[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Proposed Rules]
[Pages 1347-1349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00080]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Request for Comment on Application of Commission Regulations to
Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties
Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in
the United States
AGENCY: Commodity Futures Trading Commission.
ACTION: Request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
requesting comment on an advisory issued by Commission staff on
November 14, 2013 (the ``Staff Advisory''), regarding the applicability
of certain Commission regulations to the activity in the United States
of swap dealers (``SDs'') and major swap participants (``MSPs'')
registered with the Commission that are established in jurisdictions
other than the United States (whether an affiliate or not of a U.S.
person, a ``non-U.S. SD'' or ``non-U.S. MSP'').
DATES: Comments must be received on or before March 10, 2014.
ADDRESSES: You may submit comments by any of the following methods:
The agency's Web site, at http://comments.cftc.gov. Follow
the instructions for submitting comments through the Web site.
Mail: Melissa D. Jurgens, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments may be posted as received to http://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that may be exempt from disclosure under the Freedom of Information
Act, a petition for confidential treatment of the exempt information
may be submitted according to the established procedures in CFTC
Regulation 145.9 (17 CFR 145.9).
The Commission reserves the right, but shall have no obligation, to
review,
[[Page 1348]]
pre-screen, filter, redact, refuse, or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,
[email protected], or Frank Fisanich, Chief Counsel, 202-418-5949,
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act \1\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework
for swaps.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
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In the three years since the enactment of Dodd-Frank, the
Commission has finalized 68 rules, orders, and guidance statements in
the process of implementing Title VII of the Dodd-Frank Act. The
finalized rules promulgated under section 4s of the CEA, added by the
Dodd-Frank Act, address registration of SDs and MSPs and other
substantive requirements applicable to SDs and MSPs, while guidance
published by the Commission provided the Commission's general views
regarding the scope of the cross-border application of such rules.\2\
Among other things, the Guidance sets forth the Commission's general
views on how it ordinarily expects to apply, in accordance with section
2(i) of the CEA, the CEA and certain Commission regulations applicable
on a transaction-by-transaction basis (the ``transactional
requirements'') to swaps between a non-U.S. SD and a non-U.S. person,
including swaps involving guaranteed or conduit affiliates of U.S.
persons.\3\ In addition, the Guidance addressed the circumstances under
which the transactional requirements could be satisfied through
substituted compliance.\4\
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\2\ See Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations 78 FR 45292 (July 26, 2013)
(hereinafter, the ``Guidance'').
\3\ For purposes of this notice, the Commission would generally
interpret the terms ``U.S. person,'' ``guaranteed affiliate,'' and
``affiliate conduit'' in the same way as described in the Guidance,
78 FR at 45316-45317, 45350-45359. The Commission uses the term
``non-U.S. person'' to refer to any person outside its
interpretation of the term ``U.S. person.''
\4\ The Guidance generally describes the policy and procedural
framework under which the Commission would consider a substituted
compliance program with respect to Commission regulations applicable
to non-U.S. SDs. Specifically, the Commission described
circumstances where it expected that compliance with a comparable
regulatory requirement of a foreign jurisdiction would serve as a
reasonable substitute for compliance with the attendant requirements
of the CEA and the Commission's regulations, 78 FR at 45342-45344.
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With few exceptions, the delayed compliance dates for the
Commission's regulations implementing requirements of section 4s of the
CEA have passed and SDs and MSPs are now required to be in full
compliance with such regulations upon registration with the
Commission.\5\
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\5\ The compliance dates are summarized on the Compliance Dates
page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)
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Subsequent to publication of the Guidance, swap market participants
have raised questions with Commission staff regarding compliance by
non-U.S. SDs with the transactional requirements when using personnel
or agents located in the United States to enter into swaps with non-
U.S. persons. In other words, swap market participants have asked
whether the transactional requirements would apply to these swaps (and
if so, whether substituted compliance may be available for these swaps)
even though such swaps are between two non-U.S. persons, regardless of
whether the activities of the non-U.S. SD that lead to such swaps take
place in the United States.
In response to these inquires, the Staff Advisory \6\ was issued,
stating that for swaps between a non-U.S. SD and a non-U.S. person, the
transactional requirements either do not apply or, in some cases, may
be subject to substituted compliance if the activities of the non-U.S.
