Second Amendment to July 14, 2011 Order for Swap Regulation, 41260-41266 [2012-16987]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 77, Number 135 (Friday, July 13, 2012)]
[Rules and Regulations]
[Pages 41260-41266]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16987]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Second Amendment to July 14, 2011 Order for Swap Regulation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: On May 16, 2012, the Commodity Futures Trading Commission 
(``CFTC'' or the ``Commission'') published in the Federal Register a 
Notice of Proposed Amendment (``Notice'') to extend the temporary 
exemptive relief the Commission granted on July 14, 2011 (``July 14 
Order'') from certain provisions of the Commodity Exchange Act 
(``CEA'') that otherwise would have taken effect on the general 
effective date of title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``the Dodd-Frank Act'')--July 16, 2011. This 
final order extends the July 14 Order with certain modifications. 
Specifically, it removes references to the entities terms, including 
``swap dealer,'' ``major swap participant,'' and ``eligible contract 
participant'' in light of the final joint rulemaking of the CFTC and 
Securities and Exchange Commission (``SEC'') further defining those 
terms issued on April 18, 2012; extends the potential latest expiration 
date of the July 14 Order to December 31, 2012, or, depending on the 
nature of the relief, such other compliance date as may be determined 
by the Commission; allows the clearing of agricultural swaps, as 
described herein; and removes any reference to the exempt commercial 
market (``ECM'') and exempt board of trade (``EBOT'') grandfather 
relief previously issued by the Commission.

DATES: This final order is effective July 3, 2012.

FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, (202) 418-
5864, mhiggins@cftc.gov, Office of the General Counsel; David Aron, 
Counsel, (202) 418-6621, daron@cftc.gov, Office of the General Counsel; 
David Van Wagner, Chief Counsel, (202) 418-5481, dvanwagner@cftc.gov, 
Division of Market Oversight; Ali Hosseini, Special Counsel, (202) 418-
6144, ahosseini@cftc.gov, Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581; or Anne Polaski, Special Counsel, (312) 596-
0575, apolaski@cftc.gov, Division of Clearing and Risk; Commodity 
Futures Trading Commission, 525 West Monroe, Chicago, Illinois 60661.

SUPPLEMENTARY INFORMATION: 

Background

    On July 14, 2011, the Commission exercised its exemptive authority 
under CEA section 4(c) \1\ and its authority under section 712(f) of 
the Dodd-Frank Act by issuing the July 14 Order that addressed the 
potential that the final, joint CFTC-SEC rulemakings further defining 
the terms in sections 712(d) \2\ and 721(c) \3\ would not be in effect 
as of July 16, 2011 (i.e., the general effective date set forth in 
section 754 of the Dodd-Frank Act).\4\ In so doing, the Commission 
sought to address concerns that had been raised about the applicability 
of various regulatory requirements to certain agreements, contracts, 
and transactions after July 16, 2011, and thereby ensure that current 
practices would not be unduly disrupted during the transition to the 
new regulatory regime.\5\ The July 14 Order provided that the relief 
granted thereunder would expire no later than December 31, 2011.\6\
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    \1\ 7 U.S.C. 6(c).
    \2\ Section 712(d)(1) provides: ``Notwithstanding any other 
provision of this title and subsections (b) and (c), the Commodity 
Futures Trading Commission and the Securities and Exchange 
Commission, in consultation with the Board of Governors [of the 
Federal Reserve System], shall further define the terms `swap', 
`security-based swap', `swap dealer', `security-based swap dealer', 
`major swap participant', `major security-based swap participant', 
and `security-based swap agreement' in section 1a(47)(A)(v) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''
    \3\ Section 721(c) provides: ``To include transactions and 
entities that have been structured to evade this subtitle (or an 
amendment made by this subtitle), the Commodity Futures Trading 
Commission shall adopt a rule to further define the terms `swap', 
`swap dealer', `major swap participant', and `eligible contract 
participant'.''
    \4\ Effective Date for Swap Regulation, 76 FR 42508 (issued and 
made effective by the Commission on July 14, 2011; published in the 
Federal Register on July 19, 2011). Section 712(f) of the Dodd-Frank 
Act states that ``in order to prepare for the effective dates of the 
provisions of this Act,'' including the general effective date set 
forth in section 754, the Commission may ``exempt persons, 
agreements, contracts, or transactions from provisions of this Act, 
under the terms contained in this Act.'' Section 754 specifies that 
unless otherwise provided in Title VII, provisions requiring a 
rulemaking become effective ``not less than 60 days after 
publication of the final rule'' (but not before July 16, 2011).
    \5\ Concurrent with the July 14 Order, the Commission's Division 
of Clearing and Intermediary Oversight (which is now two divisions--
the Division of Clearing and Risk (``DCR'') and the Division of Swap 
Dealer and Intermediary Oversight (``DSIO'')) and the Division of 
Market Oversight (``DMO'') (together ``the Divisions'') identified 
certain provisions of the Dodd-Frank Act and CEA as amended that 
would take effect on July 16, 2011, but that may not be eligible for 
the exemptive relief provided by the Commission in its July 14 
Order--specifically, the amendments made to the CEA by Dodd-Frank 
Act sections 724(c), 725(a), and 731. On July 14, 2011, the 
Divisions issued Staff No-Action Relief addressing the application 
of these provisions after July 16, 2011. Available at: https://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/11-04.pdf.
    \6\ 76 FR at 42522 (July 19, 2011).
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    On December 23, 2011, the Commission published in the Federal 
Register a final order (the ``First Amended July 14 Order'') amending 
the July 14 Order in two ways.\7\ First, the Commission extended the 
potential latest expiry date from December 31, 2011 to July 16, 2012 
or, depending on the nature of the relief, such other compliance date 
as may be determined by the Commission, to address the potential that, 
as of December 31, 2011, the aforementioned joint CFTC-SEC joint 
rulemakings would not be effective. Second, the Commission included 
within the relief set forth in the First Amended July 14 Order any 
agreement, contract or transaction that fully meets the conditions in 
part 35 as in effect prior to December 31, 2011. This amendment 
addressed the fact that such transactions, which were not included 
within the scope of the original July 14 Order because the exemptive 
rules in part 35 covered them

