Registration of Swap Dealers and Major Swap Participants, 2613-2629 [2012-792]
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Rules and Regulations
Federal Register
Vol. 77, No. 12
Thursday, January 19, 2012
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.
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 3, 23, and 170
RIN 3038–AC95
Registration of Swap Dealers and
Major Swap Participants
Commodity Futures Trading
Commission.
ACTION: Final rules.
AGENCY:
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 DoddFrank 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, AttorneyAdvisor, 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.
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SUMMARY:
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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
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
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, https://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).
5 See, respectively, CEA sections 1a(49), 1a(33)
and 1a(4).
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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.
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:
(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
6 See
75 FR 80174 (Dec. 21, 2010).
4s(a) and 4s(b) were added to the CEA
by Dodd-Frank Act section 731.
7 Sections
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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.
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.
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
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.
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 DoddFrank 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).
12 Specifically, the prohibition against Federal
assistance to Swaps Entities is set forth in DoddFrank 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
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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 PushOut 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 PushOut 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
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.
In the section-by-section analysis of
the regulations contained in the
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 securitybased 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.
15 Part 3 of the Commission’s regulations governs
the registration of intermediaries and certain market
participants under the CEA.
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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
II. Comments 20 and Responses
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
16 See
75 FR at 71385.
75 FR at 71381.
18 See 75 FR at 71381–82.
19 See 75 FR at 71382–71383.
20 The comments the Commission received on the
Proposal are currently available on the
Commission’s Web site.
17 See
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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
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
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
21 75
FR at 71385 (footnote omitted).
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
§ 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.
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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.
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,
23 Comment letter from the National Futures
Association (Jan. 24, 2011) (NFA Comment Letter).
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.
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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.
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
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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.
D. Phased Implementation 28
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
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.
27 NFA Comment Letter.
28 See generally 75 FR at 71379, 71381.
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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].’’
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
In the Proposal, the Commission
provided for provisional registration
with reference to the Dodd-Frank Act’s
general statutory effective date of July
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).
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.
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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
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
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).
34 NFA Comment Letter.
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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.
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.
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).
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
35 See
also Regulation 3.10(a)(1)(v)(D).
75 FR at 71387.
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.
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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
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
38 NFA
Comment Letter.
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.
41 NFA and WGCEF Comment Letters.
42 NFA Comment Letter.
39 See
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2617
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.
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.
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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.
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
46 NFA
Comment Letter.
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.
49 See CEA sections 8a(2) and 8a(3).
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these disclosures for each of the
applicant’s principals.50
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.
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.
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
50 These forms can be accessed through NFA’s
Web site, https://www.nfa.futures.org/.
51 SIFMA Comment Letter.
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).
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
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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 selfregulatory 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
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
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.
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.
61 NFA Comment Letter.
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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.’’
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
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
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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.’’
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.
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—
2619
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
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.
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
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
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.
65 Better Markets Comment Letter.
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.
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
* * *.
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.
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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.
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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
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
The Commission further explained
that it had also previously determined
that large traders are not small entities
69 5
U.S.C. 601 et seq.
70 5 U.S.C. 601(2), 603, 604 and 605.
71 75 FR 71379, 71385.
72 47 FR 18618 (Apr. 30, 1982).
73 See CEA section 1a(49)(D).
74 75 FR at 71385.
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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
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.
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.
75 Id.
76 Id.
77 Id.
at 71385–86.
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).
78 Comment
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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.
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.
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.
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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.
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
In the Proposal, the Commission
estimated that there would be 300
‘‘Respondents/Affected Entities’’
(respondents) and that the ‘‘respondent
82 44
U.S.C. 3501 et seq.
U.S.C. 552.
84 5 U.S.C. 552a.
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.
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.
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
83 5
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86 ISDA
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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.
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
87 See,
e.g., infra Regulation 23.22(b).
supra pt. II.C for a detailed discussion of
the prohibition in CEA section 4s(b)(6).
88 See
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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
89 75
FR at 71386.
President’s Budget and Performance
Plan Fiscal Year 2010, p. 13–14 (Feb. 2011),
available at https://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.