SD take place outside the United States. The Staff Advisory further
stated that, for transactions arranged, executed, or negotiated by
personnel or agents located in the United States of non-U.S. SDs
(whether affiliates or not of a U.S. person) regularly using personnel
or agents located in the U.S. to arrange, negotiate, or execute swaps
with non-U.S. persons (the ``Covered Transactions''), the non-U.S. SD
generally would be required to comply with the transactional
requirements. The Staff Advisory further stated that this view would
also apply to a Covered Transaction booked in a non-U.S. branch of the
non-U.S. SD.\7\
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\6\ Division of Swap Dealer and Intermediary Oversight,
Applicability of Transaction-Level Requirements to Activity in the
United States, Nov. 14, 2013. Available at: http://www.cftc.gov/ucm/groups/public/@1rlettergeneral/documents/letter/13-69.pdf. As stated
in the Staff Advisory, the advisory, and the views expressed
therein, represent the views of the Division of Swap Dealer and
Intermediary Oversight only, and do not represent the position or
view of the Commission or of any other office or division of the
Commission.
\7\ See the Staff Advisory, supra note 6.
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The Commission notes that subsequent to the Staff Advisory, the
Commission's Divisions of Swap Dealer and Intermediary Oversight,
Market Oversight, and Clearing and Risk provided non-U.S. SDs time-
limited staff no-action relief from certain transactional requirements
for Covered Transactions,\8\ and have recently extended such relief
until September 15, 2014, subject to certain terms and conditions
stated in such Divisions' no-action letter.\9\
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\8\ See CFTC Staff Letter 13-71, available on the Commission's
Web site: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.
\9\ See CFTC Staff Letter 14-01, available on the Commission's
Web site.
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II. Request for Comment
In view of the complex legal and policy issues involved with
respect to the Staff Advisory, the Commission is soliciting comment
from all interested parties to further inform the Commission's and its
staff's deliberations regarding the subjects addressed in the Staff
Advisory.
Accordingly, the Commission requests comment on all aspects of the
Staff Advisory, including but not limited to the following points. If a
comment relates to one of the specific points noted below, please
identify the point by number and provide a detailed rationale
supporting the response.
1. The Commission invites comment on whether the Commission should
adopt the Staff Advisory as Commission policy, in whole or in part.
2. The Commission invites commenters to provide their views on
whether transactional requirements should apply to Covered Transactions
with non-U.S. persons who are not guaranteed or conduit affiliates of
U.S. persons. Please provide a detailed analysis of any such view and
its effect on other aspects of the Commission's cross-border policy, if
any.
3. The Commission invites comment on whether there should be any
differentiation in treatment of swaps with non-U.S. counterparties
depending on the nature of the SD (i.e., whether it is a guaranteed
affiliate or a conduit affiliate of a U.S. person).
[[Page 1349]]
4. To the extent a non-U.S. SD must comply with the transactional
requirements when entering a Covered Transaction, should the non-U.S.
SD be able to rely on a substituted compliance program for purposes of
complying with the relevant transactional requirements? If so, should
substituted compliance be available for all transactional requirements
or only specific requirements? Which requirements? Would the response
be different depending on the nature of the counterparty (i.e., whether
the non-U.S. counterparty is a guaranteed affiliate or a conduit
affiliate of a U.S. person)?
5. The Commission invites comment on the meaning of ``regularly''
in the phrase ``persons regularly arranging, negotiating, or executing
swaps for or on behalf of an SD'' and whether such persons are
performing core, front-office activities of that SD's swap dealing
business. If not, what specific activities would constitute the core,
front-office activities of an SD's swap dealing business? What
characteristics or factors distinguish a ``core, front-office''
activity from other activities? Please be exhaustive in describing such
activities.
6. The Commission invites comment on the scope and degree of
``arranging, negotiating, or executing'' swaps as used in this context.
Issued in Washington, DC, on January 3, 2014, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices To Request for Comment on Application of Commission
Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S.
Counterparties Involving Personnel or Agents of the Non-U.S. Swap
Dealers Located in the United States
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative. Commissioner O'Malia voted in the
negative.
Appendix 2--Dissenting Statement of Commissioner Scott D. O'Malia
If you thought that the Commission's approach last year
regarding cross-border issues resulted in an unsound rulemaking
process, the start of 2014 is no better.
Today's announcement of the request for comment on a staff
Advisory abrogates the Commission's fundamental legal obligations
under the Administrative Procedure Act (``APA'') and provides
another example of the Commission's unsound rule implementation
process.