[[Page 41261]]

at that time, required temporary relief because part 35 would not be 
available as of December 31, 2011.\8\ In so doing, the Commission 
clarified that new part 35 and the exemptive relief issued in the First 
Amended July 14 Order, and any interaction of the two, do not operate 
to expand the pre-Dodd-Frank Act scope of transactions eligible to be 
transacted on either an ECM or EBOT to include transactions in 
agricultural commodities.
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    \7\ Amendment to July 14, 2011 Order for Swap Regulation, 76 FR 
80233 (Dec. 23, 2011).
    \8\ The Commission promulgated a rule pursuant to section 
723(c)(3) of the Dodd-Frank Act, and CEA sections 4(c) and 4c(b), 
that, effective December 31, 2011, repealed the existing part 35 
relief and replaced it with new Sec.  35.1 of the Commission's 
regulations. See Agricultural Swaps, 76 FR 49291 (Aug. 10, 2011). 
Rule 35.1 generally provides that ``agricultural swaps may be 
transacted subject to all provisions of the CEA, and any Commission 
rule, regulation or order thereunder, that is otherwise applicable 
to swaps. [It] also clarifies that by issuing a rule allowing 
agricultural swaps to transact subject to the laws and rules 
applicable to all other swaps, the Commission is allowing 
agricultural swaps to transact on [designated contract markets 
(``DCMs''), swap execution facilities (``SEFs'')], or otherwise to 
the same extent that all other swaps are allowed to trade on DCMs, 
SEFs, or otherwise.'' Id. at 49296.
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Discussion of the Notice of Proposed Amendment

