus, be subject to registration with the
Commission.\92\
---------------------------------------------------------------------------
\89\ 75 FR at 71386.
\90\ CFTC, President's Budget and Performance Plan Fiscal Year
2010, p. 13-14 (Feb. 2011), available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcbudget2012.pdf. The
estimated 140 SDs includes ``[a]pproximately 80 global and regional
banks currently known to offer swaps in the United States;''
``[a]pproximately 40 non-bank swap dealers currently offering
commodity and other swaps;'' and ``[a]pproximately 20 new potential
market makers that wish to become swap dealers.'' Id.
\91\ Letter from Thomas W. Sexton, Senior Vice President and
General Counsel, NFA, to Gary Barnett, Director, Division of Swap
Dealer and Intermediary Oversight, CFTC (Oct. 20, 2011) (NFA Cost
Estimates Letter).
\92\ The number of MSPs is estimated to be quite small, at six
or fewer.
---------------------------------------------------------------------------
4. Registration Fees
The Commission is permitted to collect registration fees under CEA
section 8a(1). These registration fees are established by NFA as the
Commission's delegee under CEA section 8a(10). NFA has not yet adopted,
and the Commission has not yet approved, an NFA rule setting forth
registration fees for SDs and MSPs, although NFA currently estimates
that such Swaps Entity registration fee will be $15,000.\93\ At such
time as the Section 4s Implementing Regulations are finalized and the
NFA registration fees established under CEA section 8a(1) are approved,
the Commission will revise the information collection for which it has
sought approval.
---------------------------------------------------------------------------
\93\ See infra pt. III.C (discussing the costs and benefits of
this rulemaking).
---------------------------------------------------------------------------
5. Revised Burden Hour Estimates for the Information Collection
For the reasons outlined above, the Commission has determined to
revise the burden hour estimates for this information collection as
follows. The burden associated with the new regulations implementing
the registration process for SDs and MSPs is estimated to be 629 hours,
assuming 125 respondents, which will result from: (1) Application for
registration by SDs and MSPs and submission of required information on
behalf of their respective principals; (2) initially, no withdrawals
from registration by SDs or MSPs and a relatively small decrease in the
number of their respective principals; and (3) initially, no reported
corrections. Burden means the total time, effort, or financial
resources expended by persons to generate, maintain, retain, disclose
or provide information to or for a federal agency.
The respondent burden for this collection is estimated to average 1
hour per response for the Form 7-R; 0.8 hours per response for the Form
8-R; 0.1 hours per response for the Form 7-W; 0.2 hours per response
for the Form 8-T; and 0.1 hours per response for the Form 3-R. These
estimates include the time needed: To review instructions; to
[[Page 2623]]
develop, acquire, install, and utilize technology and systems for the
purposes of collecting, validating, and verifying information,
processing and maintaining information, and disclosing and providing
information; to adjust the existing ways to comply with any previously
applicable instructions and requirements; to train personnel to be able
to respond to a collection of information; and to transmit or otherwise
disclose the information.
Form 7-R
Respondents/Affected Entities: 125.
Estimated number of responses: 125.
Estimated total annual burden on respondents: 1 hour.
Frequency of collection: On occasion and annually.
Burden statement: 125 respondents x 1 hour = 125 Burden Hours.
Form 8-R
Respondents/Affected Entities: 5 principals per each of 125 SDs and
MSPs.
Estimated number of responses: 625.
Estimated total annual burden on respondents: 0.8 hours.
Frequency of collection: On occasion.
Burden statement: 625 respondents x 0.8 hours = 500 Burden Hours.
Form 8-T
Respondents/Affected Entities: 1 principal per each of 20 SDs and
MSPs.
Estimated number of responses: 20.
Estimated total annual burden on respondents: 0.2 hours.
Frequency of collection: On occasion.
Burden statement: 20 respondents x 0.2 hours = 4 Burden Hours.
C. Considerations of Costs and Benefits of the Rulemaking
This final rulemaking implements provisions of the CEA, as amended
by the Dodd-Frank Act, mandating the registration of Swaps Entities.
CEA section 4s(a) makes it unlawful for a person to act as an SD or MSP
unless it is registered with the Commission. CEA section 4s(b) requires
an SD or MSP to apply for registration in accordance with such form and
manner as the Commission may prescribe. To effectuate the Congressional
directive, this final rulemaking: Details the registration process for
SDs and MSPs; requires Swaps Entities to become and remain members of
an RFA; and implements the prohibition against a Swaps Entity
permitting a statutorily disqualified associated person from effecting
or being involved in effecting swaps on behalf of the Swaps Entity.
CEA section 15(a) requires the Commission to consider the costs and
benefits of its actions before promulgating regulations. The Commission
must evaluate costs and benefits 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.