Making matters worse, today's request for comment is completely
outside the scope of the cross-border Guidance and the Exemptive
Order as the Commission did not address the issue relating to swaps
negotiated between non-U.S. swap dealers (``SDs'') and non-U.S.
counterparties acting through agents of the non-U.S. SDs located in
the United States. This is simply a strategic move by the Commission
to try to duck blame for consistently circumventing the fundamental
tenets of the APA and failing to adhere faithfully to the express
congressional directive to limit the extraterritorial application of
the Dodd-Frank Act to foreign transactions that ``have a direct and
significant connection with activities in, or effect on, commerce of
the United States.'' \1\
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\1\ 7 U.S.C. 2(i).
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Moreover, I question why the Commission has decided to request
comment on a narrow issue of the extraterritorial application of
Dodd-Frank, while essentially ignoring the dozens of comments
already filed as part of the Commission's cross-border Exemptive
Order.\2\ Simply requesting comment on a staff Advisory does not
endorse the validity of the cross-border Guidance or the staff
Advisory issued based on the Guidance.
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\2\ See Statement of Dissent by Commissioner Scott D. O'Malia,
Interpretive Guidance and Policy Statement Regarding Compliance With
Certain Swap Regulations and Related Exemptive Order, July 12, 2013,
http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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Additionally, I have serious concerns with the evolving
jurisdictional application of the Commission's authority over cross-
border trades. It appears based on the staff Advisory, that the
Commission is applying a ``territorial'' jurisdiction test to
elements of a trade between non-U.S. entities. To better understand
the legal underpinnings of this position, I have included several
additional questions to be considered as part of the overall comment
file. It is my hope that public comments will provide greater
clarity regarding our cross-border authority and identify areas
where we must harmonize global rules with our international
regulatory partners in the near future. It makes no sense to apply
guidance or staff advisories that do not enjoy the full support and
authority provided through rulemakings based on the Commodity
Exchange Act (``CEA'').
Looking forward into this year, the CFTC needs to do away with
the reflexive rule implementation process via staff no-action and
advisories that are not voted on by the Commission. It should be the
goal of the Commission to develop rules that adhere to the APA and
ensure proper regulatory oversight, transparency and promote
competition in the derivatives space.
In this regard, I would like to seek additional comment on the
following points:
1. Please provide your views on whether Covered Transactions
with non-U.S. persons who are not guaranteed or conduit affiliates
of U.S. persons meet the direct and significant test under CEA
section 2(i).\3\ Please provide a detailed analysis of any such view
and its effect on other aspects of the Commission's cross-border
policy, if any. Would your view change depending on whether a non-
U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S.
person?
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\3\ 7 U.S.C. 2(i).
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2. CEA section 2(a)(1) \4\ provides for the general
jurisidiction of the Commission. Please provide your views on
whether Covered Transactions with non-U.S. persons who are not
guaranteed or conduit affiliates of U.S. persons fall within the
Commission's jurisdiction under CEA section 2(a)(1) or any other
provision of the CEA providing for Commission jurisdiction. Please
provide a detailed analysis of any such view and its effect on other
aspects of the Commission's cross-border policy, if any. Would your
view change depending on the nature of the non-U.S. SD (i.e.,
whether it is a guaranteed affiliate or a conduit affiliate of a
U.S. person)?
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\4\ 7 U.S.C. 2(a)(1).
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3. To the extent that Covered Transactions fall within the
Commission's jurisdiction, should a non-U.S. SD be required to
comply with all, or only certain, Transaction-Level Requirements?
Please provide a detailed analysis of any such view and its effect
on other aspects of the Commission's cross-border policy, if any.
Would your view change depending on the nature of the non-U.S. SD
(i.e., whether it is a guaranteed affiliate or a conduit affiliate
of a U.S. person)?
4. In the open meeting to consider the cross-border final
guidance and cross-border phase-in exemptive order, I asked about
the Commission's enforcement and legal authority under the cross-
border guidance. The Commission's General Counsel replied, ``[T]he
guidance itself is not binding strictly. We couldn't go into court
and, in a count of the complaint, list a violation of the guidance
as an actionable claim.'' \5\ If the Commission adopts the staff
Advisory as Commission policy (and not through the rulemaking
process), please provide your views on the Commission's ability to
enforce such policy.
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\5\ Transcript of Open Meeting to Consider Cross-Border Final
Guidance and Cross-Border Phase-In Exemptive Order (July 12, 2013),
page 79.
[FR Doc. 2014-00080 Filed 1-7-14; 8:45 am]
BILLING CODE 6351-01-P