    On May 16, 2012, the Commission published in the Federal Register a 
Notice of Proposed Amendment (``Notice'') that would further amend the 
First Amended July 14 Order in the following four ways. First, in light 
of the final, joint CFTC-SEC rulemaking further defining the entities 
terms in sections 712(d), including ``swap dealer,'' ``major swap 
participant,'' and ``eligible contract participant,'' issued on April 
18, 2012,\9\ the Notice proposed to remove references to those terms. 
Second, the Notice proposed to extend the latest potential expiry date 
from July 16, 2012 to December 31, 2012 or, depending on the nature of 
the relief, such other compliance date as may be determined by the 
Commission. The Notice stated that the extension would ensure that 
market practices will not be unduly disrupted during the transition to 
the new regulatory regime.
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    \9\ CFTC-SEC, Further Definition of ``Swap Dealer'', ``Security-
Based Swap Dealer'', ``Major Swap Participant'', ``Major Security-
Based Swap Participant'', and ``Eligible Contract Participant'' 
(issued Apr. 18, 2012) (to be codified at 17 CFR pt. 1), 77 FR 30596 
(May 23, 2012), available at: https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister041812b.pdf.
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    Third, the Notice proposed to further amend the First Amended July 
14 Order to provide that agricultural swaps, whether entered into 
bilaterally, on a DCM, or a SEF, may be cleared in the same manner that 
any other swap may be cleared and without the need for the Commission 
to issue any further exemption under section 4(c) of the CEA. The 
Notice stated that this amendment is intended to harmonize the First 
Amended July 14 Order and the final rules amending part 35 of the 
Commission's regulations, to the extent that the July 14 Order, as 
amended, maintained the pre-Dodd-Frank Act part 35 prohibition against 
the clearing of agricultural swaps. The Notice clarified that while the 
proposed Second Amended July 14 Order would remove the clearing 
prohibition for agricultural swaps, it would not permit agricultural 
swaps to be entered into or executed on an ECM or EBOT.
    The Commission noted that ECMs and EBOTs both operate some form of 
trading facility without any self-regulatory responsibilities. The 
Commission stated its general belief that any form of exchange trading 
in agricultural swaps should only be permitted in a self-regulated 
environment. In other words, unlike exempt and excluded commodities, 
which were generally allowed to be transacted on a trading facility 
(i.e., platform-traded) in an unregulated environment under the CEA 
prior to the Dodd-Frank Act \10\ and now during the transition to the 
Dodd-Frank Act regulatory regime, agricultural swaps, which were not 
allowed to be platform-traded on an ECM or EBOT under the CEA prior to 
Dodd-Frank Act, may not be platform-traded during the transition to the 
Dodd-Frank Act regulatory regime. Accordingly, under the Notice and in 
conjunction with 17 CFR part 35, as effective on and after December 31, 
2011, the Notice stated that agricultural swaps may only be entered 
into or executed bilaterally, on a DCM,\11\ or on a SEF.\12\
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    \10\ One notable exception to this general approach was the 
heightened regulatory requirements for ECM-listed contracts that 
served a significant price discovery function under the pre-Dodd-
Frank CEA. It is generally recognized, however, that the regulatory 
regime for ECM significant price discovery function contracts, which 
included nine core principles, was less rigorous than those 
applicable to either DCMs (pre- or post-Dodd-Frank) or SEFs. See CEA 
Section 2(h)(7)(C)(ii)(I)-(IX) (2008) amended by the Dodd-Frank Act.
    \11\ See December 23 Order, 76 FR at 80236, note 11 (Dec. 23, 
2011).
    \12\ See 17 CFR 35.1(b).
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    In connection with swaps executed on a DCM (whether agricultural 
swaps or otherwise), the Commission clarified that a DCM may list such 
swaps for trading under the DCM's rules related to futures contracts 
without exemptive relief.\13\ As required for futures, a DCM must 
submit such swaps to the Commission under either Sec.  40.2 (listing 
products for trading by certification) \14\ or Sec.  40.3 (voluntary 
submission of new products for Commission review and approval) \15\ of 
the Commission's regulations. Swaps that are traded on a DCM are 
required to be cleared by a DCO.\16\ In order for a DCO to be able to 
clear a swap listed for trading on a DCM, the DCO must be eligible to 
clear such swap pursuant to Sec.  39.5(a)(1) or (2),\17\ and must 
submit the swap to the Commission pursuant to Sec.  39.5(b).\18\
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    \13\ See 76 FR at 80236, note 22 (Dec. 23, 2011).
    \14\ 17 CFR 40.2.
    \15\ 17 CFR 40.3.
    \16\ See 7 U.S.C. 5(d)(11)(A).
    \17\ 17 CFR 39.5(a).
    \18\ 17 CFR 39.5(b).
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    Fourth, the Notice proposed to further amend the First Amended July 
14 Order to remove any reference to the ECM/EBOT Grandfather Order, 
which expires on July 16, 2012.\19\ The Notice stated that after July 
16, 2012, ECMs and EBOTs, as well as markets that rely on pre-Dodd-
Frank CEA section 2(d)(2) (``2(d)(2) Markets''), would only be able to 
rely on the Second Amended July 14 Order, as proposed therein. The 
Notice proposed that the relief for ECMs and EBOTs, as well as for 
2(d)(2) Markets, granted under the proposed Second Amended July 14 
Order shall expire upon the effective date of the DCM or SEF final 
rules, whichever is later, unless the ECM or EBOT, or 2(d)(2) Markets, 
files a DCM or SEF application on or before the effective date of the 
DCM or SEF final rules, in which case the relief shall remain in place 
during the pendency of the application. The Notice clarified that for 
these purposes, an application will be considered no longer pending 
upon the application being approved, provisionally approved,\20\ 
withdrawn, or denied.
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    \19\ The Commission issued the ECM/EBOT Grandfather Order 
pursuant to sections 723(c) and 734(c) of the Dodd-Frank Act which 
authorized the Commission to permit ECMs and EBOTs, respectively, to 
continue to operate pursuant to CEA sections 2(h)(3) and 5d for no 
more than one year after the general effective date of the Dodd-
Frank Act's amendments to the CEA.
    \20\ For these purposes, an application is ``provisionally 
approved'' on the date that such provisional approval becomes 
effective such that the ECM, EBOT, or 2(d)(2) Market may then rely 
on such provisional approval to operate as a DCM or SEF, as 
applicable.
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    The Commission sought comment on all aspects of the Notice.

Discussion of the Final Order

    The Commission received five comments that related to the 
Notice.\21\

[[Page 41262]]

While generally supportive of the Notice, the comments raised two 
issues for the Commission's consideration in this final order: (1) The 
expiry date applicable to ECMs currently operating pursuant to 
grandfather relief authorized by section 723(c)(l)-(2) of the Dodd-
Frank Act and their market participants and clearing organizations; and 
(2) the effectiveness of CEA section 2(e) in light of the further 
definition of the term ``eligible contract participant'' (``ECP''). In 
addition, one commenter specifically supported the Commission's 
proposal to permit the clearing of agricultural swaps without further 
exemption.\22\ The Coalition of Physical Energy Companies also 
supported the Proposed Amendment and believed that the Commission 
should undertake its implementation of the Dodd-Frank Act in a 
deliberative manner that carefully establishes necessary regulations 
and avoids inadvertent impacts and over-broad application of the 
statute.\23\
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    \21\ Letter from Diana L. Preston, Vice President and Senior 
Counsel, Center for Securities, Trust & Investments, American 
Bankers Association, to David Stawick, Secretary, Commodity Futures 
Trading Commission (May 30, 2012); Letter from Kathleen Cronin, 
Senior Managing Director, General Counsel and Corporate Secretary, 
CME Group Inc., to David Stawick, Secretary, Commodity Futures 
Trading Commission (May 30, 2012); Letter from David M. Perlman, 
Partner, Bracewell & Giuliani, LLP on behalf of the Coalition of 
Physical Energy Companies, to David Stawick, Secretary, Commodity 
Futures Trading Commission (May 30, 2012); Letter from Richard W. 
Holmes, Jr., Vice President and Counsel, Fifth Third Bank, to David 
Stawick, Secretary, Commodity Futures Trading Commission (May 30, 
2012); Letter from Paul Cusenza, Chief Executive Officer, Nodal 
Exchange, LLC, to David Stawick, Secretary, Commodity Futures 
Trading Commission (May 30, 2012). The comment letters are on file 
with the CFTC and are available via the Commission's Web site at: 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1201.
    \22\ See CME Group Letter at 2. In discussing this aspect of the 
proposed Second Amended July 14 Order, CME Group noted that for 
agricultural swaps listed on a DCM, ``a DCM will have the 
flexibility either to self-certify a new agricultural swap contract 
under Rule 40.2, or to submit the contract for CFTC approval 
pursuant to Rule 40.3.'' Id. In adopting, as proposed, the 
provisions relating to agricultural swaps, the Commission is 
affirming the discussion of agricultural swaps contained in the 
Notice, which included the explanation that in addition to a DCM 
submitting swaps to the Commission under either Sec.  40.2 or Sec.  
40.3, ``In order for a DCO to be able to clear a swap listed for 
trading on a DCM, the DCO must be able to clear such swap pursuant 
to Sec.  39.5(a)(1) or (2), [footnote omitted] and must submit the 
swap to the Commission pursuant to Sec.  39.5(b).'' See 77 FR at 
28820-21.
    \23\ COPE Letter at 1-2.
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    The comments and Commission determinations regarding the two 
substantive issues raised by commenters are discussed in the sections 
that follow.