Before adopting these registration process regulations for Swaps
Entities, the Commission sought public comment on the Proposal,
including comment on the costs and benefits of the Proposal.\94\ The
Commission has considered all comments, and, in particular, reasonable
alternatives suggested by commenters. In some instances, for the
reasons discussed above, the Commission has adopted such alternatives
or modifications to the proposed regulations where, in the Commission's
judgment, the alternative or modification accomplishes the same
regulatory objective in a more effective manner. The Commission also
specifically invited commenters to submit ``any data or other
information that they may have quantifying or qualifying the costs and
benefits of the proposal with their comment letters.'' \95\ Other than
estimates of registration fees and annual membership dues from NFA
(currently the only RFA),\96\ the Commission did not receive any
information quantifying or qualifying the costs or benefits of the
proposed regulations relating to the registration process for Swaps
Entities. The Commission did, however, receive general comments on the
cost-benefit considerations of the rulemaking. These are addressed in
the discussion below.
---------------------------------------------------------------------------
\94\ See 75 FR 71379 at 71386-87.
\95\ Id.
\96\ NFA Cost Estimates Letter.
---------------------------------------------------------------------------
1. Benefits of SD and MSP Registration Regulations
The Commission believes that the benefits of this final rulemaking
are considerable even if not quantifiable. Registration, as mandated by
Congress in the Dodd-Frank Act, will enable the Commission to increase
market integrity and protect market participants and the public by
identifying the universe of SDs and MSPs subject to heightened
regulatory requirements and oversight in connection with their swaps
activities. This rulemaking identifies the process to commence
registration by an SD or MSP, specifies the applicable registration
forms, and explains how SDs and MSPs should apply for registration. The
Commission believes that this final rulemaking's specification of a
registration process for SDs and MSPs administered by an RFA leverages
the RFA's existing expertise and economies of scale and scope.
Further, and as is discussed above,\97\ the Commission is
exercising its discretion under the Dodd-Frank Act to provide for an
exception in Regulation 23.22 from the prohibition against an SD or MSP
permitting a person associated with it who is subject to a statutory
disqualification to effect or be involved in effecting swaps on its
behalf. In taking this action, the Commission is limiting the burden on
SDs and MSPs with respect to their vetting of potential associated
persons.
---------------------------------------------------------------------------
\97\ See supra pt. II.C.
---------------------------------------------------------------------------
2. Costs of SD and MSP Registration Regulations
The Commission has identified and considered several costs
associated with this rulemaking. First, an SD or MSP must pay fees to
register with the Commission through NFA. Second, because this
rulemaking requires a registrant to become and remain a member of an
RFA--and NFA is currently the only RFA--Swaps Entities will incur the
costs of annual NFA membership dues. Third, NFA is expected to incur
expenses for executing the anticipated delegated registration process
function on the Commission's behalf and for monitoring compliance by
its SD and MSP members with NFA rules.\98\ Fourth, Swaps Entities will
incur costs when completing various CFTC registration forms that must
be filed with NFA.
---------------------------------------------------------------------------
\98\ The NFA Cost Estimates Letter explains that NFA will incur
direct and indirect costs associated with employing staff to perform
this review and confirmation, and that the registration fee estimate
of $15,000 has been designed to offset a portion of the costs that
NFA will incur in this regard.
---------------------------------------------------------------------------
The Commission is obligated to estimate the burden of and provide
supporting statements for any collection of information it seeks to
establish under considerations contained in the PRA, and seek approval
of those requirements from OMB. Therefore, the estimated burden and
support of the collection of information in this rulemaking, as well as
consideration of the comments thereto, are discussed in the PRA section
of this rulemaking as required by that statute.\99\ Registrants are
required to update these forms when the information provided therein
changes and to confirm these changes annually.
---------------------------------------------------------------------------
\99\ See supra pt. III.B.
---------------------------------------------------------------------------
[[Page 2624]]
a. Fees and Dues
Based on current estimates from NFA, the Commission believes that
SDs and MSPs will incur the following registration fees: (a) $15,000
per SD or MSP registration application, which will include the initial
determination by NFA of compliance with the Section 4s Implementing
Regulations; \100\ and (b) $85 per person for processing fingerprints
and background information for principals.\101\
---------------------------------------------------------------------------
\100\ The Commission estimated $500 for the SD/MSP registration
application fee in the Proposal, based on information NFA provided
to staff upon request in connection with the development of the
Proposal. See 75 FR at 71387. Since then, NFA significantly altered
the registration fees it estimates it will be charging SD and MSP
applicants, due to NFA's expected review and confirmation of an SD
or MSP's initial compliance with each Section 4s Implementing
Regulation prior to the SD or MSP becoming registered. NFA Cost
Estimates Letter.
\101\ This amount is unchanged from the Proposal. See 75 FR at
71387.
---------------------------------------------------------------------------
Based on current estimates from NFA, the Commission believes that
SDs and MSPs will incur annual NFA membership dues ranging from
$125,000 to $1,000,000 per member, based upon the size and complexity
of the firm's swap business.\102\ The increase in the estimate of NFA
membership dues is driven by two factors: First, the decision by NFA to
recover costs for oversight of its SD and MSP members primarily through
a membership dues structure, rather than assessing a fee on swap
transactions similar to the fee NFA imposes on futures transactions;
and second, NFA's estimate of the annual cost of its regulatory program
for Swaps Entities when that program is fully staffed and operational.