90 CFTC,
PO 00000
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Fmt 4700
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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
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.
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
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.
93 See infra pt. III.C (discussing the costs and
benefits of this rulemaking).
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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 ×
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 ×
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 ×
0.2 hours = 4 Burden Hours.
EMCDONALD on DSK29S0YB1PROD with RULES
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
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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.
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
94 See
75 FR 71379 at 71386–87.
95 Id.
96 NFA
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2623
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.
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.
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.
97 See
supra pt. II.C.
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.
99 See supra pt. III.B.
98 The
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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
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
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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
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.
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).
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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.
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
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
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.
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.
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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 costeffective 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
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.
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
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.
110 NFA Cost Estimates Letter.
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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.
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.
EMCDONALD on DSK29S0YB1PROD with RULES
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,
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.
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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.
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 DoddFrank Act regulatory regime to ensure
the fitness of SDs and MSPs. In addition
to disqualifying ineligible persons, it
enhances market participants’ ability to
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.
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2625
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 costbenefit 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
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 DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (July 21, 2010).
2. In § 1.3, paragraph (aa)(6) is added
to read as follows:
■
§ 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
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(ii) The supervision of any person or
persons so engaged.
*
*
*
*
*
PART 3—REGISTRATION
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).
4. Section 3.1 is amended by adding
paragraphs (f) and (g) to read as follows:
■
§ 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 DoddFrank Wall Street Reform and Consumer
Protection Act.
■ 5. Section 3.2 is amended by:
■ a. Revising the section heading; and
■ b. Adding paragraph (c)(3).
The revision and addition read as
follows:
§ 3.2 Registration processing by the
National Futures Association; notification
and duration of registration; provisional
registration.
EMCDONALD on DSK29S0YB1PROD with RULES
*
*
*
*
*
(c) * * *
(3)(i) If an applicant for registration as
a swap dealer or major swap participant
pursuant to § 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
§ 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
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documentation submitted pursuant to
§ 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.
*
*
*
*
*
■ 6. Section 3.4 is amended by revising
paragraph (a) to read as follows:
§ 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.
*
*
*
*
*
■ 7. Section 3.10 is amended by:
■ a. Revising the section heading;
■ b. Revising paragraph (a)(1)(i);
■ c. Adding paragraphs (a)(1)(iii), (iv),
and (v); and
■ d. Revising paragraphs (b)(1) and (d).
The additions and revisons read as
follows:
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§ 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
§ 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 § 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 § 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 § 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
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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
§ 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
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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 § 3.33(f).
*
*
*
*
*
■ 8. Section 3.21 is amended by:
■ a. Revising paragraph (c) introductory
text and paragraph (c)(1)(iv);
■ b. Adding paragraph (c)(1)(v);
■ c. Revising paragraph (c)(2)(i); and
■ d. Revising paragraph (c)(4)(i).
The revisions and addition read as
follows:
§ 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
§§ 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) * * *
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2627
(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 § 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;
*
*
*
*
*
■ 9. Section 3.30 is amended by revising
paragraph (a) to read as follows:
§ 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.
*
*
*
*
*
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10. Section 3.31 is amended by
revising paragraphs (a)(1), (b), and (c)(2)
to read as follows:
■
EMCDONALD on DSK29S0YB1PROD with RULES
§ 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
VerDate Mar<15>2010
14:51 Jan 18, 2012
Jkt 226001
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.
*
*
*
*
*
■ 11. Section 3.33 is amended by:
■ a. Revising paragraph (a) introductory
text;
■ b. Revising paragraph (b) introductory
text and paragraphs (b)(6)(vi) and (vii);
■ c. Adding paragraphs (b)(6)(viii) and
(ix); and
■ d. Revising paragraph (e).
The revisions and additions to read as
follows:
§ 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
PO 00000
Frm 00016
Fmt 4700
Sfmt 4700
guarantee agreement, that all such
agreements have been or will be
terminated in accordance with the
provisions of § 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 § 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.
*
*
*
*
*
■ 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.
E:\FR\FM\19JAR1.SGM
19JAR1
Federal Register / Vol. 77, No. 12 / Thursday, January 19, 2012 / Rules and Regulations
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).
registration under section 8a(2) or 8a(3)
of the Act.
will help efficiently allocate resources and
provide the Commission with flexibility.