1. Duration of Relief Available to ECM/EBOTs

a. Comments

    While supportive of the Notice, CME Group, on behalf of its four 
DCMs, requested that the Commission clarify one ambiguity it perceived 
with the Notice--that is, the provision of the Notice stating that the 
relief proposed shall expire on the earlier of (1) December 31, 2012 or 
(2) ``the effective date of the DCM or SEF final rules, whichever is 
later,'' unless the ECM or EBOT files a DCM or SEF application ``on or 
before the effective date of the DCM or SEF final rules, in which case 
the relief shall remain in place during the pendency of the 
application.'' \24\ According to CME Group, the second part of the 
proposed expiration date is ambiguous because it fails to specify which 
of the numerous rule proposals concerning SEFs and DCMs must be 
finalized before relief will terminate.\25\
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    \24\ CME Group Letter at 2.
    \25\ Id.
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    CME Group stated that one way to remove this perceived ambiguity 
would be for the Commission to list each rulemaking that must take 
effect before the relief will terminate. CME Group also stated that, at 
a minimum, the ECM and EBOT relief should remain in place until at 
least the effective date of CFTC implementing rules concerning: (1) All 
DCM and SEF core principles and (2) block trade size requirements for 
swaps. Alternatively, CME Group stated that the Commission could 
address the concern by stating in a final order that the relief remains 
in effect until a future date the Commission will specify in a future 
order that will provide at least 60 days notice to market participants 
and other affected parties.\26\
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    \26\ Id.
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    Nodal Exchange, which is currently operating as an ECM, sought 
assurance that the proposed relief would remain in place if an ECM 
applies to be a DCM after the effective date of the DCM rules, yet 
still on or before the effective date of the SEF rules.\27\ To that 
end, Nodal Exchange offered a change to the operative language of the 
draft order. Specifically, Nodal Exchange recommended that the phrase 
at the end of Section (3) of the proposed order be modified to include 
a second ``whichever is later'' clause, as emphasized below:
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    \27\ Nodal Exchange Letter at 1-2.

or (ii) the effective date of the designated contract market 
(``DCM'') or swap execution facility (``SEF'') final rules, 
whichever is later, unless the ECM, EBOT, or 2(d)(2) Market files a 
DCM or SEF registration application on or before the effective date 
of the DCM or SEF final rules, whichever is later, in which case the 
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relief shall remain in place during the pendency of the application.

    Nodal Exchange explained that this change is necessary because it 
must file a DCM or SEF registration application on or before the 
effective date of the DCM or SEF final rules, but to date, the final 
rules for DCMs that defer implementation of Core Principle 9 and the 
proposed rules for SEFs would significantly impact Nodal Exchange such 
that a determination of which registration will be most appropriate is 
not possible until both the DCM and SEF final rules are published.\28\ 
Before submitting the appropriate application, Nodal Exchange stated 
that it will need to assess (1) how the final regulations implement DCM 
Core Principle 9 and (2) the finalized rules for SEFs, especially with 
regard to how the Commission addresses the SEF rules regarding ``pre-
trade price transparency.'' \29\
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    \28\ Id.
    \29\ Id.
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b. Commission Determination

    The Commission has determined to amend the draft order to include a 
``whichever is later'' clause in provision (b) of section 3 of the 
Second Amended July 14 Order. That qualifying provision will read as 
follows: ``or (ii) the effective date of the designated contract market 
(``DCM'') or swap execution facility (``SEF'') final rules, whichever 
is later, unless the ECM, EBOT, or 2(d)(2) Market files a DCM or SEF 
registration application on or before the effective date of the DCM or 
SEF final rules, whichever is later, in which case the relief shall 
remain in place during the pendency of the application.'' \30\ To be 
clear, the phrase ``DCM or SEF final rules'' in that provision refers 
to the following rulemakings: (1) Core Principles and Other 
Requirements for