It is possible that NFA's estimates will change over time.
Additionally, rules relating to membership dues must be approved by
various NFA authorities, and, in accordance with CEA section 17(j),
must be approved by the Commission. The Commission expects that NFA
will submit these rules for full review and approval.\103\
---------------------------------------------------------------------------
\102\ NFA Cost Estimates Letter.
\103\ Id. (stating that NFA will submit these proposed initial
registration fees, and membership dues to the Commission for full
review and approval).
---------------------------------------------------------------------------
b. NFA Expenses
Concurrently with the adoption of these regulations, the Commission
intends to issue the Notice and Order, whereby it will delegate to an
RFA--i.e., NFA--its authority to register SDs and MSPs. Included in
this delegation will be the authority to determine an applicant's
fitness for registration and initial compliance with the Section 4s
Implementing Regulations as they relate to the applicant. Also, the
Commission is adopting proposed Regulation 170.16 to require that SDs
and MSPs become and remain members of an RFA. As is stated above, NFA
currently is the sole RFA.
Consistent with the current regulatory practice for Commission
registrants who are NFA members, NFA will be responsible for monitoring
compliance with NFA rules applicable to its members who are SDs and
MSPs.\104\ NFA therefore will incur overhead and direct costs on a
continuing basis attributable to oversight activities to confirm SD and
MSP compliance with applicable NFA rules in addition to performing
registration processing functions.\105\ NFA's currently estimated
$15,000 application fee for registering SDs and MSPs does not include
charges related to ongoing NFA oversight of its SD and MSP members for
compliance with NFA rules--which, as is stated above, NFA expects to
recover through the dues it will charge its SD and MSP members.
---------------------------------------------------------------------------
\104\ These NFA requirements will be as strict as or stricter
than the Section 4s Implementing Regulations, and like registration
fees and membership dues, will be subject to Commission review and
approval pursuant to CEA section 17(j). See supra pt. II.E.
\105\ For futures transactions, NFA collects a fee per
transaction. Initially, NFA expected to collect a fee per
transaction from its SD and MSP members to defray the costs of
overseeing their operations and activities, an approach it is no
longer pursuing. NFA Cost Estimates Letter.
---------------------------------------------------------------------------
NFA's regulatory program for the oversight of Swaps Entities will
entail significant costs. Based on an assumption of 125 SD and MSP
members, NFA estimates that the annual cost of this regulatory program
when it is fully staffed and operational in approximately three years
will be approximately $35-$45 million.\106\ NFA has stated that ``[i]n
order to generate at least $35 million in revenue, [NFA has]
preliminarily calculated that membership dues for SDs and MSPs could
range between $125,000-$1 million per Member firm based upon the size
and complexity of the firm's swaps business.''\107\
---------------------------------------------------------------------------
\106\ NFA Cost Estimates Letter. In the Proposal, the Commission
estimated for PRA purposes that as many as 250 SDs and 50 MSPs may
register. See 75 FR at 71386. Should there be more than 125 Swaps
Entities, NFA's total annual costs for the regulatory program may
exceed this estimate. NFA Cost Estimates Letter.
\107\ NFA Cost Estimates Letter.
---------------------------------------------------------------------------
By delegating the authority to perform the registration functions
for SDs and MSPs to an RFA, the Commission will avoid the expense of
establishing a new registration program within the agency and will
provide a familiar and efficient means of implementing the statutory
requirements for the registration of SDs and MSPs.\108\ Some SDs and
MSPs will have previous experience with the registration process for
futures intermediaries. The Commission believes that by delegating the
registration process to an established RFA that already has similar
oversight responsibilities for other persons registered with the
Commission, the regulatory objectives of the Dodd-Frank Act can be
achieved in a more cost-effective manner. The Commission anticipates
that delegating the authority to perform registration functions for SDs
and MSPs to an RFA will avoid the costs associated with duplicating the
systems, processes, and personnel of the RFA.\109\
---------------------------------------------------------------------------
\108\ One commenter wrote that ``given the budgetary uncertainty
faced by the Commission'' the delegation to RFA-registration model
provides the Commission with ``flexibility'' in its oversight of SDs
and MSPs. NEFI/PMAA Comment Letter.
\109\ One commenter stated that SROs reduce the costs of
regulation to the government and the taxpayer. ISDA Comment Letter.
---------------------------------------------------------------------------
Thus, the Commission believes that it will be more cost-effective
for NFA to augment its current systems and processes to accommodate the
new SD and MSP registrants than it would be for the Commission to build
the same capabilities. The Commission further believes that the
delegation of the authority to process SD and MSP registration
applications to an RFA, with the imposition of fees on those persons
who must register, is a prudent and effective approach. This model,
currently employed in the futures context, has worked successfully for
Commission registrants and the Commission for many years. While one of
the commenters on the Proposal expressed concern about NFA's current
lack of swaps expertise, the Commission notes NFA's recent efforts to
develop expertise in this area (e.g., forming a Swap Dealer Advisory
Committee in May 2010 \110\) and, accordingly, does not believe this
concern merits a different conclusion.