§§ 23.23–23.40
BILLING CODE 6351–01–P
[Reserved]
PART 170—REGISTERED FUTURES
ASSOCIATIONS
Subpart A—Definitions
§§ 23.1–23.20
13. The authority citation for part 170
continues to read as follows:
■
[Reserved]
Authority: 7 U.S.C. 6p, 12a and 21.
Subpart B—Registration
§ 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.
EMCDONALD on DSK29S0YB1PROD with RULES
§ 23.22 Associated persons of swap
dealers and major swap participants.
VerDate Mar<15>2010
14:51 Jan 18, 2012
Jkt 226001
14. Section 170.16 is added to read as
follows:
■
§ 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
(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 § 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
2629
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 (DoddFrank 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 DoddFrank 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
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Fmt 4700
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[FR Doc. 2012–792 Filed 1–18–12; 8:45 am]
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2011–0106]
RIN 1625–AA08
Special Local Regulations; Recurring
Marine Events in the Fifth Coast Guard
District
Coast Guard, DHS.
Final rule.
AGENCY:
ACTION:
The Coast Guard is revising
the list of special local regulations
established for recurring marine events
at various locations within the
geographic boundary of the Fifth Coast
Guard District. This rule revises 33 CFR
100.501 by adding 6 new annual
recurring marine events and modifying
event date(s) for 12 previously
established locations within the
geographic boundary of the Fifth Coast
Guard District. This rule also deletes 4
previously listed marine events and
corresponding regulated areas that no
longer occur. These regulations will
apply to all events listed in the table
attached to the regulation, and include
events such as regattas, power boat races
and marine parades. Special local
regulations are established to provide
for the safety of life on navigable waters
during these events, reduce the Coast
Guard’s administrative workload and
expedite public notification of events.
Entry into or movement within these
proposed regulated areas during the
enforcement periods is prohibited
without approval of the appropriate
Captain of the Port.
DATES: This rule is effective February
21, 2012.
ADDRESSES: Comments and material
received from the public, as well as
documents mentioned in this preamble
as being available in the docket, are part
of docket USCG–2011–0106 and are
available online by going to https://
www.regulations.gov, inserting USCG–
2011–0106 in the ‘‘Keyword’’ box, and
then clicking ‘‘Search.’’ This material is
also available for inspection or copying
at the Docket Management Facility (M–
30), U.S. Department of Transportation,
West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
Washington, DC 20590, between 9 a.m.
SUMMARY:
E:\FR\FM\19JAR1.SGM
19JAR1
]]>Agencies
[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,
https://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\
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\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\
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\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.
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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.
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\23\ Comment letter from the National Futures Association (Jan.
24, 2011) (NFA Comment Letter).
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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.
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\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.
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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\
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\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.
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[[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.
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\27\ NFA Comment Letter.
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D. Phased Implementation \28\
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\28\ See generally 75 FR at 71379, 71381.
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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].''
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\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).
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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\
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\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.
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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\
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\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).
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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.
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\34\ NFA Comment Letter.
\35\ See also Regulation 3.10(a)(1)(v)(D).
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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.
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\36\ See 75 FR at 71387.
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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).
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\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.
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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\
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\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.
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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.
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\41\ NFA and WGCEF Comment Letters.
\42\ NFA Comment Letter.
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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\
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\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.
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[[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.
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\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.
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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\
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\49\ See CEA sections 8a(2) and 8a(3).
\50\ These forms can be accessed through NFA's Web site, https://www.nfa.futures.org/.
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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.
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\51\ SIFMA Comment Letter.
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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.
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\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).
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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\
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\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.
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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\
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\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.
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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.''
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\61\ NFA Comment Letter.
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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.''
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\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.
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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.
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\65\ Better Markets Comment Letter.
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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--
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\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
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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\
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\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.
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\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.
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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\
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\69\ 5 U.S.C. 601 et seq.
\70\ 5 U.S.C. 601(2), 603, 604 and 605.
\71\ 75 FR 71379, 71385.
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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 min