[[Page 41263]]

Designated Contract Markets; \31\ (2) Core Principles and Other 
Requirements for Swap Execution Facilities; \32\ and (3) a rulemaking 
on DCM Core Principle 9.\33\ The Commission believes that these changes 
and clarifications are necessary and in the public interest because 
finalization of the aforementioned rules is integral to the business 
decision of whether entities currently operating as ECMs, EBOTs, or 
2(d)(2) Markets will transition to DCM or SEF status.
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    \30\ The Commission currently receives notice filings from ECMs 
and EBOTs, and thus has a general familiarity with the nature and 
number of markets operating pursuant to ECM and EBOT exemptive 
relief. See 17 CFR 36.2(b) and 17 CFR 36.3(a). In order for the 
Commission to gain a similar familiarity with 2(d)(2) Markets, and 
to facilitate their eventual transition to registered DCM or 
registered SEF status, 2(d)(2) Markets operating or intending to 
operate pursuant to the exemptive relief in this Second Amended 
Order must provide the Commission with notice of their operations 
(or intent to so operate) on or before July 16, 2012, or as 
reasonably soon thereafter as is practicable. Notices should be sent 
to the Commission's Division of Market Oversight, 1155 21st St. NW., 
Washington, DC 20581 (or electronically, to DMOLetters@cftc.gov), 
and should include the name and address of the 2(d)(2) Market, and 
the name and telephone number of a contact person. Such notice will 
assist the Commission in preparing to review any subsequent 
application for registration, or provisional registration, as a SEF 
or DCM submitted by such 2(d)(2) Market. Notwithstanding the 
provision of such notice, the Commission notes that any subsequent 
SEF or DCM registration application by a 2(d)(2) Market will still 
undergo a separate, complete, and independent evaluation by the 
Commission, just as will every SEF and/or DCM application submitted 
by an ECM and/or EBOT.
    \31\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36612 (June 19, 2012) (``Final DCM Core 
Principles Release'').
    \32\ 76 FR 1214 (January 7, 2011).
    \33\ In the Final DCM Core Principles Release, the Commission 
stated that additional time is appropriate before finalizing the 
proposed rules for DCM Core Principle 9 and that the Commission 
plans and expects to consider the final rule for DCM Core Principle 
9 when it considers the final rule for the SEF Core Principles.
    The phrase ``DCM or SEF final rules'' does not include the 
Commission's rulemaking on block trade size requirements for swaps 
or its rulemaking on the process for a DCM or SEF to make a swap 
available to trade. See Procedures To Establish Appropriate Minimum 
Block Sizes for Large Notional Off-Facility Swaps and Block Trades, 
77 FR 15460 (March 15, 2012); Process for a Designated Contract 
Market or Swap Execution Facility to Make a Swap Available to Trade, 
76 FR 77728 (December 14, 2011). Those rules will be uniformly 
applied to both DCM- and SEF-traded swaps and, accordingly, their 
respective requirements should not have a bearing on whether an ECM, 
EBOT, or 2(d)(2) Market chooses to apply to become a DCM or a SEF.
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2. Status of CEA Section 2(e) and ECPs

a. Comments

    According to Fifth Third Bank, compliance with the Dodd-Frank Act 
requirements should not become mandatory until the CFTC and SEC provide 
further guidance as to the meaning of the ``revised definition of 
ECP.'' \34\ Fifth Third Bank stated that section 2(e) of the CEA, as 
amended by the Dodd-Frank Act, which makes it unlawful for non-ECPs to 
enter into over-the-counter swaps, together with the rescission of the 
Commission's 1989 Policy Statement Concerning Swap Transactions, 
represent a major change in the rules under which banks have been 
operating for many years.\35\ Fifth Third Bank contended that banks 
(and other swap counterparties) will need to know how to determine 
whether or not a person is an ECP with a considerable degree of 
certainty well before the mandatory compliance date for CEA section 
2(e) so that they can (1) prepare compliance procedures, 
questionnaires, and other forms, and (2) train their personnel how to 
determine whether a person is or is not an ECP. Fifth Third Bank 
expressed particular concern regarding how to interpret the phrase 
``amounts invested on a discretionary basis'' in the context of CEA 
section 1a(18)(A)(xi).\36\ For these reasons, Fifth Third Bank stated 
that the proposed Second Amended July 14 Order should not assume that 
the term ``ECP'' has been adequately defined. In its view, compliance 
with CEA section 2(e) should not become mandatory until at least 60 
days after the CFTC and SEC have provided further guidance regarding 
the meaning of the term ``ECP.'' \37\
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    \34\ Fifth Third Bank Letter at 2.
    \35\ Id.
    \36\ Id. at 4-5.
    \37\ Id. at 5.
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    Similarly, citing some of the same issues as Fifth Third Bank, the 
American Bankers Association urged the Commission to amend the proposed 
order to provide for a continuation of the existing temporary exemption 
``solely with respect to Section 2(e) until the later of (i) the 
Proposed Revised Effective Date, or (ii) no less than 60 days after a 
substantive rule or interpretive guidance on Section 2(e) becomes 
effective for such purpose (issued either by the Commission or jointly 
with the SEC).'' \38\
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    \38\ American Bankers Association Letter at 1-2.
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b. Commission Determination