---------------------------------------------------------------------------
\110\ NFA Cost Estimates Letter.
---------------------------------------------------------------------------
c. Registration of Foreign Swaps Entities
The Commission received many comments on the Proposal from entities
such as foreign banks and derivatives dealers arguing that several of
the Commission's proposed regulations, taken together, would require
massive and potentially expensive internal reorganizations to comply
with the new swaps regulatory regime. Some commenters predicted adverse
consequences to the U.S. swaps markets if foreign entities were
required to register as SDs or MSPs, such as
[[Page 2625]]
decreased competition, reduced liquidity, an exodus of foreign-based
market participants from the U.S. markets, rising costs for their U.S.
customers, and increased systemic risk. Some argued that the Commission
should defer to regulators in the home jurisdiction lest participants
be subject to multiple and inconsistent regulatory burdens.\111\ Most
of these comments address the question of which entities are SDs or
MSPs, and the consequences of being required to register as such,
rather than the costs of the registration process per se.
---------------------------------------------------------------------------
\111\ These commenters did not quantify these costs. Further,
the Commission is unable to estimate these costs, which it views as
not directly related to the costs of the registration process
regulations for SDs and MSPs. These costs are more costs of
compliance with the Section 4s Implementing Regulations, which the
Commission intends to address as it finalizes those regulations.
---------------------------------------------------------------------------
The Commission generally does not believe that foreign-based Swaps
Entities will bear higher costs associated with the registration
process than U.S.-based Swaps Entities. The identified costs are fees
to become registered under the CEA with the Commission and annual NFA
membership dues. Many of these foreign-based commenters are already
familiar with navigating various U.S. federal and state regulatory
regimes in connection with their other lines of business, such as
banking and insurance. Moreover, many of the commenters already have
operations and capable personnel physically located in the U.S. To the
extent that an SD or MSP has neither familiarity with other U.S.
regulatory regimes nor personnel physically located in the U.S., the
Commission believes that any potentially higher costs that may be
incurred in connection with the registration process regulations by a
foreign-based Swaps Entity are a necessary consequence of adequately
regulating the U.S. swaps markets and ensuring a level playing field
for all intermediaries involved in the U.S. swaps markets.
3. Evaluation of Market and Public Interest Considerations in Light of
CEA Section 15(a)
(1) Protection of Market Participants and the Public
The registration of Swaps Entities is a critical component of the
comprehensive regulation of these persons. It is a statutory
requirement that SDs and MSPs be registered. Notably, the registration
process will serve to confirm initial compliance by an SD or MSP with
the Section 4s Implementing Regulations. Moreover, attendant to
applying for registration, SDs and MSPs, along with their principals,
will be vetted, and those deemed unfit will be barred from
registration. As a result, registration and the related requirements
\112\ of this final rulemaking will help protect the public by
preventing those unfit to intermediate and participate in the swaps
markets from registering in the first instance.
---------------------------------------------------------------------------
\112\ E.g., as a prerequisite to granting registration, NFA will
confirm initial compliance by an applicant for registration as an SD
or MSP with each Section 4s Implementing Regulation, and a Swaps
Entity may not, subject to certain limited exceptions, permit a
statutorily disqualified associated person to effect or be involved
in effecting swaps on its behalf.
---------------------------------------------------------------------------
Also, NFA provides an on-line, public database, the Background
Affiliation Status Information Center (BASIC), with information on each
registrant's status and the status of the registrant's principals.
BASIC also provides additional information, such as regulatory actions
taken by NFA or the Commission, with respect to a registrant or its
principals. Access to this database provides all persons with important
information about Commission registrants with whom they may seek to
transact business.
(2) Efficiency, Competitiveness, and the Financial Integrity of the
Market
Utilizing NFA's existing registration expertise and resources
promotes efficiency in that it employs NFA's existing capabilities
rather than requiring Commission investment (e.g., hiring staff and
building a technological infrastructure to process applications) to
build a new registration system. Similarly, because NFA is building
upon its existing oversight infrastructure, it should incur fewer costs
to oversee compliance relative to direct Commission oversight. While
the Commission will continue to oversee the registration process,
delegation of the performance of registration functions to an RFA will
avoid the unnecessary diversion of limited agency resources from the
Commission's other responsibilities to protect the public.
(3) Price Discovery
The Commission has not identified any impact on price discovery
through the registration provisions of this rulemaking.
(4) Sound Risk Management Practices
As is explained above, registration is a critical component within
the Dodd-Frank Act regulatory regime to ensure the fitness of SDs and
MSPs. In addition to disqualifying ineligible persons, it enhances
market participants' ability to make more informed counterparty
selection decisions. In this way, it is consistent with sound risk
management practices.