    On April 18, 2012, the Commission and the SEC adopted final rules 
jointly further defining, among other terms, ``eligible contract 
participant.'' \39\ In those rules, the Commissions provided both new 
categories of ECPs, including a new category based in part on the line 
of business element of the Commission's Policy Statement Concerning 
Swap Transactions,\40\ and interpretations regarding the further 
definition of the term ``ECP.'' The Commission and the SEC also delayed 
compliance with certain aspects of the ECP definition until December 
31, 2012.\41\
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    \39\ See Further Definition of ``Swap Dealer,'' Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant'', 77 FR 
30596 (May 23, 2012) (``Final ECP Definition Release'').
    \40\ See 17 CFR 1.3(m)(7).
    \41\ See Final ECP Definition Release at 30596, 30700 (setting 
forth the compliance dates for Commission regulations 1.3(m)(5), (6) 
and (8)(iii)).
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    While the Commissions or their staff may, from time to time, issue 
additional guidance regarding the definition of the term ``ECP,'' the 
Commission and the SEC jointly have further defined the term ``eligible 
contract participant,'' fulfilling their mandate under Dodd-Frank Act 
section 712(d)(1) to jointly further define the term ``ECP.'' In light 
of the foregoing, the Commission declines requests to modify this final 
order to delay the effectiveness of section 2(e) beyond the relief 
already provided.
    Nevertheless, because the Commission and the SEC may issue 
additional guidance concerning, among other issues of concern to 
commenters, the term ``amounts invested on a discretionary basis'' in 
the context of CEA section 1a(18)(A)(xi) after the effective date of 
section 2(e), the Commission provides the following guidance as to how 
it intends to exercise its enforcement discretion with respect to 
certain unintentional violations of section 2(e) by swap counterparties 
who are making good faith efforts to comply with section 2(e).\42\ More 
specifically, where a person finds that it has entered into a swap with 
a counterparty that the Commission and SEC later further define or 
interpret as not an ECP, absent other material factors, the Commission 
will not bring an enforcement action for violation of section 2(e) if 
the person has implemented and followed reasonably designed policies 
and procedures to verify the ECP status of a swap counterparty \43\ 
and, notwithstanding good faith compliance with such policies and 
procedures,\44\ the person enters into a swap with a non-ECP 
counterparty.
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    \42\ Because CEA section 2(e) refers both to ECPs and swaps, 
both of which, per Dodd-Frank Act section 754, must be further 
defined before CEA section 2(e) could take effect, now that ECP has 
been further defined, the further definition of the term ``swap'' is 
the sole remaining trigger for the effectiveness of CEA section 
2(e).
    \43\ In that regard, see generally Business Conduct Standards 
for Swap Dealers and Major Swap Participants With Counterparties, 77 
FR 9734 (Feb. 17, 2012) (``External Business Conduct Standards Final 
Release''). See also Final ECP Definition Release at 30646 n. 585 
(noting that ``market participants must make the determination of 
ECP status with respect to the parties to transactions in security-
based swaps and mixed swaps prior to the offer to sell or the offer 
to buy or purchase the security-based swap or mixed swap''), 30652 
(with respect to determining the ECP status of Forex Pools and 
referring to the External Business Conduct Standards Final Release), 
and 30653 n. 656 (with respect to determining the ECP status of 
Forex Pools)
    \44\ For example, an entity could demonstrate good-faith 
compliance by first seeking, including in connection with the design 
of its policies and procedures, additional guidance from counsel or 
from Commission staff, which could address questions on a case-by-
case basis with the benefit of specific facts and circumstances.
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    One example of a fact pattern that the Commission does not believe 
would exhibit good faith compliance would be treating as an ECP an 
individual who has total assets, excluding personal property (which the 
Commission does not expect to treat as ``assets invested on a 
discretionary basis''), that are less than the relevant CEA section 
1a(18)(A)(xi) dollar threshold. Conversely, if the individual swap 
counterparty could be

[[Page 41264]]

an ECP if the Commission and the SEC further define or interpret some 
or all of the individual's assets, other than personal property, to be 
``assets invested on a discretionary basis,'' absent other material 
factors, the CFTC would not expect to bring an enforcement action 
against the counterparty for entering into a swap in contravention of 
CEA section 2(e). Of course, once the Commission and the SEC further 
define or interpret a counterparty to be a non-ECP, CEA section 2(e) 
would prohibit entering into new swaps with such ineligible 
counterparties. This compliance guidance does not apply to any aspect 
of the ECP definition that was: (1) Not amended by the Dodd-Frank Act; 
(2) covered by a regulation promulgated in the Final ECP Definition 
Release; or (3) the subject of an interpretation or other guidance set 
forth in the Final ECP Definition Release.

Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \45\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with conducting or sponsoring any collection of information 
as defined by the PRA. These amendments to the July 14 Order will not 
require a new collection of information from any persons or entities 
that will be subject to the final order.
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    \45\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Considerations

    Section 15(a) of the CEA\46\ requires the Commission to consider 
the costs and benefits of its action before issuing an order under the 
CEA. CEA section 15(a) further specifies that costs and benefits shall 
be evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors.
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    \46\ 7 U.S.C. 19(a).
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    The Commission requested comments on the consideration of costs and 
benefits of the proposed amendments discussed in the Notice. One 
commenter, the American Bankers Association, stated that the 
Commission's consideration of costs and benefits in the July 14 Order 
did not take into account the costs that would result if CEA section 
2(e) were made effective in the absence of further interpretive or 
regulatory guidance from the Commission.\47\ American Bankers 
Association states that these costs include the chilling effect on 
legitimate hedging activity and reduced credit availability, 
particularly for end users. American Bankers Association further stated 
that this chilling effect would be compounded by another major concern 
of its member banks--whether swaps could potentially be subject to 
challenges for invalidity under state laws. According to the American 
Bankers Association, a significant benefit of providing temporary 
relief under section 2(e) in the manner suggested would be the legal 
certainty this would create under state law for swaps that currently 
qualify for the line of business provision, and the provision of such 
temporary relief would be consistent with the Commission's goal of 
striving to ``ensure that current practices will not be unduly 
disrupted during the transition to the new regulatory regime,'' and 
allow additional time for its member banks to find solutions to their 
CEA section 2(e) concerns.\48\
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    \47\ American Bankers Association Letter at 4.
    \48\ Id.
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    As stated above, the rules further defining the term ``ECP'' were 
finalized by the Commissions on April 18, 2012. In those rules, the 
Commissions considered the costs and benefits of the further 
definitions and guidance regarding the same, including the costs and 
benefits of legal certainty. Further, the American Bankers Association 
comment regarding the costs and benefits of the amendments to CEA 
section 2(e) made by the Dodd-Frank Act are beyond the scope of this 
final order, which is limited to amending the temporary exemptive 
relief first granted by the Commission in the July 14 Order.
    Regarding benefits, this final order continues the primary benefit 
described in the July 14 Order, which is to facilitate an orderly 
transition to the comprehensive regulatory framework for swaps 
regulation set out in Title VII of the Dodd-Frank Act. More 
specifically, this final order temporarily extends the time market 
participants and the public have to comply with certain provisions of 
the CEA that reference one or more of the terms to be further defined, 
and provides guidance with respect to the same in response to various 
comments. Accordingly, as this final order is an amendment to the July 
14 Order, the Commission's consideration of costs and benefits, as set 
forth in the July 14 Order, may be incorporated here by reference.

Second Amended July 14 Order

    The Second Amended July 14 Order shall read as follows:
    The Commission, to provide for the orderly implementation of the 
requirements of Title VII of the Dodd-Frank Act, pursuant to sections 
4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act, 
hereby issues this Order consistent with the determinations set forth 
above, which are incorporated in this final Order, as amended, by 
reference, and:
    (1) Exempts, subject to the conditions set forth in paragraph (4), 
all agreements, contracts, and transactions, and any person or entity 
offering, entering into, or rendering advice or rendering other 
services with respect to, any such agreement, contract, or transaction, 
from the provisions of the CEA, as added or amended by the Dodd-Frank 
Act, that reference one or more of the terms regarding instruments 
subject to further definition under sections 712(d) and 721(c) of the 
Dodd-Frank Act, which provisions are listed in Category 2 of the 
Appendix to this Order; provided, however, that the foregoing 
exemption:
    a. Applies only with respect to those requirements or portions of 
such provisions that specifically relate to such referenced terms; and
    b. With respect to any such provision of the CEA, shall expire upon 
the earlier of: (i) the effective date of the applicable final rule 
further defining the relevant term referenced in the provision; or (ii) 
December 31, 2012.
    (2) Agricultural Commodity Swaps. Exempts, subject to the 
conditions set forth in paragraph (4), all agreements, contracts, and 
transactions in an agricultural commodity, and any person or entity 
offering, entering into, or rendering advice or rendering other 
services with respect to, any such agreement, contract, or transaction, 
from the provisions of the CEA, if the agreement, contract, or 
transaction complies with part 35 of the Commission's regulations as in 
effect prior to December 31, 2011, including any agreement, contract, 
or transaction that complies with such provisions then in effect 
notwithstanding that:
    a. The agreement, contract, or transaction may be part of a 
fungible class of agreements that are standardized as to their material 
economic terms; and/or
    b. The creditworthiness of any party having an actual or potential 
obligation under the agreement, contract, or transaction would not be a 
material

[[Page 41265]]

consideration in entering into or determining the terms of the 
agreement, contract, or transaction i.e., the agreement, contract, or 
transaction may be cleared.
    This exemption shall expire upon the earlier of (i) December 31, 
2012; or (ii) such other compliance date as may be determined by the 
Commission.
    (3) Exempt and Excluded Commodity Swaps. Exempts, subject to the 
conditions set forth in paragraph (4), all agreements, contracts, and 
transactions, and any person or entity offering, entering into, or 
rendering advice or rendering other services with respect to, any such 
agreement, contract, or transaction, from the provisions of the CEA, if 
the agreement, contract, or transaction complies with part 35 of the 
Commission's regulations as in effect prior to December 31, 2011, 
including any agreement, contract, or transaction in an exempt or 
excluded (but not agricultural) commodity that complies with such 
provisions then in effect notwithstanding that:
    a. The agreement, contract, or transaction may be executed on a 
multilateral transaction execution facility;
    b. The agreement, contract, or transaction may be cleared;
    c. Persons offering or entering into the agreement, contract or 
transaction may not be eligible swap participants, provided that all 
parties are eligible contract participants as defined in the CEA prior 
to the date of enactment of the Dodd-Frank Act;
    d. The agreement, contract, or transaction may be part of a 
fungible class of agreements that are standardized as to their material 
economic terms; and/or
    e. No more than one of the parties to the agreement, contract, or 
transaction is entering into the agreement, contract, or transaction in 
conjunction with its line of business, but is neither an eligible 
contract participant nor an eligible swap participant, and the 
agreement, contract, or transaction was not and is not marketed to the 
public;
    Provided, however, that:
    a. Such agreements, contracts, and transactions in exempt or 
excluded commodities (and persons offering, entering into, or rendering 
advice or rendering other services with respect to, any such agreement, 
contract, or transaction) fall within the scope of any of the CEA 
sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of 
business provision as in effect prior to July 16, 2011; and
    b. This exemption shall expire upon the earlier of: (i) December 
31, 2012; or (ii) such other compliance date as may be determined by 
the Commission; except that, for agreements, contracts, and 
transactions executed on an exempt commercial market (``ECM''), exempt 
board of trade (``EBOT''), or pursuant to CEA section 2(d)(2) as in 
effect prior to July 16, 2011 (``2(d)(2) Market''), this exemption 
shall expire upon the earlier of (i) December 31, 2012; or (ii) the 
effective date of the designated contract market (``DCM'') or swap 
execution facility (``SEF'') final rules, whichever is later, unless 
the ECM, EBOT, or 2(d)(2) Market files a DCM or SEF registration 
application on or before the effective date of the DCM or SEF final 
rules, whichever is later, in which case the relief shall remain in 
place during the pendency of the application. For these purposes, an 
application will be considered no longer pending when the application 
has been approved, provisionally approved, withdrawn, or denied.
    (4) Provided that the foregoing exemptions in paragraphs (1), (2), 
and (3) above shall not:
    a. Limit in any way the Commission's authority with respect to any 
person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b, 
4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the 
Commission promulgated pursuant to such authorities, including 
regulations pursuant to CEA section 4c(b) proscribing fraud;
    b. Apply to any provision of the Dodd-Frank Act or the CEA that 
became effective prior to July 16, 2011;
    c. Affect any effective or compliance date set forth in any 
rulemaking issued by the Commission to implement provisions of the 
Dodd-Frank Act;
    d. Limit in any way the Commission's authority under section 712(f) 
of the Dodd-Frank Act to issue rules, orders, or exemptions prior to 
the effective date of any provision of the Dodd-Frank Act and the CEA, 
in order to prepare for the effective date of such provision, provided 
that such rule, order, or exemption shall not become effective prior to 
the effective date of the provision; and
    e. Affect the applicability of any provision of the CEA to futures 
contracts or options on futures contracts, or to cash markets.

In its discretion, the Commission may condition, suspend, terminate, or 
otherwise modify this Order, as appropriate, on its own motion. This 
final Order, as amended, shall be effective immediately.

    Issued in Washington, DC, on July 3, 2012 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

    Note: The following appendix will not be published in the Code 
of Federal Regulations.

Appendix 1--Statement of Chairman Gary Gensler

    I support the exemptive order regarding the effective dates of 
certain Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) provisions.
    Today's exemptive order makes five changes to the exemptive 
order issued on December 19, 2011.
    First, the proposed exemptive order extends the sunset date from 
July 16, 2012, to December 31, 2012.
    Second, the Commodity Futures Trading Commission (CFTC) and the 
Securities and Exchange Commission (SEC) have now completed the rule 
further defining the term ``swap dealer'' and ``securities-based 
swap dealer.'' Thus, the exemptive order no longer provides relief 
as it once did until those terms were further defined.
    The Commissions are also mandated by the Dodd-Frank Act to 
further define the term ``swap'' and ``securities-based swap.'' The 
staffs are making great progress, and I anticipate the Commissions 
will take up this final definitions rule in the near term. Until 
that rule is finalized, the exemptive order appropriately provides 
relief from the effective dates of certain Dodd-Frank provisions.
    Third, in advance of the completion of the definitions rule, 
market participants requested clarity regarding transacting in 
agricultural swaps. The exemptive order allows agricultural swaps 
cleared through a derivatives clearing organization or traded on a 
designated contract market to be transacted and cleared as any other 
swap. This is consistent with the agricultural swaps rule the 
Commission already finalized, which allows farmers, ranchers, 
packers, processors and other end-users to manage their risk.
    Fourth, unregistered trading facilities that offer swaps for 
trading were required under Dodd-Frank to register as swap execution 
facilities (SEFs) or designated contract markets (DCM) by July of 
this year. These facilities include exempt boards of trade, exempt 
commercial markets and markets excluded from regulation under 
section 2(d)(2). Given the Commission has yet to finalize rules on 
SEFs, this order gives these platforms additional time for such a 
transition.
    Fifth, the Commission is providing guidance regarding 
enforcement of rules that require that certain off-exchange swap 
transactions only be entered into by eligible contract participants 
(ECPs). The guidance provides that if a person takes reasonable 
steps to verify that its counterparty is an ECP, but the 
counterparty turns out not to be an ECP based on subsequent 
Commission guidance, absent other material factors, the

[[Page 41266]]

CFTC will not bring an enforcement action against the person.

[FR Doc. 2012-16987 Filed 7-12-12; 8:45 am]
BILLING CODE 6351-01-P