(5) Other Public Interest Considerations
CEA section 15 directs the Commission to consider in its cost-
benefit evaluation ``other public interest considerations.'' One such
consideration is public confidence. As an element of a regulatory
regime that establishes minimum participation standards, the Commission
believes that the registration process will promote public confidence
in swaps market integrity.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Definitions, Major swap participants,
Swap dealers.
17 CFR Part 3
Customer protection, Licensing, Major swap participants,
Registration, Swap dealers.
17 CFR Part 23
Associated persons, Major swap participants, Registration, Swap
dealers.
17 CFR Part 170
Membership, Registered futures associations.
For the reasons presented above, the Commission hereby amends
Chapter I of Title 17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21,
2010).
0
2. In Sec. 1.3, paragraph (aa)(6) is added to read as follows:
Sec. 1.3 Definitions.
* * * * *
(aa) * * *
(6) A swap dealer or major swap participant as a partner, officer,
employee, agent (or any natural person occupying a similar status or
performing similar functions), in any capacity that involves:
(i) The solicitation or acceptance of swaps (other than in a
clerical or ministerial capacity); or
[[Page 2626]]
(ii) The supervision of any person or persons so engaged.
* * * * *
PART 3--REGISTRATION
0
3. The authority citation for part 3 is revised to read as follows:
Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,
13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
111-203, 124 Stat. 1376 (July 21, 2010).
0
4. Section 3.1 is amended by adding paragraphs (f) and (g) to read as
follows:
Sec. 3.1 Definitions.
* * * * *
(f) Section 4s Implementing Regulation. Section 4s Implementing
Regulation means a regulation the Commission issues pursuant to section
4s(e), 4s(f), 4s(h), 4s(i), 4s(j), 4s(k), or 4s(l) of the Act.
(g) Swap Definitional Regulation. Swap Definitional Regulation
means a regulation the Commission issues to further define the term
``swap dealer,'' ``major swap participant'' or ``swap'' in section
1a(49), 1a(33) or 1a(47) of the Act, respectively, pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
0
5. Section 3.2 is amended by:
0
a. Revising the section heading; and
0
b. Adding paragraph (c)(3).
The revision and addition read as follows:
Sec. 3.2 Registration processing by the National Futures Association;
notification and duration of registration; provisional registration.
* * * * *
(c) * * *
(3)(i) If an applicant for registration as a swap dealer or major
swap participant pursuant to Sec. 3.10(a)(1)(v) files a Form 7-R and a
Form 8-R and fingerprint card for each natural person who is a
principal of the applicant, accompanied by such documentation as may be
required to demonstrate compliance with each of the Section 4s
Implementing Regulations, as defined in Sec. 3.1(f), as are applicable
to it, in accordance with the terms of the Section 4s Implementing
Regulations, the National Futures Association shall notify the swap
dealer or major swap participant, as the case may be, that it is
provisionally registered.
(ii) Subsequent to providing notice of provisional registration to
an applicant for registration as a swap dealer or major swap
participant, the National Futures Association shall determine whether
the documentation submitted pursuant to Sec. 3.10(a)(1)(v) by the
applicant demonstrates compliance with the Section 4s Implementing
Regulation to which it pertains; Provided, that where the National
Futures Association has notified the applicant that it is provisionally
registered, the applicant must supplement its registration application
by providing such documentation as may be required to demonstrate
compliance with each Section 4s Implementing Regulation that the
Commission issues subsequent to the date the National Futures
Association notifies the applicant that it is provisionally registered.
(iii) On and after the date on which the National Futures
Association confirms that the applicant for registration as a swap
dealer or major swap participant has demonstrated its initial
compliance with the applicable requirements of each of the Section 4s
Implementing Regulations and all other applicable registration
requirements under the Act and Commission regulations, the provisional
registration of the applicant shall cease and it shall be registered as
a swap dealer or major swap participant, as the case may be.
* * * * *
0
6. Section 3.4 is amended by revising paragraph (a) to read as follows:
Sec. 3.4 Registration in one capacity not included in registration in
any other capacity.
(a) Except as may be otherwise provided in the Act or in any rule,
regulation, or order of the Commission, each futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, introducing broker, commodity pool operator, commodity
trading advisor, leverage transaction merchant, floor broker, floor
trader, and associated person (other than an associated person of a
swap dealer or major swap participant) must register as such under the
Act. Registration in one capacity under the Act shall not include
registration in any other capacity; Provided, however, That a
registered floor broker need not also register as a floor trader in
order to engage in activity as a floor trader.
* * * * *
0
7. Section 3.10 is amended by:
0
a. Revising the section heading;
0
b. Revising paragraph (a)(1)(i);
0
c. Adding paragraphs (a)(1)(iii), (iv), and (v); and
0
d. Revising paragraphs (b)(1) and (d).
The additions and revisons read as follows:
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.
(a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, or leverage transaction merchant
must be on Form 7-R, completed and filed with the National Futures
Association in accordance with the instructions thereto.
* * * * *
(iii) Applicants for registration as a commodity pool operator must
accompany their Form 7-R with the financial statements described in
Sec. 4.13(c) of this chapter.
(iv) Applicants for registration as a leverage transaction merchant
must accompany their Form 7-R with a Form 2-FR in accordance with the
provisions of Sec. 31.13 of this chapter.
(v)(A) Applicants for registration as a swap dealer or major swap
participant must accompany their Form 7-R with such documentation as
may be required to demonstrate compliance with each Section 4s
Implementing Regulation, as defined in Sec. 3.1(f), applicable to
them, in accordance with the terms of the Section 4s Implementing
Regulation; Provided, however, that for the purposes of this paragraph
(a)(1)(v) the term ``compliance'' includes the term ``the ability to
comply,'' to the extent that a particular Section 4s Implementing
Regulation may require demonstration of the ability to comply with a
requirement thereunder.
(B) The filing of the Form 7-R and accompanying documentation by
the applicant swap dealer or major swap participant authorizes the
Commission to conduct on-site inspection of the applicant to determine
compliance with the Section 4s Implementing Regulations applicable to
it.
(C)(1) At any time prior to the latest effective date of the Swap
Definitional Regulations, defined in Sec. 3.1(g), any person may apply
to be registered as a swap dealer or major swap participant.
(2) By no later than the latest effective date of the Swap
Definitional Regulations, each person who is a swap dealer or major
swap participant on that date must apply to be registered as a swap
dealer or major swap participant, as the case may be.
(3) From and after the latest effective date of the Swap
Definitional
[[Page 2627]]
Regulations, each person who intends to engage in business as a swap
dealer or major swap participant must apply to be registered as a swap
dealer or major swap participant, as the case may be.
(D)(1) Where an applicant for registration as a swap dealer or
major swap participant to whom the National Futures Association has
provided notice of provisional registration under Sec. 3.2(c)(3) fails
to demonstrate compliance with a Section 4s Implementing Regulation,
the National Futures Association will notify the applicant that its
application is deficient, whereupon the applicant must withdraw its
registration application, it must not engage in any new activity as a
swap dealer or major swap participant, as the case may be, and the
applicant shall cease to be provisionally registered; Provided, that in
the event the applicant fails to withdraw its registration application
or cure the deficiency within 90 days following receipt of notice from
the National Futures Association that its application is deficient, the
application will be deemed withdrawn and thereupon its provisional
registration shall cease; Provided further, that upon written request
by the applicant submitted to the Commission, the Commission may in its
discretion extend the time by which the applicant must cure the
deficiency.
(2) The provisions of the foregoing paragraph (a)(1)(v)(D)(1) of
this section shall supplement and be in addition to any other
activities in which the National Futures Association engages under the
Act and Commission regulations in connection with processing an
application for registration as a swap dealer or major swap
participant.
(E) Unless specifically reserved in the applicable swap
documentation, no withdrawal, deemed withdrawal, cessation or
revocation of registration as a swap dealer or major swap participant
pursuant to paragraph (a)(1)(v), (b), or (d) of this section shall
constitute a termination event, force majeure, an illegality, increased
costs, a regulatory change, or a similar event under a swap (including
any related credit support arrangement) that would permit a party to
terminate, renegotiate, modify, amend or supplement one or more
transactions under the swap.
* * * * *
(b) Duration of registration. (1) A person registered as a futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, or leverage transaction merchant in
accordance with paragraph (a) of this section will continue to be so
registered until the effective date of any revocation or withdrawal of
such registration. Upon effectiveness of any revocation or withdrawal
of registration, such person will immediately be prohibited from
engaging in new activities requiring registration under the Act or from
representing himself to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of such registration.
* * * * *
(d) On a date to be established by the National Futures
Association, and in accordance with procedures established by the
National Futures Association, each registrant as a futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, introducing broker, commodity pool operator, commodity
trading advisor, or leverage transaction merchant shall, on an annual
basis, review and update registration information maintained with the
National Futures Association. The failure to complete the review and
update within thirty days following the date established by the
National Futures Association shall be deemed to be a request for
withdrawal from registration, which shall be processed in accordance
with the provisions of Sec. 3.33(f).
* * * * *
0
8. Section 3.21 is amended by:
0
a. Revising paragraph (c) introductory text and paragraph (c)(1)(iv);
0
b. Adding paragraph (c)(1)(v);
0
c. Revising paragraph (c)(2)(i); and
0
d. Revising paragraph (c)(4)(i).
The revisions and addition read as follows:
Sec. 3.21 Exemption from fingerprinting requirement in certain cases.
* * * * *
(c) Outside directors. Any futures commission merchant, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
or leverage transaction merchant that has a principal who is a director
but is not also an officer or employee of the firm may, in lieu of
submitting a fingerprint card in accordance with the provisions of
Sec. Sec. 3.10(a)(2) and 3.31(a)(3), file a ``Notice Pursuant to Rule
3.21(c)'' with the National Futures Association. Such notice shall
state, if true, that such outside director:
(1) * * *
(iv) The solicitation of leverage customers' orders for leverage
transactions,
(v) The solicitation or acceptance of a swap agreement;
(2) * * *
(i) Transactions involving ``commodity interests,'' as that term is
defined in Sec. 1.3(yy);
* * * * *
(4) * * *
(i) The name of the futures commission merchant, retail foreign
exchange dealer, swap dealer, major swap participant, introducing
broker, commodity pool operator, commodity trading advisor, leverage
transaction merchant, or applicant for registration in any of these
capacities of which the person is an outside director;
* * * * *
0
9. Section 3.30 is amended by revising paragraph (a) to read as
follows:
Sec. 3.30 Current address for purpose of delivery of communications
from the Commission or the National Futures Association.
(a) The address of each registrant, applicant for registration, and
principal, as submitted on the application for registration (Form 7-R
or Form 8-R) or as submitted on the biographical supplement (Form 8-R)
shall be deemed to be the address for delivery to the registrant,
applicant or principal for any communications from the Commission or
the National Futures Association, including any summons, complaint,
reparation claim, order, subpoena, special call, request for
information, notice, and other written documents or correspondence,
unless the registrant, applicant or principal specifies another address
for this purpose: Provided, that the Commission or the National Futures
Association may address any correspondence relating to a biographical
supplement submitted for or on behalf of a principal to the futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, or leverage transaction merchant with which
the principal is affiliated and may address any correspondence relating
to an associated person to the futures commission merchant, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
or leverage transaction merchant with which the associated person or
the applicant for registration is or will be associated as an
associated person.
* * * * *
[[Page 2628]]
0
10. Section 3.31 is amended by revising paragraphs (a)(1), (b), and
(c)(2) to read as follows:
Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, introducing broker, commodity pool operator, commodity
trading advisor, or leverage transaction merchant shall, in accordance
with the instructions thereto, promptly correct any deficiency or
inaccuracy in Form 7-R or Form 8-R which no longer renders accurate and
current the information contained therein. Each such correction shall
be made on Form 3-R and shall be prepared and filed in accordance with
the instructions thereto. Provided, however, that where a registrant is
reporting a change in the form of organization from or to a sole
proprietorship, the registrant must file a Form 7-W regarding the pre-
existing organization and a Form 7-R regarding the newly formed
organization.
* * * * *
(b)(1) Each applicant for registration or registrant as a floor
broker, floor trader or associated person, and each principal of a
futures commission merchant, retail foreign exchange dealer,
introducing broker, commodity pool operator, commodity trading advisor,
or leverage transaction merchant must, in accordance with the
instructions thereto, promptly correct any deficiency or inaccuracy in
the Form 8-R or supplemental statement thereto which renders no longer
accurate and current the information contained in the Form 8-R or
supplemental statement. Each such correction must be made on Form 3-R
and must be prepared and filed in accordance with the instructions
thereto.
(2) Each applicant for registration or registrant as a swap dealer
or major swap participant and each principal of a swap dealer or major
swap participant, must, in accordance with the instructions thereto,
promptly correct any deficiency or inaccuracy in the Form 8-R or
supplemental statement thereto which renders no longer accurate and
current the information contained in the Form 8-R or supplemental
statement. Each such correction must be made on Form 3-R and must be
prepared and filed in accordance with the instructions thereto.
(c) * * *
(2) Each person registered as, or applying for registration as, a
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, or leverage transaction merchant
must, within thirty days after the termination of the affiliation of a
principal with the registrant or applicant, file a notice thereof with
the National Futures Association.
* * * * *
0
11. Section 3.33 is amended by:
0
a. Revising paragraph (a) introductory text;
0
b. Revising paragraph (b) introductory text and paragraphs (b)(6)(vi)
and (vii);
0
c. Adding paragraphs (b)(6)(viii) and (ix); and
0
d. Revising paragraph (e).
The revisions and additions to read as follows:
Sec. 3.33 Withdrawal from registration.
(a) A futures commission merchant, retail foreign exchange dealer,
swap dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, leverage transaction merchant,
floor broker or floor trader may request that its registration be
withdrawn in accordance with the requirements of this section if:
* * * * *
(b) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, or leverage transaction merchant must be
made on Form 7-W, and a request for withdrawal from registration as a
floor broker or floor trader must be made on Form 8-W, completed and
filed with the National Futures Association in accordance with the
instructions thereto. The request for withdrawal must be made by a
person duly authorized by the registrant and must specify:
* * * * *
(6) * * *
(vi) The nature and extent of any pending customer, retail forex
customer, option customer, leverage customer, swap counterparty or
commodity pool participant claims against the registrant, and, to the
best of the registrant's knowledge and belief, the nature and extent of
any anticipated or threatened customer, option customer, leverage
customer, swap counterparty or commodity pool participant claims
against the registrant;
(vii) In the case of a futures commission merchant or a retail
foreign exchange dealer which is a party to a guarantee agreement, that
all such agreements have been or will be terminated in accordance with
the provisions of Sec. 1.10(j) of this chapter not more than thirty
days after the filing of the request for withdrawal from registration;
(viii) In the case of a swap dealer, that the person will not
engage in any new activity described in the definition of the term
``swap dealer'' in section 1a(49) of the Act, as such term may be
further defined by the Commission; and
(ix) In the case of a major swap participant, that the person will
not engage in any new activity described in the definition of the term
``major swap participant'' in section 1a(33) of the Act, as such term
may be further defined by the Commission.
* * * * *
(e) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, or leverage transaction merchant on Form 7-
W, and a request for withdrawal from registration as a floor broker or
floor trader on Form 8-W, must be filed with the National Futures
Association and a copy of such request must be sent by the National
Futures Association within three business days of the receipt of such
withdrawal request to the Commodity Futures Trading Commission,
Division of Swap Dealer and Intermediary Oversight, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581. In addition, any
floor broker or floor trader requesting withdrawal from registration
must file a copy of his Form 8-W with each contract market that has
granted him trading privileges. Within three business days of any
determination by the National Futures Association under Sec. 3.10(d)
to treat the failure by a registrant to file an annual Form 7-R as a
request for withdrawal, the National Futures Association shall send the
Commission notice of that determination.
* * * * *
0
12. Part 23 is added to read as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
Subpart A--[Reserved]
Sec.
23.1-23.20 [Reserved]
Subpart B--Registration
23.21 Registration of swap dealers and major swap participants.
23.22 Associated persons of swap dealers and major swap
participants.
[[Page 2629]]
23.23-23.40 [Reserved]
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6p, 6s, 9, 9a, 13b,
13c, 16a, 18, 19, 21 as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (July 21, 2010).
Subpart A--Definitions
Sec. Sec. 23.1-23.20 [Reserved]
Subpart B--Registration
Sec. 23.21 Registration of swap dealers and major swap participants.
(a) Each person who comes within the definition of the term ``swap
dealer'' in section 1a(49) of the Act, as such term may be further
defined by the Commission, is subject to the registration provisions
under the Act and to part 3 of this chapter.
(b) Each person who comes within the definition of the term ``major
swap participant'' in section 1a(33) of the Act, as such term may be
further defined by the Commission, is subject to the registration
provisions under the Act and to part 3 of this chapter.
(c) Each affiliate of an insured depository institution described
in section 716(c) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Pub. L. 111-203 section 716(c), 124 Stat. 1376 (2010))
is required to be registered as a swap dealer if the affiliate is a
swap dealer or as a major swap participant if the affiliate is a major
swap participant.
Sec. 23.22 Associated persons of swap dealers and major swap
participants.
(a) Definition. For the purpose of this section, the term
``person'' means an ``associated person of a swap dealer or major swap
participant'' as defined in section 1a(4) of the Act and Sec.
1.3(aa)(6).
(b) Fitness. No swap dealer or major swap participant may permit a
person who is subject to a statutory disqualification under section
8a(2) or 8a(3) of the Act to effect or be involved in effecting swaps
on behalf of the swap dealer or major swap participant, if the swap
dealer or major swap participant knows, or in the exercise of
reasonable care should know, of the statutory disqualification;
Provided, however, that the prohibition set forth in this paragraph (b)
shall not apply to any person listed as a principal or registered as an
associated person of a futures commission merchant, retail foreign
exchange dealer, introducing broker, commodity pool operator, commodity
trading advisor, or leverage transaction merchant, or any person
registered as a floor broker or floor trader, notwithstanding that the
person is subject to a disqualification from registration under section
8a(2) or 8a(3) of the Act.
Sec. Sec. 23.23-23.40 [Reserved]
PART 170--REGISTERED FUTURES ASSOCIATIONS
0
13. The authority citation for part 170 continues to read as follows:
Authority: 7 U.S.C. 6p, 12a and 21.
0
14. Section 170.16 is added to read as follows:
Sec. 170.16 Swap dealers and major swap participants.
Each person registered as a swap dealer or major swap participant
must become and remain a member of at least one futures association
that is registered under section 17 of the Act and that provides for
the membership therein of such swap dealer or major swap participant,
as the case may be, unless no such futures association is so
registered.
Issued in Washington, DC, on January 11, 2012, by the
Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Registration of Swap Dealers and Major Swap
Participants--Commission Voting Summary and Statements of Commissioners
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to establish a process for the
registration of swap dealers and major swap participants. The rule
implements the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) mandate that these entities be subject to
registration and regulation for their swaps business. Registration
will enable the Commodity Futures Trading Commission to monitor swap
dealers and major swap participants for compliance with the Dodd-
Frank Act and Commission rulemakings. Through regulation of dealers,
the Commission will be able to protect market participants and the
public, as well as promote sound risk management practices. The
final rule includes a requirement that swap dealers and major swap
participants become members of a registered futures association,
such as the National Futures Association (NFA).
In addition, I support the order delegating to the NFA the
authority to register swap dealers and major swap participants. This
will help efficiently allocate resources and provide the Commission
with flexibility.
[FR Doc. 2012-792 Filed 1-18-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: January 19, 2012
See Also:
